Monetary Economics and Monetary Policy

Abstract

The whole body of Keynes’s economics arose from recognition that classical theory did not provide an adequate representation of economic activity because it neutralised the role of money in the economic system. Economies were not based on the commodity money assumed by classical economics, but on bank money. Keynes saw that the evolution from commodity money to bank money had profound implications for economic theory, economic activity and economic policy. All his theories and practical measures were underpinned by a progressively more sophisticated analysis and treatment of this changed nature of money. The General Theory was, and remains, the culmination of this process and the pinnacle of monetary analysis.

This Act [Bank Act 1844] was compounded of one sound principle and one serious confusion. The sound principle consisted in the stress laid on the limitation of the quantity of the representative money as a means of ensuring the maintenance of the standard [‘whatever that standard might be’, p. 14]. The confusion lay in the futile attempt to ignore the existence of bank money and consequently the inter-relationships of money and bank credit, and to make representative money behave exactly as though it were commodity money. (CW V, p. 15)