A reinterpretation of classical monetary theory

This chapter suggests that a model of a costlessly produced, competitively supplied, convertible money is compatible with a macroeconomic model with a determinate price level, a classical dichotomy between the real and monetary sectors, in which Say's Law (Identity) is valid, the latter being equivalent to the law of reflux upheld by the Banking School. Such a model differs from the naïve quantity theory often attributed to the classical economists. The chapter also suggests that Smith, Say, Ricardo, Mill, and the Banking School had an intuitive understanding of such a model in contrast to David Hume and the Currency School who espoused the quantity theory.