My post-Keynesian professor believes that money is endogenously determined, that is, that the supply of money is the result of economic activity and cannot be controlled by any authority. Now, I’m pretty sure he’s conflating the endogeneity of money with its controllability, because Mises claims that the money supply, in the broader sense, is not controlled by the Federal Reserve, nor can it be (the Monetarist’s believe that the money supply is entirely controlled by the FED). Mises attacked the notion of endogenous money put forth by the Banking School while maintaining the belief that the supply of money was not controllable; he was a proponent of the quantity theory, though not the mechanical quantity theory (that there exists some kind of definite relationship between the money supply and prices). Wicksell, though, was a major influence on the Austrian school, and he too attacked the quantity theory of money. Now was Wicksell claiming that all money is endogenous, or was he simply attacking the equation of exchange put forth by Fisher (MV=QT)? Keynes uses Wicksell’s indirect transition mechanism in his Treatise on Money, and the post-Keynesians swear by it.
Is my teacher simply confusing exogenous/endogenous money with the controllability of money, or am I missing something. Maybe Mises contradicted himself?
"The Depository Institutions Deregulation and Monetary Control Act of 1980 had begun phasing out interest-rate ceilings on deposits and modified reserve requirements in complex ways. "
i guess the congress authorized the federal reserve (in the above mentioned act, if true that is) to compel banks to alter or control the amount of national currency, paper and digital entries that are used as a money in other words, to different levels than previously done.
i suppose congress and/or the federal reserve couldnt control chuckee-cheese tokens or what have you, but i guess they were able a extend degree of control over banks (govt law mandated reserve requirements) credit lending ability.
i doubt there is any austrian stand. you already stated what mises said.
There’s an inverted debt pyramid, where the FED is the “first mover” of sorts, but they do not control the money supply as the monetarists claim. So no, it’s not all about the state. Even if there was no FED, the private banks could underbid the market rate of interest by lending out more than has been entrusted to them as savings, setting off the ABC.
Anyways, I’m trying to understand the endogenous/exogenous money debate.
They do, but then banks pyramid credit money on top of the newly created reserves, the extent to which is not constant. On top of that, banks aren’t the only ones who create money, there’s private money created by corporations. The monetarists claim that “V” is constant, or the money multiplier, but Mises obliterates this notion. This is one thing that confuses me about “free bankers,” they always talk about keeping “MV constant” but the demand for cash holdings is not constant. This is why I said “money in the broader sense.”
What did Mises mean when he said that the supply of money can’t be controlled by the FED? My understanding was that, in the fiat system, the money supply was entirely controlled by the FED… Isn’t printing money the same as “supplying” money?
The government only directly controls the supply of base or “high-powered” money (M0). Banks create money endogenously through fractional reserve banking (monetary aggregates: M1, M2, M3, MZM), the extent to which depends on the demand for money (inverse relationship between demand for money and supply of money), and there are other highly liquid assets that are considered part of the money supply, such as large time deposits, repo’s, money market funds, etc.
But to answer my question in my op:
The definition of endogenous money has changed over time. Initially, the banking school believed that the supply of money was a function of prices, output, and the interest rate, rather than the other way around (they completely rejected the quantity theory). Their monetary theory, therefore, was an endogenous theory of money, but which has long since been refuted (though I do believe that some post-Keynesians still hold this spurious position). But today, when people refer to the endogeneity of money, they’re saying that the government doesn’t directly control the entire supply of money, that a portion of it is created by the private sector/banking system. Keynes (in the GT) and the Monetarists believed that the entire supply of money was exogenously determined, a policy variable (under the complete control of the government).
So in a full reserve banking system there wouldn’t be any “creation” of money on the part of the banks, right? Also, have you heard about a Prescott research on “endogenous” money?