Strangulation, suffocation are not words too strong to express the agony of the industrial body when embraced in the fast-tightening folds of a contracting money supply.
The easier way of learning for the pupil is that which proceeds by concrete illustrations and by the discussion of actual cases.
Francis A. Walker, 1891
Macroeconomic problems have a chance to develop and then inten¬sify, because what one person produces doesnt exchange directly for what other people produce. Goods and services exchange for goods and services indirectly, through the intermediary of money. A shortage of money obstructs the process of exchange and, by ob¬structing the process of exchange, obstructs the production of things to be exchanged. A close look at the depressed economy reveals it as an economy hamstrung by a shortage of money.
But what causes the shortage of money in the first place? Doesnt monetary policy have the job of keeping any such shortage from developing? Well, sometimes, the monetary authorities will permit their bank-supervisory function to dominate their money-supply¬management function. Or theyll forget that their own rules and regulations constrain the quantity of bank money when people shift from an asset that doesnt require a cash reserve to an asset that does. Theyll at times become preoccupied with foreign-exchange rates as a gauge of monetary policy, or with interest rates, or with the stock market. Budget balancing may so come to dominate the thinking of the Treasury that fiscal policy will contribute to a short¬age of money. Whatever its cause, a shortage of money obstructs the exchange of goods and services for other goods and services. Production and employment therefore suffer, even as badly, per¬haps, as they did during the 1930s.
Especially these days, the possibility of a new Great Depression seems less far fetched than it did even a few years ago. Unless we understand what caused the last Great Depression, however, well stand little chance of preventing a new Great Depression. Good reason, then, for adopting the period 1929-1933 to illustrate the damage that restrictive monetary policy can do. Focusing on that period conveys a sense of studying mllcroeconomics for a purpose, not just in the abstract but concretely, as it applies to a period that changed things forever.
Some of the economists who will consider this book for classroom use call themselves Old Monetarists others call themselves New Keynesians. Some teach macroeconomics or monetary and fiscal policy others teach money and banking or American economic history. Whatever they call themselves, whatever course they happen to teach, they agree that, if asked to do too much, markets can fail to clear. When markets dont clear, people and machines wind up unemployed-involuntarily unemployed.
Customarily, a preface concludes with an acknowledgement of the authors indebtedness. Im indebted heavily, especially to Leland B. Yeager, whose influence nearly everyone of these pages reflects, but also to Wadsworths reviewers: Anna J. Schwartz, National Bureau of Economic Research, Hugh Rockoff, Rutgers University and Christine Amsler, Michigan State University. ? President, American Economic Association, 1886-1892, and president, MIT, (1881-1897).