Classical Monetary Theory

Abstract

There was no doctrinal dichotomy in classical literature.1 Monetary theory was an integral part of classical value theory. The values of money and commodities were similarly explained for the simple reason that, in classical analysis, money was a commodity, namely, specie, i.e., a particular fabrication of precious metal (Mason 1963, pp. 42–43, 55–56).2 “The introduction of money,” observed John Stuart Mill (1871, p. 619 [italics mine]), “is a mere addition of one more commodity, of which the value is regulated by the same laws as that of all other commodities”3 Francis A. Walker (1877, p. 275, n. 2) later explained: “It has been rather the fashion with political economists to refuse the name Money to any medium of exchange which is not ‘a material recompense or equivalent’…; Whether we should speak of anything which is not a material recompense or equivalent, as Money, without the qualifying word, paper, is a question which we can best discuss when we come to speak of convertible paper money, i.e., bank-notes.” There had been no question about this in the classics. Classical writers invariably attached the qualifying word, “paper,” to media of exchange that did not qualify as a “material recompense or equivalent.” While classical money was a commodity, it was distinguished from all other commodities by peculiarities of both the demand and supply functions for money which were implicit in classical theory. Nevertheless, no separate analysis was necessary to explain the value of money. Classical economic theory was an organic unity. Although no classical economist ever attempted to formulate a general equilibrium model, either including or excluding money, nothing in classical thought or analysis precluded such formal integration of monetary and value theory (assuming its attainability).