Keynes, the keynesians and monetarism

Keynes, the Keynesians and Monetarism

Volumn , Issue , 2007, Pages

  Congdon, Tim ^a  

^a LONDON SCHOOL OF ECONOMICS   (United Kingdom)

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References (338)

1. The best-known Keynesians in this country in the 1960s and 1970s were Sir Roy Harrod, Lord Kahn, Lord Kaldor and Joan Robinson. Kahn, Kaldor and Mrs Robinson stayed at Cambridge, but Sir Roy Harrod taught at Oxford for most of his academic career. Although Cambridge was the home of Keynesianism, many economists in universities throughout England professed Keynesian affiliations, and it is, perhaps, misleading to locate it too precisely in geographical terms. Throughout the essay, Keynesianism economists. A distinction is therefore being drawn between Keynesian economics and Keynes's economics. A similar distinction was made in A. Leijonhufvud's On Keynesian Economics and the Economics of Keynes (New York: Oxford University Press, 1968), although Leijonhufvud was concerned with the whole body of Keynes's economics whereas I am only interested in his work on inflation.
2. Roger Opie, 'The political consequences of Lord Keynes', in D.E. Moggridge (ed.), Keynes: Aspects of the Man and his Work (London: Macmillan, 1974), p. 87.
3. Joan Robinson, Economic Philosophy (Harmondsworth: Penguin, 1962), p. 131.
4. In 1990 the Institute of Economic Affairs published British Economic Opinion: A Survey of a Thousand Economists by M. Ricketts and E. Shoesmith.When asked for their views on the proposition 'Wage-price controls should be used to control inflation', 5.4 per cent of respondents 'agreed strongly' and 28.3 per cent agreed 'with reservations', while 14.4 per cent neither agreed nor disagreed. However, attitudes towards wage and price controls would undoubtedly have been more positive 15 or 20 years earlier.
5. Sir Roy Harrod, 'Keynes's theory and its applications', in Moggridge (ed.), Keynes: Aspects, pp. 9-10
6. Opie, in Moggridge (ed.), Keynes: Aspects, p. 86. The 1970s saw suggestions that there was such a thing as a 'just price' and that 'social considerations' should enter into price determination.
7. A. Jones, The New Inflation (London: Andre Deutsch, 1973), particularly chapters 5 and 6.
8. Sir Roy Harrod in Moggridge (ed.), Keynes: Aspects, p. 9.
9. J.M. Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, Papermac edition, 1964, originally published 1936), pp. 41-3
10. particularly, the footnote on pp. 42-3.
11. Sir John Hicks, The Crisis in Keynesian Economics (Oxford: Blackwell, 1974), pp. 59-60.
12. Sir Roy Harrod in Moggridge (ed.), Keynes: Aspects, p. 9. Other examples: 'It would be most inappropriate for me to stand up here and tell you what Keynes would have thought. Goodness knows he would have thought of something much cleverer than I can think of' (pp. 8-9); and: 'I do not think we can tackle it without direct interference. They do seem to be doing this rather more effectively in America now than here having tribunals, boards, call them what you will, responsible for fixing maximum price increases. I am sure we have got to come to that, and, as our Chairman very kindly hinted, I had a letter in The Times on this very subject yesterday' (p. 10).
13. J.M. Keynes, How to Pay for the War (1940), which originally appeared as articles in The Times on 14 and 15 November 1939, with pp. 61-70
14. R.J. Ball and P. Doyle (eds), Inflation (Harmondsworth: Penguin, 1969), pp. 21-7.
15. J.M. Keynes, 'Liberalism and labour' (1926), reprinted in Essays in Persuasion (London: Macmillan, 1931), p. 341.
16. An amusing footnote on this theme appeared on pp. 70-71 of D.E. Moggridge (ed.), Keynes: Aspects of the Man and his Work. It was at Joan Robinson's expense. She had supported the notion that 'Maynard had never spent the 20 minutes necessary to understand the theory of value', sublimely unaware that as a matter of fact (as is clear from one of the notes to her publisher) he had acted as referee to her very book on the subject.
17. E. Johnson and D.E. Moggridge (eds), The Collected Writings of John Maynard Keynes, vol. II, The Economic Consequences of the Peace (London: Macmillan for the Royal Economic Society, 1971, originally published in 1919), pp. 151-2.
18. Keynes, Essays in Persuasion, p. 284. The alternative of import restrictions was the one preferred in the context of the passage quoted, but Keynes was in favour of a devaluation if it was politically possible.
19. Keynes, General Theory, p. 296.
20. Keynes, General Theory, p. 301.
21. The frailty of institutions in the face of economic imperatives was one theme of G.A. Dorfman, Wage Politics in Britain (London: Charles Knight, 1974)
22. particularly, chapter 2 on the inter-war period
23. Keynes, Essays in Persuasion, p. 60.
24. There is a fascinating discussion of the notion of liquidity preference, and its connection with investment flexibility, in the second part of Sir John Hicks, The Crisis in Keynesian Economics
25. Johnson and Moggridge (eds), The Collected Writings of John Maynard Keynes, vol. VI, A Treatise on Money: The Applied Theory of Money (London: Macmillan for the Royal Economic Society, 1971, originally published in 1930), pp. 132-86.
26. Johnson and Moggridge (eds), The Collected Writings of John Maynard Keynes, vol. IV, A Tract on Monetary Reform (London: Macmillan for the Royal Economic Society, 1971, originally published in 1923), pp. 141-8.
27. Keynes, Treatise, pp. 155-61 and pp. 170-75.
28. Keynes himself put 'direct' in italics (p. 189) of the Treatise, presumably because he thought that a rise in the price of money would cause people to economize on its use and, therefore, the authorities could indirectly control the money supply. The belief that a central bank should not hold down the money supply directly, because it has the lenderof-last-resort function, is a very typical banker's attitude. Incidentally, it is one reason why Friedmanite economists and central bankers often do not see eye to eye.
29. S. Howson, ' "A dear money man"? Keynes on monetary policy, 1920', The Economic Journal, June 1973, p. 458.
30. Howson, ' "A dear money man" ', p. 461.
31. D. Moggridge and E. Johnson (eds), Collected Writings of John Maynard Keynes, vol. IV, A Tract on Monetary Reform (London: Macmillan, 1971, originally published 1923), p. 36.
32. R. Skidelsky, John Maynard Keynes, vol. 2, The Economist as Saviour 1920-37 (London: Macmillan, 1992), p. 337.
33. Samuelson's remarks appeared in his contribution to S. Harris (ed.), The New Economics (New York: Alfred A. Knopf, 1948). They were quoted by Murray Rothbard in his contribution to M. Skousen (ed.), Dissent on Keynes (New York: Praeger, 1992). See p. 184 of Skousen.
34. According to H. Johnson, the General Theory gave 'old concepts new and confusing names' and emphasized 'as crucial analytical steps that' had 'previously been taken as platitudinous'. E.S. Johnson and H.G. Johnson (eds), The Shadow of Keynes (Oxford: Basil Blackwell, 1978), p. 188.
35. Sir John Hicks, Critical Essays in Monetary Theory (Oxford: Clarendon Press, 1967), p. 189.
36. Hicks, Critical Essays, p. 189.
37. As Patinkin noted, the money-holders' choice in the Treatise on Money was between bank deposits and 'securities', whereas in the General Theory it was between money and bonds. Don Patinkin, Keynes' Monetary Thought (Durham, NC: Duke University Press, 1976), pp. 38-9.
38. The restriction of wealth to money and bonds continues to affect textbook writers to the present day. A standard text - Macroeconomics by Dornbusch and Fischer - says, in a discussion of the demand for money: 'The wealth budget constraint in the assets market states that the demand for real [money] balances. .. plus the demand for real bond holdings. .. must add up to the real financial wealth of the individual.' So, 'the decision to hold real money balances is also a decision to hold less real wealth in the form of bonds'. R. Dornbusch and S. Fischer, Macroeconomics (New York: McGraw-Hill, 6th edition, 1994), p. 103. Surprisingly, the adoption of the limited definition of wealth follows shortly after an excellent account of real-world assets, which refers at length to equities and houses. Keynes's awareness that he spoke of 'the rate of interest' in a dangerous way is evident in a footnote on p. 151 of the General Theory, in which he said that high stock market valuations had the same stimulatory effect on investment as a low rate of interest.
39. The argument that an increase in 'the quantity of money' reduces 'the rate of interest' begs many questions, not least the meaning of the phrases 'the quantity of money' and 'the rate of interest'. Keynes's analysis related to 'the short period' (that is, with the capital stock fixed) and assumed an economy in which the only non-money assets were bonds. But, as soon as one thinks of an economy with several assets, including equities, houses and other forms of real estate, and in which agents look ahead over many periods, it is possible - as explained in the text - for an increase in the quantity of money to lead to higher inflation expectations, a fall in bond prices and a rise in the rate of interest. Keynes's theory of the monetary determination of the rate of interest would then disintegrate. The point will be elaborated in my Money in a Modern Economy (forthcoming), to be published by Edward Elgar.
40. A. Leijonhufvud, On Keynesian Economics and the Economics of Keynes (New York and London: Oxford University Press, 1968), p. 152.
41. The political implications of the General Theory were highly topical in the late 1930s and enhanced its influence on the public debate. In 1954 Joseph Schumpeter remarked: 'There cannot be any doubt that it [The General Theory] owed its victorious career primarily to the fact that its argument implemented some of the strongest political preferences of a large number of modern economists.' This quotation appeared in Don Bellante's contribution to Skousen (ed.), Dissent on Keynes, p. 119.
42. D. Moggridge and E. Johnson (eds), Collected Writings of John Maynard Keynes, vol. VII, The General Theory of Employment, Interest and Money (London: Macmillan, 1973, originally published 1936), p. 383.
43. V.H. Hewitt and J.M. Keyworth, As Good as Gold: 300 Years of British Bank Note Design (London: British Museum Publications in association with the Bank of England, 1987), p. 27.
44. C.A.E. Goodhart, The Business of Banking, 1891-1914 (London: Weidenfeld and Nicolson, 1972), pp. 195-208.
45. J.A. Schumpeter, History of Economic Analysis (London: George Allen and Unwin, 1954), p. 256.
46. H. Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (Fairfield, NJ: August M. Kelly, 1978, reprint of version edited by F.A. von Hayek and published by George Allen and Unwin in 1939; originally published 1802), p. 276.
47. Thornton, Paper Credit, p. 259.
48. I am not suggesting that Thornton was opposed to the gold standard. In fact, his 1811 contributions to two House of Commons debates show that he was strongly in favour of it. See Paper Credit, p. 346. I am claiming only that his writings hinted at the possibility of a different approach.
49. Moggridge and Johnson (eds), Collected Writings of Keynes, vol. IV, A Tract on Monetary Reform (London: Macmillan, 1971, originally published 1923), p. 136.
50. Moggridge and Johnson (eds), Keynes, vol. IV, Tract, pp. 126-7 and p. 140.
51. Moggridge and Johnson (eds), Keynes, vol. IV, Tract, pp. 141-2.
52. Moggridge and Johnson (eds), Keynes, vol. IV, Tract, pp. 142-5.
53. I discussed some of the definitional problems in my contribution 'British and American monetarism compared', pp. 38-72, in R. Hill (ed.), Keynes, Money and Monetarism (London: Macmillan, 1989). (This paper is reprinted in this volume as Essay 7 on pp. 146-72.)
54. Lord Kahn, On Re-reading Keynes (London: Oxford University Press for the British Academy, 1975), pp. 22-3.
55. Moggridge and Johnson (eds), Keynes: General Theory, p. 378.
56. W. Beckerman (ed.), The Labour Government's Economic Record: 1964-70 (London: Duckworth, 1972), pp. 340-41.
57. F. Cripps and M. Fetherston, 'The role of monetary policy in economic management', Economic Policy Review, March 1977, p. 54.
58. Tim Congdon, Monetarism: An Essay in Definition (London: Centre for Policy Studies, 1978), pp. 11-13
59. See also chapter 6, 'How Friedman came to Britain', pp. 172-202
60. W. Parsons, The Power of the Financial Press (Aldershot, UK and Brookfield, US: Edward Elgar, 1989).
61. Bank of England and HM Treasury, Cmnd. 7858 Monetary Control (London: HMSO, 1980).
62. See my pamphlet, Monetarism Lost (London: Centre for Policy Studies, 1989), for a more detailed description of the evolution of monetary policy in the 1980s
63. Moggridge and Johnson (eds), Keynes: Tract, pp. 145-6.
64. Moggridge and Johnson (eds), Keynes: Tract, pp. 153-4.
65. Alan Walters, Britain's Economic Renaissance (New York: Oxford University Press, 1986), pp. 116-17.
66. This is a reference to Sir John Hicks's famous paper on 'A suggestion for simplifying the theory of money', written before Keynes's General Theory
67. Milton Friedman's 'The quantity theory of money: a restatement', a paper originally published in 1956, said that 'the demand for money is a special topic in the theory of capital'. It was the theoretical launching-pad of the so-called 'monetarist counterrevolution'.
68. Professor Patrick Minford of Liverpool University argued late into the boom that slow growth of M0 presaged an early return to 3 per cent inflation. This was not the first time that Minford had been disastrously wrong by using M0 for forecasting purposes. He warned in late 1985 that, because of slow M0 growth, 'we now have the tightest monetary policy we have ever had' and maintained that 'a stalling in the growth rate, unless immediate action is taken to reduce interest rates, is now increasingly likely'. See p. 45 of J. Bruce-Gardyne and others, Whither Monetarism? (London: Centre for Policy Studies, 1985). These remarks were made on the eve of the strongest boom for 15 years.
69. According to one former civil servant, even Mr Denis Healey - who as Chancellor of the Exchequer had made the announcement that introduced broad money targets - did not really believe in them. 'To ascribe paternity for the MTFS to Denis Healey seems to me to be going too far. He was described at the time as an unbelieving monetarist, meaning that he adopted monetary targets only with a view to inspiring confidence in the financial world, which did believe in them.' Leo Pliatzky, The Treasury under Mrs Thatcher (Oxford: Basil Blackwell, 1989), p. 122.
70. In any case, other European countries did not suffer the illusion that full membership of the EMS specified a complete anti-inflationary policy. They also followed domestic financial targets stated in terms of credit and/or broad money. In their regard for narrow money, it was British economic policy-makers and their advisers who had become idiosyncratic. The Bank of England stopped publishing data on M0 in early 2006.
71. J.C.R. Dow, The Management of the British Economy 1945-60 (Cambridge: Cambridge University Press, 1964), p. 178.
72. H. Stein, The Fiscal Revolution in America (Chicago, IL and London: Chicago University Press, 1969), p. 165.
73. Part of the explanation for the differences between Keynes and the Keynesians is to be sought in the complexity and obscurity of The General Theory. For example, while there can be little doubt that Keynes wished to promote fiscal policy relative to monetary policy, The General Theory says almost nothing about how exactly fiscal policy should be conducted. The American economist, Abba Lerner, tried to formalize the fiscal prescriptions implicit in The General Theory in his idea of 'functional finance' (that is, to run a deficit in a downturn and a surplus in a boom). But Keynes was critical of Lerner's proposals, asserting that functional finance 'runs directly contrary to men's natural instincts. .. about what is sensible'. R. Skidelsky, John Maynard Keynes, vol. 3, Fighting for Britain 1937-46 (London: Macmillan, 2000), p. 276.
74. E.E.B. Bridges, The Treasury (London: George Allen and Unwin, and New York: Oxford University Press, 1964), p. 90.
75. 'The Economy Report' and 'The Economy Bill', in D. Moggridge and Mrs E. Johnson (eds), The Collected Writings of John Maynard Keynes, vol. IX, Essays in Persuasion (London: Macmillan, 1972, originally published in 1931), pp. 101-5 and 145-9, originally based on articles published in New Statesman and Nation on 15 August and 19 September 1931.
76. B.E.V. Sabine, British Budgets in Peace and War (London: George Allen and Unwin, 1970), p. 300.
77. Dow, Management of British Economy, p. 198.
78. White Paper on Employment Policy (London:HMSO, 1944), pp. 25-6, paragraphs 77-9.
79. Bridges, The Treasury, pp. 93-4. The quotation is from p. 93.
80. Dow, Management of British Economy, p. 198.
81. I.M.D. Little, 'Fiscal policy', in G.D.N. Worswick and P.D. Ady (eds), The British Economy in the Nineteen-Fifties (Oxford: Oxford University Press, 1962), ch. 8, pp. 231-91. The quotation is from p. 251.
82. Dow, Management of British Economy, p. 161.
83. Little in Worswick and Ady (eds), British Economy in Nineteen-Fifties, p. 275.
84. Dow, Management of the British Economy, pp. 183-8. The quotations are from p. 183 and p. 187 respectively.
85. H. Brittain, The British Budgetary System (London: George Allen and Unwin, 1959), pp. 53-4. Brittain and Keynes clashed at meetings held in the Treasury in 1945 to prepare papers for the National Debt Enquiry. According to Peden (citing James Meade's papers, collected by Mrs Elizabeth Johnson and Donald Moggridge),Keynes told Brittain to his face that he was 'intellectually contemptible'. As Peden notes, the Sinking Fund for national debt - of which Brittain was apparently a defender - was not phased out until 1954, while the above-the-line/below-the-line distinction survived until the publication of an official paper on Reform of the Exchequer Accounts (Cmnd. 21014) in 1962.
86. (See G.C. Peden, Keynes and his Critics: Treasury Responses to the Keynesian Revolution 1925-46 [Oxford and New York: Oxford University Press for the British Academy, 2004], p. 12, p. 331 and pp. 349-50.)
87. Peden also emphasizes in his book on the Treasury the durability of a doctrine introduced by Asquith in 1906 and 1907, that the only investments which should be financed by borrowing were those expected to produce a money return, and which would not rely on future taxation for the servicing of the borrowing involved. (Peden, The Treasury and British Public Policy 1906-59 [Oxford: Oxford University Press, 2000], p. 39.)
88. Tomlinson has said that in the 1950s 'day-to-day discussion of economic issues in government departments' was 'notable for extraordinary crudity'. (J. Tomlinson, Public Policy and the Economy [Oxford: Clarendon Press, 1990], p. 256.)
89. Brittain, British Budgetary System, p. 56.
90. Brittain, British Budgetary System, p. 43.
91. R.C.O. Matthews, 'Why has Britain had full employment since the war?', Economic Journal, vol. 78, September 1968, pp. 555-69. The quotation is from p. 556.
92. B. Hansen, Fiscal Policy in Seven Countries 1955-65 (Paris: Organisation for Economic Co-operation and Development, 1969).
93. S. Brittan, Steering the Economy (Harmondsworth: Penguin, 1971), p. 455.
94. Dow, Management of the British Economy, p. 384.
95. S. Brittan, The Price of Economic Freedom (London: Macmillan, 1970).
96. W. Beckerman (ed.), The Labour Government's Economic Record 1964-70 (London: Duckworth, 1972), p. 25.
97. D. Healey (later Lord Healey), The Time of My Life (London: Michael Joseph, 1989), p. 380.
98. See the papers, 'Monetarism and the budget deficit' and 'The analytical foundations of the Medium-Term Financial Strategy', in Tim Congdon, Reflections on Monetarism (Aldershot, UK and Brookfield, US: Edward Elgar for the Institute of Economic Affairs, 1992), pp. 38-48 and 65-77
99. A growing interest in a medium-term perspective can also be noticed in A. Budd, 'Economic policy and the medium term', in G.D.N. Worswick and F.T. Blackaby (eds), The Medium Term: Models of the British Economy (London: Heinemann, 1974), pp. 133-42.
100. See 'How Friedman came to Britain', in W. Parsons, The Power of the Financial Press (Aldershot, UK and Brookfield, US: Edward Elgar, 1989), ch. 6, pp. 172-202.
101. See the paper, 'The relationship between fiscal and monetary policy in the London Business School model', by A.P. Budd and T. Burns, in M.J. Artis and M.H. Miller (eds), Essays in Fiscal and Monetary Policy (Oxford: Oxford University Press, 1981), pp. 136-63. The quotations are from p. 136.
102. See 'Implementation and results of the strategy', in G. Maynard, The Economy under Mrs. Thatcher (Oxford: Basil Blackwell, 1988), ch. 4, pp. 58-92. But the claim on p. 65 that the MTFS had as its 'stated objective' a 'progressive. .. return to budget balance', is not correct. The balanced-budget goal surfaced in official statements much later, in 1988.
103. Maynard, Economy under Mrs. Thatcher, p. 66.
104. The quotation is from p. 56 of M. Friedman, 'Response to questionnaire on monetary policy', in House of Commons Treasury and Civil Service Committee (Session 1979/80), Memoranda on Monetary Policy (London:HMSO, 1980), pp. 55-62. As explained in note 11 to the Introduction, the author disagrees with Friedman's views on public finance.
105. HM Treasury, The Next Ten Years: Public Expenditure and Taxation into the 1990s, Cmnd 9189 (London: HMSO, 1984)
106. Nigel (later Lord) Lawson, The View from No. 11 (London: Bantam Press, 1992), p. 812.
107. A. Budd and G. Dicks, 'A strategy for stable prices' Economic Outlook (Aldershot: Gower Publishing for the London Business School), July 1983, pp. 18-23.
108. Lawson, View from No. 11, p. 811.
109. Sir Terence Burns, Managing the Nation's Economy - the conduct of monetary and fiscal policy, given as South Bank Business School annual lecture (London: HM Treasury, 1996), p. 5. Burns's 1995 lecture - in which interest rates and fiscal policy were taken to be independent instruments - was a long way from his London Business School papers of the late 1970s in which the interdependence of fiscal and monetary policies had been emphasized.
110. '[T]here are very few practitioners who would argue that fiscal policy has no role to play at all in influencing demand.. .'. Burns, Managing the Economy, p. 5.
111. See, for example, S. Howson (ed.), The Collected Papers of James Meade, vol. 1: Employment and Inflation (London: Unwin Hyman, 1988), pp. 6-25, 'Public works in their international aspect', originally published in 1933.
112. A. Britton, Macroeconomic Policy in Britain (Cambridge: Cambridge University Press for the National Institute of Economic and Social Research, 1991), p. 215, but note Britton's warning on p. 217 that the cyclically adjusted public sector financial deficits 'do not identify policy acts, that is deliberate choices by government as distinct from the passive response of the system to events'.
113. F.W. Paish, Studies in an Inflationary Economy (London: Macmillan, 1962), p. 327.
114. For the introduction of the concept of the output gap, see the appendix to the Introduction. In the late 1980s and early 1990s the Organisation for Economic Cooperation and Development in Paris devoted some effort to preparing historical estimates of these gaps in its member nations
115. See C. Giorno et al., 'Potential output, output gaps and structural budget balances', Economic Studies, no. 24 (Paris: OECD, 1995).
116. H. Brittain, The British Budgetary System (London: George Allen and Unwin, 1959), pp. 53-4.
117. D. Winch, Economics and Policy (London: Hodder and Stoughton, 1969), p. 313 and p. 315.
118. R.C.O. Matthews, 'Why has Britain had full employment since the war', Economic Journal, 78 (1968), pp. 555-69. The quotation is from p. 556.
119. T.G. Congdon, Monetary Control in Britain (London and Basingstoke: Macmillan Press, 1982), pp. 35-45.
120. For a sceptical assessment of the historical reality of the Keynesian revolution, see T.G. Congdon, 'Did Britain have a Keynesian revolution? Fiscal policy since 1941', in J. Maloney (ed.), Debt and Deficits: An Historical Perspective (Cheltenham: Edward Elgar, UK and Lyme, USA 1998), pp. 84-115, of which a revised version is reprinted here as Essay 4 on pp. 81-111.
121. N. Lawson, The View from No. 11 (London and New York: Bantam Press, 1992), pp. 447-60.
122. Lawson, The View from No. 11, pp. 811-12.
123. J. Hawksworth and S. Wilcox, Challenging the Conventions: Public Borrowing Rules and Housing Investment (Coventry: The Chartered Institute of Housing, 1995), p. 3.
124. HM Treasury, Stability and Investment for the Long Term (London:HMSO, 1998), p. 20.
125. Brittain, Budgetary System, p. 53.
126. Brittain, Budgetary System, p. 53.
127. Brittain, Budgetary System, p. 175.
128. HM Treasury, Stability and Investment, p. 22.
129. One example will suffice. 'Monetarism, like Christianity, makes a comeback from time to time. When things get bad, even sceptics start paying lip service, just in case there is something in the doctrine which might conceivably save them from eternal damnation.' C. Johnson, in a review of G. Pepper's Money, Credit and Inflation, The Business Economist, vol. 22, no. 1, winter 1990, pp. 64-5.
130. Economists at provincial ('red-brick') universities and financial journalists were the main contributors to a pamphlet critical of the Radcliffe Report, Not Unanimous, which was published by the Institute of Economic Affairs in January 1960. Only one of the seven contributors (R.F. Henderson) was from Cambridge University. Henderson opened his chapter with a recognition of indebtedness to Dennis Robertson, but to no other Cambridge economists.
131. G. Fletcher, Understanding Dennis Robertson (Cheltenham, UK and Northampton, MA USA: Edward Elgar Publishing, 2000), p. 404.
132. The inclusion of Indian Currency and Finance in the list may seem surprising. But - arguably - this was the beginning of an interest in the place of gold in an international currency regime which continued until the Bretton Woods negotiations (and his House of Lords speeches on them) in the mid-1940s.
133. J.M. Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936), p. 293.
134. Keynes, General Theory, p. 296.
135. Money plays a crucial role in asset price determination, while sharp changes in asset prices affect expenditure. For more on these themes, see Essay 9 on pp. 181-205 and Essay 14 on pp. 281-315.
136. The phrases in quotation marks are taken from Keynes's famous introduction to the Cambridge Economic Handbooks, which he edited until 1936
137. Mrs Joan Robinson - a left-wing economics don at Cambridge - used the phrase 'bastardised Keynesianism' to characterize the textbook income-expenditure model
138. M. Friedman, The Optimum Quantity of Money (London: Macmillan, 1969), p. 84.
139. F. Hayek, Law, Legislation and Liberty, vol. 1 (London: Routledge and Kegan Paul, 1973), p. 14.
140. Shonfield's remark in his British Economic Policy Since the War (quoted in note 1 to the Introduction to this volume) - that 'the success or failure of the trade unions in controlling their members will determine the level of prices - and nothing else' - illustrated this sort of thinking
141. Professor Maurice Dobb has made the distinction between the two types of theory particularly well in a number of books, notably in Political Economy and Capitalism (London: Routledge and Kegan Paul, 1970)
142. E.S. Johnson and H.G. Johnson, The Shadow of Keynes (Oxford: Basil Blackwell, 1978), p. 137
143. See also M. Skousen (ed.), Dissent on Keynes (New York: Praeger, 1992), p. 196.
144. See R. Opie, 'The political consequences of Lord Keynes', pp. 75-90, in D.E.Moggridge (ed.), Keynes: Aspects of the Man and his Work (London: Macmillan, 1974). The quotation is from p. 79.
145. Financial Statistics (London: Her Majesty's Stationery Office), September 1977, p. 51 and p. 74; Financial Statistics (London: The Stationery Office), July 2006, p. 58 and p. 78.
146. This was the point of the title of Keith Joseph's 1976 Stockton Lecture, 'Monetarism is not enough'. The title did not mean that monetarism was inadequate; it meant that control of the money supply had to be accompanied by restraint over public expenditure. To quote from the speech itself, 'Monetary contraction in a mixed economy strangles the private sector unless the state sector contracts with it and reduces its take in the national income'. M. Halcrow, Keith Joseph: A Single Mind (London: Macmillan, 1989), p. 113.
147. If this remark seems outlandish, see note 9 to Essay 12 in this collection, where George Orwell is quoted as saying - in 1945 - that communists keen 'to advance Russian interests at all costs. .. abound in England today'.
148. The case for money supply targets was advocated in the public debate at about the same time as the thesis that 'Britain had too few producers', because public sector employment (financed by taxes) seemed - almost continuously - to be rising faster than private sector employment (financed by sales revenue). The thesis was presented by R. Bacon and W. Eltis in an article in the Sunday Times in 1974, and in a book, Britain's Economic Problem: Too Few Producers (London: Macmillan, 1976). Between 1961 and 1979 public sector employment climbed at an annual compound rate of 1.3 per cent from 5.86 million to 7.45 million, while private sector employment contracted from 18.60 million to 17.94 million (The source for the data is Economic Trends: Annual Supplement [London: HMSO, 1988], p. 209.) During the 1979-97 Conservative government these trends were reversed, partly because of the privatization of nationalized industries.
149. See D. Moggridge, 'Keynes: the economist', pp. 53-74, in D.E. Moggridge (ed.), Keynes: Aspects of the Man and his Work (London: Macmillan, 1974). The reference to 'wild asides' is on p. 74.
150. M. Oakeshott, Rationalism in Politics (London: Methuen, 1962), p. 45. The remark appears in a review of Henry Simons's Economic Policy for a Free Society.
151. M. Friedman, 'The fragility of freedom', Encounter, November 1976, pp. 8-14.
152. It should be noted that the ideas put forward by Friedman in this article owed much to work on the theory of public choice done at the University of Western Virginia. See note 25 below.
153. The point may seem remote from the realities of Britain in the 1970s when inflation was running at 'only' 10 per cent a year. However, even this rate of price increases meant that the value of money over a five or ten year time span was highly uncertain and prohibitive of long-term contracts. The issue of long-term fixed-interest debentures and loan stocks on London financial markets practically ceased in these years. The general message is that - as inflation accelerates - the time horizon of the typical economic transector shortens until finally it is no more than a few hours or minutes. See an amusing footnote on p. 41
154. J.M. Keynes, A Tract on Monetary Reform, in vol. IV of D.E. Moggridge and E. Johnson (eds), The Collected Writings of John Maynard Keynes (London: Macmillan, 1971).
155. The theory of public choice - which argues that public servants may put their own private interests ahead of the 'public interest' - was developed, mostly in the 1970s, by James Buchanan and Gordon Tullock. Its 'headquarters' are usually located as the Center for the Study of Public Choice at the Virginia Polytechnic Institute and State University. The public choice perspective was largely adopted by Chicago economists.
156. HM Treasury press release, 9 June 1980, Statement by Nigel Lawson, MP, Financial Secretary to the Treasury during his meeting with regional city editors
157. T. Mayer, The Structure of Monetarism (New York and London: Norton, 1978)
158. particularly, p. 2 for a list of 12 characteristic monetarist propositions.
159. Monetary Control, Cmnd 7858 (London: HMSO, 1980), and Memorandum by HM Treasury, pp. 86-95, in vol. II, Minutes of Evidence of Third Report from the House of Commons Treasury and Civil Service Committee, Session 1980-81 (London:HMSO, 1981).
160. Memorandum by HM Treasury, p. 90.
161. Note by HM Treasury on 'The stability of the income velocity of circulation of money supply', pp. 126-7, in Third Report from the Treasury and Civil Service Committee, Session 1980-81.
162. For an example of the approach see the chapter on 'Bank lending and monetary control' in C.A.E. Goodhart, Monetary Theory and Practice (London, Macmillan: 1984), pp. 122-45.
163. It should be added that interest rate changes acted not only on bank lending, but also on the ability of the authorities to sell gilt-edged securities as part of the funding programme
164. Monetary Control, p. 1.
165. Monetary Control, p. 2.
166. Memorandum by HM Treasury, p. 89.
167. See, for example, J. Burton, 'Trade unions' role in the British disease: "An interest in inflation" ', pp. 99-111, in A. Seldon (ed.), Is Monetarism Enough? (London: Institute of Economic Affairs, 1980), particularly pp. 105-6
168. T.G. Congdon, 'Why has monetarism failed so far', The Banker (April 1982), pp. 43-9. The subject was also discussed in T.G. Congdon, Monetarism: An Essay in Definition (London: Centre for Policy Studies, 1978), particularly pp. 53-6.
169. J.M. Keynes, A Tract on Monetary Reform (1923), reprinted in The Collected Writings of John Maynard Keynes, vol. IV, eds D. Moggridge and E. Johnson (London: Macmillan for the Royal Economic Society, 1971), p. 126, p. 132 and p. 138.
170. Essay 3, pp. 61-3, for a more extended discussion of Keynes' proposal for a 'managed currency'.
171. HM Treasury press release, 12 May 1981. The Mais Lecture given by Sir Geoffrey Howe, QC, MP, Chancellor of the Exchequer, at the City University, p. 11. At about this time Howe's Treasury colleague and future Chancellor, Nigel Lawson, became convinced that an exchange-rate discipline in the form of the EMS was superior to 'targets for domestic monetary aggregates' in monetary policy-making. On 15 June 1981 he sent Howe a long note on the virtues of joining the EMS. (Nigel Lawson, The View from No. 11 [London: Bantam Press, 1992], p. 111.)
172. Mayer, Monetarism, p. 27.
173. Few economists would regard the monetary base by itself as constituting a measure of the money supply. The Treasury was therefore rather iconoclastic in its attitude toward M0, which it apparently regarded as the full-scale aggregate when M0 was introduced in 1983. In both the USA and the UK the value of transactions in cash is less than 1 per cent of all transactions by non-bank agents.
174. The quotation comes from p. 71 of P. Meek, 'Comment on papers presented by Messrs. Forece and Coleby', in P. Meek (ed.), Central Bank Views on Monetary Targeting (New York: Federal Reserve Bank of New York, 1983), pp. 70-71.
175. The quotations are from p. 57 of M. Friedman, 'Response to questionnaire on monetary policy', in House of Commons Treasury and Civil Service Committee (Session 1979-80), Memorandum on Monetary Policy (London: HMSO, 1980), pp. 55-62
176. The selfconfidence and assertiveness of Friedman's criticism of the UK authorities in 1980 looks misplaced, to say the least, in retrospect. At the time of writing (mid-2006) no central bank tries to target the quantity of money by controlling the monetary base. In Goodhart's words, writing in 1995, 'the debate over monetary base control appears historical'. (The quotation is from C. Goodhart, The Central Bank and the Financial System [London: Macmillan, 1995], p. 261.)
177. also pp. 235-6 of Bindsell's Monetary Policy Implementation: Theory, Past and Present for critical comments on Friedman's position in the early 1980s. (Ulrich Bindsell, Monetary Policy Implementation: Theory, Past and Present [Oxford: Oxford University Press, 2004].)
178. The arrangements are described in 'The role of the Bank of England in the money market', in The Development and Operation of Monetary Policy 1960-83 (Oxford: Oxford University Press for the Bank of England, 1984), pp. 156-64.
179. Econometric work may identify a contemporaneous link between the monetary base and one or other measure of the money supply, but that does not mean that the base 'explains' money rather than the other way round. If one wanted to predict the growth of M3 over the next six to 12 months, the level of monetary base today would not be much help, but forecasts of bank lending and the PSBR would be.
180. Meek, 'Comment', p. 70.
181. Friedman, 'Response', p. 58.
182. J.M. Keynes, A Treatise on Money: 2. The Applied Theory of Money (1930), reprinted in Collected Writings, vol. VI (1971), pp. 224 and 225.
183. J.M. Keynes, The General Theory of Employment, Interest and Money (1936), reprinted in Collected Writings, vol. III (1973), p. 327.
184. Keynes, Treatise 2, in Collected Writings, vol. V (1971), pp. 30-32 and pp. 217-30. These distinctions anticipate the more celebrated analysis of the motives for holding money in The General Theory.
185. HM Treasury press release, 19 October 1978. Speech by Rt Hon. Denis Healey, MP, Chancellor of the Exchequer, to the Lord Mayor's dinner.
186. The quotation is from p. 97 of P.E. Middleton, 'The relationship between fiscal and monetary policy', in M.J. Artis and M.H. Miller (eds), Essays in Fiscal and Monetary Policy (Oxford: Oxford University Press, 1981), pp. 95-116.
187. See pp. 21-3 of T.G. Congdon, 'The analytical foundations of the Medium-Term Financial Strategy', in M. Keen (ed.), The Economy and the 1984 Budget (Oxford: Basil Blackwell for the Institute of Fiscal Studies, 1984), pp. 17-29.
188. Mentioned on p. 5 of J.L. Jordan, 'The Anderson Jordan approach after nearly 20 years', Federal Reserve Bank of St Louis Review, October 1986, pp. 5-8.
189. Friedman, 'Response', p. 56.
190. The quotation is from p. 2 of C.J. Allsopp, 'The assessment: monetary and fiscal policy in the 1980s', Oxford Review of Economic Policy, vol. 1, no. 1, Spring 1985, pp. 1-19.
191. Friedman, 'Response', p. 59.
192. Mayer, Monetarism, pp. 24-5.
193. Keynes, General Theory, p. 306.
194. Thus, for example, Laidler's awareness of trade union power may have been one reason for his advocacy of a 'gradualist' approach to the elimination of inflation. See D. Laidler on the case for gradualism, in Laidler, Monetarist Perspectives (Oxford: Philip Allan, 1982), ch. 5, pp. 176-7.
195. M. Friedman, Unemployment versus Inflation? (London: Institute of Economic Affairs, 1975), pp. 30-35. The quotations are from pp. 32 and 33.
196. A. Budd, S. Holly, A. Longbottom and D. Smith, 'Does monetarism fit the UK facts?', in B. Griffiths and G.E. Wood (eds), Monetarism in the United Kingdom (London: Macmillan, 1984), pp. 75-119.
197. Keynes, Tract, p. 126.
198. See, for example,M. Parkin and G. Zis (eds), Inflation in Open Economies (Manchester: Manchester University Press and Toronto: University of Toronto Press, 1976).
199. See R.J. Ball and T. Burns, 'Long-run portfolio equilibrium and balance-of-payments adjustment in econometric models', in J. Sawyer (ed.), Modelling the International Transmission Mechanism (Amsterdam: North-Holland, 1979). It was Burns's position in the exchange rate controversy of 1977/78, and his papers on the interrelationship between fiscal and monetary policy, which gave him a reputation as a monetary economist - or even as a monetarist - in the public debate and so led to his appointment as Chief Economic Adviser in January 1980.
200. (See G. Howe, Conflict of Loyalty [London: Pan Books, 1994], p. 156.) In his paper on 'Exchange rate policy in the United Kingdom', in S. Holly (ed.), Money, Inflation and Employment: Essays in Honour of James Ball (Aldershot, UK and Brookfield, US: Edward Elgar, 1994), pp. 26-38
201. Budd highlights Ball's role in the 1977 debate. The final two sentences of Budd's paper read, 'The challenge was to incorporate the monetarist ideas into an empirical model of the UK economy. That is what Ball and his colleagues were able to do and that is why they played a major role in reshaping ideas and were able to contribute to a significant change in policy' (p. 37).
202. Reprinted in M. Friedman, Essays in Positive Economics (Chicago, IL: University of Chicago Press, 1953).
203. Friedman, 'Response', p. 53.
204. Keynes, Tract, p. 126.
205. G. Maynard, The Economy under Mrs Thatcher (Oxford: Basil Blackwell, 1988), p. 100.
206. A. Walters, Britain's Economic Renaissance (New York and Oxford: Oxford University Press, 1986), pp. 117 and 121
207. The description of M3 as a 'credit aggregate' was surprising. M3 consists of notes, coin and bank deposits. To say that its growth is driven by bank credit is not to say that bank deposits are the same thing as bank notes. (They evidently are not.) In any case, in the modern world where no money is backed by a commodity, the growth of M1 - or, indeed, even of M0 - is also driven by credit.
208. (See T. Congdon, 'Credit, broad money and the economy', in D. Llewellyn [ed.], Reflections on Money [London: Macmillan, for the Economic Research Council, 1989], pp. 59-82.)
209. Walters mentioned in a footnote on p. 118 of Britain's Economic Renaissance that he had used 'M3 statistics' to make an accurate prediction of 15 per cent inflation in 1974. See the footnote on p. 84 of T. Congdon, Money and Asset Prices in Boom and Bust (London: Institute of Economic Affairs, 2005) for more on Walter's shifting views on the money aggregates.
210. Liverpool Research Group in Macroeconomics, Quarterly Economic Bulletin, October 1987, p. 13. If this proposition were true, it would have drastic implications for economic theory and policy. But it overlooks the banks' liquidity-transformation role. Since cheques can be written against bank deposits and there is no loss of cheque-writing ability because of the existence of bank loans, the simultaneous expansion of deposits and loans increases the economy's liquidity and can change behaviour.
211. More direct damage to British monetarism came in other ways. For example, the Observer - which, under the lead of its Economics Editor,William Keegan, was strongly anti-monetarist - reprinted Friedman's 1980 evidence to the Treasury and Civil Service Committee. It correctly judged that this evidence would weaken the credibility of official policy. For the influence of the New Classical economist, Eugene Fama, on Minford's enthusiasm for M0, see note 37 to Essay 14 on p. 315.
212. Walters, Renaissance, p. 135.
213. P. Minford, 'The exchange rate and monetary policy', in W.A. Eltis and P.J.N. Sinclair (eds), The Money Supply and the Exchange Rate (Oxford: Clarendon Press, 1981), pp. 120-42. The quotation is from p. 121.
214. Again, see the chapter on bank lending and monetary control in Goodhart, Monetary Theory. On pp. 126 Goodhart noted that 'official reactions in the gilts market to developments in the monetary aggregates. .. have been relatively successful in offsetting unforeseen variations' in bank lending and other influences on broad money growth.
215. Walters, Renaissance, pp. 128 and 131.
216. These worries, which were particularly serious in Italy, Ireland and Belgium, are discussed in chapters 1-3 of T. Congdon, The Debt Threat (Oxford: Basil Blackwell, 1988).
217. Perhaps it should not come as a surprise, after his remarks to the Treasury and Civil Service Committee in 1980, that Friedman should say in a letter to The Wall Street Journal on 4 September 1984 that he did not regard the USA's budget deficit - then about 4 per cent of GDP - as a major issue or a cause for concern
218. Keynes, Tract, p. 147.
219. D. Hendry and N.R. Ericsson, 'Assertion without empirical basis: an econometric appraisal of Monetary Trends in the United States and United Kingdom, by Milton Friedman and Anna Schwartz', Bank of England Panel of Economic Consultants, Monetary Trends in the United Kingdom, panel paper no. 22, October 1983, pp. 45-101.
220. N. Kaldor, 'The new monetarism', Lloyds Bank Review, July 1970, pp. 1-17, reprinted on pp. 261-78 of A. Walters (ed.), Money and Banking (Harmondsworth: Penguin Books, 1973). See, in particular, p. 277
221. In the late 1970s Budd and Burns also argued that the fiscal position had a strong medium-term influence on the rate of monetary growth. See A.P. Budd and T. Burns, 'The relationship between fiscal and monetary policy in the LBS model', Discussion Paper no. 51 (Econometric Forecasting Unit: London Business School, June 1978).
222. The breakdown of 'Kaldor's rule' was noted in J.H.B. Tew, 'Monetary policy', in F.T. Blackaby (ed.), British Economic Policy 1960-74 (Cambridge: Cambridge University Press, 1978), ch. 5, pp. 218-303
223. See, particularly, pp. 277-8. Ironically, for those concerned that excessive money supply growth would lead to inflation, Kaldor's rule justified official action to constrain the budget deficit, as incorporated in the Conservatives' Medium-Term Financial Strategy from 1980.
224. If this is not immediately apparent, the negative output gap increased on average by 0.17 per cent per quarter (that is, at an annualized rate of 0.7 per cent) in the seven quarters to Q3 1983, according to Nickell. 0.7 per cent is 0.2 per cent more than 0.5 per cent, which (I suggest) would be within a trend corridor.
225. See Essay 4, on 'Did Britain have a "Keynesian revolution"?', for more discussion
226. As noted in Essay 7, the emphasis on controlling the PSBR as a key aspect of monetarism seems to have been distinctively British. The author set out the background to British monetarists' concern about high budget deficits in 'The analytical foundations of the Medium-Term Financial Strategy', first published in the May 1984 issue of Fiscal Studies and also as pp. 65-77
227. T. Congdon, Reflections on Monetarism (Aldershot,UK and Brookfield, US: Edward Elgar for the Institute of Economic Affairs, 1992).
228. 'Academic adherents of monetarism were in a small minority in Britain in the 1970s. However, the impact of [their] theories on policy would seem to have been substantial.' (J. Tomlinson, Public Policy and the Economy since 1900 [Oxford: Clarendon Press, 1990], p. 297.)
229. Large tax increases led to a big reduction in the cyclically adjusted budget deficit between 1992 and 1995, while the level of output was beneath trend. But - in contrast with the somewhat similar circumstances in 1981 which prompted the letter to The Times from the 364 - there was barely a whimper of dissent from the academic Keynesians about the 'tightening' of fiscal policy.
230. Chapter 8 of Lawson's semi-autobiography The View from No. 11 is on 'the black art of monetary control'. In a footnote on p. 77 he says that the subject matter of the chapter 'is an issue of passionate interest to a small number of people and mind-numbing gobbledygook to many others'. He then remarks, 'The general reader can safely turn straight away to Chapter 9 without losing the thread of this book'. (N. Lawson, The View from No. 11 [London and New York: Bantam Press, 1992].) But the debates between the 'small number of people' to whom Lawson refers were ultimately fundamental in deciding the macroeconomic outcomes of his period as Chancellor and, later, the reputation of the Conservative Party for competence in managing the economy.
231. Lawson, The View from No. 11, p. 111.
232. The author argued that domestically focused money supply targets were incompatible with a fixed exchange rate in an article in The Times on 19 January, 1976. (See pp. 18-21 of his Reflections on Monetarism, where the article is reprinted.) In view of the disastrous results of the period of ERM membership between 1990 and 1992, two sentences from the 1976 article may be apposite. '[T]o adopt a fixed exchange rate is to abandon the independence of monetary policy. It leaves internal inflation and employment objectives at the mercy of foreign central banks.'
233. The role of asset prices in the transmission mechanism from money to the economy is discussed in more detail in the author's Money and Asset Prices in Boom and Bust (London: Institute of Economic Affairs, 2005)
234. In Thatcher's own writings the author has found only one reference to his criticisms of her government's monetary policy. (These criticisms began in early 1986, shortly after the effective ending of broad money targets in October 1985.) The reference is a footnote on p. 710 of the second volume of her memoirs where she says, 'The suggestion that the inflation which began at the end of 1988 and lasted until mid-1991 could be explained by decisions on interest rates and monetary policy in 1985 assumed almost a four-year lag in the effect of monetary expansion on inflation. We know that lags, in Milton Friedman's words, are "long and variable" with an average of about eighteen months. So three to four years is possible, but hardly plausible.' (M. Thatcher, The Downing Street Years [London: HarperCollins, 1993].) In fact, the length of the
235. This sentence invites the misinterpretation that bank lending causes inflation. Note that - in the normal course of events - a new bank loan creates a new bank deposit. So the growth rate of bank lending usually has an important bearing on the growth rate of bank deposits. But bank deposits, not loans, are money. The equilibrium relationships between money and money national income hold, whether the money is created by new bank lending or by banks' purchases of securities.
236. M.J. Oliver, Whatever Happened to Monetarism? (Aldershot, UK and Brookfield, USA: Ashgate, 1997), pp. 151-2.
237. T. Mayer and P. Minford, 'Monetarism: a retrospective', World Economics, vol. 5, no. 2, April-June 2004, pp. 147-85.
238. M. Ricketts and E. Shoesmith, British Economic Opinion: A Survey of a Thousand Economists (London: Institute of Economic Affairs, 1990). A large majority of survey respondents disagreed that the central bank should follow a money supply rule, but agreed - if with reservations - to a wages policy as a means of controlling inflation. See pp. 74-8.
239. The reference to 'pulp forests' was made by Samuel Brittan. (See p. 173 of his paper, 'Inflation and democracy', on pp. 161-85 of F. Hirsch and J.H. Goldthorpe (eds), The Political Economy of Inflation [London: Martin Robertson, 1978].) Literally thousands of papers were written in the 1960s and 1970s about the influence of trade union bargaining on inflation
240. See, for example, J. Johnston and M. Timbrell, 'Empirical tests of a bargaining theory of wage rate determination', in D. Laidler and D. Purdy (eds), Inflation in Labour Markets (Manchester: Manchester University Press, 1974), pp. 79-108.
241. An example of strong emphasis on the income-expenditure model of national income determination is provided by the opening pages of Christopher Dow's Major Recessions: Britain and the World, 1920-1995 (Oxford: Oxford University Press, 2000)
242. C.A.E. Goodhart, Money Information and Uncertainty (1st edition, London: Macmillan, 1975), p. 242.
243. The word 'corporatism' was used, for example, by Mr Peter Jay in his Wincott Lecture on 'A general hypothesis of employment, inflation and politics', reproduced on pp. 33-55 of P. Jay, The Crisis for Western Political Economy (London: Andre Deutsch, 1984). See p. 47.
244. J.M. Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1964, paperback reprint of 1936 edition), p. 379.
245. The phrase 'interventionist bias' may seem a little shrill, but opinion surveys of British university economists confirm that the great majority have been and remain supporters of planning and intervention with the price mechanism. See Ricketts and Shoesmith, British Economic Opinion and W. Beckerman (ed.), The Labour Government's Economic Record: 1964-70 (London: Duckworth, 1972), both passim. There can also be little doubt about the bias of elite opinion in the immediate aftermath of the Second World War. According to George Orwell, writing in 1945: 'Among the intelligentsia, it hardly needs saying that the dominant form of nationalism is Communism. .. A Communist, for my purposes here, is one who looks upon the U.S.S.R. as his Fatherland and feels it his duty to justify Russian policy and advance Russian interests at all costs. Obviously, such people abound in England today, and their direct and indirect influence is very great.' S. Orwell and I. Angus (eds), The Collected Essays, Journalism and Letters of George Orwell, vol. III (Harmondsworth: Penguin Books in association with Secker and Warburg, 1971, paperback reprint of 1968 hardback original), p. 414.
246. J. Tobin, Policies for Prosperity (Brighton: Wheatsheaf Books, 1987), pp. 265-6.
247. R.J. Ball and T. Burns, 'The inflationary mechanism in the UK economy', American Economic Review, vol. 66, September 1976, pp. 467-84.
248. In its Quarterly Review of May 1973 the National Institute opined - in the middle of the biggest boom in the post-war period - that 'there is no reason why the present boom should either bust or have to be busted'
249. The alarm was expressed in the weekly columns of Peter Jay in The Times, Samuel Brittan in the Financial Times and other commentators. On 29 April 1975 The Wall Street Journal carried a leading article entitled 'Goodbye, Great Britain'.
250. 'Butskellite' is a corruption of the names of Reginald Butler, Conservative Chancellor of the Exchequer from 1951 to 1955, and Hugh Gaitskell, leader of the Labour Party in the 1950s
251. The first edition of Karl Popper's polemical The Poverty of Historicism (London: Routledge and Kegan Paul), written 'in memory of the countless men and women of all creeds or nations or races who fell victims to the fascist and communist belief in Inexorable Laws of Historical Destiny', was published in 1957 and went through five reprints in the 1960s
252. T. Benn, Arguments for Socialism, ed. C. Mullin (Harmondsworth: Penguin, 1980, originally published in 1979), p. 44.
253. N. Annan, Our Age: Portrait of a Generation (London: Weidenfeld and Nicholson, 1990), passim but especially chapter 26 'Our vision of life rejected'; and B. Magee, Confessions of a Philosopher (London: Weidenfeld and Nicholson, 1997), pp. 413-15.
254. T. Mayer and P. Minford 'Monetarism: a retrospective', World Economics, vol. 5, no. 3, April-June 2004, p. 182. For the antecedents to the MTFS, see G. Pepper and M. Oliver, Monetarism under Thatcher: Lessons for the Future, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, 2001, especially pp. 8-20.
255. A large part of the rationale for the references to 'prudence' in Mr Gordon Brown's speeches and to the more extended treatment in the 1998 Treasury paper on Stability and Investment for the Long Term is to be sought in ideas of inter-generational equity developed in the last 20 years by the American economist, Laurence Kotlikoff, and others. These ideas have nothing whatever to do with Keynes or Keynesianism. New Labour's rules are discussed in Essay 5 in this book. The author proposed that fiscal policy should be organized to achieve medium-term stability in the ratio of public debt to GDP in a paper given the Money Study Group at Brasenose College, Oxford, on 14 September 1976 and reprinted in pp. 39-49 of his 1992 Reflections on Monetarism (Aldershot, UK and Brookfield, US). In effect, the 1976 Money Study Group paper anticipated the later announcement of New Labour's 'sustainable investment rule' by over 20 years. Nevertheless, a newspaper report of 23 June 2006 ('Warm tributes paid to economic policy-maker', Financial Times, occasioned by the tragically early death of the City economist, David Walton), by Chris Giles and Scheherezade Daneshku, said that 'David Walton's greatest legacy to economic policy was in devising two new rules of thumb - debt sustainability and the golden rule - in November 1993 with Gavyn Davies, the former chief economist of Goldman Sachs'. These rules were apparently 'adopted enthusiastically by Mr. [Gordon] Brown in opposition and subsequently in government'. The author has been unable to track down any papers written by Walton and Davies in which they set out the case for New Labour's rules, although they may well have argued for them in oral presentations to Mr Brown.
256. T. Congdon, 'The UK's achievement of economic stability: how and why did it happen?', World Economics, vol. 3, no. 4, October-December 2002, pp. 25-41, and reprinted here as Essay 13.
257. Mayer and Minford did indeed say that 'some of its [monetarism's] basic ideas have become so widely accepted that they are no longer monetarist' (p. 183).
258. K. Bain and P. Howells, Monetary Economics: Policy and Its Theoretical Basis (Basingstoke: Palgrave Macmillan, 2003), p. 327.
259. In an important respect the demand for money remained stable throughout the 1980s and 1990s. Of the three non-bank, non-public sectors in the UK (the household, corporate and financial sectors), the largest money-holder from the early 1960s until today has been the household sector. A standard finding in all econometric work is that the household sector's demand-for-money function has remained stable, according to the usual significance tests. (See, for example, L. Drake and K.A. Crystal, 'Personal sector money demand in the UK', Oxford Economic Papers, vol. 49, no. 2, April 1997, pp. 188-206, and R.S.J. Thomas, 'The demand for M4: a sectoral analysis. Part I - The personal sector', Bank of England Working Paper, no. 61, 1997.) The author first pointed out the stability of household sector money-holding behaviour in a research paper published in May 1986 when he was working for the stockbroking firm, L. Messel & Co., which was then being acquired by (what become) Lehman Brothers. Note that in these years 'the personal sector' became 'the household sector', because of official redefinitions, while the data were often revised. These changes did not alter the key point, that the household/personal sector's demand for money was stable over a period of many decades, despite financial deregulation, macroeconomic upheaval, large changes in interest rates and so on.
260. More precisely, a lower probability value would attach to a specific range of values around, say, the central value of the growth rate of income forecast for a particular value of the growth rate of money
261. For the Loughborough speech, see 'Financial change and broad money', in the Bank of England Quarterly Bulletin, vol. 26, no. 4, December 1986, pp. 499-507
262. It would be nice to think that Leigh-Pemberton - who had been Thatcher's personal appointee to the governorship - knew what he was talking about. He has written nothing of significance in his own name on monetary theory or policy since leaving the Bank of England. (In his entry in People of Today, he lists his recreations as 'country pursuits'.) According to Lawson in The View from No. 11 (London and New York: Bantam Press, 1992), the 'principal author' (p. 635) of the Loughborough speech was Eddie (later Sir Edward) George, who became the Governor of the Bank of England after Leigh-Pemberton.
263. For an explanation of the phrase 'forecasters' droop', see Essay 3, p. 73.
264. See the three chapters on pp. 50-154 of G. Pepper, Inside Thatcher's Monetarist Revolution (London and Basingstoke: Macmillan, 1998) for a comparison of monetarist and non-monetarist forecasts. See also pp. 191-4 of the author's Reflections on Monetarism, based on an article in The Spectator of 11 March 1989, for an account of the role of monetary data in the largely correct forecast for 1988 made by his forecasting team
265. L. Messel & Co., and D. Smith, From Boom to Bust (Harmondsworth: Penguin, 1992), pp. 69-70. According to Lawson, in the mid-1980s 'nearly all the reputable monetarist gurus - with the exception of the City analyst Tim Congdon - so far from urging broad money targets on me criticized me for giving too much influence to broad money in general and £M3 in particular'. (Lawson, The View from No. 11, p. 453.) There is some truth in what Lawson says, but there were in fact a small number of less well-known City economists with similar views to the author's.
266. In view of the lack of support for monetarism among academic economists, it may seem puzzling that monetarism had so much influence on the Conservative Party in the late 1970s and early 1980s. The author's surmise is as follows. The UK has five kinds of economist
267. A. Budd, 'The quest for stability', Julian Hodge Institute of Applied Macroeconomics annual lecture, Cardiff, annual lecture given on 25 April 2002. (Printed as a pamphlet jointly by Cardiff Business School and Julian Hodge Bank.) The lecture was republished in the autumn 2002 issue of World Economics, vol. 3, no. 3.
268. The author received help from Mr Richard Wild, then of Cardiff Business School and now at the Office for National Statistics, in the preparation of the data
269. See pp. 269-70 and notes 5, 6 and 8 below for the belief that the first 25 years were unusually stable because of Keynesian policies.
270. Budd's emphasis on the continuity of policy from 1992 contrasts with claims of a sharp discontinuity in 1997 in Reforming Britain's Economic and Financial Policy, a collection of Treasury papers and speeches edited by Ed Balls and Gus O'Donnell. In the foreword to this book, Mr Gordon Brown, the Chancellor of the Exchequer, said, 'My first words from the Treasury. .. were to reaffirm for this government our commitment to the goal set out in 1944 of high and stable levels of growth and employment, and to state that from 1997 onwards the attainment of this goal would require a wholly new monetary and fiscal framework.' A few sentences later Brown talked of 'a new paradigm' in 1997. (E. Balls and G. O'Donnell [eds], Reforming Britain's Economic and Financial Policy [Basingstoke and New York: Palgrave, 2002], p. x.)
271. S. Williams, Politics is for People (Harmondsworth: Penguin, 1981), p. 17.
272. W. Godley and F. Cripps, Macroeconomics (Oxford: Oxford University Press, also in Fontana paperback, 1983), pp. 13-14.
273. J.M. Keynes, The General Theory (London: Macmillan, paperback edition 1964, originally published 1936), p. 378.
274. C.A.R. Crosland, The Future of Socialism (New York: Schocken paperback edition, 1963), p. 79.
275. See, for example, Hahn's comment in the 1981 Mitsui lectures that 'inflation as such is not an outstanding evil, nor do I believe it to be costly in the sense that economists use that term'. (F. Hahn, Money and Inflation [Oxford: Blackwell, 1982], p. 106)
276. The September 2002 issue of Euromoney magazine included a quotation (p. 67) from Joseph Stiglitz, the Nobel-prize-winning economist, to the effect that 'Gordon Brown is a new Keynesian'. The September 2002 issue of Institutional Investor magazine carried an interview with Brown where he said, 'We've reduced [public] debt very substantially in Britain, from 44 per cent of national income to 30 per cent. .. So we are fiscal disciplinarians'. If Keynesianism is to be equated with fiscal discipline, then Picasso's Guernica was stimulated by T.S. Eliot's poetry and Maoism was heavily indebted to John Stuart Mill. Perhaps - by the phrase 'New Keynesianism' - Stiglitz meant the adjustment of interest rates according to the level of the output gap. But - as explained in the appendix to the Introduction - the label 'New Keynesian' is misapplied to this policy prescription.
277. At its first meeting in early 1993, five out of the seven members of the Treasury Panel did not want its reports to include a section on monetary developments. The author of this essay wrote two Open Letters to the other members of the Panel, urging that a section on money was needed. (See the March and April 1993 issues of the Gerrard & National Monthly Economic Review.) Thereafter, a section on monetary developments did become part of the Treasury Panel's agenda.
278. See the note on 'The transmission mechanism of monetary policy' delivered to the Treasury Committee of the House of Commons and the House of Lord Select Committee in May 1999. The note is also discussed in note 9 to Essay 14.
279. A. Hauser and A. Brigden, 'Money and credit in an inflation-targeting regime', autumn 2002, pp. 299-307, Bank of England Quarterly Bulletin. The quotation is from p. 299.
280. The address was republished in Milton Friedman, The Optimum Quantity of Money (London: Macmillan, 1969), pp. 95-110.
281. In a 1952 essay 'The methodology of positive economics', Friedman argued that economic theory generated 'a body of generalizations' whose validity stemmed from 'the accuracy of their predictions'. ('The methodology of positive economics', Essays in Positive Economics [Chicago and London: University of Chicago Press, 1953], pp. 3-43.)
282. '[A]bove-trend growth can be reconciled for several years with low inflation.' (Submission by Professor Tim Congdon of Lombard Street Research in the February 1993 report of the Panel of Independent Forecasters [London: HM Treasury, 1993], p. 25.)
283. See also pp. 9-11 of the June 1999 issue of Lombard Street Research's Monthly Economic Review, with Lord Burns' lecture on Lombard Street Research's tenth birthday. (The lecture was called 'The new consensus on macroeconomic policy: will it prove temporary or permanent?'.)
284. N. Lawson, The View from No. 11 (London and New York: Bantam Press, 1992), passim. (See also Essay 3 in this collection for British economists' fondness for basing interest rates on the exchange rate.)
285. E. Johnson and D. Moggridge (ed.), The Collected Writings of John Maynard Keynes, vol. XI, Economic Articles and Correspondence (London: Macmillan Press for the Royal Economic Society, 1983), p. 376.
286. W.J. Barber (ed.), The Works of Irving Fisher, vol. 4, The Purchasing Power of Money (London: Pickering and Chatto, 1997, originally published by Macmillan in New York in 1911), p. 27.
287. Barber (ed.), Works of Fisher, vol. 5, Elementary Principles of Economics (London: Pickering and Chatto, 1997, originally published by Macmillan in New York in 1912), pp. 242-4.
288. The analysis on pp. 242-7 of Elementary Principles is different from that in chapter 4 of Purchasing Power, even though chapter 4 had ostensibly been on the same subject of 'the transition period' (that is, the passage of events in the transmission mechanism). Chapter 4 of Purchasing Power is highly Wicksellian, with much discussion of the relationship between interest rates and the rate of price change, and then between real interest rates and credit demands. This Wicksellian strand was dropped in pp. 242-7 of Elementary Principles.
289. See M. Friedman, 'Statement on monetary theory and policy', given in Congressional hearings in 1959, reprinted on pp. 136-45 of R.J. Ball and P. Boyle (eds), Inflation (Harmondsworth: Penguin Books, 1969). The quotations are from p. 141.
290. D. Patinkin, Money, Interest and Prices (New York: Harper and Row, 2nd edition, 1965), p. 21
291. Keynes is sometimes said to be the originator of the idea of 'real balances', as he used the general idea in his 1923 book A Tract on Monetary Reform in a discussion of inflation in revolutionary Russia in the early 1920s. Patinkin's view on the importance of the real-balance effect seems to have changed in his later years. In an entry on 'Real balances' in the 1987 Palgrave he said, 'the significance of the real-balance effect is in the real of macroeconomic theory and not policy'
292. P. Newman, M. Milgate and J. Eatwell (eds), The New Palgrave: Money [London: Macmillan, 1989, based on 1987 New Palgrave], p. 307.)
293. This claim is controversial. Patinkin regarded the real-balance effect as a kind of wealth effect. It was pointed out that, as the banking system's assets and liabilities must be equal, that part of the quantity of money represented by banks' deposit liabilities (so-called 'inside money', from a distinction proposed by Gurley and Shaw in their 1960 Money in a Theory of Finance [Washington, DC: Brookings Institution, 1960]) could not represent a nation's net wealth. A logical implication was that the real-balance effect related only to 'outside money', often taken to be equivalent to monetary base assets issued by the central bank. It was then shown that, since the monetary base is modest compared with other elements in a nation's wealth, the real-balance effect is small and cannot have a powerful influence on macroeconomic outcomes. (See, in particular, T. Mayer, 'The empirical significance of the real balance effect', Quarterly Journal of Economics, vol. 73, no. 2, 1959, pp. 275-91.) The emphasis in macroeconomic theory moved away from the real-balance effect towards 'the Keynes effect', to be understood as the effect of changes in the quantity of money on interest rates and so on investment. However, an argument can be made that the only concept of money relevant to the real-balance effect is an allinclusive measure, since agents can eliminate excesses or deficiencies of smaller, lessthan-inclusive measures by transfers between money balances (that is, they can switch between sight and time deposits, or between notes and sight deposits). Such 'money transfers' plainly have no effect on aggregate demand or asset dispositions. (This point is developed in the critique of Minford's views on money on pp. 304-7.) By implication, if the real-balance effect is indeed the sine qua non of monetary theory, it must relate to inside money and cannot be exclusively a wealth effect. (See T. Congdon, 'Broad money vs. narrow money', The Review of Policy Issues, vol. 1, no. 5, 1995, pp. 13-27, for further discussion.) Laidler has also used the phrase 'the real-balance effect' to mean something more than just a wealth effect and claimed that, in the US economy for the years 1954-78, 'the adjustment of real balances towards the desired long-run values has a pervasive and systematic influence on the macroeconomy'. (D. Laidler, Money and Macroeconomics [Cheltenham: Edward Elgar, 1997], p. 172.) Note also that the claim that outside money, that is, the central bank's liabilities, constitutes net wealth to the private sector of the economy is debatable. It would obviously be invalid if the central banks' assets were all claims on the private sector. But, even if government securities were all of the central bank's assets and - in accordance with Barro's doctrine of Ricardian equivalence - government debt were judged not to be net wealth to the private sector, then, utside money also cannot be net wealth to the private sector, and he private sector's net wealth cannot be increased when the central bank expands its balance sheet. Yet virtually all macroeconomists accept that something important happens when the central bank shifts the position of the supply curve of the monetary base and changes short-term interest rates. If this effect is not a net wealth effect, how does it change anything and why does it matter? And, if it matters so much even though it is not a wealth effect, why is it that changes in inside money do not matter at all? These are some of the issues to which the author plans to return in his book Money in a Modern Economy (forthcoming), to be published by Edward Elgar.
294. In the autumn of 1995 the Journal of Economic Perspectives published a number of papers on the transmission mechanism of monetary policy. Not one of the papers focused on the real-balance effect as the heart of this mechanism. Indeed, despite Fisher's and Friedman's clear statements many years earlier, and Friedman's and many others' vast output on the empirical relationship between money and the economy, Bernanke and Gertler opined that 'empirical analysis of the effects of monetary policy has treated the monetary transmission mechanism as a "black box"' (B. Bernanke and M. Gertler, 'Inside the black box: the credit channel of monetary policy transmission', Journal of Economic Perspectives, Autumn 1995, pp. 27-48. The quotation is from p. 27.)
295. The Monetary Policy Committee of the Bank of England, The Transmission Mechanism of Monetary Policy (London: Bank of England, in response to suggestions by the Treasury Committee of the House of Commons, 1999), p. 10. The note is believed to have been written by John Vickers, the Bank's chief economist at the time. See also S. Dale and A.G. Haldane, 'Interest rates and the channels of monetary transmission: some sectoral estimates', Bank of England, Working Paper Series no. 18, 1993, for a description of the transmission mechanism in which the quantity of money plays no motivating role.
296. Johnson and Moggridge (eds), Collected Writings of Keynes, vol. V, A Treatise on Money: The Pure Theory of Money (London: Macmillan Press for the Royal Economic Society, 1971, originally published in 1930), ch. 15, 'The industrial circulation and the financial circulation', pp. 217-30
297. Keynes argued that 'the industrial circulation. .. will vary with. .. the aggregate of money incomes, i.e., with the volume and cost of production of current output' (p. 221), whereas 'the financial circulation is. .. determined by quite a different set of considerations' (p. 222). In his words, 'the amount of business deposits. .. required to look after financial business depends - apart from possible variations in the velocity of these deposits - on the volume of trading X the average value of the instruments traded' (also p. 222). Arguably, these remarks contained the germ of the later distinction between the transactions and speculative motives for holding money. In the discussion of the financial circulation in A Treatise of Money securities (that is, equities and bonds) are the alternative to money; in the discussion of the speculative demand to hold money in The General Theory bonds are the alternative to money.
298. M. Friedman and D. Meiselman, 'The relative stability of monetary velocity and the investment multiplier in the United States, 1897-1958' in Stabilization Policies (Englewood Cliffs, NJ: Prentice Hall for the Commission on Money and Credit, 1963), pp. 165-268. See, in particular, p. 217.
299. T. Doggett, 'The 1989 Share Register Survey', Economic Trends, January 1991, pp. 116-21.
300. R. Thomas, 'The demand for M4: a sectoral analysis, Part I - The personal sector', Bank of England, Working Paper Series no. 61, 1997, and K.A. Chrystal and L. Drake, 'Personal sector money demand in the UK', Oxford Economic Papers (Oxford: Clarendon Press, 1967).
301. R. Thomas, 'The demand for M4: a sectoral analysis, Part II - The company sector', Bank of England, Working Paper Series no. 62, 1997 and K.A. Chrystal, 'Company sector money demand: new evidence on the existence of a stable long-run relationship for the UK', Journal of Money, Credit and Banking, 1994, vol. 26, pp. 479-94.
302. The author developed his ideas on UK financial institutions' money-holding behaviour over many years as a stockbroking economist and consultant, when such institutions were his principal clients
303. Of course, every economy has international transactions. Such transactions represent another escape-valve for an excess supply or demand for money balances, in accordance with the monetary approach to the balance of payments. But to discuss the possibilities would take the paper too far. In any case, the incorporation of 'an overseas sector' in data sets on transactions in particular assets is conceptually straightforward. (See Table 14.3.) The overseas sector's transactions become entries in the capital account of the balance of payments. Again, it is conceptually straightforward - although empirically very demanding - to expand the arena of payments, the closed circuit for transactions, so that it becomes the world economy. (The reader may wonder why the essay uses the data for 1994 rather than a later year. The answer is that the Office for National Statistics no longer publishes the data in this form.)
304. The idea that investment adjusts until the market value of a capital equals the replacement cost is associated with James Tobin and 'the Q ratio', that is, the ratio of market value of a firm's capital to its replacement cost. See his article, 'A general equilibrium approach to monetary theory', Journal of Money, Credit and Banking, 1969, vol. 1, pp. 15-29
305. But similar remarks have been made by many economists, including Friedman. See his 'The lag in effect of monetary policy', in M. Friedman, The Optimum Quantity of Money (London: Macmillan, 1969), pp. 237-60
306. reprinted from a paper in 1961 in the Journal of Political Economy, and, in particular, pp. 255-6. When an excess supply of money affects asset markets, the result is 'to raise the prices of houses relative to the rents of dwelling units, or the cost of purchasing a car relative to the cost of renting one' and so on. In Friedman's view, 'the process operates through the balance sheet, and it is plausible that balance-sheet adjustments are sluggish in the sense that individuals spread adjustments over a considerable period of time' (p. 256).
307. Numerous studies identify a relationship between wealth and consumption. See, for example, J. Byrne and E.P. Davis, 'Disaggregate wealth and aggregate consumption: an investigation of empirical relationships in the G7', National Institute of Economic and Social Research Discussion Paper, no. 180 (London: National Institute, 2001).
308. An implication is that the circular flow of funds - such a familiar part of the undergraduate macroeconomic courses - is misleading and unrealistic when it is taken to imply that national income stays in line with national expenditure unless autonomous injections of demand come from the government or overseas. Any agent can sell any asset, obtain a money balance and use the proceeds to buy a good or service which constitutes part of national output, and the purchase leads to increased national income and expenditure. Similarly, any agent can run down a money balance and buy a good or service, with the same effects. Assets differ from money in that the nominal value of money is given, whereas the nominal value of assets can vary without limit. The transactions involved in 'mortgage equity withdrawal' from the housing market - at present a topic of much interest - illustrate the merging of asset markets and markets in current goods and services. Much research on this topic has been conducted at the Bank of England. See, for example, M. Davey, 'Mortgage equity withdrawal and consumption', Bank of England Quarterly Bulletin, Spring 2001, pp. 100-103. The author introduced the concept of equity withdrawal to the analysis of personal sector spending in a paper written jointly with Paul Turnbull in 1982. (T. Congdon and P. Turnbull, 'The coming boom in housing credit', L. Messel & Co. research paper, June 1982, reprinted in T. Congdon, Reflections on Monetarism [Aldershot, UK and Brookfield, US: Edward Elgar for the Institute of Economic Affairs, 1992], pp. 274-87.) (The argument in this note is developed in more length in Essay 9.)
309. N. Kaldor, 'The new monetarism', Lloyds Bank Review, July 1970, pp. 1-17, reprinted on pp. 261-78 of A.Walters (ed.), Money and Banking: Selected Readings (Harmondsworth: Penguin Education, 1973). See, in particular, p. 268 in the book of papers edited by Walters.
310. Patrick Minford, paper from Liverpool Research Group, summer 1996. The passage was discussed in T. Congdon, 'An open letter to Professor Patrick Minford', Gerrard & National Monthly Economic Review, July 1996, pp. 3-12.
311. P. Minford, The Supply Side Revolution in Britain (Aldershot, UK and Brookfield, US: Edward Elgar for Institute of Economic Affairs, 1991), p. 70.
312. Economic Trends: Annual Supplement (London: National Statistics, 2002 edition), p. 245. The data on changes in the sectors' money balances later in this paragraph and in the next few paragraphs come from the database in the National Statistics website, as it was in the spring of 2004.
313. Financial Statistics, September 1972, pp. 88-91, and September 1976, pp. 88-9.
314. The figures for the FT industrial ordinary index are monthly averages
315. Economic Trends: Annual Supplement (London: National Statistics, 2002), p. 245.
316. Financial Statistics, July 1987 and April 1989, table 7.13 in both issues.
317. Financial Statistics, July 1987 and April 1989, table 7.14 in both issues.
318. Note that this is the first occasion that interest rates have been introduced into the narrative. The narrative would undoubtedly have been enriched and been brought closer to reality if they had been introduced earlier, but a perfectly sensible account of events has been given without them.
319. Financial Statistics, August 1992, table 7.22, p. 92, and December 1994, table 5.1B, p. 83.
320. This point was noted on p. 11 of D. Chrystal and P. Mizen, 'Other financial corporations: Cinderella or ugly sister?', Bank of England Working Paper Series, no. 151, 2001. In their words, 'Life insurance companies and pension funds, for example, hold money on deposit but they do not take on significant bank borrowings'.
321. Kaldor's own argument is unsustainable. However, another objection to the Fisher/ Friedman approach is more difficult to handle. This is that the quantity of money is not a deus ex machina; instead it must be endogenous, in that it is determined by processes within the economy. The 'Santa Claus hypothesis' in Fisher's story and the analogous 'helicopter money' idea in Friedman's work are blatantly unrealistic. Money is instead created by governments and central banks, and by banks and their customers, subject to a variety of economic incentives. It is plainly true that, in the real world, money is endogenous in this less ambitious sense. But that does not mean that the real balance effect is not at work. Instead the vital implication of the endogeneity of money is that two types of process need to be distinguished. These are The processes by which money is created, and the processes by which the economy adjusts to changes in the quantity of money (i.e., the real-balance effect). There is no necessity, in any particular quarter or year, either for the quantity of money itself to be in equilibrium (that is, for the banking system's size and deposit liabilities to be stable and unchanging) or for the quantity of money actually in being to be equal to the demand to hold it. Ironically, Kaldor's central claim - that the banking system creates enough money balances to ensure that the demand to hold money equals the supply (and so a real balance effect never unfolds) - prevents discussion of certain problems of macroeconomic instability in a capitalist economy with a banking system. The processes of money supply creation and the processes whereby the economy adjusts to changes in the quantity of money are processes in time. It is possible that the time taken for agents to eliminate excess or deficient money balances is so long that injections or withdrawals of money in the interval are large enough to prevent agents moving back onto their money demand schedules. Agents keep on adjusting their asset dispositions and expenditure on goods and services in order to equate the demand for money with the money supply, but they are constantly frustrated from reaching monetary equilibrium by changes in the money supply. If the changes in the money supply are very rapid (expanding, for example, because of a vast budget deficit, or contracting, for example, because of the effect of debt-deflation on banks' capital and then the quantity of money), they exaggerate the monetary disequilibrium and the economy becomes severely unstable. Examples in one direction are wild hyperinflations and in the other the Great Depression in the USA between 1929 and 1933. The income-expenditure model is useless in understanding such episodes. As Wicksell argued, a modern economy - in which money is created by bank credit - may be inherently unstable, unlike a traditional economy in which all money was a commodity. The suggestions in this note are to be developed in more detail in the author's Money in a Modern Economy (forthcoming), to be published by Edward Elgar.
322. The author has made this point on a number of occasions. See, for example, 'Credit, broad money and economic activity', pp. 171-90, in T. Congdon, Reflections on Monetarism (Aldershot, UK and Brookfield, US: Edward Elgar, 1992), particularly pp. 182-3
323. T. Congdon, 'Broad money vs. narrow money', in The Review of Policy Issues (Sheffield: Sheffield Hallam University, 1995), pp. 13-27. All measures of narrow money are endogenous in that agents' individual attempts to alter their money holdings also change the aggregate quantity of money. An all-inclusive money measure, that is, a broad money measure, is not endogenous in this sense. A broad money measure may nevertheless be endogenous in the sense that it reflects processes within an economy, and particularly processes inside the banking system, subject to price incentives. But the endogeneity of broad money in this sense still leaves it with the ability, when disturbed from an equilibrium level, to change asset dispositions and expenditure patterns, in accordance with the Fisher/Friedman/Patinkin story. See also note 32 above.
324. P. Minford, Markets Not Stakes (London: Orion Business Books, 1998), p. 104.
325. Minford, Markets, p. 105. Milton Friedman in a personal communication with the author complained that this essay's discussion of the irrelevance of the base to financial institutions' behaviour was too long, since the point was obvious. In his reply the author recalled Friedman's own classic 1956 paper restating the quantity theory of money, in which Friedman said 'the theory of the demand for money is a special topic in the theory of capital'. He asked Friedman whether he thought the theory of the demand for narrow money was a special topic in the theory of capital, since - on the evidence of UK's financial institutions' behaviour - it plainly was not. Surely - if economists want to assemble a monetary theory of the joint determination of asset prices and national income - an all-inclusive measure of money must be put to work. Again, the suggestions here are to be developed in more detail in the author's Money in a Modern Economy (forthcoming), to be published by Edward Elgar.
326. The author used the phrase 'too much money chasing too few assets' in a newspaper article in The Times of 9 January 1986, in a reaction on the recent sharp upturn in money supply growth. But it was recognized that inflation was not imminent. Immediately after the mention of money and assets, the comment was, 'But it is nonsense, while unemployment remains above three million, industry has abundant spare capacity and there is scope to increase output, to say that "too much money is chasing too few goods" '.(The article, 'Why Lawson must repent', was reprinted as 'A forecast of a Lawson minboom', pp. 123-5, in Congdon's Reflections on Monetarism.)
327. Minford attributes his own thinking on money - particularly his view that bank credit, bank deposits and the banking system are irrelevant to macroeconomic outcomes - to an American economist, Eugene Fama, and especially to two papers written by Fama in 1980 and 1983
328. See Minford, Supply Side Revolution, p. 73
329. Minford, Markets not Stakes, p. 103.
330. See the Annex, by P. Warburton on 'Econometric analysis of one type of real balance effect', pp. 119-21, to T. Congdon, 'Money, asset prices and the boom-bust cycles in the UK: an analysis of the transmission mechanism from money to macroeconomic outcomes', in K. Matthews and P. Booth (eds), Issues in Monetary Policy (Chichester: John Wiley and Sons, 2006), pp. 103-22.
331. According to one analyst highly critical of the role of the money supply as a policy guide, the results of his work showed that 'money holdings of OFIs might be the best leading indicator of money income of all the monetary variables', although qualifying this by noting that in Q2 1990 his equation overpredicted the OFIs' money holdings. He appeared not to entertain the possibility that the under-prediction relative to the equation indicated that the OFIs were short of money balances, and that this might affect future asset values and the economy. (G. Young, The Influence of Financial Intermediaries on the Behaviour of the UK Economy [London: National Institute of Economic and Social Research, Occasional Papers no. 50, 1996], p. 97.)
332. For an example of scepticism about the monetarist approach to the transmission mechanism, see the criticisms of Friedman made by Goodhart on pp. 190-91 of the 1st edition of his Money, Information and Uncertainty (London: Macmillan, 1975). But in the 2nd edition of Money, Information and Uncertainty (London: Macmillan, 1989) Goodhart was more sympathetic to the monetarist story, particularly when money was seen as a 'buffer-stock' to even out expenditure. (See pp. 281-5 of the 2nd edition.)
333. Friedman claimed that the University of Chicago had an 'oral tradition' of monetary economics, which explained the distinctiveness of its monetary thought in the 1950s and 1960s. The content of economics course at Chicago in those decades was undoubtedly very different from that in Cambridge, England, or Cambridge, Massachusetts.
334. As this is an autobiographical piece, I thought readers might be interested to know that one of my earliest papers - a critique of the then Conservative government's Counter-Inflation Programme - was published in The Bankers' Magazine in 1973. I had written it while at Nuffield College, Oxford, as a postgraduate student. Nigel Lawson was on the same staircase as a Journalist Fellow. He was working (with Jock Bruce-Gardyne) on a book on past blunders in British policy-making, published in 1976 as The Power Game. He very kindly took a few hours to read my paper and commented on it favourably.
335. From 1983 - when Nigel Lawson became Chancellor of the Exchequer - the four key individuals close to Treasury policy-making were Lawson himself, Sir Terence (later Lord) Burns, Sir Peter Middleton and Sir Alan Walters. (Burns was Chief Economic Adviser and Middleton Permanent Secretary to the Treasury, and - when he was not away - Walters was Economic Adviser to the Prime Minister, Mrs Thatcher.) Lawson's views on broad money take up barely a sentence or two of his The View from No. 11 ([London and New York: Bantam Press, 1992] see pp. 78-9) and he was responsible for the introduction of the target for M0 (p. 453); Burns had written on 'international monetarism' and the role of differential monetary growth rates (in different countries) in determining the exchange rate before becoming Chief Economic Adviser in 1980, but he has made no substantial statement on money aggregates and the monetary transmission mechanism since then; Middleton never gave any written justification, in his own name, for whatever views he held in the 1980s on the money aggregates, but he poked fun at monetarists in his 1988 Jubilee Lecture to the National Institute of Economic and Social Research, and that probably represents his true position;Walters shilly-shallied in the course of his career between broad and narrow money, but in the 1980s was committed to narrow money, which he praised on pp. 116-20 of his Britain's Economic Renaissance (New York and Oxford: Oxford University Press, 1986). Of this group Walters was plainly the most interested in monetary economics and the transmission mechanism. For a critique of the views on the money aggregates expressed in Britain's Economic Renaissance, see T. Congdon, Money and Asset Prices in Boom and Bust (London: Institute of Economic Affairs, 2005), pp. 83-5. For a rather cynical survey of the beliefs of the various players, see G. Pepper and M. Oliver, Monetarism under Thatcher: Lessons for the Future (Cheltenham, UK and Northampton, MA, USA: Edward Elgar, 2001).
336. Report of the Committee on the Working of the Monetary System (Cmnd. 827) (London: HMSO, 1959).
337. This point is made, in criticism of Minford's views on M0, on pp. 78-83 of T. Congdon, Money and Asset Prices in Boom and Bust (London: Institute of Economic Affairs, 2005). See also Essay 14, particularly pp. 304-7.
338. See note 23 to Essay 12