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A Reinterpretation of Classical Monetary Theory

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  • Federal Trade Commission
... 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. ...
Thesis
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 ...
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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 ...
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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.
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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.
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