B on enb enne , Ma in
A icle
Thomas Maye on Mone a ism
K edi und Kapi al
P o ided in Coope a ion wi h:
Duncke & Humblo , Be lin
Sugges ed Ci a ion: B on enb enne , Ma in (1975) : Thomas Maye on Mone a ism, K edi und
Kapi al, ISSN 0023-4591, Duncke & Humblo , Be lin, Vol. 8, Iss. 4, pp. 473-484,
h ps://doi.o g/10.3790/ccm.8.4.473
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Thomas Maye on Mone a ism
By Ma in B on enb enne , Du ham, N. C.
When I use a wo d i means jus wha I wan
i o mean — nei he mo e no less.
Alice in Wonde land
I.
P o esso Maye and I collabo a ed amicably and — I hope — use-
ully du ing ou Michigan S a e days in he 1950's.1 He has since gone
Wes om Michigan, while I ha e gone Eas . I ne e heless seems
s ange o si in judgemen on his wo k — e en a his own in i a ion.
I ha e accep ed he in i a ion mainly in he hope o cla i ying some o
my own ideas as a by-p oduc o conside ing his.
II.
Maye 's essay on "The S uc u e o Mone a ism""* is a long exe cise
on he na u e and in e - ela ionships o wel e p oposi ions which he
ea s as comp ising con empo a y mone a ism. The i s ou o hese
p oposi ions — he quan i y heo y o money, some dis inc ly mon-
e a is ansmission mechanism be ween mone a y and income changes,
belie in he inhe en s abili y o he p i a e economy, and he unimpo -
ance o alloca i e (dis ibu i e) disagg ega ion o he explana ion o
sho - un mac oeconomic e ec s — he sees as necessa y condi ions o
mone a ism bu o e s no o mal p oo which migh sa is y a p o es-
sional logician. The o he eigh — including such well-known ace s as
p e e ence o mone a y ules, unconce n wi h gua an eed ull em-
ploymen , dis us o he Phillips cu e and "incomes policies," dislike
o in la iona y inance — a e ei he a gumen s in suppo o his "big
ou " o policy conclusions o co olla ies om hem, which mos bu
no all mone a is s do in ac suppo . The en i e edi ice is summa ized
* K edi und Kapi al, Vol. 8 (1975) pp. 190 and pp. 293.
1 M. B on enb enne and Thomas Maye
>
"Liquidi y Func ions in he Ame -
ican Economy." Econome ica (Ap il, 1960.)
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474 Ma in B on enb enne
diag amma ically in a igu e which seeks o include no only all wel e
p oposi ions bu also he p incipal ela ions Maye belie es o exis be-
ween hem. Any such cons uc ion is ine i ably subjec i e, bu Maye
hopes i may ne e heless be objec i ely help ul o his p o essional
colleagues.
III.
Maye se s mone a ism agains he con en ional "Keynesianism" o ,
say, he No he n wing o he Ame ican Democ a ic pa y and i s eco-
nomic spokesmen. I should mysel ha e p e e ed he an i hesis o ha e
been " iscalism" wi hou qui e so much emphasis on he doc ines o
he la e Lo d Keynes, ei he in he "Gene al Theo y" o 19362 o as
hey may ha e been de eloping in he in la iona y milieu a he ime
o his dea h en yea s la e .3
Le us deno e by pu e iscalism he doc ine ha "money does no
ma e ." This implies ha 1. he economic e ec s o a iscal measu e a e
independen o he way ha measu e is inanced, and ha 2. changes
in he s ock o money ha e no e ec on he le el o economic ac i i y
unless embodied in a iscal measu e o in oducing he new money
in o he economy (o wi hd awing money om i ). Simila ly, le us
deno e by pu e mone a ism he doc ine ha "only money ma e s."
This implies ha (1) he economic e ec s o a change in he money
s ock a e la gely independen o he me hods by which he posi i e o
nega i e inc emen is injec ed in o o wi hd awn om he economy,
and ha (2) iscal policy measu es ha e negligible e ec s on he econo-
my apa om hei mone a y consequences.
Le us also suppose, wi hou asking emba assing ques ions abou
measu emen , ha a con inuum could somehow be se up, wi h pu e
iscalis s a one end (i any exis ) and pu e mone a is s a he o he
(subjec o he same es ic ion). Taxonomic exe cises like Maye 's a e
aluable i , as I hink he belie es, economis s end o be bunched a he
2 E en in he dep hs o dep ession, he e is oom o doub ha " he eco-
nomics o Keynes" was so iscalis as "Keynesian economics" subsequen ly
became. The e doub s cons i u e, in pa , he Clowe -Leijonhu ud ein e -
p e a ion o he "Gene al Theo y", which I in e p e as shi ing emphasis om
he shapes o he ola ili ies o ce ain c ucial unc ions. See Axel Leijonhu -
udy "Keynesian Economics and he Economics o Keynes" (New Yo k: Ox-
o d Uni e si y P ess, 1968).
5 J. M. Keynes, "The Balance o Paymen s o he Uni ed S a es," Economic
Jou nal (June, 1946).
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Thomas Maye on Mone a ism 475
wo ends o his con inuum, wi h ela i ely ew eclec ics in he middle.
They a e less use ul i , as I ha e come inc easingly o in ui 4, he dis-
ibu ion would be mo e o less e en h oughou he con inuum (excep
pe haps a he wo ex emes) wi h no gaps o bald spo s open o o he -
han-a bi a y cu s be ween mone a is s and iscalis s.
Di icul ies a e compounded by a leas wo o he conside a ions:
1. A iscal measu e (an expansion) is accompanied by a mone a y ex-
pansion o keep in e es a es down and p e en mul iplie a enua ion.
Is he esul ing income inc ease o be a ibu ed o he iscal expansion
— in Hicksian e ms, he shi in he IS cu e — o o i s mone a y
co olla y — he shi in he LM cu e?5
2. Assume ha he Mundell assignmen o policy ools is co ec 6 —
iscal policy o he in e nal balance and mone a y policy o he ex e nal
balance. Is his iscalism o mone a ism? Since Maye is dealing wi h he
closed economy a leas 95 pe cen o he ime, I p esume he would
call Mundell a iscalis ; I am no su e o my own s and, especially o
small coun ies wi h high in e na ional dependence.
IV.
Accep ing he isk o pedan y, I wish mo e mac oeconomis s — in-
cluding Maye — would dis inguish ca e ully be ween s abili y and
ola ili y in desc ibing he unc ions wi h which hey a e dealing. To
4 O my own colleagues a Duke Uni e si y, pe haps se en (including
mysel ) ha e ecen ly augh o w i en in he mac oeconomics — mone a y
policy — iscal policy iangle. O hese, I should classi y h ee as decidedly
mo e iscalis ha I, wo as decidedly mo e mone a is , and he o he as
loca ed close o mysel on my hypo he ical con inuum.
5 In my own eclec ic and uno iginal iew, he answe depends on he in-
e es -elas ici ies o he wo unc ions. An inelas ic IS and/o an in ini ely-
elas ic LM leads o iscalis answe s. An in ini ely-elas ic IS and/o inelas ic
LM leads o mone a is answe s. The eal wo ld o he 1970's is "jus a li le
bi in be ween", al hough he eal wo ld o he 1930's — when Keynes9
"Gene al Theo y" was w i en — may indeed ha e con o med o iscalism.
Wha one migh call "no ma i e" iscalism, howe e , depends no a all on he
shapes o he mac oeconomic unc ions. Wha e e hese shapes may be, i
equi es mone a y policy o " alida e" expansi e iscal policy by keeping
nominal in e es a es om ising. I am unawa e o any co esponding no -
ma i e mone a ism.
• Robe A. Mundell, "The App op ia e Use o Mone a y and Fiscal Policy
o In e nal and Ex e nal S abili y", IMF S a Pape s (Ma ch, 1962).
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476 Ma in B on enb enne
classi y he dis inc ion, suppose ha a Hicksian IS - LM model in
(Y, ) space, wi h e o e ms (shi pa ame e s) e and e may be w i -
en :
IS cu e = a
—
bY + e (a, b > 0)
LM cu e = a + iY + e
(oc
< a, i > 0)
Sol ing o Y , we ha e:
_ (a - «) + (e - e )
Y' ~ bT1
This is a mac os a ically s able solu ion by all he usual de ini ions
I know abou . (Nei he IS no LM slopes he w ong way, in o he
wo ds.) Bu a he same ime, he s able equilib ium alue o Y is
highly ola ile, pa icula ly i he e o e ms (e y £ ) a e nega i ely
co ela ed. Simila ly, sol ing o he in e es a e i we de i e:
i
(a
+ e ) + b
(oc
+ s )
^ = i+p
which is also s able bu ola ile, pa icula ly i he e o e ms a e posi-
i ely co ela ed.
Wha di e ence does his poin make? P ima ily, ha he case o
in e en ion and di ec con ol is much s onge in uns able ma ke s
han in me ely ola ile ones. And seconda ily, ha a numbe o con-
cep ually s able unc ions (in es men unc ions, Phillips cu es, pos-
sibly e en liquidi y unc ions) may exis bu be so ola ile o e a wide
ange o shi pa ame e s (no only economic bu social and poli ical)
as o be disappoin ing when used o modelling, planning, acking, and
allied uses. (This, I ea , is pa icula ly ue o he once-so-p omising
Phillips cu e wi h i s nea unemploymen — in la ion ade-o .)
V.
Maye 's oo no es e eal a unning deba e wi h leading mone a is s
on he jus i iabili y o Maye 's eigh subo dina e p oposi ions. They a e
admi edly no logically essen ial o mone a ism al hough many (p o-
bably mos ) mone a is s accep hem. Maye 's c i ics objec o Meye 's
excluding om hei anks he mino i y who do no accep one o mo e
o his g oup o eigh .
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Thomas Maye on Mone a ism 477
He e, I hink, I am on Maye 's side on Schumpe e ian g ounds. Fo
in aising he Schumpe e ian ques ion, wha g and " ision" o he eco-
nomic p ocess inspi ed he de elopmen o mone a is ideology, i is o
his g oup ha we mus look, a he han o he ela i e abs ac ion and
a idi y o Maye 's p ima y qua e . And i I selec among he eigh ,
I should selec (1) a mone a y g ow h ule as a leas a "second bes "
guide o mone a y policy (Maye 's # 9), (2) he co olla y use o a
money s ock a he han an in e es a e mone a y a ge (his #8),
(3) a willingness o ole a e unemploymen as a cos o p ice disin la ion
(#11) coupled (a e Phillips' 1958 pape )7 wi h ejec ion o he Phil-
lips cu e as a eliable ade-o indica o (# 10) and an essen ially lib-
e a ian abho ence o "supp essed in la ion" and such di ec con ols
as incomes policies, a ioning, and alloca ions (# 12).8
VI.
I migh mysel sugges , again on Schumpe e ian g ounds, one addi-
ional (nin h) membe o Maye 's eam o seconda y p oposi ions, ais-
ing his o al o 13.9 This is he deba able p oposi ion ha he mone a y
au ho i y — meaning he Fede al Rese e in con empo a y Ame ica —
does in ac ha e he powe , and acco dingly he esponsibili y, o e-
gula e he money supply. The aspec o mone a is ision in ol ed he e
is ha mone a y mismanagemen by he Fede al Rese e has been and
is he p ime cause o he g ea booms and con ac ions o he Ame ican
pas and p esen , which ha e been unjus ly blamed on he ee en e -
p ise sys em as a whole.
This p oposi ion is deba able on a leas h ee bases, wo pu ely do-
mes ic and he hi d in e na ional.
7 A. W. Phillips, "The Rela ion be ween Unemploymen and he Ra e o
Change o Money Wages in he Uni ed Kingdom, 1861 - 1957," Economica
(No embe , 1958). Fo he mos in luen ial Ame ican applica ion, see Paul
A. Samuelson and Robe M. Solow. "Analy ical Aspec s o An i-In la ion
Policy," Ame ican Economic Re iew (May, 1960).
8 A pa icula ly ap example in Mil on F iedman, "Wha P ice Guidepos ?"
in Geo ge P. Shul z and Robe F. Alibe , eds. Guidelines: In o mal Con ols
and he Ma ke Place (Chicago: Uni e si y o Chicago P ess, 1966), pp. 17
o 39.
9 O , i Maye inclines o iakaidekaphobia, his p oposi ion migh be
subs i u ed o he p e e ence o small models o e la ge ones (his # 6) which
seems ela ed only enuously o he basic mone a is insigh .
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478 Ma in B on enb enne
1. I M is he money s ock and B he mone a y base, we ha e:10
B
M —
-il"")
D
M J
whe e die comme cial banks' ese e a io and con olled by he
comme cial banks hemsel es a leas wi hin legal limi s and
public's a io o cu ency o o al money and con olled by he public.
I is he con en ion o nume ous w i e s (mos p ominen ly J. G. GUY-
ley and E. S. Shaw)11 ha he Fede al Rese e's con ol o B is inad-
equa e o egula e M in ei he cyclical booms o dep essions.
2. The Fede al Rese e is a c ea u e o Cong ess and canno dis ega d
cu en poli ical sen imen , howe e w ong-headed i may be. The e
ha e been equen a emp s al eady, led o h ee decades by he ex-
pansionis Cong essmen W igh Pa man (D., Tex.) as Chai man o he
House o Rep esen a i es Commi ee on Banking and Cu ency, o e-
s ic pa icula ly he sys em's an i-in la iona y clou by limi ing me h-
ods in ol ing " igh money". (This e m e e s o ises in nominal in e -
es a es and s anda ds o c edi -wo hiness, "c edi squeezes" on pa -
icula companies unusually dependen on bo owed unds, and p essu e
on sa ings ins i u ions om "disin e media ion", as deposi s a e wi h-
d awn in sea ch o highe in e es incomes.) Mo e ecen cong essional
c i ics, such as Sena o William P oxmi e and Rep esen a i e Hen y
Reuss (bo h D., Wis.) ha e been mo e sympa he ic o mone a ism in hei
p oposals.12
10 The de i a ion below is based on Phillip Cagan, "De e minan s and
E ec s o Changes on he S ock o Money, 1975 - 1960" (New Yo k: Colum-
bia Uni e si y P ess, 1965) p. 12
M = C + D (C = cu ency, D = bank deposi s)
B = C + R (R = bank ese es)
Ç + R
MC + DMM 1 l
B C + R C_ R C, .R D C,
.R
/ C:
M M M + D'M M+D M
11 Gu ley and Shaw, "Money in a Theo y o Finance" (Washing on: B ook-
ings Ins i u e, 1960).
12 The bela ed ise o "mone a is " c i icism o he Fede al Rese e wi hin
Cong ess i sel lends some suppo o mone a is ep oaches agains Fede al
Rese e " leeing whe e no man pu sue h" in connec ion wi h pas inep ness.
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Thomas Maye on Mone a ism 479
3. Unde a egime o ixed exchange a es and un egula ed sho - e m
capi al mo emen s, he powe o any coun y's mone a y au ho i y is
ci cumsc ibed by he endency o in e na ional equali y o in e es a es.
Mone a y expansionism, lowe ing sho - e m a es a home, is hus
coun e ac ed by capi al ou lows, and ice e sa. Du ing he 1960's,
mo eo e in e na ional aspec s o mone a y con ol ha e been exace -
ba ed o he Uni ed S a es by he ise o he Eu odolla ma ke . This
ma ke has become a ehicle o o eign banks, including o eign b an-
ches o Ame ican banks, o c ea e dolla deposi s on a la ge scale by
loans subjec nei he o ese e no o epo ing equi emen s, so ha
he Fede al Rese e can only es ima e mo e o less inaccu a ely he o al
olume o he dolla s ou s anding and o e hanging he Ame ican money
ma ke . I is ob iously di icul o egula e a quan i y when one does
no know wi h adequa e p ecision wha ha quan i y is!
The basis o scep icism ega ding mone a ism is summa ized by a
"Wall S ee Jou nal" edi o ialis :13 "[A] e so much go e nmen ma-
nipula ion o e so many yea s, p i a e comme ce has become exceed-
ingly ad oi in swi ching o money impo s and subs i u es, chie ly ade
c edi and c edi ca ds, bo h o which a e sou ces o liquidi y" i. e., o
au onomous changes in eloci y.
VII.
Th ee andom commen s on Maye 's exposi ion o indi idual p o-
posi ions and I close:
Du ing he G ea Dep ession, o example, and unde he gold s anda d,
F iedman and Schwa z deny ha he ea o gold d ains cons i u ed a a-
ional explana ion o Fede al Rese e phobia agains expansiona y open-
ma ke ope a ions. Mil on F iedman and Anna J. Schwa z, "The G ea Con-
ac ion, 1929 - 1933", (P ince on: P ince on Uni e si y P ess, 1965), pp. 103
o 110.
13 Jude Wanniski, "The Mundell-La e Hypo hesis — A New View o
he Wo ld Economy", Public In e es (Sp ing, 1975), p. 28 n., ci ing P o esso
Robe Mundell. — Mo e gene ally, he mone a is heo y o he in e na ional
balance o paymen s seems i sel inconsis en wi h any no ion o o e - iding
powe in he hands o domes ic mone a y au ho i ies. This is because i sees
a balance o paymen s de ici (su plus) as p ima ily a mani es a ion o an
excess supply o (demand o ) money, and an a oidance o he au ho i y's
au ho i y. See Donal Kemp, "A Mone a y View o he Balance o Paymen s",
Fede al Rese e Bank o S . Louis Re iew (Ap il, 1975) and sou ces ci ed,
(including P o esso Mundell).
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480 Ma in B on enb enne
1. On ha alleged "black box" — he ansmission mechanism be ween
mone a y changes and he eal economy — Maye should pe haps ha e
spelled ou in mo e de ail wha he hinks mone a is s belie e ha p o-
cess o be, o i indeed hey seem o him hopelessly di ided among
hemsel es. To me, any explana ion mus in ol e he p oposi ion, es ing
on Pigou and Keynes e ec s, ha money changes e ec eal a iables
h ough p ice-le el changes sepa a ely om and in addi ion hei e ec s
h ough in e es changes bo h nominal and eal. I so, i is impo an
"whe he one o mula es he analysis in e ms o M o in e ms o ",
since he e ec s, despi e subs an ial o e laps, a e signi ican ly di e en .
I is easy o c i icize mone a is coyness in deciding be ween he Mu
M2, ..., Mn concep s o money (I ha e seen n alues as high as 7). Bu
he c i ics owe P o esso F iedman in pa icula he concession o men-
ioning his belie (uncon i med, o he bes o my knowledge) ha all
M-
he a ios would be sensibly cons an bu o such cons ain s as he
ban on in e es paymen s on demand deposi s and he "Regula ion Q"
in e es ceilings on sa ings deposi s.
I likewise ha e ques ions abou Maye 's sen ence: "An inc ease in he
eal s ock o money lowe s he impu ed eal in e es a e on money bal-
ances" (i alics his) as a pa o he ansmission p ocess, unless indeed
his s a emen implies a ise in he p ice le el.14
2. I may in ol e no mo e han my in la ed ego o poin ou he
exis ence o a comp omise p oposal (o my own)15 midway be ween he
F iedman - Shaw cons an mone a y g ow h ule (Maye 's p oposi ion
14 In pe sonal co espondence, Maye has cla i ied my di icul y he e. By
"impu ed eal in e es a e" he means wha I would call he ma ginal u ili y
o an inc emen o eal balances. I do no hink ha ou di e ence is mo e
han e bal.
15 M. B on enb enne , "Mone a y Rules: A New Look", J. L. E. (Oc obe ,
1965). — I we w i e he s anda d equa ion o exchange as:
MV = pY = pN n , whence
log
M
+ log V = log p + log N
-}-
log
7i
d log M + d log V = d log
p
+
d
log N + d log n
dM dV = dp ,dN du
M V ~~ p N n
Gm + G = Gp + Gn + Gn
he exp ession in he ex ollows, i Gp = 0, i e., i p ice-le el s abili y is
main ained.
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