Two Classical Monetary Models

There are, under current discussion in the journals, at least two notions of the consumers demand for money which, within the traditions of monetary theory, appear to be clearly ‘acceptable’. ¹ One of these has received impetus from the work of Patinkin (1956) and others. It supposes, in essence, that people hold money because they want to. They gain utility from so doing. The utility accrues directly to real balances rather than to money as such, but it is money that is held. The other approach, recently discussed by Clower (1963b) and others, supposes that money is held, not because people want to hold it, but because they must. They are constrained so to do by the workings of the economic system. It will be the purpose of this paper to discuss the empirical implications of this latter model. Clower has shown that a particular case of this model is consistent with Say’s Law, Walras’s Law, homogeneity of degree zero of excess demand functions in money prices alone, the determination of absolute prices by the quantity theory and the classical ‘invalid’ dichotomy. Since this list includes almost everything that has ever been claimed for a theory of money the model in which people hold money because they are constrained so to do must be a good one indeed. Elsewhere (Lloyd, 1964), we have shown that the Patinkin model is lacking in known empirical implications. We shall show here that the constraint model is not so lacking. It is rich in empirical content. Perhaps it is too rich.