Alternative Theories of Money and Finance
New Directions in Modern Economics series
Chapter 4: Endogenous money: heterodox controversies
If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem. John Paul Getty INTRODUCTION Keynes’s finance motive provides an important starting point in subsequent heterodox theories of endogenous money. This chapter will examine some of these controversies between the three major contending analytical approaches, usually designated as the Horizontalist, Structuralist and Circuitist schools of thought. These ongoing debates revolve around the concepts of uncertainty, liquidity preferences and the critical notion of a monetary circuit. Indeed, these controversies traverse the profound questions of the very meaning and definition of modern money and reflect divergent methodological approaches. Should the supply of money be treated as a stock or a flow concept? Are the static assumptions of Keynes’s (1936) original theory of the supply of a given quantity of money compatible with the dynamic nature of credit money? There are also considerable divergences between the post-Keynesian and Circuitist theories over the dynamics of endogenous money and the role performed by the central bank. Given the limited scope of this study, the focus will be on how these various approaches to endogenous money shed light on the inner logic of financial and monetary crises. POST-KEYNESIAN THEORIES OF ENDOGENOUS MONEY Many post-Keynesians (Bibow, 1995; Arestis, 1996; Bertocco, 2005) 67 68 The economics of financial turbulence argue that the finance motive is a crucial component of the demand for money. Keynes’s seminal monetary theory of production suggests that the circuit of credit is necessary to finance...
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