The Golden Age of the Quantity Theory

by David Laidler

Documents the elaboration of the quantity theory of money into a general choice theoretic explanation of price level behaviour. The author argues that the principal architects of the quantity theory - Marshall, Fisher and Wicksell - contributed indirectly to the collapse of the gold standard.

240 pages, Paperback

First published January 1, 1991

Reviews

[Frank Stein · Rating 5 out of 5]

Another amazing history of economic and monetary thought by David Laidler.

Even though I loved his other book, on the background to Keynesian theory, I was less interested in this work, which dealt with the history of the "quantity theory of money." After all, whatever one thinks of its merits, what can be more intellectually dull than the idea that "prices are determined by the amount of money in economy"? It simply means, all things being equal, more money equals higher prices, less money, lower prices. Seems straightforward, but Laidler brings out all the seeming subtleties in this line of thought, as well as its burgeoning evolution into what later became Keynesianism.

First, Laidler shows that early economists, such as John Stuart Mills, thought that the "cost of production" of gold or silver determined how much money was worth, and therefore how much the price of everything was worth in gold and silver, though they admitted that in the short term more or less money could mean higher or lower prices. That is at least partially because they focused on money as a medium of exchange (or "circulating medium") and not also as a store of value to be saved. If it wasn't circulating, to them it wasn't by definition money.

When Alfred Marshall in 1887 began advocating the quantity theory publicly, as opposed to the cost of production theory, it didn't take long for many important insights to follow, some that would seem to be of a much later generation. Marshall already understood the amount of money people kept to be the result of the "real balance effect," of how much people wanted to keep in money as opposed to, say, bonds (or, to him, cattle or furniture, he seemed to not see the difference). He and Walter Jevons also noted that in long production cycles, during a deflation, where industry had to buy products that once transformed had already dropped in price, as well as labor that tended to refuse to lose nominal wages, money could be "sticky" downwards, and thus cause disruptions in what was called the "credit cycle." It was only gradually people like A.C. Pigou added a serious analysis of output, as opposed to just credit, to his cycle, and talked seriously about how fluctuations in money could disrupt the real economy. Yet even Marshall advocated an indexation of money, or the creation of a stable measure of purchasing power, to help ease the credit cycle and financial panics.

The irony in the title, as Laidler points out, is the the so-called Golden Age of the Gold Standard (1870-1914) was also the golden age of the quantity theory, and many have connected the two. But the quantity theorists were often bimettalists, or, like Marshall and Jevons, believed in indexing money, and therefore did more than any theorists to end reliance on the gold standard. And theorists like Knut Wicksell eventually used the quantity theory to destroy itself, to show how interest rates could be unhinged from the "natural" interest rate, and people like Keynes stepped in to make a case for active government management. For a seemingly simple idea, Laidler shows how varied it could be, and how profound its effects.

[Rizky · Rating 4 out of 5]

Provides a relatively brief but wide-ranging coverage of monetary economic thought, primarily from the late 19th to the early 20th century. Especially helpful are (a) its careful differentiation between the unique contributions of Fisher, Wicksell, and the Cambridge School to the development of the QTM in its most refined form, (b) presenting these refinements not as revolutions but as clear responses to the work of earlier classical economists, and (c) discussing the rarely clear-cut relations between real-world and theoretical developments.

But the title is somewhat misleading, as so much of the book ranges far beyond the Quantity Theory that it would probably be more accurately described as a history of monetary thought more generally over the period. It is also quite a difficult read for stylistic reasons, as the prose is rather dry, while the sentences are often overlong and include (in my view) an unnecessarily large number of backward references ("as noted", "as discussed", etc.).

Difficult, but rewarding! Certainly not for beginners - assumes familiarity with a fair bit of monetary theory already. Highly recommended even if you are not interested in the QTM more narrowly, as it has plenty to say about competing and related theoretical developments.