Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

Central and Free Banking Theory 617After Cantillon, and aside from some interesting monetaryanalysis by Turgot, Montesquieu, and Galiani, 29 no importantreferences to banking appear until Hume makes his essentialcontributions.David Hume’s (1711–1776) treatment of monetary mattersis contained in three brief but comprehensive and illuminatingessays entitled “Of Money,” “Of Interest” and “Of the Balanceof Trade.” 30 Hume deserves special recognition for havingsuccessfully refuted John Law’s mercantilist fallacies by provingthat the quantity of money in circulation is irrelevant to economicactivity. Indeed Hume argues that the volume of moneyin circulation is unimportant and ultimately influences onlythe trend in nominal prices, as stated by the quantity theory ofmoney. To quote Hume: “The greater or less plenty of money isof no consequence; since the prices of commodities are alwaysproportioned to the plenty of money.” 31 Nevertheless Hume’s29 Ferdinando Galiani follows in Davanzati and Montanari’s footsteps,and his writings, included in Della moneta, rival even the works of Cantillonand Hume.30 These essays have been reprinted in splendid editions by Liberty Classics.See Hume, Essays: Moral, Political and Literary, pp. 281–327.31 See “Of Money,” ibid., p. 281. Even today this essential observation ofHume’s escapes some highly distinguished economists, as is clear fromthe following assertion Luis Ángel Rojo makes:From a social standpoint, the real money balances held by thepublic should be at a level where the social marginal productivityof the money is equal to the social marginal cost of producingit—a cost which is very low in a modern economy.From a private perspective, the overall possession of realmoney balances will reach a level where their private marginalproductivity—which, for the sake of simplicity, we mayassume to be equal to their social marginal productivity—isequal to the private opportunity cost of holding riches inmoney form. As the public will decide, based on personalstandards, the volume of real money balances they wish tomaintain, the amount actually held will tend to be lower thanthat which would be ideal from a social viewpoint. (LuisÁngel Rojo, Renta, precios y balanza de pagos [Madrid: AlianzaUniversidad, 1976], pp. 421–22)