Abstract: A full-fledged theory of an endogenous money supply requires an outright rejection of the quantity theory of money in three clear-cut ways: (1) rejection of the notion that a capitalist economy naturally tends toward a long-run, full-employment equilibrium; (2) rejection of the argument that the income velocity of money is stable and independent of the rate of interest (or, in more contemporary terms, that the demand for money is a stable function of real income per capita); and, most important of all, (3) rejection of the quantity theory's causal arrow running from the money supply to either nominal income or the general price level. These points were made in Chapter 4. Put in more positive terms, for purposes of this chapter, the theory of an endogenous money supply, in its most extreme form, argues: (1) that capitalism is inherently unstable; (2) that the underlying financial structure is given to waves of financial innovations in response to the conventional tight-money policies of the central bank; and (3) that any increase in nominal income causes an increase in the supply of money sufficient to accommodate the resulting increase in the demand for money.
Publication Year: 1986
Publication Date: 1986-01-01
Language: en
Type: book-chapter
Indexed In: ['crossref']
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