Classical Monetary Theory and the Quantity Theory

Abstract

This chapter responds to criticisms by (Blaug, M. (1995). Why is the quantity theory the oldest surviving theory in economics? In M. Blaug (Ed.), The quantity theory of money: From Locke to Keynes and Friedman. Edward Elgar.) and (O’Brien, D.P. (1995). Long-run equilibrium and cyclical disturbances: The currency and banking controversy over monetary control. In M. Blaug (Ed.), The quantity theory of money: From Locke to Keynes and Friedman. Edward Elgar.) of the distinction drawn in earlier chapters between the quantity theory and classical (anti-quantity) monetary theory. The criticisms of Blaug are shown to be largely semantic while those of O’Brien are shown to be based on a particular interpretation of the idea of an international price level under the gold standard in contrast to the one used in this volume: equality of tradable goods prices measured in terms of gold. A further response to O’Brien introduces a non-tradable-goods sector which allows for national price-level differences under the gold standard without fundamentally altering the basic propositions of the classical money model presented preceding chapters.