Abstract
T HE PURPOSE of this paperis to examine some of the assumptions that are frequently implicit in monetary models of the economic system and to consider some of the lines along which further investigation of the operation of the banking system might be pursued. Most analyses of the monetary mechanism proceed from an assumption that there is a relation, or a series of relations, between money and other assets available to the community. They examine the influence of these relations and of changes in the prime aggregate, money, on the rest of the economy. In general, they assume that the amount of money available to the community can be determined by the monetary authorities.1 This view is based on the traditional postulates regarding the operation of the banking system under a system of fractional reserve banking, which lead to the conclusion that the central bank has absolute control over its monetary liabilities.2 Deliberate changes in central bank monetary liabilities are assumed to result in proportionate changes in bank reserves. These changes in bank reserves, in turn, induce a secondary expansion or contraction by the banking system of an amount indicated by the ratio of currency in circulation to money and the ratio of customary or required reserves against deposits. These two ratios are considered to be reasonably stable, i.e., subject to only insignificant changes in the short run (in the absence of changes in legal reserve
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