The True Gold Standard (Second Edition)
Previous article: Rueff Restates Say’s Law
Rueff addresses the Quantity Theory on the same basis.
“In light of the foregoing observations, the quantity theory of money can be stated as follows: the general price level varies only as a result of the difference between the simultaneous variations of total actual cash balances and total desired cash balances.
“As long as the variations of the former [dM] equal the variations in the latter [dL], the general price level is indifferent to supply and demand [dP = 0 for any Q], because if supply increases, demand increases accordingly.
“Similarly the general price level is indifferent to an increase in the quantity of money in circulation so long as such money is desired.” (“Sur la theorie quantitative et le phenomene de regulation monetaire,” Econometrica, July 1949, unpublished Lehrman Institute translation)
This begins to explain how one might use some measure of undesired or “excess” money as a basis for prediction. But it does not settle the question of policy.
“Some people will think that the previous statements settle the problem of the quantity theory and that, by influencing the difference between the amount of circulation and the total desired cash balances, it is possible to cause variations in the general price level, as one wishes. This is the view of theorists who believe that the monetary authorities regulate the price level by causing variations in the quantity of money in circulation [i.e. the monetarists].
“These people, however, are entirely wrong because they lose sight of the basic link which tends to regulate the quantity of money in circulation to the amount of desired cash balances.” (idem,III/5)
According to Rueff, the problem of price stability is not simply a question of abstract monetary theory, but of specific monetary institutions in the real world.
Goldman of Polyconomics, as we will see, argues that what’s wrong with the monetarists is that they focus on the money supply while ignoring the demand for money. In fact, Milton Friedman’s whole theory is basically about the demand for money.
Rueff argued that the real problem with the monetarists is not that they focus too much, but rather too little on the supply of money; namely, they assign too little importance to the concrete mechanisms by which money is actually created. Most monetarists adopt the convention that the government can control the nominal supply of money, while demanders of money control its value. Rueff pointed out that under a properly functioning monetary system, even the nominal supply of money is determined by people’s demand for it.
Next Installment: The Link Between Money Supply and People’s Demand for It
The Rueffian Synthesis