Simon Newcomb’s monetary theory: a reappraisal

Abstract

Whereas Simon Newcomb formulated the equation of exchange, he rejected the causality and the proportionality postulates of the quantity theory in some cases. To solve this puzzle, this paper relies on the distinction between the classical theory of money and the quantity theory of money and shows that, according to Newcomb, the quantity theory applied only for inconvertible paper money, while metallic money and convertible bank issues were regulated by different mechanisms. Understanding Newcomb’s distinction between the different types of issues also sheds light on his stance in the monetary debate of the U.S. Reconstruction period.

Keywords:

• Simon Newcomb
• quantity theory of money
• greenback debate

JEL CLASSIFICATION:

• B12
• B31
• E41
• E42

Acknowledgments

I wish to thank Samuel Demeulemeester, Rebeca Gomez Betancourt, Laurent Le Maux, Stephen Meardon, Nathalie Sigot as well as the participants of the 2019 ESHET Annual Conference, the 21^st ESHET Summer School and the seminar Atelier de PHARE for their comments and suggestions. I also wish to thank the two anonymous referees, this article has largely benefited from their comments and suggestions. Finally, I thank Jeffrey Althouse for answering my multiple questions relative to the English language. All errors remaining are mine.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Newcomb’s equation was not the first algebraic quantity equation (Humphrey 1984). It was neither the last one, as Fisher extended Newcomb’s equation (Dimand 2019, 57).

2 Fisher dedicated a second book to Newcomb. In the dedication of his 1920 book entitled Stabilizing the Dollar Fisher writes, “to John Rooke, Simon Newcomb, Alfred Russel Wallace and all others who have anticipated me in proposing plans for stabilizing the monetary units.” Fisher war referring to Newcomb’s (1879) article in The North American Review, in which Newcomb (1879, 235) proposed a tabular standard of value. I wish to thank the anonymous referee who brought Fisher’s dedication to my attention.

3 The literature on classical monetary theory as different from the quantity theory approach has been criticized by Blaug (1995) and O’Brien (1995). While Blaug (1995, 32) adheres to Niehans’ (1987) idea that classical economists rejected the short-run non-neutrality of money, he believed that Glasner (1985) took the argument “one step further” in order to defend a free-banking theory. The difference between the two authors lies in their definition of classical monetary theory. Glasner used the term classical monetary theory to refer to the classical political economists who rejected the exogeneity of money supply, while Blaug (1995, 32–33) uses a much larger definition that includes all classical political economists. This paper’s aim is not to settle this debate, it rather relies on the distinction between classical monetary theory and quantity monetary theory in order to understand Newcomb’s monetary theory.

4 Other studies have placed Newcomb in the broader 19th century intellectual context insisting on different aspects of his economic theory and methodology, see Schumpeter (1955, 866), Dunphy (1956), Moyer (1992), Friedman (2008), and Wible and Hoover (2015).

5 For a more detailed analysis of the greenback debate: (a) From a historical perspective see Mitchell (1903, 1908), Sharkey (1959), Unger (1964), Timberlake (1964), Nugent (1967), Hammond (1970), Bensel (1990) and Barreyre (2014, 2015). (b) From an analytical perspective see Kindahl (1961), Friedman and Schwartz (1963), Calomiris (1988, 1992) and Le Maux (2017). On the National Banking System see Bolles (1886, ch. XI), James (1976), Calomiris and Mason (2008), Le Maux (2013), and Jaremski (2004).

6 This means that neither national banks nor the Treasury were obliged to convert their issue into gold.

7 While Newcomb (1877, 69; 1879, 228) continued to think of the gold standard as the best standard that had ever been implemented, after 1879 he expressed worries concerning the possibility of significant variations in the price of gold. This led him to endorse a tabular standard of value, under which the government would “issue paper currency which shall be redeemable, not in gold dollars of fixed weight, but in such quantities of gold and silver bullion as shall suffice to make the required purchases” (Newcomb 1879, 235). Newcomb continued to defend his tabular standard for years to follow, see Newcomb (1893).

8 The capital of the banks was constituted by the savings of capitalists, savings that were the result of an abstention from consumption (Newcomb 1865, 39).

9 The main aspects of the National Banking System were described in the National Bank Act of 1863 and were the following: “five or more persons could form a banking association, and on deposing $50,000, or a larger amount, of any kind of government interest-bearing bonds with the United-States treasurer, could receive circulating notes to the amount of ninety per cent of the current and par value of the bonds deposited. These notes were to be receivable for all government dues except duties on imports, and payable on government debts except for interest on its bonds. In lieu of all taxes on circulation or bonds, the banks had to pay semi-annual, one-half of one per cent on their circulation, and they were to conform to the laws of the States in fixing their rates of interest. They were to keep on hand, in lawful money, at least twenty-five per cent of their notes and deposits, and were to redeem their circulation at the place of issue. The amount to be issued was fixed at $300,000,000, one-half of which was to be issued to banks in States and territories, determined by their population, the other half was to be distributed to with regard to the existing banking capital, business, and resources of each State” (Bolles 1886, 219–220).

10 Deriving from the fact that greenbacks were depreciated, Newcomb considered that a greenback issuance superior to $250,000,000 transferred the profit of the creditor to the debtor if the debt was to be reimbursed in greenbacks (Newcomb 1865, 131–132; 1866, 110).

11 Therefore, Newcomb (1865, 138–139; 1866, 134) thought the government should have maintained the gold standard during the war and funded the war through a viable system of taxation. According to Mitchell (1903, chap. 1), maintaining the specie payments was not possible during the war.

12 Although in 1866 Newcomb (111–112) fixes this limit at 600 million dollars, his argument is essentially the same: the level of prices will rise proportionally with every paper money issuance greater than the quantity of money necessary for the transaction of the business of the country.

13 After resumption was completed, Newcomb (1879) thought that a specie standard was not ultimately enough to guarantee the stability of the monetary standard. He then endorsed a tabular standard of value, as previously explained.