Money, Capital, and Forced Saving
According to the conventional wisdom of the quantity theory of money, the ultimate effect of an exogenous change in monetary conditions falls exclusively on the general level of prices. Consideration of the possible effects of such changes on the so-called real variables of the system—the relative prices of commodities, the distribution of income between wages and profits, and the levels of output and employment—is restricted to intermediate situations where full adjustment to altered monetary conditions has not yet taken place. These situations have been the traditional haunt of critics of the more extreme advocates of the quantity theory who tend to play down any real consequences of monetary disturbances. This has been the case since the celebrated Bullionist Controversy and the Currency School-Banking School debates of the nineteenth century, down to debates over the Phillips curve and over the rational expectations hypothesis. However, they have also provided a fertile field for rapid theoretical advances in our understanding of the operation of the monetary system and its role in economic activity.
The interwar years provide a particularly interesting episode in this regard, for they saw not only significant developments in the analysis of these transitional situations but also the emergence of arguments like those of the General Theory, whose aim was to break away from the quantity theory framework and to reestablish monetary theory on a new footing. Indeed, there is an important sense in which these latter arguments developed directly out of debates about the transmission mechanism of monetary change within the quantity theory itself. One such debate