A Quick Note on Money

Nick Rowe and David Glasner are having an interesting debate on whether it is possible to speak of excess demand (or excess supply) for money in a world where most money consists of commercial bank deposits.

Nick, naturally, argues for the affirmative. Glasner argues for the negative, drawing on Tobin's 1967 restatement of the 19th century "law of reflux."

This is a tricky question to take sides on. The problem, from my point of view, is that to get from the classical "real exchange" economy , to our actual "monetary production" economy (both phrases are Keynes's), takes not one but two steps. First, you have to see how real activity depends on liquidity conditions. And second, you have to see how liquidity conditions depend on the whole network of actual and potential balance sheet positions — liquidity as a social relation, as Mike Beggs says. A focus on the special role of money is helpful in the first step but an obstacle to the second.

I think Keynes himself contributed to the problem with his discussion money in the General Theory. He was working so hard to get people to take the first step that he pushed the second one out of view. The GT is full of language like:

Unemployment develops, that is to say, because people want the moon; -- men cannot be employed when the object of desire (i.e. money) is something which cannot be produced and the demand for which cannot be readily choked off. There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e. a central bank) under public control.

This is a story about exogenous money; this kind of language smoothed the the way for what Perry Mehrling calls “Monetary Walrasianism,” as you get from someone like Nick Rowe. Jorg Bibow's definitive account of Keynesian liquidity preference theory (summarized here) makes it clear that Keynes did this for clear strategic reasons, and the Treatise on Money is better in this respect. But it’s still a problem.

So for me the Tobin article (and Glasner’s summary) has an ambivalent character. They are right to criticize the idea of an exogenous stock of money, and the related idea that transaction demand for money is central to aggregate demand; but I worry that their arguments tend to tip backward toward the classical dichotomy rather than point forward toward a fuller account of liquidity.