Introduction

Summary

Monetary theories, Sir John Hicks taught us, are always closely related to monetary histories, even more than general economic theory is related to economic facts. The institutions making up the monetary system the mediums used in a nonbarter economy, the preconceptions of the participants in the various transactions as to what does and does not constitute money, and even the observers’ prejudices all play crucial roles in constructing theories. Monetary theories have obvious consequences for policy, so much so that positions on the right policies also have significant effect on theoretical discussions.

Monetary Theory and Policy from Hume and Smith to Wicksell: Money, Credit, and the Economy surveys the major developments in monetary theory and associated positions on policy. The book begins with David Hume and Adam Smith, moves through Henry Thornton and David Ricardo, and ends with Walter Bagehot and Knut Wicksell. The period covers the one hundred years of the Classical School, from the 1770s to the 1870s, with a brief look before, at Hume, and a look beyond, to Alfred Marshall and Wicksell.

The book covers the period’s major monetary theorists and asks: What role did commodity-money, and in particular gold and silver, play in their conceptualizations? How did they explain the roles of the invisible and visible hands in money, credit, and banking? What did they think about rules and discretion? Did they distinguish between the two different roles of the financial system – making payments efficiently within the exchange process and facilitating intermediation in the capital market? How did they perceive the influence of the monetary system on macroeconomic aggregates, whether nominal, such as the price level and exchange rates, or real, such as output, employment, and the accumulation of wealth?