The Origin of the Political Economy of Money

Abstract

The rise of classical political economy has certainly marked a change in the way economic theory dealt with monetary issues, as it combined the microeconomic knowledge of the problems of metallic circulation with a macroeconomic analysis of the causes of monetary disturbances (balance of payments disequilibria, monetary policy). For the first time monetary theory was put on a sound theoretical footing. However, the belief of classical political economists in the self-correcting properties of markets, translated into their policy prescriptions, has given rise to interpretations that charge classical political economists of naivety: in their desire to subject all markets to the laws of supply and demand, they would have advocated a commodity-money and used the same analytical tools for the markets of commodities as well for money. The paper argues that there is no ground for such allegation. Rather, by looking into the works of Ricardo and Thornton, it is argued that supply and demand play a limited role in the explanation of monetary variables, since causality relationships are carefully specified and the need for an institution that 'made the market function' is forcefully advocated.