The Monetary Sector

Abstract

In any real economy where the monetary authorities¹ can hope to influence economic behaviour in a predictable way via changes in the money supply, there are a number of preconditions that have to be fulfilled. The most important of these preconditions is that the monetary authorities should be able to control that set of assets which constitute the ‘money stock’, and that the latter should itself influence the rest of the economy. Professor Shackle (1971, p. 32) is quite explicit on this point: ‘If the controlling of money is to provide a means of controlling the economy, money has to be something which passes two tests. It must itself have, or it must transmit, powerful effects on the economy; and it must itself be susceptible to control in appropriate respects.’ Whether these preconditions are satisfied in the case of the UK economy has been the subject of a good deal of debate and controversy. And not surprisingly so: ‘These two requirements give us, perhaps, a sort of map-maker’s fix on the definition of money. Neither requirement alone is sufficient, and, of course, there is no presumption that such a “money” can be identified or shown to exist’ (Shackle, 1971, p. 32). Central to the debate, therefore, is the question of a proper definition of the ‘money stock’, and we begin this chapter with a discussion of this.