1. Additional famous policy debates pitting mercantilists and classicals include (1) the Swedish Bullionist controversy (1755-1765), (2) the English Bullionist-Antibullionist, or Bank Restriction, dispute (1797-1821), (3) the Bimetallism debate (1880-1896), and (4) the German hyperinflation debate (1922-1923).
2. Because anti-quantity theory elements also characterize the fixed-exchange-rate, small-open-economy case of the monetary approach to the balance of payments, some observers may be tempted to equate mercantilism with that approach. In fact, however, the two theories differ markedly. First, the monetary approach applies the quantity theory, rather than its opposite, to closed-economy and inconvertible-paper, floating-exchange-rate regimes. By contrast, mercantilists, with few exceptions, tended to apply the anti-quantity theory indiscriminately to all regimes. Second, the monetary approach rejects the mercantilist money-stimulates-trade doctrine.
3. On Law's monetary theory, see Murphy (1997, Chs. 6 and 8) and Hutchison (1988, pp. 134-40). On Steuart's theory, see Eltis (1986), Hutchison (1988, pp. 341-51), Meek (1967), and Skinner (1981).
4. Law's fear of monetary shortage under a metallic standard is incompatible with the monetary approach to the balance of payments. The latter sees a small open economy, like Scotland, taking its price level as given from the closed world economy with money then flowing in through the balance of payments to support that price level such that no monetary shortage occurs. Of these two propositions, Law recognized the first but denied the second. See Murphy (1997, Ch. 8).
6. On Steuart's cost-push theory, see Screpanti and Zamagni (1993, p. 53).
7. Not all mercantilists were as sanguine as Steuart on hoards. Indeed they were somewhat ambivalent on the subject. Hoards to them could be either desirable or undesirable. On the one hand, hoards, by draining excess cash from circulation, would tailor the remaining stock precisely to the needs of trade. On the other hand, if output and so the needs of trade were expandable under the impact of a monetary stimulus, such hoards, by removing the source of that stimulus, could unduly constrain real activity. Even so, such hoards would see to it that no monetary excess ever developed to spill over into the commodity market to bid up prices.
8. See Screpanti and Zamagni (1993, p. 53).
9. Steuart of course never resorted to such modern terminology. Nevertheless, the concepts were his.
10. On Steuart's statesman, see Eltis (1986) and Skinner (1981).
11. Law denied that the monetary expansion was excessive on the grounds that much of it went to redeem outstanding government bonds and equity claims to his trading firm. Since to him bonds and stocks shared money's characteristic as a transactions medium, he saw them as exerting the same influence on spending. In his view, money swapped for bonds and equities leaves the total supply of financial purchasing power — money, bonds, and stocks — unchanged. Such monetary issue therefore is noninflationary. He erred. Not being transactions media, bonds and stocks are far from perfect substitutes for money in spending. Monetizing them can be inflationary. See Niehans (1990, p. 51).
12. See Murphy (1997) for an exhaustive account of the rise and fall of Law's system.
13. Thus a follower of Smith might attribute Scotland's penury not to monetary deficiency and the absence of banks, but rather to lack of specialization and division of labor resulting from a small population.
14. Cesarano (1998) argues that Hume actually rejected the price-specie-flow mechanism and its attendant relative price effects for the monetary approach to the balance of payments. By contrast, the standard view emphasized here holds that neither Hume nor his classical followers subscribed to the approach's proposition of instantaneous purchasing power parity, or law of one price.
15. See Ricardo (1951-73, I, pp. 46, 61-3, 104-5, 126, 302-3, 307-8, 315).
16. See Hume ([1752] 1955, pp. 37-8, 47-8).
17. Classicals recognized still other sources of short-run nonneutrality including sticky nominal interest rates, fixed nominal charges such as rents and taxes, fixed nominal incomes of wage earners and rentiers, confusion of relative- for absolute price changes, market size encouragement to specialization and division of labor, and deliberate efforts on the part of organized groups to maintain real incomes. See Humphrey (1993, pp. 251-63).
18. Hume ([1752] 1955, pp. 39-40) admit-ted that money might exhibit long-run super-nonneutrality. Being unanticipated (perhaps because agents formulate their expectations in a backward-looking way), a steady succession of money stock changes might perpetually frustrate the attempt of prices to catch up and therefore permanently affect the level of real output.
19. Perhaps too cavalierly, classicals dismissed or minimized the problem of unemployment. To them joblessness, while it certainly occurred from time to time, was necessarily short-lived and self-correcting through automatic wage, price, and interest-rate reductions. Only their inflationist, full-employment-at-any-cost counterparts of the Birmingham School, especially the Attwood brothers, Thomas and Matthias, were gravely concerned with it.
20. See Hume (1752, pp. 47-59); Ricardo (1951-73, I, pp. 363-4; III, pp. 88-89, 91,92; IV, p. 233; V, p. 445); Thornton ([1802] 1939, pp. 253-56).
21. Thornton ([1811] 1939, p. 342). He ([1802] 1939, pp. 244, 253-6) applies the same criticism to the real bills doctrine which ties the issue of bank money (notes and checking deposits) to the nominal volume of commercial paper that borrowers offer as collateral for bank loans./p>
22. For classic accounts of the Currency School-Banking School debate, see Viner (1937, Ch. 5), Fetter (1965, Ch. 6), Robbins (1958, Ch. 5), and Mints (1945, Ch. 6). For recent interpretations, see O'Brien (1975, pp. 153-59) and Schwartz (1987).
23. With the exception of John Wheatley, classicals held that national price levels could deviate temporarily from their purchasing power parity, or long-run equilibrium, levels.
24. O'Brien (1975, p. 153) credits Joplin, Drummond, Page, Pennington, and McCulloch with the simultaneous enunciation of the metallic principle.
25. Because these doctrines are consistent with those of the monetary approach to the balance of payments, Skaggs (1999) interprets the Banking School as early anticipators of that approach. Even so, the School hardly derived its conclusions from the logic of the monetary approach. The conclusions may have been the same, but they were reached by a different route.
26. On Tooke's interest cost-push theory and Knut Wicksell's definitive critique of it, see Humphrey (1998, pp. 60-64).
27. Before he abandoned classicism, Keynes was one of its luminaries. Both his 1923 A Tract on Monetary Reform and his 1930 A Treatise on Money are squarely in the classical tradition. He returned to the classical fold shortly before his death in 1946.
28. Keynes applied this notion to a closed economy. He was not referring to the case where, with foreign prices given and the exchange rate fixed, the real terms of trade drives the price level in a small open economy.
29. On the cost-push pricing theories of Keynes and his followers, see Tavlas (1981, pp. 324-330).
30. On the mercantilists' policy goal of full employment, see Grampp (1952).
31. See Haberler (1941, pp. 242, 389, 403), Pigou (1943, 1947), and Patinkin (1948, 1965).
32. See Warburton (1966) for a collection of his relevant papers, many published between 1944 and 1953.
33. See Taylor (1997, pp. 278-9).
34. Alternatively, an established reputation as a zealous inflation fighter would do.
35. The time consistency case for rules differs a bit from Friedman's argument. He sees rules as overcoming the central bank's inability to predict the short-run impact of its actions. By contrast, the time inconsistency argument is that rules are good for commitment reasons even though central bankers have full knowledge of the impact of their moves.
