Notes on the History of Monetary Thought

I’m working on a series of papers on traditional banking theory as an alternative framework for understanding the relationship between banking, finance and the macroeconomy, (part 1 is here) and in this post I’m just jotting down some thoughts on the history of economic thought.

As my papers argue by the early 20th century there was a fairly coherent theory of the relationship between banking, economic activity, the price level, and the guidance of these factors using the central bank policy rate — I call this “traditional banking theory.” With the growth of the “quantity (of money) theorists,” this school was sometimes described as “qualitative,” but it’s proponents pointed out (Beckhart, AER 1940) that the two schools didn’t differ in the importance they placed on the use of data, but rather in the value of using aggregate quantities to determine policy.

There are two points to make here:

After the Depression (and I believe massive policy influence in the 1930s), this traditional school of monetary thought was entirely displaced by two aggregate theory approaches: Monetarists and Keynesians. The histories I am familiar with focused on the debate between the two macro schools and the view that macro cannot be understood without a micro-understanding of debt disappeared from academic discourse. (I still don’t understand how this happened, but maybe the “invention” of macro played a role in it.)

Traditional banking theory didn’t really disappear. Instead it became part of the vast gulf that developed between market practitioners and academic theorists. For example, Marcia Stigum’s Money Market, a textbook written based on interviews with practitioners, reflects aspects of traditional banking theory.

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