III. The Money Market

There is another reason for stagflation to take place in the phase of contraction in the inside money economy. The desire to redeem financial obligations in the recession means the increase in the demand for money and, in the absence of infinitely elastic supply of money, the rise in the market interest rate. Interest rates become higher. As Eichner (1973) has pointed out, the market interest rate is one of the fundamental determinants of the markup under oligopoly (we shall consider below the close relationship between the domination of oligopolistic structures and the domination of inside money). The higher is the rate of interest, the higher is the mark-up and, naturally, the higher prices will be. The point is that the price in the conditions of "oligopolistic competition" is a means of financing discretionary expenditures (Eichner and Kregel, 1975). The price rise provides additional finances for oligopolistic firm. As Eichner (1973) has believed, the interest rate is a something like "a floor" for the mark-up increase by oligopolistic company. The interest rate rise makes external finance expensive. Such increase in the cost of external finance may force oligopolistic firm to increase prices in order to get additional cash inflow. Needless to say, that the interest rates rise usually before and in the beginning of recession. The cyclical phase of slump is the period of the rising and higher interest rates. In the inside money economy (as we shall prove below, such economy cannot be "perfectly competitive") the rising and higher interest rates generate inflation. In the phase of contraction any inflation becomes stagflation. The process of creating new credit money can become self-fulfilling in the inside money economy. This tendency intensifies in the recession because the increase in the inside money stock in the phases of recovery and boom inevitably leads to the huge payments of principal and interest in the contraction. In this situation some firms go bankrupt anyway, simply because these firms are worse than the "average" companies. Such bankruptcies mean the emergence of bad loans for some commercial banks and other financial institutions. Needless to say, that these events cause the increase in the lender risk (Keynes, 1936: 145, Minsky, 1986: 193). It is the important factor of the rise of the "new inside money" price, that is to say, the rise of the rate of interest. Banks, of course, can provide new finances for the corporate sector by means of managed liabilities. But the use of such instruments is very expensive (Wolfson, 1995) and inevitably forces banks to raise the "retail" interest rates. As we have pointed out above, the increase in the "price of money" in a oligopolistic economy leads to the increase in the prices of goods and services. The severe slumps in the 1974-75, 1980-82 in the USA and other advanced countries with the inside money economy were characterized by the decreasing output and the rising interest rates and price level. The slump of the 1990-91 is the only exception with its low inflation and interest rates (Wolfson, 1995).

IV. Imperfect Competition and the Inside Money Economy

Why is the inside money economy oligopolistic? We think that the emergence and the spreading of inside money are the response to the increase in the capital-intensity of the economy. The expensive investment with long gestation period cannot be implemented without more or less stable external finances. It is possible only when the bank deposits are money and banks can finance their activity not only by excess reserves, but also by purchased funds (managed liabilities), in other words, in the endogenous inside money economy. Endogenous inside money is a inevitable ingredient of the economy in which an expensive and long period gestation investment "rules the roost". But the large-scale and long-term investment cannot be performed by "perfectly competitive", "polypolistic" firms. Such small "polypolistic" firms cannot control their prices and have no market power at all, and also possess too small own ("entrepreneurial") capital (Kalecki, 1956: 91-95). In such conditions these firms cannot obtain funds, sufficient for the expensive and long-term investments. The atomistic competition economy is first of all a consumption-oriented economy. It can be often very unstable, but the problems of long-term investment, mergers and acquisitions, leveraged buyouts and financial evolution are not central to this type of the economy. Capital-intensification and corresponding changes in the banking sector occur under oligopolistic and other "imperfect" structures. The idea of close relationship between