James Ahiakpor writes:

    > I wish Roger Sandilands had paid a more careful attention to what I was
saying and the context in which I cited Francis Walker's objection to
the inclusions of the means of payment in the definition of money before
offering his intervention.  Alas, he merely confused issues.

The context was Walker's objection to some of his predecessors' inclusion of checkable deposits in their definition of "money". Aware of this context, I disagreed with his objections and disagree with James's defence of Walker here.

    > Indeed, Hume called paper money or notes, "counterfeit money,"
Smith referred to them as "promissory notes," while Thornton called them
"paper credit."  

Yes, but if James were to pay careful attention to the context of what Hume wrote, he would see that he did not object to paper money as such, only that private bankers were not to be trusted with its issue; instead it should be entrusted to a public [presumably central] bank. And it was important, noted Hume, with huge insight, that this money should not be increased "beyond its natural proportions to labour and commodities". In other words, the public bank should only increase the supply of this money in line with the real demand for it to finance the growth of real income. This would avoid a fall in its value and prevent it being "counterfeit".

And, one could add, to enable the sovereign, rather than private bankers, to obtain the non-inflationary "seigniorage" that could legitimately be associated with the supply of paper money when "well regulated" (to quote Adam Smith in similar vein). Admittedly, some (including, I believe, James and many "Austrians") would prefer that there be a fixed stock of gold as the nation's fixed money supply, and then to let prices fall ("good" deflation) as GDP increases. 

Incidentally, capture of seigniorage for the public rather than private bankers, is part of the case for 100% reserves against demand deposits in commercial banks (proposed first by Currie and Henry Simons in 1934 and then by Irving Fisher). This would divorce the supply of money from the lending of money. Lending would then be restricted to the supply of genuine, interest-bearing savings - in banks or elsewhere - rather than via active transactions balances in banks qua banks. (Non-interest-bearing demand deposits are held mainly for the active transactions motive rather than the income motive for holding much less active, interest-bearing savings balances).

James also refers to Milton Friedman's (1963) preference for M2 as the approprite definition of money. But that is why - contrary to Lauchlin Currie's much earlier empirical studies based on M1 (sadly ignored by Friedmand & Schwartz) - he failed to reveal any pro-cyclical variation in velocity in the 1920s despite having argued elsewhere that such was the a priori expectation. 

James also says: "When one pays with cash, one would have had to turn one's income first into cash before surrendering it to a vendor."  And he states that "Roger thus misses the above understanding of the difference between a check and money..."

But, equally, when I ask my employer to pay me by transferring money from his bank account to mine, I am effectively - and more quickly - turning my income into a means of payment. Some I encash, but mostly I pay by cheque or, nowadays, with a card. (Of course neither the cheque nor the card are money. The money in my current account is my available, spendable money - and, pace James, each dollar recorded there is just as much a unit of account as a dollar bill.)

    > By the time Currie came on the scene, the modern definition of money to
include savings or wealth (bank deposit) had become well established.

Actually there was no official money supply series published in the USA before Currie constructed one for "A Note on Income Velocities" (QJE 1934) and in his "The Supply and Control of Money in the United States" (Harvard 1934). The Fed published series on "credit" (loans) but this differed widely - and misleadingly for policy - from the M1 series published by Currie. 

Nor can I accept James's criticism of F&S's (1963) for claiming (as did Currie 30 years earlier) that the Fed caused or made worse the Great Depression by allowing the money supply to fall by a third. This is because James focuses on the Fed's liabilities in the form of high-powered money or the monetary base, which increased by 25%. But this was (a) because of a huge flight into cash motivated by the desire to hoard (increase in unspent and unspendable savings), even though not all of this was accommodated by the Fed because emergency legislation was not passed to lift the gold constraint; and (b) because of the commercial banks' own desire to increase their reserve ratios. These reserves are not part of the money supply, as almost every monetary theorist I know knows (apart perhaps from James), because they are not in circulation. 

Thus, in conclusion, yes the money supply _did_ shrink - disastrously. A focus on the 25% increase in base money would hardly have helped those who argued for greater Fed activism in 1929-32!

    > Friedman was able to confound the Keynesians by employing the
Keynesian broad definition of money to show how money matters: cut money
and an economy suffers.  But in the end he did classical economics a
great disservice by enshrining the fusion of money and wealth or credit
into the definition of money.

Or, rather, I would say, by focusing on counter-cyclical M2 rather than pro-cyclical M1.

Lastly, readers may be interested in an appreciative letter from Allyn Young to Edwin Cannan, June 22, 1926 in reply to Cannan's urging him to accept the Chair of Political Economy at the LSE. Young ended thus: "I can quite understand that you would have liked to have been followed by one of your own pupils, if that had been possible. Yet, although not a pupil of yours, I can at least put forth a claim to some measure of discipleship. Except for a few points in monetary theory (for example, I should hold that banks _do_ "create" deposits!) I think there would be very little difference between us."

But what a difference there is in that caveat, James.

- Roger Sandilands