The Pendulum Meta-theory

Quality versus Quantity of Money

An essay based on a theme from the book by Glyn Davies:

Davies, Glyn. A history of money from ancient times to the present day, 3rd ed. Cardiff: University of Wales Press, 2002. 720 pages. Paperback: ISBN 0 7083 1717 0. Hardback: ISBN 0 7083 1773 1.

See also Money in Fiction

Causes of Inflation

One of Glyn Davies's main themes is the problem of simultaneously trying to control the quality and quantity of money. He discusses many cases of inflation over the past couple of thousand years and identifies several (not necessarily mutually exclusive) causes.

Conflict between the Interests of Debtors and Creditors

The history of money is one of "unceasing conflict between the interests of debtors, who seek to enlarge the quantity of money and who seek busily to find acceptable substitutes, and the interests of creditors, who seek to maintain or increase the value of money by limiting its supply, by refusing substitutes or accepting them with great reluctance, and generally trying in all sorts of ways to safeguard the quality of money." (page 30). The government itself is often the most important debtor and at times may be a major creditor.

" is of the utmost significance to realize that because the monetary pendulum is rarely motionless at the point of perfect balance between the conflicting interests of creditors and debtors, so money itself is rarely 'neutral' in its effects upon the real economy and upon the fortunes of different sections of the community..." (page 32)

"...the market gives no priority to posterity or the poor: silent majorities." (page 657)

"In the normal course of events money is rarely 'passive' or 'neutral' while the safe haven of equilibrium on which so much economists' ink has been equally rarely attained." (page 658)

The Fungibility of Money

"Money is so useful - in other words, it performs so many functions - that it always attracts substitutes: and the narrower its confining lines are drawn, the higher the premium there is on developing passable substitutes." (page 27).

In a discussion of the invention of money the author says: "Money has many origins - not just one - precisely because it can perform many functions in similar ways and similar functions in many ways. As an institution money is almost infinitely adaptable." (page 27).

"Money is by its very nature dynamically unstable in volume and velocity, in quantity and quality." (page 30).

Money's adaptability is chameleon-like. "Money designed for one specific function will easily take on other jobs and come up smiling. Old money very readily functions in new ways and new money in old ways: money is eminently fungible." (page 29).

One good example of fungibility is the creation of Bowie bonds. For more information see Who's Who in Bowie Bonds, or alternatively, Something Wild, a novel about Bowie bonds by Linda Davies, the daughter of Glyn Davies who is the author of A History of Money.

The Population Explosion

The author lays considerable stress on the effects of population changes on attempts to control the quality and quantity of money, pointing out that the population explosion of our times "has been a virtually silent explosion as far as monetarist literature is concerned. Thus nowhere in Friedman's powerful, popular and influential book Free to Choose is there any mention of the population problem, nor the slightest hint that the inflation on which he is acknowledged to be the world's greatest expert might in any way be caused by the rapidly rising potential and real demands of the thousands of millions born into the world since he began his researches." (page 5).

Population pressures have had an effect on inflation in previous ages too, e.g. the so-called "Price Revolution" in England in the period 1540-1640, and the author also discusses the effect of the reduction in population caused by the ravages of the Black Death.

The Military Ratchet

"The military ratchet was the most important single influence in raising prices and reducing the value of money in the past 1,000 years, and for most of that time debasement was the most common, but not the only, way of strengthening the sinews of war." (page 646)

The financial consequences of Alexander the Great, the rise and fall of the Roman Empire, the Viking assault on England, the Norman Conquest, the Crusades, the Hundred Years War between England and France, the Spanish conquest of Mexico and Peru, the aftermath in Britain of the Napoleonic Wars, the U.S. Civil War, and the financing of the two World Wars are all treated.

The importance of war as a cause of inflation increased with the adoption of paper money in the west.

"When modern paper money release prices from their metallic anchors, the military ratchet began to be seen at its most powerful...The 'Continentals' of the new USA fell in value by the end of the Revolutionary War to one-thousandth of their nominal value, a process repeated by the Confederate paper which similarly became worthless by the end of the Civil War. The assignats of the French Revolution and the hyper-inflation of the German mark between 1918 and 1924 are simply among the best known of hundreds of examples of war-induced inflation." (page 647)

The Developmental Money Ratchet

"Second only to war as an engine of inflation is the general acceptance of the need for an ever-expanding supply of money in order to facilitate economic development, a belief which in a weaker and vaguer form long preceded the Keynesian revolution, though it was the Keynesian ratchet which acted as a strong causative factor in the unusually high peacetime inflations of the second half of the twentieth century." (page 647) Glyn Davies cites Sir William Petty and John Law, "the Keynes of the early eighteenth century", in this regard and discusses the fiasco of the Mississippi Bubble to show that the policy temptations facing politicians, governments and the public are not new.

However, he also points out that in certain circumstances this ratchet can work and says "however much the Keynesian revolution may be condemned for its long-run consequences of high and stubborn inflation, Keynes's enormous success in providing cheap finance for the Second World War and in being largely responsible for the inestimable benefits of full employment for the first post-war generation, i.e. for its short- and medium-term benefits, should not be forgotten." (page 648).


Sometimes the supply of money is insufficient to sustain economic activity at the level that would be reached if its productive capacity was fully utilized. Various instances are discussed in the book.

When Alexander the Great conquered the Persian empire he seized enormous quantities of precious metals which were melted down and used for making coins. Instead of causing inflation this gave a considerable boost to economic activity in the ancient world indicating the importance of coinage in revolutionising financial transactions.

Medieval England was much more successful than other major European countries in avoiding inflation, but the author points out that it could be argued that economic growth was sacrificed as a result though at this distance in time it is impossible to determine whether or not its economy was "crucified on a cross of silver" (to paraphrase the American politician William Jennings Bryan who in the presidential election campaign of 1896 made a famous speech about mankind being crucified on a cross of gold).

The British colonies in North America suffered greatly from a lack of official British coins and therefore adopted a variety of expedients including wampum, tobacco and paper money.

The Great Depression of the 1930s. One reason for its severity was the action of the FED in restricting the US money supply.

Pendulum Theory

As a result of the above-mentioned factors the supply of money tends to alternate in every age between too little and too much, with the pendulum swinging from excessive concern with the quality of money to the opposite extreme of an inflationary, excessive quantity of money.

This is the basis of the author's pendulum meta-theory of money, i.e. a "general theory comprising sets of more limited, partial theories, which spring out of the special circumstances of their time. The enveloping pendulum or metatheory also explains why the usual theories of money, despite being so confidently held at one time, tend to change so drastically and diametrically (and therefore so puzzlingly to the uninitiated) to an equally accepted but opposite theory within the time span appropriate to historical investigation." (pages 31-32).

In every age the supply of money tends to be either too generous or too restrictive, whether by objective standards or by those of creditors or debtors who have conflicting interests. According to the pendulum metatheory monetary theories do not deal with eternal verities but are prescriptions for courses of action that may be appropriate at particular times and places. Even when successful, by altering circumstances they ensure their own failure in the long term.

In support of these claims Glyn Davies ranges widely, both chronologically, from the dawn of civilization about 3000 BC onwards, and geographically from China to the New World, Denmark to Fiji. The development of financial policy and institutions in Britain, the United States, France, Germany and Japan is traced up to the present day. (The treatment of Britain and the United States is particularly detailed). There is also a chapter on the problems of the Third World.

Thus a huge range of evidence regarding the causes of changes in both the quality and quantity of money is surveyed and the author concludes chapter 12, Global Money in Historical Perspective, with the words (from House of the Dead, part 1 chapter 2) of the Russian novelist Dostoevsky:

"Money is coined liberty."
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Roy Davies - Last updated 25 May 2005.