James Steuart and the Theory of the Monetary Economy

The monetary economy is a system of production of goods governed by a controlled scarcity of money. The central factor in budget restraint is money and not scarcity of resources or goods. An eminent theorist of the monetary economy is Sir James Steuart. Similar to classical and neoclassical economists, Steuart sees real goods as the sole means of exchange in a supposed former state of barter. This condition does not necessitate money. However, industrial production, achieved by trade, is dependent on money and credit from the very beginning. One of the most interesting points is that, as opposed to Smith’s theory where the potential demand is limited by production, Steuart shows the independence of demand from production and that not consumer demand but the use of property as collateral for creating new money determines the level of social product. Quite on the contrary to mainstream opinions, Steuart – like Keynes two centuries later – regards the money of account as the primary concept of a theory of money. Money proper, which corresponds to money of account and which he is actually interested in, exists as banknotes. Steuart follows up on the ideas of earlier mercantilists on the origin of money, which can be described as the pawn or pledge theory of money. Neither gold nor silver is money, but the notes issued by a bank for good security – a topic neglected in both Keynes’s and the classical and neoclassical theories of money. According to Steuart, a bank is not primarily a savings bank which makes the existing money circulate more efficiently. This part of the bank’s activity exists and it is not unknown to Steuart, but his focus is on credit banks that create or issue new money. Steuart understands that in his time, the consumers of luxury goods and most investors in trade and industry are from the class of landed proprietors, and, therefore, he recommends the establishment of banks that issue banknotes secured by landed property. Today securities are transformed into paper money in the same way as in Steuart’s time and, therefore, his principles remain important even for modern central banking.