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Controversies in Monetary Economics

Revised Edition

John Smithin

This influential volume, which has been revised and updated for the twenty-first century, includes both new material and more detailed expositions of existing arguments. Although so-called ‘real’ theories of business cycles and growth are prevalent in contemporary mainstream economics, Controversies in Monetary Economics suggests that those economists who have instinctively focused on monetary factors in explaining macroeconomic behaviour are more genuinely ‘realistic’. The author combines an explanation of past and present monetary controversy with practical proposals for the conduct of monetary policy in the contemporary global economy. Several alternative approaches are discussed, ranging from the traditional quantity theory to post Keynesian theories of endogenous money.
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Chapter 10: Concluding Remarks

John Smithin


THE QUANTITY THEORY OF MONEY As we have seen, the most straightforward way to approach monetary policy issues, if not necessarily the most historically accurate, is to think of money as being simply commodity money, such as full-bodied coins minted from precious metals. This immediately leads on to a comparison between the total quantity of such a commodity money in existence at any point in time and the volume of goods and services traded in the economy over some convenient accounting period. In other words, it leads directly to the characteristic modes of thought associated with the quantity theory of money. With money measured in an arbitrary unit of denomination, and making allowance for the concept of the velocity of circulation, the simplest possible theory of the determination of money prices then follows. As illustrated by the passage from Hume (1752) quoted in Chapter 4 above, this approach was already more or less fully developed by the mid-eighteenth century. It can plausibly be argued that recent refinements have really added very little except mathematical sophistication. For example, the logic can be easily transferred from a commodity-based system to a regime with an inconvertible paper currency, as shown by the monetarists. It is doubtful, however, that this general theoretical framework was entirely appropriate as a description of the reality of the market economy even at Hume’s time of writing. Hicks’s (1989) view that even the most basic monetary transaction has an underlying credit element was mentioned in Chapter 2. It...

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