A reappraisal of the Friedman-Kaldor debate in the light of the great recession

Abstract

This paper summarizes the arguments and counterarguments within the scientific discussion on the issue of the exogenous and endogenous money supply theories, developed by Milton Friedman and Nicholas Kaldor in the 1960s-1970s. The main purpose of the research is to demonstrate that the influence of the monetarist exogenous money supply theory has become low and that the influence of the Post-Keynesian endogenous money supply theory has become strong during the last decades. Systematization of the literary sources and approaches for solving the problem indicates that Friedman’s metaphor has been deeply twisted from its original sense and is now interpreted as a fiscal policy rather than a monetary option; while hard-line monetarism never triumphed in central banks, Kaldor’s endogenous money supply theory has gained ground at the same time. Investigation of the topic in the paper is carried out in the following logical sequence: an analysis of the Friedman-Kaldor debate of 1969-1970; a demonstration of Friedman’s metaphor of the helicopter money was strong after this debate; a demonstration that Friedman’s metaphor was linked to fiscal policy rather than to monetary policy and is therefore a weak metaphor; a demonstration that Kaldor’s endogenous money supply theory gained ground within the main European central banks from the 1940s: in French, English and German monetary authorities. Methodological tools of the research methods were the primary sources of the main central banks ((Federal Reserve System, Bank of France, Bank of England, German Bundesbank, Committee of the Governors of the central banks of the European Economic Commission, Bank of International Settlements). The research empirically confirms and theoretically proves that Nicholas Kaldor finally won the debate and that the Post-Keynesian framework is more efficient to understand the functioning of monetary policies, especially the monetary creation process. The results of the research can be useful for all researchers working on the monetary creation process and on monetary theories and policies.