A feature of Classical economics was the widespread acceptance of what has become known as Says Law.

(OBrien 2004: 191)

* ADAM SMITH - Smiths quantity theory: The most abundant mines, either of the precious metals, or of the precious stones, could add little to the wealth of the world. A produce, of which the value is principally derived from its scarcity (Smith 1776, p.148). - Mints (1945, ) - Smith recognized, as did most of the writers who preceded him, that bank notes serve the purposes of money, that they are issued in the process of making loans, that bankers operate on the basis of fractional reserves, and that these reserves are necessary for the purpose of maintaining convertibility. / Like Stueart but unlike most of the earlier writers, Smith held that the total of convertible bank notes plus specie in circulation cannot exceed the amount of specie alone that would have circulated had there been no bank notes. (Mints 1945, 26) => This idea of the law of monetary circulation in case of mixture of paper money and specie seems to have influenced Marx. - Smith is not a quantity theorist. In Ricardo (1809, p.29) it is noted that for Smith the only possible reason for the rise of market price of gold over its mint price would be the debasement of coins. On the other hand, Ricardo lists over-issue of paper notes and suspension of specie payment as additional reasons for the gold premium. Mr. Thornton should
have reflected that

at the time he wrote, specie could not be demanded at the Bank in exchange

for notes ; that this was a cause for the depreciation of the currency which Dr. Smith could never have anticipated (Ricardo 1809, p.30).

* BANKS - Mints (1945) points out that theory of banking is pervaded with a confusion between individual banks and the banking system as a whole almost since its birth. (39) - Individual banks vs. banking system as a whole: See Mints (1945, 39) Mints points out that this distinction was one of the most baffling for writers on banking theory. - Individual banks vs. banking system as a whole: - the accepted statements of banking theory, with scarcely an exception, have made no such distinction, [i.e. between the power of issue of a single bank and of a banking system

acting in harmony], with the result that confusion, obscurity, and error prevail with reference to the most fundamental principles of the subject. (Philips quoted in Viner 1937, 239)

* BANK ACT of 1844 - Arnon 2011, 218-19; - The banking school objected to the Bank Act of 1844, both that it was no remedy against overexpansion of bank credit and that overexpansion of convertible bank notes was impossible. But they never supported any proposal for legislative control of the volume of bank credit, partly because they thought it impracticable, partly because, like the currency school, they objected to such control on general laissez-faire grounds. (Viner 233) - The Bank abused the freedom for regulation given by the Act to its banking department and reduced the discount rate immediately after the onset of the Act; consequently, it frequently faced gold drain. (Viner 229-30) The Act clearly failed to guarantee adequately good management of its credit operations on the part of the Bank of England. (Viner 230) Peel thought that regulation of the operations of the issue department would suffice .. to assure sound management of the currency. (231) Torrens and Overstone had never committed themselves to the doctrine that regulation of the note issues was a remedy for all banking ills. (231) So basically, Viner is describing the Act as a measure to regulate note issue only rather than credit operation as a whole. Three reasons pointed out by Viner on why the currency school was satisfied with such a limited measure of the Act: i) The primary aim of the currency school in regard the Act was to guarantee the convertibility of the note issue, and as Overstone remarked, it did preserved it; ii) They focused on notes as the only form of bank credit ignoring the importance of deposits. It was perceived that the deposits were governed by the note issue; iii) From the laissez-faire idea, they opposed extending regulation. (232-33) - According to the banking school, the failure of the Act lies in - The suspension of the 1844 Bank Act enables the Bank to issue an unlimited sum of banknotes, irrespective of the extent to which these are covered by its gold reserves; i.e. to create an unlimited amount of fictitious, paper money capital and use this to make advances to the banks and billbrokers [i.e. primary banks], and through them to the world of commerce (CIII 605)

* BANK DEPOSITS - Viner has an interesting account of bank deposits as having been recognized by the writers already in around 1800 as having the same status with the bank notes. (244) - the book credit of London banker, and the notes of a country banker, are but two different forms of the same species of credit. This statement by Pennington is often credited with being the first statement of the identity between the economic functions of notes and deposits. (Viner 243)

* BANKING SCHOOL VS. CURRENCY SCHOOL (AND CONVERTIBILITY) - Viner; Skaggs 1991, 459-462; References in Arnon (2011, 209, fn.1) - Both rejected the anti-bullionist doctrine that an inconvertible paper money could not be issued to excess. The currency school went further; they claimed that even a convertible paper currency could be issued to excess, not permanently, but for sufficiently long periods to endanger the maintenance of convertibility and to generate financial crises. (223) - The discussion between the two schools turned wholly, however, on short-run issues. On the question of what determined the quantity and the value of a metallic currency in the long run, both schools followed the classical or Ricardian doctrines. (Viner 221) Critique of the law of reflux and the Banking School: See Viner, p.237-38 It lay in its assumption that the needs of business for currency were a definite quantity independent of the state of business psychology and the activities of the banks. (238) - For bullionists, convertibility was a substitute for the control of note issue to be corresponded to metallic circulation. Anti-bullionists insisted that if based on good securities, overissues are impossible regardless of convertibility. - To understand the position of the Currency School, it is to be remembered that, for this school, a gold drain reveals that too much paper had been issued in relation to the gold reserve. The only reason why a country may be faced with a gold drain and a deficit in the balance of payments is domestic inflation. The only way to stem the loss of gold is to restore the equality between exports and imports, and the only way to do this is to let prices fall at

home. Inflation by an excessive supply of money is the explanation not only of gold drains and balance of payments deficits, but more in general of crises. (Ormazabal 2009, 8) - Both the currency school and banking school recognized that the long-run equilibrium price level was determined by the relative costs of production of gold and other commodities. (Skaggs 1991, 460) - The banking school system is less familiar to modern economists than the currency school system because it is based on the theory of competitively supplied convertible currency and the monetary approach to the balance of payments, rather than on the quantity theory and the price specie-flow mechanism. (Skaggs 1991, 462) - During the post-Resumption period, That the currency was operating badly no one disputed, although there were not a few who would have agreed with Cobden that managing the currency [was] . just as possible as the management of the tides, or the regulation of stars, or the winds, and that all that government could do, therefore, would be to place it on a wholly metallic basis, and then let automatic processes run their course. (Viner 1937, 219) - The currency school: - Viner (1937, 224); - The object: The real question to be solved is how to regulate the quantity of the paper circulation, so as to keep its value identical with what the value of the metallic currency would be. It is not necessary, perhaps, that a paper circulation should be of precisely the same quantity as the metallic currency~~~~~ (Viner 1937, 222) - The currency school, i.e., the doctrine that a mixed currency should be made to operate as would a purely metallic currency, did resemble, however, the bullionist doctrine that an inconvertible paper currency should be made to operate as would a convertible currency, and was obviously derived from it. (223) - They didnt count deposits as currency. - What they mean by excess of issue: Viner (1937, 236) - Although the members of the currency school all supported a system of currency regulation which would place the issue of bank notes rigorous control but would leave deposits wholly free from interference, they did not agree on the grounds which justified this discriminatory treatment of deposits and notes. (Viner 249-50) - The banking school: - They pointed out that under a purely metallic currency there existed in addition to specie, and under a mixed currency there existed in addition to specie and paper notes, a large

quantity of bank deposits and bills of exchange which, the claimed, were also currency and in any case operated on pries in the same manner as did bank notes and specie. Under a purely metallic currency, moreover, some of the gold was not in circulation, but was in hoards Changes in the amounts of these hoards could not possibly have any effect on prices. (Viner 222) [The currency school] never even allude to the existence of such a thing as a great hoard of the metals, though upon the action of the hoards depends the whole economy of international payments between specie-circulating communities, while any operation of the money collected in hoards upon prices must, even according to the currency hypothesis, be wholly impossible. (Fullarton, recited from Viner 222) => How does this relate to MCAs ignorance of money stock? - The amount of paper notes in circulation was adequately controlled by the ordinary processes of competitive banking, and if the requirement of convertibility was maintained, could not exceed the needs of business for any appreciable length of time. (Viner 223) - The banking school objected to the Bank Act of 1844, both that it was no remedy against overexpansion of bank credit and that overexpansion of convertible bank notes was impossible. But they never supported any proposal for legislative control of the volume of bank credit, partly because they thought it impracticable, partly because, like the currency school, they objected to such control on general laissez-faire grounds. (Viner 233) See passages from Fullarton cited in Viner (1937, 234) - The essential fallacy of the banking school doctrine had already been exposed during the bullionist controversy by Ricardo and others. It lay in its assumption that the needs of business for currency were a definite quantity independent of the state of business psychology and the activities of the banks. (Viner 238) - Given their commitment to laissez-faire in banking, the original banking school was reluctant to accept the need for active control of credit as a logical implication of their views on the impossibility of controlling the quantity of currency. (Merhling 1996: 336. See this more on the debate banking school vs. currency school) -From a banking school view, sophisticated forms of asset and liability management have replaced the relatively narrow classic channel of reflux with a number of wider channels more suited to meet the fluctuations of modern trade. (Merhling 1996: 337) - ..just as the Real Bills Doctrine proved incomplete as a policy for regulating the system as a whole, so too these modern doctrines fail to address the question of regulating credit. The classic banking school view teaches that money takes care of itself provided credit is

maintained on a sound basis. (Merhling 1996: 339) - Rather than focus on controlling the quantity of money, the banking school tradition focuses on controlling the quality of money by making sure that the credit-backed currency is backed by credits of the highest possible quality. (Mehrling 1996: 332) - The final outcome of the discussion was that the currency school agreed with the banking school that deposits and other forms of "auxiliary currency" or "economizing expedients," as well as bank notes, could be a source of difficulty, but that the two groups appraised differently the relative importance of variations in the two types of means of payment as causes of currency and credit disturbances. The currency school were not prepared to support government regulation of the credit operations of the banking system, but believed that statutory limitation of the note issues would bring a substantial measure of improvement. The banking school .refused to support statutory restrictions on either bank deposits or bank notes, and maintained that the strict limitation of the amount of uncovered note issue would either have no effect or would operate to accentuate rather than to moderate the fluctuations. in business conditions. (Viner 1937, 252) - Ricardos currency principle: Overissuance of redeemable notes by BoE would make the public continuously melting coins and sell them to BoE at a premium while BoE continuously minting coins for redemption (Ricardo 1809, p.8-9) - After explaining classical theory of the cycle according to which crisis is mainly due to financial system, i.e. banks undue expansion of note issuance, Laidler writes that the controversy was basically about the cause of such credit, financial cycle (1991, p.21). - Mill (1871, p.552) and Jevons (1862, 7) criticized the currency school view that only notes and coins affect price. - In Laidler (1991, p.14-15), the banking school is understood as differing to the currency school only in maintaining that not only notes but also other credit instruments also affect prices, i.e. not in rejecting the QTM itself but only in limiting its validity in case of sophisticated financial system. Yet he also approvingly quotes Mill saying When credit comes into play as a means of purchasing, distinct from money in hand, we shall hereafter find that the connection between prices and the amount of the circulating medium is much less direct and intimate, and that such connection as does exist no longer admits of so simple a mode of expression (Mill 1871, p.513-14). This passage seems anti-QTM.

* BILLS OF EXCHANGE - The question of whether bills of exchange and similar assets constitute circulating medium was as infrequently discussed as that of the monetary significance of deposits, but with much greater understanding. Thortons analysis was excellent, and, indeed, has hardly been surpassed to the present day. (Mints 1945, 43) - Ricardo and the Gold Standard, 25 - It was widely used as means of payment. 25

* BULLIONIST CONTROVERSY - Bullionists: accepted the appearance of a premium on bullion as a demonstration of depreciation of bank notes and mismanagement of the currency. (Viner 1937, 119, fn.1) - The contemporary literature of the bullionist controversy is of great importance for the history of the theory of international trade in its monetary aspects. The germs at least of most of the current monetary theories are to be found in it. (Viner 1937, 120) - It was largely through Ricardos writings . that the bullionist doctrines exercised their influence on the subsequent century of monetary controversy. (122) - Central issue: whether the paper money depreciated or not during the Restriction period. - Central issue during inflation phase: the proper method of determining the existence of excess of issue. The chief test by bullionists was whether a premium on bullion exists. (125) The excess was tested not in comparison to the quantity of currency of 1797 but to that of the year when the test is made. The exemplary bullionist position by Boyd: The premium on bullion, the low rate of exchange, and the high prices of commodities in general, [are] symptoms and effects of the superabundance of paper. (from Viner 125) - Ricardos main bullionist argument: not that the currency increased during the Restriciton, but that it increased only relatively compared to the amount that would have circulated if conversion was in place at that time. (136-137) + Bullionist arguments: - Ricardo (1809, p.27~), - Mr. Thornton should have reflected that at the time he wrote, specie could not be demanded at the Bank in exchange for notes ; that this was a cause for the depreciation of the

currency which Dr. Smith could never have anticipated. . But as all checks against the over-issues of the Bank are now removed by the act of parliament, which restricts them from paying their notes in specie, they are no longer bound by fears for the safely of their establishment," to limit the quantity of their notes to that sum which shall keep them of the same value as the coin which they represent. Accordingly we find that gold bullion has risen from Si. 17s. lid. the average price previously to 1797, to 4/. lO.s. and has been lately as high as 4/. 13s. per oz. (Ricardo 1809, p.30~~~~~!!!!). - Clipping, debasement of coins and over-issue of paper all result in the same thing, depreciation of currency (Ricardo 1809, p.32). - The bullionists had insisted that under an inconvertible paper money currency the issues should be so regulated as to conform to the aggregate circulation of specie and paper which could be maintained under a convertible currency, but usually maintained or took it for granted, without argument that if the requirement of convertibility were enforced there was no need of further regulation to insure against excess or deficient issue of paper money. The anti-bullionists on the other hand ~~~~ (223) - Henry Thorton blamed usury laws and called for using the rate of interest as a regulator of the volume of note issue. (Viner 149) => Very similar to neoliberal policy of Volker shock. However, differently from other bullionists, Ricardo denied any relation between the rate of interest and the quantity of money or the demand for loans. (Viner 150) In relation to the real bills doctrine, anti-bullionists argued that the interest itself regardless of the rate would prevent an overissue while bullionists suggested that the rate should be compared with the profit rate (or the market rate of interest); i.e. if the latter is higher than the bank rate, the interest itself would not act as a check on the overissue. - As against the usury law of 5 % Bank rate, which was stipulated by the anti-bullionist Bank of England officials, who conceive it, in relation to real bills doctrine, as enough to check the volume of bank credit extended to commercial borrowers, bullionists claimed that it is not effective to check the volume. (Viner 153) - Ricardo agreed with the other bullionists that the needs of commerce for currency could not be quantitatively defined, and that through a resultant change in prices commerce could absorb whatever amount was issued. (Viner 15) => How is the needs of commerce criteria for the optimal quantity of money different from the metallic standard criteria? - Factors ignored by bullionists (Viner 130-31):

i) bank deposits as currency, ii) velocity of circulation: the problem was the assumption not that velocity is constant even at that time it was well known that the velocity is subject to fluctuation with various conditions but that the suspension of conversion would not alter the velocity. iii) the fact that under inconvertibility speculative anticipations of depreciation or appreciation of the currency would affect the willingness of individuals to hold the currency and would thus influence its velocity of circulation and its value in relation to gold, to foreign currencies, and to commodities, independently of the effects of variations in its quantity. In modern times, as we now know only too well, such speculative factors can dominate for an appreciable length of time the metallic or exchange value of an inconvertible paper currency. There is every reason to believe that such speculative factors were also operative in some degree during the period of the bullionist controversy. (132) => Here the depreciation of paper currency is against gold and thus gold still operates as the measure of value. Then what is the depreciation of paper currency against in the current economy where gold is not measure of value any more? This factor speculation is related to the confidence in the future of paper currency. (135) iv) p.135-36 - Anti-bullionist positions: - The anti-bullionists . Had ordinarily maintained that a paper currency could not be issued to excess whether convertible or not, if issued only by banks as loans on the security of good short-term commercial paper. (223) - Anti-bullionists critique of bullionist criteria of the proper quantity of circulation was more evident in deflation phase than in the inflation phase. (136) - The anti-bullionists often attempted to show from statistics as to Bank of England notes issues either that the issues had not increased or that there was no relation in time or degree between the fluctuations in issue and the fluctuations in the premium on bullion or the exchanges. (136) - Some argued that the premium on gold should be referred to gold coins and not to bullion as in bullionists case. (137) - The premium on bullion over paper notes is not a proof of excess currency but of the imbalance of international payment. (138-) - They were in agreement with bullionists in recognizing there were limits for a desirable quantity of money; i.e. needs of business. The disagreement was on whether there was an

excess of circulation during the Restriction period and whether the premium on bullion over paper notes was a proof for the excess. - Under inconvertibility, the excess notes would return to banks as repayments or, under convertibility, as for redemption in specie. (148) - Between BOEs notes and country banks notes, bullionists blamed BOE for the excess of notes from the ground that BOEs notes acted as reserve for the country banks and thus regulated the latters issue. Anti-bullionists on the other hand denied the excess itself from the first place, and denied BOEs regulation of country banks notes. (Viner 156) - The Restriction Act was repealed completely in 1821 immediately after which the price of gold fell to the mint price. (Viner 173)

* CENTRAL BANK - The Bank of England leaned heavily on the Real Bills Doctrine. More than half the members of the Committee of Treasury were proponents of it. (Mints 1945, 51) - Ways to issue note, getting its notes into circulation: commercial discount activities, advances to the government, purchases of exchequer bills and public stocks in the open market, advances to investors in new issues of government stocks, (Viner 1937, 153)

* CONVERTIBILITY - Both Fetter and Mints recognize Fullartons commitment to the convertibility of Bank of England notes into gold. However, Fetter insists that Fullarton treated convertibility as a matter of secondary importance, whereas Mints argues that Fullarton included it in his system without good reasons. (Skaggs 1991, 458) - Banks issue IOUs (bank notes) that are convertible on demand into an asset whose value cannot be controlled by the banks (gold). Convertibility serves three purposes. First, it makes bank notes more readily acceptable than other credit instruments. Second, convertibility ensures holders of a banks notes that the bank will not drive the value of its notes to zero by issuing them without limit. Third, if gold were to appreciate over time relative to other goods, the holders of bank notes would earn a real interest return by holding

bank notes. (Skaggs 1991, 464) - Michael Godfrey claimed that it was only the fact of convertibility that made bank bills circulate as money ~~~ A second anonymous writer of 1705 thought that, if the notes were well secured, convertibility was not necessary. (Mints 1945, 18) The main important is the - See Mints (1945, 30) - As a matter of long-run policy, it was probably the majority opinion not only that convertibility into specie was desirable but that it was a sufficient means of statutory regulation of the currency; although there were many who would have demurred to the notion that convertibility of the obligations of the Bank of England was desirable under the exigencies of the then current situation; and there were also other, more numerous during the later years of the Restriction, who preferred some form of inconvertible currency as a matter of permanent policyMoreover, Ricardo .. and Thornton .. held that some degree of management of the currency by means of open-market operations was desirable, in addition to the requirement of convertibility into specie. (Mints 1945, 45) - Some anti-bullionists agreed that convertibility of country bank notes into Bank of England notes was as effective a restriction on country bank note issue as convertibility on gold. (Viner 1937, 156) - The bullionists had denied the possibility of a relative overissue of country bank notes if they were convertible upon demand into BOE notes or specie. => Isnt this banking schools opinion? - .. the boom of 1824-25 and the resultant crisis of 1826 opened the eyes of many to the expansion possibility even under convertibility, and the currency school on this point did not adhere to the bullionist doctrine.. [They] held that the Bank of England and the country banks, acting together, could issue to excess even under convertibility. - The banking schools rationale for the impossibility of overissue under convertibility was a competitive check among individual banks against adverse balance. The currency school rejected this logic arguing that if all individual banks increase the issue in unison the adverse balance would occur. (Viner 240)

* COST OF PRODUCTION THEORY

- I think LTV can be conceived as a subcategory of cost of production theory. For example, we find the following sentence in Marx (1859): In both cases it is assumed that the production cost of gold, or its value, remains unchanged.

* FOREIGN EXCHANGE - In Ricardo, indirect quote is used for exchange rate. So fall in foreign exchange means depreciation. And the latter is conceived as related to unfavorable trade balance. Im not sure but it seems that this is due to the following reasoning: It is assumed that competing countries have similar productivity and hence commodity values are similar to each other (????). Consequently, difference in commodity prices depends on difference in the denominator of price, i.e. value of money. In this context, fall in the value of money implies increase of commodity prices, which is an unfavorable terms of trade. (Check if this reasoning is correct.)

* GOLD STANDARD - Quadrio-Curzio 1982, The Gold Problem; Cooper 1982, The Gold Standard, Brookings Papers on Economic Activity. - specie GS: one where there is only gold in circulation in the form of coins. Bullion GS: in which paper money is convertible into gold in the form of ingots. - Ricardo (1809, p.19-20) explains very well on how exact mint pricing of gold and silver reflects their true value determines either gold or silver to become the standard measure of value. - But although the debasement of the silver coin had continued for many years, it had neither, previously to 1798, raised the price of gold or silver, nor had it produced any effect on the exchanges. This is a convincing proof, that gold coin was, during that period, considered as the standard measure of value (Ricardo 1809, p.23). - Exchanged rate fixed on gold (Ricardo 1809, p.23-24).

* HUME - Monetary setting: metallic and convertible currency regime - Hegelands point is that Humes QT is all about the money neutrality not about causal relation between money and price. However, starting from exogenous money supply there is

no way to reach the money neutrality other than to say that money supply leads to inflation. I think Hegelands case for the proportionality, not causation, between money and price as an essence of QT is just too sensational without any substance. Moreover, the proportionality thesis has no place for a SR non-neutrality of money; the former assumes a simultaneous movement of money and price while the latter there is a lag. Here is textual evidence that undermines Hegelands point. we must consider, that though the high price of commodities be a necessary consequence of the encrease of gold and silver, yet it follows not immediately upon that encrease; but some time is required before the money circulates through the whole state, and makes its effect be felt on all ranks of people. Furthermore, an exclusive emphasis on the money neutrality as the only essence of Humes QT is not justified. Even if Hume repeatedly emphasizes that the greater or less plenty of money is of no consequence, he suggest a constantly expansionary monetary policy: The good policy of the magistrate consists only in keeping it, if possible, still encreasing; because, by that means, he keeps alive a spirit of industry in the nation, and encreases the stock of labour, in which consists all real power and riches. It is indeed evident, that money is nothing but the representation of labour and commodities, and serves only as a method of rating or estimating them. (Hume 1752, p.) This statement questions the usual comments made on Hume that for him money is merely a means of exchange. Here he seems to recognize moneys function as measure of value. If then, Humes definition of money is not much different from Marxs at least in its face value; notice that both entails money neutrality. Where coin is in greater plenty; as a greater quantity of it is required to represent the same quantity of goods; it can have no effect, either good or bad, taking a nation within itself ( - Humes point is this: With development of the economy, with increase of production, barter economy moves to monetary economy. However, if the quantity of money does not increase in line with it, prices will get decrease according to Hume's quantitative theory of price. It does not follow from this that the economy will have more money circulating in the system. Rather, what will happen is just a decrease of prices. For this reason, in Hume's system, there cannot be something like 'increase of demand for money' endogenously emerging. This is why the only money supply in Hume is of exogenous kind. An abundance, or large circulation, of money is not the cause of the development of the economy, which has its own logic. (Hume II. III. 15-16).

- Here, Hume points out two factors explaining why the simple barter economy is poor: i) Scarce money in the system so that the government gains little tax revenue, ii) as it is not a market economy, commodities in the market are much less, hence they are expensive, according to Hume's quantitative theory of price. Main point: The scarcity of money is not the cause but the effect of the poverty. Its cause is the scarcity of commodities due to underdevelopment of the production and market more so than the scarcity of money; the result is high price, according to Hume's quantitative price theory. (Hume II. III. 19). - It is interesting to see in Hume, the systemizer of the QT, all the major elements that constitute monetarism; i) LR money neutrality & SR non-neutrality, ii) nominal vs. real quantity of money, iii) classical dichotomy (what determines the prosperity and poverty of the society is the manner and customs of the people not more of less of money, iv) a policy suggestion for monetary authority exactly the same as Friedmans k% rule, v) hatred for high price level and preferences for low one, - Humes suggestion for monetary policy (II. III. 21): i) gradual increase of money (meaning constant rate of increase of money), ii) thorough concoction and circulation [of money] through the state (why it matters is explained in the last part of II. III. 20). Hume does not discuss how the monetary authority can control the money supply. Mostly, in Humes model money is entirely exogenous. But he does mention issue of banknote (Somewhere he objects to it since it would raise prices). - Humes notion of the value of money: Money having chiefly a fictitious value, the greater or less plenty of it is of no consequence - ON MONEY: Two observations on money are made: i) the greater or less plenty of money is of no consequence (money neutrality), ii) the price level is determined by a relative ratio between quantity of commodities and quantity of money. Hume's QT does not determine the value of money from the price level as an inverse of the latter as later quantity theorists do. Rather, the logic is 'change in relative ratio of commodities and money -> simultaneous change in value of money and value of commodities, which leads to change in price.' - ON INTEREST: First, Money does not affect interest rate. Second, it has three determinants; i) demand for it, ii) supply of it, iii) profit rate. These three all depend on the state of industry and commerce, the manners and customs of people, not on money. The third has a direct relation to the second, i.e. the developed status of the economy increases lenders who want secure dividends rather than risk profits. In the developed economy these money

will be concentrated and systematically lent to borrowers while this is not the case with underdeveloped society even though it has the same amount of money. So by the demand and supply principle, the increase of supply of funds decreases interest. Profit rate should be correlated with interest rate in a competitive environment. This is the third element for the interest rate determination. Now, it is a bit ambiguous whether there will be more money circulating in the developed economy. Logically, it should be not; the difference between the developed economy and not developed one is that the same amount of money is concentrated in some place and lent out systematically while in the other it is not. However, Hume writing seems to allude a causal relation from development to more money circulation, which is nothing but an endogenous theory of money. Cannot we understand Hume explanation how lenders increase when industry and commerce develop as some kind of an endogenous creation of money??? Actually, criticizing the mercantilist idea that money is a source of wealth and that more money leads the economy to developed industry and commerce, Hume repeatedly emphasizes that it is confusing between the cause and effect. (example: II. IV. 15, etc.) In this argument Hume is saying that the more money is an effect of growth of industry not a cause. Humes idea is that a variety of fine manufactures, with vigilant enterprising merchants, will soon draw money to a state, if it be any where to be found in the world. Right below, Hume also gives an example of development without an increase of money and the result will be deflation. Humes idea on the non-relation between money and interest rate is this: As nominal increase of money will not change its real quantity, the borrowing amount has the same proportion to the aggregate money. That is, even though money supply increases, since price increase will be increasing as a consequence, demand for borrowed money will increases as well; demand and supply both increase; no change in the loanable funds price, i.e. interest rate. Rather, since what is bought with the borrowed money is commodities and labours, the latters quantity matters for the interest rate. - See a beautiful prose about a rising of modern society in II. IV. 10. After all, Hume's economic theory of monetary theory has an emphasis, as a source of wealth and richness (which is identified with happiness), on human, on his/her diligency and labour, etc. as opposed to God of feudalism and to money and gold of Mercantilism. - Arnon (2010, especially in p.22-23) on Hume as a moderate metallist is very good. While admitting the advantages of paper money, Hume suggests that good money is made of metal. And the reason is because it is world money acceptable internationally and doesnt have its value depended on the stability of the state. Hume writes It is true, money must always be

made of some materials, which have intrinsic value, otherwise it would be multiplied without end, and would sink to nothing (Arnon in p.23 quotes Humes letter to Morellet, July 10, 1769). Then how should we understand Hume basic position that the value of money is fictitious? If money should be made of material with intrinsic value why is it that its value is determined by its relative quantity to commodities?

* LAW OF REFLUX - Ormazabal 2009, 12; Glasner 1992, 869; - For Fullarton, as for Tooke, the law was not a variant of the Real Bills Doctrine but an essential part of a genuine theory of competitive banking. (Skaggs 1991, 459) - As Laidler (1972, 172-73) has shown, in Tookes hands the Law of Reflux becomes part of a theory of portfolio choice, rather than a variation on the Real Bills Doctrine. The same evaluation applies to Fullarton. (Skaggs 1991, 462) - ~~~ Bank-notes, on the contrary, are never issued but on loan, and an equal amount of notes must be returned into the bank whenever the loan becomes due. Bank-notes never, therefore, can clog the market by their redundance, . [The] reflux and the issue will, in the long run, always balance each other. (Fullarton cited in Viner 1937, 237)

* MONEY - Important criterion for determining what money is: Money is what money does (by Francis Walker) - Discussion whether bank deposits is money and what money consisted of: Viner 244-50. Here the main difference between bank deposits and bank notes as for the question of what

money is and what money is not was the difference of velocity of each. (248) Especially, for why deposits is not included see p.251. - Keynes objection to the idea of controlling the value of bank notes: A Treatise on Money (1930: II, 264) - For currency school: coins plus bank notes (Of course varying views exist within the school. See Skaggs (1991, 460, fn.12).) For Banking School: narrowed down to gold coins and bullion. - the book credits of a London banker, and the notes of a country banker, are but two different forms of the same species of credit. This statement by Pennington is often credited with being the first statement of the identity between the economic functions of notes and deposits. (Viner 243) (Viner notes in the footnote that Torrens, under Penningtons influence, finally accepted most of the banking school doctrine with respect to the role of bank deposits. (Viner 244) - Viner (1937) notes that bank deposits and bills of exchange were recognized as currency even in the bullionist controversy. (244-52) (banknotes as active circulation; bank deposits as passive circulation) - Definition of money: Viner (1937, 246-52) points out that velocity is important category in defining money. + DEMAND FOR MONEY - Demand for money related to Cambridge k is different from hoarding.

* PALMER RULE - Implemented in 1832, following currency principle (keeping the correspondence between fluctuation of paper currency and that of bullion reserves). But the difference is that for Pennington who presented the same idea of the Rule currency includes both notes and deposits while the currency school treats only notes as currency. The reason why the inclusion of deposits matters is because it is the component of currency which is not controllable by the authority while bank notes are. - Its main technical method was to keep the securities of the BOE constant so that the fluctuation of currency corresponds to that of bullion reserves of the BOE. However, its defect is that it didnt consider the fluctuation of deposits as one element of currency. (Viner 225) - Defects and difficulties of the Rule: Viner (1937, 225-28) Currency school people blamed

the Rule for its attempt to maintain the correspondence indirectly through constancy of securities but not directly enforcing the correspondence through its discount and open market operation policy. - The security reserves, i.e. treasury bonds, of the BOE are consisted of that covering the notes and that covering the deposits. The Palmer Rule stipulated to hold constant the securities of both types. However, the fluctuation of deposits is out of control of the Bank. In the Rule this consideration was absent; as a result, its aim, i.e. correspondence of currency fluctuation to the bullion fluctuation, could not be achieved. Pointing this out, the currency school people suggested that BOE keeps only securities covering the notes constant. It is reflected in The Bank Act of 1844.

* RICARDO - Hume applied the model to a metallic or convertible currency regime. Ricardo, writing almost sixty years later, extended Humes model to an inconvertible paper currency regime with floating exchange rates and a variable price of gold (Humphrey 1990, p.5). - Did not accept Humes analysis of SR non-neutrality of money: However abundant may be the quantity of money or of banknotes; though it may increase the nominal prices of commodities,[] nothing will be added to the real revenue and wealth of the country. [] There will be a violent and an unjust transfer of property, but no benefit whatever will be gained by the community (III, 93). I see no reason why it [depreciation of currency] should diminish the idle, and add to the productive class of society. (III, 123. answer to the criticism of Malthus in the appendix to the 4th edition of High Price). (Requoted from Takenaga 2003). - Inconsistency on the value of money between QT and the cost of production theory: Wicksell (1898, p.82).
- It is on this principle that paper money circulates: the whole charge for paper money may be considered as seignorage. Thoug h it has no intrinsic value, yet, by limiting its quantity, its value in exchange is as great as an equal denomination of [gold] coin, or of bullion in that coin. It will be seen that it is not necessary that the paper money should be payable in specie to secure its value; it is only necessary that its quantity should be regulated according to the value of the metal which is declared to be the standard (Ricardo)

Happily in this case, as well as in most others in commerce, where there is free

competition, the interests of the individual and that of the community are never at variance (Ricardo 1809, p.6). - The price equation: Note price of commodities = Note price of gold * Gold price of commodities. Some textual evidence for this can be found in Ricardo (1809, p.34).

- In 1811, Parliament rejected the Bullion Committees report, which reflects Ricardos Bullionist position of High Price of Bullion (1809). A return of the monetary debate in 1819 committees after some calm years heavily relied on Ricardo, his Ingot Plan, at this time Parliament reversing its previous view. Throughout these periods, for Ricardo value means purchasing power and the value of gold was determined by its relative quantity against other commodities. Arnon (2010, p.147) notes one of Ricardos concerns in his later years was his realization that his previous treatments were incomplete [which] forced him to return to the complicated question of values. Ricardos last drafts that reflect this were The Plan for the Establishment of a National Bank and Absolute Value and Exchangeable Value. - Arnon (2010, p.148-49) mentions a very important point on Ricardos posthumus work Plan for the Establishment of a National Bank, which reflects his break from Smithian notion of free competitive banking (note issuance). In this work, Ricardo distinguishes two banking business, issuing notes (creating money or money supply) and making loans and suggests that the former should be monopolized by a trustworthy entity holding gold and the latter subject to free competition. The rejection of free trade in the business of issuing notes by competitive banks and the monopolization of the money supply process heavily influenced the Currency School and inherited by modern monetarists. Arnon emphasizes, contrary to the existing views, that Ricardos last text The Plan for a National Bank shows his break from his own earlier views and his difference from the Currency School while the latter had the central bank following the rule for its monetary policy while Ricardo assigned some discretion to it in managing the proper quantity of currency through open market operation (151). See the Summary (p.151) of Arnons section on Ricardo; very important on Ricardo, classical economy and the central bank theory.

* QUANTITY OF MONEY - Optimal quantity: i) For Smith, determined by effectual demand. The participants in the bullionist controversy were the first to seriously to tackle it; Arnon (2011, 42) ii) For bullionists, the quantity that would circulate under a metallic standard. (Viner 1937, 125) iii) For Henry Thorton (1797), it depends on the state of the public mind, that is, on the disposition of persons to detain them. He emphasized the confidence in the paper money as effective on the velocity of its circulation and on the size of the cash balances held by

individuals. Thus according to him, the suspension of specie payment itself could lead to a premium on bullion over paper even though there is not increase in note issue. (Viner 134) But Thorton did not think that such loss of confidence occurred then as did Ricardo (135) (Vine supports this confidence approach to the premium on bullion and criticizes the bullionists who deny it. 135) iv) For anti-bullionists, needs of business (148) - Debate on which ways of issuing notes are more susceptible to overissue: See Viner (1937, 153, fn.21)

* QUANTITY THEORY OF MONEY - Marcuzzo et al. (1986: 55) note that for Marx the object of monetary theory is to determine the quantity of money by values of commodities and gold money, and to analyze the mechanisms of the determination. (the use of the law of value as a basis for determining the quantity of money) - It is a theoretical base of currency principle. (Ormazabal 2009) - The earliest demonstration of the exchange equation is Lubbock (1840) presented in Viner (1937, 249)

* REAL BILLS DOCTRINE - Also known as Needs of Trade Doctrine or Commercial Loan Theory of Banking (Laidler 2000). - Supporters: - The directors of the Bank of England and prominent members of the Cabinet at the time of bullionist controversy. (Viner 1937, 149) - Anti-bullionists - Opponents: - Bullionists rejected it at least for an inconvertible case. (Viner 149) - Smiths support of real bills doctrine describes that banks will not over-issue due to the loss

incurred by it; in his reasoning, a convertibility imperative for banks is assumed. (Glasner 1992, 872-73) For Smith certainly did not believe that by simply lending on the security of real bills an entire banking system could avoid an inflationary overissue. It was convertibility that prevented inflation. However, Smith took it for granted that, without special privileges conferred by the government, ordinary banks could operate only by committing themselves to convertibility. (Glasner 1992, 875) - The focus of RBD is on the asset side of banks balance sheet while that of LR is on the liability side. (Glasner 1992, 877-78) - Real bills doctrine in various forms: Some, like Smith, applying it to individual banks, believed that holding only such assets would help a bank avoid issuing more than the profitmaximizing amount of notes and help it retire or redeem its notes economically should the demand for its notes decrease. Others, like the anti-Bullionists, applying it to the entire banking system, asserted that acquiring real bills only would allow a monopolistic bank of issue or an entire banking system, even if unconstrained by convertibility, to avoid issuing too many notes and causing inflation. (Glasner 1992, 878) - According to the Banking School, the Bank of England should reissue the notes returned in times of gold drain as long as the security given in exchange for them is good: this is the essence of the Real Bills Doctrine. As long as the banks issue notes in order to discount real bills, there is no reason why the market price of gold should deviate from the mint-parity or why there should follow a depreciation of the currency. Let us specify that a bill is real to the extent that it is what it is, that is, a promise of deferred payment for a really existing good or service. A bill is not real when it is fictitious. Fictitious bills are a circuitous means to get bank credit by giving the appearance of transaction where there has been none. It should be noted that the reason why the issue of notes in discount of good bills cannot be inflationary is not that it does not alter the proportion money-commodities; indeed, it does alter this proportion. According to the Banking School, the reason why the issue of notes against real bills cannot depreciate the currency is that it does not have any effect on demand. The eventual alteration of the proportion between commodities and money is not inflationary because the notes issued in discount of real bills do not give rise to any fresh demand for commodities. Moreover; an eventual rise of the market price of gold over the mint-parity would reveal that fictitious bills have been discounted with good Sterling paper. Convertibility sets the limit of the issue of notes because the notes issued in excess of the needs of trade will immediately return to the issuer. The maintenance of the convertibility of

paper notes is, thus, the cornerstone of the Banking Schools defense of the gold reserve of the Bank of England. (Ormazabal 2009, 17; emphasis in the original) - A necessary though not sufficient condition that bills of exchange must meet to be good is not to be fictitious. (Ormazabal 2009, 10) - Critique: - Mints 1945; - These authors accuse the Banking School of overlooking the fact that the liquidity of bills is lower than that of gold and, to make things worse, than that of banknotes. This is why there is no reason to guarantee that the issue of notes according to the RBD will not be inflationary; unless very exceptional circumstances concur, the difference between the (total) liquidity of the notes and the (limited) liquidity of the bills will manifest itself in the depreciation of the notes, which will circulate below par by a margin determined by the nominal of the notes and the liquidity of the bills that back up the notes (the nominal of which must be the same as the nominal of the notes). (Ormazabal 2009, 15) - In relation to the real bills doctrine, anti-bullionists argued that the interest itself regardless of the rate would prevent an overissue while bullionists suggested that the rate should be compared with the profit rate (or the market rate of interest); i.e. if the latter is higher than the bank rate, the interest itself would not act as a check on the overissue. (Viner 150) => This is another case for a critique of the doctrine. (After demonstrating the above point, Viner writes: That the quantity of bank loans demanded is dependent on the rate of discount is now universally accepted by economists and need not be further argued. (151)) - Anti-bullionists claim that if banks follow real bills doctrine excess notes would reflux to banks as repayment under inconvertibility or for redemption in specie under convertibility. (Viner 148) - Smiths explanation on why it is banks self-interest to follow the doctrine: More note issues implies more reserves required, which incurs costs. At the heart of Smiths arguments one can find an implicit model of competitive banking regulated by gold. (Arnon 2011, 42) Smiths only requirements on the free banking: opposition to notes of low denomination, convertibility, real bills loan policy. Smiths reason for opposing low denomination: Arnon (2011, 43-44) - Arnon (2011, 43, fn.14)

- Smiths RBD: When a bank discounts to a merchant a real bill of exchange drawn by a real creditor upon a real debtor, and which, as soon as it becomes due is really paid by that debtor; it only advances to him a part of the value which he would otherwise be obliged to keep by him unemployed and in ready money for answering occasional demands. The payment of the bill, when it becomes due, replaces to the bank the value of what it had advanced, together with the interest. The coffers of the bank, so far as its dealings are confined to such customers, resemble a water pond, from which, though a stream is continually running out, yet another is continually running in, fully equal to that which runs out; so that, without any further care or attention, the pond keeps always equally, or very nearly equally full. Little or no expense can ever be necessary for replenishing the coffers of such a bank. (1776 p.304)

* RESTRICTION IN 1797 - The monetary system before restriction: Mixture of metal coins and paper notes of Bank of England and country banks, and checkable bank deposits were also part of the circulating medium. (Viner 1937, 123)

* SAYS LAW - Originates in Says Treatise, ch.15 Of the Demand or Market for Products - Most strikingly formulated by James Mill

- Banking school and currency school were agreed for the long run analysis of the determination of the quantity and the value of metallic currency following Ricardian or classical doctrine; while their distinction lies in the short run analysis.

* TOOKE - Contribution: i) application of free-trade principles to banking: Arnon (2011, 216) ii) endogenous money:

iii) Anti-QT: - Prices are determined by the incomes of the consumers. - Rejection of the currency schools distinction between notes which are money and other means of payment such as checks, bills of exchange, deposits, which are not. - He characterizes supporters of the Currency School as believing that good management and the convertibility of bank notes are not sufficient guidelines for banking policy. (Arnon 2011, 219) - According to Fetter (1965), Tooke came to the very brink of the proposition that the only limitation needed on the monetary supply was that banks lend only on real bills. (193) => Exactly same as Smith. (Arnon 2011, 219-20) - Even Tookes rejection of the view that banks can willfully change the quantities of money presupposes convertible notes. (Arnon 2011, 226) - what Tooke calls general prices are determined not by the quantity of money, however money is defined, but by that sum of money that constitutes the income of consumers. (Arnon 2011, 232)

* VALUE OF MONEY + Ricardos notion of value of money: - Ricardo and the Gold Standard, 41 - In Ricardo, the term absolute value appears for the first time in Principles, Collected Work Vol.1, p.21. But intrinsic or real value appeared long before. (Marcuzzo et el. 1986: 42) - In Principles, gold is conceived as an invariable standard whose conditions of production are relatively stable. But Ricardo didnt take it as a perfect standard measure of value since in case of an economy where gold is imported, the value of gold is dictated by the labour time expended on the production of goods exchanged for gold. The implication is that the value of gold in such case is subject to terms of trade. (Marcuzzo et al. 1986: 45-46) - The principle that the value of their [i.e. the Banks] notes is dependent on their amount, and that they ascertained the variation of their value by the tests I have just referred to [i.e] the rate of exchange and the price of bullion (Ricardo 1809, p.28). - Value of notes would be value of what they represent.

* VELOCITY - Velocity in defining money: Viner (248-49) - the economy by which payments are effected (Marx 1859) - the degree of economy practiced in effecting those payments (Ricardo 1816 Proposal for an Economical and Secure Currency)

* NOTES - Real Bills Doctrine should be understood as some sort of rule to be followed by bankers; thus a proper way to put it is that under the inconvertible paper money system, banks have less incentive to follow the Doctrine than under the convertible one obviously because they are not obliged to convert their notes into specie. - Monetarists mainly insist that the money supply will affect macro-economy. In contrast, Marxist and heterodox economists stick to anti-quantity theory according to which money is determined by the real side of the economy. Then what is so special about money according to these left-wing economists? - The main imperative for the classical monetary writers both banking school and currency school was to guarantee the note issue to correspond to the needs of trade. The difference between the two schools was whether it is achieved through being forced by policy control (currency school) or it is automatically achieved under a set of conditions (banking school). Real bills doctrine and convertibility should be understood as ones of such conditions. Yet the former is not something that can be enforced through stipulation by the monetary authorities while the latter is. Rather, the real bills doctrine could be effective only as a self-imposed rule. In this regard, while the convertibility involves a question of whether banks have to follow, the real bills doctrine involves a question of whether banks have incentives to follow. And convertibility policy could be one crucial factor that has to do with such incentive. That is, in the convertibility monetary regime, banks have every incentive to follow the real bills doctrine since issuing notes to bad bills would result in depreciation of their notes against the gold price and finally in the bank run; whereas banks do not have to worry about such problems in the inconvertible monetary regime. In sum the relation between convertibility and real bills doctrine, which is often left ambiguous in the literature, could be conceived as

follows: In the convertible monetary regime banks will tend to adopt the real bills doctrine as an implicit rule and thus the possibility of overissue will be low and if it happens it will be corrected shortly through the conversion mechanism; on the contrary, in the inconvertible monetary regime, banks have no incentive to follow the real bills doctrine and thus the possibility of overissue is very high (as evidenced by the recent financial crisis!) Moreover, in this system, there is no correcting mechanism for the overissue other than inflation, which might call for a government intervention in regulating the note issuance. (In the inconvertible monetary regime, how could you conceptualize inflation? What is the point of reference for the inflation? The rate of change of price level in case it corresponds to the growth rate of needs of trade?) The implication the follows is that in the convertible monetary system, the quantity theory does not hold while in the inconvertible monetary regime it is valid, the degree of which depends on the specifics of the institutional setting. This would be the core content of Marxs monetary theory. (Some variations on the relation between the convertibility and the real bills doctrine should also be considered. Within the banking school there are some writers who claim that the real bill doctrine is valid regardless of convertibility Robert Torrens is one example (Mints 1945, 47) Adam Smith and Peter Carey (Mints 1945, 46) belong to the other group. Contrary to such variations within the banking school, the main idea of the currency school is straightforwardly that the real bills doctrine does not hold even under the convertibility as can be seen in the Bank Act of 1844. In this regard, Mints write The defenders of the real-bills doctrine usually did not state their position on the question of convertibility as explicitly as did their opponents, although a few expressed a preference for notes convertible into specie and other definitely objected to them. (Minst 1945, 46)) See Mints (1945, 45-) on all of these issues. (But consider the following statement by BofE officials from 1810 Report: provided the conduct of the Bank is regulated as it now is, no accommodation would be given to a person of that description, [i.e. the person who employs it in speculation whatever the rate.] (Viner 1937, 151)) - To conceive Marx in volume 3 where he deals with the more advanced monetary system, i.e. credit paper money as anti-quantity theorist is to take him as an anti-bullionist rather than a banking school writer. The difference is that while the latter usually perceive convertibility as a guarantee to prevent an overissue, the former went further to argue that even inconvertible money could not issued in excess once the real bills doctrine is followed by banks. As for the implication for the quantity theory, the question is whether antibullionists thought the overissue would necessarily to lead to inflation. The answer is yes

they did since what they tried to show was not that overissue is not the reason for the inflation at that time but that there was no overissue from the outset in the aftermath of the Restriction of 1797. See Viner (1937, 223) - The currency school attributed the difficulties of 1847 not to the Act of 1844 but to the mismanagement of the Bank. See Overstones comment as cited in Viner (1937, 232); it is strikingly similar to Friedmans blame of the Fed for causing the Great Depression. The heterodox, including Marxist, camps adherence to the banking school doctrines and the antiquantity theory should be understood in this context. That is, they wanted to avoid blaming policies or government agencies for a more structural and deeper cause.

* QUESTIONS - If bills of exchange were used as means of exchange and payments (Mints 1945, 43), then there is no need to discount them?

Reference Glasner, David 1992, The Real-Bills Doctrine in the Light of the Law of Reflux, History of

Political Economy 24(2). Marcuzzo, Maria Cristina and Annalisa Rosselli 1986, Ricardo and the Gold Standard; the Foundations of the International Monetary Order, translated by Joan Hall. Skaggs, Neil T. 1991, John Fullartons Law of Refulx and Central Bank Policy, History of Political Economy 23(3).