Contents

List of figures
Preface
Acknowledgements
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

vi
vii
ix

Money in macroeconomics: frameworks of analysis

The services of money
Moneys demand and supply: equilibrium and disequilibrium (1)
Moneys demand and supply: equilibrium and disequilibrium (2)
Patinkins monetary theory and extensions
Disequilibrium economics (1)
Disequilibrium economics (2)
Inflation
Money in an open economy
Interest rate theory

Bibliography
Index

1
22
67
102
141
169
193
217
242
267
281
301

Figures
1.1
1.2
1.3
2.1
2.2
2.3
4.1
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5.11
5.12
6.1
6.2
7.1
7.2
7.3
10.1
10.2
10.3

Growth of real income, actual and potential

Classification of approaches and subapproaches to the central
questions of money/macro theory
Relations among money supply, money demand and nominal
income
The liquidity trap
Shifts in the money supply curve matched by shifts in the
demand curve
Marginal yields on a cash balance with and without the
availability of money substitutes and credit
Conditions of equilibrium
Aggregate real output and alternative demands for commodities
Conditions of equilibrium
Equilibrium conditions for an original and a doubled nominal
quantity of money
The transition after a doubling of the nominal quantity of money
Intensification of demands for commodities, bonds and money
Shift of demand from commodities toward bonds and money
Shift of demand from bonds toward money
Shift of demand from commodities toward money
Shift of demand from commodities and bonds toward money
Intensification of (investment) demand for commodities and
of supply of bonds
Uniform unitary elasticity of the demand for money
The market-equilibrium curve for money
The case of deficient demand
The case of excess demand
The straddle diagram
An increase in the money supply
Bond financing (perverse result)
Pure exchange economy (no production)
Production economy with no exchange
Economy with production and exchange

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3
8
11
48
49
54
105
147
149
151
152
154
155
155
156
157
157
163
164
180
184
213
214
215
277
278
279

Preface
Leland Yeager is probably best known for his contributions to international
economics and monetary reform. While he has written highly regarded work
in the area of trade theory (for example, Yeager and Tuerck, 1966, 1976), he
is most famous for his International Monetary Relations (1966, 1976b), a
landmark book that became the standard reference in the field. Both editions
of that volume are divided into theory and historical narrative. (Friedman and
Schwartzs (1963) purely historical narrative was published just three years
earlier.) Some economists have recently rediscovered many of the ideas,
theories and evidence found in Lelands books of over a quarter of a century
ago. In the area of monetary reform, he and Robert Greenfield developed the
much discussed BFH system.
I believe his legacy, however, will be in the entire arena of monetary theory.
When I first arrived at the University of Tennessee at Chattanooga in 1977,
students would ask me whether I was a Keynesian or a monetarist. I would
reply: Neither, I am a Yeagerite. Since then labels have changed and schools
of thought have come and gone, but the one constant is that I still regard myself
as a Yeagerite, albeit a little wiser and a lot older. I view this book as a tribute
to Lelands enormous contributions to monetary theory, especially his development of monetary-disequilibrium theory.
Years ago I joined Lelands efforts to produce this work, which is a hybrid
of treatise and graduate textbook. Toward what I hoped was the end of what we
both recognized as an excessively long-drawn-out process, Leland felt obliged
to withdraw his name as co-author of the book. Nevertheless, the bulk of the
material contained in it (both published and unpublished) is his. Leland has
provided draft chapters as well as numerous notes and other materials. We have
had voluminous correspondence and have exchanged many drafts. I have
copious notes taken during our many visits together. He has been kind and
patient in answering literally thousands of questions.
As sole author of this book, I accept responsibility for any errors. On the
other hand, the theories presented are Lelands, and he should receive full
credit for them. The Acknowledgements section lists his published articles and
books, from which passages appear in part here. In no case was an article or
manuscript reproduced in its entirety. I have edited this material, which includes
passages from articles that we wrote together. In most cases I have tried to
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viii

Preface

stay as close as possible to the original wording, sometimes repeating it

verbatim, sometimes not.
I have chosen to focus on what I consider to be the timeless, enduring fundamentals of monetary-disequilibrium theory. The book does not examine the
empirical evidence which supports this theory. Nor does it need to do so. I
believe that Clark Warburton, Milton Friedman, Anna Schwartz, Karl Brunner,
Allan Meltzer, Phillip Cagan, David Laidler, Leland Yeager, and many others
already have provided ample evidence in support of orthodox monetarism. This
book provides the theory with special emphasis on the processes involved
which underlies the monetarist evidence. It specifically sheds light on the socalled black box of the monetarists (see pages 12930 below).
Two schools of thought dominate the textbook market. First is the new
Keynesian economics. Second is the fashionable exaggeration of monetarism
into the so-called new classical macroeconomics. These two schools, reviewed
in chapters 6, 7 and 8, have crowded the monetary-disequilibrium hypothesis,
or orthodox monetarism, off the intellectual stage. Because this work tries to
remedy this imbalance, I feel no obligation to give equal space to doctrines and
pieces of apparatus already receiving ample exposure. Instead of reproducing
whatever may be considered (rightly or wrongly) to be standard fare, I concentrate on what I judge to be the essentials of the topic.
Alan Rabin

Acknowledgements
When I joined Professor Yeagers efforts to produce this book many years ago,
little did I realize how much theory I still needed to learn. Fortunately Lelands
great devotion to learning, teaching and economics was highly contagious. I
appreciate the numerous hours he spent with me discussing monetary theory and
responding to my thousands of inquiries. I shall always be grateful for his unparalleled patience and generosity. Writing this book has been a once-in-a-lifetime
experience; it truly has been a labor of love.
So many people have helped me over the years that trying to list them all
would be a formidable task. Moreover, I fear leaving some of them out.
However, I do want to single out Tom Humphrey of the Federal Reserve Bank
of Richmond. Although he came aboard the project at the tail end, I could not
have completed it without his help. He provided the encouragement, sounding
board and third voice that I sorely needed.
Parts of the book include extracts from material that Leland has previously
published. I want to thank the editors and publishers who have granted
permission to use the following:
Birch, D.E., A.A. Rabin and L.B. Yeager (1982), Inflation, output, and
employment: some clarifications, Economic Inquiry, April, 20921, material
is reproduced by permission of the Western Economic Association.
Rabin, A.A. and L.B. Yeager (1982), Monetary Approaches to the Balance of
Payments and Exchange Rates, Essays in International Finance No. 148,
November, copyright c. 1982 by the International Finance Section of
Princeton University, permission granted by publisher.
Rabin, A.A. and L.B. Yeager (1997), The monetary transmission mechanism,
Eastern Economic Journal, Summer, 2939, permission granted by the
Eastern Economic Association.
Yeager, L.B. (1956), A cash-balance interpretation of depression, Southern
Economic Journal, April, 43847, appearing with permission of the Southern
Economic Association.
Excerpts from The International Monetary Mechanism by Yeager, L.B.
copyright c. 1968 by Holt, Rinehart and Winston, reprinted by permission of
the publisher.
ix