Some observations about the endogenous money theory

The endogenous money theory constitutes the core element of the post-keynesian monetary theory. The first formulation of this theory can be found in the works of Kaldor published in the 1970s. Taking these studies as a starting point, the post-keynesians elaborated two versions of the endogenous money theory which differ in their assumptions about the behaviour of the monetary authorities and the banking system, and hence offer different conclusions about the slope of the money supply curve. The aim of this paper is to evaluate the importance of the endogenous money theory using a criterion which can be defined on the basis of Keynes’s distinction between a real exchange economy and a monetary economy. As is well known, Keynes (1933a, 1933b) uses the former term to refer to an economy in which money is merely a tool to reduce the cost of exchange and whose presence does not alter the structure of the economic system, which remains substantially a barter economy. A monetary economy instead refers to an economic system in which the presence of fiat money radically changes the nature of exchange and the characteristics of the production process. Keynes (1933a, p. 410) notes that the classical economists formulated an explanation of how the real-exchange economy works, convinced that this explanation could be easily applied to a monetary economy. He believed that this conviction was unfounded and stressed the need to elaborate a ‘monetary theory of production, to supplement the real–exchange theories which we already possess’ (Keynes, 1933a, p. 411). The specification of the elements determining the non-neutrality of money is thus the key factor differentiating Keynes’s theory from the classical one.1 The criterion used to evaluate the significance of the endogenous money theory is whether it enables us to elaborate on and to broaden the explanation of the justification the nonneutrality of money formulated by Keynes. In The General Theory the reasons for the non-neutrality of money are grounded in the store of wealth function of money; the liquidity preference theory is the element on which the keynesian explanation of income fluctuation is based. The importance of the money endogeneity theory can therefore be assessed in relation to its ability to specify determinant factors for the non-neutrality of money that have not been highlighted by the liquidity preference theory; in other words, the significance of the endogenous money theory depends on its capacity to bring out elements of a monetary economy that have been overlooked in the liquidity preference theory. This paper presents the following results. First of all, it shows that the endogenous money theory makes it possible to extend the analysis of the factors accounting for the non-neutrality of money beyond what Keynes has done in The General Theory; in particular this paper argues that the theory of money endogeneity obtains this result by underlying the means of payment function of money. Second, the work shows that the money endogeneity theory gives credence to certain points developed by Keynes in some works published in 1933 and between 1937 and 1939. Third, the work emphasises that the novel aspects of the money endogeneity theory do not depend on the particular version of this theory, i.e. they do not depend on the slope of the credit supply curve. Finally, in the paper the most significant aspects of the money endogeneity theory are presented by means of a theoretical model that distinguishes clearly between the credit market and the money market. It is shown that an important element of the money endogeneity theory is that it elaborates an alternative credit theory to the neoclassical one.The paper is divided into three parts. In the first one, the most relevant aspects of the money endogeneity theory are presented starting from Kaldor’s work, and we bring out the consistency between that theory and the considerations formulated by Keynes in some writings which preceded and followed the publication of The General Theory. In the second part the two versions of the money endogeneity theory are analysed and it is noted that the debate between the supporters of these two versions risks overshadowing the innovative aspects of the money endogeneity theory that do not depend on the slope of the credit and money supply curves. Then in the third part, the aspects that distinguish a monetary economy from a real-exchange economy and that emerge because of the money endogeneity theory are described.