Edited by L. Randall Wray and Mathew Forstater
Chapter 6: Demand Management and the Monetary System: Do Currency Boards and Currency Unions Spell the End for Keynesian Policy?
Stephanie A. Bell In 1943, Abba Lerner defended the virtues of discretionary ﬁscal policy in an article entitled ‘Functional ﬁnance and the federal debt’. His defense went well beyond the standard pump-priming arguments favored by soft-core Keynesians like Alvin Hansen. That is, rather than arguing for temporary spending programs, designed to grease the wheels of commerce, Lerner argued that public policy should always be conducted in accordance with two fundamental ‘laws’ or principles. The ﬁrst of his principles makes it incumbent on the government to maintain spending at the level necessary to generate full employment, while the second speciﬁes the manner in which the ﬁrst principle is to be carried out. Speciﬁcally, the second principle calls for the government to avoid raising taxes or borrowing in order to offset the spending it undertakes in accordance with the ﬁrst principle. Lerner termed his approach ‘Functional Finance’ because it requires the government’s ﬁnancial activities to be evaluated on the basis of the way they work or function, instead of following established rules regarding ﬁscal piety.1 The problem with Lerner’s 1943 article is that it made Functional Finance sound like a viable option for all nations, regardless of the monetary system in place. He said: Functional Finance is not especially related to democracy or to private enterprise. It is applicable to a communist society just as well as to a fascist society or a democratic society. It is applicable to any society in which money is used as an important element...
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