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Monetary Theory

Alan A. Rabin

Alan Rabin argues that new Keynesian and new classical macroeconomics, which have dominated the literature and textbooks, have crowded the monetary-disequilibrium hypothesis, or orthodox monetarism, off the intellectual stage. Trying to remedy this imbalance, the author concentrates on what he judges to be the essentials of monetary theory.
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Chapter 2: The Services of Money

Alan A. Rabin


INTRODUCTION This chapter investigates (1) how money promotes economic coordination; (2) how ill-functioning money can impair coordination and (3) what services individuals derive from their holdings of money. The third topic is fundamental to understanding the demand for money and to the money-supply-and-demand analysis of total spending. THE SERVICES AND FUNCTIONS OF MONEY We gain insight into the damage monetary disorder does by reviewing what services a well functioning monetary system renders to the community as a whole. The traditional list includes money’s functions as: (1) medium of exchange; (2) unit of account; (3) store of value and (4) standard of deferred payments. Money overcomes the familiar difficulties of barter. It facilitates exchange not only between people working in different lines of production but also over time. By using money and claims denominated in it, people can arrange to receive what other people produce either before or after delivering their own outputs. Because people receive their incomes in generalized purchasing power rather than in the specific goods they help to produce, they enjoy enhanced freedom of choice and greater consumer sovereignty. Because money can be stored more cheaply than the goods received as income under barter, consumers have wider options about when as well as what to consume. By facilitating exchange over time, money promotes the pooling and mobilization of savings through financial intermediation and the securities markets. It thereby promotes construction of capital-intensive and specialized production facilities, which, like the division of labor, enhances productivity. In our existing system,...

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