Classical Monetary Theory and the Quantity Theory

Some years ago, I proposed (Glasner 1985) what then seemed to be a novel interpretation of classical monetary theory. Relying on work by Laidler ([1972] 1975), Thompson (1974), Frenkel and Johnson (1976), Girton and Roper (1978), and McCloskey and Zecher (1976), I suggested that notwithstanding the conventional identification of classical monetary theory with the quantity theory of money--and a rather crude version of the quantity theory, at that--many leading classical theorists espoused a monetary theory very different from the quantity theory. The difference between the two theories, I argued, is that the quantity theory treats the stock of money as an exogenous variable to which prices adjust, whereas the other (antiquantity-theoretic) theory treats the absolute level of prices, fixed by the convertibility of money into a real commodity, as an exogenous variable to which the stock of money adjusts. I further argued that much of the history of classical monetary theory could be understood as a dialectic between these two clashing theories.

Until the early 1970s the notion that the quantity theory was the dominant, if not the only, monetary paradigm in classical economics was not even up for debate. The works cited above laid the foundation for my own challenge to the consensus. What role my 1985 article and a subsequent one (Glasner 1989b) had in upsetting the consensus about the quantity theory in classical economics is better left to others to sort out (see Skaggs 1999). But whatever its significance, my contribution to this reassessment of classical monetary theory elicited critical responses from two distinguished historians of economic thought, Mark Blaug (1995) and D. P. O'Brien (1995).

Blaug (1995, 32-33) charges that I misrepresented my antiquantity-theoretic version of classical monetary theory as the exclusive classical monetary theory when, in fact, the quantity theory was integral to classical monetary theory, and that I mistakenly included David Ricardo, Henry Thornton, and J. S. Mill in the antiquantity-theory camp. O'Brien (1995, 54) contends that the theory I ascribed to classical monetary theorists bears no likeness to classical monetary theory. Moreover, the theoretical model underlying my version of classical monetary theory, O'Brien argues, is based on a series of untenable theoretical assumptions that the classical economists would never have entertained.

In responding to these issues, I shall first address the less fundamental, though hardly trivial, criticism of Blaug. Blaug actually acknowledges the antiquantity-theoretic content of much of classical monetary theory, and in doing so he undercuts, at least in part, some of O'Brien's criticisms. In section 2, I summarize the model that I used to explain the classical antiquantity theory. O'Brien charges that that model, focused exclusively on long-run equilibrium conditions, not only ignores the short-run adjustment problems that chiefly concerned the classical monetary theorists but also improperly assumes that purchasing power parity always obtains. I demonstrate that my model does not exclude the possibility of short-run disequilibria and that the only assumption of the model related to purchasing power parity is a routine one--that the law of one price obtains. I consider in section 3 a model that explicitly allows for short-run variations in local price levels, in this case. It is only within such a model, according to O'Brien, that the issues that occupied the classical economists can be understood. In section 4, I discuss the nature of monetary adjustment when the money stock consists of the liabilities (convertible on demand into gold) of a competitive banking system. In section 5, I comment on the role of monetary policy in a model with an endogenous real business cycle, a circumstance that, in O'Brien's view, provides the rationale for the proposed monetary regime of the Currency School. Section 6 contains a few concluding thoughts.

1. Blaug on Classical Monetary Theory

Blaug discusses classical monetary theory in the context of the question (which also provided the title of...