David Hume’s Monetary Theory Revisited: Was He Really a Quantity Theorist and an Inflationist?

Abstract

David Hume’s monetary theory has been controversial since its formulation. Lately, the focus has been on Hume’s alleged misapplication of the quantity theory of money. While he appears to subscribe to a simple quantity theory with money neutrality, in a famously contested passage in the essay Of Money , he violates the neutrality condition by claiming that an increase in the money stock has favorable output effects. While most commentators argue about the persistence of the output effect, this paper suggests that we can derive an alternative understanding of Hume’s monetary thinking by recognizing that he made an analytical distinction between endogenous and exogenous money. Realization that only the former has a favorable output effect forces us to overturn the long‐standing consensus that Hume instructed the government to use monetary or trade policy to engineer a gradually increasing money stock.