Money and the Theory of Assets

There has been until recently little connection between what is usually taught as Monetary Theory and the General Theory of Prices (or Value). Furthermore, there is little connection between the two compartments of Monetary Theory: the Theory of the ‘Equation of Exchange’ with its underlying concepts, Price Level, Velocity of Circulation, Real Income, etc., on the one hand and, on the other, the Theory of Credit and Banking. The Babylonian lack of common language between the two compartments of Monetary Theory is well illustrated by the fact that, while ‘Exchange Value of Money’ (Wicksell, Robertson) is defined as the reciprocal of the Price Level, the term Price of Money is often used to designate interest rates on short loans — although usually economists agree to use Exchange Value of a thing and Price of a thing as equivalent terms. In neither of the two compartments of Monetary Theory is much use made of the fundamentals of economic theory. The Price Level is treated as if it had nothing to do with prices. The velocity of circulation has been, thanks to the Cambridge School, associated with cash holdings instead of being left in the air; but the next step, to treat cash holdings on the same lines on which holdings of any other Stocks are treated in the General Theory of Prices, has been made by few economists only, of whom Dr. Hicks is the most outstanding.1 Similarly, the Interest Rate of the treatises on Banking and Trade Cycle seems to be ashamed of any connection with its less adventurous and ‘dynamic’ but more scholarly relation, the Interest Rate of the marginal productivity theory: the parentage is casually mentioned, if at all, in a few hurried phrases only.