Much of the History of Monetary Theory Reduces to a Struggle between Opposing Mercantilist and Classical Camps

Much of the history of monetary theory reduces to a struggle between opposing mercantilist and classical camps. Mercantilists, with their fears of hoarding and scarcity of money together with their prescription of cheap (low interest rate) and plentiful cash as a stimulus to real activity, tend to gain the upper hand when unemployment is the dominant problem. Classicals, chanting their mantra that inflation is always and everywhere a monetary phenomenon, tend to prevail when price stability is the chief policy concern.

Currently, the classical view is in the driver’s seat. By all rights it should remain there since it long ago exposed the mercantilist view as fundamentally flawed. It is by no means certain, however, that the classical view’s reign is secure. For history reveals that, whenever one view holds center stage, the other, fallacious or not, is waiting in the wings to take over when the time is ripe.

 --Thomas M. Humphrey, Federal Reserve Bank of Richmond annual report, 1998

--Nathan Lewis, Gold: The Once and Future Money (Hoboken, NJ: John Wiley and Sons, 2007), 211.