Mainstream monetary theory rests on two arguments: inflation is determined by demand, and interest rates are used to return inflation to its target: central banks are the guardians of inflation. However, for post-Keynesians, inflation cannot be caused by demand, and there exists a poor and unreliable relationship between interest rates and aggregate demand. The whole theoretical edifice of the neoclassical approach collapses. Therefore, if monetary policy is based on a wrong interpretation of inflation and the link between aggregate demand and interest rates, the result can be and has been catastrophic. It leads to periods of crisis in aggregate demand.
This chapter focuses on money and banking in the history of economic thought, to show that the nature of money and the role of banks have been essentially misunderstood in a number of strands of thought. This has led to a variety of monetary policy interventions, both in economic history and at the time of writing, that were not (and could not be) up to the task. The conclusion asserts that it is essential that the properties of money and banking are understood by teachers and researchers, as well as policy makers in the economic domain.