Although Sir Mervyn King has little more than six months left of his second term as Governor of the Bank of England, his intellectual evolution continues. His latest speech, given on October 23 in Cardiff to the South Wales Chamber of Commerce, contained an intriguing sentence: "The role of the Bank of England is to create the right amount of money, neither too much, nor too little, to support sustainable growth at the target rate of inflation."

He arrived at this conclusion after some remarks about "insufficient" and "excessive" money creation. The trouble with insufficient money creation is that it might result in "a contraction in the money supply and a depression", as had been seen in the US in the 1930s. On the other hand, "excessive money creation leads to accelerating inflation and ultimately the collapse of the currency". These remarks are banal in themselves as similar sentiments have been uttered by dozens of economists at one time or another. However, coming from King after a 20-year stint at Britain's central bank they are significant, perhaps even of great significance. 

First, King is clearly saying here that changes in the quantity of money "lead to" changes in macroeconomic outcomes. The assertion that money "causes" deflation or inflation is more or less explicit. This is in line with standard monetary theory, but sharply at variance with the widely-held but pervasive misconception among Britain's academic economists that expenditure is determined by "animal spirits" and fiscal policy, and that money and banking can be ignored. 

Secondly, the management of the quantity of money is said to be "the role of the Bank of England". This agrees with numerous statements made by the British government and the Bank of England at the dawn of Thatcherism in the late 1970s and early 1980s. In those statements, as in King's latest speech, the task of keeping money on track was seen as a responsibility of the state. The state had that responsibility, even though the quantity of money is dominated nowadays by bank deposits, which are liabilities of privately owned organisations. (Well, privately owned unless they have been nationalised or semi-nationalised.)