Essays in Monetary Theory and Policy: On the Nature of Money (8)

By Ken Yamat*

What is the nature of money?

Money is a medium of exchange, a store of value, and a unit of account as described below:

In an important sense our task throughout this monograph has been to develop a theory of the nature of money. When asked “What is money?”, most people respond – quite reasonably – that money is used to buy something. This gets at money’s use as a medium of exchange, which is of course the most familiar use. If pressed further, most would also say that money is something one can hold as a store of value. Indeed, economists recognize money as the safest and most liquid store of value available, at least outside situations with high inflation, when money’s value falls rapidly. Some people will also mention the use of money to pay something down, debt, with money used as a means of payment, or means of final settlement of contractual obligations. Finally, if we ask people “How much is that worth?” – pointing to just about anything- a common response would be to evaluate with in terms of money, this time acting as the unit of account used to measure wealth, debt, prices, economic value. (Wray, 2013)

Marx believed money was a unit of account when he said, “Within countries, currencies are the national units of account.” A unit of account is necessary to make some type of meaning out of value. A unit of account can be anything such as 100 bushels of wheat without actually having to take delivery. You can say your car is worth 100 bushels of wheat while mine is only worth half or 50. Without this unit of account we can still say “mine is worth more than yours” but the question is by how much is mine worth more than yours. Without this unit of account we will not know the value of a particular object thus we use this unit account to further trade.

Orthodox economists see money as neutral (and this is rejected by the non orthodox approach). An increase in the money supply will increase the price level and the prices of each commodity or item stays relative to everything else. If before the increased price level a hamburger was a dollar and pencil was two after the new price level a hamburger would be two dollars and a pencil four.  The higher price level was only a nominal increase and not a real increase thus money is neutral in the long run.

Classical macroeconomics emphasized several key long-run properties of the economy, including the neutrality of money and the quantity theory of money. Neutrality holds if the equilibrium values of real variables–including the level of output–are independent of the level of the money supply in the long run. Super neutrality holds when real variables–including the rate of growth of output–are independent of the rate of growth in the money supply in the long run. The quantity theory of money holds that prices move proportionately to changes in the money supply so that inflation is linked to money growth. Together, these propositions identify both what monetary policy can achieve and what it cannot and therefore delineate the responsibilities of central banks. They mean that central banks have no effect on the level or growth rate of output in the long run but do determine the rate of inflation in the long run. (Meyer, 2001)

According to Wray, “Heterodox economists share an endogenous approach to money that insists that money is an essential component of the normal operation of the capitalist economy. Hence, they deny that money could be neutral, whether in the short run or in the long run.”

Heterodox theory rejects the loanable funds market, where the interest rate and the quantity loaned is dependent on the supply and demand for loanable funds  in favor of Keynes’ liquidity preference theory, where the money supply is vertical and an increase in the money supply is a shift of the money supply line to the right and the quantity demanded is the negatively sloped demand curve; or the horizontalist approach where the money supply is a horizontal line, hence an unlimited money supply at the interest rate set by the federal reserve and the demand for money is the negatively sloped line. The interest rate is on the vertical axis and national income is on the horizontal axis. The overnight interest rate is set by the central bank and the money supply is unlimited at that interest rate. Thus quantity loaned is dependent on the interest rate and the pool of qualified borrowers and not the money supply.

Money is debt

Since money originates as a loan it is in essence debt. When a borrower is granted a loan to make a purchase, for example a vehicle, the borrower gives his IOU or liability to the bank which is an asset to the bank and debt to the borrower. The car dealership received cash from the bank and they used this to pay their employees and other expenses etc. Being that the money supply is “horizontal” the bank did not have this money to lend but the central bank cleared the loan.  Then the central bank increased the digits (to originate the overnight loan to the bank) and created a debt to lending bank which is an asset, for accounting purposes, to the central bank in essence creating money out of thin air as debt. The money the employees and venders received originated as debt and continues to be debt until the loan is paid off of which time the central bank destroys the money. Thus money is debt.

Typically, it is a demand deposit liability of a bank. It is matched on the other side of the bank’s balance sheet by a loan, which represents the debt of the borrower in whose name the bank’s IOU is issued. In other words, one who wants to undertake production of commodities (by means of purchasing commodities) must issue an IOU to the bank (a “loan” held as the bank’s asset) and obtain in return a bank deposit (the bank’s liability). The commodities to be used as means of production are then purchased by transferring the deposit (the bank debits the producer’s deposit and credits the deposits of the sellers of means of production). When the producer finishes the production process and sells the produced commodities, her deposit account is credited and the purchasers of the sold commodities have their deposit accounts debited. At this point, if the producer desires, she can use her deposit account to “repay” the loan (the bank simultaneously debits the demand deposit and the loan). All of this can be done electronically and is rather like our scorekeeper who takes points off the scoreboard. (Wray, 2010)

Money is endogenous and the interest rate is exogenous

Neoclassical economics side with the “money is exogenous” approach where banks lend after they received reserves from the central bank. This is rejected by the non orthodox economists.

Heterodox economists view money as endogenous where the overnight interest rate is set by the central bank and member banks lend without regard to their reserves while central bank accommodates reserves “horizontally” at overnight interest rate. Thus bank reserves are “unlimited” at the interest rate set by the central bank. Thus the money supply is endogenous and the overnight interest rate is exogenously determined.

Moore convincingly argues that the central bank exogenously administers the overnight inter-bank lending rate (fed funds rate in the USA). Once it sets a rate target, it has no choice but to accommodate “horizontally” the demand for reserves. This has raised two objections. First, some have argued that this is no different from the usual orthodox exposition of monetary policy as a choice between targeting reserves or targeting the interest rate: if the central bank chooses an interest rate target, it loses control over reserves. However, it is supposed that the central bank could choose a reserve target and hence hit money targets. Moore’s response has been that the central bank actually must accommodate the demand for reserves, but can choose a different interest rate target. Hence, if the central bank can indeed hit a reserve target, it does so only through its decision to raise or lower the interest rate to lower or raise the demand for reserves. Thus, the supply of reserves is best thought of as wholly accommodating the demand, but at the central bank’s interest rate target. (Wray, 2004)

The origin of money

The Neoclassical theory is markets formed based on barter and later money was created as a medium of exchange to lubricate markets, reduces transaction costs, and to remove the double coincidence of wants that prevails in a barter system.

In Neoclassical theory, money is really added as an afterthought to a model that is based on a barter paradigm. In the long run, at least, money is neutral, playing no role except to determine unimportant nominal prices. Money is taken to be an exogenous variable whose quantity is determined either by the supply of a scarce commodity (for example, gold), or by the government in the case of a “fiat” money. In the money and banking textbooks, the central bank controls the money supply through its provision of required reserves, to which a deposit multiplier is applied to determine the quantity of privately supplied bank deposits. (Wray, 2001)

To Adam Smith monetary commodities emerged as vehicles to help individuals ‘truck and barter.’ Before money, barter is said to have involved so confusing an array of cross-pricing relationships that it prompted buyers and sellers to seek a single commodity to serve as an agreed upon standard. According to this fable the monetary breakthrough lay in designating monetary commodities – silver, copper or even grain – against which merchants priced (that is, co-measured) their wares. Douglass North (1984) depicts the process as one of minimizing transaction costs, a tendency he believed was best promoted by private transactors. (Hudson, 2004)

Non orthodox economists view money as originating with the state where markets didn’t need to exist at the time of money creation thus they reject the neoclassical theory of where money originated. These governments created a currency, taxed the locals, and this created a demand and use for the currency. Wray in “Endogenous Money: Structuralist and Horizontalist” explains how money originated with the government:

The State Money approach can be traced to Knapp, and was endorsed by Keynes. (Wray 1990; Knapp 1924) The approach has also been called the “chartalist” or “taxes-drive money” approach. (Wray 1998) It emphasizes the important role played by “government” in the origins and evolution of money. More specifically, it is believed that the state imposes an obligation in the form of a generalized, social unit of account—a money— used for measuring the obligation. This does not require the pre-existence of markets, and, indeed, almost certainly predates them. Once the authorities can levy such an obligation, they can then name what can be delivered to fulfill it. They do this by denominating those things that can be delivered, in other words, by pricing them in the monetary unit. To do this, they must first “define” or “name” the unit of account, and then place an obligation denominated in that unit on at least a segment of the population. The obligation itself takes the form of fees, fines, taxes, duties, tribute, or tithes. Today, of course, the most important obligation is the tax, hence, the role played by taxes in “driving money” is highlighted. (Wray, 2007) 

Money is created when spending occurs. When you purchased that home you financed it with a loan from the bank of which later the bank received the funds from the central bank, in the form of overnight reserves, as the central bank lends reserves “horizontally” to its member banks. Thus the loan on a person’s home was money created increasing the money supply. When this money is paid back the money supply decreases as money is destroyed when the IOUs are paid off. Money is created via spending and destroyed when loans are paid off.

Spending and creation of “money” in the form of a bank deposit are linked. It is best to think of these as balance sheet entries: the bank accepts the IOU of the borrower and credits her demand deposit; the borrower’s IOU is offset by the credit to her deposit. Spending then simply shifts the demand deposit to a seller. Money is created “endogenously” to finance spending. Later, when loans are repaid, the demand deposit as well as the borrower’s IOU are debited—money is destroyed. There is no magic involved, no “manna from heaven”, no separation of the “real” (say, IS curve) from the “monetary” (LM curve). As Clower (1965) would remark, money buys goods and goods buy money but goods do not buy goods. Barter is ruled out as one must first obtain money—from income flows, asset sales, or borrowing—before spending. And the money must get created with an initiating purchase.

That is the idea behind the “endogenous money” approach adopted by Post Keynesians: loans create deposits. And repayment of loans destroys deposits. Many PKs go further and adopt the “horizontalist” approach: both the supply of loans and the supply of bank reserves are horizontal, at an exogenously administered interest rate. (Moore 1988) We do not need to get into this in detail here, nor does a reader have to accept a horizontal supply of deposits and loans (we don’t!). The fundamental idea is that bank lending is never constrained by the deposits that flow into banks—since banks create deposits when they lend. (Fullwiler, Kelton, & Wray, 2012)

Tax driven money

There are many authors, not only in the west, that have works regarding tax driven money thus it is agreed that taxes drive money.

The notion of tax-driven money can be found throughout the history of economic thought, in the works of a remarkable range of authors representing various time periods and schools of thought. The idea also appears in policy discussions and in fields outside economics, such as political science and history. Neither is the idea unique to the West, as Von Glahn’s work demonstrates. It also appears that monies previously thought to be “primitive,” such as the cowrie, were actually tax-driven. Nevertheless, the idea is conspicuously absent from textbooks and works on monetary theory and history. (Forstater, 2004)

In colonial Africa the government created a currency and then taxed the locals in that currency. Thus the local had to pay their debts to the government in that currency. By taxing the locals in their currency the government created a need for their currency. The taxing of the locals in the official currency creates a stronger demand than the demand created, if any, when governments pass legal tender laws for their currency. There are examples of times when a currency was deemed the legal tender by the government and there was still not any demand for those currencies.

Several points concerning the role of direct taxation in colonial capitalist primitive accumulation need to be made. First, direct taxation means that the tax cannot be, e.g. an income tax. An income tax cannot assure that a population that possesses the means of production to produce their own subsistence will enter wage labor or grow cash crops. If they simply continue to engage in subsistence production, they can avoid the cash economy and thus escape the income tax and any need for colonial currency. The tax must therefore be a direct tax, such as the poll tax, hut tax, head tax, wife tax, and land tax. Second, although taxation was often imposed in the name of securing revenue for the colonial coffers, and the tax was justified in the name of Africans bearing some of the financial burden of running the colonial state, in fact the colonial government did not need the colonial currency held by Africans. What they needed was for the African population to need the currency, and that was the purpose of the direct tax. The colonial government and European settlers must ultimately be the source of the currency, so they did not need it from the Africans. It was a means of compelling the African to sell goods and services, especially labor services for the currency. Despite the claims by the colonial officials that the taxes were a revenue source, there is indication that they understood the working of the system well. For example, often the tax was called a “labor tax” or “prestation.” Under this system, one was relieved of their tax obligation if one could show that one had worked for some stated length of time for Europeans in the previous year (see, e.g. Christopher, 1984, pp. 56, 57; Crowder, 1968, p. 185; Davidson, 1974, pp. 256, 257; Dilley, 1937, p. 214;Wieschoff, 1944, p. 37). It is clear in this case that the purpose of the tax was not to produce revenue. (Forstater, 2005)

As the citizens had to pay their government liabilities with the newly created currency demand was created for the currency. Thus they became an accepted means of payment not only to the government as others can use the currency to settle their debts to the government.

There is a long tradition of analysis of state currency, or “state money,” referred to by Charles Goodhart as the “cartalist” (or chartalist) school of monetary thought and which he has contrasted with the “metallist” (Mengerian, monetarist) tradition (1998). While authors such as Joseph Schumpeter (1954) passed down a view of chartalism with a misplaced emphasis on “legal tender” laws, resulting in something of a “legal” or “contractual” version of chartalism, Goodhart has made clear that the fundamental insight is that the power of the state to impose a tax liability payable in its own currency is sufficient to create a demand for the currency and give it value. Recent research into the history of economic thought has revealed substantial evidence of past support for this thesis regarding tax-driven money: we now know that, throughout history, many more economists understood the workings of tax-driven money, and many if not most currencies in history were in fact tax-driven, contrary to what was previously thought to be the case (see, e.g., Wray 1998, 2004; Bell and Nell 2003; Forstater forthcoming).

The idea of a tax-driven currency was once common knowledge. It can be found in the writings of economists and others going back to Adam Smith and beyond. Smith well understood that taxation is the key to understanding the value of state money (in fact, he used the American colonies’ issue of paper money as an example—see Smith [1776] 1937, 311–312). So did a diverse array of economists that came after him, including John Stuart Mill, William Stanley Jevons, Phillip H. Wicksteed, and John Maynard Keynes, among many others (see Forstater forthcoming). (Forstater & Mosler, 2005)

Banking

The neoclassical theory on banking is where banks are an exchange system between borrowers and savers. Savers lend or invest and borrowers pay interest to savers. The interest rate is dependent on the supply and demand for loanable funds. If the supply of loanable funds is high (low) relative to the demand for loanable funds the interest rate decreases (increases). If a borrower applies for a loan and is qualified the bank will check to see if the funds are available to lend before the loan is approved. If a bank runs out of money to lend they stop lending or raise capital to continue lending. This is rejected by the non orthodox approach.

…the common view that banks sit and wait for a deposit to come in before they make a loan must have the logical sequence backwards. (Fullwiler, Kelton, & Wray, 2012)

Banks lend to all qualified applicants without regard to their reserves and these new loans clear the central bank as the central bank supplies reserves on demand. The loan creates a deposit into the borrower’s account, an asset in the form of a note to the bank, a liability to the fed from the bank, and an asset to the fed, for accounting purposes, from the bank.

In modern banking when a borrower qualifies for a loan the bank originates the loan without checking to see if the money is available at the bank. This money clears the central bank whether the bank had the money or not. Then the central bank lends the funds to the bank at the overnight rate. According to Marc Lavoie (1984) “loans make deposits” and “deposits make reserves.”

Banks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet. That is why it is called credit “creation”–credit is created literally out of thin air (or with the stroke of a keyboard). The loan is not created out of reserves. And the loan is not created out of deposits: Loans create deposits, not the other way around. Then the deposits need a certain amount of reserves to be held against them, and the central bank supplies them (more on that below).

Banks don’t lend out of deposits; nor do they lend out of reserves. They lend by creating deposits. And deposits are also created by government deficits.

Reserves play a pivotal role in money creation but not in the way often envisaged. The money multiplier view of the world envisages the central bank creating reserves and the reserves multiplying into new lending. That is, reserves constrain bank lending. That would seem compelling. If banks are subject to minimum reserve requirements (requiring them to hold reserves in a certain proportion to their deposits, and deposits are the balance-sheet counterpart to loans at the point of credit creation), then, by restricting the amount of reserves that the central bank supplies, it should be able to control the amount of credit.

But modern central banking doesn’t work this way. Central banks don’t constrain the amount of bank reserves they supply. Rather they supply whatever amount of reserves that the banking system demands given the reserve requirements and the amount of deposits that have been created. (Sheard, 2013)

The central bank lends these reserves “horizontally” to its member banks at the federal funds rate. Thus reserves are “horizontal” or unlimited at the overnight rate.

Indeed, in order to hit the overnight rate target, the central bank must accommodate the demand for reserves, draining the excess or supplying reserves when the system is short. Thus, the supply of reserves is best characterized as horizontal, at the central bank’s target rate.

The central bank can only “exogenously” set the short-term interest rate (federal funds rate in the U.S., repo rate in the UK) at which it supplies reserves “horizontally” on demand to banks. (Wray, 2007)

Issuers of currencies and users of currencies

Users of currencies are like states or households. They need to have money in the bank before they spend. They tax and borrow and then they spend. They strive for a balanced budget and to keep government spending under tight controls. Issuers of currencies do not have the same constraints users of currencies have. Since these governments can issue more currency they cannot run out of currency thus they should not try to save money or strive for a balanced budget. Users of currencies have real spending constraints whereas issuers have self imposed spending constraints.

A key distinction is that between the government as issuer of a currency and the nongovernment agents and sectors as users of a currency. Households, firms, state and local governments, and member nations of a monetary union are all currency users. A State with its own national currency is a currency issuer. The issuer of a national currency operates from a different perspective than a currency user. Operationally, government spending consists of crediting a member’s bank account at the government’s central bank or paying with actual cash. Therefore, unlike currency users, and counter to popular conception, the issuer of a currency is not revenue constrained when it spends. The only constraints are self-imposed (these include no-overdraft provisions, debt ceiling limitations, etc.). Note that if one pays taxes or buys government securities with actual cash, the government shreds it, clearly indicating operationally government has no use for revenue per se. (Forstater & Mosler, 2005)

Policy making by users of currencies

Users of currencies need money before they can spend. They tax and borrow and then they spend. Their main goal is to run a balanced budget thus they don’t bankrupt the country. Full employment is secondary to these users of currencies since they do not have the same tools of sovereign issuers of currencies.

Orthodox theory believes in the utility of fiscal austerity where the economic goal is to cut expenses and have a balanced budget rather than the non orthodox approach of deficit spending to increase employment. The government is a household where they need the money before they can spend. The government taxes borrows and then they spend. Countries that use the Euro are users of a currency and their budget is similar to a household where they need money before they can spend and they must tax and borrow before they can spend.

Users of the Euro, like other users of currencies, need to run their government, like a household or should operate with a balanced or surplus budget. For example one of the obligations of the Maastricht Treaty (formally, the Treaty on European Union or TEU) that was signed on 7 February 1992 by the members of the European Community in Maastricht, Netherlands, “for the members was to keep “sound fiscal policies, with debt limited to 60% of GDP and annual deficits no greater than 3% of GDP.” These countries, for the most part, should keep a balanced budget, keep their government small, and they should not try to control inflation, employment, and interest rates via monetary or fiscal policy. These countries that use the Euro have budgets similar to states.

Also users of currencies are not able to increase the numbers at the central bank thus spending to achieve some type of economic policy. Since they are not able to depreciate their currencies which would stimulate exports and depreciate their government debt they need to keep their debt to GDP at low levels. With limited monetary and fiscal policies these users of currencies should keep their government small as a percentage of GDP since they do not have strong economic tools to affect the economy.

Policy making for an issuer of a currency on a floating exchange rate

Issuers of currencies can choose to have their currency float, have a fixed exchange rate (called pegging), or have a managed exchange rate. However since the majority of the worlds currencies float on the international market, we will only address policy making for countries with floating exchange rates. The floating exchange system has the most flexibility with regard to fiscal and monetary policy when compared to the other systems.

Sovereign issuers of currencies never run out of money therefore there is not a need to keep a balanced budget. Their main goal is full employment via deficit spending with stability of the currency. They can use open market operations as a tool to stimulate the economy via the buying and selling of treasuries. By purchasing treasuries the central bank is increasing the money supply possibly in an attempt to depreciate the currency which will make exports less expensive to the rest of the world increasing employment.

They should implement Lerner’s functional finance approach to monetary and fiscal policy where the central bank increases or decreases the overnight rate to increase or decrease the money supply while the central bank lends “horizontally” all of the required reserves to the banking system at the target rate. Deficit spending is in order until full employment is achieved. Lerner, in “Money as a Creature of the State” explains why government spending is important to sovereign issuers of currencies: 

Depression occurs only if the money spent is insufficient. Inflation occurs only of the amount of money spent is excessive. The government which is what the state means in practice by virtue of its power to create or destroy money by fiat and its power to take money away from people by taxation, is in a position to keep the rate of spending in the economy at the level required to fill its two great responsibilities, the prevention of depression, and the maintenance of the value of money. (Lerner, 1947) 

Although these governments have unlimited supplies of currency and they can deficit spend simply by crediting accounts they should not deficit spend until the money supply has an exponential growth rate as one of their goals is the stability of the currency. Rapid increases in the money supply can cause inflation as Milton Friedman, in his book ‘Free to Choose’, explains: 

Today, when the commonly accepted media of exchange have no relation to any commodity, the quantity of money is determined in every major country by the government. Government and the government alone is responsible for any rapid increase in the quantity of money. That very fact has been the major source of confusion about the cause and the cure of inflation.

If the quantity of goods and services available for purchase – output, for short – were to increase as rapidly as the quantity of money, prices would tend to be stable. Prices might even fall gradually as higher incomes led people to want to hold a larger fraction of their wealth in the form of money. Inflation occurs when the quantity of money rises appreciably more rapidly than output, and the more rapid the rise in the quantity of money pure unit of output, the greater the rate of inflation. There is probably no other proposition in economics that is as well established as this one. (Friedman & Friedman, 1979)

Issuers of currencies do not tax and borrow in order to spend. They spend by crediting private bank accounts. Government spending creates money and increases the private sector wealth while taxes wipe out money thus decreasing the money supply. They should deficit spend during recessions and run surpluses, only if possible, during economic booms. Wray in his book “Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems” describes Milton Friedman’s version of functional finance:

Briefly, Milton Friedman’s 1948 article, “A monetary and Fiscal Framework for Economic Stability”, put forward a proposal according to which the government would run a balance budget only at full employment, with deficits in recessions and surpluses in economic booms. There is little doubt that most economists in the early postwar period shared Friedman’s views on that. But Friedman went further, almost all the way Lerner’s functional finance approach: all government spending would be paid for by issuing government money (currency and bank reserves); when taxes were paid, this money would be “destroyed” (just as you tear up your own IOU when it is returned to you). Thus, budget deficits lead to money creation. Surpluses would lead to net reduction of money. (Wray, 2013)

Conclusions

Money is a medium of exchange, a store of value, and a unit of account. It is also debt as that is how money is created. The orthodox view its origins as a buffer to trade which came after the barter system. Non orthodox economics view its origins with the state where the state created a currency and taxed it to create value.

Orthodox economists view the banking system as a system for savers and borrowers to exchange. Where the supply of loanable funds comes from savers and the interest rate is dependent on the supply and demand for loanable funds. Banks lend out of reserves and before they approve of a loan they check to see if the funds are available to lend. This idea is rejected by the non orthodox approach where the money supply is “horizontal” at the overnight rate determined by the central bank and while banks lend the central bank supplies reserves “horizontally.” Banks do not lend out of reserves since “loans create deposits” and “deposits create reserves.”

Users of currencies are like a household, a business, or a state; they need to have money in the bank before they can spend. Thus they need to tax and sell bonds before they can spend and they should operate on a balanced or surplus budget rather than deficit spend to increase employment. Deficit spending is not good for users of currencies.

Sovereign issuers of currencies on floating exchange systems have the most flexibility for domestic policy when compared with countries on the gold standard, pegged, fixed, managed exchanges, or users of currencies. They have an unlimited amount of currency and can deficit spend by simply crediting accounts. They should not try to have balanced or surplus budget but use deficit spending as a tool for domestic policy. Their main goals should be to have high employment, via deficit spending thus creating private sector wealth, and stability for the currency.

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*A Note:

For the next few weeks we will be running a series of articles on monetary theory and policy. These are final essays written by MA students in my class this past Fall semester. I was very happy with the results—students indicated that they had a firm grasp of both the orthodox approach as well as the heterodox approach to the subject. Most of them also included some Modern Money Theory in their answers. I asked about half of the students in the class if they would like to contribute their essay to this series. Sometimes students are the best teachers because they see things with a fresh eye and cut to what is important. They are usually less concerned with esoteric academic debates than are their professors. Note that these contributions are voluntary and are written by Masters students. I told students they could choose to use their own names, or they could choose an alias. Comments are welcome, but please be nice—remember these are students.

For your reference, here were the topics for the paper. The paper had a maximum  limit of 6000 words.

Choose one of the following. You must consider and address both the orthodox approach and the heterodox approach in your essay. Where relevant, include various strands of each.

A) What is the nature of money? Given the nature of money, what approach should be taken to policy-making?

B) What is the nature of banking? Given the nature of banking, what approach should be taken to policy-making?

C) According to John Smithin there are several main themes throughout controversies of monetary economics, each typically addressed by each of the various approaches to monetary theory and policy. In your essay, discuss how each of the approaches we covered this semester tackles these themes enumerated by Smithin. 

L. Randall Wray

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