Paul Narcyz Rosenstein-Rodan, The Coordination of the General Theories of Money and Price (1936)

Rosenstein-Rodan’s article examines how monetary theory can become integral to price theory. Its three sections challenge conventional comparisons between barter and monetary economies, trace the convergence of cash-balance and capital analysis, and propose a dynamic synthesis. Money cannot simply be appended to an equilibrium theory of relative prices: uncertainty, asset holding, and expectations must enter the explanation of prices themselves.

The opening section reconstructs the classical separation of monetary and price theory:

The whole classical theory was a theory of relative prices of a barter economy in a state of equilibrium.

Classical analysis determined relative prices first, then introduced quantity theory to explain their monetary expression. Rosenstein-Rodan questions the definitions underlying this procedure. A meaningful barter counterpart must accommodate accounting, exchange, and the storage of value, even where different goods perform these functions for different individuals. The functions cannot be identified merely by naming a monetary instrument. In particular, a standard for future obligations need not preserve value through time:

Perishable goods might be for instance a standard of deferred payments, in which case they could not be a store of value.

The store-of-value function brings uncertainty into monetary analysis. Money satisfies a desire for security, and its valuation interacts with the valuation of other goods. Excluding this function therefore removes an essential monetary problem. Through a three-person, three-good example, Rosenstein-Rodan distinguishes neutrality as unchanged relative prices from neutrality as effects equivalent to those arising in barter. The former is not a general property:

In this barter economy changes which correspond to changes in the volume of money in a monetary economy will in most circumstances have an influence on relative prices; money therefore will not be "neutral" in the first sense.

The second definition also presents difficulties. Comparisons assuming otherwise identical preferences overlook the interdependence of expectations and valuations: changing which goods people regard as secure changes their demand for other goods. Moreover, money is only one possible store of value. Durable goods provide alternatives, and individuals hold combinations of assets against unforeseen contingencies. Monetary institutions concentrate these holdings and reduce differences in expectations, making the contrast between barter and money a matter of degree. Discussion of Say’s law introduces another meaning of neutrality—the absence of cumulative monetary disequilibrium—without equating it with invariant relative prices.

Section II follows two approaches beyond static analysis. The cash-balance approach makes desired money holdings a determinant of prices rather than merely a consequence of transactions. Under certain foresight and without frictions, balances could be invested until needed, while clearing arrangements could replace cash holding. Money prices would consequently lack a determinate foundation. Investment charges and the inconvenience of managing small sums qualify this argument, but uncertainty remains central to explaining the variability of monetary demand. Money acquires a substantive place in utility theory by relaxing assumptions that otherwise make holding it unnecessary.

Capital analysis reaches a related conclusion through Wicksell’s cumulative process. A discrepancy between natural and money interest rates sets investment, production, and prices moving without guaranteeing a return to their original position. Rosenstein-Rodan rejects a necessary equivalence between interest-rate equilibrium and stable consumer prices. Adjustment depends on anticipated as well as actual prices. This supports his criticism of Hayek’s privileging of expectations based on current prices and of the supposition that optimistic and pessimistic forecasts cancel out. Expectations may spread collectively, while expansion and contraction impose asymmetric costs. His discussion of Keynes’s General Theory likewise emphasizes that demand depends on actual prices as well as expectations.

Section III proposes coordinating dynamic theories of money and prices. Present demand must reflect current prices and anticipated prices at successive future dates. Cash balances enter as an additional economic good expressing uncertainty; lending and borrowing introduce another market and the interest rate. Monetary and commodity demands thus belong within one explanatory system. Rosenstein-Rodan treats the aggregation of heterogeneous loans as provisional and stresses that expectations prove mistaken and undergo revision. Equilibrium through time can therefore persist only briefly. The article’s constructive contribution is to make liquidity, credit, and revisable expectations internal to price theory rather than subsequent monetary corrections to it.