Money and the Lender of Last Resort

In 1957, when my Central Banking and Money Market Changes appeared, there may have been some novelty in pointing out that the monetary and financial instruments, usages, and behavior of the significant banking institutions and financial markets changeor evolvein response to perceived profit opportunities. In 1985, it is commonplace. But the acceptance of the fact that the substance of money has changed strikingly over the past four decades has not significantly changed the way monetary theorists think about money. The assumption of exogenous moneythat there is a well-defined, exogenously determined money supply that the central bank can control with adequate precisionstill permeates monetary theory. Banks still are viewed as passive reactors that transform high-powered money into public money; profit-maximizing behavior by business apparently does not extend to banks and bankers. Since the mid-1960s, the world's central banks, and our own Federal Reserve System, have been at least as concerned with maintaining the integrity of the banking and financial structure as with the control of a money supply in order to guide the economy to some desired performance goal. Beginning with the Federal Reserve's reaction to the credit crunch of 1966 and continuing through the recent episodes of domestic a d international financial trauma, the Federal Reserve has episodically tossed aside any pretense of trying to achieve economic stability through monetary control. It has concentrated its interventions on de-