The Endogenous Money Stock

Abstract

The banking system has no direct control over the prices of individual commodities or over the rates of money earnings of the factors of production. Nor has it, in reality, any direct control over the quantity of money; for it is a characteristic of modern systems that the central bank is ready to buy for money at a stipulated rate of discount any quantities of securities of certain approved types. (Keynes, 1972, vol. 6, p. 189) Recently it has become convenient to divide the inflation problem into two distinct subquestions (Brunner, 1975). The first concentrates on the relation between monetary growth and inflation. Abundant empirical evidence confirms that the major historical accelerations and decelerations of inflation have been accompanied by accelerations and decelerations in the rate of growth of the money stock. The second focuses on the sources of the changes in the money stock, the of monetary growth. Today's worldwide inflation appears to be a new phenomenon, and the processes behind monetary growth across time in particular countries, and across countries at a given time, are currently the subject of searching inquiry by many economists (Gordon, 1976). This article examines the interrelationships between these two subquestions. An analysis of the political economy of monetary growth leads to rejection of the statistical exogeneity of the money stock. The conclusion is reached that for the United States-at least in the postwar period-the high-powered monetary base, while exogenous in a control sense, is endogenous in a statistical sense, since it is closely correlated with the past rate of change in money wage rates. The chief empirical evidence for the monetarist