| | | | | | Money plays an important role in the operation of the economy, illustrated by the following excerpt from a 1942 radio broadcast by Keynes: | | | | | | | | | For some weeks at this hour you have enjoyed the day-dreams of planning. But what about the nightmare of finance? I am sure there have been many listeners who have been muttering, "That's all very well, but how is it to be paid for?" Let me begin by telling you how I tried to answer an eminent architect who pushed on one side all the grandiose plans to rebuild London with the phrase "Where's the money to come from?" | | | | | | | | | "The money?" I said, "But surely, Sir John, you don't build houses with money. Do you mean that there won't be enough bricks and mortar and steel and cement?" | | | | | | | | | "Oh no," he replied, "of course there will be plenty of all that." | | | | | | | | | "Do you mean," I went on, "that there won't be enough labor? For what will the builders be doing if they are not building houses?" | | | | | | | | | "Oh no, that's all right," he agreed. | | | | | | | | | "Then there is only one conclusion. You must be meaning, Sir John, that there won't be enough architects." But there I was trespassing on the boundaries of politeness. So I hurried to add: "Well, if there are bricks and mortar and steel and concrete and labor and architects, why not assemble all this good material into houses?" | | | | | | | | | But he was, I fear, quite unconvinced. "What I want to know," he repeated, "is where the money is coming from." | | | | | | | | | To answer that would have got him and me into deeper water than I cared for, so I replied rather shabbily, "The same place it is coming from now." | | | | | | | | | He might have countered (but he didn't), "Of course I know that money is not the slightest use whatever. But, all the same, my dear sir, you will find it a devil of a business not to have any." | | | | | | | | | The message here is that although money is not a physical ingredient required for the production of goods and services, its presence greatly facilitates this production. Money serves as a lubricant for the economy, allowing greater specialization of production and labor and thus creating higher productivity. Imagine how inefficient it would be to do business by bartering one good or service for another! | | | | | | | | | By controlling the amount of money in the economy, the government can affect the operation of the economy. The purpose of this chapter is to explain how the banking system works and how the government, through its central bank the Federal Reserve System influences the supply of money in the economy. The role played by the financial system in channeling funds from savers to investors, an extremely important ingredient in the operation of our capitalist economy, is described in appendix 8.1. | | | | |
