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The so-called credit crunch of 1966 has long been recognized as the first significant postwar financial crisis and one that required the first important intervention by the Federal Reserve Bank. In the midst of the robust postwar expansion, the Fed began to fear inflation and tightened monetary policy to the point at which profitability of financial institutions was threatened. As Minsky argued, "By the end of August, the disorganization in the municipals market, rumors about the solvency and liquidity of savings institutions, and the frantic position-making efforts by money-market banks generated what can be characterized as a controlled panic. The situation clearly called for Federal Reserve action." The Fed was forced to enter as a lender of last resort to save the muni bond market, which in effect validated practices that were stretching liquidity. As a result of Fed intervention, the economy continued to expand, new financial practices emerged and were validated, leverage ratios increased, memories of the Great Depression faded, and markets came to expect that big government and the Fed would come to the rescue as needed. That 1966 crisis was only a minor speed bump on the road to Minskian fragility. To some extent, 1966 proved to be the first verification of the "financial instability hypothesis" that Minsky had been developing since the late 1950s, and the events of that year would stimulate further development of his analysis of the early postwar transition from a "robust" financial system toward a "fragile" financial system.

All modern economies have a "chartalist" or "state" money, as acknowledged by Friedrich Knapp and J. M. Keynes. In this paper, I examine the "history" of money to shed light on its origins. I also examine in detail the views of those who accepted the chartalist, or state, approach to money, from Adam Smith to Knapp and Keynes, with some discussion of the views of Hyman Minsky and Abba Lerner. This is then linked to Lerner's "functional finance" approach to money and government spending. I next explore the implications of "modern money" for government policy and show that much economic analysis reaches erroneous conclusions because it fails to recognize the nature of modern money. The state "defines" money when it chooses that in which taxes must be paid. Government spending is the most important determinant of the supply of base money; government deficits are the most important source of net money holdings. This stands in stark contrast to traditional analysis, for fiscal policy is the primary determinant of the money supply and monetary policy determines the short-term interest rate. Because government deficits increase bank reserves, monetary policy is required to offer an interest-earning alternative to excess reserves; essentially, monetary policy consists of sales of government bonds (by the Treasury and central bank) to "drain" excess reserves in order to hit the interest rate target established for monetary policy. Thus, bond sales are not a part of fiscal policy nor are they needed to "finance" government deficits. This analysis leads to several interesting policy conclusions regarding the importance of government deficits and debts and regarding proposals to promote full employment.

This paper poses that the one commonality between institutionalist thought and Keynesianism (as presented in his General Theory) was money. Tracing the origins and uses of money, the myth of the development of money as a medium of exchange is dispelled and replaced with money used as evidence of debt, specifically, government debt. This paper was presented as the Presidential Address to the 1998 Association for Institutionalist Thought conference. As such, the paper should be taken in the same spirit as the [in]famous neoclassical Robinson Crusoe story, or Paul Samuelson's story of the evolution of money. The only significant change that has been made is to add several endnotes that will make some of the references more clear; this might make the piece more accessible for students.