ABSTRACT
In a normally functioning capitalist economy, in which money is mainly debts to banks, money is constantly being created and destroyed. The transition from abstract economics to the economic analysis of capitalism depends upon defining money as a 'product' of financial interrelations. An immediate effect of a change in liquidity preference is upon the money price of capital assets. Money market funds are but the latest in a series of financial market and banking innovations that have changed the nature of the financial system over the past several decades. Federal Reserve operations to constrain inflation first constrain the ability of commercial banks to finance asset acquisition by expanding their reserve-absorbing liabilities. The financial processes of a capitalist economy introduce instability by making a tranquil state unstable in an upward direction and set flexible limits to this upward expansion. The debt deflation process can be limited if the financial system is robust.
