《货币经济学》课程文献阅读：Role of Money and Monetary Policy（Brunner,1968）

Editors Note to"The Role of Money and Monetary Policy The following is a guest article prepared by Dr. Karl Brunner. Since July 1966, Dr. runner has be en the Everett D. Reese Professor of Economics at The Ohio State Univer sity. For the previous fifteen years he was Professor of Economics at the University of California at Los Angeles In this article Dr. Brunner examines the current status of the debate regarding the role of money and monetary policy in economic stabil ization actions. It is presented in this Review with the anticipation that his examination of the issues involoed in this debate will bring forth further discussion by proponents of the various views. Such discussions are essential for development of the framework required for rational stabilization policy Dr. Brunner and several other well-known economists have been leading proponents of the monetary view of economic stabilization. On the basis of a great amount of theo retical and empirical research, they contend that the Federal reserve can control the money stock and that the money stock is a good indicator of the thrust of Federal Reserve actions on output, employment, and prices. These economists have been critical of the role played by the Federal Reserve System in monetary management because they have found little euidence that the System has recognized the importance of money in carrying out its responsibility for economic stabilization A countercritique to the criticisms of these monetary economists has been presented in seceral publications of the Federal Reserve System. This countercritique derives its eco- nomic foundations from a so-called"New View"of monetary economics. This"New View stresses the role of assets, both real and financial, and the relative price mechanism in mone- tary analysis. The countercritique contends that the Federal Reserve has little control over the money stock and that the money stock plays only a minor role in the transmission mechanism linking Federal Reserve actions to the real sectors of the economy Dr. Brunner, in this article, analyzes and evaluates tarious issues raised by the counter critique. He points out that the main economists who stress the role of money and monetary policy also utilize the asset and relative price approach to monetary analyis; hence, in this regard there is little difference between them and the"New View. The main point of conten- tion between the two groups, according to Dr. Brunner, lies in the extent of the development of testable hypotheses bearing on the issues raised by each group. He maintains that the onetary point of view has developed such hypotheses and has subjected them to rigor ous empirical examination. On the other hand, the " New view and the countercritique according to Dr. Brunner, have kept their analyses of the monetary mechanism in the realm of abstract economics. He characterizes their analyses as"an empty form with little empirical Recent discussions of various points of view on these issues appear in"Standards For Guiding Monetary Actions, hearings before the Joint Economic Committee, May 1968 Positions of academic economists, business economists, and members of the Board of Gou- ernors of the Federal Reserve System are contained in these hearings. The"Report of the Committee, June 1968, recommends to the Federal Reserve System that the yearly growth of the money stock be held within a range of 2 to 6 per cent Numerous works are cited in this article, and the interested reader should refer to them for laboration of the many summary arguments adbanced by the author. Several statistical tests are reported in tables; the author should be contacted directly for further information on these tests and in regard to the data used Page 8

y,.:_.:_~... ..~Ma,aaaeaa.aaAgi.,ava-., . - -. “n.IM~,4 ~th~x g~a..ahi¼nAMW k.a-.._.&fr.,A.e..~,. Editor’s Note to “The Role of Money and Monetary Policy” The following is a guest article prepared by Dr. Karl Brunner. Since July 1966, Dr. Brunner has been the Everett D. Reese Professor of Economics at The Ohio State Univer￾sity. For the previous fifteen years he was Professor of Economics at the University of California at Los Angeles. in this article Dr. Brunner examines the current status of the debate regarding the role of money and monetary policy in economic stabilization actions. It is presented in this Review with the anticipation that his examination of the issues involved in this debate will bring forth further discussion by proponents of the various views. Such discussions are essential for development of the framework required for rational stabilization policy. Dr. Brunner and several other well-known economists have been leading proponents of the monetary view of economic stabilization. On the basis of a great amount of theo￾retical and empirical research, they contend that the Federal Reserve can control the money stock and that the money stock is a good indicator of the thrust of Federal Reserve actions on output, employment, and prices. These economists have been critical of the role played by the Federal Reserve System in monetary management because they have found little evidence that the System has recognized the importance of money in carrying out its responsibility for economic stabilization. A countercritique to the criticisms of these monetary economists has been presented in several publications of the Federal Reserve System. This countercritique derives its eco￾nomic foundations from a so-called “New View” of monetary economics. This “New View” stresses the role of assets, both real and financial, and the relative price mechanism in mone￾tary analysis. The countercritique contends that the Federal Reserve has little control over the money stock and that the money stock plays only a minor role in the transmission mechanism linking Federal Reserve actions to the real sectors of the economy. Dr. Brunner, in this article, analyzes and evaluates various issues raised by the counter￾critique. He points out that the main economists who stress the role of money and monetary policy also utilize the asset and relative price approach to monetary analyis; hence, in this regard there is little difference between them and the “New View.” The main point of conten￾tion between the two groups, according to Dr. Brunner, lies in the extent of the development of testable hypotheses bearing on the issues raised by each group. He maintains that the monetary point of view has developed such hypotheses and has subjected them to rigor￾ous empirical examination. On the other hand, the “New View” and the countercritique, according to Dr. Brunner, have kept their analyses of the monetary mechanism in the realm of abstract economics. He characterizes their analyses as “an empty form with little empirical content.” Recent discussions of various points of view on these issues appear in “Standards For Guiding Monetary Actions,” hearings before the Joint Economic Committee, May 1968. Positions of academic economists, business economists, and members of the Board of Gov￾ernors of the Federal Reserve System are contained in these hearings. The “Report of the Committee,” June 1968, recommends to the Federal Reserve System that the yearly growth of the money stock be held within a range of 2 to 6 per cent. Numerous works are cited in this article, and the interested reader should refer to them for elaboration of the many summary arguments advanced by the author. Several statistical tests are reported in tables; the author should be contacted directly for further information on these tests and in regard to the data used. Page 8

The Role of Money and Monetary Policy KARL BRUNNER° The Ohio State University HE DEVELOPMENT of monetary analysis in po olicy methods was naturally to be expected and the past decade has intensified the debate concerning is welcomed. Four articles which defend present the role of money and monetary policy. Extensive policy procedures have appeared during the past research fostered critical examinations of the Fed- few years in various Federal Reserve publications. I ral Reserve's traditional descriptions of policy and These articles comprise a countercritique which of the arrangements governing policymaking. Some argues that monetary impulses are neither properly academic economists and others attribute the cyclical measured nor actually transmitted by the money fluctuations of monetary growth and the persistent stock. The authors reject the Monetarist thesis that problem concerning the proper interpretation of monetary impulses are a chief factor determining monetary policy to the established procedures of variations in economic activity, and they contend monetary policy and the conceptions traditionally that cyclical fuctuations of monetary growth cannot guiding policymakers be attributed to the behavior of the Federal Reserve The critique of established policy procedure authorities. These fluctuations are claimed to result which evolved from this research into questions con- primarily from the behav al banks rming the monetary mechanism, is derived from a body of monetary theory referred to in this paper as The ideas and arguments put forth in these articles the Monetarist position. Three major conclusions have deserve close attention. The controversy defined by emerged from the hypotheses put forth. First, mone- the critique of policy in professional studies and the tary impulses are a major factor accounting for vari- countercritique appearing in Federal Reserve pub- ations in output, employment and prices. Second, lications bears on issues of fundamental importance movements in the money stock are the most reliable to public policy. Underlying all the fashionable word measure of the thrust of monetary impulses. Third, and phrases is the fundamental question: What is the the behavior of the monetary authorities dominates movements in the money stock over business cycles. ILyle Gramley and Samuel Chase, "Time Deposits in Mone. se to the criticisms of existing me Allan H Y中是地 ve Bank of Kansas City, March 196 The rol erry L. Jordan of the Federal Reserv Cycles, Monthly Review, Federal Reserve of new york Page 9

4-. -. --— ... -. .2—. ~ The Rote of Money and Monetary Policy KARL BRUNNER° The Ohio State University HE DEVELOPMENT of monetary analysis in the past decade has intensified the debate concerning the role of money and monetary policy. Extensive research fostered critical examinations of the Fed￾eral Reserve’s traditional descriptions of policy and of the arrangements governing policymaking. Some academic economists and others attribute the cyclical fluctuations of monetary growth and the persistent problem concerning the proper interpretation of monetary policy to the established procedures of monetary policy and the conceptions traditionally guiding policymakers. The critique of established policy procedures, which evolved from this research into questions con￾cerning the monetary mechanism, is derived from a body of monetary theory referred to in this paper as the Monetarist position. Three major conclusions have emerged from the hypotheses put forth. First, mone￾tary impulses are a major factor accounting for vari￾ations in output, employment and prices. Second, movements in the money stock are the most reliable measure of the thrust of monetary impulses. Third, the behavior of the monetary authorities dominates movements in the money stock over business cycles. A response to the criticisms of existing monetary °This paper owes a heavy debt to my long and stimulating association with Allan H. Melizer. I also wish to acknowledge the editorial assistance of Leonall C. Andersen, Keith M. Carlson, and Jerry L. Jordan of the Federal Reserve Bank of St. Louis. policy methods was naturally to be expected and is welcomed. Four articles which defend present policy procedures have appeared during the past few years in various Federal Reserve publications.1 These articles comprise a countercritique which argues that monetary impulses are neither properly measured nor actually transmitted by the money stock. The authors reject the Monetarist thesis that monetary impulses are a chief factor determining variations in economic activity, and they contend that cyclical fluctuations of monetary growth cannot be attributed to the behavior of the Federal Reserve authorities. These fluctuations are claimed to result primarily from the behavior of commercial banks and the public. The ideas and arguments put forth in these articles deserve close attention, The controversy defined by the critique of policy in professional studies and the countercritique appearing in Federal Reserve pub￾lications bears on issues of fundamental importance to public policy. Underlying all the fashionable words and phrases is the fundamental question: What is the 1 Lyle Cramley and Samuel Chase, “Time Deposits in Mone￾tary Analysis,” Federal Reserve Bulletin, October 1965. John H. Kareken, “Commercial Banks and the Sup~lyof Money: A Market Determined Demand Deposit Rate,’ Federal Re- serve Bulletin, October 1967. J. A. Cacy, “Alternative A~- proaches to the Analysis of the Financial Structure, Monthly Review, Federal Reserve Bank of Kansas City, March 1968. Richard C. Davis, “The Role of the Money Supply in Business Cycles,” Monthly Review, Federal Reserve Bank of New York, April 1968. Page 9

role of monetary policy and what are the require- Kareken,s paper supplements the Gramley-Cha arguments. He finds"the received money supply The following sections discuss the major aspects of eoryquite inadequate. His paper is designed to improve monetary analysis by constructing a theory the countercritique. These rejoinders may contribute of an individual bank as a firm. This theory is offered resulting clarification may remove some unnecessary s an explanation of a banks desired balance sheet disputes. Even though the central contentions of the position. It also appears to form the basis of a model controversy will remain, the continuous articulation describing the interaction of the publics and the of opposing points of view plays a vital role in the banks behavior in the joint determination of the money search for greater understanding of the monetary stock, bank credit and interest rates. The whole development emphasizes somewhat suggestively the portance of the public's and banks' behavior in A Summary of the Countercritique to undermine the empirical hypothe. is also designed es advanced by The four articles relied on two radically different the monetarist position. This is achieved by means groups of arguments. Gramley-Chase, Kareken and of explicit references to specific and"obviously de- acy exploit the juxtaposition "New View ve Traditional View"as the central idea guiding their sirable features of the model presented countercritique. The analytical framework developed Cacy's article develops neither an explicit frame under the"Traditional View"label. On the other advanced by the Monetarist thesis. However,he by the critique in order to organize his arguments provides a useful summary of the general position of the countercritique. The Monetarist analysis is con Gramley-Chase describe their general venient ntly subsumed by Cacy under a"Traditional in the following words (New) developments have reaffirmed the monetary mechanisms: "The new approach argues bankers point of view that deposits are attracted that there is no essential difference between the manner in which the liabilities of banks and environment, growth rates of deposits have be- nonbank financial institutions are determined. Both conduct of monetary policy .. A framework of the portfolio decisions of the public. "3 The new analysis [is required] from which the significance approach is contrasted with the Traditional View of time deposits and of changing time deposits which "obscures the important role played by the can be deduced. Traditional methods of mone- public and overstates the role played by the central tary analysis are not well suited to this task. The bank in the determination of the volume of money Viewin monetary economics provides a balances. 4 The general comparison developed by useful analytical framework. In the new Cacy suggests quite clearly to the reader that the banks- like other financial institutions Traditional View allegedly espoused by the Mone- are considered as suppliers of financial claims for tarist position cannot match the "realistic sense"of the public to hold, and the public is given a the New view advocated by the countercritique significant role in determining the total amount of bank liabilities.... Traditional analysis In the context of the framework developed by the fails to recognize that substitution between time critique, Davis questions some basic propositions of deposits and securities may be an important the Monetarist position ource of pro-cyclical variations in the stock of In the past five to ten years, however, there has come into increasing prominence a group of bank policy. 2 economists who would like to go considerably This general argument guided the construction of the simple assertion that the bel avior an explicit model designed to emphasize the role of money is a significant factor influencing the the public s and the banks behavior in the determina behavior of the economy... In order to bring a few of the issues into sharper focus, this article tion of the money stock, bank credit and interest rates. cy, pp 5&7. Gramley-Chase, pp. 1380, 1381, 1393

________ ..: ¼,.~:.t .,j~~aS.’~!M~%’.~ role of monetary policy and what are the require￾ments of rational policymaking? The following sections discuss the major aspects of the countercritique. These rejoinders may contribute to a better understanding of the issues, and the resulting clarification may remove some unnecessary disputes. Even though the central contentions of the controversy will remain, the continuous articulation of opposing points of view plays a vital role in the search for greater understanding of the monetary process. A Summary of the Countercritique The four articles relied on two radically different groups of arguments. Gramley-Chase, Kareken and Cacy exploit the juxtaposition “New View versus Traditional View” as the central idea guiding their countercritique. The analytical framework developed by the critique is naturally subsumed for this purpose under the “Traditional View” label. On the other hand, Davis uses the analytical framework developed by the critique in order to organize his arguments. Gramley-Chase describe their general argument in the following words: “(New) developments have reaffirmed the bankers’ point of view that deposits are attracted, not created, as textbooks suggest. In this new environment, growth rates of deposits have be￾come more suspect than ever as indicators of the conduct of monetary policy. . . . A framework of analysis [is required] from which the significance of time deposits and of changing time deposits can be deduced. Traditional methods of mone￾tary analysis are not well suited to this task. The ‘New View’ in monetary economics provides a more useful analytical framework. In the new view, banks — like other financial institutions — are considered as suppliers of financial claims for the public to hold, and the public is given a significant role in determining the total amount of bank liabilities. .. . Traditional analysis fails to recognize that substitution between time deposits and securities may be an important source of pro-cyclical variations in the stock of money even in the face of countercycical central bank policy.”2 This general argument guided the construction of an explicit model designed to emphasize the role of the public’s and the banks’ behavior in the determina￾tion of the money stock, bank credit and interest rates. 2 Cramley-Chase, pp. 1380, 1381, 1393. Kareken’s paper supplements the Gramley-Chase arguments. He finds “the received money supply theory” quite inadequate. His paper is designed to improve monetary analysis by constructing a theory of an individual bank as a firm. This theory is offered as an explanation of a bank’s desired balance sheet position. It also appears to form the basis of a model describing the interaction of the public’s and the banks’ behavior in the joint determination of the money stock, bank credit and interest rates. The whole development emphasizes somewhat suggestively the importance of the public’s and banks’ behavior in explanations of monetary growth. It is also designed to undermine the empirical hypotheses advanced by the Monetarist position. This is achieved by means of explicit references to specific and “obviously de￾sirable” features of the model presented. Cacy’s article develops neither an explicit frame￾work nor a direct critique of the basic propositions advanced by the Monetarist thesis. However, he provides a useful summary of the general position of the countercritique. The Monetarist analysis is con￾veniently subsumed by Cacy under a “Traditional View” which is juxtaposed to a “New View” of monetary mechanisms: “The new approach argues - . that there is no essential difference between the manner in which the liabilities of banks and nonbank financial institutions are determined. Both types of institutions are subject in the same way to the portfolio decisions of the public.”3 The new approach is contrasted with the Traditional View, which “obscures the important role played by the public and overstates the role played by the central bank in the determination of the volume of money balances,”4 The general comparison developed by Cacy suggests quite clearly to the reader that the Traditional View allegedly espoused by the Mone￾tarist position cannot match the “realistic sense” of the New View advocated by the countercritique. In the context of the framework developed by the critique, Davis questions some basic propositions of the Monetarist position: “In the past five to ten years, however, there has come into increasing prominence a group of economists who would like to go considerably beyond the simple assertion that the behavior of money is a significant factor influencing the behavior of the economy. . .. In order to bring a few of the issues into sharper focus, this article 3 Cacy, pp. 5 & 7. 4 lbid., p. 7. Page 10

will take a look at some evidence for the money of Empirical onjectures advanced without analytical jected by the Monetarist position, and an array supply view. It confines itself to examining the historical or en ubstantiation. Also, not a single pap relationship between monetary cycles and cycles the countercritique developed a relevant assess- in general business. The article concludes that ment of the Monetarists empirical theories or central the relationship between these two kinds of propositions cycles does not, in fact, provide any real support for the view that the behavior of money is the In sections B and c detailed examinations of predominant determinant of fluctuations in busi- specific conjectures ed on rival ex ness activity. Moreover, the historical relationship cyclical fluctuations of monetary growth are pre- between cycles in money and in business cannot sented. The direct on the monetarist position be used to demonstrate that monetary policy is, by Davis is discussed in some detail in Section D in its effects, so long delayed and so uncertain as This section also states the crucial propositions of to be an unsatisfactory countercyclical weapon. the Monetarist thesis in order to clarify some aspects An Examination of the Issues of this position. This reformulation reveals that the reservations assembled by Davis are quite innocuous A careful surv the countercritique yielded the They provide no analytical or empirical case against following results. The Gramley- Chase, Kareken, and the Monetarist thesis. Conjectures associated with the es- interpretation of monetary policy ( the " indicator tion the status of empirical theories used by the problem")are presented in Section E Monetarist critique in its examination of monetary policy. The Davis paper questions quite directly, on A. The New viet the other hand, the existence and relevance of the evidence in support of the Monetarist position, and The countercritique has apparently been decisively constitutes a direct assault on the Monetarist critique. influenced by programmatic elaborations originally The others constitute an indirect assault which at- published by Gurley-Shaw and James Tobin. 7 The tempts to devalue the critique's analysis, and thus to program is most faithfully reproduced by Cacy, and destroy its central propositions concerning the role it also shaped the arguments guiding the model of money and monetary policy construction Kareken and Gramley-Chase. The The indirect assault on the Monetarist position by New View, as a program, is a sensible resp Gramley-Chase, Kareken and Cacy requires a clari a highly unsatisfactory state of monetary analysis the nature of the New view inherited in the late 1950s, A money and banking a program of analysis must be clearly distinguished application of economic analysis to the financial sector. At most. this inherited literature contained onjectures 6 All three aspects are usually mixed only suggestive pieces of analysis. It lacked a mean gether in a general description. It is important to gful theory capable of ex responses understand, however, that neither research strategy the monetary system to policy actions or to in cations of the general program. The explicit separa- View proposed a systematic application of economic tion of the three aspects is crucial for a proper analysis, in particular an application of relative price assessment of the New view theory, to the array of financial intermediaries, their Section A examines some general characteristics of assets and liabilities the countercritique' s reliance on the New view. It shows the New View to consist of a program ac- This program is most admirable and incontestable but it cannot explain the confict revealed by critique ceptable to all economists, a research strategy re- and countercritique. The Monetarist approach ac tHese three aspects of the New View will subsequently be tion, this approach used the suggestions and andl. cepted the general principle of applying relative price theory to the analysis of monetary processes. In ac more fully. Their progran e application of relative price theory to analysis of financial John G. Gurley and Edward F. Shaw, Money in a Theory of growth and propositions about proper interpretation of policy udies, ed. Deane Carson Irwin, 1963) P

~...t .. ...‘..~. .. ...., -. . will take a look at some evidence for the ‘money supply’ view... It confines itself to examining the historical relationship between monetary cycles and cycles in general business. The article concludes that the relationship between these two kinds of cycles does not, in fact, provide any real support for the view that the behavior of money is the predominant determinant of fluctuations in busi￾ness activity. Moreover, the historical relationship between cycles in money and in business cannot be used to demonstrate that monetary policy is, in its effects, so long delayed and so uncertain as to be an unsatisfactory countercyclical weapon.”5 An Examination of the Issues A careful survey of the countercritique yielded the following results. The Gramley-Chase, Kareken, and Cacy papers parade the New View in order to ques￾tion the status of empirical theories used by the Monetarist critique in its examination of monetary policy. The Davis paper questions quite directly, on the other hand, the existence and relevance of the evidence in support of the Monetarist position, and constitutes a direct assault on the Monetarist critique. The others constitute an indirect assault which at￾tempts to devalue the critique’s analysis, and thus to destroy its central propositions concerning the role of money and monetary policy. The indirect assault on the Monetarist position by Gramley-Chase, Kareken and Cacy requires a clari￾fication concerning the nature of the New View. A program of analysis must be clearly distinguished from a research strategy and an array of specific conjectures.6 All three aspects are usually mixed together in a general description. It is important to understand, however, that neither research strategy nor specific empirical conjectures are logical impli￾cations of the general program. The explicit separa￾tion of the three aspects is crucial for a proper assessment of the New View. Section A examines some general characteristics of the countercritique’s reliance on the New View. It shows the New View to consist of a program ac￾ceptable to all economists, a research strategy 5 Davis, pp. 63-64. °These three aspects of the New View will subsequently be elaborated more fully. Their program of analysis refers to the application of relative price theory to analysis of financial markets and financial institutions. Their research strategy refers to a decision to initiate analysis in the context of a most general framework. Their specific conjectures refer to propositions concerning the causes of fluctuation of monetary growth and propositions about proper interpretation of policy. jected by the Monetarist position, and an array of specific conjectures advanced without analytical or empirical substantiation. Also, not a single paper of the countercritique developed a relevant assess￾ment of the Monetarist’s empirical theories or central propositions. In sections B and C detailed examinations of specific conjectures centered on rival explanations of cyclical fluctuations of monetary growth are pre￾sented. The direct assault on the Monetarist position by Davis is discussed in some detail in Section D. This section also states the crucial propositions of the Monetarist thesis in order to clarify some aspects of this position. This refonnulation reveals that the reservations assembled by Davis are quite innocuous. They provide no analytical or empirical case against the Monetarist thesis. Conjectures associated with the interpretation of monetary policy (the “indicator problem”) are presented in Section E. A. The New View The countercritique has apparently been decisively influenced by programmatic elaborations originally published by Gurley-Shaw and James Tobin.7 The program is most faithfully reproduced by Cacy, and it also shaped the arguments guiding the model construction by Kareken and Gramley-Chase. The New View, as a program, is a sensible response to a highly unsatisfactory state of monetary analysis inherited in the late 1950’s. A money and banking syndrome perpetuated by textbooks obstructed the application of economic analysis to the financial sector. At most, this inherited literature contained only suggestive pieces of analysis. It lacked a mean￾ingful theory capable of explaining the responses of the monetary system to policy actions or to in￾fluences emanating from the real sector. The New View proposed a systematic application of economic analysis, in particular an application of relative price theory, to the array of financial intermediaries, their assets and liabilities. This program is most admirable and incontestable, but it cannot explain the conflict revealed by critique and countercritique. The Monetarist approach ac￾cepted the general principle of applying relative price theory to the analysis of monetary processes. In addi￾tion, this approach used the suggestions and analyti￾John C. Gurley and Edward F. Shaw, Money in a Theory of Finance, (Washington: Brookings Institute, 1960). James Tobin, “Commercial Banks as Creators of Money,” Ranking and Monetary Studies, ed. Deane Carson (II. D. Irwin, 1963). Page 11

cal pieces inherited from past efforts in order to Two sources of the conflict have been recognized develop some specific hypotheses which do explain thus far. The Monetarists research strategy was con- portions of our observable environment. The New cerned quite directly with the construction of em- Viewers' obvious failure to recognize the limited con- pirical theories about the monetary system, whereas tent of their programmatic statements only contrib- the New View indulged, for a lengthy interval,in utes to maintenance of the conflict ery general programmatic excursions. Moreover, the New viewers apparently misconstrued their program A subtle difference appears, however, in the re- as being a meaningful theory about our observable search strategy. The New View was introduced essen tially as a generalized approach, including a quite third source of the persistent conflict ributed to a ronment. This logical formal exposition, but with little attempt at specific structuring and empirical content. The most impres- The latter source arises from the criticism ad sive statements propagated by the New View were dressed by the New Viewers to the Monetarists'the- crucially influenced by the sheer formalism of its ories of money supply processes. Three of the papers exposition. In the context of the New View's almost exploit the logically dubious but psychologically ef empty form, little remains to differentiate one object fective juxtaposition between a"New View"and a rom another. For instance, in case one only admits Traditional View. In doing this they fail to dis he occurrence of marginal costs and marginal yield uish between the inherited state of monetary associated with the actions of every household, firm, system analysis typically reflected by the money and financial intermediary, one will necessarily con- and banking textbook syndrome and sear clude that banks and non-bank financial intermedi- output of economists advocating the monetarist thesis aries are restricted in size by the same economic This distinction is quite fundamental forces and circumstances, In such a context there analogies misled the New Viewers and they did not is truly no essential difference between the deter- recognize the logical difference between detailed mination of bank and non-bank intermediary liabili- formulations of empirical theories on the one side ties,or between banks and non-bank intermediaries, and haphazard pieces of unfinished analysis on the or between money and other financial assets other side. 9 The strong impressions conveyed by the New View A related failure accompanies this logical hus result from the relative emptiness of the formu- There is not the slightest attempt to assess lation which has been used to elaborate their position. native hypothe theories by systematic exposure In the context of the formal world of the New to observations from the real world. It follows, there- View,"almost everything is almost like everything fore, that the countercritique scarcely analyzed the else". This undifferentiated state of affairs is not, how- empirical theories advanced by the Monetarist critique ever, a property of our observable world. It is only a property of the highly formal discussion designed book by Pesek and ealth and y the New View to overcome the unsatisfactor state of monetary analysis still prevailing in the late by Harry 1950s or early 1960s. 8 and bank As examples of the empirical work performed by the Mone- ADequate analysis of the medium of exchange function of tarists, the reader should consult the following works: Milton honey, or of the cor Frie thing else. "This analysis requires proper recognition that marginal cost of information concerning qualities and prop the assets involved. The analysis of the wealth position of Puzzles in u.s. monetar ivity of iney, requires recognition of the marginal produc- 6, Padova, Italy, Karl Brunner and Robert Crouch honey to the holder he relevant differences between of the New view s standard on hain nsult a preliminary approach to the analysis of the medmay program cannot cope with these issues lso consult for both issues the important August 17, 196 Page 12

Wh.~ .. . ~ ., ~~z.atq~ ‘~ ‘~a~ cal pieces inherited from past efforts in order to develop some specific hypotheses which do explain portions of our observable environment. The New Viewers’ obvious failure to recognize the limited con￾tent of theft programmatic statements only contrib￾utes to maintenance of the conflict. A subtle difference appears, however, in the re￾search strategy. The New View was introduced essen￾tially as a generalized approach, including a quite formal exposition, but with little attempt at specific structuring and empirical content. The most impres￾sive statements propagated by the New View were crucially influenced by the sheer formalism of its exposition. In the context of the New View’s almost empty form, little remains to differentiate one object from another, For instance, in case one only admits the occurrence of marginal costs and marginal yields associated with the actions of every household, firm, and financial intermediary, one will necessarily con￾clude that banks and non-bank financial intermedi￾aries are restricted in size by the same economic forces and circumstances, In such a context there is truly no essential difference between the deter￾mination of bank and non-bank intermediary liabili￾ties, or between banks and non-bank intermediaries, or between money and other financial assets. The strong impressions conveyed by the New View thus result from the relative emptiness of the formu￾lation which has been used to elaborate their position. In the context of the formal world of the New View, “almost everything is almost like everything else”. This undifferentiated state of affairs is not, how￾ever, a property of our observable world. It is only a property of the highly formal discussion designed by the New View to overcome the unsatisfactory state of monetary analysis still prevailing in the late 1950’s or early 1960’s.8 8Adcquate analysis of the medium of exchange function of money, or of the conditions under which inside money be￾comes a component of wealth, was obstmcted by the pro￾grammatic state of the New View. The useful analysis of the medium-of-exchange function depends on a decisive rejec- tion of the assertion that “everything is almost like every￾thing else.” This analysis requires proper recognition that the marginal cost of information concerning qualities and prop￾erties of assets differs substantially between assets, and that the marginal cost of readjusting asset positions depends on the assets involved. The analysis of the wealth position of inside money requires recognition of the marginal produc￾tivity of inside money to the holder. Adequate attention to the relevant differences between various cost or yield functions associated with different assets or positions is required by both problems. The blandness of the New View’s standard program cannot cope with these issues. The reader may consult a preliminary approach to the analysis of the medium of exchange function in the paper by Karl Brunner and Allan H. Meltzer, in the Journal of Finance, 1964, listed in footnote 9. He should also consult for both issues the important Two sources of the conflict have been recognized thus far. The Monetarists’ research strategy was con￾cerned quite directly with the construction of em￾pirical theories about the monetary system, whereas the New View indulged, for a lengthy interval, in very general programmatic excursions. Moreover, the New Viewers apparently misconstrued their program as being a meaningful theory about our observable environment. This logical error contributed to a third source of the persistent conflict. The latter source arises from the criticism ad￾dressed by the New Viewers to the Monetarists’ the￾ories of money supply processes. Three of the papers exploit the logically dubious but psychologically ef￾fective juxtaposition between a “New View” and a “Traditional View.” In doing this they fail to dis￾tinguish between the inherited state of monetary system analysis typically reflected by the money and banking textbook syndrome and the research output of economists advocating the Monctarist thesis. This distinction is quite fundamental, Some formal analogies misled the New Viewers and they did not recognize the logical difference between detailed formulations of empirical theories on the one side and haphazard pieces of unfinished analysis on the other side.° A related failure accompanies this logical error. There is not the slightest attempt to assess alter￾native hypotheses or theories by systematic exposure to observations from the real world. It follows, there￾fore, that the countercritique scarcely analyzed the empirical theories advanced by the Monetarist critique book by Boris Pesek and Thomas Saving, Money, Wealth and Economic Theory, The Macmillan Company, New York, 1967, or the paper by Harry Johnson, “Inside Money, Outside Money, Income, Wealth and Welfare in Monetary Theory, to be published in The Journal of Money, Credit and Rank￾ing, December 1968. 9 As examples of the empirical work performed by the Mone￾tarists, the reader should consult the following works: Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960, (Princeton: Princeton Uni￾versity Press, 1963). Philip Cagan, Determinants and Effects of Changes in the Stock of Money, (Columbia: Columbia University Press, 1965). Karl Brunner and Allan H. Meltzer, “Sonic Further Investigations of Demand and Supply Func￾tions for Money,” Journal of Finance, Volume XIX, May 1964. Karl l3runncr and Allan H. Meltzer, ‘A Credit-Market Theory of the Money Supply and an Explanation of Two Puzzles in U.S. Monetary Pohcy,” Essays in Honor of Marco Eanno, 1966, Padova, Italy. Karl Brunner and Robert Crouch, “Money Supply Theory and British Monetary Experience, Methods of Operations Research III — Essays in Honor of Wilhelm Krelle, ed. Rudolf Henn (Published in Meisenheim, Germany, by Anton Ham, 1966). Karl Brunner, “A Schema for the Supply Theory of Money,” International Economic Review, 1961. Karl Brunner and Allan H. Meltzer, “An Al￾ternative Approach to the Monetary Mechanism,” Subcom￾mittee on Domestic Finance, Committee on Banking and Currency, House of Representatives, August 17, 1964. Page 12