ABSTRACT
How money, and more generally the financial arrangements affect the level of production of goods and services in the real economy has long been a matter of controversy among economists. One could easily trace it back at least to David Hume, but a more convenient recent landmark would be the so-called KeynesianMonetarist controversy, which was influenced by Friedman and Schwartz’s (1963) account of the monetary history of the United States. They attributed the Great Depression almost exclusively to monetary causes and over-regulation by the Federal Reserve System (Fed) at the critical juncture.1 Ironically we seem to have completed the full circle in so far as economists and policy makers seem to hold overwhelmingly the opinion that under-regulation of the financial sector by the Fed was responsible for the current crisis. Assigning pre-eminence to monetary factors in the working of the economy is hardly new. Before the Second World War, a similar debate took place about the relative importance of ‘industry’ and ‘finance’ in Britain, and the official doctrine favoured maintaining a high international credit rating for British sterling at the cost of substantial unemployment as home. The official doctrine of ‘sound finance’ claimed that government deficit spending to fight unemployment would only result in a corresponding deficit in the balance of payments without improving the employment situation. This led Winston Churchill to observe,
The Governor [of the Bank of England] shows himself perfectly happy in the spectacle of Britain possessing the finest credit rating in the world simultaneously with a million and a quarter unemployed … I would rather see Finance less proud and Industry more content.2
