A Restatement of the Price Theory of Monies

8/12/2019 A Restatement of the Price Theory of Monies

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Muse de Ste: inv. 891.14.1, Robert Mols, "Port de Cette"

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This publication was prepared in the framework of the progrAgence nationale de la recherche (www.anr.fr)DAMIN (La Dprciation de l'Argent Montaire et les Relations ISilver monetary depreciation and international relations) (www.a

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ISBN 978-94-91384-24-0


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A Restatement of the Price Theory of Moni

Dennis O. Flynn and Marie A. Lee1

1. Neoclassical Roots of Modern Economics

Pre-20th-century Classical economists perceived physical monies

same way they perceived non-monetary goods according to relative cterms of embodied labor time. Thus, if production of a specific hand-require 500 hours of labor, while production of coin-x required 25 lalabor embodied in production of intrinsic content and machinery), thenwould equal 20 coin-x/rug-y. Labor value of the rug (500 hrs/rug) dividthe coin (25 hrs/coin) causes labor hours to cancel. What could be moresuch a calculation? Cost of production was viewed through the prism of which in turn regulated respective market values (and thus the rate at wh

for rug-y).Diminution in intrinsic content of a coin whether intentional osay, to wear and tear) did not pose a theoretical problem for the Clasloss of 10 percent of intrinsic content of coin-x, other things equal, si

price of rug-x would rise from 20 coin-x/rug-y to 22 coin-x/rug-y. Hencontent by 10% simply implied that 10% more coins would have t

purchase of the rug, since each coin contained only 90% the embodiedbodied coin. Other complicating challenges to Classical monetary theo

dismissed (one of which will be mentioned in a moment), but the overarcClassical value theory for monetary and non-monetary products alike general cost-of-production approach. Classical value theory was basecriterion: the amount of labor embodied in production of each product.

The most fundamental building blocks of economic theory today and Demand emerged after the 1870s, derived from a subjectivereplaced the objectivecost-of-production value-theory foundation of Cla

purposes of this essay, Neoclassical economics refers to supply and d

emerged from subjective early-20th

-century utility analysis. Notshortcomings within Neoclassical theory itself, it must be acknowledgedformulation also boasted advantages over its Classical labor-theory-of-vinstance, subjective utility theory recognized enhancement in vanotwithstanding fixed embodied-labor production cost. Subjective prefchange over time, so product price can rise in response to emergence of i


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improved version of Classical economics; neo terminology can besubjective Neoclassical economics replacedobjective Classical economi

While subjective utility analysis since the early-20th century economic theory in certain respects, as mentioned above, Neoclassical thto properly integrate monetary theory and subjective non-monetary thestumbling block has to do with proper conceptualization of time.cornerstone of modern Neoclassical economics, asserts that consumptioof individual satisfaction (i.e. utility). Consider textbook application ofand Demand under competitive conditions to an ordinary item sucThe supply function (SMilk) refers to the profit-maximizing rate of milk

sale) at each price, while the demand function (DMilk) refers to the utilitmilk consumption (or, milk purchase) at each price. Consider precise dimeach axis.

Figure 1. Milk Market

Dimensions for the (horizontal) quantity axis in Figure 1 are gaQ i d d d h i (D ) f ll f ilk


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2. Freezing Time: Is Addition of Monetary Apples and Oranges Le

Expression of non-monetarysupply and demand quantities as timcannot be overemphasized because this requirement contrasts sharply wof supply and demand quantities in conventional monetary theory (money supply and money demand functions are explicitly portrayed meaning that monetary quantities are conceptualized at a point in timeshot in an old-fashion motion picture reel). Portrayal of monies as poincontrasts sharply with portrayal of non-monetary items, which ar

produced/sold (supply-side) and consumed/purchased (demand-side)

period. Readers need explore no further than their own wallets in order tinventory-stocks: currency refers to coins, paper bills, and other tamonetary items of various mint dates and intrinsic contents. Irrespectivcontent of an individual dollar-bill or dollar-coin, or the mint date of eactheory treats all dollar bills and dollar coins as interchangeable (i.e. a

perfect substitute for a 2007 $US-note). The key point is this: conventisupply refers to accumulated stocks of diverse tangible monetary itemyear of production or intrinsic content of each constituent component. I

diverse contents both in terms of intrinsic physical quality and date of together (e.g. copper + lead + nickel coins + paper bills), and (b) exptheoretic-supply-and-demand terms. Physical monies do indeed accumtheorists simply recognize this reality when referring to money supply inthe other hand, the practice of adding together distinct physical monies is

be shown below.


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at an instant in time. The bottom line: money-supply and money-deexpressed in units of money (no time dimension is permitted); that

concepts are couched in terms of inventories.2

This inventory-approach itheory and contrasts sharply with depictions of non-monetary quantities iexpressed strictly as units of the item per time period.

A sketch-summary of the main points covered thus far is perhaps economic theory today portrays monetary quantities in a strikingly-dmainstream portrayal of non-monetary quantities. First, the textbook mis uniquely vertical because it is (correctly) portrayed in point-in-t(Figure 2), while the non-monetary supply function is displayed as a co

slopedfunction (Figure 1). Quantity of money supply is portrayed as fibeen (conceptually) frozen; thus, quantity of money is viewed as amonetary units (irrespective of what the interest rate might be) held at athe other hand, quantity of milk produced/sold (i.e. supplied) or consdemanded) over timevaries depending upon the level of price chosen. Ssupply-demand analysis focuses strictly upon each unique product individentical Grade-AA eggs), whereas supply of and demand for money aggregation of diverse items (i.e. coins and notes of various intrinsic

mint dates). In other words, monetary-versus-non-monetary quantity axe(a) inclusion/exclusion of time, and (b) inclusion/exclusion of non-idenquantities exclude passage of time, whereas non-monetary quantities eunits. Disparate treatment of monetary quantities vis--vis non-mocharacteristic of Neoclassical economics, and this helps explain the origidichotomy in modern economic theory microeconomics versus mdistinction that never existed under the Classical regime that precetheoretical system.4

2Unfortunately, velocity terminology continues to appear in monetary history literatuof the early twentieth century, Irving Fisher attempted to transform mondimensioned flow concepts (in a failed attempt to somehow interface with dimensioned flows generated via utility analysis for non-monetary itemmethodology was rightly repudiated by UK-Cambridge monetary theoristheorists insisted that monies are inherently inventories, and must be concepinventory-theoretic terms (i.e. not as quantities over time). Economics tereference Fishers quantity theory of money as a precursor to modern m

nonsense: Fishers attempt to convert point-in-time monetary stocks into timflows failed, plain and simple. The approach of this essay is the opposite of tha(i.e. microeconomics in todays jargon) must be broadened to includeinventory supply concepts. Economists today generally consider non-modemand and supply analysis to be rock solid, in other words, while many percemess. I argue the opposite: Canonical microeconomic supply-and-demand inadequate because they are incapable of integrating inventory stocks. Once n


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3. Scientific Measurement from the Outside

All scientific measurements require imposition of arbitrary metricthe object evaluated. A heap of coal, for instance, might be weighed in teunit of measurement strictly independent of the coal itself. It clearly woumeasure a heap of coal in terms of itself: the heap of coal would weiirrespective of its heaviness or mass. The same holds true for expression

price of a non-monetary product: the objects price must be measured external to the object itself. Textbook prices of non-monetary items are nterms of an abstract dollar, an intangible-unit-of-account money th

microeconomic supply-demand system (Figure 1). Textbook authors asprice pops into the analysts head, since the abstract dollar itself is avalue in any case. It is immaterial whether the author assigns a pric$50/shirt, for instance, since the abstract-measuring-stick dollar is arbioutside the analysis in any case. Economist reason that microeconomic pof Supply and Demand refer to relativeprices only, since the abstract din the process of generating meaningful relative prices. For example, i(for a specific shirt) and price of a particular coffee mug were $5/m

$10/shirt by $5/mug yields a relative priceof 2 mugs/shirt (since abstraAlternatively, prices of $50/shirt and $25/mug could have been assiwhereupon, division of $50/shirt by $25/mug yields the same relative priother words, dollar (nominal) prices can be scaled up or down to any analyst: Supply and demand functions yield the same relativeprices irresabstract dollars assigned. (This is a version of Monetary Neutrality rea

jargon.) A key point to keep in mind is that market value cannot be abstract dollar ($) within microeconomic analysis, since the dollar is an

stick arbitrarily imposed from outside of the supply-demand system. In supply-demand analysis has nothing to do with valuation of any taconclusion is pre-ordained since microeconomic demand is generatedconsumption, while physical monies are inventory stocks that are non-cwords, tangible monies are precluded from Neoclassical utility-based Demand (a fact recognized by all economists). Given that tangible monexcluded from utility-based microeconomic theory, economists had littletheoretical home for tangible monies. Macroeconomics evolved inhome for tangible monies (along with relatives).

One advantage of standard macroeconomic money supply and m2 above) is explicit acknowledgement that physical monies must binventory terms (notwithstanding Irving Fishers failed MV = PT attempmonetary stocks as monetary flows). Hence, absence of a time-dimenquantity axes is implicit acknowledgement that monies are inventorI d d hi l d d d i i h


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4. Value in Terms of Which Money?

It has been claimed that the first clear statements of the so-calledMoney date from the sixteenth century, while American treasure floodof Europe. (Grice-Hutchinson 1952) Mintage of American silver is saimoney supplies, which in turn caused elevation of price levels for ovewords, increased quantitiesof money causedthe famous (European) Pri1920s archival research by Earl J. Hamilton (1934) seemed to confirmcontention that percentage growth in money supplies causedsixteenth-ceinflations, Hamilton became a worldwide star among monetary econom

for John Maynard Keynes too). Hamiltons landmark explanation evhowever, as it relied upon Irving Fishers ill-fated, flows-only version ofof Money: MV = PT. Eschewing details here, Hamiltons Fisherian modof time-dimensioned flows rather than inventory stocks was demonstraempirical evidence. (Flynn 1978; Flynn 1984)

Given an inability to integrate monetary theory and value theorytheory has become schizophrenic. 5 Unable to formulate a purchase-microeconomic price (Figure 1), macroeconomic monetary theory inste

that are (arguably) irreconcilable: A short-run monetary model (Figentirely separate long-run monetary model (Figure 3). The models lthat the short-run rental price of money depicted in Figure 2 is the inthe long-run price of money depicted in Figure 3 is 1/P (reciprocal ofmacroeconomic models of money are inapplicable to global monetary h

previously, since historys four main monetary substances over the past fgold, copper, and cowry shells had separate points of production, distitherefore incongruent trade routes connecting respective areas of product

markets (Flynn and Girldez 1997). In other words, aggregation osubstances into catch-all category money precludes proper analysisdeserve brief mention: (1) textbook models refer to monetary stocks wwhile monetary history is filled with cases of actual monies that roamuninhibited; (2) it is impossible to speak of the value of a hodgepodgIntegration of monetary substances within value theory requires disaggitems to the maximum extent possible, and conceptual limitation to makes little sense in historical terms.6Let us now turn to the central ques

the essay: What is the best way to conceptualize the price axis in monetary) analysis?


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Figure 3. Long-Run Money Market

The conventional short-run approach to money (Figure 2) is uprice refers to a rental rate rather than purchase price (for non-moLenders rent money in the sense that the monetary item must be return

condition (also true for machine rental), plus pay a rental fee (the interesan interest rate on the price axis borrowed from John Maynard

preference theory is unsatisfactory on at least two counts. First, ohundred pounds of beans at 5%/year with contractual obligation to repayone year hence: Such legitimate loan does not justify labeling the pricThen how can this slight-of-hand apply to money? Second, how can specmoney histories discuss the price of silver bullion, say, relative to its terms of the interest rate? Do normal profits exist when the price of cow

their cost of production at 5%/year? Neither price, nor production coexpressed in terms of pure percentages. Slight-of-hand placement ofmoneys vertical axis does at least permit connection between monetasectors: Monies (inherently point-in-time inventory stocks) are tied real sector (couched in terms of time-dimensioned flows) via interesover time).7 But conventional monetary theory is incapable of addres


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approach to evaluate the worth of an item: Calculate values of all itemexcept the $US, then impute value to the $US (the sole excluded res

suggestion that the best way to analyze price of a particular pair of stockprices of all products except stockings, and then impute market value oresidual item. In sum, Figure 3 contains aggregation problems on bothaxdiscussion of production cost for any particular money.

5. Pragmatic Accounting via Intangible Monies

Pragmatic business people sometimes solve an everyday problem

involves profound theoretical implications. Imaginary monies wecenturies ago in Europe (and probably elsewhere) simply to keep boocontext of formidable practical problems. Monies rarely remained withinalready mentioned, so everyday business was often conducted via dozendistinct tangible monies. In such context, which tangible money shouldtrack all transactions? The short answer: none. Choice of a specific coin not suffice because coins often experienced alteration in intrinsic content

both intentional and unintentional (normal wear and tear) adulteration.

that perhaps dates back to the time of Charlemagne (Enaudi 1953), the DDutch East India Company (VOC) recorded all transactions in terms of of-account-money system intangible stivers and guilders (English-lDutch stuiver and gulden) between the 1570s and 1681. (Wolters 20non-physical stivers and guilders were linked to an actual physical coin(hereafter designated Rx$) that contained precisely 25.7 grams of pure-monetary authorities proclaimed one perfect Rx$ equivalent to 47 intanstivers in 1606, which implied that each intangible unit-of-account stive

precisely .5468085 grams of fine silver (i.e. one-forty-seventh of 25intangible unit-of-account guilder (UAG) equalled 20 UASt by definiUAG therefore representedprecisely 10.93617 grams of pure silver. Thof-account-money (LUAM) system was ingenious and time-tested; sininvolved bewildering varieties of diverse physical media-of-exchtransaction could be recorded in terms of its grams-of-pure-silver translation of transactions into silver equivalence on-the-spot must haveexchange-rate calculation skills, but what alternative accounting arr

superior? Physical media-of-exchange monies could not serve as indunits because they lacked uniformity. Keeping track in a logical and pracan outsidescientific measurement device an intangible, imaginary un

Recognition of ubiquitous intangible link-unit-of-account moniefor over a thousand years has implications for monetary theory. We alink-unit-of-account money that clearly could serve neither as a medium


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6. A Price Theory of Monies

Formulation of a Price Theory of Monies requires imposition ofas is true for any scientific theory. It is tempting to conclude that the imdiscussed an intangible money separate from tangible medium-of-exchserve as such an outside metric. However, while link-unit-of-account mUASt and UAG) have served admirably as abstract accounting units, tfor measuring economic values. This crucial distinction can be clarifilabels for each axis in Figure 4.

For simplicity, assume that Dutch UASt and UAG are rounded d

and 10 grams fine-silver equivalence respectively (rather than odd numThe Unified Theory of Prices is unified in the sense that it is allproducts, including tangible media of exchange, but also includingassumption, the stock of fine silver indicated by ISsilver equals 10 milliSince each UASt represents.5 grams of fine silver, one could equivalentof fine silver equals 20 million UASt. Or, one could equivalently state silver equals 1 million UAG. Each number 10 million versus 20 millirefers to the same quantity of fine silver.


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and Guilder LUAMs cannot represent the price of fine silver, since they fine silver; price changed and quantity did not change.

Figure 5. Change in RUAM-Price; Fixed LUAM-Quan

Since we claim that the Unified Theory of Prices is applicincluding fine silver, the intangible unit-of-account money label on the v4 and Figure 5 must refer to a unit-of-account money distinct from thdiscussed above. The UTP requires expression of all prices in terms of a

money the RUAM which must not be confused with the LUAMaccount monies (e.g. the UASt and UAG, as well as the RUAM) are bfrom categorization as tangible medium-of-exchange and store-of-val(such as the UASt/UAG) were designed to fulfill the accounting sub-funaccount function of money alone, whereas the RUAM serves a sepfunction of the unit-of-account function of money. The Unified Theor


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7. Does the UTP Apply to Practical Issues Encountered in Historical

The Unified Theory of Prices can be applied to any topic in ecindeed can be used to relate branches of history typically thought to becomponent is the notion of end-market, a term that does not eeconomics. Inventory Demand determines where a tangible product evend-market. Consider shipment of a large number of a particular high-pthe fictional Kor exported from Korea to (and through) Rotterdam, quantity of Kors destined to remain within Rotterdam is determined by (

preferences, (2) wealth of Rotterdam residents, and (3) the citys ppopulation of Rotterdam is far greater than population of BilthovenUtrecht), for instance, many more Kors would probably fill garagegarages in Bilthoven. End-market locations for Kors in Germany, BFrance and elsewhere would likewise depend upon the same set of detsurprise: wealthy neighborhoods contain more units of expensive neighborhoods. Yet the UTP model applies to exclusive and non-exalike: Salt inventories, for example, are presumably distributed relativelmarket neighborhoods of various categories. Inventories of paper towgreater in pre-Hurricane-Katrina New Orleans than after Katrina, but fodepopulation of that city. Such observations may seem obvious, yet codescription of them is precluded since Inventory Supply and Inventory not exist for conventional, flows-only Laws of Supply and Demand.

Demonstration of Unified Theory of Prices mechanisms is most eassistance of the Hydraulic Metaphor, an intuitive model of stocks antrade goods as if they were liquids. The Hydraulic Metaphor has been apdescription of how and why textiles produced in western India were dest

in eastern African (including hinterland).

10

Figure 6 reproduces just onevisual with focus upon the central role of end-markets (precise mechanisvia eighteen previous visuals). The Jambusar container of western IndiAfrican Regional Center containers, and those of eastern-African Hintedark liquids, which indicate quantities of textiles at rest in end-marketFigure 6. Respective Inventory Demand at each location determincapacity-size (not drawn to proper scale). This Figure 6 visual imagecentral conclusion: Inventory Demand determines Inventory Supply, an

other way around. All flows detailed in the article from which Figure 6 production supply, sales supply, purchase demand, consumption deultimately respond to Inventory Demand.


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7. Unified Theory of Prices Applications to Monetary History

Direct application of the UTP to valuation of individual monies ya Price Theory of Monies, in contradistinction to numerous past versTheory of Money.11Application of this Price Theory of Monies to sevenmonetary events should interest monetary historians, since the UTP sugg

by Dutch contemporaries was logical and reasonable, in contrast to prevthat Dutch behavior was erratic and irrational. Many mint authorities didrepeatedly, followed by strengthening of intrinsic coin content, only to rto a series of debasements: How can such mint behavior be characte

pragmatic?

The Price Theory of Monies suggests logical behavior by mint Figure 7.12 A full-bodied 1681 coin Guilder (CG1681) contained 9.61 gSince records indicate that the Mint price (and by assumption,equaled .00993631 CG1681per gram of fine silver, mint seigniorage of aimplied. In other words, fine silver in money form was worth approximawas worth of fine silver in bullion form. Whenever the Mint price equ

bullion price, guilder coins (1681) were minted (southeasterly-poin

increase in stock of CG1681); on the other hand, whenever the bullion priprice by more than 4.5%, full-bodied guilder coins (1681) were mpointing arrow indicating decrease in stock of CG1681). A central thearises, however, as soon as one attempts to express alteration in valuwhile simultaneously expressing both Mint price and bullion price in tethe value of any item cannot be expressed in terms of itself (since price how market value changes). Specifically, the value of a coin guilder caterms of the coin guilder. The Price Theory of Monies avoids th

conundrum by denominating coin-guilder prices in terms of an entirelRUAM (ratio-unit-of-account money).13

Recognizing that specific coin-guilders experienced greater wea(originally-identical) particular coin-guilders, certain acknowledged speamong coins on the basis of intrinsic silver content. In plain languaguilders were culled. Few market participants possessed specialist sneeded to discern precise coin contents; hence, bullion-market traninvolved use of coins that had deteriorated, but to an extent not precisely

bullion market. Such was not the case for specialists, however, who according to intrinsic content (in a specialist bullion sub-market). Ntraders presumably recognized deterioration of coin quality over time (sinspecialists culled strong coins), however, even though precise intrinsic ccoin might remain unknown to most. It is reasonable to assume that gecoin value more or less commensurate with deteriorating intrinsic


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The Mint is at disadvantage under such circumstances, since thebullion with full-bodied coins, while bullion-market purchases were

coins. The Mint must roughly match rising bullion-market price, notwithbullion price inflation resulted from bullion-market transactions conducintrinsic-content coins over time. Since Mint price had to rise to mcompetition, the Mint was forced to accept declining seigniorage ovdeterioration in coin quality in the bullion market would eventually leadseigniorage to zero, which forced cessation of mint activity when bulliomint price) rose to/above BP = MP = .09936318 CG1681/gram fine silvthe bullion price rose to BP = .10405827 CG1681/gram fine silver (

profitable to melt full-bodied (9.61 grams of fine silver) coin guilders.

Figure 7. Minting and Melting Physical 1681 Guilder C

The Mint found itself at untenable competitive disadvantage rebullion market. The Mint was thus forced to debase its own coin, assuproduction, even though it may have desired to maintain coin integarrival of debasement, the process would repeat, since newly-minte


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At this triumphant juncture of reestablished coin integrity, the system iyet another cycle of coin deterioration, notwithstanding desire by mint

coin strength. Through application of the RUAM intangible money concof Monies reveals market mechanisms that force debasement, reinforcement. Monetary historians know all too well that outcomes outlined here are possible, yet theoretical imposition of an intangiblemoney (RUAM) at least permits discussion of changing market valuatiomedium-of-exchange monies.16Actual historical actors, who seem errativiewed through the lens of conventional economic theory, are re

pragmatists when viewed through corrective lenses offered by the Price T

8. UTP Compatibility with Other Approaches to Monetary History

A central contention of this essay is that the Unified Theory ofrather than displace, other approaches to monetary history (with exceptiflows-only MV = PT framework). Visualization of interconnected Kishimoto (2011) comes to mind, since metaphorical liquid stocks andher analysis. The Hydraulic Metaphor is consistent with Kishimo

generally. Since volume capacity of each container (or pond) refers tfor the particular money in question, however, the UTP framework fodetermine pond capacity, an aspect with potential to enhance, ratKishimotos analysis. Where grown in population and wealth is evident,

pond capacity would show visual grow (other things equal); moreover, sugrowth in local container capacity relative to inventories already held lelevated market value for that particular monetary item. Arbitrage possresulting in importation of that specific money. (Importation causes

RUAM-price to eventually decline, other things equal, thereby ularbitrage gains.) Incidentally, there is nothing particularly monmechanisms, since UTP Hydraulic Metaphor analysis applies eqagricultural or manufactured items and to individual monies.

UTP analysis is compatible with multiple monetary units connectand specific locations, as emphasized by Kuroda (2009). Indeed, Kheterogeneous coin-content and weight-system examples could be extexamples of heterogeneous non-monetary products as well. His wor

conventional monetary aggregation is unacceptable. Theories based must be developed, including models that disaggregate distinct monextent possible. Disaggregation is a fundamental characteristic of thePrices, as is UTP focus on inventory analysis. Kuroda describes complewithin Europe, in addition to Asian counterparts that he has studied inten


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Figure 8. Kishimotos Chain-of-Ponds and Local Mark

For example, in late sixteenth-century France, 180 kinds of cointhan twenty different sovereign areas, were in circulation. Herclear contrast between a commensurable payment system in

based on a conceptual unit of account, and the diversity of actualevel markets. (Kuroda 2009, p.263)

Exchange rates between monies varied enormously, but so did ex

non-monetary products and between monetary and non-monetary produstate of affairs. The theoreticians task is to properly describe mechamonetary and non-monetary values, as well as mechanisms that causevary through time. Macroeconomic theory misleads historians because are aggregated and worse yet, aggregated to the nation-state levelobscures more than it reveals. Wealth-focused UTP analysis disaggregaextent possible, on the other hand, and treats tangible monetary and taitems as inventory stocks subject to evaluation within a single cohercontention of this essay that market valuation of all products within a monetary and non-monetary alike requires application of an intangiblemoney: the RUAM.

Another application of the Hydraulic Metaphor has focused upon Kim (2006; 2007), whose work details complex international trade netwoverthrow of the Ming Empire by the Qing (1644-1911), mountainou


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Assume further that just 1% of Chinas silver stock wore out (includingyear (bubbles above Chinas container represents this loss, re

evaporation). One obvious conclusion from this Metaphor application 5 million pesos worth of silver per year into China is required in ordeChinese holdings of silver, even assuming zero growth in population ansimple point illustrates (part of the reason) why China remained the worcenturies. Conventional trade history concentration on time-dimensionimports and exports are fine as far as they go, but inventory stocks (incfor production, through to final goods destined for end-markets) determitrade flows.

Figure 9. Silver into End-Market China after 1750 (non-arbitr

Although not explicitly couched in Unified Theory of Prices Metaphor) terms, Richard von Glahn has long been a proponent of stocreasoning. He rejects views of scholars who maintain that Chinese silv1830s and 1840s led to depression in China, the Opium War of 183dominance. Von Glahn criticizes emphasis upon supply-side causation


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Theory of Prices. Consider an everyday example: Fifty bottles of red winbecause I desire to hold fifty bottles in inventory (given my wealth an

Fifty bottles of wine do not flow into my cellar autonomously (or in retrade imbalance), causing me to somehow adjust desired inventory demsome supply-side influx. Imputation of Inventory-Supply-side causatiasserted import flows defies common sense. It is Inventory Supply thaDemand. Von Glahn correctly disaggregates specify types of silver itemdemand-side terms:

the decline in Chinese silver imports during the second quarcentury must be considered in the context of the demand for partic

both in China and in the global market, not simply the supply othis respect, we must also pay attention to the rapid adoption of tnew monetary standard What drove the sharp increase in silv1780s-1820s was not the demand for silver in general, but the means of payment. (von Glahn 2011, p. 75)

Equipped with inventory-theoretic analysis of distinct and disaggregatedintegrates solid empirical evidence gleaned from primary and secondary

Another proponent of inventory-demand reasoning in monetar

Irigoin (2013 this volume) argues in favor of conceptual disaggregatimported into China. Not only must silver-bullion imports be separaimports, attention to characteristics of specific coins is also critically imdeteriorating supply-side mint quality of Mexican coins caused remreactions within Chinese markets. Widespread recognition of coin integrCarolus peso to global dominance, China prominently included. An unfothe Mexican revolution was mintage of unreliable Mexican coins after 1generated powerfully-negative, demand-side reactions within China.

customers were unwilling to hold new coins that were unreliable, prefeold-reliable Carolus pesos previously minted. In a nutshell, inventory

pesos soared while inventory supply of Carolus pesos dropped (due to wand other forms of loss). Unsurprising from an inventory-theoretic povalue of the Carolus peso rose in dramatic fashion. Price premiums sufficiently to prompt import of Carolus coins into China, while Chinesimultaneously exported. Only with reestablishment of coin reputatioeagle in the 1850s were newly-minted coins once again imported in volum

Irigoins interpretation is advantageous for several reasons. Firsilver are disaggregated. Second, silver flows are portrayed in terms of dfrom specificsilvermarkets, in opposition to trade-imbalance argumenvarious forms) aspassive balancing items. Third, Irigoin rejects the viesilver) opium imports caused Chinese exports of silver. Fourth, supplyM i i h t h i t t d f dl ith i t


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analysis. Microeconomic Laws of Supply and Demand are restricted dimensioned quantities only, while monetary quantities are inherently postocks. Thus, macroeconomic analysis is a 20th-century invention necesconceptual place into which monies (and some other intractable items) co

John Maynard Keynes furnished a transmission mechanism theof Liquidity Preference) through which monetary stocks could bmonetary flows. Keynesian theory doomed cost-of-production monetadeepening burial ground, since it is impossible to speak of the cost of money relative to an interest rate (%/time).

The Price Theory of Monies offers an opportunity to reintrodu

reasoning to monetary analysis. Rather than try to accommodate mondimensioned microeconomic theory the worst example of which is IrvMV = PT approach the Unified Theory of Prices instead reformulates a way that point-in-time inventories can be accommodated. OncInventory-Demand analysis is rendered applicable to all tangible items, tand demand already couched in inventory terms can be integratemonetary siblings. It is in this sense that the UTP returns to Classical roo

A formidable stumbling block on the way to a unified theory in

prices of tangible monies in exactly the same terms as prices for Conventional monetary theory renders this problem unsolvable througeach money simultaneously fulfill allmonetary functions: (1) medium of account, and (3) store of value. Yet we have seen that pragmatic Euro(and probably people elsewhere) violated this restriction continuously years: Their imaginary monies were intangible and thus only capable of-account function alone. Modern theory contradicts a millennium of eis the monetary theory that must be jettisoned! These imaginary

monies worked well for accounting purposes, yet they cannot be used foof any tangible money in a cost-of-production framework because quantities (of silver in the Dutch example). The Price Theory of Mapplication of a different sort of intangible money a ratio-unit-of-accouthat is applicable for measurement of relative values of all items, monetaalike. It is hard to imagine legitimate objection to imposition of such anto value theory, since the dollar (or its equivalent) already routinely servin every microeconomics textbook in the world.

The Unified Theory of Prices features Inventory Demand as a ceThe easiest version to visualize is the Hydraulic Metaphor mentioned bthis essay. The central idea is simple: Inventory Demand for any tangiblotherwise ultimately determines location of Inventory Supply. Inventodetermined by (1) wealth, (2) tastes and preferences, and (3) populatt t ll t k f d k t t th t d


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time-dimensioned flows. But it is wealth and its components (Inventorythe world go round, so to speak, and monetary stocks comprise but ocomponent of global wealth. Time-dimensioned flows are crucially immust be integrated with inventory concepts if we are to make prograccumulation.


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References

Enaudi, Luigi (1953), The Theory of Imaginary Money from Charlem

Revolution, (trans. By Giorgio Tagliacozzo) in Frederic C. Lane an

(eds.),Enterprise and Secular Change: Readings in Economic History.

and Unwin.

Flynn, Dennis O. (forthcoming), Link-Unit-of-Account versus Ratio-Uni

Seventeenth-Century Dutch Mint Policy, in Jane Kate Leonard and U

Small Currencies Matter: Trade and Transactions in Early Modern E

Third International Workshop of the Research Group Monies, Markets

and East Asia, 1600-1900, 1-3 October 2008. Leiden: Brill, forthcomin

Flynn, Dennis O. (2009),A Price Theories of Monies: Evolving lessons in mone

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Flynn, Dennis O. (1984), "Use and Misuse of the Quantity Theory of Mo

Historiography," in F. Irsigler and E. H.G. Van Cauwenberghe

Geldumlauf und Wechselkurse/Mintage, Monetary Circulation and Exc

C7-Section des 8th International Economic History Congress BudapVerlag (Trierer Historische Forchungen, Bd.7), pp.383-417.

Flynn, Dennis O. (1978), "A New Perspective on the Spanish Price Revo

Approach to the Balance of Payments," Explorations in Economic

pp.388-406.

Flynn, Dennis O. and Marie A. Lee (forthcoming), Hydraulic Metaphor: A

Local Connectivity, in Tsukasa Mizushima, Dennis O. Flynn, and

(eds.),Place, Space, and Time: Asian Hinterlands and Political Econom

Long Eighteenth Century. Leiden: Brill, forthcoming.Flynn, Dennis O. and Marie A. Lee (2013)), East Asian Trade before/afte

Korea: Modeling Imports and Exports in Global Context, Asian Rev

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Flynn, Dennis O. and Arturo Girldez (2008), Born Again: Globalizations Six

(Asian/Global Versus European Dynamics,Pacific Economic Review

Flynn, Dennis O. and Arturo Girldez (2002), Cycles of Silver: Global Econo

mid-18thCentury,Journal of World History, Vol. 13, No. 2 (2002), pp

Flynn, Dennis O. and Arturo Girldez (1997, eds.), Metals and Monies in

Economy (Volume in the series, An Expanding World: The Europ

History, 1450-1800.) Aldershot: Ashgate/Variorum Press.

Grice-Hutchinson, M. (1952). The School of Salamanca: Readings in Spanish M

1605. Oxford: Clarendon Press.


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their Debates on Economic Policies,International Journal of Asian Stu

Kuroda, Akinoba (2008), Concurrent but Non-Integrable Currency Cir

Relationships among Monies in Modern China and Other Regions,Fi

15.1.

Lin, Man-houng (2006), China Upside Down: Currency, Society, and I

Cambridge: Harvard University Press.Machado, Pedro (2009), Clothes of a New Fashion: Indian Ocean Networks o

Zones of Contact in Africa and India in the Eighteenth and Nineteen

Riello and Tirtankar Roy, eds., How India Clothed the World: The

Textiles, 1500-1850, pp. 53-84. Leiden: Brill.

Mankiw, N. Gregory (2012).Brief Principles of Macroeconomics.Sixth Editio

Western Cengage.

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Contents

Georges DEPEYROT,Introduction..............................................................

Part 1

Business with Money: Monetary Politics and Capital Flows in the Era of th

Session of theEuropean Business History AssociationandBusiness HistoryParis conference onBusiness enterprises and the tensions between loc

Aug. 30 Sept. 1, 2012

Catherine BRGIANNI,Introduction...........................................................

Vladimir BAKHTIN,Foreign loans and investments in the Russian Empireof the 19thcentury........................................................

Catherine BRGIANNI,Monetary and numismatic mechanisms as an echoglobalisation: the Greek paradigm of the 19thcentury

Michael MRCHER, The Finnish 1 markka 1922 An exceptional coinag

Rita MARTINS DE SOUSA, The Lisbon Mint during the Era of the First Glo

Part 2Small change: bronze or copper coins from Antiquity to 19

Round Table of the "Silver Monetary Depreciation and International Rel(ANR DAMIN, LabEx TransferS), Paris, cole Normale Sup

May 13-14, 2013

Catherine GRANDJEAN,Les dbuts de la monnaie de bronze dans le mondConstantina KATSARI,Exceptional restrictions in the circulation for bron

in Roman eastern provinces ...............................................

Claudia DE LOZANNE JEFFERIES, The role of copper money within the dynsovereign debt and the perception of unsound fiat money i


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Part 3

Transfers of precious metals and their consequences, 16th

Round Table of the "Silver Monetary Depreciation and International Rel(ANR DAMIN, LabEx TransferS), Madrid, Casa de Velzquez, May

Patrice BAUBEAU,Money, That Obscure Object of Desire........................

Allison Margaret BIGELOW,Lost in Translation: Knowledge Transfers anDivergences in Early Modern Spanish and English Silver

Catherine BRGIANNI, Stories and myths: Greek gold transfers during the

and beyond..........................................................................Juan E. CASTAEDA,A new estimate of the stock of gold (1492 - 2012)...

Dennis O. FLYNN, Marie A. LEE,A Restatement of the Price Theory of M

Claudia DE LOZANNE JEFFERIES, Silver production in 17th- century SpanisA preliminary analysis of its volatility, trajectory and posson the Castilian monetary system.......................................

Elisabeth KASKE, The Revenue Imperative: Silver vs. Copper Coin in GoFinance in 1850s China ......................................................

Marina KOVALCHUK,Japan. Adoption of the Gold Standard: Economic Pfrom a Historical Point of View..........................................

KURODA, Akinobu, What was Silver TaelSystem?A Mistake of China as Silver Standard Country..............

Claudio MARSILIO,Lisbon, London, or Genoa? Three alternative destinaSpanish Silver of Philip IV (1627-1650)............................

Rita MARTINS DE SOUSA, Transfers of precious metals and the money supPortugal 16-19thcenturies..................................................

Rila MUKHERJEE,An Early Medieval Metal Corridor, Silver, Bengal, Baand Yunnan 7thto the 13thCenturies .................................

Emmanuel PRUNAUXLes transports de fonds et lusage des espces dansen France au dbut du XIXesicle......................................

Ekaterina SVIRINA,Russian metallic currency of the first half of the 19th introductory analytical characteristics ..............................

Marc FLANDREAU, Specie in the History of Finance .................................

Contents ......................................................................................................


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Documents

A Restatement of the Price Theory of Monies