The first monetary theory of the Great Depression is often credited to Milton Friedman. Advanced to counter the idea that the Great Depression resulted from inherent capitalistic instabilities, Friedman's theory attributed the Depression to policy mistakes by an inept Federal Reserve Board. More...

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...

This chapter uses the classical money model introduced in Chapter 2 to explain the different views of Adam Smith and David Hume on banking and the price-specie-flow mechanism (PSFM). These differences reappeared in the debates between the Banking School and the Currency School over Peel's Bank...

This chapter considers the law of reflux and its alternative interpretations: (1) as a monetary policy rule for stabilizing the price level and (2) as rule for individual banks to follow to remain liquid. The chapter argues that Adam Smith endorsed only the second interpretation, and that the...

This chapter responds to criticisms by (Blaug, M. (1995). Why is the quantity theory the oldest surviving theory in economics? In M. Blaug (Ed.), The quantity theory of money: From Locke to Keynes and Friedman. Edward Elgar.) and (O’Brien, D.P. (1995). Long-run equilibrium and cyclical...

This chapter explores the different explanations of Ricardo and Thornton for the depreciation of sterling after convertibility of sterling into gold was suspended during the Napoleonic Wars. Ricardo held that only overissue by the Bank of England could have caused depreciation of sterling while...

This chapter discusses four areas of monetary theory on which the ideas of Smith and Hume have left their imprint: (1) the overissue of bank liabilities, (2) the price-specie-flow mechanism (PSFM), (3) the need for a lender of last resort in a competitive banking system, (4) real-bills doctrine...

Monetary-policy rules arise when the value of a medium of exchange exceeds its cost of production. Two classes of monetary rules can be identified: (1) price rules that target the value of money in terms of a real commodity, e.g., gold, or in terms of an index of prices, and (2) quantity rules...