Rant mode on. It made my flesh creep just to type that title.
Some statements are right. Some statements are wrong. Some statements aren't even wrong. Some statements, like the one in my title, aren't even not even wrong; they are just gibberish.
"The actual stock of money is demand-determined".
That's a bit better. It's no longer gibberish. It gets promoted to the "not even wrong" category. Because "demand" is not a number, it's a curve, or a function. The quantity demanded (which is a number) depends on stuff. Let's try again.
"The actual stock of money is determined by the quantity demanded at the rate of interest set by the supplier."
That's a lot better. It gets promoted to the "wrong" category.
It's wrong, but other than that it's a perfectly coherent theory of the world. Draw a picture with the stock of money on the horizontal axis and the rate of interest on the vertical axis. Draw a downward-sloping demand curve. Draw a horizontal supply curve. The actual stock of money is determined by the point where the supply and demand curves intersect. The actual stock of money depends on both supply and demand, but the supply curve is perfectly elastic at a given rate of interest.
There are two things wrong with that theory:
1. The "demand for money" normally means the relationship between the desired average stock of money that people wish to hold and its determinants. And money, as medium of exchange, is very different from other goods. Even if the demand for money were perfectly interest-inelastic (it isn't, but this assumption is just for illustration), it would be possible for the central bank to increase the actual stock of money, and make it exceed the desired stock of money, simply by lowering the rate of interest. By lowering the rate of interest people would want to borrow more money from the central bank. They would borrow that money, not because they want to hold more money (by assumption they don't), but because they want to spend more money. Money's funny like that. When I sell my car for $2,000 that doesn't mean I have decided I would prefer to hold an extra $2,000 money than hold a car. It normally means I have decided I want to hold a different car, or a bicycle, or whatever. I hold that $2,000 in my inventory of money only temporarily until I pass it on to someone else in exchange for a new car. My stock of money is a buffer stock that makes life easier by avoiding the need for perfect synchronisation of ingoings and outgoings.
2. Except for usually very short periods of time, that aren't usually very interesting macroeconomically speaking, the money supply curve is not perfectly elastic at a fixed rate of interest. [Update: and the monetary system would eventually explode or implode if it were perfectly interest elastic for a long enough period of time.]
Take Canada for example. The Bank of Canada has a Fixed Announcement Date every 6 weeks, at which it looks at everything it thinks is relevant and sets a new target for the overnight rate of interest. And it really doesn't like to change that target between FADs unless something big happens. So drawing a perfectly interest-elastic money supply curve is a reasonable approximation to reality for 6 week periods. For any longer period of time, it's totally wrong.
What's right? Well, the Bank of Canada targets 2% CPI inflation. It does whatever it takes to bring inflation back to the 2% target at a "medium-term" horizon, which it defines as about 2 years. The Bank of Canada does not target the rate of interest (except for the 6 weeks between FADs). It targets 2% inflation, and lets the rate of interest (and any other variable) move to whatever it takes to keep inflation at 2%.
At the Bank of Canada's medium term horizon, the supply of money is perfectly interest-inelastic. It's perfectly income-inelastic. It's perfectly almost everything-inelastic, except for one thing. It is perfectly inflation-elastic.
The money supply curve is vertical on the old picture, once we get past 6 weeks. Redraw the picture, delete the rate of interest on the vertical axis, and replace it with the rate of inflation. Draw the money supply curve perfectly elastic at 2% inflation. [Update: just to be clear, the inflation-elasticity of money supply is minus infinity, so it's perfectly negatively elastic.] That's a bit better.
Rant mode off.