The central message of this book is that members of the economics profession, all the way from professors to students, are currently operating with a basically incorrect paradigm of the way modern banking systems operate and of the causal connection between wages, prices, on the one hand, and monetary developments, on the other. Currently, the standard paradigm, especially among economists in the United States, treats the central bank as determining the money base and thence the money stock. The growth of the money supply is held to be the main force determining the rate of growth of money income, wages, and prices.

… This book argues that the above order of causation should be reversed. Changes in wages and employment largely determine the demand for bank loans, which in turn determine the rate of growth of the money stock. Central banks have no alternative but to accept this course of events, their only option being to vary the short-term rate of interest at which they supply liquidity to the banking system on demand. Commercial banks are now in a position to supply whatever volume of credit to the economy their borrowers demand.

– Basil Moore, Horizontalists and Verticalists, 1988 [1]

Most economics books come nowhere close to starting like this. To be fair, when Moore wrote the book, many Post-Keynesians thought that this picture is too simplified. Only a few – such as Marc Lavoie – supported Moore’s view. He himself had been writing about the Post-Keynesian theory of money for some years, around that time. The supposed simplicity gave rise to the long debate Horizontalism versus Structuralism. There’s a lot of nice literature on this and its worth a read.

What do the terms horizontal and vertical refer to? Economists make supply-demand diagrams in which price is on the y-axis and quantity is on the x-axis. Moore called neoclassical economists Verticalists because according to them, the “money supply” is vertical in the diagram. “Money demand” is downward sloping. The interest rate at which the supply and demand curves meet is the market interest rate. Horizontalists, strongly believe that this is exactly wrong and the supply curve is horizontal at the rate determined by the central bank. The quantity of money, then, is the point at which the non-banking sector’s desire to hold money balances (as opposed to “demand”) determines the money stock (as opposed to “supply”). Of course, as explained by Louis-Philippe Rochon and Matias Vernengo [2], the idea of making supply-demand diagrams is only a second-best tool, the more important point being that money is endogenous.

Recommend Moore’s book. I had previewed the book at amazon.com but had to search the whole internet to get it. I tried a Greek and a French seller and ordered online, only to be told later I should expect a refund since that the book is out of stock and wrongly mentioned on the website as available. I finally found a seller at Amazon France selling a used copy for €175.38 but would deliver only to a few countries. I had to get it shipped to a friend in the US and ask him to ship it to me, which cost me an extra $94.


  1. Basil Moore, Horizontalists and Verticalists, The Macroeconomics Of Credit Money, Cambridge University Press, 1988.
  2. Louis-Philippe Rochon and Matias Vernengo, Introduction, p2, Credit, Interest Rates And The Open Economy: Essays On Horizontalism, ed. Louis-Philippe Rochon and Matias Vernengo, Edward Elgar Publishing, 2001.

Update: 4 Jan 2012: Fixed some errors in the quote.

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