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A Reinterpretation of Classical Monetary Theory
... This interpretation of Newcomb's monetary theory relies on the recently introduced distinction between the classical monetary theory and the quantity theory of money. This distinction has been developed by Niehans (1978Niehans ( , 1987Niehans ( , 1990, Glasner (1985Glasner ( , 1989Glasner ( , 2000, Skaggs (1991Skaggs ( , 1994Skaggs ( , 1995 and Le Maux (2014). This literature studies the monetary theory of classical political economists and holds that two approaches to monetary theory could be found in the classical school of political economy: a) one that applied the quantity theory of money irrespectively of the kind of issue, and b) one that distinguished an adjustment mechanism for each kind of issue. ...
... One of Newcomb's main interests was understanding if the variations in price levels could be due to variations in the value of money, i.e. the standard of 119 The literature on classical monetary theory as different from the quantity theory approach has been criticized by Blaug (1995) and O'Brien (1995). While Blaug (1995, 32) adheres to Niehans' (1987) idea that classical economists rejected the short-run non-neutrality of money, he believed that Glasner (1985) took the argument "one step further" in order to defend a free-banking theory. The difference between the two authors lies in their definition of classical monetary theory. ...
Cette thèse propose une reconstruction théorique des débats monétaires de la période de la Reconstruction aux États-Unis en se focalisant sur les travaux de Henry Charles Carey, Hugh McCulloch, Simon Newcomb et John Sherman. Elle s’efforce d’identifier les liens entre les positions respectives de chacun, les politiques économiques préconisées et leurs visions du développement économique. Répondre à cette ambition implique au préalable d’expliquer pourquoi la question monétaire centrale est celle des greenbacks – le papier-monnaie inconvertible ayant cours légal émis afin de financer la guerre de Sécession – et de préciser comment la question monétaire a été le lieu privilégié d'affrontement entre des visions politiques antagonistes (chapitre 1). Les chapitres qui suivent se focalisent sur l’analyse des écrits des principaux participants aux débats. Le chapitre 2 s’intéresse à la théorie monétaire de Carey et montre comment elle vise à réunifier les États-Unis tout en établissant leur indépendance nationale à travers l’industrialisation par le maintien du système monétaire des greenbacks et du protectionnisme. Face à Carey se trouvent ceux qui favorisent un retour à la convertibilité, parmi ceux-ci McCulloch, Newcomb et Sherman. Le chapitre 3 examine la position de McCulloch et Sherman et établit que leur position dans le débat était dictée par leur vision du développement économique qui promouvait l’intégration internationale des États-Unis. Enfin, le chapitre 4 porte sur l’auteur qui constitue la référence théorique commune à ceux qui défendent le retour à la convertibilité : tant la méthodologie que la théorie monétaire de Newcomb y sont analysées.
... The argument in this sections draws on previous discussions of the Hume and the Currency and Banking Schools inGlasner (1985Glasner ( , 1989Glasner ( , 2017 ...
In Hayek's early writings on business cycle theory and the Great Depression he argued that business cycle downturns including the steep downturn of 1929-31 were caused by unsustainable elongations of capital structure of the economy resulting from bank-financed investment in excess of voluntary saving. Because monetary expansion was the cause of the crisis, Hayek argued that monetary expansion was an inappropriate remedy to cure the deflation and high unemployment caused by the crisis. He therefore recommended allowing the Depression to take its course until the distortions that led to the downturn could be corrected by market forces. However, this view of the Depression was at odds with Hayek's own neutral money criterion which implied that prices should fall during expansions and rise during contractions so that nominal spending would remain more or less constant over the cycle. Although Hayek strongly favored allowing prices to fall in the expansion, he did not follow the logic of his own theory in favoring generally increasing prices during the contraction. This paper explores the reasons for Hayek's reluctance to follow the logic of his own theory in his early policy recommendations. The key factors responsible for his early policy recommendations seem to be his attachment to the gold standard and the seeming necessity for countries to accept deflation to maintain convertibility and his hope or expectation that deflation would overwhelm the price rigidities that he believed were obstructing the price mechanism from speeding a recovery. By 1935 Hayek's attachment to the gold standard was starting to weaken, and in later years he openly acknowledged that he had been mistaken not to favor policy measures, including monetary expansion, designed to stabilize total spending.
... The straightforward response, which I have discussed elsewhere (Glasner 1985(Glasner , 1989a(Glasner , 1989b, is that, given a convertible competitively supplied money (the institutional norm for most of the Classical period), the early mainstream classical economists, including Smith, Say, the elder Mill, and Ricardo, as well as the later classical economists associated with, or sympathetic to, the Banking School, such as Tooke, Fullarton, and the younger Mill, believed that market forces would induce competitive banks to supply as much money as the public demands at a price level determined by convertibility, not by the quantity of money. In such a monetary environment, an excess demand for money is not primarily reflected in an excess supply of commodities. ...
... The argument in this sections draws on previous discussions of the Hume and the Currency and Banking Schools inGlasner (1985Glasner ( , 1989Glasner ( , 2017 ...
In his early writings on business cycle theory and the Great Depression Hayek argued that business cycle downturns including the steep downturn of 1929–1931 were caused by unsustainable elongations of capital structure of the economy resulting from bank-financed investment in excess of voluntary saving. Because monetary expansion was the cause of the crisis, Hayek argued that monetary expansion was an inappropriate remedy to cure the deflation and high unemployment caused by the crisis. He therefore recommended allowing the Depression to take its course until the distortions that led to the downturn could be corrected by market forces. However, this view of the Depression was at odds with Hayek’s own neutral money criterion which implied that prices should fall during expansions and rise during contractions so that nominal spending would remain more or less constant over the cycle. Although Hayek strongly favoured allowing prices to fall in the expansion, he did not follow the logic of his own theory in favouring generally increasing prices during the contraction. This chapter explores the reasons for Hayek’s reluctance to follow the logic of his own theory in his early policy recommendations. The key factors responsible for his early policy recommendations seem to be his attachment to the gold standard and the seeming necessity for countries to accept deflation to maintain convertibility and his hope or expectation that deflation would overwhelm the price rigidities that he believed were obstructing the price mechanism from speeding a recovery. By 1935, Hayek’s attachment to the gold standard was starting to weaken, and in later years he openly acknowledged that he had been mistaken not to favor policy measures, including monetary expansion, designed to stabilize total spending.
Irving Fisher dedicated Stabilizing the Dollar (1920) to Simon Newcomb for anticipating him “in proposing plans for stabilizing monetary units.” The congruence of Newcomb’s and Fisher’s monetary theories and reform proposals was not as straightforward as Fisher’s book dedication suggested. Their plans had different theoretical roots: Fisher’s compensated dollar plan was the outcome of his quantity theory of money, while Newcomb held a classical monetary theory. We compare Newcomb’s and Fisher’s plans to stabilise the dollar and explore the theoretical rationales behind them offering an illustration of how similar proposals can be the result of different theories.
This article studies the changes that took place in the Bank of England's Restriction‐era policies governing private sector lending. The findings show that the Bank was adapting to novel monetary circumstances, created both by the evolution of the English financial system and by the Restriction itself, and that, although the process was far from smooth, the Bank was learning to act as a central bank: during this period the Bank transformed its internal operating procedures to put regulation‐based constraints on its private sector lending, established regular reviews of its policies and their effects on the money market, and adopted a distinct crisis‐orientated lending policy. In addition to establishing that these core central bank activities developed over this period, the article also shows that for 18 months starting in 1809 the Bank's policies were destabilizing, and that the Bullion Committee probably played a role in a shift in Bank lending policies that took place in mid‐1810. Overall, this study finds that the 1810 crisis was a turning point in the Bank's understanding of its role in the economy: the Bank directors both acknowledged privately the Bank's duty to the public, and restructured its discount policies with a view to promoting financial and monetary stability.
This article investigates the classical monetary theory on bank liquidity and finance and especially the contribution of Thomas Tooke, John Stuart Mill and John Fullarton at the light of the debate on the Great Recession. These authors show how financial markets and banking system may collapse altogether after a rise of values in certain classes of securities or real estate markets. And they come to the view that competition between commercial banks creates the appearance of market discipline, while the expectation of scarcity in some specific markets leads to a speculative process, which in turn destabilizes the banking system and triggers the need for the lender of last resort.
Whereas Simon Newcomb formulated the equation of exchange, he rejected the causality and the proportionality postulates of the quantity theory in some cases. To solve this puzzle, this paper relies on the distinction between the classical theory of money and the quantity theory of money and shows that, according to Newcomb, the quantity theory applied only for inconvertible paper money, while metallic money and convertible bank issues were regulated by different mechanisms. Understanding Newcomb’s distinction between the different types of issues also sheds light on his stance in the monetary debate of the U.S. Reconstruction period.
At the beginning of the 18th century, Sweden was an imperial power that had just sustained a century of modest economic growth. In 1800, Sweden’s empire was gone, after a series of military defeats. Real GDP per capita had fallen to the same level as the early 1600s. In other words, the 18th century witnessed the end of the Swedish Empire and a startling reversal of economic progress. In this paper, I propose a possible explanation for both of these outcomes. First, I argue that Sweden’s limited fiscal capacity played an important role. The creation of the Riksbank should have facilitated government borrowing and military spending as the Bank of England did for the British. However, the Riksbank was not designed or equipped for this role. I document the constraints on financing national defense through the Riksbank and argue that the bank was ill-equipped to finance an adequate national defense. This explains the reversal of the empire. Second, when the Hats took power in the Riksdag in 1739, they used the Riksbank to give loans to firms, which were financed through the issuance of bank notes. The objective was to increase investment and economic activity. I find no evidence that these loans had any effect on real GDP per capita. However, the resulting inflation has a negative and significant effect on output during the period of inconvertible paper money. The combined evidence suggests that Hat policy contributed to the decline in economic activity during the reversal of fortune.
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