An important reason that Hawtry's
monetary theory of the business cycle is no longer
considered useful is that:
the ratio of reserves to deposits is no longer
determined by banks.
banks can no longer create bank reserves.
the ratio of currency to deposits is
no longer determined by banks.
while changes in the amount of money
influenced spending in the 19th century, they no
longer do in the 20th.
Today reserve ratios of banks are set by
a central bank. In the 19th century banks
controlled their own reserve ratios. During good economic
times they tended to reduce those ratios (which increased
the amount of money in circulation), but when the economy
went into recession, they tended to increase them (which
decreased the amount of money in circulation). This
pattern is an example of:
both amplifying and dampening