Economic Writings John Locke Author:John Locke This beautifully formatted collection of economic essays contains: 1. Some Considerations of the Consequences of the Lowering of Interest, and Raising the Value of Money. 2. Letter to a friend concerning usury. 3. Observation, encouraging the coining of silver money in England. Locke's general theory of value and price is a supply and dema... more »nd theory, which was set out in a letter to a Member of Parliament in 1691, titled Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money. He refers to supply as "quantity" and demand as "rent". "The price of any commodity rises or falls by the proportion of the number of buyer and sellers," and "that which regulates the price... is nothing else but their quantity in proportion to their rent." The quantity theory of money forms a special case of this general theory. His idea is based on "money answers all things" (Ecclesiastes) or "rent of money is always sufficient, or more than enough," and "varies very little..." Locke concludes that as far as money is concerned, the demand is exclusively regulated by its quantity, regardless of whether the demand for money is unlimited or constant. He also investigates the determinants of demand and supply. For supply, he explains the value of goods as based on their scarcity and ability to be exchanged and consumed. He explains demand for goods as based on their ability to yield a flow of income. Locke develops an early theory of capitalization, such as land, which has value because "by its constant production of saleable commodities it brings in a certain yearly income." He considers the demand for money as almost the same as demand for goods or land; it depends on whether money is wanted as medium of exchange. As a medium of exchange, he states that "money is capable by exchange to procure us the necessaries or conveniences of life," and for loanable funds, "it comes to be of the same nature with land by yielding a certain yearly income... or interest." Locke distinguishes two functions of money, as a "counter" to measure value, and as a "pledge" to lay claim to goods. He believes that silver and gold, as opposed to paper money, are the appropriate currency for international transactions. Silver and gold, he says, are treated to have equal value by all of humanity and can thus be treated as a pledge by anyone, while the value of paper money is only valid under the government which issues it. Locke argues that a country should seek a favorable balance of trade, lest it fall behind other countries and suffer a loss in its trade. Since the world money stock grows constantly, a country must constantly seek to enlarge its own stock. Locke develops his theory of foreign exchanges, in addition to commodity movements, there are also movements in country stock of money, and movements of capital determine exchange rates. He considers the latter less significant and less volatile than commodity movements. As for a country's money stock, if it is large relative to that of other countries, he says it will cause the country's exchange to rise above par, as an export balance would do.« less