The nature of money under a commodity standard: exogenous or endogenous?

Abstract

The aim of the present article is to discuss the nature of money under a commodity standard. The notion of money supply endogeneity, endorsed by Post-Keynesian (PK) scholars within the institutional framework of modern credit economies, is extended to the case of a gold standard regime by recourse to the view of early classical economists, which highlights the endogenous determination of the supply of precious metals in a long-period position. This interpretation represents a more robust and natural extension of the PK approach than the neoclassical quantity-theoretic framework employed by several PK scholars to give account of the normal working of this monetary system.

Keywords:

• Classical economics
• endogenous money
• gold standard
• quantity theory

JEL CLASSIFICATION:

• E12
• E42
• E51

Notes

1 The list is not extensive but only illustrative.

2 It should be remarked that this position was not unanimous among marginalist authors. For instance, Cassel remarks that “It is generally believed that the stability of the value of gold depends on the accumulated stock of gold being very large in comparison with each year’s production. This fallacy is repeated in almost every text-book on the subject” (Cassel 1920, 41). Also, Schumpeter states that “In any event, it would be a layman’s conception to hold that the quantity of gold coming onto the market is not conditioned by economic factors but is just a natural datum—all ‘natural data’ work only through the economic mechanism…not only that the quantity of gold money determines prices, but also that in principle prices likewise determined the quantity of gold money” (Schumpeter 1956 [1917/8], 198–199).

3 See also Cottrell (1997).

4 Cf. Feldman (2015).

5 It could be asserted that, for the cost-of-production theory of the value of gold to be valid, the biggest changes in gold production should be due to variations in the output of existing mines, and not due to new discoveries. However, the cost approach is perfectly compatible with a discovery-led story if such findings are endogenously induced by market conditions. Beyond some random factors that may influence the likelihood of finding a new bullion deposit, it seems natural that more people look for gold when mining is more profitable because of falling commodity prices due to a relatively scarce gold supply (Lewis 1978, 93). Cagan (1967, 242) and Rockoff (1984) also express themselves in favour of the endogenous nature of gold discoveries. In contrast, Eichengreen and McLean (1994) recognize a consistent relationship between gold supply and the price level, but only at the world level.

6 In contrast to this competitive view of the gold market, Mundell (1997) asserts that since ancient times gold mines have been under the control of governments, which may imply a non-profit component in the incentives to alter gold production. For a similar argument, see Shubik (1999, 276).

7 Say’s Law and hoarding were compatible within the classical framework because money hoards were at the service of the needs of circulation in an entirely passive way. Otherwise, it would have been more consistent to disregard Say’s Law and move to a theory of the adjustment between aggregate saving and investment, as neoclassical and Keynesian economics subsequently developed.

8 The first uses of the Quantity Theory under a commodity standard were much prior to neoclassical economics. In effect, the first systematizations of the causal relation between the exogenous movements of the money supply and the price level originated at the time of the European “Price Revolution” in response to the gold and silver remittances from the New World. References should be made to the Salamanca School (of which Grice-Hutchinson 1952 provides a detailed analysis) or the French Bodin (1568 [1997]). For an alternative interpretation of the Price Revolution inspired in the classical tradition, see Feldman (2014).

9 See for instance, Niehans (1978, Ch. 8).

10 The non-substitution theorem is clear on this point, showing that given the real wage—or the rate of profits—and with constant returns to scale, demand conditions do not affect relative prices.

11 This implies that ${K^d=Q}_i.$

12 One may also add a monetary demand for gold for replacement of coins due to “wear and tear.”

13 The full employment of the capital stock is implicit due to Walras’ Law.

14 Cf. Nell (2011).