The monetary economics of Jules Dupuit

Abstract

This paper analyses Dupuit's views on money, bimetallism, free banking and credit. By means of textual and contextual analysis, I argue that Dupuit endorsed the quantity theory based on the neutrality of money. For him, the value of money was determined by supply and demand. The only exception concerned the redistributive effects of gold between trading nations. Dupuit's approach to credit and his views on the issuance of banknotes were distinct from those of most French liberals. He did not consider credit to be capital, and he warned against the overissue of banknotes.

Keywords:

• Money
• quantity theory
• gold
• bimetallism
• free banking
• credit
• economic crises

J.E.L. Classification:

• B12
• B31
• E40
• E50

Acknowledgements

I am grateful to Perry Mehrling, Nathaniel Donahue, and to two anonymous referees for their helpful comments. Thanks go as well to participants at the Economics Department Seminar, Wesleyan University, January 2014. The usual disclaimer applies.

Notes

¹ As rightly pointed out by Mosca (2011, p. 305) who opines: “Dupuit's monetary thinking is certainly the most neglected in the literature, still awaiting its scholars”.

² For instance, see S.E.P. (1856a, p. 138; 1863, pp. 338–39).

³ Dupuit's participation in the meetings of Société d’économie politique dedicated to “money, finance, bank and financial crisis” is replicated in the second volume of Oeuvres économiques complètes (Breton and Klotz 2009, pp. 667–735). Unfortunately, the minutes are incomplete since the addresses of other participants are missing. Instead I use the minutes published in their entirety in the Journal des économistes.

⁴ Also known as the “Paris Group” (Schumpeter 1954, pp. 840–43), “liberal” is used here in the French sense referring to the nineteenth-century economists who believed that free market was more effective than government intervention. See also Salerno (1978), Breton and Lutfalla (1991) and Leter (2006). For the most part, the French liberals held meetings at Société d’économie politique and regularly contributed to the Journal des économistes.

⁵ There were very minor modifications between the articles (Dupuit 1860) and the book (Dupuit 1861). In this paper, I refer to the latter. According to Lamé Fleury (1867, p. 183), the book was written upon request of the minister of Commerce Eugène Rouher. Dupuit's views on money and its effects on the economy are exposed throughout eight chapters, about 17% of the total length. References to previous work or other authors are rare (Simonin and Vatin 2002). He only quoted Aristotle, Adam Smith, Pellegrino Rossi, Jean-Baptiste Say and Destutt de Tracy.

⁶ Surprisingly there is no trace of Ricardo's theory of comparative advantage in La liberté commerciale. Also a noticeable point developed in the book was that free trade was the only effective remedy to solve problems associated with scarcity of food. In general Dupuit appeared more extreme than his fellow economists on free trade – he rejected any transitional period – and education whereas he was a more accommodating free marketer on issues like transportation, literary property, or taxation.

⁷ On this topic the similarity with Say's views is striking. However, one should keep in mind that Say initially believed that “using a commodity as money, raises significantly its intrinsic value, its value as commodity” (1803, p. 458). He later evolved on the issue to develop his basic position. The value of money was determined by supply and demand.

⁸ On the articulation between utility and value in Dupuit's thought, see for instance Diemer (2003).

⁹ Dupuit touched upon the so-called Say's law to illustrate the function of medium of exchange, but also to advocate free trade (1861, p. 55, 57). In Cours complet d’économie politique, Say posited that “it is with products that we purchase what others produced” (“C'est avec des produits que nous achetons ce que d'autres ont produit”) (Say 1828–29, 1:350). Although Dupuit mentioned J.-B. Say three times in La liberté commerciale, he did not cite Say in the two above-mentioned citations relative to Say's law. One has to keep in mind that the treatment of this principle in Say's writings is complex and multifaceted. For more information, see, for instance, Sowell (1972), Baumol (1977, 1999), Blaug (1997), Jonsson (1997), Kates (1997, 2003), and Béraud (2003).

¹⁰ It could be argued that if a change in the quantity of money could somewhat affect the allocation of the stock of money between individuals, money would have real effects. Dupuit was silent on this issue however.

¹¹ At first, this position seems inconsistent with the idea that “the more labor is divided, the more money is necessary” (1861, p. 51). In fact, however, the inconsistency is only superficial. On the one hand, Dupuit analysed quantity theory and international trade. In an open economy, it was futile to seek to accumulate species within a country because this would only raise prices. On the other hand, Dupuit emphasised that the division of labor automatically increased individual transactions and therefore more money was needed to facilitate them. Simply put, the demand for money grew with transactions, but not vice versa.

¹² Chevalier leaned on Tooke's observations contained in the first volume of History of Prices stressing that wage increases were far short of the rise in the price of necessities (Tooke 1838, part IV, chapter V, section 5, pp. 328–30).

¹³ In a preliminary remark, Dupuit implied that using a partial equilibrium approach, albeit indispensable in dealing with issues influenced by numerous causes, was not an easy task. It was in accordance with his conviction that the economic science was first and foremost a science of reasoning: “one of the great difficulties of political economy, is that when one wants to examine the facts, one can be very confused, because, as they are the result of many causes which take effect simultaneously, it is very hard to determine the right and distinct influence. One needs to be able to isolate each one of them in order to make sure that no mistake is made while linking effect to cause” (S.E.P. 1856a, p. 141). Apparently succeeding generations of engineer-economists applied the same methodological approach. See Divisia (1951, p. 15).

¹⁴ Emphasis added.

¹⁵ One can tell by the adjectives used to describe the events. The words “financial” and commercial” were used the most but they were misleading. The crisis had financial origins and commercial repercussions. I opt for using the generic term “economic” crisis.

¹⁶ Dupuit was referring to the discovery of new gold mines in Australia and California.

¹⁷ On Juglar's theory of crises see Besomi (2009, 2010) and also Dal-Pont-Legrand and Frobert (2010).

¹⁸ Dupuit's reasoning was concerned with subsistence goods (“useful goods”). As for non-subsistence goods, Dupuit noted in La liberté commerciale (chap. 21) that in years of scarcity of corn the consumption of bread by the rich remained constant and their consumption of other goods grew, while the low-income class reduced its consumption overall (bread and other goods).

¹⁹ Hippolyte Passy agreed with Dupuit: “in a nutshell, what characterizes the current crisis is the lack of capital funds and the disproportion between savings and [governmental] prior commitments” (S.E.P. 1857, p. 469).

²⁰ Dussart asserted: “what delayed the eruption of the crisis for two years is the abundance of the Californian output: the greater quantity of gold made transactions easier and slowed down the natural effect of the causes of the crisis” while Chevalier stated: “the rapid growth of circulation of these precious metals first delayed the crisis and then aggravated it. Creating more species first helped trading then stimulated output and led to exaggerated speculation while also contributing to growth” (S.E.P. 1857, p. 472). In this quote, Chevalier made an explicit reference to the velocity of circulation, a notion that Dupuit did not use.

²¹ Dupuit used the same idea two months later: “the countries who receive this increase in precious metal pay for it in exchange for commodities that they are deprived of…commodities, in becoming scarcer, become more expensive at the expense of consumers. Therefore one cannot conclude that the greater abundance of gold enhanced the European wealth…the gold mines discovery in California and Australia has been more regrettable than profitable” (S.E.P. 1858b, p. 307).

²² Cairnes’ reasoning was published in the report of the 27th meeting of the British Society for the Advancement of Science (known today as the British Science Association) that took place in Dublin in August and September 1857 (see second part, notices and abstracts). Dupuit formulated his argument for the first time during the December 1857 session of Société d’économie politique. It is highly improbable that Dupuit derived his conclusions from Cairnes for three reasons. During the debates, he did not make any reference to the Irish economist. Besides, the report of the British Society was only published in London a year later, in 1858. Moreover, Dupuit never mentioned Cairnes in his writings or in his Société d’économie politique's addresses. I should also add that Dupuit was not a corresponding member of the British Society (see list p. xxviii of the report).

²³ For a modern discussion of bimetallism see, for instance, Friedman (1990a, 1990b) and Flandreau (1996a, 1996b, 1997) who claim that bimetallism was stable and robust. See Garber (1996), Garber and Weisbrod (1992) and Oppers (1992) for divergent views.

²⁴ This denoted Dupuit's familiarity with the function of a store of value. Gold and silver were stores of value because of their intrinsic value. Banknotes were stores of value in the context of convertibility, which was the standard situation albeit interrupted between 1848 and 1850, and between 1870 and 1877 (Leclercq 2010). Regarding banknotes, Dupuit declared: “the banknote, that has no intrinsic value but can be traded everywhere for precious metal, is a sort of superior billon” (S.E.P. 1863, p. 339).

²⁵ Chevalier argued that French bimetallism served as a “parachute” to retard the fall of gold relative to silver. Depreciating gold could be exchanged for silver on favourable terms thus slowing down the price drop. Consequently, he concluded that what was apparently a bimetallic system was in fact silver monometallism.

²⁶ The statutes of Banque de france imposed drastic requirements for the discount of bills of exchange and promissory notes. In particular, at least three signatures of eminently solvent individuals were required; hence, the recurring accusations of credit rationing from free banking supporters.

²⁷ A suggestion made by Breton and Klotz (2009, 2:708, fn. 7). For a thorough discussion of Macleod's ideas, see Skaggs (1997, 2003).

²⁸ Thus Coquelin's magnum opus Du crédit et des banques was published in 1848 whereas the first volume of Macleod's Theory and Practice of Banking – the first book in which he offered his theory of credit and banking – appeared in 1855.

²⁹ In the third and subsequent editions of Traité d’économie politique, Say wrote “some [individuals] sometimes think that credit multiplies capital. This error…demonstrates an absolute ignorance about the nature and the functions of capital funding. Capital is always a very real value, and determined in a certain way; because the immaterial goods cannot be accumulated. Yet a material good cannot be in two places at the same time, and be used by two persons at the same time. Constructions, machines, provisions, merchandise that constitute my capital, can thoroughly be values that I borrowed: in this case, I run a business with a capital that does not belong to me, and that I rent; but, for sure, the capital that I use is not used by someone else. The person who lends it to me is prevented from the power of using it elsewhere” (Say, 1803, pp. 767–9).

³⁰ Dupuit was not completely isolated on this issue. Du Puynode (1853, pp. 110–2, 1863, pp. 106–9) used similar arguments. Furthermore, in this passage there is no mention of a possible impact of the issuance of banknotes on the rate of interest, a subject that is surprisingly nowhere to be found in his work. Overall he was in line with most classical economists who conceived the rate of interest as the price formed by the supply and demand of loanable funds (S.I.E.P.E.S. 1865).

³¹ “There is no need to set a fixed proportion between the metallic deposits from a bank and the amount of notes to be issued. It essentially depends upon the importance of the establishment, the extent of his credit, and the environment in which it operates, and many other circumstances very difficult to enumerate” (1848, pp. 186–7).

³² The railroads were an exception to this rule in Dupuit's thought (see Numa 2012, 2013).