The Golden Age of the Quantity Theory

by David Laidler

How did neoclassical monetary economics, as epitomized by the work of Fisher, Wicksell, and the Cambridge School, evolve from the classical orthodoxy that dominated economics in the 1870s? To answer this question, David Laidler considers the interaction of theoretical developments with contemporary policy debates about bimetallism and the evolution of the gold exchange standard. He argues that neoclassical monetary economics, in which the quantity theory of money played a central role, laid the intellectual groundwork for the replacement of the gold standard by various managed monetary systems in the years following World War I. Laidler is one of the world's foremost experts on monetary economics, and this book provides an illuminating account and analysis of one of the most important periods in the development of that field. Scholars of the history of economic thought and all monetary economists will find that The Golden Age of the Quantity Theory is the most systematic treatment of the development of monetary economics between 1870 and 1914 currently available.

Originally published in 1991.

The Princeton Legacy Library uses the latest print-on-demand technology to again make available previously out-of-print books from the distinguished backlist of Princeton University Press. These editions preserve the original texts of these important books while presenting them in durable paperback and hardcover editions. The goal of the Princeton Legacy Library is to vastly increase access to the rich scholarly heritage found in the thousands of books published by Princeton University Press since its founding in 1905.

238 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.