Money and Markets: Essays in Honor of Leland B. Yeager

140 Michael R. Montgomerythere of commodities generally, not in consequence of over-production, but of a want ofcommercial confidence” (Mill 1983 [1844]: 45, the last line of his essay).13 Perhaps – to indulge for a moment in pure speculation – they also sensed other complications,such as the general equilibrium problem at the heart of the macro-adjustmentquestion, with prices of some being incomes of others (see Yeager 1999 for a usefuldiscussion of the advantages of the general equilibrium approach in macroeconomics).14 Another reason for these assertions is that the Classicals were engaged in a contest ofideas with the Mercantilists and their view of “bullion and treasure as the essence ofwealth” (Blaug 1978: 10). However, many of these statements occurred in the midst of adiscussion of Say’s Law, not Mercantilism.15 This paper, with its emphasis on Say’s Law, has somewhat de-emphasized the pathbreakingcontributions of David Hume. Hume perceived, as an empirical observation,that periods of money inflow corresponded to periods where “industry has encreased”(1970 [1752]: 37) and vice versa (p. 40), and he even reached the momentous deductionthat it is only in the interval while prices are adjusting that such monetary change has realeffects (ibid.: 38, 40). Moreover, Hume saw that such effects are symmetric, sincethe alterations in the quantity of money, either on one side or the other, are notimmediately attended with proportionable alterations in the price of commodities.There is always an interval before matters be adjusted to their new situation; and thisinterval is as pernicious to industry, when gold and silver are diminishing, as it isadvantageous when these metals are encreasing.(1970 [1752]: 40)But Hume addressed only cases of change in money supply. Of Mill’s notion thatchanges in money demand might occur and generate analogous effects, we see no sign inhis essay. In fact, Hume’s essay aggressively denies that money is anything but a mediumof-exchangeand a unit-of-account.16 For example, Ricardo, in his Chapter XXI in the Principles on the effects of accumulation,briefly discusses how a substantial change in the money supply can impact the rateof interest during the interval of adjustment, and – though he does not say so – one mayargue this would have an aggregate impact (1951 [1817]: 297–8). Just prior to thesethoughts, Ricardo traces out the bare bones of a money-driven cycle based on confusionof real and nominal effects (ibid.). But Ricardo discusses these within the context of asingle representative merchant, and does not go on to draw out any economy-wideimplications from these insights. Moroever, he places no special emphasis on thesepassages – they are merely ruminations in the midst of other loosely related ruminations.17 In this one sense, the Real Business Cycle school is truly Classical in its orientation.Such was also Wesley Mitchell’s approach in his Business Cycles (Mitchell 1913). But,historically, these movements are exceptions to the rule started by Mill in his UnsettledQuestions essay.18 In the Unsettled Questions, Mill had expressed concerns that the phrase “excess of allcommodities” should, “perhaps,” not be used, since the phrase wrongly suggests “theidea of excessive production” (1983 [1844]: 43). Of course, an “excess of all commodities”is just the “flip-side” of an “under-supply of money.” One is reminded of the ancientPythagoreans, who suppressed knowledge of the square root of two due to their beliefthat all numbers should be derivable from the ratios of other numbers, a trait not sharedby the square root of two (see Sagan 1980: 185). If some Pythagoreanesque desire tosuppress the full implications of his concept did lead Mill to tone down its presentation inthe Principles, it is ironic. It is doubtful that Keynes (1965 [1936]: 18–21) could haveproceeded with his famously distorted interpretation of Mill, based on the chapter “OfExcess of Supply” in the Principles, had Mill included there more of his discussion in theUnsettled Questions.