The Endogeneity of Money and Keynes’s General Theory

Monetarist theory and policy continue to occupy a dominant position in the United States in the mid-1980s. Along with the continuing strength of monetarism, however, an idea inconsistent with the monetarist position has come to be rather widely accepted. That is the idea that the quantity of money is endogenously determined. An additional incongruity is that the presentation by John Maynard Keynes in The General Theory of Employment, Interest and Money of the quantity of money as exogenous is one of the factors that contributed to the resurgence of monetarism and to the repudiation of Keynes's own central thesis by monetarists and others [Keynes 1936]. These developments are seen to be all the more remarkable when it is recognized that Keynes's central thesis in The General Theory seems to require that the quantity of money be endogenously determined and, furthermore, that he seemed to so regard it in some of his other writings both before and after The General Theory. The present study inquires into the endogeneity or exogeneity of the determination of the quantity of money, demonstrates that Keynes's theory of income and employment requires an endogenous theory of money, and shows how Keynes's presentation of money as exogenously determined provided a rationale for attacks on The General Theory.