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Controversies in Monetary Economics

Revised Edition

John Smithin

This influential volume, which has been revised and updated for the twenty-first century, includes both new material and more detailed expositions of existing arguments. Although so-called ‘real’ theories of business cycles and growth are prevalent in contemporary mainstream economics, Controversies in Monetary Economics suggests that those economists who have instinctively focused on monetary factors in explaining macroeconomic behaviour are more genuinely ‘realistic’. The author combines an explanation of past and present monetary controversy with practical proposals for the conduct of monetary policy in the contemporary global economy. Several alternative approaches are discussed, ranging from the traditional quantity theory to post Keynesian theories of endogenous money.
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Chapter 2: The Nature and Functions of Money: A Re-Examination

John Smithin


INTRODUCTION Standard textbooks on money and banking invariably include a chapter with a title similar to that above, in which the objective is to define money at a conceptual level, primarily with reference to the functions it is supposed to perform in the market economy. This is thought necessary because of the difficulties standing in the way of any comprehensive empirical definition. Historically, a very broad range of physical commodities and financial assets has been acceptable as money at different times and places. In an era of rapid financial innovation, such as the present, the evolution of the payments system becomes apparent even to the most casual participant in the process, to the embarrassment of econometricians estimating demand for money functions, or policy makers inclined to conduct monetary policy with reference to one or other of the arbitrarily defined monetary aggregates. The same textbooks provide long lists of the different items which have (actually or reputedly) served as money at one time or another, ranging from the ubiquitous cattle and cowry shells of ancient times, tobacco in colonial America, the stone money of Uap, coins minted from the precious metals such as gold and silver, bank notes and bank deposits, inconvertible paper money, deposits at non-bank financial institutions, and so on, up to and including the ‘e-money’ (electronic money) of the present day.1 The point of defining money in terms of the functions it performs is (presumably) to cut through the problems posed...

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