Monetary Analysis in Classical Economics: Banking School and Neo-Ricardian Monetary Theory of Distribution

Eckhard Hein

Chapter 4 in Money, Distribution Conflict and Capital Accumulation, 2008, pp 13-15 from Palgrave Macmillan

Abstract: Abstract Whereas Classical orthodoxy relied on the quantity theory of money, in the Banking-Currency-Controversy the proponents of the Banking School (Tooke, Fullarton) rejected the determination of the level of prices by the quantity of money.10 On the one hand, it was argued that money also serves as a store of value so that changes in the quantity of money supply need not necessarily enter circulation and affect the level of prices. On the other hand, a distinction was made between ‘paper money’ issued by the state and ‘paper credit’ consisting of bank notes issued by commercial banks, and hence between a money circuit and a credit circuit. Whereas ‘paper money’ issued by the state can exceed the amount required for circulation and hence affect the price level, for bank notes the ‘law of reflux’ applies: Bank notes return to the issuing bank and are therefore withdrawn from circulation. The quantity of credit money becomes an endogenous variable which is not under the control of the monetary authorities.11 It is, rather, determined by the demand for credit and adjusts to the requirements of circulation.

Keywords: Interest Rate; Monetary Policy; Capital Accumulation; Money Supply; Monetary Authority (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-59560-6_4

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DOI: 10.1057/9780230595606_4

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