• Lecture Video

Slide 2: Two traditions (0:00 – 0:18)

“There were, at the least, two strands in classical economics. There was one (represented, roughly speaking, by Ricardo and his followers) which maintained that all would be well if by some device credit money could be made to behave like metallic money; there was another (represented, so far as I have taken the story, by Thornton and Mill) which held that credit money must be managed, even though (as was admitted) it is difficult to manage it. This is a major difference, and it has outlasted Keynes.” Hicks 1967, “Monetary Theory and History”

Slide 3: Drivers (0:18 – 5:18)

• World Wars, World Depression, Rise of Welfare State, Stabilization Policy
• Rise of the United States (1913 Fed, 1944 Bretton Woods), from sterling to dollar reserve
• Professionalization of Economics, Formal Turn in Economics, Econometric Movement
• De-colonization, Independence, Financial Crisis
• Emerging Markets, Financial Globalization, Global Financial Crisis

Slide 4: The Money View (5:18 – 6:41)

• Banking as a Payments System
  • Copeland (1952): A Moneyflow Economy
  • Minsky (1957): The Survival Constraint
• Banking as a Market Making System
  • Hawtrey (1919): Hierarchy of Money and Credit
  • Hicks (1989): Centrality of the Dealer Function
  • Bagehot (1873): Dealer of Last Resort

Slide 5: The Economics/Finance View (6:41 – 8:12)

• MV=PT, money as means of exchange
• IS-LM (nominal interest rate), money as store of value
• Purchasing Power Parity, P=sP* (FX), money as measure of value
• DSGE with Taylor Rule (inflation targeting)

Slide 6: Finance and Macroeconomics (8:12 – 10:36)

Finance: “consumption CAPM” Economics: “Real Business Cycles”

Slide 7: Fatal Abstractions (10:36 – 13:06)

• No “Banking as a Payment System”
  • No Money Flow, NIPA
  • No Survival Constraint, Budget Constraint
• No “Banking as a Market-Making System”
  • No Hierarchy, Money as n+1th market
  • No Dealers, Price equilibrates, supply and demand
  • No Dealer of Last Resort, Central Bank operates on inflation expectations

Slide 8: Monetary Thought, 1913 (13:06 – 18:15)

Slide 9: Political Thought, 1913 (18:15 – 21:53)

• Three Bogeymen
  • Big Finance Memory of 1907 Crisis (JP Morgan)
    • And 1910 (Jekyll Island)
  • Big Government Memory of 1862 (Greenbacks)
  • Big Wide World Actuality of Sterling System
• Political Solution
  • Real Bills Language (vs. Finance and Government)
  • Gold Convertibility (vs. Wide World)
  • Board of Governors, democratic oversight
• Funding Liquidity vs. Market Liquidity

Slide 10: Language vs. Reality (21:53 – 26:21)

• Funding liquidity versus market liquidity
  • Real bills doctrine, self-liquidating bills
  • Shiftability doctrine, Moulton 1918
    • Primitive repo, Primitive shadow banking!
• Wartime transformation
  • Centrality of government debt (Bogey #2)
  • Centrality of government debt dealers (Bogey #1)
• Tenth Annual Report (1923)
  • Invention of open market operations

Slide 11: Great Depression Transformation (26:21 – 28:21)

• Federal Reserve failure
  • 1931 lender of last resort but not dealer of last resort (funding liquidity, not market liquidity)
• Federal Reserve transformation
  • Banking Act of 1935, “apotheosis of shiftability”
  • Banking Act of 1937, “orderly conditions” tantamount to dealer of last resort, essential hybridity

Slide 12: Emerging Norms of Management (28:21 – 33:53)

• Keynes 1930 Treatise, normal backwardation
  • Keynes 1936 GT, liquidity preference
  • Hicks 1939, V&C, forward rate bias
• Wartime hiatus, and more transformation
  • From war finance to Bretton Woods 1944 (Bogey #3)
  • From war finance to Fed-Treasury Accord 1951
• FOMC “Report of the Ad Hoc Subcommittee on the Government Securities Market” (1952)
  • Level of interest rates
  • “Tone” of the money market, centrality of private dealers

Slide 13: Capital Finance, indirect (33:53 – 36:04)

Slide 14: International Dollar, indirect (36:04 – 37:16)

Slide 15: Origins of Macroeconomics? (37:16 – 38:28)

• Alvin Hansen
  • Continental Business Cycles (Schumpeter) + American Institutionalism (Burns/Mitchell)
• John Maynard Keynes
  • English Banking Traditions (Tooke, Bagehot, Marshall, Hawtrey)
• James Tobin: neoclassical synthesis
  • Irving Fisher (Walrasianism) + Cambridge Quantity equation

Slide 16: Evolution of Macro? (38:28 – 40:11)

• Internal Inconsistency, Monetarist Challenge
  • Phelps (1968), Friedman (1968), Muth (1961)
• New Classical Theory (Lucas 1975, 1976, 1977)
  • “Equilibrium Model of the Business Cycle”
  • “Econometric Policy Evaluation”
  • “Understanding Business Cycles”
• Real Business Cycles
  • Kydland and Prescott (1982)
  • Long and Plosser (1983)

Slide 17: The Lucas Link: Macro vs. Finance (40:11 – 42:52)

“On the one hand, it is easy to postulate agents and market institutions which ignore or foolishly waste information: the result is a theory which seriously understates agents’ abilities to vary their decision rules with changes in the environment (such as, for example, the theory underlying the major econometric forecasting models). It is equally easy to postulate ‘efficient’ securities markets which rapidly transmit all information to all traders: the result is a static general equilibrium model. To observe that one must avoid both extremes to understand the business cycle does not take one very far in discovering the correct ‘centrist’ model, but it seems nonetheless an essential point of departure.” (Lucas 1975, 1138).

Slide 18: Rise of the Academics (42:52 – 46:34)

Slide 19: Modigliani (46:34 – 47:22)

• “Liquidity Preference and the Theory of Interest and Money” (1944)

Slide 20: Samuelson (1947 [1937]) (47:22 – 50:04)

• Robertson’s Money (1922)
• Monetary Walrasianism
  • Hicks 1935 “A suggestion for simplifying…”
  • Marschak 1938 “Money and the theory of assets”
• M = M(p1,….,pn,pm,I,r)
  • Monetary theory of the rate of interest? NO
  • Liquidity preference theory of term structure? NO
• Neoclassical Synthesis (1955, 1967)

Slide 21: An Aside on Hicks (50:04 – 51:20)

• Repudiation of 1937 “Keynes and the Classics”, but not 1935 “Simplifying”
• 1962 Presidential Address “Liquidity” restarts his monetary inquiry, culminating in 1989 Market Theory of Money
• Not monetary Walrasianism, rather completion of Keynes Treatise on Money
• Hicks and the money view

Slide 22: Emerging Norms of Management (51:20 – 53:09)

Slide 23: State of Debate circa 1975 (53:09 – 55:12)

Slide 24: Can Monetary Policy Work? (55:12 – 56:52)

“If the interest rate on money, as well as the rates on all other financial assets, were flexible and endogenous, then ….there would be no room for monetary policy to affect aggregate demand.” Tobin (1969, 26)

Slide 25: Monetarism Mark I (56:52 – 57:14)

• “One can see why the initial monetarist tide was so successful – no one had thought of building any dykes.”
  • Hahn on neoclassical “synthesis” (1983, 51) in Paul Samuelson and Modern Economic Theory

Slide 26: The "Hahn Problem" (57:14 – 58:15)

Slide 27: The Problem of Time (58:15 – 1:00:25)

Slide 28: Rise of Finance (1:00:25 – 1:01:00)

• CAPM Origins [Marschak 1938]
  • Markowitz (1956) to Sharpe (1964)
  • Modigliani-Miller (1958) to Treynor (1962)
• Options Pricing Origins
  • Treynor to Black-Scholes (1973)
  • Samuelson to Merton (1973)

Slide 29: "Monetarism" Mark II (1:01:00 – 1:01:35)

• Black (1970) “Banking in a World Without Money”
• Real Business Cycles
  • Kydland and Prescott (1982)
  • Long and Plosser (1983)
• Dynamic Stochastic General Equilibrium Model
  • No banks, no money, liquidity as a free good
  • Price level formed by “expectations” and Central Bank Taylor Rule

Slide 30: Risk control in efficient markets (1:01:35 – 1:03:17)

Slide 31: Special Theories of "Liquidity" (1:03:17 – 1:04:18)

Slide 32: The Problem of time, Redux (1:04:18 – 1:05:05)

Slide 33: The Money View (1:05:05 – 1:05:10)

• Banking as a Payments System
  • Copeland (1952): A Moneyflow Economy
  • Minsky (1957): The Survival Constraint
• Banking as a Market Making System
  • Hawtrey (1919): Hierarchy of Money and Credit
  • Hicks (1989): Centrality of the Dealer Function
  • Bagehot (1873): Dealer of Last Resort

Slide 34: "Capitalism is essentially a financial system" (1967) (1:05:10 – 1:05:31)

Slide 35: The Vision of Minsky (1999) (1:05:31 – 1:08:12)

“By his own reckoning, Minsky was an institutionalist economist in the sense that he viewed the structure of the economic world not as immanent in some set of underlying data—such as endowments, technology, and preferences—but rather as constituted by a set of key economic institutions. He was institutionalist too in his insistence that our economy is essentially, not incidentally, monetary in character. His way of fleshing out that idea was to look at every economic unit—firms, households, governments, even countries—as though it were a bank daily balancing cash inflow against cash outflow. From that point of view, the categories that most economists, and most people, take to be solid simply melt into air. Production, consumption, and trade, are nothing more than flows of money in and out and between different economic units. The most real thing is money, but money is nothing more than a form of debt, which is to say a commitment to pay money at some time in the future. The whole system is therefore fundamentally circular and self-referential. There is nothing underneath, as it were, holding it up. In Minsky’s hyper-modern institutionalism, institutions do not merely organize the stuff of some pre-existing real world; there are the only real world there is. Financial relationships are not about mediating something else on the ‘real’ side of the economy; they are the constitutive relationships of the whole system. The veil of money is the very fabric of the modern economy.”