One of the long-running debates within economics is the question whether money is endogenous or exogenous. Those who follow internet economic debates can expect this argument to flare up periodically. This debate should largely be considered dead and buried; and abolishing money from economic theory would put the final nail in the coffin…Bond Economics
I notice that there has been a bit of a dustup lately about free banking, triggered by two posts by Izabella Kaminska, first on FTAlphaville followed by another on her own blog. I don’t want to get too deeply into the specifics of Kaminska’s posts, save to correct a couple of factual misstatements and conceptual misunderstandings (see below). At any rate, George Selgin has a detailed reply to Kaminska’s errors with which I mostly agree, and Scott Sumner has scolded her for not distinguishing between sensible free bankers, e.g., Larry White, George Selgin, Kevin Dowd, and Bill Woolsey, and the anti-Fed, gold-bug nutcases who, following in the footsteps of Ron Paul, have adopted free banking as a slogan with which to pursue their anti-Fed crusade.
Now it just so happens that, as some readers may know, I wrote a book about free banking, which I began writing almost 30 years ago. The point of the book was not to call for a revolutionary change in our monetary system, but to show that financial innovations and market forces were causing our modern monetary system to evolve into something like the theoretical model of a free banking system that had been worked out in a general sort of way by some classical monetary theorists, starting with Adam Smith, who believed that a system of private banks operating under a gold standard would supply as much money as, but no more money than, the public wanted to hold. In other words, the quantity of money produced by a system of competing banks, operating under convertibility, could be left to take care of itself, with no centralized quantitative control over either the quantity of bank liabilities or the amount of reserves held by the banking system.…
There are quite a few arguments in economics which are entirely superfluous. One of them is over whether central banks determine the money supply or whether it is determined by the banking sector. I have dealt with this previously (following along on the coat tails of Rowe and Sumner) but as I work through Keen’s lectures on “endogenous money” (see primarily 06 part 2 and 07 part 1) I can’t help but notice that this issue seems to be central to much of his criticisms of mainstream economics. So in pursuit of my ultimate goal of rescuing the theory of money and debt from the Marxists–er, I mean “post Keynesians”–and folding it somehow neatly into regular old-fashioned economics, let me first address this whole endogenous/exogenous ball of wax.Free Radical
...my posts on the nature, origin and history of money.Social Democracy For The 21St Century: A Post Keynesian Perspective
I hope Paul Krugman will move on to a 21st century understanding of banking.Economonitor — Great Leap Forward
More generally, I find the idea expressed by Friedman – that the economy will tend toward a stable, long term equilibrium, perhaps oscillating in the short term – is often used by economists, but is rarely fully justified. It is merely assumed that the economy will behave this way, and any erratic behaviour – such as money illusion, and sticky wages/prices – can be dismissed as short term ‘noise’. However, seems to me that such an idea can only be sustained by sweeping potential problems under the rug. Indeed, this supposed ‘noise’ (a) could be more relevant to understanding the system than the equilibrium and (b) could have a permanent impact on the economy and therefore equilibrium itself.Unlearning Economics
Money is at the centre of all modern capitalist economies. Understanding its nature and origins is therefore of great importance. At the heart of Post Keynesian monetary theory is the idea of endogenous money.
This is opposed to the mainstream exogenous money supply theory: the idea that the central bank has direct control over the money supply and its growth. The latter theory is wrong, and I review that major points of endogenous money below.Social Democracy For The 21St Century
MODERN MONETARY THEORY (MMT) notes correctly that money is a creature of the state, and that important macroeconomic and policy conclusions follow from this understanding, e.g., sovereign states are not revenue constrained and spending is primarily limited by inflation. Taxes give value to state money and maintain its value (i.e., inflation can be controlled through taxes).
One (among many) key policy insight is that a job guarantee is possible. A job guarantee not only achieves what many think should for myriad social reasons be a primary goal of macroeconomics but also further creates a buffer stock that achieves an additional primary macroeconomic policy goal – stability.
However, most of the world does not operate under pure state systems of money. Most of what serves as money in most banking systems in the world is privately created credit money.
We can compare the current most common banking system with a pure state system of money:....Clint Balinger
I’ve always sided with endogenous money because it is supported by the evidence. If anyone can offer me contrary evidence about the above or other relevant hypotheses, I’ll be happy to listen. But economist-y special pleading about how, even though exogenous money is wrong, the economy behaves as if it is right, or about how I’m not allowed to refute ‘centuries of theory,’ is simply not enough when the evidence is this strong.Unlearning Economics
1 Load of Babylon which was perceived by Isaiah, the son of Amoz.The chapter then proceeds to provide some details concerning the earthly environment during the time of Babylon's destruction. Picking it up in verse 15:
15 Everyone found shall be stabbed, and everyone gathered up shall fall by the sword.Skipping over some more of the gory details, it is then revealed that God will use the Medes to enact His will of destruction upon Babylon. But why the Medes? What sets Mede apart from Babylon?
17 Behold Me rousing against them the Medes, who are not accounting silver, And gold - they are not delighting in it.The verse reveals that the Medes were NOT "accounting" in silver, or as MMT might say, the Mede was not 'running their spreadsheet', or monetary system in a unit of "accounting" based on exogenous weight measures of silver. Also revealed is that the Medes did not "delight in gold".
19 And it comes that Babylon, the stateliest of kingdoms, The beauty, the pomp of the Chaldeans, shall be as the overturning of Sodom and Gomorrah by the Alueim.And so Babylon has remained.
20 It shall not be indwelt permanently, not shall anyone tabernacle there further, for generation after generation, Nor shall the Arabian tent there, nor shepherds recline their flocks there.
21 Yet the animals of arid spaces will recline there, and their homes will be full of their uproar.
Hmmm. That's starting to sound like a transactions demand for money function. But if we have a demand to hold money for transactions purposes, we can still get an equilibrium in which money is held and valued even if T(t) is always zero.Read it at Worthwhile Canadian Initiative
(Wicksteed said (HT David Glasner) that fiat money has value because the government requires it for payment of taxes. I'm saying that's not sufficient. And it's not even necessary, in the sense that if my local recycler accepted fiat money, even at a negligible price, that would be enough to replace T(t)>0 in ruling out the equilibrium in which fiat money has a price of zero.)
I think the biggest policy failures in Washington over the past three or four decades are caused by confusion over the nature of money, and more specifically, the nature of a sovereign currency. So many of our policy makers simply do not understand that a sovereign issuer of the currency is not like a household user of the currency. For a sovereign issuer, there is never a solvency constraint. And a sovereign issuer spends by issuing its currency—not by borrowing it.Read it at Economonitor | Great Leap Forward
Somehow [Krugman] also seems to think the idea behind [MMT] is new and originates from economic cranks....
This is what [Knut] Wicksell wrote in 1898 on “pure credit systems” in Interest and Prices (Geldzins und Güterpreise), 1936 (1898), p. 68f:
It is possible to go even further. There is no real need for any money at all if a payment between two customers can be accomplished by simply transferring the appropriate sum of money in the books of the bank …
A pure credit system has not yet … been completely developed in this form. But here and there it is to be found in the somewhat different guise of the banknote system …
We intend therefor, as a basis for the following discussion, to imagine a state of affairs in which money does not actually circulate at all, neither in the form of coin … nor in the form of notes, but where all domestic payments are effected by means of the Giro system and bookkeeping transfers. A thorough analysis of this purely imaginary case seems to me to be worth while, for it provides a precise antithesis to the equally imaginary case of a pure cash system, in which credit plays no part whatever [the exact equivalent of Krugman's often used model assumption of "cash in advance"- LPS] …
For the sake of simplicity, let us then assume that the whole monetary system of a country is in the hands of a single credit institution, provided with an adequate number of branches, at which each independent economic individual keeps an account on which he can draw cheques.
