This is the fourth of six posts.
If the monetary standard should not be fixed, then neither should it be flexed (by the fiat of an eighteenth-century sovereign). It should be, as Martin notes in the previous post, evolved (by democracy).
Nonetheless, Martin needs first to face the lingering legacy of Locke.
First, if money is a commodity (as Locke argued), then banks should hoard money in a financial crisis because money will be in short supply. But if money is credit (as Bagehot argued), then banks should distribute it [202-204, 210, 234].
Banks should be able to borrow from the Central Bank in order to appease customers who are demanding money. This should help to restore confidence because customers will then have more claims on the Central Bank (with all its creditworthiness) and less on the individual banks. (Keynes later echoed this .) But Locke completely misses the dimension of money that is credit.
Second, and following Locke, comes Sayʼs Law, in which supply determines demand . This is because Say assumes market equilibrium: that supply and demand will cancel one another out. Therefore excess supply must be met by equal demand.
According to this law, a recession is not due to a shortage of demand (because of a shortage of money). A recession is due to a shortage of supply. Since the supply problem must be sorted out before the monetary one, and because governments cannot do much about supply, governments will, according to this law, not interfere in recessions.
But if one does not accept Sayʼs assumptions (about market equilibrium, for example), and if one does not hold that money is a commodity, then Say’s very categories of supply and demand seem somewhat beside the point.
(Sayʼs Law also goes against Keynes’ proposal, which, in the spirit of Bagehot, asserts that governments should spend in a recession. So one's economic assumptions really do make a “real world” difference. Note also, for example, the failure of the British Government to respond to the Irish potato famine. This was because the British assumed that as a “market issue”, the market knows best. So they let things lie [147f.])
The third facet of Locke’s legacy will be considered at length in the next post.