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A Critical Narrative on the Theories of Money

,-ne. A.a/ Rana
Researcher at 0nna.an &nneshan) an inde"endent 1ultidisci"linar. thin2 tan2 -ased in 3ha2a) 4angladesh
,1ail5 earana6unna.an.org

Abstract
Although 1one. is now used as a generall. acce"ta-le 1ediu1 of e7change) the e1ergence of it was due to
unintended conse8uence of hu1an actions. Since the e1ergence as the 1ediu1 of e7change) 1one. underwent
se9eral theoretical de9elo"1ents as regards its nature) function and use in the econo1.. :his "a"er ai1s at
"resenting a -rief account of the do1inant theoretical de9elo"1ents of 1one.. Firstl.) a -rief anal.sis of the
origin of 1one. as a generall. acce"ta-le 1ediu1 of e7change is de9elo"ed in this "a"er. Secondl.) the classical
functions of 1one. are re9isited and finall.) the do1inant theoretical de9elo"1ents of 1one. ; the classical
foundations) the 8uantit. theor. of 1one.) <e.nes= theor. of 1one.) neoclassical theories of 1one.) 1onetarist
school of thought) and "ost-<e.nesian theor. of 1one. ; are discussed criticall. on a -rief account.
Keywords: >ediu1 of e7change) ?uantit. theor. of 1one.) 4arter s.ste1) @lassical dichoto1.) @o11odit.)
0nintended conse8uence

1. Introduction
:he e1ergence of 1one. as a generall. acce"ta-le 1ediu1 of e7change did not ta2e "lace as a result of an.
co11on will or general agree1ent -etween "eo"le. Aith res"ect to the di9ision of la-or) indi9iduals -eca1e
de"endent u"on each other to 1eet their needs. As a result) indi9iduals used to e7change one=s goods for
another=s. :he e7changes -etween indi9iduals were -eco1ing co1"le7 in line with the increased di9ision of
la-or. :hus there e1erged the 1ediu1 of e7change ; the 1one. ; as a wa. out to the difficulties of co1"le7
-arter s.ste1. Bowe9er) the discussion of the nature and use of 1one. occu"ies a large s"ace in the literature of
classical "olitical econo1.. Su-se8uentl.) it too2 "lace in the literature of Neoclassical) <e.nesian) and "ost-
<e.nesian econo1ics. Further1ore) "articular school of thought on the anal.sis of 1one.) na1el. 1onetarist
school led -. >ilton Fried1an has also e1erged. ,ach of the theoretical de9elo"1ents of 1one. has e1erged to
address "articular econo1ic "ro-le1s related to the use of 1one.. Bowe9er) these theoretical de9elo"1ents of
1one. ha9e also re1ained under the critical a""raisals fro1 different "ers"ecti9es of econo1ics science. :his
"a"er ai1ing to draw a -rief account of the theoretical de9elo"1ents of 1one. e7"lains how 1one. as a
generall. acce"ta-le 1ediu1 of e7change e1erged and functions of 1one. in the first and second sections and
then "resents the critical anal.ses of different theoretical de9elo"1ents of 1one. in the su-se8uent sections.

2. The Oriin of Money
&n the 8uestion of how 1one. e1erged as a 1ediu1 of e7change) @arl >enger 1$$*# "uts forward two
co1"elling e7"lanations. First) it is argued whether 1one. e1erged as a result of an. co11on will or
"ur"oseful hu1an acti9ities and second) whether the origin of 1one. was due to unintended results of hu1an
acti9ities ai1ed at attaining indi9idual goals. According to >enger=s notion of organic e7"lanation ; natural
organis1s are analogous to certain social "heno1ena -oth in ter1s of their function and their origin ; the for1er
e7"lanation is ter1ed as "rag1atic "heno1ena and the latter is ter1ed as organic "heno1ena. :he origin of
1one. is) therefore) e7"lained in >enger=s anal.sis as an organic "heno1enon that e1erged fro1 unintended
results of historical de9elo"1ent.
&ne needs) e.g. onl. to thin2 of the "heno1enon of 1one.) as institution which to so great a
1easure ser9es the welfare of societ.) and .et in 1ost nations) -. far) is -. no 1eans the result
of an agree1ent directed at its esta-lish1ent as a social institution) or of "ositi9e legislation)
-ut is the unintended "roduct of historical de9elo"1ent. &ne needs onl. to thin2 of law) of
language) of the origin of 1ar2ets) the origin of co11unities and of states etc >enger 1$$*) ".
1*+#.
:he argu1ent here is 1one. as a generall. acce"ta-le 1ediu1 of e7change has e1erged fro1 the dis"ersed
actions of hu1ans without a co11on will to esta-lish it. :he 1ediu1 of e7change has -een 9ar.ing in ter1s of
ti1e and "laces. 3ifferent t."es of co11odities ser9ed as 1ediu1 of e7change in different nations and cultures.
In line with increased 1ar2et traffic) e7changes of co11odities -eca1e trou-leso1e. For e7a1"le) in a -arter
s.ste1 if the indi9idual A needs the co11odit. "ossessed -. the indi9idual 4) 4 needs the co11odit.
"ossessed -. the indi9idual @) and @ needs the co11odit. "ossessed -. A) the de1and and su""l. do not
coincide in this -arter s.ste1. :herefore) the need for a good as a 1ediu1 of e7change e1erges that has high
salea-ilit. and all the actors in the -arter s.ste1 re1ain willing to hold that highl. salea-le goods to -u. their
needed goods in e7change for that. :hus >enger 1$92# argues that the origin of 1one. can -e understood in
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ter1s of its high salea-leness. Indi9iduals would -e willing to hold the goods of high salea-ilit. to e7change for
their needed goods since there is high de1and for 1ore salea-le goods in the 1ar2et.
:he theor. of 1one. necessaril. "resu""oses a theor. of salea-leness of goods. If we gras"
this) we shall -e a-le to understand how the al1ost unli1ited salea-leness of 1one. is onl. a
s"ecial case ; "resenting onl. a difference of degree ; of a generic "heno1enon of econo1ic
life ; na1el.) the difference in the salea-leness of co11odities in general >enger 1$92) ".
2%*#.
Another i1"ortant reason of the high de1and for 1ore salea-le goods in the 1ar2et is that indi9iduals tr. to
1ini1iCe their transaction cost -. using 1ore salea-le goods in their e7change. Indi9iduals) therefore) "refer the
1ore salea-le goods or 1ore needed goods to others) -ut the. do not ha9e the intention to -ring a-out these
goods as generall. acce"ta-le 1ediu1s of e7change. Rather) in the "rocess of the con9enient transaction) so1e
goods -eco1e filtered as the no1inees for -eing a generall. acce"ta-le 1ediu1 of e7change. >ar2et
en9iron1ent) howe9er) also encourages the indi9iduals to use 1ore salea-le goods in their e7change. If
indi9iduals use 1ore salea-le goods in their e7change) the 1ar2et traffic increases which) in turn) necessitates
the use of 1ore salea-le goods in e7change. :hus the good that is regarded as a generall. acce"ta-le 1ediu1 of
e7change -eco1es 1ore and 1ore salea-le in the 1ar2et. :his "rocess results in the e1ergence of a 1ediu1 of
e7change as an unintended conse8uence of the actions of self-interested indi9iduals.

!. Classical "unctions of Money
After the 1a2ing of a contract -etween two indi9iduals on the transaction of sale or "urchase) there re1ain a
de-t in real ter1s fro1 the seller on the one hand and a de-t in 1one. ter1s fro1 the -u.er on the other. Ahen a
de-t is e7"ressed in ter1s of 1one.) 1one. is "aid for the discharge of the de-t. >one.) therefore) co1es into a
transaction in two wa.s5 first) it causes the for1ation of a contract -etween indi9iduals and second) it is used for
"a.ing. :a2ing these roles of 1one. into account) Bic2s 19$9# categoriCes four functions of 1one.. First)
1one. is used as a standard of 9alue. It 1easures the 9alue of goods "roduced in the econo1.. Second) 1one.
"la.s role as a 1eans of "a.1ent. After the 1a2ing of contract of transaction -etween -u.er and seller) -u.er
"a.s 1one. to the seller for the discharge of the de-t that he owes to the seller -. the contract of the transaction.
:hird) 1one. can -e a store of 9alue as it can -e hoarded. Bowe9er) this "ro"ert. of 1one. is considered to -e
no distinguishing since an. dura-le co11odit. can also -e a store of 9alue. It cannot also -e defended -. the
<e.nesian argu1ent of 1one.=s "ossession of "erfect li8uidit. as li8uidit.) in turn) cannot -e defined e7ce"t in
ter1s of e7changea-ilit. for 1one. Bic2s 19$9) ". %2#. Fourth) 1one. is used as a Dstandard of deferred
"a.1ent=. &nce 1one. is used as a standard of 9alue of the co11odities) it can -e used as a standard of deferred
"a.1ent since "a.1ents are usuall. 1ore or less deferred.
:he a-o9e anal.sis shows that 1one. -asicall. has two distinguishing functions5 standard of 9alue and 1eans of
"a.1ent. :he rest functions -asicall. follow fro1 these two. Bowe9er) now the 8uestion co1es whether
1one.=s functions of standard of 9alue and 1eans of "a.1ent are inde"endent of each other or one i1"lies the
other. :he answer lies in the latter argu1ent that 1one. cannot -e used as a 1eans of "a.1ent of a de-t unless
1one. as standard of 9alue has alread. -een i1"lied in the de-t. :herefore) 1one. as a 1eans of "a.1ent
i1"lies 1one. as a standard of 9alue. Bowe9er) a de-t e7"ressed in 1one. in ter1s of standard of 9alue can still
-e discharged otherwise than in 1one.. It could -e offset against another de-t. For instance) the de-t fro1 A to
4 can -e cancelled -. the de-t fro1 4 to A. If these two de-ts arise fro1 si1ilar transactions) the result is a
-arter transaction where e7changes of goods ta2e "lace with no 1one. changing hands. :hus) e9en if a de-t is
e7"ressed in 1one. ter1s) 1one. as a 1eans of "a.1ent can still -e 1issing Bic2s 19$9#.

#. Classical Theories of Money
Ada1 S1ith 1776# offered an earl. discussion of origin of 1one. through e7a1ining the di9ision of la-or
which he defines as the root cause of la-or "roducti9it.. In line with an ela-orate di9ision of la-or) "roducers
ha9e to e7change a "art of their "roduct for that of the others. Bowe9er) this "rocess of direct co11odit.
e7change -eco1e Dclogged and e1-arrassed in its o"eration= due to inco1"ati-ilit. of wants a1ong the
"roducers. :hus D"rudent= "erson -eco1es aware of 2ee"ing a certain 8uantit. of a co11odit. which he thin2s
e9er.one would -e li2el. to e7change their co11odities for. !recious 1etals are -est suited for this "ur"ose
since the. are i1"erisha-le and indi9isi-le. :hus S1ith theoreticall. deri9ed 1one. as a co11odit. that can
"urchase the other co11odities and o9erco1e the "ro-le1s of -arter. :he no1inal "rice of goods thus -eco1es
the 1easure of their e7changea-ilit.. S1ith) therefore) "uts forward the classical theor. of e7change 9alue -.
distinguishing -etween D9alue in use= and D9alue in e7change= and concludes that la-or is the real 1easure of
e7changea-le 9alue of all co11odities ; the real "rice of a co11odit. is the Dtoil and trou-le= of ac8uiring it.
S1ith) howe9er) tries to reach an in9ariant 1easure of 9alue in e7change) -ut that was not feasi-le since the real
"rice of 1one. co11odit. is directl. affected -. changes in the conditions of its "roduction. :herefore) the
1etal used for 1one. cannot -e this in9ariant 1easure) rather the 1ost that the 1etallic 1one. can do is to
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esta-lish no1inal "rices) which 9ar. in9ersel. with the 9alue of the 1etal and the 1etal content of the coin Itoh
and Ea"a9itsas 1999#.
Bowe9er) in the de9elo"1ent of the -arter illusion) sa.=s law of 1ar2ets occu"ies a central "osition. Sa. 1971#
argues that su""l. creates its own de1and as "roducts are e7changed for "roducts and the econo1. wor2s as if it
were a -arter s.ste1 with 1one. strictl. neutral in res"ect to out"ut and une1"lo.1ent. If there are une1"lo.ed
wor2ers in the econo1.) all is needed to e1"lo. the1 to "roduce additional "roducts -ecause these "roducts will
create sufficient de1and to clear the 1ar2et. :hus according to Sa. there will -e no in9oluntar. une1"lo.1ent
in the -arter-li2e econo1.. :herefore) on the 8uestion of nature and uses of 1one.) Sa. argues that as su""l.
creates its own de1and) 1one. 1erel. acts as the agent of the transfer of 9alue. :he use of 1one. thus onl.
"ro9ides a 1ore efficient for1 of e7change than the direct -arter) -ut is not essentiall. different fro1 -arter.
>one. is not desired as an o-/ect of food) of household use) or of "ersonal co9ering) -ut for
the "ur"ose of re-sale) as it were) and re-e7change for so1e o-/ect of utilit.) after ha9ing -een
originall. recei9ed in e7change for one such alread.. >one. is) therefore) not an o-/ect of
consu1"tionF it "asses through the hands without sensi-le di1inution or in/ur.F and 1a.
"erfor1 its office e8uall. well) whether its 1aterial -e gold or sil9er) leather or "a"er Sa.
1971) ". 221#.
Sa. does not differentiate -etween 1one. e7changes in a self-e1"lo.ed econo1. and 1one. e7changes in an
econo1. of large ca"italist "roducers. >one.) he argues) is onl. used in the s.ste1 of e7change where
"roducers sell their "roducts in e7change for 1one. to -u. the goods the. need for li9ing. It is further argued
that inco1e that is not s"ent for consu1"tion is still s"ent -ecause sa9ing is another for1 of s"ending. :herefore)
the circular flow of sales and "urchases re1ain uninterru"ted -. dela.s in "urchases following salesF changes in
the 9elocit. of 1one. irres"ecti9e of whether 1one. outla.s are for consu1"tion or for sa9ing or in9est1ent
since for the 1ost "art) sa9ing and in9est1ent are done -. the sa1e indi9idual Sa. 1971#.

$. The %uantity Theory of Money
:he 8uantit. theor. of 1one. discerned fro1 the classical theor. of 1one. and credit e1"hasiCes the
har1onious e8uili-ration -etween the total 8uantit. of co11odit. out"ut and the total 8uantit. of co11odit.
1one.) "ro9ided that there is no state or other interference in the o"erations of do1estic and international
ca"italist 1ar2ets. For instance) the creation of credit 1one. -. -an2s could u"set the "resu1ed har1on. in the
rate of e7change of the aggregate 8uantit. of co11odit. for the aggregate 8uantit. of 1one.. In this regard)
1one. is 9iewed as a secondar. as"ect of ca"italist e7change ; a 9eil on real econo1ic acti9ities Itoh and
Ea"a9itsas 1999) ". %#. Bowe9er) to full. discern the classical argu1ents on the 8uantit. theor. of 1one.) one
has to understand Bu1e=s anal.sis and Stuart=s criti8ue of it.
It is noteworth. here that Bu1e=s anal.sis of the 8uantit. theor. of 1one. is not original -ut can -e referred to
the wor2 of @antillon and >ontes8uieu. Bowe9er) Bu1e 17(2# argues that 1one. onl. has Dfictitious 9alue=
and is a Dre"resentation of la-or and co11odities= in the s"here of e7change. :he Dfictitious 9alue= of 1one. is
the rate of e7change of the aggregate 8uantit. of co11odit. for the aggregate 8uantit. of 1one.. Bu1e=s theor.
of 1one. holds an international as"ect that 1one. flows -etween the countries in the 1anner of water -etween
9essels and see2s the sa1e le9el in all countries Bu1e 17(2) "". 6%-6(#. For e7a1"le) if the do1estic 8uantit.
of 1one. is increased -. gold disco9eries in a foreign countr.) 1one.=s rate of e7change with the 8uantit. of
co11odit. -eco1es distur-ed in the do1estic 1ar2et ; the 9alue of 1one. naturall. falls. @onse8uentl.) there
causes -alance of "a.1ent deficits in the do1estic countr. since ; the international le9el of 1one. ha9ing
re1ained the sa1e ; the 1onetar. 1etal flows out of the countr.. :his distur-ance ends when 1one. again
attain its correct le9el internationall.. :hus in the long run) 1one. is a 9eil on the real acti9it. and re1ains
econo1icall. neutral ; ha9ing no i1"act on countr.=s out"ut.
Bu1e=s 8uantit. theor. of 1one. co1es under the attac2 of argu1ent of anti-8uantit. theor. of 1one.
"ostulated -. John Stuart >ill. Stuart 1767# argues that the circulation of 1one. is the successi9e "assage of
co11odit. and 1one. fro1 one hand to another re"resenting the e7changes a1ong different classes of societ..
If the "ro"er e7change of e8ui9alents a1ong classes does not ta2e "lace) consu1"tion -eco1es li1ited and the
"oor or the Dthe industriousness= suffer. :herefore) the states1an has to 2now the "ro"ensit. of rich "eo"le=s
consu1"tion and the dis"osition of the "oor "eo"le to industriousness and the "ro"ortion of circulating 1one. as
regards -oth "ro"ensit. and dis"osition. In this res"ect) 1etallic 1one. is considered to -e "ro-le1atic since
"eo"le are inclined to hoard it when the. ha9e no desire to consu1e. As a result) the hoarded 1one. -eco1es
lost in the circulation and gi9es rise to an insufficienc. of do1estic 1one.) which inhi-its the growth of industr.
in the econo1..
:he circulation of e9er. countr.G 1ust e9er -e in "ro"ortion to the industr. of the inha-itants)
"roducing the co11odities which co1e to 1ar2etG if the coin of a countr.) therefore) fall
-elow the "ro"ortion of the "roduce of industr. offered to sale) industr. itself will co1e to a
sto"F or in9entions) such as s.1-olic 1one.) will -e fallen u"on to "ro9ide an e8ui9alent for it.
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4ut if the s"ecie -e found a-o9e "ro"ortion of the industr.) it will ha9e no effect in raising
"rices) nor will it enter into circulation5 it will -e hoarded u" in treasures) where it 1ust wait
not onl. the call of desire in the "ro"rietors to consu1e) -ut of the industrious to satisf. this
call Stuart 1767) ". 9(#.
:herefore) no conclusion can -e drawn) according to Stuart) a-out the "rices fro1 the assu1"tion of ar-itrar.
changes in the 8uantit. of 1one.. An increase in the 8uantit. of 1one. 1ight not result in an e7"ansion of
consu1er de1and) -ut a decrease would certainl. result in a decline in industrial growth and a rise in
une1"lo.1ent. Bowe9er) it is argued that Stuart=s anal.sis is an unco1"ro1ising re/ection of Bu1e=s 8uantit.
theor. of 1one. -ased on such assu1"tions of the hoarding of 1etallic 1one.) the endogenous creation of
credit 1one.) and the non-neutralit. of 1one. Itoh and Ea"a9itsas 1999#.

&. Keynes' Theory of Money and (is Attac) on Classical Model
<e.nes de9elo"s his theor. of 1one. on the -asis of two "reconditions5 re/ection of loana-le funds theor. and
the re/ection of the 8uantit. theor. of 1one. Johnson) Ee. and @ate 2++1#. According to the loana-le funds
theor.) consu1"tion) sa9ing) and in9est1ent are all the function of the interest rate. :he interest rate is
deter1ined in the loana-le funds 1ar2et where financial assets are -ought and sold. :hus the su""l. of and
de1and for loana-le funds) in other words the sa9ing and in9est1ent -eco1e in e8uili-riu1 at full e1"lo.1ent
in the "erfect co1"etition. As such) deficiencies in aggregate de1and -ecause of e7cessi9e sa9ing or deficient
in9est1ent can ne9er cause in9oluntar. une1"lo.1ent in the e8uili-riu1. &n the contrar. to the "ro"osition of
loana-le funds theor.) <e.nes 19*+# argues that consu1"tion is a function of inco1e and sa9ing is a function
of inco1e and interest rate. :herefore) the factors that deter1ine the decisions of households= consu1"tion and
sa9ing are different fro1 the factors that deter1ine -usiness in9est1ent decisions. As a result) sa9ings 1a. not
"ossi-l. -e transfor1ed into e8ui9alent a1ount of in9est1ent. :hus increases in sa9ings 1a. cause decrease in
aggregate de1and) which) in turn) results in in9oluntar. une1"lo.1ent. Bowe9er) now here co1es the 8uestion
how interest rate is deter1ined in <e.nesian anal.sis. In answering the 8uestion) <e.nes= theor. of 1one.
e7"lains the deter1ination of interest rate through re/ecting the classical dichoto1..
Bowe9er) -efore de9elo"ing the theor. of 1one.) <e.nes re/ected the classical 8uantit. theor. of 1one. on the
-asis of three grounds Johnson) Ee. H @ate 2++1#. First) he argues that the two assu1"tions i.e. the ratio of cash
to de"osits is constant and the ratio of reser9es to de"osit is constant) on which the sta-le 9elocit. of 1one. rests
do not hold. :herefore) the "ro"ortionalit. conclusion of the 8uantit. theor. of 1one. does also not hold.
Second) <e.nes re/ected the assu1"tion of 8uantit. theor. of 1one. that "eo"le de1and 1one. onl. for the
transaction "ur"oses. Instead he argues "eo"le de1and 1one. for such "ur"oses as to 1eet "ersonal e7"enditure)
to 1eet -usiness o-ligation) to 1eet "ersonal in9est1ent needs. Finall.) he re/ects the assu1"tion of 8uantit.
theor. of 1one. that out"ut could -e treated as constant. Ahile the classical 1odel e7"lains that econo1. is
alwa.s in e8uili-riu1 at full e1"lo.1ent and the out"ut can therefore -e ta2en as constant at full e1"lo.1ent
le9el) <e.nes shows that) as discussed earlier) less than full e1"lo.1ent e8uili-riu1 is not "ossi-le -ut also
"ro-a-le. :herefore) once it is esta-lished that less than full e1"lo.1ent e8uili-riu1 is "ossi-le in the econo1.)
the assu1"tion of constant out"ut -eco1es unacce"ta-le.
Aith the re/ection of loana-le funds theor. and the 8uantit. theor. of 1one.) <e.nes "ro9ides the -asis for the
eli1ination of classical dichoto1. which argues that interest rate is uni8uel. deter1ined -. the real 9aria-les.
Bowe9er) <e.nes= theor. of 1one. and the interest rate deter1ination lin2 the real and 1onetar. sectors of the
econo1. and thus o9erco1e the classical dichoto1.. <e.nes argues that there are three co1"onents in the
de1and for 1one.5 the transactions de1and for 1one.) the "recautionar. de1and for 1one.) and the
s"eculati9e de1and for 1one.. :he 2e. as"ect of <e.nes= theor. of 1one. lies in the s"eculati9e de1and for
1one. and the resulting li8uidit. "reference ; the de1and for real -alances that "eo"le want to ha9e in order to
a9oid ca"ital loss fro1 holding -onds. :he s"eculati9e de1and for 1one. lin2s the deter1ination of interest rate
to the de1and for 1one. and thus results in the interest rate -eing deter1ined in the 1one. 1ar2et instead of
loana-le funds 1ar2et. :herefore) according to <e.nes= theor. of 1one.) interest rate -eing deter1ined -. the
de1and and su""l. of 1one. affects in9est1ent) aggregate de1and) out"ut) and e1"lo.1ent and thus
o9erco1es the classical dichoto1. of -eing uni8uel. deter1ined -. the real 9aria-les.

*. Neoclassical Theories of Money
Neoclassical econo1ics e7"lains the -arter illusion as regards a -od. of doctrine concerned with the allocation
of gi9en resources a1ong alternati9e uses with a 9iew to .ielding 1a7i1u1 satisfaction. It "ri1aril. focuses on
the e8uili-riu1 of real sacrifice and real satisfaction) "utting 1one. in a su-sidiar. role and a"art fro1 the -asic
"rinci"les of econo1ics. :he neoclassical theories of 1one. continue to hold the neutralit. characteristic of
1one.. :he "oint of de"arture of neoclassical theor. of 1one. is a theor. of the e7change of goods for goods
a1ong consu1ers who 1a7i1iCe their satisfaction through ad/usting their 1arginal utilit. to "rices in a
co1"etiti9e 1ar2et 3illard 19$$#.
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As one of the founders of neoclassical 1arginalis1) Stanle. Je9ons re1ains con9entional and conser9ati9e on
the 8uestion of 1one.. Be de9elo"s a theor. of e7change on the -asis of outco1e of -arter -etween two
indi9iduals where the. are said to -e in e8uili-riu1 if their 1arginal utilities corres"ond to 1ar2et "rices
3illard 19$$#. Bowe9er) Aalras 19(%# de9elo"s the theor. of e7change as regards a theor. of "roduction and a
theor. of ca"ital for1ation. Be a""lies his theor. of 9alue to 1one. and argues that the 9alue of 1one. is -ased
on the conce"t of Ddesired cash -alance= and the e8uili-riu1 deter1ined -. su""l. of and de1and for 1one..
Bowe9er) Aalras rules out the uncertainties -. assu1ing that consu1ers and "roducers ha9e fairl. e7act ideas
a-out their recei"ts and e7"enditures of cash and the a1ounts and ti1ing of these transactions are also 2nown to
the1. Be further argues that 1one. is de1anded for transaction "ur"oses -ut not for s"eculati9e "ur"oses.
Bolding the notion of neutralit. of 1one. and anal.Cing the econo1. as if it were a -arter s.ste1) Alfred
>arshall 19*+# argues that 1one. can -e used to 1easure the strength of 1oti9es to sacrifice and to satisf. in
econo1ic acti9ities. &n the one hand) there is a certain su1 of 1one. that "ro1"ts an indi9idual to undergo
certain sacrifices i.e. la-or in "roduction) on the other hand) there is a certain su1 of 1one. that an indi9idual
gi9es u" to en/o. certain satisfactions i.e. utilities in consu1"tion. :herefore) 1one. is a co11on ele1ent that
lin2s >arshall=s two le9els of anal.sis5 the su-/ecti9e le9el and the o-/ecti9e le9el. &n the one hand) 1one.
1easures an indi9idual=s sacrifices of "roduction and satisfactions of consu1"tion at the su-/ecti9e le9el. &n the
other hand) it 1easures an indi9idual=s e7"enses of "roduction and e7"enditures for consu1"tion at o-/ecti9e
le9el. :hus 1one.) according to >arshall) does not 1easure the 1oti9es and decisions of indi9iduals) -ut 1erel.
ser9es as the 1easuring rod of the forces of 1oti9es and decisions. In addition) >arshall=s theor. of 1one. and
credit) howe9er) not onl. deals with the "rice le9els -ut also with the c.clical and general une1"lo.1ent) which
>arshall considers as a te1"orar. de"arture fro1 e8uili-riu1 resulting fro1 distur-ances in the credit 1ar2ets
Ahita2er 19$7#.

+. The Monetarist ,chool
>onetaris1) rightl. associated with the na1e of >ilton Fried1an) re"resents the resurgence of the classical
8uantit. theor. of 1one. under the guise of the conditions of "ostwar ca"italis1. Fried1an has -een
"roclai1ing the 1ain 1essage of 1onetaris1 since 19(+s as regards his for1ulation of the 8uantit. theor. of
1one. as a theor. of 1one. de1and Itoh and Ea"a9itsas 1999#. Fried1an 19(6# argues that the de1and for
real 1one. -alances is a function of such 9aria-les as real inco1e) wealth) and se9eral rates of return on
different assets. Bowe9er) the de1and for real 1one. -alances is considered to -e e1"iricall. sta-le) while the
su""l. of no1inal 1one. -alances is assu1ed to -e autono1ous since the central -an2 controls the su""l. of
no1inal 1one.. As the su""l. of no1inal 1one. -alances is controlled -. authorities) and the de1and for the
real 1one. -alances re1ain sta-le) changes in no1inal inco1e -eco1e "ro"ortionate to the changes in the
no1inal su""l. of 1one.. :herefore) as Fried1an 197+# argues) inflation is alwa.s and e9er.where a 1onetar.
"heno1enon and it arises fro1 the 1ore ra"id growth of 1one. su""l. than that of the out"ut.
:o 9alidate the argu1ent of 1onetaris1 that the changes in no1inal inco1e ha9e to -e "ro"ortionate to the
changes in no1inal 1one. su""l.) Fried1an and SchwartC 196* H 19$2# conducted an e7tensi9e stud. of the
histor. of 1onetar. "heno1ena in the 0nited States and the 4ritain. :he results of the stud. were found to
su-stantiate the 1onetarist "ro"osition. Bowe9er) the wor2 of Fried1an and SchwartC has -een su-/ected to
withering criticis1 due to its su"erficial 9iew of financial institutions and histor. :o-in 197+#. In line with his
1onetarist argu1ent) Fried1an 196$# challenges the "ro"osition of !hilli"s cur9e -. den.ing the e7istence of a
sta-le trade-off -etween inflation and une1"lo.1ent. Be argues that in the long run) no trade-off ta2es "lace
-etween une1"lo.1ent and inflation in the econo1.) instead the une1"lo.1ent settles at natural rate) while an
e7"ansionar. fiscal "olic. 1ight -e effecti9e to reduce une1"lo.1ent -elow the natural rate onl. in the short-
run. :hus the 1onetarist school argues that the onl. "er1anent result of e7"ansionar. fiscal "olic. is higher rate
of inflation and therefore a stead. rate of growth of 1one. su""l. needs to -e ado"ted) lea9ing e9er.thing else
to the o"erations of ca"italist 1ar2et.

-. The .ost/Keynesian Theory of Money
:he "ost-<e.nesian theor. of 1one. e1erges in contradiction to the orthodo7 <e.nesians) who ignores 1ost
as"ect of a 1onetar. econo1. as well as in contradiction to 1onetarists) who ad9ocate the e7ogenous as"ects of
stoc2 of 1one. Ea9oie) 19$%#. :he "ost-<e.nesians argues that the 1a/or "art of the 1one. stoc2 arises
essentiall. for endogenous reasons ; the res"onse of -an2ing s.ste1 to an increased de1and for 1one. ; rather
than for e7ogenous reasons ; -. the deli-erate su""l. of 1one. -. the central -an2.
!ost-<e.nesians) in shar" contrast to 1onetarists) regard the stoc2 of 1one. as -eing
essentiall. endogenous) res"onding and acco11odating to changes in the le9el of 1one.
wages >oore 1979) ". 12(#.
Bowe9er) it is argued that the "ost <e.nesians differ with the 1onetarists on four stages. First) "ost-<e.nesians
show that the e7istence of a credit 1ulti"lier due to the e7ogenous controls ado"ted -. the 1onetar. authorities
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does not necessaril. i1"l. a causalit. running fro1 1onetar. -ase or central -an2 1one. to the 1one. stoc2.
Instead) the causalit. runs fro1 higher credit needs) to higher -an2 de"osits) to higher re8uired reser9es. Second)
the "ost-<e.nesian contend that the central -an2s "refer to acco11odate the needs of the co11ercial -an2s.
:hird) e9en if the central -an2s want to control the stoc2 of 1one.) the. can do so onl. through changing the
le9el of interest rates. Finall.) the "ost-<e.nesians clai1 that central -an2s= control on 1one. stoc2 through
changing the le9el of interest rates causes disru"tions in financial 1ar2ets. :herefore) a 1onetar. "olic. -ased
on the su""l. of 1one. tends to -e ineffecti9e or desta-iliCing.

10. Conclusion
:his "a"er 1a2es a -rief account of 9arious theoretical "ers"ecti9es on 1one.. :he classical econo1ic
e7"lanation of the origin of 1one. -. Ada1 S1ith e7"licates that the di9ision of la-or "ro1"ts the indi9iduals
to -e de"endent u"on each other to 1eet their needs -. e7changing of one=s goods for another=s. Since the
di9ision of la-or intensifies the e7changes of co11odities -etween the indi9iduals -eco1e co1"le7. :hus the
need for a generall. acce"ta-le 1ediu1 of e7change e1erges. Bowe9er) the neoclassical econo1ist @arl >enger
contends that 1one. as a 1ediu1 of e7change e1erged as an unintended conse8uence of hu1an actions ; that is
1one. did not e1erge -. an. co11on will or general agree1ent of the "eo"le. :he classical theories of 1one.
"ut forward -. J. 4. Sa. "ostulates that the su""l. of a "roduct creates its own de1and where "roducts are
e7changed for the "roducts and econo1. acts as if it were a -arter s.ste1 with 1one. -eing strictl. neutral with
res"ect to out"ut and une1"lo.1ent. 4esides) the 8uantit. theor. of 1one. i1"lies that there re1ains a
har1onious e8uili-ration -etween the total 8uantit. of co11odit. out"ut and the total 8uantit. of co11odit.
1one.. An. state or other interference in this har1onious e8uili-ration) therefore) cause distur-ance in the
e7change rate. :he <e.nes= theor. of 1one. argues that the deter1ination of interest rate can -e done -. the
1onetar. 9aria-les as there is s"eculati9e de1and for 1one. a1ong the "eo"le and thus o9erco1es classical
dichoto1.. :he neoclassical theories of 1one. e1"hasiCe the e8uili-riu1 of real satisfaction and real sacrifice)
"utting 1one. in a su-sidiar. role and neutral as regards out"ut and une1"lo.1ent. >eanwhile) the 1onetarist
school clai1s that since the de1and for real 1one. -alances re1ain sta-le) changes in no1inal inco1e -eco1e
"ro"ortionate to the changes in the su""l.. Finall.) the "ost-<e.nesian theor. of 1one.) as o""osed to
1onetarist school) argues that the 1a/or "art of 1one. stoc2 arises for endogenous reasons i.e. -an2s= res"onse
to increased de1and for 1one.) while 1onetaris1 argues it arises e7ogenousl. ; su""l. of 1one. -. the central
-an2s.

1eferences
3illard) 3. 19$$#. D:he 4arter Illusion in @lassical and Neoclassical ,cono1ics=) Eastern Economic Journal,
9ol. II') no. %) "". 299-*1$.
Fried1an) >. 19(6#. J:he ?uantit. :heor. of >one.5 A Restate1ent) in >. Fried1an ed.#) Studies in the
Quantity Theory of Money, @hicago) III.5 0ni9ersit. of @hicago !ress.
Fried1an) >. 196$#. K:he Role of >onetar. !olic.L American Economic Review', >arch.
Fried1an) >. and A Sch99artC 196*#. Monetary History of the United States, !"#$%"& !rinceton NJ5
!rinceton 0ni9ersit. !ress.
Fried1an) >. and A. Sch99artC 19$2#. Monetary Trends in the United States and the United 'in(dom) Their
Relation to *ncome, +rices and *nterest Rates @hicago) 111.5 0ni9ersit. of @hicago !ress.
Bic2s) J. 19$9#. A Mar,et Theory of Money) &7ford5 @larendon !ress.
Bu1e) 3) 17(2#. K,ssa.s) Eiterar.) >oral and !oliticalK) in ,. Rotwein ed#.) -ritin(s on Economics, ,din-urgh5
Nelson.
Itoh) >. and Ea"a9itsas) @. 1999#. +olitical Economy of Money and .inance, Eondon5 >c>illan. .
Johnson) E. ,.) Ro-ert) E. H @ate) :. 2++1#. D<e.nes= theor. of 1one. and his attac2 on classical 1odel=) *AER,
9ol. 7) no. %) "". %+9-%+1$.
<e.nes) J. >. 19*+#. A treatise on money, Eondon5 >c>illan.
Ea9oie) >. 19$%#. D:he ,ndogenous Flow of @redit and the !ost <e.nesian :heor. of >one.=) Jouranl of
Economic *ssues, 9ol. I'III) no. *) "". 771-797.
>arshall) A. 19*+#. +rinci/les of Economics, Eondon5 >c>illan.
>enger) @. 1$$*#. *nvesti(ation into the Method of the Social Sciences, with S/ecial Reference to Economics,
New Mor2 and Eondon5 New Mor2 0ni9ersit. !ress.
>enger) @. 1$92#. D&n the origins of 1one.=) Economic Journal, 25 2*9-2((F re"rinted in R. >. ,-eling ed.#
1991#. Australian Economics) A Reader, 9ol. 1$) Billsdale) >I5 Billsdale @ollege !ress) "". %$*-(+%.
>oore) 4. J. 1979#. D>onetar. Factors=) In A 0uide to +ost 'eynesian Economics 2 Fall#) "". %9-7+.
Sa.) J. 4. 1971#. A treatise on +olitical Economy, New Mor25 Augustus >. <elle. !u-lishers.
S1ith) A. 1776#. The -ealth of 1ations, ed. ,. @annan) 9ols. I and n) Eondon5 >ethuen.
Steuart) J. 1767#. DAn In8uir. into the !rinci"les of !olitical ,cono1.K) in -or,s, +olitical, Meta/hysical, and
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2hronolo(ical, of the 3ate Sir James Steuart, 9ols I) n) ni) i9) Eondon.
:o-in) J. 197+#. K>one. and Inco1e5 !ostBoc) ,rgo !ro"ter BocNK) Quarterly Journal of Economics, >a..
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