Content area
Abstract
The nature of money and banking is examined, and a simple model of the relation between interest rates and the rate of growth of the money supply is presented. The Monetarist theory regarding this relation is flawed. Two interest rate regimes of recent US history are examined: 1. the low interest rate regime which lasted from World War II to 1965 and 2. the high interest rate regime which began in 1966. It is argued that a fast rate of growth of the money supply does not cause high interest rates; rather, high interest rates cause rapid growth of the money supply. Furthermore, tight money policy and high interest rates are not consistent with slow growth of the money supply, or, more correctly, the combination of high interest rates and slow growth of the money supply can occur only in the presence of financial system crisis.