Money, Credit, and Capital
By James Tobin with Stephen S. Golub
Irwin/McGraw-Hill, 1998
Preface
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Money, Credit, and Capital has been a long time in the making. I
started writing it in 1958 while on a sabbatical year in Geneva. When I returned to Yale,
I taught the several chapters in my graduate money course and added others. Initial drafts
of most of the chapters were completed by the end of 1960. Mimeographed chapters were used
for many years in graduate courses at Yale, and also at MIT and elsewhere. Copies
circulated widely.
In the early 1960s I was distracted from the book by my sojourn in Washington and my
continued involvement in public policy. I was also writing a series of monetary and
macroeconomic journal articles with a focus related to, but somewhat different from, the
book chapters. The book required revisions to keep up with the profession and with the
world of affairs. I found them to be a daunting task, mounting with the passage of time
and never finished to my satisfaction.
I did not give up the objective of completing and publishing the book. My good fortune was
that Stephen Golub made it possible. He had studied the mimeo chapters as a graduate
student at Yale and admired them. He spontaneously volunteered to help me put the book in
publishable form. That he has done, these past years ever since 1990. He has contributed
knowledge, wisdom, clarity, and judgment; he has believed in the book, and he has often
saved me from myself. He has related our work to relevant modern literature and brought it
closer to being up to date. The book has been inestimably improved by his participation.
Yet the approach, the thematic ideas, the shortcomings are my own for better or worse,
dating back to 1958. Steve is not responsible for the idiosyncratic and perhaps
anachronistic aspects of my approach.
In these final laps I have also been lucky to have the help of Joseph Boyer, now an
advanced graduate student at Yale. He has read everything critically; checked mathematics,
charts, and notations; warned against errors, inconsistencies, and obscurities; dug up
statistics and facts of history, institutions, and literature. My debt to him is enormous.
(He has also been an excellent teaching assistant for me in undergraduate macroeconomics.)
Some of the chapters of this book found their way into journals or edited volumes. In
particular, much of Chapters 3 and 4 was published in Tobin (1965) and Chapter 7 was
published in Tobin (1982b) virtually as it had been circulating in draft and as it now
appears here. Likewise, as noted throughout the book, ideas and materials from my journal
articles have been used, adapted, and referred to. This book is not at all, however, a
collection of essays. The book has its own integrated theme and development, in some ways
narrower and in some ways broader than my other works.
This project was originally commissioned by Seymour Harris, a professor, mentor,
collaborator, and dear friend of mine at Harvard. My friendship with him and my debt to
him are expressed in my tribute at the memorial service for him in 1975 (Tobin, 1996).
Seymour was an entrepreneur, always organizing forums, editing books and journals, writing
and getting others to write on important current topics of theory and policy. He was
editor of a series of economics handbooks for McGraw-Hill. My book was to be the handbook
on money. I felt bad for disappointing Seymour Harris, and I still do. When this book was
finally approaching submission for publication, I thought I owed McGraw-Hill the right to
publish it as originally agreed, if they wished to do so after so long a delay, though
they surely had no obligation. I was pleased that Lucille Sutton did want the book, and I
am grateful for her interest, encouragement, and patience.
Over the years, a sequence of student research assistants and others have helped me with
the project, doubtless to their frustration. Their contributions are embodied in this
final version; often they may still be quite recognizable. My first research assistant was
Donald Hester. Don was a sophomore in Yale College in 1954 when I found him. He began
working on the book chapters in 1959. As he became a Yale graduate student and faculty
member, I continued to rely on him. Don has been a distinguished scholar and writer in
monetary economics in his own right; he has spent most of his career at the University of
Wisconsin. During those same years another loyal graduate student, Leroy S. Wehrle,
contributed painstaking research and many ideas.
I am indebted to many other students and colleagues at Yale for help at various stages of
the manuscript: among them, Roger Grawe, the late Koen Suryatmodo, and Gary Smith.
Ever since William C. Brainard came to Yale as a new graduate student in 1957, I have been
running up intellectual debts to him, many of them on the subjects of this book. Arthur
Okun, tragically cut off in the prime of life, was always an inspiration. I was fortunate
to have as a faculty colleague the late Raymond Goldsmith, the world's leading authority
on worldwide financial institutions and national balance sheets throughout history.
Experts who critically examined chapters for my benefit included Ralph Young and Stephen
Axilrod at the Board of Governors of the Federal Reserve System, Jerome Stein, Henry
Wallich, and Karen Johnson. Emilio Barone called my attention to a subtle error in (Tobin,
1982b), corrected in Chapter 7 herein.
I honor the memories of Althea Strauss and Laura Harrison, who long before the days of
word processing, accurately typed one draft chapter after another. Recently, Glena Ames
has been my trouble-shooting technical word processor. Emre Deliveli, a talented
undergraduate, has quickly solved a variety of last-minute troubles with tables and
figures. In the transition from our manuscript to a printed product, Kris Engberg and her
colleagues at Publication Services saved us from errors and improved our book.
At various stages, the Rockefeller, Sloan, and National Science foundations have supported
research related to this book. McGraw-Hill paid for a research assistant one summer. Above
all, the Cowles Foundation for Research in Economics at Yale University, my professional
home since its coming in 1955, has always supported my work with funds, service,
friendship, and inspiration.
Introduction
The vision of the financial system portrayed in this book has several characteristic themes:
The actors in the economy are wealth owners (not necessarily wealthy) who are managing their portfolios, their balance sheets. They face menus of assets and debts with various properties, differing, for example, in liquidity, risk, and return. The menus offer assets that run the gamut from hand-to-hand currency to reproducible capital goods. These assets and debts are substitutes for one another, but generally imperfect substitutes. The microeconomic foundations here tell how these actors, who differ from each other in circumstances and preferences, go about making these portfolio decisions.
Financial markets and institutions enable agents to buy and sell assets and in the process generate asset prices and interest rates, a whole structure of them. Banks are important intermediaries, largely because they are the fulcrum for central bank monetary policies. They and similar institutions are, like the general public, portfolio managers. They "monetize" capital in the sense that their monetary liabilities correspond to nonmonetary assets like loans to businesses to finance real investments. But the macroeconomic interface between financial markets and the real economy is much broader than the direct activities of banks. The book pays particular attention to the relation between the valuations of claims on real capital assets and the replacement cost of the capital itself. This "q" ratio is in principle an influence on new real investment activity.
The mechanisms of Federal Reserve monetary policies are analyzed in detail. They relate to federal debt in its various forms, and they depend upon legal institutions and on the central bank's operating procedures. The point is to link Federal Reserve policy moves to real investment activity via q and via the interest rates and credit lines offered private borrowers.