Critical Assessments of The General Theory
Edited by L. Randall Wray and Matthew Forstater
Chapter 10: Keynes on the Control of the Money Supply and the Interest Rates
Carlo Panico INTRODUCTION This chapter examines Keynes’s views on the ability of the monetary authorities to control the money supply and the interest rates. Its aim is to evaluate whether Keynes could agree on the horizontal slope of the money supply function, whether his position can be located in any one of the sides of the recent debates on the ability of the central bank to control the money supply, and whether it is this part of his contributions that makes his work depart from the traditional neoclassical approach. Keynesian economists emphasise that monetary policy tends to stabilise the interest rate at a speciﬁc level by letting the money supply accommodate the requirement of the economy. This idea was dominant at the time of the Radcliﬀe Report and during the two following decades.1 During the 1980s, the analysis of the money supply was at the centre of a large debate among Keynesian authors, some of whom have made the idea of the Radcliﬀe Report more stringent. Following the contributions of Moore, they have stated that in a credit money economy the central bank has no technical ability to control the monetary issue. The horizontal slope of the money supply thus has a necessary character, since variations in bank loans only depend on the decisions of bank borrowers, not of banks themselves (Moore, 1983, pp. 543–5), while the central bank is bound to perform a fully accommodating role of lender of last resort. These positions have been...
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