Money and Crises
Say defines money as a means of payment. Its value is determined by supply and demand. Its value is thus not inversely proportional to its quantity in circulation: it also depends on the quantity demanded.
Say had lived through the period of the “assignats”. He was thus led to investigate the causes of the value of an inconvertible paper money. He had first thought that “money is accepted in exchanges... because it is a commodity, which has a value” (Say 1803 [2006]: 456). In this perspective a paper money could not have circulated. That the assignats experiment could go on was thanks to the measures taken by the government: not only were the assignats fiat money but producers were obliged to accept it against the commodities, the price of which was fixed by the State. In 1814 however, Say, in England, read Ricardo’s analysis of the 1797 Bank Restriction Act. He then came to think that the value of paper money is not due to a possible reimbursement in specie, but is a consequence of the need of a medium of exchanges. “It is the proportion of notes, and not discredit, which influence their value” (Say 1815 [1996]: 75).With money as a means of payment, it could be thought that products do not sell because the quantity of money is too small. Say discards this idea in the celebrated chapter “Des debouches” of Traite - the source of the so-called Say’s law. However, in the different editions, the arguments change. In 1803, he maintained that any agent, even if he deals with important sums during a period, has at the end of it approximately the same cash balance than at the beginning. He thus justified what was called later Say’s identity: the sum of the excess demands, money excluded, is identically nil. However he abandoned this idea in 1814 and stated that “when money falls short of the needs of commerce, it is easily replaced” (Say 1814 [2006]: 248).
For want of money, one pays with notes, cheques and bills of exchange. An excess demand for money can possibly correspond to an excess supply of goods, but it will soon disappear because other means of payment replace money proper (Baumol 1977: 159). The idea of an equality replaces that of an identity: in equilibrium, demand for and supply of money are equal, and the sum of the excess demands for goods is nil.However, when Say examined the 1825 British crisis, he put the blame on banks: “the spirit of speculation was excessively excited by the banks, which in England all have the power of issuing notes payable to the bearer” (Say 1826b: 43). The abundance of the circulation provoked a fall of the value of specie relative to bullion, and there was a run at the banks to convert notes into specie in order to melt it into bullion. The reserves were depleted, banks were unable to discount bills of exchange and entrepreneurs, unable to face their commitments, went bankrupt. Say does not deny the possibility of crises, but he rejects the idea that they are due to an excessive production or a too rapid accumulation of capital.