NUMISMATIC

* MAIN IDEAS - The common theme between our framework and the older literature is that the money stock is a balance sheet aggregate of the financial sector. Our approach suggests that broader balance sheet aggregates such as total assets and leverage are the relevant financial intermediary variables to incorporate into macroeconomic analysis (Adrian & Shin 2010, p.2-3). * BANK - Fisher (1911) and Keynes (1936) weakened the sharp distinction previously observed between money proper and money substitutes such as bank deposits. This development gave rise to a definition of money as the aggregate of all generally accepted media of exchange, including (some financial liabilities of commercial banks, which has created on ongoing debate about whether the ability of thebankig system to creat media of exchange is constrained by the supply of bank reserves (implying a key role for the cetral bank ) or by the demand for deposits (suggesting free banking - Goodhart (1984) describes the textbook money multiplier story with RRR as absolute baloney. (His comments on it in Goodhart 1994, p.1424-6) Why? Because It is extremely unlikely that any central bank would allow a fundamentally sound financial institution under its jurisdiction to fail simply because it lacked sufficient liquid assets during a run on its deposits (Dalziel 2001, p.32). - modern analysis of the ultimate constraint faced by banks focuses on the risk of bad debts not on the bank-run (Dalziel 2001, p.32). - Classical economists adherence to laissez-faire principles had an exception, i.e. note issuance. Yet the principles were still applied to deposit banking and credit markets (Laidler 1991, p.39).

* BANKNOTES - the banknote, a convertible currency of credit. Here the illusion that the note-holder lends capital to the bank rather than the ultimate borrower is further reinforced by the banks promise to repay the principal on demand in money proper. Even more, because of convertibility, note-holders are free to imagine that they have not lend capital at all, that the note they hold is itself capital, that the banknote is in fact money not credit. But all this imagining does not change the fact that the banknote is not money but only a token of the

banks credit. Although the banknote may in all practical respects function exactly as money, it remains distinct from money on account of the mechanism of its supply; the banknote enters circulation as the bank of issue discounts some capital loan. (Merhling 1996: 334) This is different from Wrays notion of money as naturally credit money; In reality, credit money is the natural form of money: money as a privately issued IOU. (Wray 1996: 445) - Marx: The credit given by a banker may assume various forms, such as bills of exchange on other banks, cheques on them, credit accounts of the same kind, and finally, if the bank is entitled to issue notes bank-notes of the bank itself. A bank-note is nothing but a draft upon a banker, payable at any time to the bearer, and given by the banker in place of private drafts. This last form of credit appears particularly important and striking to the layman, first, because this form of credit-money breaks out of the confines of mere commercial circulation into general circulation, and serves there as money; and because in most countries the principal banks issuing notes, being a peculiar mixture of national and private banks, actually have the national credit to back them, and their notes are more or less legal tender; because it is apparent here that the banker deals in credit itself, a bank-note being merely a circulating token of credit. But the banker also has to do with credit in all its other forms, even when he advances the cash money deposited with him. In fact, a bank-note simply represents the coin of wholesale trade, and it is always the deposit which carries the most weight with banks (KIII,25) - Wray provides a different story of development of banking from the orthodox one. He argues that bank first emerged not as deposit banks operating as intermediaries from depositors to borrowers but as banks making loans by issuing banknotes; that is, they financed their position in assets by creating liabilities. (Wray 1996: 446) - Bank deposit: entirely ideal claim on banks (Lapavitsas 1991: 314) - Banknotes: a promise to pay by a bank. (Lapavitsas 1991: 315) ~~~ Bank-notes, on the contrary, are never issued but on loan, and an equal amount of notes must be returned into the bank whenever the loan becomes due. Bank-notes never, therefore, can clog the market by their redundance, . [The] reflux and the issue will, in the long run, always balance each other. (Fullarton cited in Viner 1937, 237) - Notes are issued based on commercial loans [i.e. trade credit] which arise only from the needs to accommodate certain commodity trade (Likitkijsomboon 2005, p.165). - Decreasing role of banknote substituted by depository money: Lapavitsas 1991, p.315-16.

Especially: Precisely this development allows the supersession of the banknote as the chief means of payment in advanced capitalism. Given the existence of systematic hoard collection, it is possible to transfer money ideally and without the passage of bank promises to pay. Instead payments can be made by transferring the claims on banks directly as entries in different bank accounts. The immediate corollary of this is that banknotes, indeed all circulating money, are displaced from the sphere of exchange. In terms of the functions of money, the circulating functions are diminished and the hoarding function becomes dominant. - As for the function of means of payment, banknotes have been replaced by the deposit mechanism. They have been reduced to the function of simple means of circulation, facilitating primarily the exchange of commodities in the area of expenditure of private income Banknotes enter exchange according to how money is demanded for purposes of income realization; hence, their entry teds to be demand-determined. Furthermore, the reflux tends to take place as hoards out of private income are created, and not as debts to banks are paid. The upshot of the rise of depository credit money is to attenuate the links of the modern banknote with the advance and repayment of credit (Lapavitsas 1991, p.317). - See Fisher (1911, p.35) - A bank note is essentially to be regarded as a kind of deposit-receipt or cheque, which passes through a number of hands before it is presented to the bank either for redemption or as a deposit (Wicksell 1898, p.69). - The essential characteristic of notes consists in their taking the place of coin in the cash reserves of private individuals and of those banks which do not themselves issue notes (Wicksell 1898, p.70). * BILLS OF EXCHANGE - The most typical private debt certificate - It is only on account of their relative inconvenience, and for similar reasons (taxation of bills, etc.), that this original use of bills has gradually become less prevalent since banking was perfected. Bills no longer pass from hand to hand so much as formerly; they are discounted at some bank, and usually then remain in the bank's portfolio until they become due (at any rate so far as domestic bills are concerned). In other words, the employment of a bill of exchange has become purely a form of lending money (Wicksell 1898, p.64). See this page for more about bills of exchange. -

* CENTRAL BANK - The operations between central bank and treasury: See the references in Fiebiger et al. 2012, p.19

*COST OF PRODUCTION THEORY - Smith criticizes Tooke and Newmarks explanation of the effect of 1850s discovery of gold as contradicting Tookes Banking School position (p.9). Actually, their view is very similar to Humes SR non-neutrality of money and Fisher s transition period explanation. That is, according to Tooke and Newmark: Mg increase by gold discovery -> increase in expenditure and income by increase reserves and lowering interest rate (p.7) -> increase in demand -> increase in price. This is nothing but QTs SR perspective!!! Smith demonstrates the traditional Classical view on the topic as: Mg increase by gold discovery -> decrease in the cost of production of gold through a decrease of the cost of production of the least productive mine -> decrease in the value of gold -> increase of general level of prices -> increase in the demand for money. From the standpoint of the classical approach, it is difficult to conceive how the additional output of gold was absorbed into monetary circulation in absence of a prior causal reduction in its cost of production which directly raised the general price level (p.9).

* CREDIT MONEY (CREDIT SYSTEM) - Marxs vs. PK - Marxs emphasis on hoards as a material base for the development of credit system and the contemporary case of ex nihilo issuance of bank liabilities (Are they contradictory?): - PKs credit view of money is based on Keynes Post-GT articles (1937a, 1937b, 1938, 1939): Keynes observed that an important role of the banking system is to extend credit to finance investment goods production in advance of the saving that is necessarily generated

through Kahns (1930) multiplier process (Dalziel 1999-2000, p. - Dos Santos (2012, p.15-16)s explanation is not satisfactory. He gives two aspects: i) Excess credit money will reflux back to the initial issuers or the demand for credit will decrease, ii) Competitive capitalist accumulation systematically requires the maintenance of money holdings as part of the social portfolio of financial and real assets. It simultaneously generates a systematic demand for credit, if capitalists are to embark on growing scales of investment. The credit system dynamically mediates between these two needs by creating its own forms of money and advancing them to those demanding credit. -> As for the first, besides that how the two can be reconciled is unclear, it relies on the law of reflux, whose validity is to be questioned, and moreover, the failure of reflux of excess money may not necessarily decrease the demand for credit money. As for the second, the question still remains that why the money holdings need to be maintained when the credit system can create its own forms of money out of nothing. - Lapavitsass explanation of Marxs credit theory (LS 2000, p.321-22; for instance, ..the credit system is a set of social mechanisms aimed at collecting loanable money capital and channeling it back toward real accumulation which is exactly the same with mainstream loanable funds theory) directly contradicts PKs theory. It seems to me that no Marxist writers who are sensitive to this stark difference have directly faced this point to provide a satisfactory discussion on how to reconcile the two. This is also true for Lapavitsas. - Lapavitsas and Saad-Filho (2000, p.329) clearly support loanable funds theory when they note Banking credit involves collecting and advancin g loanable capital, and results in creation of credit money as a by-product. The sources of loanable capital comprise idle money created in the turnover of the total social capital. => I think loanable funds theory vs. PKs credit creation ex nihilo should not be understood as either or. Assigning the former a dominant position implies an approach where credit creation out of nothing is logically possible but is not unlimited as PKs think. Lapavitsass position is this which I agree with. PKs are right to stress that the supply of credit money is credit-driven, but wrong to claim that the supply of credit itself responds passively to its demand (LS 2000, p.329). LS continue to note limits facing banks ability to issue their liabilities. - the supply of credit money is not produced by a production function relationship, but rather as a by-product of making loans (Moore 1998, p.8). This admits a possibility of money supply demand discrepancy and differs from MCT. Dalziel adds an expression is

obtained for the nominal money stock as the by-product of the demand for current investment finance and the retirement of previous investment finance by firms (Dalziel 1999-2000, p.236). - Credit itself loosens the bond between money and commodities, just as it slackens the link between income and expenditure. (de Brunhoff 1978: 47) - Broadly speaking, the credit system is a mechanism for the internal reallocation of spare funds among industrial and commercial capitalists; as such, it can increase the efficiency of the process of capital accumulation, and enlarge its scope. (Lapavitsas & Saad-Filho 2000: 321-2) - Different forms of credit: see Wray (2007: 3) - Pay attention to the relation between credit money and means of payment: credit money emerges due to moneys function of means of payment. Credit money issued from the credit debt relation is destroyed when real money (possessing intrinsic value) comes in as means of paying settling the credit-debt relation. rapid turnaround from creditism to metalism (Marx; reqouted from Chae 1999: 301) Steuart explains the difference between real (metallic) and symbolic money [credit money] is that the former definitely settles transactions, while the latter, since it is essentially a promise to pay, does not. (Itoh & Lapavitsas 1999: 17) One of the elements that make it difficult to measure the quantity of credit money and control it is the relative autonomy of commercial credit from banking credit and of credit of private banks from credit of central bank. Itoh and Lapavitsas (1999: 102) explain the autonomy as deeply rooted in these informational relations, [i.e. information asymmetry among these agents which is a typical feature of private market economy.] - Virtually all heterodox economists insist that money should be seen as credit money, which simultaneously involves four balance sheet entries. Credit money (say, a bank demand deposit) is an IOU of the issuer (the bank), offset by a loan that is held as an asset. The loan, in turn, represents an IOU of the borrower, while the credit money is held as an asset by a depositor. On this view, money is neither a commodity (such as coined gold), nor is it fiat (an asset without a matching liability). In the first subsection, I will briefly discuss the creditary nature of money. This is not (or should not be) controversial among heterodox economists. In the second subsection, I address the nature of the money issued by the state. Some heterodox economists have inconsistently accepted the orthodox characterization of the

states money as a fiat money, with a nominal value established by state proclamation (or legal tender laws). It is often not recognized that even the states money is an IOU. (Wray 2007: 2) - PKs thesis that loans make deposits: It is worth noting that in all cases . deposit banking develops after the public has become accustomed to using credit money. For example, banks in Western Europe operated primarily on the basis of banknotes until the nineteenth century, rather than as deposit banks. Knapp (1924) argues that deposit banking cannot evolve until the public has developed the banking habit, that is, that habit of accepting banknotes. Thus, rather than acting as intermediaries from depositors to borrowers, early banks make loans by issuing banknotes; that is, they financed their position in assets by creating liabilities. - Instability of credit money: See Grundrisse 131 - Is credit money such as banknotes and bank deposits different from money proper? -> In Marx, yes, I think. The private banknote is, after all, a mere private promise to pay by a bank, the creditworthiness of which cannot be immediately general (Lapavitsas 1991, p.312). See Lapavitsas (1991, p.313; in green). <Quantity of credit money> - Thornton stressed that the price at which monetary credit is traded, i.e. the rate of interest, is critical for determination of the quantity of credit money. (Lapavitsas 2000: 649) - Does credit money have only means of payment as its function excluding function of means of exchange or hoarding? - Credit money is distinguished from money-proper (as Lapavitsas 1991 does), but in what sense? How are they distinguished when credit money plays all three functions of money? HW: In that the basis of credit moneys acceptability (or value), which is the creditworthiness of, at most, the state, or the world government, which is non-existent, is much weaker than that of money-proper, i.e. metallic money. - Banks more often lend rights to draw (or deposit rights) than actual cash, partly because of the greater convenience to borrowers, and partly because the banks wish to keep their cash reserves large, in order to meet large or unexpected demands (Fisher 1911, p.35). - When lending, bank give the borrower either the right to draw deposits or banknotes. So in the simplest case, banks make loans in the form of cash, banknotes, or deposit accounts. (Fisher 1911, p.35, 38).

- Mill (1871) recognized so well the presence of other assets in the circulating medium and the role of credit in determining prices (Laidler 1991, p.17). - The debts themselves can be, and usually were, private debts, but in principle, social institutions could also step in and supply such instruments (Arnon 2010, p.60). + Various methods of creating credit money, or credit instrument -

* CURRENCY - If we confine our attention to present and normal conditions, and to those means of
exchange which either are money or most nearly approximate it, we shall find that money itself belongs to a general class of property rights which we may call "currency" or "circulating media." Currency includes any type of property right which, whether generally acceptable or not, does actually, for its chief purpose and use, serve as a means of exchange. Circulating media are of two chief classes: (1) money; (2) bank deposits, (Fisher 1911).

* CONVERTIBILITY, INCONVERTIBLE MONEY - Laidler (1991, p.9-10) presents the same idea of mine as for the inconvertible monetary system; there he says that in the classical period, inconvertibility was an exception and commodity money based system was a norm. Then how should we understand the classical economists adherence to the quantity theory of money when it is the case that, as Glasner (1985) and others have shown, the QTM holds only in the inconvertible monetary system? This can be explained from their peculiar definition of money and value, i.e. money as a mere means of exchange and value as a fictitious value. - Historically, inconvertibility in Marxs day in 19th century was only temporary, exceptional event. But this was no longer the case since the first world war. - For Marx, convertibility prevents inflation not by the risk of gold drains and the international specie-flow- mechanism as in Ricardos theory, but by the law of reflux: namely, that notes are issued only when they are needed by capitalists. (Likitkijsomboon 2005: 163) - Marx uses the general equivalent theory of money to analyze several outstanding problems in monetary theory of the nineteenth century But Marxs treatment of the problem of paper

money issued by the State without any guarantee of convertibility into gold at fixed rate is of considerable interest. (Foley 1986, 25) - If the State issues more paper than can be absorbed by circul ation, agents will try to get rid of the excess paper money by using it to buy gold. This attempt creates a market for the exchange of paper money and gold and a price in that market, usually called the discount of paper against gold . The excess issue of paper money by the State raises the prices of commodities in terms of paper money through the mechanisms of the discount between paper and gold. (Foley 1986, 26; emphasis in the original.) - As above, Foley admits the QTM result in case of paper money in Marx. But he points out how Marxs analysis and its result are different from QTM: i) In QTM, Q -> P holds for both paper money and gold money while in Marx it applies only to paper money not to gold; ii) QTM explains the mechanism of the rise in prices as lying in excess demand in the market for all commodities as agents try to spend excess money holdings. Yet in Marx the mechanism has nothing to do with such excess demand because it works through the market in which the paper money exchanges against gold; thus the change in paper money prices are merely a reflection of the discount between paper and gold. (Foley 1986, 27) => Both i) and ii) hold in Moseleys approach. Then what is the point of Foleys critique of the latter? -> This analysis cannot, however, be the basis of an explanation of the value of money in contemporary monetary systems where there is no money commodity. The essence of Marxs treatment of this problem is that gold continues to function as the general equivalent commodity when the paper money issued. In contemporary monetary systems there is no comparable money commodity against which paper money can be discounted. (Foley 1986, 27) => This is a very strong critique of Moseley & Saros approach. What would be their answer? Are their approach based on insisting the commodity theory of money still in the contemporary non-commodity money regime? - currency inconvertibility may also lead to extra money inflation instead or in spite of the crisis, because it reduces the constraints imposed by convertibility upon speculative booms, and because inconvertibility allows the mismatch between the structure of supply and the composition of demand to increase sharply, which can be an important cause of the crisis (Saad-Filho 2002, p.351). - Saad-Filho (2002, p.351) comments that inconvertibility may smooth out the cycles, however it may lead to permanent inflation. See p.352 for the references for this statement.

- In 1870, specie convertibility, and in Britain in particular gold convertibility, was regarded as a sine quo non of sound monetary management (Laidler 1991, p.42).

* CYCLE - In pointing out that classical economists explained cycles as caused by financial fluctuation and very gradually and slowly realized that real factors also contribute to cycle, Laidler (1991, p .45) mentions that this is in contrast to Marx, for whom cycle was real cycle and who barely discussed price fluctuation and financial factors. This is deadly wrong. - Output fluctuation was systematically integrated into theories of cycle only by Marshall in 1879. - While todays economics has business cycle theory which deals with fluctuations of real variables, classical economics had credit cycle theory dealing with those of the volume of bank credit, money supply, interest rates and prices (Laidler 1991, p.41)

* ENDOGENOUS MONEY
- the point made by endogenous money theorists is that we dont live in a fiat -money system, but in a credit-money system which has had a relatively small and subservient fiat money system tacked onto it . Calling our current financial system a fiat money or fractional reserve banking system is akin to the blind man who classified an elephant as a snake, because he felt its trunk. We live in a credit

money system with a fiat money subsystem that has some independence, but certainly doesnt rule the monetary roostfar from it (Keen 2009). - This feature of monetary systems was already well recognised by Wicksell: No matter what amount of money may be demanded from the banks, that is the amount which they are in a position to lend. . . The supply of money is thus furnished by the demand itself. (Wicksell 1898 [1936, p.110-11]). - Rousseas comments: Keynes did not assume a perfectly elastic money supply, for if the money supply is automatically endogenous all along the line, then the finance motive becomes a trivially ephemeral and unimportant novelty (Rousseas 1986, p.44). And to argue that the central bank fully accommodates any and all increases in the demand for money not only overstates the case but eliminates banks as a barrier to increased investment. If blame is to be apportioned properly, most of it should go to central banks captured by monetarist counterrevolutionaries. Money does matter in the short run and it does affect the

level of investment, and hence output and employment, when, on a mistaken notion of the cause of inflation, its quantity, is severely restricted (45).

* FRIEDMAN - In Friedman (1985), the position seems to have converted from the money demand approach to QT to the original exogenous money stock approach (Rogers 1989, p.8). - Friedman admits that Defining V as PY/M is not exactly correct but just for a convenience due to a difficulty of measuring V, which should have independent determinants. In such definition, V is treated as a residual or statistical discrepancy that renders the equation correct (Friedman 1970, p.198). - Comparison between different versions of QT Fisherian transaction approach Important General purchasing Income approach Cambridge cashbalances approach Temporal abode of purchasing power: Money is held; Money as asset;

aspect of money power; Money is transferred; various institutions and technicalities of payment is emphasized. Important function of money Means of exchange and payment

Store of value (Both demand and time deposits are included in money

- Each of these does not exclude the other. - Cash-balances approach fits better to Marshallian demand and supply framework.

+ Keynes approach - Replaced the equation of exchange identity with income identity with stable consumption propensity. - Three points of Keynes in refuting QT (206). - The first point proved false by the fact that Keynes ignored the wealth variable in consumption function. - On Keynes: p.207- Keynesians: M -> i -> k -> y (real income). For Keynes on this mechanism, there is something unclear in Friedmans discussion. In one place he says that Keynes actually took changes in M being entirely reflected in change in k even though Keynes also made a general argument that in the SR change in M would be lead to changes in k or y or both. In the other place Friedman says that for Keynes k embodies the liquidity preference which depends on the interest rate and that the interest rate is also a price variable and thus varies very slowly. Then in Friedmans discussion, Keyness mechanism that leads changes in M to changes in k is missing. Keynesian some decades of Keynes no longer consider the interest rate as institutional data and attribute more significance to the quantity of money than Keynes did (Friedman 1970, p.211). What this means is this: For Keynes in GT, i is determined not by the quantity of money (as according to the loanable funds theory) but by the liquidity preference, which in turn is determined by various objective and subjective elements of the economy and investors. - Friedman defines the Keynesian approach as conceiving prices as institutional data; traditional Marxian theory is on the same page with the Keynesian theory in that it also explains prices to be determined from the real sides of the economy, not from the monetary sides.

* DEPOSIT - For Marx and Cannan bank deposits are sums of money lent to banks by depositors. They held the same view as that of the banker Walter Leaf in his book Banking (1926, p.102): The

banks can lend no more than they can borrow?in fact not nearly so much. If anyone in the deposit banking system can be called a creator of credit it is the depositor: for the banks are strictly limited in their lending operations by the amount which the depositor thinks fit to leave with them. Opposed to this is a theory described by Cannon as the mystical school of banking theorists, which holds that the bulk of bank deposits are created by the banks themselves. (Hardcastle 1983) Two types of deposits: i) people put their money in the bank (money that is lent to the bank), ii) money that is lent by bank to people Is it right to include both as deposit as most monetary economists do? Wouldnt it involve double counting? Deposits are created in the act of bank borrowing, as banks credit the loan proceeds to the borrowers account. (Moore 1996: 91) -> I think the horizontalism vs. structuralism comes down the creditworthiness of the issuer of private bank money. If it is strong and stable borrowers would be content with deposit money for the loan; otherwise, they will require the bank for cash in which case loans and deposits will not equal to each other. In this sense, horizontalism is based on an assumption that private bank money perfectly performs various functions of money. depository money is credit money generated by the advance of banking credit (Lapavitsas 1991: 316) confusing - The notes now circulating came into existence as the results of loans from the banks to entrepreneurs, who pay out wages in advance of receiving the proceeds of selling the goods which the workers produce (Robinson 1956, p.226; requoted from Rossi 2001, p.115, fn.32). Bank notes are in fact recorded as a deposit in the central banks balance sheet (references). There is therefore identity between the stock of money and the sum total of bank deposits existing, at any point in time, in the economy as a whole. The statistical definition of money (M0~M4, etc.) focuses indeed on these stock-magnitudes (Rossi 2001, p.116, fn.32). - One has in fact always to remember that paper money is just the representation of a bank deposit, and that the transmission of bank notes between agents implies the transfer of the corresponding drawing right (purchasing power) over current production, recorded within the banking system (Rossi 2001, p.107). ..every bank-note corresponds to a book-entry of which it is the mere image (Cencini 1988, p.58; re-quoted from Rossi 2001, p.107).

any payment within the national economy is tautologically a monetary transaction carried out through the bookkeeping records of the domestic banking system (Rossi 2001, p.107). - Recall that bank notes and coins are the material representation of a bank deposit, to wit, a deposit in central bank money (Rossi 2001, p.158, fn.54). - In Lapavitsas (1991) where a very good Marxist analysis of credit money banknote and deposit is presented, the causal relation between bank credit (loan) and deposit is still unclear. For instance, in one place it is stated money deposits are claims against banks which are generated as money hoards are concentrated and lent out (315); while in the other depository money is credit money generated by the advance of banking credit (316). From these and others it is unclear whether Lapavitsas identifies deposits with hoards, in which case it follows that deposits makes loans, or whether they are conceived as different based on the proposition that loans i.e. banks lending out hoarded money makes deposits. Lapavitsas seems to adhere to the former; for example, he writes Hoard creation by individuals out of private income brings banknotes back to the banks to be transformed into depository claims (317). But this type of confusion is prevalent even in the Post Keynesian literature; we could understand this by distinguishing between individual perspective and that of society. Still however, Marxian theory of credit in general seems to be closer to deposit making loan thesis i.e. loanable funds theory. - Classical economists first Pennington and Boyd recognized the identity between deposits and notes as for the function of means of exchange, or currency. Yet, Boyd made a slight distinction between passive circulation for the former and active circulation for the latter (Viner 1937, p.244). See Viner (1937, p.243~) for more. - Difference between deposits and notes: Fisher (1911, p.19), For Fisher (1911, p.38; 1912, p.137) deposits are means of exchange (or as is the same thing, currency) but not money while banknotes are both. Further distinction is for currency; bank deposits themselves which checks or deposits account represent are currency while checks are not currency; The chief difference is a formal one, the notes circulating from hand to hand, while the deposit currency circulates only by means of special orders called "checks (1911, p.32). Excluding deposits from money represents his theoretical root in the Currency school as opposed to Banking school? Viner writes as if treating deposits and checks on them identically. - Fisher treats bank deposits and banknotes as similar each other in the sense that they are liabilities of the bank, i.e. the latter has to redeem them on demand: Besides lending deposit rights, banks may also lend their own notes, called "bank notes." And the principle governing

bank notes is the same as the principle governing deposit rights. The holder simply gets a pocketful of bank notes instead of a bank account. In either case the bank must be always ready to pay the holder to "redeem its notes" as well as pay its depositors, on demand, and in either case the bank exchanges a promise for a promise. In the case of the note, the bank has exchanged its bank note for a customer's promissory note. The bank note carries no interest, but is payable on demand. The customer's note bears interest, but is payable only at a definite date (Fisher 1911, p.35). - Wicksell is an exception among the quantity theorists in that he makes a distinction, as for functions of money, between means of exchange and store of value (Wicksell 1898, p.22). - See Fisher (1911, p.35) - Reserves are required for the defense of deposits but not for banknotes. - The currency schools case for arguing that deposits bore a fixed proportion to notes: Norman claimed that the volume of deposits and bills of exchange was dependent on the volume of underlying credit, which in turn was regulated by the amount of bank notes and coin, and that in any case the influence on prices of these "economizing expedients" was only "trifling and transient (Viner 1937, p.251). -EUREKA!!!! The reason why economists or the currency school people have tended not to include deposits into the category of money is strongly implied in Fisher (1911, ch.3). In sum, deposits are not a direct represent of money but merely a right to draw. Due to a fractional reserve practice, those rights do not have a complete correspondence to money in banks. (Checks are a certificate of those right.) Basically, this position conceives only M1 as money but not M2, M3, etc. Another important reason: Classical economists conceived money mainly as means of exchange; those that are not active in circulation are not money.1 This is why deposits are excluded from the category of money. On the other hand, modern economists recognize the store of value as an important function of money and thus consider deposits as money. Laidler (1991, p.8) insightfully explains this difference from the difference in method. That is, conceiving money as a store of value or assets presupposes an individualistic micro framework as in the modern portfolio theory whereas money as means of exchange does not
1

Laidler (1991, p.8) writes that there was only one exception to the classical economists

ignorance of moneys function of store of value and hoard (asset); it was Mill, who only points this in passing. When he says this, Laidler seems to not have Banking School in mind for whom money is a store of value as well. In particular, Marx.

and only requires the equation of exchange, which was the macro framework for classical economists. What is Wicksells view on this? On one hand, he shares the same view with the quantity theory on money that its only function is the means of exchange. But he conceives deposits broadly as means of exchange awaiting temporarily to be used in transaction (thus he was able to include deposits into the category of money while Fisher was not). On the other hand, in some place Wicksell recognizes moneys function of a store of value. -> Wicksell treats the two functions of money means of exchange and a store of value is indistinguishable. - For a very clear explanation in comparison to banknotes: http://chestofbooks.com/finance/banking/Banking-Principles-And-Practice-2/Bank-NotesAnd-Deposits-Differences.html#.UQlvOb9X2Sq - Deposit vs. hoarding: Hoarded money is money out of circulation. Currency school writers conceived deposits as hoarded money and excluded them from the category of money since for them money is nothing but means of circulation and therefore money out of circulation is not money. As private bank money tends to replace cash with the development of banking system, we could categorize demand deposits as money in circulation while time deposits as hoarding out of circulation since the latter cannot be immediately used for transactions. - Schumpeter s very insightful view and critique of the traditional view of Cannan, according to which deposits are similar to deposit of things for safe custody (Schumpeter 1954, p.11134).

* DEMAND FOR MONEY - History of theories on demand for money: McCallum & Goodfriend 1987, 122- ; - Literature: See section 2 of Kim, Shin, Yun (2012), Judd and Scadding (1982). - See the TREATISE ON MONEY section - It should be distinguished from demand for credit or demand for nonmoney financial assets. In PK, money is created by credit, demand for money and demand for credit is positively related.

* DICHOTOMY - the method of analysis dichotomizing economics into two specialized departments, real

and monetary, is harmful and defective. We must deal with the economy as a whole uniting and interlinking the two subsystems (Morishima 1992, p.184).

* EQUATION OF EXCHANGE - Historical origin: Bordo 1987, Milgate 1987. Viner 1937, p.249, fn.613. - Controversy on whether it is an identity or equilibrium condition: See Rossi 2001, p.67 - Extended version where M includes money outside of the sphere of circulation is suggested in Tao (2002 Mismatch, p.10) Tao says that this comes closer to Fishers original spirit. - The equation of exchange is a statement, in mathematical form, of the total transactions effected in a certain period in a given community. It is obtained simply by adding together the equations of exchange for all individual transactions (Fisher 1912, p.140). Fisher calls each side of the equation, money side and goods side. - The equation shows that these four sets of magnitudes are mutually related. Because this equation must be fulfilled, the prices must bear a relation to the three other sets of magnitudes quantity of money, rapidity of circulation, and quantities of goods exchanged. Consequently, these prices must, as a whole, vary proportionally with the quantity of money and with its velocity of circulation, and inversely with the quantities of goods exchanged (Fisher 1912, Elementary p.142).
- Hicks grumbles about the preoccupation of monetary theorists on the equation of exchange, which has all sorts of ingenious little arithmetical tricks performed on it. He suggests that marginal utility theory, which is the basic framework for the theory of value, has to be used in the theory of money as well; in this direction the main aim would be to demonstrate that money has marginal utility and that is why the public demand it. Hicks attributes this way of theorization to Keynes liquidity preference theory and suggests that the latters influence on Milton Friedmans theory of demand for money should be well recognized. http://uneasymoney.com/2013/08/06/hicks-on-keynes-and-the-theory-ofthe-demand-for-money/

* IRVING FISHER

- Fishers theory of appreciation and interest, as he advised his readers many times, was based on the crucial distinction between periods of full equilibrium and those of transition, or disequilibrium (Rutledge 1977, p.204). - Fishers distinction between LR and SR analysis of the equation of exchange and recognition of the significance of the transition period (SR) can find its root in the classical quantity theorists. Laidler (1991, p.17-19) shows that Mill and Cairnes understood the SR transmission mechanism from monetary expansion through interest rate adjustment to some real effects. - Equation (5.3) incorporates the idea of transition periods outlined above. Fisher made it clear that velocity is far from being constant (Wood, 1995, p. 104; Fisher, [1911] 1985, pp. 55, 63, 64, 320). Moreover, velocity is a function of expected price changes or the expected inflation rate. The positive correlation between velocity and expected inflation seems to be a major assumption in theories following the quantity theoretic tradition, as the Chicago School and the Cambridge approach (see Patinkin, 1969, pp. 50, 51; Laidler, 1991b, pp. 292-293; Tavlas and Aschheim, 1985, p. 295) (Loef & Monissen 1999, p.10). - After a detailed elaboration on deposits (M) Fisher arrives at a conclusion that an inclusion of them into the equation of exchange does not change the causal relation between money and price (Fisher 1911, p.42-43). - In explaining the credit cycle Fisher (1911, ch.4) concludes that the most important element that disturbs the equilibrium bringing about cyclical fluctuation is the quantity of money. - Anti-QTM in Fisher: - After demonstrating various cases of change in equation of exchange, Finally, if there is a simultaneous change in two or all of the three influences, i.e., quantity of money, velocity of circulation, and quantities of goods exchanged, the price level will be a compound or resultant of these various influences. If, for example, the quantity of money is doubled, and its velocity of circulation is halved, while the quantity of goods exchanged remains constant, the price level will be undisturbed. Likewise it will be undisturbed if the quantity of money is doubled and the quantity of goods is doubled, while the velocity of circulation remains the same. To double the quantity of money, therefore, is not always to double prices. We must distinctly recognize that the quantity of money is only one of three factors, all equally important in determining the price level (Elementary p.145). - Using the graphical demonstration (fulcrum) of the equation of exchange, In general, any change in one of these four sets of magnitudes must be accompanied by such a change or

changes in one or more of the other three as shall maintain equilibrium (Elementary p.147). We dont find any logical necessity in this statement leading to QTM. But that is what Fisher does in EPE and PPM. For example, see Fisher (Elementary p.149~); here, after stating the above-quoted remark, it is maintained that the third element, the quantity of money, is the most important due to the peculiar nature of money; according to Fishers following explanation, its peculiarity is that, contrast to other goods, it attains its value not from itself but from its role of medium of exchange. This is exactly the same as the logic used by the classical quantity theorists. Hume, in this reasoning, for example, characterized money as having fictitious value. Now, understood in this way, destroying the logic of QT becomes very easy; just to show that what Fisher characterizes as a peculiarity of money is not moneys only aspect, i.e. money also has a hoarding function. - The factors in the equation of exchange are therefore continually seeking normal adjustment. A ship in a calm sea will "pitch" only a few times before coming to rest, but in a high sea the pitching never ceases. While continually seeking equilibrium, the ship continually encounters causes which accentuate the oscillation. The factors seeking mutual adjustment are money in circulation, deposits, their velocities, the Q's and the p's. These magnitudes must always be linked together by the equation MV + MV = pQ. This represents the mechanism of exchange. But in order to conform to such a relation the displacement of any one part of the mechanism spreads its effects during the transition period over all parts. Since periods of transition are the rule and those of equilibrium the exception, the mechanism of exchange is almost always in a dynamic rather than a static condition (Fisher 1911, p.51). - Fishers description of transition period in chapter 4 does invalidate QTM as conceded by Laidler (1991, p.78). But Laidler insists that Fishers version of QTM provides insight into the secular behavior of price. However, Fisher also writes that transition periods are normal conditions of the real workings of the economy. - For Fisher, the general price level means the weighted average price of all goods (Elementary, p.147). - Credit cycle in PPM ch.4: It is the lagging behind of the rate of interest which allows the oscillations to reach so great proportions. At the end of the chapter Fisher quotes Marshall and it shows that Marshalls account is exactly the same with Fishers credit cycle theory. - Laidler (1991, p.64) says that Fisher was interested in analyzing the determinants of the value of money to invoked the title of Pigous 1917 paper.

- Marshalls superiority over Fisher (on the interest rate analysis) is his demonstration of the sequence increase in money -> decrease in interest rate -> increase in investment which raises prices, which is lacking in Fisher. Notice that this is just Marshalls analysis of transition period while he basically treated the interest rate as a real variable, by which it means that the supply of gold exercises no permanent influence over the rate of discount (Laidler 1991, p.65-66). However, Laidler (68) points out that the first part of the chain is not Marshalls original contribution but could be traced to Hume. (What about Humes proposition that interest rate is not determined by the quantity of money?) - Fisher was aware of the importance of distinguishing between absolute and relative prices. And this is similar to Marx. - Fishers monetary model of compenstated dollar and another one for price stabilization through open market operation in 100% Money are well described in Humphrey (1990). - A fatal fallacy of Fisher: to assume a fixed level of desired deposit holding. Even though this can be true for money, it is not for deposits. More deposits, better it is. Can there be a notion of surplus deposits exceeding some desired level? No. - Emphasis on the priority of analysis of the general price level to that of individual prices: 106~ - Summary: 109-10. - The Business Cycle Largely a Dance of the Dollar, (1925) where Fisher attributed business cycles
to changes in the value of money.

* INFLATION - Dalziel (2001)s discussion of six English-speaking countries experience shows that in 70s income policy freeze on wage and price was used to control inflation, and in late 70s and early 80s monetary constraint was used, and these two episodes proves they were successful. But monetary constraint policy was abandoned in late 80s due to the break of the stable relation between monetary growth and inflation. This abandonment led to a rebound of inflation, which brought about in 90s a reform in monetary policy to adopt a direct control of inflation rather than an indirect one through monetary target.

* INTEREST RATE

- Exogenous/endogenous interest rate: The Fed can determine the Federal Funds rate but practically, it set it both according to a reaction function and in response to the economic situation as the lender of last resort. In this sense, it is hard to say that the interest rate is totally exogenous as horizontalists would say. See Pollin (2008, p.3,4). - The decision to finance expenditure by borrowing, however, is simultaneously a decision not to run down existing holdings of liquid assets. Deficit units commonly do run simultaneous debit even though the cost of credit exceeds (sometimes by a large margin) the return on deposits. The difference, or spread between the rate charged on advances, and the rate paid on deposits, may be taken as indicating the real cost of liquidity. (Howells & Mariscal 1992, 381) - In Hume, interest rate does not depend on the quantity of money (Of Interest, p.12-13). - Interest rate and prices i) The classical view (Ricardo, etc.): low i -> high I -> increase in P -> deficit trade balance -> outflow of golds -> decrease in P ii) Tooke: low i -> outflow of money capital searching for a better investment opportunity > decrease in P (However, Wicksell (1898, p.112 fn) reports that Tooke admitted some validity of the Classical view. And he supports the first view) - In Keynesian IS-LM framework, the interest rate is determined in the money market independently of goods market; in the latter it is investment and consumption expenditures and associated employments that are determined and ultimately the income. This is in opposition to what Keynes called classical system where there is no separate consideration of money, which is a mere veil, and the interest rate is determined by the interaction of investment and saving in the goods market, which is a loanable funds theory. In this sense, Keynesian story has the monetary interest rate contrary to classical system which has the real interest rate. The importance of the monetary rate of interest was pointed out by Marx before Keynes: See CIII 645, especially, to day that the demand for money capital and hence the interest rate rises because the profit rate is high is not the same as saying that the demand for industrial capital rises and that this is why the interest rate is high (CIII 645).

* ASSET & LIABILITY MANAGEMENT - Reference: Lavoie 1992, p.212; Moore 1989 A Simple Model of Bank Intermediation,

p.13-20); Goodhart 1989 Hs Moore become too horizontalist? 30-2. - Liability management: - Borrowing in the interbank market. This could provide banks with reserves independently of the central bank. Banks borrow from the central bank when their ability to procure reserves through liability management reaches its limits (Lapavitsas & Saad -Filho 2000, p.311-12). - Lavoie (1999, p.105) - One way to characterize liability management is as a means of attracting funds out of demand deposit accounts, which have relatively high reserve requirements into CDs, the federal funds market, Eurodollars, and similiar instruments within the short-term money market (Pollin 1991, p.) Liability management requires that intennediaries with insufficient reserves to meet loan demand pay market interest rates for funds acquired through federal funds borrowing, repurchase agreements, issuing certificates of deposits or similar practices.I ntermediariesw ill acquiesce in paying marketr ates on such instruments only if they could not expect to obtain the funds they need more cheaply and/or readily through accommodative open market operations and discount window borrowing, frown costs included (Pollin 1991, p.370).

* LIQUIDITY PREFERENCE - Keynes formulation of liquidity preference in the GT . was a watered down version of his richer analysis of the demand for money in the Treatise (Rousseas 1986, p.31). His theory of liquidity preference in the GT was a step back from his analysis of the demand for money in the Treatise.

* LOANABLE FUNDS THEORY + Criticisms: - Schumpeter: The presence of bank alters the analytic situation profoundly and makes it highly inadvisable to construe bank credit on the model of existing funds being withdrawn from previous uses by an entirely imaginary act of saving and then lent out by their owners. It is much more realistic to say that the banks create credit, that is, that they create deposits in their act of lending, than to say that they lend the deposits that have been entrusted to them. And the reason for insisting on this is that depositors should not be invested with the insignia of a role which they do not play. The theory to which economists

clung so tenaciously makes them out to be savers when they neither save nor intend to do so; it attributes to them an influence on the supply of credit which they do not have. The theory of credit creation . . . brings out the peculiar mechanism of saving and investment that is characteristic of full fledged capitalist society and the true role of banks in capitalist evolution. . . . this theory therefore constitutes a definite advance in analysis (Schumpeter 1954, 1114). - Bertocco (2009, p.618-19) describes the loanable funds theory as asserting substantial neutrality of bank money for two reasons: i) the presence of bank money does not affect the natural rate of interest, ii) the monetary authorities can achieve money neutrality by targeting money rate of interest at natural rate.

* MILL - See Wicksell (1898, p.85)s dismiss. - Admits the validity of Banking Schools endogenous theory of money but only in the periods of tranquility. The relies on the reflux channel of bank deposits (Wicksell 1898, p.856).

* MODEL, MODELLING - the relationships in their dynamic setting treat causality as running unidirectionally from the independent variables on the right side of each equation to the dependent variables on the left. True, the modern theorist versed in formal equilibrium analysis may question this mode of reasoning. Accustomed to thinking in terms of a system of equations simultaneously satisfied by a set of ariables, he or she would argue that it makes no sense to think of one variable adjusting first and thus causing another to adjust, and so on. Nevertheless, it is just this sort of chain of causation that lies at the heart of Wicksells inflation mechanism and of the active versus passive money debate (Humphrey 2002, p.65).

* MONETARISM

- The closest the Federal Reserve came to a "monetarist experiment" began in October 1979, when the FOMC under Chairman Paul Volcker adopted an operating procedure based on the management of non-borrowed reserves.11 The intent was to focus policy on controlling the growth of M1 and M2 and thereby to reduce inflation, which had been running at doubledigit rates. As you know, the disinflation effort was successful and ushered in the lowinflation regime that the United States has enjoyed since. However, the Federal Reserve discontinued the procedure based on non-borrowed reserves in 1982. It would be fair to say that monetary and credit aggregates have not played a central role in the formulation of U.S. monetary policy since that time, although policymakers continue to use monetary data as a source of information about the state of the economy. (Bernanke 2006) - .the contemporary incarnation (Congdon, 1978, p.3) of the (still) dominated theory, which considers the purchasing power of money as the reciprocal of the general level of prices (Rossi 2001, p.64). - Achilles heel: Bernanke & Blinder (1988, p.438) - See Friedman, B. (1988) for the breakdown of money stocks and macro variables.

* MONETARY POLICY + Channels: - Expectations channel: - Risk-taking channel: Borio & Zhu (2008)

* MONEY - Definition: - Fisher (1911, p.19~): Primary vs. fiduciary money The chief quality of fiduciary
money which makes it exchangeable is its redeemability in primary money, or else its imposed character of legal tender. - Relation between credit money and paper (symbolic, token) money: Bank notes and all other fiduciary money, as well as bank deposits, circulate by certificates often called "tokens." (Fisher 1911).

- Currency: coin and notes backed by specie. A broader notion would be circulating medium that includes bank deposits.

- Difficulty with money: In

theory
it is

practice, money is a most convenient device, but in always a stumbling-block to the student of economics, who is exceedingly prone to misunderstand its functions (Fisher 1912, p.134).

- After discussing how early classical writers conceived money, Viner writes But the whole discussion as to what is and what is not "money" retains the appearance of significance only while velocity considerations are kept in the background. Moreover instruments which were not money at some particular moment could be so at some other moment. In this connection bills of exchange, time deposits, and overdraft privileges could be regarded as a sort of "potential money (Viner 1937, p.248). - There is no denying that views on money are as difficult to describe as are shifting clouds (Schumpeter 1954, p.289). - assets are part of the money stock if and only if they constitute claims to currency, unrestricted (at par). This principle rationalizes the common practice of including demand deposits in the money stock of the US, while excluding time deposits and various other assets. (Eatwell et al. 1987, 118) - On the reference for metallists vs. cartalists debate see Zazzaro 2003, fn.4. + Origin of Money: - Indeed, although [metalist and chartalist] are mostly presented as divergences on the logical origin of money (Wray, 1993; 2000; Ingham, 2000), often it is only its historical origin that is in dispute. More precisely, given the inevitable absence of conclusive evidence about the true origin of money, the real problem under discussion is which of the possible historical origins of money is the most logically convincing (Zazzaro 2003, p.9). Besides the historiographic and anthropological econstructions so brilliantly summarised by Einzig (1966), an interesting attempt to offer some statistical evidence to test the various hypotheses on the origin of money is offered by Pryor (1977), who finds slight evidence in favour of the theory that sees money as a means of payment precede money as a medium of exchange on the economic development scale (Ibid, p.33). + Real Money: - Real money is what a payee accepts without question, because he is induced to do so by " legal tender " laws or by a well-established custom (Fisher 1912, p.138). - Fisher distinguishes primary money vs. fiduciary money (Fisher 1912, p.139) for commodity money vs. non-commodity money. - Monetary base could be conceived of as being consisted of money in reserves and money in circulation. The former is money kept in banks such as vault cash and reserves at central

banks, the latter being coins and notes in the public. Fisher (1911, p.41-42) shows that deposits are in a fixed ratio to each. - Fisher distinguishes money and deposits and categorizes three goods, i) money, ii) deposits, iii) other goods. From this, we have six different types of exchange (Fisher 1911, p.39-40). I think this is a very useful approach. - The gap between classical and neo-classical on money is that between money as a social institution and money as an object of individual choice, the latter in the sense of related to demand for money (Laidler 1991, p.41). - Similarly to Fisher, Wicksell points out the peculiarity of money as means of exchange (29). Remind that Fisher, in explaining why he treats the quantity of money so a special variable within the equation of exchange, notes that money is a means of exchange. - Keynes definition: Leijonhufvud has argued, and I believe correctly, that Keynes used the term "money" as referring not only to currency and deposits narrowly defined but to the whole range of short-term assets that provided "liquidity" in the sense of security against capital loss arising from changes in interest rates .. It is therefore somewhat misleading to regard Keynes, as most of the literature does, as distinguishing between "money" and "bonds." (Friedman 1970, p.). - Debates on QT were on the determination of the value of money, i.e. the quantity theory of money vs. cost of production theory. Since Keynes, as Milton Friedman well described, the focus moved to the determination of nominal income, so the quantity theory of money (which dictates that nominal income is determined by the quantity of money) vs. income-expenditure theory (it is investment and consumption expenditure that dietermine nominal income). + Real vs. Monetary: - [Saving and investment decisions] rests basically on the fact that in making their borrowing and lending decisions, rational households (and firms) are fundamentally concerned with goods and services consumed or provided at various points in time. They are basically concerned, that is, with choices involving consumption and labor supply in the present and in the future. But such choices must satisfy budget constraints and thus are precisely equivalent to decisions about borrowing and lending that is, supply and demand choices for financial assets. . . . Consequently, there is no need to consider both types of decisions explicitly. . . . it is seriously misleading to discuss issues in terms of possible connections between the financial and real sectors of the economy, to use a phrase that

appears occasionally in the literature on monetary policy. The phrase is misleading because it fails to recognize that the financial sector is a real sector (McCallum 1989, 29-30). - Money: banking system liabilities, credit: banking system assets + DEMAND FOR MONEY: - Demand for money related to Cambridge k is different from hoard. - Keynes formulation of liquidity preference in the GT . was a watered down version of his richer analysis of the demand for money in the Treatise (Rousseas 1986, p.31). His theory of liquidity preference in the GT was a step back from his analysis of the demand for money in the Treatise. It was essentially a bond-money model where the demand for money was a demand for earning assets. The finance motive, however, focused on the demand for money not as a demand for a stock of assets but as a business demand for a flow of credit (44). -> As can be seen from Rousseas comments, popularized discussions on the demand for money are not based on a commonly accepted definition of money. Therefore, any discussions on the demand for money should start by providing a rigorous definition of money. But is it true that GTs discussion of demand for money was about bond-money? I dont think so; in the liquidity preference function L(Y,i), i is a negative argument. + Keyness concept of money - Perhaps anything in terms of which the factors of production contract to be remunerated, which is not and cannot be a part of current output and is capable of being used otherwise than to purchase current output, is, in a sense, money. If so, but not otherwise, the use of money is a necessary condition for fluctuations in effective demand (Keynes 1933: 86; re-quoted from Hein 2006) - Hicks grumbles about the preoccupation of monetary theorists on the equation of exchange,
which has all sorts of ingenious little arithmetical tricks performed on it. He suggests that margin al utility theory, which is the basic framework for the theory of value, has to be used in the theory of money as well; in this direction the main aim would be to demonstrate that money has marginal utility and that is why the public demand it. Hicks attributes this way of theorization to Keynes liquidity preference theory and suggests that the latters influence on Milton Friedmans theory of demand for money should be well recognized. http://uneasymoney.com/2013/08/06/hicks-on-keynes-and-thetheory-of-the-demand-for-money/

* NEOCLASSICAL APPROACH, CRITIQUES - For references see Rossi 2001, p.76

* NUMERAIRE - See Passinetti 1993 Structural Change and Economic Growth, p.63-4.

* QUANTITY THEORY OF MONEY - Origin: See Wicksell (1898, p.38, fn.1), - Literature: Edwin Kemmerer (applied QT to the Gold Standard) - Blaug says it is striking to see how economists failed to provide rigorous statement on QTM. (Blaug 1995: 43) - The QTM was born in the sixteenth century as a response to the global price revolution set off by the gold and silver discoveries of the New World, that is, by the attempt to explain world inflation by an exogenous increase in the money supply; exogenous, that is, in a model sense of the term. Nevertheless, for one country considered in isolation the change in the money supply was endogenous because it depended on the elasticity of supply of its exports and the elasticity of demand for its imports. (Blaug 1995: 38) - QTM received its greatest fillip with the suspension of specie payments in 1797, which introduced an entire generation of monetary thinkers to the notion of inconvertible fiat paper money and floating exchange rates, a monetary regime in which the money supply is exogenous as it had never been before. (Blaug 1995: 30) Marx also reports the same story: The suspension of cash payments by the Bank of England in 1797, the rise in price of many commodities which followed, the fall in the mint-price of gold below its market-price, and the depreciation of bank-notes especially after 1809 were the immediate practical occasion for a party contest within Parliament and a theoretical encounter outside it, both waged with equal passion. (Marx 1970: See more on this.) The convertibility of paper money was restored in 1821

- Three elements of QTM: i) money is exogenous, it determines price, ii) demand function of money is stable, constant income velocity of money, iii) Y or T is determined not by M or P but by real variables. See Blaug (1995: 29) - See Blaug (1995: 39-40) for two versions of QTM: i) Cambridge income approach (rest theory of money) ii) Fishers transaction approach (motion theory of money) money -> price causal mechanism almost disappeared in Fisherian transaction approach to QTM. According to M. Friedman (1987), in income approach money is a particular asset to be held, rather than a means of circulation to be transferred. (from Brunhoff 1997) Brunhoff (1997) notes that in both approaches, M is a stock not a flow, and empirically the money stock is represented by the aggregate M2 (currency and deposits). - It is interesting that for Hume, who was against paper money, money only has fictitious value and is representation of labour and commodities in the sphere of exchange. (See Itoh & Lapavitsas 1999: 8) - One of the most important theoretical features of monetary theories within the tradition of quantity theory of money seems to be accepting Humes notion of fictitious value of money. - Two values of money which Foley emphasized already had been the controversial issue in the classical PE. For example, Humes notion of fictitious value of money; Ricardos automatic equilibrium mechanism which explains how the contradiction between fictitious value of money and the intrinsic value of money (both of which Ricardo accepted) is resolved. - Ricardos money theory allows only a means of exchange function for money. - The question, of course, is whether, in the case of inconvertible currency, changes in the price level are in any sense caused by changes in the money supply. In the banking school view, the answer to this question seems to depend on whether there is a channel for reflux of an excess issue of money (i.e. fiat currency) in addition to the channel for reflux of excess deposits. (Merhling 1996: 337 See pp.337-8 more on this.) - Discussion of a contradiction between the theory of money and the theory of value in Ricardo (as pointed out by Marx): Clair 1957, A Key to Ricardo, p.299; De Vivo 1987, Ricardo, David, The New Palgrave Dictionary of Economics eds. Eatwell, Milgate, Newman - The quantity equation . Must be drastically modified when we consider systems in which credit plays an important role in financing transactions. (Foley 1986, 24) - In Marx in contrast to QTM the quantity of money adapts to the needs of circulation by the expansion and contraction of hoards in commodity money system and by expansion and

contraction of credit in non-commodity money system. (Foley 1986, 25) - Still, Marxs approach to the quantity equation is theoretically important. It suggests that even in a monetary system with an abstract unit of account, that is, in a system in which forms of credit act as means of payment, the correct order of explanation for monetary phenomena runs from the needs of circulation to the mechanisms that meet those needs. (Foley 1986, 25) => This is so a simplification of the complex reality where finance plays more active roles in affecting price system. Foley and other anti-QT writers tend to take money as a simple veil. (But what about endogenous money theory of PK and MCA? How does this money as a veil aspect of heterodox tendency towards anti-QTM relate to the general fact that the monetary dichotomy of money as veil is a typical idea of neoclassical mainstreams? Mainstream economists admit moneys influence on price if not on output. Heterodox economists do not even admit this. The latter has stronger classical dichotomy and money neutrality than the former.) They also seem to strictly adhere to the real bills doctrine and the law of reflux. Cf. Money is active in positing commodities as values. This prefigures the dominance of buying in order to sell (M-C-M) in developed capitalist relations. In M-C-M, money cannot possibly be seen as passive because a monetary increment is set as the aim of the circuit. Money is the most active thing there is in the economy, an important goal of any theory of money should be to explain this. (Arthur, 2006: 33) But active in what sense? In this passage it is unclear or it refers merely to the notion of money the increment of which is the final goal of capitalist production. Does Arthur also imply active in that it affects either output or price? - As for the comparison between Marx and QTM, the similarity lies only at the phenomenal level of causal relation between money and price. More fundamental aspects as for the mechanism underlying the relation generate huge difference between Marx and QTM. - Difference between M and QTM: Moseley - Difference between extra money approach and QTM (Saad-Filho 2002, p.350-351): i) exogenous vs. endogenous creation of money, ii) money neutrality in the short-run and longrun, iii) simple (predictable) and complex (unpredictable) relation between money and price - The quantity theory has been one of the most bitterly contested theories in economics, largely because the recognition of its truth or falsity affected powerful interests in commerce and politics. It has been maintained and the assertion is scarcely an exaggeration that the theorems of Euclid would be bitterly controverted if financial or political interests were

involved (Fisher ch.2). - As for transaction and income version of QTM, see Friedman (1987) the transaction version includes the purchase of an existing asset a house or a piece of land or a share of equity stock precisely on a par with an intermediate or final transaction. The income version excludes such transactions completely. The transactions and income versions of the quantity theory involve very different conceptions of the role of money. (Friedman 1987, 7) - One of the main reasons for the case of anti-QTM and anti-monetarism for the heterodox tradition is the fact that no meaningful statement is possible with the quantity of money, or in modern language, monetary aggregate; for both the difficulty in measuring the latter and the instability of the empirical relationship between money growth and other macro variables as inflation, nominal output growth, etc. If this so, Marxists general objection to QT should be found elsewhere since Marx has a unambiguous distinction between money and non-money which renders measuring monetary aggregate not difficult. - Fisher maintained that the causal relation between money and price holds true even when the other variables change (Fisher 1911, ch.5) -> Does he really says this? In this chapter Fisher examines other factors outside of equation of exchange and see how they affect prices through influencing the rest of the three variables. - Fishers case for the QTM is always presupposed upon the premise other things being equal (Fisher 1965, p.14) - Equiproportionality hypothesis holds on two grounds (Fisher 1911, ch.8 which is summarized in Humphrey 1997, p.75). i) Full employment of resources in the long run; Keynesian notion of underemployment equilibrium would undermine this point. ii) There is a desired level of money velocity and people would tend to maintain it; First, it seems unreasonable to presuppose the money velocity as having its own measure independent of other variables; second, what is the meaning of the desired level of money velocity and why should people have such level? - One can employ a simple litmus test: a person essentially is a quantity theorist if he believes the monetary authority can stabilize the price level through control, direct or indirect, of the stock of money or nominal purchasing power (Humphrey 1997, p.85). - CRITIQUE OF QT - Tookes critique summarized in seventeen conlcusions; See Wicksell (1898, p.44)s comments on this.

- QTM is usually based on an exclusion of moneys function of hoard and store of value. For example Fishers explanation Suppose, for instance, that the quantity of money were doubled, while its velocity of circulation and the quantity of goods exchanged remained the same. Then it would be quite impossible for prices to remain unchanged. The money side would now be $10,000,000 X 20 times a year, or $200,000,000 ; whereas, if prices should not change, the goods would remain $100,000,000 and the equation would be violated. Since exchanges, individually and collectively, always involve an equivalent quid pro quo, the two sides must be equal (Fisher 1912, p.143). Here the premise is that those extra money would entirely be used in transaction, which precludes the possibility of hoards. - In the interwar period, Stockholm School, influenced by Wicksell, rejected QTM as outmoded and irrelevant, identifying it with the stable velocity of currency construction of Wicksells pure cash economy special case (Laidler 1991, p.148). - Critical comments on the modern Neoclassical implication of QT in Nicholas (2011, p.112-13). Some QT-look-like phenomenon whereby monetary expansion, such as a recent quantitative easing, leads to speculative bubbles should be distinguished from the usual QT mechanism whereby an increase of general price level is generated by the expansionary monetary policy. - A circular reasoning in Cambridge cash balance approach; demand for money already presupposes some price level and the value of money. Austrian school came up with the same answer with Moseley, i.e. money demand depends on expectation of future prices (Shand 1984, p.160-61, Nicholas 2011, p.113). Nicholas answer to this solution is very powerful: it would only provide an escape route for the Neoclassical approach if it can be assumed that the future value of money does not depend on preferences to hold current balances (113). This also applies to Moseleys answer; if we are to argue that the quantity of money depends on the future prices, then it has to be shown in order to avoid a circular reasoning that those future prices do not depend on the current quantity of money. - Classical quantity theorists, however, did not argue that velocity was an empirically stable parameter in this sense. They were as much concerned with the cyclical interaction of money and prices as with secular relations, and in this context they stressed not the role of a given institutional structure in stabilizing velocity in the long run, but rather the short-run scope for prices to vary independently of the quantity of money which that structure provided (Laidler 1991, p.16). It was mainly Cairnes and Mill who modified and gave sophistication to the classical QT (Ibid).

- Quantity theorists always start their exposition with an awkward assumption such as an arbitrary overnight increase of money balance for all people. Example: Hume (1752, p.53) Those changes in the money stock are taken as given and not explained. This shows their exogenous money approach. - In most case, whenever the causal mechanism from increase of money to rise of prices is explained full employment is assumed implicitly or explicitly. Underemployment will disappear through price adjustment in the long run. What about from the heterodox perspective? - Keynes income-expenditure approach is a critique of QT: Both have a different explanation of income determination. For Keynes it is investment and consumption and for QT the quantity of money that determines income. - Formalization: Humphrey (2002), + CAMBRIDGE CASH-BALANCE APPROACH: - Its first exposition in Marshal and Walras: See Laidler 1991, p.59-60. Keyness liquidity theory as a refinement of earlier Cambridge monetary thought (Laidler 1991, fn.9 of ch.3) - Cambridge people had an ambiguous distinction between income and wealth in dealing with demand for money (Laidler 1991, p.61) - Is based on the Walrass Law according to which excess demand of goods should be matched by excess supply of something else. For the quantity theorists the latter is money (Humphrey 2002, p.67). - One of the differences between income and transaction version of QT is the conception of money. Income version: money is held, Transaction version: money is transferred (Friedman 1970, p.200). Friedman takes the income version as lying in between the transaction version and Cambridge cash-balance approach. - M in this approach includes all monetary assets that constitute the concept of money, demand and time deposits, etc. - Is money includes deposits as well? - The notion of excess supply of money is non-sense; desire for accumulation of money has no limit. But this idea is widely accepted even in the heterodox literature. Examples: Gurley & Shaw (1960, p.66), - Blaug (ETP 4th ed.) p.636-37 for critique of Cambridge approach. + CAMBRIDGE K

- Critique by Patnaik (2009, p.37-38): i) its assumption of unit-elastic price expectation, ii) with inside money, its argument about the real-balance effect becomes invalid as shown in Johnson (1958) Monetary Theory and Policy AER, iii) its ambiguous time framework. + CASH TRANSACTION APPRAOCH - Patnaik (2009, p.44) points out that transaction demand for money is logically incompatible with the Walrasian equilibrium framework since for former presupposes a time lag between sales and purchases, which however in the latter is absent. - Clower (1967): See Patnaik (2009, p.44)s summary - Hool (1979): See Patnaik (2009, p.44)s summary + MILTON FRIEDMAN - As for the equation of exchange MV=PY, Friedman describes it as a tautology which states that PY the nominal income is determined by either M or V (1970, p.195). The underlying premise is the causation from the LHS to RHS. This is taken for granted. More general and fair is to characterize the equation of exchange as an identity where the equality always holds regardless of the direction of causation, which is a separate question. - After stating that P (or Y when P is fixed, and thus nominal income PY) changes by changes in k or M, Friedman (1970, p.195) defines QT as, in an analytical level, an analysis of elements affecting k and, in an empirical level, a generalization of the relatively slow change of demand for cash holding and fast and independent changes in money supply. - Transaction version: important fact of money is that it is transferred and it is the general purchasing power. - Cash-balance approach: important fact of money is that it is held and it is a temporal abode of purchasing power. - See Patnaik (2009, ch.5, fn1) for monetarisms separation of interest rate and money supply. - Marshall and Keynes have the opposite view from each other on the adjustment process: For Marshall prices only and not quantity adjust in the short run while in the long run the quantity also adjusts. Whereas, for Keynes it is only quantity but not price that adjusts in the short run. See Friedman (1970, p.208-209) on this. - Keynes explored this penetrating insight by carrying it to the extreme: all adjustment in quantity, none in price. He qualified this statement by assuming it to apply only to conditions of underemployment. At "full" employment, he shifted to the quantity-theory model and

asserted that all adjustment would be in price-he designated this a situation of "true inflation." However, Keynes paid no more than lip service to this possibility, and his disciples have done the same; so it does not misrepresent the body of his analysis largely to neglect the qualification (Friedman 1970, p.209-10). - More precise name is quantity of money theory of price. - the smaller quantity of money would perform the functions of a circulating medium, as well as the larger (Ricardo High Price of Bullion) - Essence of QTM (Arnon 2010, p.58) - Hume: - It is also evident, that the prices do not so much depend on the absolute quantity of commodities and that of money, which are in a nation, as on that of the commodities, which come or may come to market, and of the money which circulates. If the coin be locked up in chests, it is the same thing with regard to prices, as if it were annihilated; if the commodities be hoarded in emagazines and granaries, a like effect follows. As the money and commodities, in these cases, never meet, they cannot affect each other. Were we, at any time, to form conjectures concerning the price of provisions, the corn, which the farmer must reserve ffor seed and for the maintenance of himself and family, ought never to enter into the estimation. It is only the overplus, compared to the demand, that determines the value (Of Money). - It is the proportion between the circulating money, and the commodities in the market, which determines the prices (Of Money). - Dimand ()s reading of Hume is misplaced; see its conclusion and compare it with Humphrey (1982). - Cantillon effect (Blaug 1985, p.21) - While Humphrey (1982) made a distinction of "level vs. rate of change" of quantity of money to make sense of Hume, Wennerfield (2005) came up with "exogenous vs. endogenous" supply of money. - QTM originally had the pure commodity money system at its background. The history of QTM can be understood as a gradual emergence of theoretical challenges to it as the monetary system gradually developed away from the pure commodity money system toward mixture of gold and paper money. Hume included convertible banknotes in the category of quantity of money. However, it the assumption was a perfect coverage of notes by metal. The biggest challenge is the case of pure credit economy as in Wicksell. - See Arnon 2010, p.167: Many of the classicals thought the supply was endogenous to the

economic processes, and thus was uncontrollable. More specifically, they thought that, in line with the famous Price-Specie-Flow mechanism, the supply of the monetary aggregate and the price level are determined in such a way that, in the long run, the value of money is determined by the value of the commodity-money (167-68).

* PATNAIK (2009)

* QUANTITY OF MONEY + Literature - Friedman, Benjamin (1988) Monetary PolicyWithout Quantity Variables, American Economic Review 78, 440-45. - If the financial system is instead organized around the capital market, then conventional measures of money represent only a small proportion of the aggregate size of the leveraged sector. The concept of liquidity we proposed earlierthe growth rate of aggregate balance sheets or, more precisely, the growth rate of outstanding repurchase agreementsis a far better measure for a modern, market-based financial system than is the money stock. (Adrian and Shin 2008). - Our results add to the literature on the role of liquidity in asset pricing. Gennotte and Leland (1990) and Geanakoplos (2003) provide early analyses that are based on competitive equilibrium. As well as those mentioned in the opening to our paper, recent contributions to the role of liquidity in asset pricing include Allen and Gale (2004), Acharya and Pedersen (2005), Brunnermeier and Pedersen (2005, 2009), Morris and Shin (2004), Diamond and Rajan (2005). The common thread is the relationship between funding conditions and the resulting market prices of assets. Closely related is the literature examining financial distress and liquidity drains (Adrian & Shin 2010, p.436). - Money, on the contrary, as the medium of circulation, haunts the sphere of circulation and constantly moves around within it. The question therefore arises of how much money this sphere continuously absorbs (KI, p.213). Marx starts with this statement in explaining the equation of exchange relation and the money/price relation within it. - Based on Post Keynesian theory of endogenous money that the proximate cause of changes in the money supply is the low of net new bank lending and the empirical observation that

the fluctuation of transaction velocity is followed by monetary growth, Howells & Mariscal (1992) tests a hypothesis that the flow of net new bank lending to the personal sector depends, inter alia, upon total rather than income-related transactions. - Three ways of effectuating change in the quantity of money (Fisher, Elementary, p.150-51): i) Renaming coins, ii) cutting them in two, iii) duplicating them. Fisher says that all these three increase price proportionately. - See Laidler (1999, p.87, fn.20) for the argument that money serving a pure store of value should be regarded as no longer in circulation, and hence irrelevant to the working of the quantity theory. - Hume: What matters is not the total stock of commodities and money in the economy but commodities coming to the market and money circulating therein (Hume Of Money, p.6-7). - For Hume, what matters for QTM is the level of quantity of money while moneys real effect has to do with its rate of change (Humphrey 1982). - See Wicksell (1898, p.137) - Money supply in monetarism: Problematic since there is no way to introduce the entry of money into the model without affecting interest rate. See Patnaik 2010, ch.2 fn.5) - Commercial banks lending money to shadow banks takes a form of holding such as ABCP not directly handing over money. This practice changes the measure of narrower measures of monetary aggregate (See 2013, p.18). - Whereas traditional definitions of monetary aggregates exclude the liabilities between financial intermediaries when defining monetary aggregates, such liability aggregates turn out to be perhaps the most informative of them all (Shin 2012, The search for early warning indicator). - The role of monetary aggregates as the counterpart to credit developments have been well understood by central bankers (see, for instance, Issing (2003) and Tucker (2007)). (Kim, Shin, Yun) * PRICE THEORY - The reason why classical economists emphasized the price stability and thus the relation between money and price so much: See Laidler (1991, p.9) - The equation shows that these four sets of magnitudes are mutually related. Because this equation must be fulfilled, the prices must bear a relation to the three other sets of magnitudes quantity of money, rapidity of circulation, and quantities of goods exchanged.

Consequently, these prices must, as a whole, vary proportionally with the quantity of money and with its velocity of circulation, and inversely with the quantities of goods exchanged (Fisher 1912, p.142). - One of the main issues is real vs. monetary theory of price. Cost of production and QT correspond to each. While uneasy coexistence characterizes the Classical quantity theorists, the Cambridge economists and Fisher got rid of the real aspects of price theory (Laidler 1991, p.83) - What role does money play in Marxs theory of price? The usual Marxian approach posed as opposed to the QT and monetarism emphasizes the real aspects of price fluctuation as opposed to monetary ones. In this sense then Marxian approach treats money as a veil which is the same with the mainstream economics. How do we deal with this? - The use of money to order preference by individuals, or compute returns on inputs by entrepreneurs, does not make it the measure of the exchangeable worth of commodities. It does not make it the general equivalent in the process of exchange and, therefore, that which regulates the actual exchange of commodities. This is because the use of money to set prices which directly or indirectly reflect preferences/utility would imply, given the heterogeneity of preferences/utility, that money in some way or another also reduces preferences/utility to equivalence. But given the nature of preferences/utility, such a reduction would appear to be contradictory (Howard 2011, p.95). - Neoclassicals do not recognize that it is not prices that govern the allocation of resources but rather the incomes of producers and, in particular, the profits of productive capitalists~~~ (Nicholas 2011, p.97). They dont either see that prices reflect the physical requirements of reproduction of commodities (98; see this page for more). - Neoclassical price theory implies money acquires its value, and commodities their money prices, in the process of exchange, as a result of their quantitative commensuration. It implies money come into circulation without a given magnitude of exchangeable worth and commodities without money prices (Nicholas 2011, p.111). - General Price Level: - Hume assumed it as observable. Ricardo objected this and suggested pound price of
gold or of foreign currency, i.e. exchange rate as a good proxy. This is so as, =

where P denotes price, the subscript I includes all commodities 1, 2, .., i, subscript g denotes gold, superscript P implies price in terms of pound, superscript G price in terms of gold. can be replaced by where superscript F implies price in terms of foreign

currency. Both and provide a standard level against which the domestic price level in terms of domestic currency can be judged whether too high or too low (Of course, in case of , the gold price used in constructing the latter is the official mint price). So if we
normalize (or ), according to the above equation and move in a one-to-one

correspondence. - Friedman characterizes Keynesian as who will explicitly assert that P is really an institutional datum that will be completely unaffected even in short periods by changes in M (Friedman 1970, p.210). Friedmans description of Keyness treatment of price is exactly the same with Foleys: It appends to this system a historical set of prices and an institutional structure that is assumed either to keep prices rigid or to determine changes in prices on '-the basis of "bargaining power" or some similar set of forces Initially, the set of forces determining prices was treated as not being incorporated in any formal body of economic analysis. More recently, the developments symbolized by the "Phillips curve" reflect attempts to bring the determination of prices back into the body of economic analysis, to establish a link between real magnitudes and the rate at which prices change from their initial historically determined level (Phillips 1958) (Friedman 1970, p.220). The last part, where price change is considered from its historically determined level is exactly the same with Foleys assertion that Marxian price theory should start with a historical analysis of the price movement. - The price level is normally the one absolutely passive element in the equation of exchange. It is controlled solely by the other elements and the causes antecedent to them, but exerts no control over them (Fisher 1911).

* SEIGNIORAGE - Originally, seigniorage was an amount collected by the seigneur minting the currency out of previous metals. It was equal to the difference between the face value of the currency and the value of its metallic content (Rossi 2001, p.115, fn.23).

* STUDIES IN MONETARY AGGREGATE - Friedman 1956 Studies in the Quantity Theory of Money; Friedman 1960 A Program for Monetary Stability (It advocated that monetary policy engineer a constant growth rate for the money stock.); William Abbott;

* TEXTBOOK - Graduate level: Jordi Gali Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New-Keynesian Framework, Woodford Interest and Prices, DeJong Structural Macroeconometrics, - Introductory & Intermediate: Ray Bert Westerfield 1928, Banking Principles and Practice (all the banking and financing terminology is explained with great clarity and easiness).

* VELOCITY OF MONEY - Literature: - Nicholas (2011, p.193, fn.52) - Laurent, Robert. "Currency Transfers by Denominations." Ph.D. dissertation, Univ. Chicago, 1969; Friedman says it extremely ingenious indirect calculation of V as opposed to V. (Friedman 1970, fn.3) - Defintion: - This important magnitude, called the velocity of circulation or rapidity of turnover, means simply the quotient obtained by dividing the total money payments for goods in the course of a year by the average amount in circulation by which these payments are effected. This velocity of circulation in an entire community is a sort of average of the rates of turnover of different persons. Each person has his own rate of turnover which he can readily calculate by dividing the amount of money he expends per year by the average amount he carries (Fisher 1911, Elementary p.141) - Howells & Mariscal (1992): ratio of transactions to total deposits - Keynes in Treatise on Money makes a distinction between V1 for the velocity of income and V2 for the velocity of business deposits, further distinguishing the latter into that used in industrial circulation and in financial circulation (Howells & Mariscal 1992, 377) => By business deposits Keynes means cash deposits or transaction deposits or active balance as opposed to long-term deposits or idle balance. the volume of trading in financial instruments is not only highly variable but has no close connection with the volume of output whether of capital goods or of consumption goods; for the current output of fixed capital is small compared with the existing stock of wealth, which in the present context we will call the volume of securities and the activity

with which these securities are being passed round from hand to hand does not depend on the rate at which they are being added to. (Keynes 1930, vol.1, p.222) => Fluctuations in financial transactions both can and will cause changes in velocity, independently of changes in the production of final goods and services ~~~~~~ (Howells & Mariscal 1992, 377) - Friedman admits that Defining V as PY/M is not exactly correct but just for a convenience due to a difficulty of measuring V, which should have independent determinants. In such definition, V is treated as a residual or statistical discrepancy that renders the equation correct (Friedman 1970, p.198). - As for the residual approach (which I term the approach where the velocity of money is defined as a ratio of the other variables of the equation of exchange), the velocity of money would be actual in the sense that it is what is observed; on the other hand, we could also think of desired levels which need not equal the actual amount. This is how Friedman (1970) proceeds. - it is important to remember that the growth of liability management, seen as an alternative means of generating needed reserves, is essentially another way of viewing the phenomenon of rising money velocity. If we define velocity as nominal GNP/M1, then clearly an increase in lending relative to deposits and reserves will imply that GNP should similarly rise relative to Ml.1 (Pollin 1991). - Friedman (1987, 8) distinguishes observed, or measured, velocity and desired velocity. The former corresponds to what Kotz refers to and the latter to Lapavitsas and Marx. - A measure of total transactions has to incorporate all intermediate transactions (for raw materials, part-finished goods); all transactions in second-hand goods (including much spending on house purchase in the United Kingdom) and by far the greater part of financial and speculative transactions. (Howells & Mariscal 1992, 373) Similarly, in Marx monetary transaction is consisted of real transaction (real replacement of commodities) and financial one (speculation in futures on the stock exchange etc.). (Marx 1978, 417) - Keynes in Treatise on Money measured velocity as for active deposits to total transactions, not in relation to the change in the ratio of active deposits to idle ones. Howells & Mariscal 1992, 376) Thus it has been usual to limit the velocity of circulation, so far as is practicable, to the effective money or money in active circulation and not to stultify the conception by watering down the velocity of the money in circulation by including money which was not in circulation at all, but was being used as a store of value and therefore had no velocity at all. (Keynes 1930, vol.1, p.17; emphasis in the original)

- Bank lending could be used on anything transactions, real or financial (speculative) (Howells & Mariscal 1992, 378) A boom in spending of this kind, if it results in a surge in bank lending and eventually in the money stock, must result in a fall in income velocity both absolutely and in relation to transactions velocity. (Ibid, 378) - One important issue in the literature on the money velocity is to explain the divergence between transaction and income velocities in 1980s. Howells & Mariscal (1992)s case is the possibility that much of it is due to a boom in financial, speculative, and second-hand (particularly housing) transactions as opposed to other explanations one of which is the disintegration of production units and a consequent rise in intermediate transactions. (378) - Within a Post Keynesian framework, it is not clear, to begin with, whether velocity as a concept remains useful for understanding the processes through which money becomes endogenous. (Pollin & Schaberg 1998, 136) - It should also be noted that many contemporary economists operating more closely within the quantity theory framework recognize the importance of financial innovation for explaining changes in velocity (see, for example, Laidler 1985). What is not clear is how such recognition squares with the stronger claims of the quantity theory approach. (Pollin & Schaberg 1998, fn.3) - Velocity of money as a function of interest rate: Duck 1993 Some international evidence on the quantity theory of money Journal of Money, Credit, and Banking 25-1. - Instability of velocity: Robison 1956. - Money in motion vs. Money at rest (Bordo 1989, Tao 2002) - To understand money in motion, we must inspect its quantity, quality and velocity the quality of money is its purchasing power adjusted by price index P. (Tao 2002 Mismatch, p.9) - Does not include hoards: Howells (1991, p.387), - Treating the velocity as having a measure of its own independent from the other variables typically in Fisher (1911) is strange judging from the conventional measure as the ratio, say, between the total transaction to total deposit. - Equation (5.3) incorporates the idea of transition periods outlined above. Fisher made it clear that velocity is far from being constant (Wood, 1995, p. 104; Fisher, [1911] 1985, pp. 55, 63, 64, 320). Moreover, velocity is a function of expected price changes or the expected inflation rate. The positive correlation between velocity and expected inflation seems to be a major assumption in theories following the quantity theoretic tradition, as the Chicago School

and the Cambridge approach (see Patinkin, 1969, pp. 50, 51; Laidler, 1991b, pp. 292-293; Tavlas and Aschheim, 1985, p. 295). Expected inflation may well be destabilizing by increasing or decreasing velocity in such a way that the economic system might be far from being stable. If velocity is sufficiently sensitive to inflation, the latter, once started, can accelerate without limit even in the absence of any monetary expansion (Laidler, 1991b, p. 292). (Loef & Monissen 1999, p.10-11). - Two broad categories determining the velocity of money: i) the technical institutional characteristics of the trading system in general and the financial system in particular ii) factors conditioning individual portfolio choices - Cambridge School abandoned the concept: See Laidler (1999, p.59) - Empirical studies: David Kinley - For neo-classical quantity theorists such as Marshall and Fisher the velocity of money is a variable with its own dynamics independently of the quantity of money; however, Wicksell took it as a passive variable. Yet, Marshall and Cambridge people are closer to Wicksell than Fisher is in that they did not presuppose a stability of reserve-deposit and currency-deposit ratios, as Fisher did (Laidler 1991, p.148). - Wicksells discussion i) In case of pure cash economy: Defining an individuals velocity of circulation of money (or its reciprocal interval of rest) as a ratio of her total payments to total cash holdings and discussing three determinants of cash holdings, Wicksell concludes that the velocity of money is almost constant, stable. An important question whether the velocity of money is an independent or merely a dependent variable is posed first; admitting that it is most reasonable to think it as dependent on M, Q, P, Wicksell mentions that some institutional, technical factors set limits to its level (Wicksell 1898, p.54). ii) Simple credit economy (It has no banking system but only commercial credit and individual lending. However, the latters do not substitute money. They only accelerate the circulation of money.): Even though the velocity of money has a much higher elasticity in simple credit economy than in pure cash economy, it is not elastic enough to invalidate the QT. The main reason is the loan is not open to anyone but only to those who are wealthy enough to guarantee their creditworthiness. iii) Cashless pure credit economy: Two important measures use of bills of exchange and development of banking system do away with those obstacles which set limit for the

acceleration of velocity of money in the simple credit econom y. Notes provide in themselves the basis for a more or less elastic system of credit, and they circulate with a velocity which is more or less variable. It is for this reason that it was never possible for even the older supporters of the Quantity Theory to provide a satisfactory demonstration of the exact relationship which they held to exist between the price level and the quantity of notes (and coin) (Wicksell 1898, p.69-70). Yet, in this chapter (chapter 6) Wicksell does not give a definite description of the variation of the money velocity and its implication to the QT. Only towards the end of the chapter does he states that as for the pure credit economy case where no money circulates, and for the purpose of domestic trade no money need be kept reserve, the Quantity Theory of Money would appear to be deprived of its very foundations (Wicksell 1898, p.76). - Positive correlation with the interest rate (Wicksell 1898, p.119). - When neo-classical writers conceived the velocity of money as independent variable with its own dynamics, Wicksell postulated that a modern banking system had capacity to render the velocity of currency a passive variable in the face of real shocks (Laidler 1991, p.147). - Within Keyness liquidity preference theory, velocity is uniquely dependent on the rate of interest (Rousseas 1986, p.46; See more). - Relation between financial innovation, interest rate, velocity of money: See Rousseas (1960, 1986), Phillips (1981), Minsky (1957)

* VALUE - Fisher s theory of value: Fisher 1911, ch.1-1Whenever any species of wealth is
measured in its physical units, a first step is taken toward the measurement of that mysterious magnitude called "value." Sometimes value is looked upon as a physical and sometimes as a physical phenomenon. But, although the determination of value always involves a psychical process judgment yet the terms in which the results are expressed and measured are physical (Fisher 1911, ch.1).

* VALUE OF MONEY - Definition: - Pareto: See Wicksell (1898, p.16),

- For the classical economists (especially 1820s onward), in the commodity-based monetary system the value of money is pinned down to the cost price of production of metals as opposed to the demand and supply principle in the long run, even though there was a disagreement on the short-run story; the currency school arguing for the demand and supply principle and thus for the impact of the quantity of money on price while banking school rejecting them. The gold discovery in California and Victoria in 1850s supported the currency schools case even for the long-run scenario (Laidler 1991, p.12-13). A difficult point for the modern reader for the first part of the above statement is that for the classical economists the cost price of production of precious metals was marginal price as mining was subject to the diminishing rate of return principle and that marginal price requires the Marshallian demand and supply framework (Laidler 1991, p.10). This very important point is also mentioned by Wicksell: Some authors, for instance W. Roscher, attempt to uphold the Cost of Production Theory of Money on the basis that "the value in exchange of the precious metals is determined by the cost of producing them from the poorest mines which must be worked in order to supply the aggregate want of them". It is rather the Quantity Theory of Money which is involved in such an argument. For the marginal cost of production is primarily an effect, rather than a cause, in relation to the exchange value of money. The exchange values of the precious metals might conceivably be subject to considerable fluctuations in either direction, on account, for instance, of changes in the demand for money, while the natural conditions that govern their production remained completely unaltered (Wicksell 1898, p.33). - There is an uneasy tension in classical monetary theory between cost of production and quantity theory explanations of the price level. This tension is resolved through the individual choice-theoretic approach of marginalist theory (Laidler 1991, p.41). See Ibid, p.51 as well. - Critique of cost of production theory of value of money: See Wicksell (1898, p.25-27). The well-known law that the prices of commodities tend towards their costs of production is comprehensible only if it refers to relative costs and prices (27). - In Fisher (1912, Elementary Principles of Economics, p.133-34), the meaning of the purchasing power of money is explained in detail in relation to the general price level. - According to Rossi, conceiving the value of money as determined by the prices, which are formed in the market tells nothing about the former (Rossi 2001, p.92). - Rossi criticizes neoclassicals simulation determination of prices and value of money as circular (Ibid, p.92).

- Mills theory of the value of money is exactly the same of Moseley: the amount of goods and of transactions being the same, the value of money is inversely as its quantity multiplied by what is called the rapidity of circulation (Mill 1871, p.513-14). However, I have to check the monetary system Mill is assuming. - The first exposition of Cambridge cash balance approach in Marshall (1871, 1887) and Walras (1886) appeared in the context of bimetallic controversy. This is true for Fishers work (1894, 1896, 1911). Though the bimetallic controversy provided part of the background to the evolution of the quantity theory, however, that evolution mainly involved the resolution of theoretical tensions in the classical version of that doctrine (Laidler 1991, p.52). - The Cambridge School and Fisher alike, though the details of their analysis differed, both developed the quantity theory which they inherited from their classical predecessors into a general theory of the price level (Laidler 1991, p.52). - Classical economists have two views on the value of money: cost of production theory and quantity theory. An uneasy existence of the two can be found for example in Mill, in whose view they were complementary to one another; but his attribution of rising marginal production costs to mining, along with his lack of clarity about the stock-flow distinction, left the details of that complementarity unclear. Marshalls original work of 1871 on money both clarified and completed Mills analysis, and in particular put cost of production considerations in their proper place (Laidler 1991, p.54). From Laidlers subsequent exposition of this, it seems that Laider is thinking that Marshall solved this by translating the classical quantity theory into a demand for currency theory (i.e. cash -balance approach) and ending up with an idea that even in the long run the demand and supply principle applies instead of cost of production. One of the main elements of the solution is a stock-flow distinction. Laidler (83) writes Without a firm grasp of the stock flow distinction, it is hard indeed to put the (rising) marginal cost of extracting new supplies of the precious metals in its proper place among the factors determining the purchasing power of commodity money~~~~. - In Marshall, as a head of the Cambridge cash balance approach, the emphasis is on the influence of demand rather than of supply on the value of currency. - Founding Neoclassical works on the value of money: Friedman (1956), Patinkin (1956) It is argued that the value of money, and, therefore, the level of money prices, reflects, on the one hand, the preferences of individuals for money as medium of exchange, and, on the other hand, the relative availability of money (Nicholas 2011, p.98).

- Nicholas (2011) suggests for Marxian economics to replace the notion of equilibrium price with reproduction price since: If exchange is seen as mediating a division of labour and facilitating the reproduction of commodities, then equilibrium prices can only be meaningfully conceived of as those which facilitate the balanced reproduction of commodities which is a very different notion of equilibrium prices (100). For Marx equilibrium prices are those which facilitate the reproduction of commodities in the context of the balanced reproduction of the system (101). Then for Marx are equilibrium prices the center of gravity of actual prices?? Nicholas (2011, p.101) says not but the their average. - Paretos definition: See Wicksell (1898, p.16, fn.1) - Identifying purchasing power and value of money implies a certain way of defining money; i.e. money only as a means of exchange or means of purchase. In this understanding, moneys value lies in its purchasing power. If money as understood as having functions other than means of exchange, then it would gain value from those functions other than means of exchange. Money as such, i.e. so long as it fulfills the functions of money, is of significance in the economic world only as an intermediary. It is its purchasing power over commodities that determines its utility and marginal utility, and it is not determined by them (29). - But even though there is nothing to determine or set limits to the exchange value of our commodity (M), as we have called it, in the market in which it plays the part purely and simply of a medium of exchange, there is no reason why its exchange value should not be determined, more or less completely, through the influence of other markets in which it appears as a commodity proper (29). This is a very similar reasoning to Foleys approach to MELT. - Short-run vs. Long-run determination of the value of money: - For Moseley, Marxs theory of MELT is a long-run theory. Then how would Moseley reply to Wicksells following comments? - Now it is precisely changes in prices and fluctuations in the value of money over relatively short periodsten, fifteen, or twenty yearswhich have the most serious consequences for trade. The more gradual changessecular they may be calledin the value of money are of far less importance in this connection, even though they mount up considerably in the course of centuries. To some extent their interest is purely historical (Wicksell 1898, p.33). - Monetary theory that dealt with the long run that which argued that the cost of producing the commodity serving as a unit of account could not deviate from its purchasing

power was, in fact, an implementation of the law of one price to money. If a unit of commodity-money could buy a certain amount of goods through exchange, and the value of those goods was different from what one had to spend in order to produce a new unit, then naturally, someone would exploit this difference. In such situation, a long-term process of arbitrage took place The value of the unit of account in exchange, that is, its purchasing power, was determined in the short run via the Quantity Theory. In case of a gap between the cost of production and the purchasing power, forces worked to exploit the situation .. One should note that introducing inconvertibility fiat money or inconvertible paper money destroys the links between the long-run and short-run attractors just described. (Arnon 2010, p.58). - Wicksells critique of commodity money theory and the cost of production theory of the value of money: The Cost of Production Theory may appear sufficiently logical, and it may indeed appear self-evident, but it is just when enlightenment is most urgently needed that this theory leaves us sadly in the lurch. The treatment of money (or rather of the substance of which money consists) as a commodity, and the theory of the value of money that is based on this treatment, lead to almost entirely negative conclusions as soon as we have to deal with these questions of real practical importance which arise in modern monetary systems. We must therefore look for other means of elucidation (Wicksell 1898, p.33). This is very similar to Foleys critique of Marx for treating the value of money as the labour value expended in the production of money commodity in Foley (1983). - After raising a question what determines the exchange value of money and the general price level in the pure credit economy, Wicksell says that as for the pure credit economy case where no money circulates, and for the purpose of domestic trade no money need be kept reserve, the Quantity Theory of Money would appear to be deprived of its very foundations (Wicksell 1898, p.76). - So if the argument that fiat money is worthless is as strong as I believe it to be, how does one answer Hal Varians question why is a dollar worth anything? There are two possibilities. First, the real world could be less rational than pure economic logic would suggest. I no longer would dismiss this possibility out of hand, as I once did. But we should at least recognize that a positive value for fiat money may involve an element of irrationality. A positive value for fiat money may be no less a bubble than tulips in 17th century Holland, or houses in 21st century America. People may be accepting money in the false expectation that they will always be able to find some other sucker willing to accept

it. If so, everyone will eventually realize whats going on, and the game will be over (Glasner 2011 Blog) - Wicksells explanation: Wicksell (1898, p.48). Especially p.48-49 seem very important and similar to Fred but hard to follow. - In reviewing Grandmont (1982), Patnaik (2009, p.42) writes Since a positive value of money today arises because money is expected to have a positive value, and since this expectation in turn derives from its having had a positive value in the past, the basic question of why money has a positive value at all remains unanswered. In other words, Grandmont s justification of the assumption required for a positive value of money today simply would not do; it leaves the value of money hanging by its own bootstraps, to use Dennis Robertsons (1940) famous phrase. Which means circular reasoning. - The value of a security depends on the cash flows that it is expected to pay (Admati et al.
2011). - Addressing financial booms calls for stronger anchors in the financial, monetary and fiscal Regimes (Borio 2012).

* WICKSELL - Wicksell special: American Journal of Economics and Sociology 1999 58(3). - Preface of Wicksell (1898) is a very good summary of the book and its main goal. - Anti-QT: Laidler (1991, p.141) - Wicksells nuanced view on QT (p.41~): - First of all, he identifies it with the equation of exchange which is not correct and says that it is a truism, understandably so since the equation of exchange is an identity. Then he points out its weaknesses as follows: - QT is based on unrealistic assumptions: i) almost completely individualistic system of holding cash balances, ii) on average fixed Cambridge k, iii) M in the equation of exchange includes only cashes excluding money substitutes (This point is overcome by Fishers extended version of equation of exchange), iv) Money in circulation and money in hoards can be sharply distinguished (Wicksell argues that they cannot be distinguished since money is hoarded for the sake of future transactions and thus the function of hoarded money is not different from money in circulation, i.e. means of exchange).

- WICKSELLS MAIN CONTRIBUTION ON QT: Wicksell basically agrees with QTs explanation of price change, i.e. M -> i -> P as represented by Ricardo. (His understanding of QT is based on Ricardos.) Then he points out that the weak point of QT is the fact that the monetary condition is not the only factor the affects prices. That is, i alone cannot affect P since in order to judge whether i is high or low it needs to be compare with some other standard level. This standard level is missing in QT. And Wicksell is saying that it is provided by somewhere else than the money market. Wichsells contribution to developing QT is to introducing the natural rate on capital against which the money rate of interest can be judged high or low. - Wicksells theory of cycle is closer to Marx-Schumpeter tradition than to neo-classical one in that it views cycle and crisis not as a monetary phenomenon and not caused by monetary elements. - When neo-classical writers conceived the velocity of money as independent variable with its own dynamics, Wicksell postulated that a modern banking system had capacity to render the velocity of currency a passive variable in the face of real shocks (Laidler 1991, p.147). - HOW SIMILAR IS WICKSELLS STATEMENT WITH MINE: MODERN investigations in the field of the theory of value have thrown much light on the origin and determination of the exchange values, or relative prices, of commodities. But they have, unfortunately, done nothing to promote directly the theory of moneyof the value of money and money prices (Wicksell 1898, p.18). - Absolute (artificially determined) vs. relative (naturally determined) price (1898, p.4) - Production, exchange, and consumption do not affect absolute prices but only relative prices or exchange value (23). Absolute prices change only by the forces outside of those three realms, namely the money market (24). - ENDOGENOUS THEORY OF MONEY: 110-111 - From the way Wicksell uses the words value, exchange-value, we find that Marx and Neoclassicals have the same concept of price or exchange-value as a ratio between the value of two commodities in exchange. The difference is the definition of value; i.e. labour vs. utility. For example, he defines value as The value of an object is merely the importance that we ascribe to its possession for the purpose of gratifying our wants (29). - Similarly to Fisher, Wicksell points out the peculiarity of money as means of exchange (29). Remind that Fisher, in explaining why he treats the quantity of money so a special variable within the equation of exchange, notes that money is a means of exchange.

- Main argument in chapter 4 The So-Called Cost of Production Theory of Money: ~~~~It is just because the metal used in coinage is employed so little for industrial purposes,' and because, above all, its real consumption proceeds at so small a rate, that the value of money, at any rate over short periods of time, is not dependent on these factors, but is governed by quite different laws, which we still have to discuss (Wicksell 1898, p.34). Wicksell admits the validity of cost of production approach on two grounds. First, it is valid in the long run. Second, it is valid when money commodity is used for non-monetary purposes to a sufficiently large extent. And he dismisses the cost of production approach by trivializing these two grounds. First, the long run analysis is merely out of a historical interest not of an urgent practical need. This reminds Keynes in the long run we are all dead. Second, as monetary use of money commodity is gradually dwindling and nowadays it is very small, the theory is becoming useless. The second explanation is based on a misconception on the part of Wicksell. He conceives that on one that the cost of production theory corresponds to nonmonetary uses of money commodity and on the other hand monetary uses of money commodity should be explained by something other than the cost of production theory. However, there is no reason why monetary use of money cannot be explained by the cost of production theory, and this is how Marx proceeds in chapter 1, volume 1 of Capital. In this regard, Wicksell notes In passing, there is a point to be noticed. The growth in the use of money, and the increase in monetary stocks, tends more and more to reduce the significance of the commodity characteristics of money. On the other hand, the development of the monetary system results in a displacement of specie by credit instruments and so-called money substitutes, and there exists, therefore, an important tendency towards a strengthening of the commodity aspect of money and of its influence on prices (Wicksell 1898, p.34). - On Karl Marx (p.34~) - Wicksells critique of Hilderbrands view that even the value of inconvertible government paper money is determined by that of metallic coin, which entirely disappeared from the circulation is applicable to the traditional Marxists commodity money theory (49). Right after, he mentions: It does not appear to me that such a conception has any foundation. It is not some vague ritual, but the palpable facts of exchange and of credit, of commodity markets and of the money market, which day by day determine individual commodity prices and consequently (in a country that has a paper standard) the average purchasing power of the nation's paper money (47). - On Tooke (p.43~):

- As for Tookes income theory of price (income determines price), Wicksell points out that the other way round is also possible. - Tookes view on the determination of price has two components: supply-side analysis based on cost of production theory and demand-side one based on his income theory of price, which admits the validity of the quantity theory (M increase -> Income increase -> Excess demand -> P increase). Wicksell notes that Tooke developed only the former. This is a gap in Tooke. - As can be verified from his critique of Tookes view on QT and also from his comments on QTs weakness, Wicksells primary goal is to trace out the specific mechanism that governs the dynamic relation between money and price. See Wicksell (1898, p.44). - Main argument: the real cause of the rise in prices is to be looked for, not in the expansion of the note issue as such, but in the provision by the Bank of easier credit, which is itself the cause of the expansion (Wicksell 1898, p.87; see this page more). - Wicksells emphasis on the rate of interest instead of the quantity of money (p.87) reminds one of PKs credit view. - On interest rate, Wicksell has a very similar view with Keynesians that objects to the conventional view where investment is a negative function of interest rate. See Wicksells discussion on the rate of interest to price (89-93). The main idea is that the short term rate has no immediate impact on price but the long term rate has. - Relative prices are subject to stable equilibrium while money prices to neutral equilibrium (101). - Monetary circuit approach (104-105): Wicksell here presents the monetary circuit theory to show i) that money can be dispensable in the capitalist economy, ii) that the ordinary working of the monetary circuit does not generate any inflationary or deflationary forces (and here prices refer to money prices not relative prices, which could either increase or decrease reflecting overall conditions or production and exchange), - From his discussion on endogenous money concept in p.110-11 Wicksell concludes that therefore the banks have power to control the price levels and interest rate. - Summary of chapter 7, 8: p.120. - Natural rate of interest: Entrepreneurs borrow money capital and buy real capital goods with it. It can be thought of as they are really borrow those real capital goods since money capital is just mediating this end. Natural rate of interest on capital is defined as the interest rate determined by the demand and supply of the real capital goods without a mediation of money.

See p.120, Normal rate of interest: p.100, Their relation: 120. - Wicksell (1898)s main point is that traditional QT holds only in commodity money economy; in his cashless economy model, money is entirely absent. The idea that the validity of QT depends on the specifics monetary setting is same as mine but the relation is the opposite. For me, commodity money regime corresponds to anti-QT and inconvertible credit money to QT. - Cumulative Process (Interest Rate Policy) - A critique of Wicksells cumulative process and natural rate of interest: Mises pointed out that banks cannot maintain long the loan rate lower than the natural rate (See Festre 2006). However, Humphrey (2002, p.65) mentions otherwise because In the pure credit economy, central bankers theoretically could hold the market ratewhich in pure cash and mixed cash-credit economies tends to converge to the natural ratebelow or above that latter rate forever. - Assumptions of the cumulative process model: Humphrey (2002, p.64-65). - Mechanism of translating the interest rate differential through excess demand finally to price increase: A lower market rate stimulates planned investment by raising the present discounted value of the stream of expected future returns to capital. The rise in this discounted revenue stream raises the price of capital goods above their replacement cost and makes it profitable to produce more of them. Furthermore, since the market rate is the intertemporal relative price of consumption today in terms of consumption sacrificed tomorrow, a fall in that price induces people to take more of consumption today. Consumption rises and saving falls, hence the shortfall of saving below investment at lower than natural interest rates (Humphrey 2002, p.66). - In Wicksells pure credit economy model, money supply is created entirely as accommodating money demand by firms more precisely, deposits instead of money. In other words, there is no exogenous money supply. Even a quantity theorist Wicksell expert notes this (Humphrey 2002, p.66). From this it is obvious that the unresolved debate on whether Wicksell was a quantity theorist notwithstanding, his cumulative process model departs from the traditional, simplistic QT, where the disturbance from the status quo starts with changes in the quantity of money. However, Humphrey further argues that even though excess deposits are impossible the byproduct money stock could possibly be in excess. To show this, he uses the Cambridge cash balance equation and maintains that since M, Q, k have not changed those newly created deposits would constitute excess supply of money,

which the public will not want to hold and thus spend on extra consumptions (Ibid, p.67). Two errors should be noted. First, in this model, there is no money but only deposits; this is based on Wicksells definition of money which does not include deposit. Second, Wicksell notes that in the pure credit economy, which is the background of the cumulative process, the velocity of money is highly elastic which seems to undermine the QT. Which means that k cannot be taken as stable or constant. - Wicksells interest rate model is at the center-stage of the current macroeconomic monetary policy debate. Humphrey (1990) traces its origin in Thornton (1802) and Joplin. - Wicksells critique of Marxs theory on money: See John Cunningham Wood 1994 Knut Wicksell: Critical Assessments Vol.2, p.86. - I dont quite understand why quantity of money is a meaningless concept in pure credit economy. Number in banks account created by banks accommodation of credit demand can definitely be aggregated. Maybe Wicksell is confining money of QTM to metallic coins, hard cash. - I dont quite understand Bertocco (2009, p.616)s explanation of the relation between loanable funds theory and Wicksell. Read it again.

* TREATISE ON MONEY (KEYNES 1930) - See Rousseas (1986, p.32~)s summary. - Industrial Circulation vs. Financial Circulation; - Within Industrial Circulation: income deposits vs. business deposits A, the sum of the two being cash deposits, which are used exclusively to meet transactions requirements for a means of payment in that sector (Rousseas, p.33). - Within Financial Circulation: business deposits B vs. savings deposits (A & B) - business deposits B: the volume of trading in financial instruments, i.e. the activity of financial business. - savings deposits A: for personal reasons, extremely stable - savings deposits B: such as highly liquid negotiable CDs, money market funds, fluctuates with bulls and bears (Bears anticipates a fall in the cash value of financial securities and increase their holding of savings deposits B, whereas bulls represent movement in the opposite direction from money to securities) -> Confusing. Speculative bubbles (bulls) lead to excessive demand for money in the financial sector, no??? This is what Rousseas himself writes in p.35.

- Demand for money in the financial sector is the sum of income-deposits B and savingsdeposits B - Total demand for money: combined demand of the industrial and financial sectors the motive being means of payment and store of wealth respectively. - Since while the first demand closely follow the pace of real activity the second demand is highly unstable, Keynes demined any stable link between money and the nominal level of national income (Rousseas 1986, p.34).

* LAW OF REFLUX + CRITIQUE - Reference for a critique of Kaldor-Trevithicks reflux mechanism: (Cottrell (1986, p. 17),
Palley (1991, p. 397), Chick (1992, p. 205), Dalziel (2001, p. 144, n. 2))

* QUANTITATIVE EASING (QE) + Definitions: - For the banks it is nothing but an asset shift from less liquid to more liquid assets (in most cases, reserves), the result of which is an increase of balance sheet (since both assets and liabilities change) size of the central bank. - This
is where central banks like the US Federal Reserve, the Bank of England or the Bank of Japan decide to buy billions of government or corporate bonds in the open market from banks and other financial institutions. (Michael Roberts)

+ Marxian views: - When profitability is the main cause the monetary trick will not save the economy. Michael Roberts represents this opinion: The lack of demand for credit is the flipside of the
failure of the Keynesian/monetarist policy of quantitative easing. If average incomes and pensions have lost from QE, are there any winners? Yes: the BoE puts it rather modestly: As with all changes in the stance of monetary policy, the recent period of loose monetary policy has had distributional consequences, and its benefits have not been shared equally across all individuals. . The BoE found that driving up the value of government and corporate bonds through QE purchases benefited the rich who hold most of these bonds. (http://thenextrecession.wordpress.com/2012/08/25/qe-uk-banks-and-the-economy/) + Post Keynesian views

- Ann Pettifor

* ASSET-BASED & OVERDRAFT SYSTEM - Origin of the distinction: Keynes (Treatise, ch.32), Hicks (1974), - Following Literature: Renversez (1996), Lavoie (2005), - Critique of reserve-constraining view: Rochon (1999, ch.6) + ASSET-BASED SYSTEM - Treasury bills (as liquid asset) act as a buffer; central bank advances are an additional buffer. + OVERDRAFT SYSTEM - In this approach the definition of reserves is wide to include Treasury bills (short-term) and government bonds (long-term)

* RESERVES - Nonborrowed reserves: Banks secure nonborrowed reserves through liability management such as federal funds borrowing, repurchase agreements, issuing certificates of deposits or similar practices. Central Bank influences the nonborrowed resereves through open market operation. - Borrowed reserves: Borrowed from discount window.

* NOTES - It is now admitted that the quantity of money does not have any meaningful relation with the macroeconomic performance, and for this reason, the Fed ceased to project ahead the growth of monetary aggregate. Then how could we understood the Feds active intervention during the current crisis such as QE?

Reference Adrian, Shin, Hyun Song. 2010. Liquidity and Leverage, Journal of Financial Intermediation 19, pp. 418-437. Bernanke, Ben 2006, Monetary Aggregates and Monetary Policy at the Federal Reserve: A Historical Perspective, At the Fourth ECB Central Banking Conference, Frankfurt, Germany. Goodhart, 1989, Money , Information and Uncertainty. Laidler, David 1991, The Golden Age of the Quantity Theory, Princeton University Press