Abstract
The monetary economy is a system of production of goods governed by a controlled scarcity of money. The central factor in budget restraint is money and not scarcity of resources or goods. An eminent theorist of the monetary economy is Sir James Steuart.
Similar to classical and neoclassical economists, Steuart sees real goods as the sole means of exchange in a supposed former state of barter. This condition does not necessitate money. However, industrial production, achieved by trade, is dependent on money and credit from the very beginning.
One of the most interesting points is that, as opposed to Smith’s theory where the potential demand is limited by production, Steuart shows the independence of demand from production and that not consumer demand but the use of property as collateral for creating new money determines the level of social product.
Quite on the contrary to mainstream opinions, Steuart – like Keynes two centuries later – regards the money of account as the primary concept of a theory of money. Money proper, which corresponds to money of account and which he is actually interested in, exists as banknotes. Steuart follows up on the ideas of earlier mercantilists on the origin of money, which can be described as the pawn or pledge theory of money. Neither gold nor silver is money, but the notes issued by a bank for good security – a topic neglected in both Keynes’s and the classical and neoclassical theories of money. According to Steuart, a bank is not primarily a savings bank which makes the existing money circulate more efficiently. This part of the bank’s activity exists and it is not unknown to Steuart, but his focus is on credit banks that create or issue new money.
Steuart understands that in his time, the consumers of luxury goods and most investors in trade and industry are from the class of landed proprietors, and, therefore, he recommends the establishment of banks that issue banknotes secured by landed property. Today securities are transformed into paper money in the same way as in Steuart’s time and, therefore, his principles remain important even for modern central banking.
*Slightly revised and abridged version of Stadermann and Steiger 1999; and see 2001, 45–86
Translation by Ariane Stadermann
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Notes
- 1.
A modern German school of Keynesianism founded by Hajo Riese, Freie Universität Berlin; see Riese (2000).
- 2.
Not only the victory of Smith’s theory but also his method not to refer to Steuart’s treatise at all. Smith knew Steuart’s treatise very well and was eager to reject the latter’s theory, as has been revealed in a letter of 2 September 1772 by Smith to a member of the British parliament published first in 1972: “I have the same opinion of Sir James Steuart’s Book that you have. Without once mentioning it I flatter myself, that every false principle in it, will meet with a clear and distinct confutation of mine” (Smith 1972, 163).
- 3.
Steuart (1767, I, 172–175 and 181–183) distinguishes between a “large” demand in terms of quantities, which enables a large supply, and a “high” demand in terms of prices, which indicates a demand greater than the supply. In modern theory, the first constellation is a buyer’s and the second a seller’s market.
- 4.
It is an equilibrium of demand and supply and not of supply and demand, because of the independency of demand. Steuart uses the term work synonymously to supply. In his model of the supplier, the producer is a workman. The workman is an independent producer of goods and not – like in classical theory – a wage labourer.
- 5.
For the first time, Steuart uses the expression money of accompt in a treatise on the principles of money published six years earlier (Steuart 1761, 175). Money of account here refers to coins only and not to paper money.
- 6.
“Only the poor are in need of the security of bullion money [coins]. As the other people get wealthier by their industry, they use bills of exchange instead of coined money” (our translation of the German translation). The quotation reveals that Boisguilbert still had no idea that coins can be substituted by another money: banknotes. “Bills of exchange” are not money but a claim on money.
- 7.
A bank which does not enjoy the confidence of the debtors does not get any good securities transferred. The debtor must fear a withdrawal of the pledges – which are the assets of the bank – in case of bankruptcy. Enforcement threatens him even in the case he has fulfilled his duties as debtor vis-à-vis the bank.
- 8.
The weakness has been corrected, in accordance with our interpretation of Steuart’s analysis, in Heinsohn and Steiger 2000, especially 505 f.
- 9.
Smith develops his theory of interest in two different parts of the Wealth of Nations (1776, 96 and 325).
- 10.
As we have shown in our contribution on Keynes in this volume (Stadermann and Steiger 2011), this great economist failed to detect the missing monetary properties of the assignats. On the contrary, Keynes praised them as a revolution in the development of the monetary economy.
The original assignats issued at sight at the Caisse de l’Extraordinaire were never paid at all. They were received in payment for the national domains bought by competing individuals. However, as has been admirably demonstrated by Jean-Baptiste Say, their nominal value could never give any determinate value to the assignats, because the value of the former increased exactly in proportion as that of the latter declined. The Treasury did not bother about this, because the rise in the price of its domains enabled it to cash a greater amount of assignats and re-issue new ones for its expenditures, without enlarging the quantity of the assignats. The Treasury was not aware that, notwithstanding these advantages, the rise in the price of the domains meant a rapid devaluation of the assignats. “The error was discovered in the end, when it was impossible any longer to purchase the most trifling article with any sum of assignats, whatever might be its amount. The next measure was to issue mandats, that is to say, papers purporting to be an order for the absolute transfer of the specific portion of the national domains expressed in the mandat: but, besides that it was then too late, the operation was infamously executed” (Say 1803, 283).
- 11.
Similar to Vickers, M.A. Akhtar (1778, 64–66; and see 1979, 289–293) also detects that for Steuart, money is not a veil laying over real economic transactions. He stresses, nevertheless, only the role of Steuart’s paper money as a dynamic element and as a means to determinate the level of economic activities, without considering that creating money affords an interest-bearing credit contract and good securities.
- 12.
The same statement can be found already in Boisguilbert 1695, 67: “Money can only be regarded as a means or way … to a comfortable life. … This means that a certain country, in which the quantity of money in circulation is small, can be regarded as rich, while the reverse is true for a country with a large quantity of money, which can be in a state of misery, especially when it is difficult to exchange its money for commodities” (our translation of the German translation).
- 13.
The possible loss of the central bank does not mean a loss of its own capital, which Bagehot – as opposed to Steuart for his notes issuing credit bank – does not recognise, but a loss of its “banking reserves” or reserve of banknotes. The holding of a reserve of banknotes is a characteristic of the Bank of England due to its partition into an Issue and a Banking Department. An “ordinary” central bank does not hold its banknotes as reserves, of course, but deletes them from its balance, when they return to it after the assets, which triggered their issue, have been sold or given back. At the Bank of England, this deletion is made by the Issue Department when it returns gold to the redeemers of its notes. The Banking Department, however, has to hold a reserve of banknotes in accordance with the deposits at the Bank of England by the commercial banks; see Bagehot 1873, 248. For a merger of the separate balances of the both of its departments to a consolidated balance of the Bank of England of 16 September 1903, in which the “banking reserves” are deleted, see Andréades 1904, 296.
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Stadermann, HJ., Steiger, O. (2012). James Steuart and the Theory of the Monetary Economy. In: Backhaus, J. (eds) Handbook of the History of Economic Thought. The European Heritage in Economics and the Social Sciences, vol 11. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-8336-7_27
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