Introduction

This chapter and Chapter 9 present an analytical framework for understanding both the previously discussed monetary theories of Hume and Smith and the theories developed over the course of the nineteenth century, which we will cover in the coming chapters. The framework seeks to explain the roles played by monetary instruments in two separate processes: exchange and intermediation. Money, “near-monies,” and various credit instruments that will be defined later facilitate these two key processes in a monetary economy. However, because the same mediums are used in the two processes, understanding the roles played by the various mediums in each process and their interdependencies is one of the more difficult problems in any monetary theory. We will start first from the roles played by these mediums in the exchange of commodities and services.

Most theories concerning money and banking within the exchange process fall into one of two categories that we will label, after Schumpeter, “monetary theories of credit” and “credit theories of money.” The former have a common logical structure that typically starts with an analysis of a basic form of money. The focus of the inquiry is the process of exchange in the economy; the relationship between the flow of commodities and the flow of money becomes the pivot around which the monetary theory is built. Other means of payment are then discussed, beginning with those considered to be near-monies in some sense and continuing with those which are less near-monies. Finally, some distinction, which is not always explicitly defined, is usually drawn between “money,” “near-monies,” and “credit.” In such an approach, the concept of credit can only be defined and given meaning in terms of the definition and analysis of money.