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The predictive power of the quantity theory of money and the growth of credit instruments at the end of the nineteenth century in the United States

Constance André--Aigret, Laboratoir Triangle, université Lumière Lyon 2

The American monetary debates of the 1890s centered around the validity or not of the quantity theory of money to explain the fluctuations of prices and to consider the banking and monetary development of that time such as the rise of use of credit instruments. The inclusion of this credit instrument was not consensual among economists at the end of the nineteenth century; while Fisher incorporated it; some others, such as Walker did not. Some authors, J. L. Laughlin and his students H. P. Willis, W. C. Mitchell and S. McLean Hardy did question this absence of consensus in 1895 and 1896. According to them, this absence of unanimity coupled with an exclusion of historical analysis challenges the validity of the theory as it weakens its predictive power: it affects the hard core of the research program. The research program of the quantity theory of money is, in this way, degenerative, its authors did from a specific case, i.e. the quantity theory of money established by Ricardo, a general theory which is consistent only in the context of its elaboration. The answer of some of the quantity theorists, for example F. A. Walker, had been first to minimize the use of credit instruments and its importance as to him it did not challenge the hard core of the research program but only an auxiliary hypothesis. The aim of this paper is to investigate this debate in considering the quantity theory of money as a research program with the definition of money as a means of exchange and to confront it to the research program of Laughlin, Willis, Mitchell and Hardy. The later elaborated a monetary theory, including as the hard core the hypothesis of money as a standard of value, which, according to them, enhances the predictive power of their theory. This confrontation enables quantity theorists to be more consensual about the role and effects of credit in the economy and its incorporation gave the quantity theory a more important predictive power.

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Keywords: Monetary debates, Laughlin, quantity theory, credit

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