The Reform of the Federal Reserve in 2008: Is the Money Supply Endogenous or Exogenous?

In modern economies, the flow of money is determined by endogenous and exogenous factors. This means that the supply of monetary base and bank credit is driven by funding requirements of firms to produce. But, at the same time, it means that the government can influence those flows, just as it does with the interest rate or other instruments. Such a view has been advocated for some time by Marx and the Banking School. This vision of the monetary system is opposed to the idea that the money supply is purely exogenous, as argued by monetarism, or purely endogenous, according to the “horizontalist” conception. Several recent events, such as the massive central banks’ sterilizations of currency purchases or the reform of the Federal Reserve in 2008, confirm its exogenous dimension, recently denied by various streams. The Fed’s reform introduced what became known as the principle of “decoupling” or “divorce” of the interest rate and the monetary base (Keister and McAndrews, Borio and Disyatat, Lavoie). That is, the possibility of an independent management of each one. Thus, it has reopened the debate on the functioning of money and, also, stimulated the rethinking of the subject by various theoretical schools.