There are two main approaches to monetary theory. The first constructs monetary theory by analogy to the theory of value, deriving the demand and supply of money from fundamental portfolio preferences, intermediation technologies and the endowment of high-powered money given by the government. The second approach views money as a form of credit, a promise to pay income at some time in the future, and therefore constructs monetary theory to correspond with a theory of income. Debt claims to assured future income flows provide liquidity in a form which can be bought and sold. It is this second, less popular, approach which these essays are concerned primarily to elaborate.;It is demonstrated first that the logical foundations of the value approach are by no means as secure as generally assumed, while the foundations of the credit approach are hardly as shaky as might be supposed. Indeed, on grounds of logical consistency there are reasons to prefer the credit approach. Second it is shown how the credit approach can be formally elaborated so as to offer determinate quantitative answers to detailed questions. This formalization involves using mathematical techniques drawn from probability theory which are new to macroeconomics. Third, the theory is applied to understanding the development of the U.S. financial structure in the postwar period as a passage from a system dominated by government debt and managed by the government to one dominated by private debt and managed by no one in particular. Quantitative measures of the key concepts are derived and the institutional development of particular financial markets is examined.
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