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Tuesday, June 18, 2013

Theory of money

While Turgot did not devote a great deal of attention to the theory of money proper, he had some important contributions to make. In addition to continuing the Hume model and integrating it with his analysis of interest, Turgot was emphatic in his opposition to the now dominant idea that money is purely a conventional token. In his critique of a prize-winning paper by J.J. Graslin (1767), Turgot declares Graslin totally mistaken in ‘regarding money purely as a conventional token of wealth’. In contrast, Turgot declares, ‘it is not at all by virtue of a convention that money is exchanged for all the other values: it is itself an object of commerce, a form of wealth, because it has a value, and because any value exchanges in trade for an equal value’.

In his unfinished dictionary article on ‘Value and Money’, Turgot develops his monetary theory further. Drawing on his knowledge of linguistics, he declares that money is a kind of language, bringing forms of various conventional things into a ‘common term or standard’. The common term of all currencies is the actual value, or prices, of the objects they try to measure. These ‘measures’, however, are hardly perfect, Turgot acknowledges, since the values of gold and silver always vary in relation to commodities as well as each other. All monies are made of the same materials, largely gold and silver, and differ only on the units of currency. And all these units are reducible to each other, as are other measures of length or volume, by expressions of weight in each standard currency. There are two kinds of money, Turgot notes, real money – coins, pieces of metal marked by inscriptions – and fictitious money, serving as units of account or numéraires. When real money units are defined in terms of the units of account, the various units are then linked to each other and to specific weights of gold or silver.
Problems arise, Turgot shows, because the real monies in the world are not just one metal but two – gold and silver. The relative values of gold and silver on the market will then vary in accordance with the abundance and the relative scarcity of gold and silver in the various nations.

Austrian Perspective on the History of Economic Thought (2 volume set)

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