Financing Business and Consumer Needs Without Inflation

"Needs" for short-run inventory credit formed the basis of a particular school of thought regarding monetary policy early in the nineteenth century in England, and this phi losophy imbued the Federal Reserve in the United States at its inception. In the early 1930's, a swing of the pendulum in the opposite direction brought into dominance the Quantity Theory, which denied any relevance of business and consumer needs to desirable credit policy. The state was supreme in these matters and could, through appropriate central bank op eration, control the quantity and availability of bank credit and hence—it was thought—the evolution of prices and production. Nowadays the position is less simple. Nonbank financial or ganizations and firms can create near moneys, and the needs of producers for credit may be satisfied outside the banking sys tem. This may reduce the efficacy of Federal Reserve control of inflation; but the control exercised by the Federal Reserve over money may be sufficient to master the situation in all money and credit markets. On the other hand, effective control of inflation does in fact seem to be jeopardized by monopoly pricing by industries and by labor unions; a "need" for money is thus created which is not easily denied by the monetary authority. Some types of direct control of monopoly practices may become unavoidable.