Monetary Theory and Policy

In order to isolate a field of study clearly enough demarcated to be usefully surveyed, it is necessary to define monetary theory as comprising theories concerning the influence of the quantity of money in the economic system, and monetary policy as policy employing the central bank’s control of the supply of money as an instrument for achieving the objectives of general economic policy. In surveying the field thus narrowly defined fourteen years ago, Henry Villard [123] began by remarking on the relative decline in the significance attached to it as compared with the offshoot fields of business cycle and fiscal (income and employment) theory, a decline related to the experience of the 1930’s, the intellectual impact of Keynes’s General Theory [66], and the inhibiting effects of the wartime expansion of public debt on monetary policy. While this division of labor has continued, and has indeed been accentuated by the emergence of the cross-cutting field of economic growth and development as an area of specialization, the field of money has been increasingly active and has received increasing attention in the past fourteen years.