Revisiting the Controversy on the Money Supply

When secularControversy on the money supply stagnationStagnation in Japan began in the early 1990s, Kikuo[aut]Iwata, Kikuo Iwata, who was later appointed as the Deputy Governor of the Bank of Japan (BOJ), argued that this was because the BOJ was decreasing the growth rate of the money stock. Kunio Okina[aut]Okina, Kunio countered that the BOJ was supplying the monetary base in response to demand and could not increase the money stock. Thus began the controversy on the money supplyControversy on the money supply. Although the BOJ under Kuroda supplied a large monetary base, it could not raise the rate of money stock growth. Central banks in the United States and Europe also supplied large amounts of monetary base after the global financialGlobal financial crisis crisis, but, eventually, they could not increase the money stock. Thus, Iwata also lost the controversy on the money supplyControversy on the money supply. We will clarify not only why a massive supply of monetary base does not lead to an increase in the money stock but also the mechanism by which deficit fiscal policy increases the money stock. Based on this argument, we also clarify the fallacy of Friedman’s theory of the Great DepressionGreat DepressionFriedman’s theory of the Great Depression and reflationists’ claim that Takahashi’s fiscal policyTakahashi’s fiscal policy in Japan in the 1930s was a monetary policy of increasing the money stock.