Essays in Monetary Theory and Policy: On the Nature of Money (9)

By Lukas Kaluza*


“Money is what we use to pay for things.” This quote from Lerner (1947, p. 313) is the simple answer to the question: “What is money?” But in order to get an answer to the question of the nature of money we have to go further into the theory and consider two different approaches: the orthodox and the heterodox approach. In the following essay the answers of both approaches to the questions of the nature of money will be discussed and after that implications for policy making will be made. Therefore, this essay will start with a short excursion in which the two different stories of the history of money will be given.

The History of Money

In this first part, the two different stories about the history of money will be presented. This will provide a first understanding about the differences of the two approaches to money. That knowledge will make it easier to comprehend the contrary views of the nature of money in the next part of the essay.

Orthodox History of Money

For many orthodox authors the history of money goes back to the barter story of the evolution of money, which is also promoted by many textbooks. People who promote this view believe that money naturally evolved out of barter (Hudson 2004). This view goes all the way back to Adam Smith, who believed that money commodities evolved as a vehicle to help people in the processes of barter and negotiation (Hudson 2004). And even prior to him people promoted similar views. Before the invention of money, barter relied on a set of non-monetary commodity relations, so from this view there was a functioning market economy that could exist without money. From this point of view, money is more like a vehicle that solved the technical problem of the “double coincidence of wants” (Levine 1983). As a result of this view, there was a market in existence even before money was invented. When we imagine an exchange between two individuals A and B in the time before money was invented, there was always the need that A had something B wanted, that A wanted to get something from B. Besides this, A and B would have had to answer the question what quantity of the good A offered is worth the quantity of goods B offered. This is the point where money steps in, to solve the problems of the measure of value and the problem of the “double coincidence of wants”, one specific commodity, which was previously present in the system, carries out the role of money (Levine 1983). This is believed to be most likely a precious metal like gold or silver (Innes, 1913). So, money evolved as a way to reduce the transaction costs in an economy and increase the efficiency of barter (Wray, 2012a). This raises the question how fiatand paper money could be logically linked to that story. As an argument how this could have happened, many orthodox thinkers came up with the goldsmith story. According to this story, people were looking for a safe place to store their commodity money and this place was commonly the goldsmith, where people deposited their money and as an exchange they got receipts, called “goldsmiths’ notes” (Wray, 2012a). People discovered that by exchanging the notes, instead of the underlying commodity, the exchange cost could be further reduced. As a result of that, some of the notes were in circulation the whole time and were never withdrawn, which gave the goldsmiths the ability to lend notes for more reserves than they actually had (Wray 2012a). This could be viewed as the beginning of banking. As the time went on, governments started to compete with the private institutions by issuing their own money (Wray 2012a) and this finally led to the monetary system of the modern time.

Heterodox History of Money

However, this orthodox approach to the history of money is rejected by most of the heterodox economists, as well as anthropologists and historians. They criticize the classical textbook story of the history of money as historically inaccurate and refuse the idea that money naturally evolves out of a pre-existing barter economy (Smithin 2003, Ch. 2). Innes commented on the orthodox story in 1913 that based on modern historical research and recent discoveries “none of these theories rest on a solid basis of historical proof – that in fact they are false” (Innes, 1913, p. 23). Furthermore, in his article “What is money” he shows different historical examples of monetary systems and comes to the conclusion that, throughout history there is no proof for a metallic standard of value (Innes 1913 p. 27). So what is the history of money from the heterodox perspective?

The real origin of money cannot be restated for sure. One reason for that could be that money even predates writing, since the oldest examples of written work seem to be records of monetary debt (Wray 2005). However, according to Wray, it is most likely that money evolved out of penal system to settle disputes (Wray 2005). While the wergild fines first had to be paid to the victims, the system had later been changed so that fines had to be paid to an authority. A precondition for a system like that was the evolution ofthe egalitarian society into a class society with one class or authority with the necessary power (Wray 2005). In other words, a prerequisite for the evolution of money was the abandonment of the classical tribal society, in which everybody was equal and in which there was no such thing as personal property in favor for a society with different classes and hierarchies. Given that the authorities had the power to levy fines on people, there was the need for a general unit of account, which would help that different things and commodities could be compared. The fines in the penal system were, at first, in the form of a certain commodity, but these were later standardized through the authorities by choosing a unit of account (Tcherneva 2001). The early monetary units were most likely weight units for the most important grains (Wray 2005). Many heterodox authors argue that “monetary concepts and practices are seen as socially constructed and constituted categories. Moreover, in effect, monetary constructs such as price lists, debt, bookkeeping and so on are regarded as the precondition for the emergence of market exchange and production for sale in the market, rather than vice versa” (Smithin 2003, Ch. 2, p. 19). In effect, this is the complete opposite of the orthodox view, in which the market could exist without money.

Nature of Money

After the short introduction into the history of money from both perspectives, the two views on the nature of money will now be presented. Therefore, the implications of the history of money can be used to get a better understanding. First, the orthodox view on money will be shown, before the heterodox view will be presented. In order to fully get an understanding for the heterodox nature of money, the credit money approach, as well as the state money approach, will be explained. One of the biggest differences between the orthodox and the heterodox approaches is certainly the view of the money supply. While according to the orthodox approach, the money supply is viewed as exogenously determined, the heterodox approach sees it as endogenously determined within the system.

Orthodox View

As stated earlier, the orthodox history of money goes back to the barter story. One of the implications of this story is that money is neutral, since changes in the monetary variable have no influence on the underlying barter exchange ratios (Smithin 2003, Ch. 2). Money is introduced into the economy only as a technical vehicle to reduce the transaction costs to overcome the inefficiencies of barter, like the ‘double coincidence of wants’, so in this view the ‘medium of exchange function’ of money is dominant (Smithin, 2003, Ch. 2). Out of the ‘medium of exchange function’ the two other functions of money, as the ‘store of value function’ and as the ‘unit of account function’, evolve in a logical manner. Something that could not fulfill the store of value function would not be accepted as a medium of exchange since the medium of exchange must be something that allows the storage of purchasing power over time. Nonetheless, this does not necessarily mean that money is the best available way to store value in an economy. There could be other stores of value which offer a higher return, but since they are not generally accepted as a medium of exchange, they are less liquid than money (Smithin, 2003, Ch. 2). The ‘unit of account function’ evolves out of the ‘medium of exchange function’ due to efficiency matters: the unit of account should be equivalent to the medium of exchange, since otherwise there would be additional calculation and negotiation costs (Smithin, 2003, Ch. 2). Even though the functions of money are stated in the orthodox theory, it is still unclear how money enters the economy in the first place. That is way this can be best described as a “helicopter drop” (Tcherneva 2001, p. 109).

Now back to the neutrality of money. According to the quantity theory of money, which is a core element of the orthodox analysis, real variables (such as output and employment) are, at least in the long-run, independent of money. In such a model, only nominal prices are determined by money (Tcherneva 2001). Only in the short-run, money can have an effect on real variables through the effect of monetary fooling (Tcherneva 2001). Here is an example: When the government spends too much, this could lead to too much money chasing too few goods, so inflation results (Tcherneva 2001). In the long-run, there would be no impact on real variables, but in the short-run, there could be an effect on them. This is due to anincrease of spending on different assets that results out of a too large money supply, therefore prices will increase and firms will expect high profitability. Thus, they will increase spending on input and, as a result, prices, output, and nominal income will rise in the short-run. As a consequence, there will be a temporary effect on employment that lasts until the money demand rises to the level of the initial increase of the money supply (Tcherneva 2001).

Due to the given facts, the orthodox mainstream view leads to a real analysis rather than a monetary analysis of the economy (Smithin 2003, Ch. 2).

Exogenous Money

In many money and banking textbooks, the discussion of money supply is often reduced to “an arithmetic problem” based on the “deposit multiplier” identity (Wray 2010, p. 33). To an increase of supply of reserves by the central bank, banks respond by an increase in loans and deposits in a certain relation the growth of supply. As a result, the growth of the money supply is seen as exogenously controlled by the central bank (Wray 2010). In the following paragraph, we will take a deeper look at this theory forwarded by many orthodox authors.

The exogenous money approach basically says that one or more of the variables interest rate, price level and real output are depended on the stock of money (Desai 1987). The money stock itself is determined by the monetary authorities (central bank), like the FED in the US, according to the exogenous money approach. The monetary base is controlled by the central bank, because the central bank is providing the required reserves for banks (Wray 2001). Therefore, the stock of money (M) is determined by the money multiplier (m) and the monetary base (B). The relationship of these three variables is expressed in the equation M=m*B (Brunner 1989, p. 265). The monetary multiplier itself is controlled by the central bank, which can set the required reserve ratio (rrr) for banks (Tcherneva 2001). The required reserve ratio essentially expresses that proportion of reserves a bank has to hold in comparison to its lending. With a required reserve ratio of 20 for example, it is possible for a bank to lend 200 Dollar for every 10 Dollar of reserves. The mathematical relationship between the monetary multiplier (m) and the required reserve ratio (rrr) is m = (1/rrr). So, according to the exogenous money approach, the central bank has full control over the supply of money.

Desai (1987) conducts further analysis of the exogenous approach as he looks at different types of money and evaluates how the exogenous approach could be applied here. Commodity money could be seen as exogenous, since the authorities could easily debase the coinage just by removing some precious metal from the coin and replace it by an inferior metal or they could appreciate it by adding precious metal (Desai 1987). Another way, in which the supply could be changed, is by the discovery of new sources for the commodity, such as the discovery of new gold deposits (Desai 1987). Even if we extend the commodity money economy with inside money, so money is produced inside the private sector, typically by banks, one could argue that the system is exogenous, as long as the extent to which a bank is able to lend money still depends on the banking system (Desai 1987). In such an economy, the lending activity could be limited, for example through a required reserve ratio, so the system could still be viewed as exogenous. For the case of an outside fiat money, the endogenous money approach could also be easily applied, since the authorities are the only ones who have the power to create high powered money, the banking system can be seen a passive agent that has the cash base always fully loaned up, and so the stock of money is totally controlled exogenously (Desai 1987).

Heterodox View

Now, let us turn to the heterodox view of money. We already know that heterodox authors reject the barter story that is promoted by orthodoxy and that, from a heterodox view, a market cannot exist without money since money is a prerequisite for the emergence of a market. So, what are the heterodox answers to the nature of money? To answer this question, we have to uncover the social relations that are hidden behind the veil of money. Therefore, it is useful to take a look at the credit theory of money, as well as at the state theory of money (Wray 2012a).

Credit Theory of Money

The credit theory of money, forwarded by Innes and Schumpeter, basically says that credit-debt relations, hidden by the veil of money, are the “key institutional relations of the capitalist economy” (Wray 2012a, p. 24). “Credit” and “debit” are both words to express the same legal relationship between two parties from the opposite perspectives. When A owes B something, A is the debtor and B the creditor (Innes 1913). Innes argues that there is no need for a medium of exchange in an economy, as long as the community would recognize the credit-debt relation that evolves out of this exchange. So, he argues that, according to this theory, a sale is not an exchange of a commodity for another commodity that is the medium for exchange, but rather “the exchange of a commodity for credit” (Innes 1913, p. 391). He shows that, from the earliest times of historical records, as long as 4,000 years ago, there was a law of debt (Innes 1913). The whole system of commerce is the constant creation of credits and debts, which is the primitive law of commerce. Credit and debt have nothing to do with any kind of precious metal and the value of a credit only depends on the solvency of the debtor (Innes 1913). He also underpins his argumentation in the way that he shows that, for centuries, the principle instruments of commerce were tallies rather than coins or pieces of metal (Innes 1913).

Still one question evolves out of this paragraph: How could the credit theory of money with the primitive law of commerce, which says that commerce is basically the constant creation of credits and debts, be connected to money issued by the state like we use it today? To provide an answer for this question, we will go on with state theory of money.

State Theory of Money

The state money approach emphasizes the role of the state or other authorities in the evolution of money (Wray 2012a, p. 24). The government money is nothing else than the government’s own IOU, but why should anyone acceptitsince the government produces nothing for sales? The answer to the question is that the government or the authority has the possibility to obligate people to become their debtor in a process of levying obligations, fines or taxes (Innes 1913). Furthermore, the authority can decide what it will accept from the debtor, so that he can get rid of his debt. The process of denominating the things that the authority will accept as a redemption is nothing else than pricing (Wray 2012b).

So, the quintessence of this whole theory is that a state can achieve the general acceptance of anything as money and establish a value, without backing it with something, if the state is willing to accept it as a payment for taxes and other obligations (Lerner 1947). In this way, everyone with this obligation is willing to accept the money and other people will accept it, because they know other people with an obligation to the state are willing to accept it (Lerner 1947). It doesn’t matter what it is that the state wants for the payment of debt, if it is a precious metal, colored pieces of paper or seed of a certain plant, as long as the obligations on people are high enough to create a general acceptance. Typically, it wants its own IOU denominated in the state’s unit of account, so its own money. Due to these relations, Lerner came to his famous quote: “Money is a creature of the state” (Lerner 1947, p. 313). Usually, a modern state wants tax payments from its population, so that is where the term “tax-driven money” comes from. And we can see another fact; there is no need to back a currency with gold or another commodity or to have legal tender laws; it is enough to levy a tax or another obligation in orderto create a demand for a currency and to give it a value (Wray 2012b, Ch 2). Furthermore, the whole theory of commodity money is rejected since goods don’t buy goods, but money buys goods. Thus, money could never be a commodity (Wray 2012b, Ch. 8.2).

In this paragraph, we saw how the credit and the state money theory can be integrated. As result, we can come to the conclusion that “credit and credit alone is money” (Innes 1913, p. 392). Since money is credit and credit and debt always represent social relationships, we can say that money always represents social relationships.

Endogenous Money

In the endogenous money approach, as promoted by Post Keynesians, in difference to the exogenous money approach, the money supply is a function of the money demand, instead of being determined by the government or by the supply of a scarce commodity (Wray 2001). So, with an increasing money demand, the money supply will typically rise. According to the endogenous money approach, the central bank has no control over the stock of money in circulation. The reason is that banks usually make loans first without worrying if they got sufficient reserves and look for reserves later (Wray 2001). The central bank is defensive and therefore, it is always willing to lend money to the banks. In this way, it ensures that clearing between banks is always possible. The logic here is that loans make deposits.

This is conforming to the logic of monetary production by Marx-Veblen-Keynes, according to which, in a capitalist economy, money is always the objective of production and not just a way to measure the output (Wray 2012b, Ch. 8.2). A commodity only becomes a commodity when it can be exchanged for money. In this way, labor itself is a commodity too (Wray 2012b, Ch. 8.2). In addition, in order to produce a commodity you need commodities, like raw materials or labor, as an input. Because there is always the need for commodities in the beginning of the production process, which could only be purchased with money, the production process itself has to start with money (Wray 2012b, Ch. 8.2). So, the whole logic of monetary production by Marx could be expressed in the following way: M-C-C’-M’. The production of goods starts with money M to purchase commodities C, which are then altered into different commodities C’ and these are typically sold for more money M’ in the end (Wray 2012b, Ch. 8.2). The main goal of production, according to this logic, is to end up with more money M’ than we used to purchase the input, thus M’ should be bigger than M. So, if we assume that central bank is in control of the money supply, as it is believed in the exogenous money approach, the possibility of the capitalist product would always depend on the willingness of the central bank to increase the money supply.

Another important aspectof the endogenous money approach is that saving does not finance spending on an aggregate level, more likely the causation is from spending to saving (Wray 2005). This is also expressed by the paradox of thrift, which says that for an individual household it is possible to save more by reducing its spending, but the society as a whole can only save more when its increase its spending (Wray 2012b, Ch. 1.3).

This goes along with the horizontalist money approach by Basil Moore, which is therefore in conflict with the orthodox money multiplier view. The horizontalist view denies that the central bank can control the bank reserves or the money supply. Reserves are non-discretionary. “This effectively reverses the ‘deposit multiplier’ of the money and banking textbooks, arguing that ‘loans make deposits’ and ‘deposits make reserves’” (Wray 2005, p. 23-24). In other words, when banks extend loans, this leads to an extension in deposits first, and then to an extension in reserves. However, since the quantity of money is determined endogenously, the central bank is still able to exogenously set the short-term interest rate at which it will supply the banks with reserves (for the US this is the fed funds rate) (Wray 2005,). As a result, in the horizontalist approach, the money supply curve is horizontal, while the money supply depends on the money demand (Md) and the central bank’s target interest rate (the fed funds rate in case of the US), which can be influenced exogenously by the central bank (FED).

To come to a conclusion, banks have the power to create money, so if someone is willing to get a credit, they lend them money by creating money and then afterwards, they are looking if they got sufficient reserves, but if not they just borrow them from other banks or the central bank. So, that is why the money multiplier argument is wrong: The central bank cannot control the money supply. This leads us to the point that in the endogenous money approach even the long-run neutrality of money is rejected, since “the creation of money is tied to the fundamental processes of a capitalist economy” and therefore, “money always matters” (Wray 2005, p. 24).

Policy Implications

Now after the history and the nature of money from the perspective of the orthodox and heterodox approach have been presented, the implication for policy-making will be given. Again, the orthodox approach comes first.

Orthodox Implication for Policy-making

According to the monetarist view, an excess in the money supply would lead to inflation. This is due to the fact that money is neutral at least in the long-run; therefore it can have no effect on real variables over time. As a result, when the government is spending too much, so that too much money is chasing too few goods, inflation will be the result (Tcherneva 2001). We can see this when we look at one of the basic equations of the Quantity Theory of Money – the equation of exchange – which is MV=PT, in which M is the quantity of money, T is the volume of transactions, P is the price level and V is the velocity of circulation (Goldfeld 1989). One of the key assumptions is that the velocity is relatively constant, since it is determined by technological and/or institutional factors (Goldfeld 1989). Therefore, an increase in the quantity of money (dM) would lead to an increase of the price level (dP), in other words inflation, since money is neutral in classical models and the velocity of transaction V can be viewed as stable.

In addition, monetary effects would have a long lag of several quarters or more and therefore, monetarists like Friedman and Brunner argue that an active monetary policy tends to worsen the problem of economic fluctuations (Cagen 1989). Thus, orthodox economists argue that a stable monetary growth rate would be the best choice for policy-making because in this way, economic disturbances due to monetary sources could be avoided and a nearly constant price level would be established over the long-run (Cagen 1989). Furthermore, a policy like this would remove the pressure on politics for monetary stimuli and it would also remove uncertainty for people because the policy would be predictable (Cagen 1989).

Another concept applied by many orthodox economists is the trade-off between unemployment and inflation, expressed in the Phillips Curve (Wray 2000). According to the Phillips Curve a lower unemployment rate is correlated with a higher inflation and low inflation is correlated with a higher unemployment rate. However, this principle is rejected by Friedman in the long-run and since monetarists tend to focus on long-run consequences, they are against policy attempts to reduce short-run fluctuations of the economy (Cagen 1989).

There is also a version of the rational expectations theory that goes even further by saying that there is little or no short-run trade-off between unemployment and inflation, due to the ability of the market to anticipate any systematic policy. Therefore, only unanticipated policies would have an effect, but these seem to be very unlikely, so it would be the best if there were a policy with a predictable monetary growth (Cagen 1989). This rational expectations theory was merged with Monetarism and the Neoclassical Theory to form the New Classical Theory. It came to the conclusion “that money is neutral in the short run, as well as the long run, so long as policy is predictable” (Wray 2010, p. 33-34).

Finally, another important policy implication that can be drawn from the orthodox approach is that the separation of fiscal and monetary policy is desirable, due to the belief that this would reduce the threat of inflation (Tcherneva 2001). Therefore, the central bank should be completely independent from the fiscal authority (Tcherneva 2001).

Heterodox Implication for Policy-making

As it was stated earlier, money is it nothing else than an IOU issued by the state with the promise to accept it back in form of tax payments, fees or other obligations. This is the essence of money in the modern money theory; money is an IOU issued by the state, which got its value from the fact that it is redeemable in payments to the state. So what are the implications for policy-making if we apply this view on money?

Here, we will only look at states that issue their own sovereign currency, which is not pegged in any way. A sovereign currency is basically a currency issued by a sovereign government that keeps basic powers associated with money for itself, such as the power to decide which is the money of account for official use, the exclusive power to issue the currency, and the power to levy taxes, fees and fines, and what it will accept for those obligations (Wray 2012b, Ch. 2.1). A government that is the issuer of a sovereign currency is able to spend as much as it wants in its own currency, since by spending it does nothing else than crediting bank accounts, in other words issuing its own IOU (Wray 2007). Therefore, a government is always able to afford everything that is offered for sale in its currency (Wray 2012b, Ch. 4.1). There is also no default risk for a government in its own currency, because it can always keystroke reserves into existence. Furthermore, the government does not need taxes in order to finance its spending, when the government is getting back its own liabilities (HPM) they simply get destroyed (Wray 2005). Because the government is the only issuer of its currency, it is necessary for the government to tax first and to spend later, otherwise people would have nothing to pay their tax with. Due to this, taxes couldn’t be the source of government spending (Tcherneva 2001). In the same way, a government also doesn’t need to borrow its own currency through the issuing of bonds. Therefore, the issuing of bonds through a government can be rather seen as an “‘interest rate maintaining option’ because it is a way to get some reserves out of the market” (Wray 2001, p. 2-3).

For Lerner there is a responsibility of the state evolving out of its role as the creator of money (Lerner 1947). For him a “depression occurs if the amount of money spent is insufficient” while “inflation occurs if the amount of money spent is excessive” (Lerner 1947, p. 314). Therefore, Lerner came up with the “functional finance approach”. The two basic principles are: First, government should spend more if the domestic income is too low. Unemployment is an evidence for this, thus, if there is unemployment the government spending is too low or the taxes are too high (Wray 2012b, Ch. 6.3). Second, if the interest rate is too high, the government needs to provide more money in order to lower the interest rates (Wray 2012b, Ch. 6.3). In his view, it is not necessary for the government to have a balanced budget every year, nor would it be functional. Rather, a government should use its spending power to achieve the public purpose, like a low unemployment rate.

Moreover, for the private sector it is not bad when a government runs continuous budget deficits, because a deficit in one sector equals the surplus of the other sectors. Based on the work of Wynne Godley, the relation between the three sector balances can be expressed in the following way: “Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0” (Wray 2012b, Ch. 1.1, p. 5). In a state with a foreign balance of zero, the private sector is able to run surpluses, if the government runs a deficit. Then private sector is able to acquire net financial wealth, because the government is accumulation debt. It is also worth to note that Friedman proposed an approach similar to Lerner, in which a combination of monetary and fiscal policy should be used to stabilize the economy (Wray 2012b, Ch. 6.3).

Some authors of the MMT even go further and suggest that the government should run an “employer of last resort” program, which should achieve full employment, enhance price stability and serve as a macroeconomic stabilizer (Wray 2012b, Ch. 7.1). In such a program, the government would promise to provide a job to anyone who is willing to work (Wray 2012b, Ch. 7.1). Since the government can afford to buy anything for sale in its own IOU, the affordability would be no constraint for such a program.

Although it was shown here that a state that is issuing its own sovereign currency can always afford to buy everything that is for sale in its own currency, it does not mean that there are no risks or negative consequences of doing this. An excessive government spending can lead to inflation (Wray 2012b, Ch. 6.1). This is especially the case when the government is purchasing scarce resources or “bottlenecks”, because increasing the demand while supply stays nearly stable, tends to lead to rising prices. There could also be pressures on the exchange rate if the government is spending too much (Wray 2012b, Ch. 6.1). Another fact that has to be considered is that a too big government could leave too less resources to the private sector to allow them to pursue the private purpose (Wray 2012b, Ch. 6.1). Therefore, budgeting as self-imposed constrain on the government is a good idea (Wray 2012b, Ch. 6.1). 

All in all, it was shown that a state that issues a sovereign currency has much more freedom in its policy-making than it is believed in the orthodox view. A sovereign state can never run out of money. To buy things in its own IOU the government simply needs to credit bank accounts, so it does nothing else than simply spend reserve into existence. Therefore, a government can always afford to buy anything that is for sale in its own currency. Considering this nature of money, it could be said “the primary function of money is to allow governments to spend and consume” in other words “to transfer real goods and service from the private to the public sector” (Tcherneva 2001, p. 112).


In this paper the two different approaches to the nature of money were shown. The different two stories of the history of money were presented, in addition, to the implications for policy-making. Overall, this is an interesting and wide field, so in this paper only the surface could be touched. 

*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


Brunner, Karl.1989. Money Supply In: The New Palgrave: A Dictionary of Economics. Eatwell, John; Milgate, Murry; Newman, Peter. Macmillan Press Limited. pp. 263-267.

Cagen, Phillip.1989. Monetarism. In: The New Palgrave: A Dictionary of Economics. Eatwell, John; Milgate, Murry; Newman, Peter. Macmillan Press Limited. pp. 195-205.

Desai, Meghnad. 1989. Endogenous and Exogenous Money. In: The New Palgrave: A Dictionary of Economics. Eatwell, John; Milgate, Murry; Newman, Peter. Macmillan Press Limited. pp. 146-150. 

Goldfeld, Stephen, M.1989. Demand for money: empirical studies. In: The New Palgrave: A Dictionary of Economics. Eatwell, John; Milgate, Murry; Newman, Peter. Macmillan Press Limited. pp. 131-143.

Hudson, Michael. 2004. The Archaeology of Money – Debt vs. Barter Theories of Money’s Origins. In: Credit and State Theories of Money the Contributions of A. Mitchell Innes.

Lerner, Abba P. 1947. Money as a Creature of the State. In: The American Economic Review, Vol. 37, May, No. 2, Papers and Proceedings of the Fifty-ninth. pp. 312-317.

Levine, David. 1983. Two options for the theory of money. 

Innes, A. Mitchell. 1913. What is Money?. In: Banking Law Journal, May 1913. pp. 377-408. 

Smithin, John. 2003. Controversies in Monetary Economics. Edward Elgar Publishing Limited.

Tcherneva, Pavlina R. 2001. Money: A Comparison of the Post Keynesian and Orthodox Approaches. In: Oeconomicus, Volume IV, Winter, pp. 109-114. 

Wray, L. Randall. 2001. The Endogenous Money Approach. Working Paper No. 17.

Wray, L. Randall. 2005. Credit Money, State Money, and Endogenous Money Approaches: a survey and attempted integration.

Wray, L. Randall. 2007. Endogenous Money: Structuralist and Horizontalist. Working Paper No.  512.

Wray, L. Randall. 2010. Alternative Approaches to Money. In: Theoretical Inquiries in Law, Volume 11, 1. pp. 29-49.

Wray, L. Randall. 2012a. Introduction to an Alternative History of Money. Working Paper No. 717.

Wray, L. Randall. 2012b. Modern Money Theory – A Primer on Macroeconomics for Sovereign Monetary Systems. Palgrave Macmillan.


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