From Wicksell to Le Bourva: The ‚Compensation Thesis' in Monetary Theory

In the aftermath of the Great Financial Recession and with a focus on macroeconomic imbalances in the world economy economists have shown renewed interest in the way central banks work. One area that is under close surveillance is the way fixed exchange rate systems are organized. While the 'sterilization' principle is presented in most modern text books, another contender to explain the consequences of net inflows of foreign assets is the 'compensation' thesis (Lavoie, 1992). It states that central banks are not necessarily active on the money market to sterilize, but instead movements in the balance sheets are triggered by other actors to which the central bank passively reacts. This theoretical swing attaches a more passive role to central banks and translates into less discretionary power than is often attributed.

Starting from this reality, the present article opens the debate on the theoretical background of this central banking practices by going back beyond the well known Post-Keynesian heterodoxy. In our inquiry, we demonstrate that an horizontalist approach was already present in France in the writings of a French economist Jacques Le Bourva (1959). Despite the work of Lavoie (1992) to popularize Le Bourva monetary approach, his theory is quite unkown. However, we go beyond that by comparing his approach to that of Wicksell on whose shoulders Le Bourva seems to stand. In so doing, we fill in a missing link in the endogenous monetary theory history.

The goal of this article is twofold. First, it aims at demonstrating to what extent money is 'always and everywhere' an endogenous phenomenon. In this respect, the 'Le Bourva-Wicksell' wedding is worth considering. Second, the popularization of Le Bourva monetary theory adsd new elements to the French monetary theory of that time.

In this article we review, first, the articles published by Le Bourva (1959, 1962) in order to shed light on the history of the compensation thesis. Following this first part, which introduces the theory, we compare it with the ideas of Wicksell (1898) in the second part. In the third part we argue that to a substantial extent the current central bank policy has been foreshadowed by Le Bourva and Wicksell. As far as central banking theory is concerned, the article underlines to what extent the heterodox approach to monetary theory was already present in Le Bourva, even if there does not remain an echo in the Bank of France's corridors.