A Source Book on Early Monetary Thought: Writings on Money Before Adam Smith PDF
Preview A Source Book on Early Monetary Thought: Writings on Money Before Adam Smith
A Source Book on Early Monetary Thought A Source Book on Early Monetary Thought Writings on Money before Adam Smith Edited by Edward W. Fuller Palo Alto, CA, USA Cheltenham, UK • Northampton, MA, USA © Edward W. Fuller 2020 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2020944726 This book is available electronically in the Economics subject collection http://dx.doi.org/10.4337/9781839109997 ISBN 978 1 83910 998 0 (cased) ISBN 978 1 80037 000 5 (paperback) ISBN 978 1 83910 999 7 (eBook) 2 0 Contents Foreword by Jesús Huerta de Soto vii Foreword by Joseph T. Salerno viii Acknowledgments xii 1 Introduction: The Aristotelian Monetary Tradition 1 Edward W. Fuller 2 Aristotle: Nicomachean Ethics (c. 350 BC) 8 3 Aristotle: Politics (c. 350 BC) 11 4 Albert the Great: Commentary on Aristotle’s Nicomachean Ethics (c. 1262) 14 5 Albert the Great: Commentary on Aristotle’s Politics (c. 1263) 21 6 Thomas Aquinas: Commentary on Aristotle’s Nicomachean Ethics (c. 1271) 29 7 Thomas Aquinas: Commentary on Aristotle’s Politics (c. 1272) 34 8 Peter John Olivi: A Treatise on Contracts (c. 1295) 41 9 Jean Buridan: Commentary on Aristotle’s Nicomachean Ethics (c. 1336) 47 10 Jean Buridan: Commentary on Aristotle’s Politics (c. 1349) 54 11 Nicholas Oresme: Treatise on Money (1358) 70 12 Gabriel Biel: On the Power and Utility of Moneys (1495) 89 13 Copernicus: Essay on the Coinage of Money (1526) 96 14 Luís Saravia de la Calle: Instructions for Merchants (1544) 103 15 Martín de Azpilcueta: On Exchange (1556) 105 16 Tomás de Mercado: Manual of Deals and Contracts (1569) 113 17 Sir Thomas Smith: A Discourse of the Commonweal of this Realm of England (1581) 114 18 Francisco García: A Very General and Useful Treatise on Contracts (1583) 120 19 Bernardo Davanzati: A Discourse upon Coins (1588) 123 v vi A source book on early monetary thought 20 Luís de Molina: A Treatise on Money (1597) 132 21 Leonard Lessius: On Buying and Selling (1605) 134 22 Juan de Mariana: A Treatise on the Alteration of Money (1609) 137 23 Hugo Grotius: The Rights of War and Peace (1625) 168 24 Samuel Pufendorf: The Elements of Universal Jurisprudence (1660) 171 25 Samuel Pufendorf: The Whole Duty of Man (1673) 174 26 John Locke: Some Considerations of the Consequences of the Lowering of Interest, and Raising the Value of Money (1691) 177 27 Dudley North: Discourses upon Trade (1691) 194 28 Isaac Gervaise: The System or Theory of the Trade of the World (1720) 206 29 Richard Cantillon: An Essay on Economic Theory (1730) 217 30 Jacob Vanderlint: Money Answers All Things (1734) 244 31 Francis Hutcheson: Philosophiae Moralis Institutio Compendiaria (1747) 246 32 Ferdinando Galiani: On Money (1751) 248 33 David Hume: Of Money (1752) 260 34 David Hume: Of Interest (1752) 267 35 David Hume: Of the Balance of Trade (1752) 274 36 Joseph Harris: An Essay upon Money and Coins (1757–58) 283 37 A.R.J. Turgot: Reflections on the Formation and Distribution of Wealth (1766) 289 38 Étienne Bonnot de Condillac: Commerce and Government Considered in Their Mutual Relationship (1776) 296 Index 310 Foreword Money is the quintessential social institution. Society is nothing but a complex network of exchange relationships. The emergence of money exponentially increases exchange relation- ships, both quantitatively and qualitatively. In this way, money fosters society. Further, it is in the framework of exchange relationships that other vital human institutions are formed and refined. Institutions like language, morality, law, and accounting emerge spontaneously in the context of the exchange relationships that are only possible because of money. Money is the fundamental societal institution on which all others ultimately depend. Given the overwhelming significance of money to society, monetary theory is the most important area of study in all of the social sciences. As economists of all schools have recog- nized, economic ideas ultimately determine the course of humankind. And ideas about money are the most momentous of all economic ideas. For better or worse, the future course of human civilization hangs on whether good or bad ideas on money triumph. Just as monetary theory holds a cardinal place in the social sciences, the history of monetary thought holds a special place in the general history of thought. Indeed, it is impossible to truly understand the history of thought or the history of human institutions without some under- standing of the history of monetary thought. For historians of economic thought in particular, there is no more important space than the history of monetary thought. Therein lies the importance of the current book. This volume is an anthology of key con- tributions to monetary thought in the 20 centuries before Adam Smith. Such a collection has been sorely needed. Here, for the first time, we have a single volume that provides an extensive overview of the history of monetary thought. The future of Western civilization depends on the institution of money. If the institution of money regresses, other vital human institutions are sure to follow. Sound money is essential to the continuing progress of humankind. But sound money starts with sound ideas—specifically, sound monetary theory. The history of indispensable ideas on money can be found within this volume. Jesús Huerta de Soto Madrid, Spain February 2020 vii Foreword Prior to the marginalist revolution of the 1870s, during which the Austrian school of economics was born, the crowning achievement of economics was classical monetary theory. This theory originated over the course of two nineteenth-century monetary controversies involving mainly British economists. The so-called “bullionist controversy” took place during the first decade of the nineteenth century. It concerned the question of whether or not the legal suspension of convertibility of bank notes into gold was the cause of the domestic price inflation, the rise in the price of gold bullion above its par value with the British pound, and the depreciation of the pound on the foreign exchanges. The “bullionists,” led by David Ricardo and his lesser known predecessor Lord King, were hardcore anti-inflationists who argued that the expansion of the supply of inconvertible bank notes mainly by the Bank of England caused these events and that the remedy was to end the suspension of specie payments by the Bank and return to the gold standard. Their opponents, the “anti-bullionists,” were pro-inflationists and comprised largely bankers and merchants. They argued that the increased supply of inconvertible bank notes had nothing to do with rising commodity prices, the high price of gold bullion, and depreciated exchange rates. The anti-bullionists instead blamed these things on the scarcity of commodi- ties and the unfavorable balance of payments caused by bad harvests and the war with France. The bullionists triumphed in the debate and their views were reflected in the famous Bullion Report issued by Parliament in 1811 that initiated the legislative movement to return to full convertibility of all bank notes in 1821. Most important for our purposes is that the bullionists, in defending their position in the controversy, developed a systematic way of thinking about money and banking that formed the core of classical monetary theory. Despite the bullionists’ triumph and the subsequent restoration of the gold standard, however, Great Britain experienced financial panics and recessions in 1825–26 and then again in 1837 and 1839. These episodes set the stage for a debate between the British Currency School and the British Banking School. The controversy actually began in the mid-1830s, heated up in the 1840s, and lingered on through the 1850s. The central point at issue was whether the convertibility of bank notes into gold was in and of itself sufficient to prevent the recurrence of financial crises and economic downturns. The Banking School argued that it was, while the Currency School countered with the “currency principle.” According to this principle, under a “mixed currency” composed of both gold and bank notes convertible into gold, financial crises and contractions of real output and employment could only be avoided if the money supply expanded and contracted exactly as a “purely metallic currency” would. In practice this meant that banks could only issue additional notes in exchange for a deposit of gold of equal denomination. For Great Britain, which lacked gold mines, the currency principle implied that the money supply would decrease and increase pound for pound with the ebb and flow of gold through the balance of payments. In this way an increase in real output in Great Britain, for example, would increase the demand for money viii Foreword ix and cheapen domestic prices, thereby encouraging exports and creating a surplus in the balance of payments. This would draw in additional gold and expand the money supply to satisfy the increased monetary demand. If the growth rate of real output in Great Britain lagged behind that of other nations, the reverse would occur and the decline in the demand for money would increase spending and domestic prices and cause a balance-of-payments deficit, an outflow of gold, and the contraction of the supply of gold and bank notes in domestic circulation. Thus the domestic money supply would only expand and contract in response to genuine changes in the demand for money by the public. With the Bank of England and the private banks com- pletely deprived of the power to increase the money supply by arbitrarily creating and lending out unbacked bank notes or “fiduciary media,” there would be no more inflationary booms culminating in banking panics and the onset of business bankruptcies, declining production, and sharp spikes in unemployment. This was the vision and hope of the Currency School, which marked its members as the true heirs of the bullionists. Unfortunately, while further developing bullionist monetary theory, leading proponents of the currency principle—namely, Robert Torrens, Lord Overstone (S. J. Loyd), and George W. Norman—made a critical error. They failed to recognize that bank deposits were—no less than bank notes—money substitutes and, therefore, a part of the overall money supply. By ignoring this fact, the Currency School failed to apply the currency principle to bank deposits, leaving banks free to arbitrarily increase the money supply by expanding credit via the creation of unbacked deposits. Consequently, the triumph of the Currency School in the policy arena with the enactment of the currency principle into law in Peel’s Act (also known as the Bank Charter Act of 1844) was a victory in name only. Financial crises and the boom-bust cycle continued to disrupt the British economy during the next several decades, and in each instance Peel’s Act was suspended and the Bank of England was permitted to issue additional notes without 100 percent gold backing. The repeated cyclical fluctuations and suspensions discredited the Currency School and classical monetary theory in general and, by the last quarter of the nineteenth century, Banking School doctrines came to dominate the literature on money and banking and the currency principle sank into oblivion. It was not until 1912, in his treatise Theorie des Geldes und der Umlaufsmittel—translated into English in 1934 as The Theory of Money and Credit—that Ludwig von Mises revived and reconstructed classical monetary theory by jettisoning the cost-of-production theory of value and integrating money with the subjective theory of value and prices. Mises also elaborated the Currency School’s explanation of financial crises and recessions into a full-blown theory of the business cycle valid for closed as well as open economies. In so doing Mises also breathed new life into the currency principle while perfecting it by including bank deposits along with bank notes and gold in the money supply. Mises upheld the revised currency principle as the only means for preventing the recurrence of business cycles. What were the main propositions of classical monetary theory? First, and most important, the classical economists conceived money as a commodity subject to the same laws of value as any other commodity. They thus applied supply and demand analysis to explain the purchasing power or “price” of money in the short run while tracing out the long-run forces that caused its purchasing power to tend to equal the costs of production of the money commodity in the long run. Classical monetary theorists therefore did not characterize money as a mere token which was arbitrarily selected and assigned value by the political authorities or by social convention to function as a claim to goods. Rather, they maintained that money was a useful commodity
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