The development of monetary economics: a modern perspective on monetary controversies

1

evelopmen t

o f

onetar y

Economic s

A Moder n Perspectiv e o n

onetar y Controversie s

T h e Developmen t o f Monetar y Economic s

T o Joh n Creed y wit h thank s

T h e Developmen t o f

Monetary Economics

A Modern Perspective on Monetary

Controversie s

D.P . O'Brie n

Emeritus Professor of Economics,

University of Durham, UK

DAI HOC THAI NGUYEN

TRUNG TAM HOC LIEU

Edwar d Elga r

Cheltenham, UK • Northampton, MA, USA

© D.P. O'Brien 2007

All rights reserved. No part of this publication may be reproduced, stored in

a retrieval system or transmitted in any form or by any means, electronic.

mechanical or photocopying, recording, or otherwise without the prior

permission of the publisher.

Published by

Edward Elgar Publishing Limited

Glensanda House

Montpelher Parade

Cheltenham

Glos GL50 1UA

UK

Edward Elgar Publishing, Inc.

William Pratt House

9 Dewey Court

Northampton

Massachusetts 01060

USA

A catalogue record for this book

is available from the British Library

Library of Congress Cataloguing in Publication Data

O'Brien, D.P. (Denis Patrick), 1939-

The development of monetary economics : a modern perspective on

monetary controversies / by D.P. O'Brien.

p. cm.

Includes bibliographical references (p. ) and index.

1. Monetary policy-History. I . Title.

HG230.3.O27 2007

332.4-dc22 2007000732

ISBN 978 1 84720 260 4

Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

Content s

List of Figures ix

List of Tables xi

Preface xiii

Acknowledgements xu

I Introduction

1 Introduction 1

II Early Monetary Debates

2 Bodin's Analysis of Inflation 9

2.1 European Inflation 12

2.1.1 Inflation in France 13

2.2 Scholastic Contribution 15

2.2.1 Navarrus 16

2.2.2 The Quantity Theory in the 16th Century 17

2.3 The Paradoxes 19

2.3.1 Bodin's Critique 20

2.3.2 Bodin and the Causes of Inflation 22

2.4 Exports and the Gains from Trade 25

2.4.1 Gresham'sLaw 27

2.4.2 The Demand for Money 29

2.5 Inflation: Effects and Remedies 30

2.5.1 Currency Reform 31

2.6 Conclusions 34

3 John Law: Money and Trade Considered 37

3.1 Law's Concerns 38

3.2 The Role of Money 40

3.3 Silver Coinage 41

3.4 The Monetary Growth Model 42

3.5 Development and the Price Level 45

3.6 Paper Money 47

v

vi CONTESTS

3.7 The Land Standard 48

3.8 A Formal Statement of Law's Model

5 0

3.9 Conclusions 54

4 The Rate of Interest: Locke and His Critics 57

4.1 Locke and the Usury Laws 58

4.2 Locke's Macroeconomic Vision 61

4.3 The Price Level 65

4.4 The Balance of Payments 66

4.5 Joseph Massie 68

4.6 David Hume 73

4.7 Conclusions 76

III 19th Century British Controversies

5 The Currency and Banking Controversy 79

5.1 The Nature of Long-Run Equihbrium 83

5.2 The Need for Monetary Control 93

5.3 Macroeconomic Management of Disturbances 96

5.4 The Monetary Aggregate 100

5.5 Conclusions 105

6 Monetary Base Control 107

6.1 The Monetary Background 108

6.2 The Bank Charter Act of 1844 Il l

6.2.1 The Debate Il l

6.2.2 Provisions of the Act 112

6.3 Wider Considerations 115

6.3.1 Other Means of Payment 115

6.3.2 The Nature of the Monetary Base 116

6.3.3 Causes of Gold Loss 116

6.4 The Issues Tested 117

6.5 Era I : The Data 1833-44 118

6.5.1 Control of the Note Issue 118

6.5.2 Changes in the Price Level 120

6.5.3 The Price Level 126

6.5.4 Bills of Exchange 129

6.6 Era II: 1844-57 132

6.6.1 The Change in the Composition of the Country Bank

Note Issue 132

6.6.2 Control of the Note Issue 135

6.6.3 Changes in the Price Level 139

6.6.4 The Price Level 142

6.6.5 Bills of Exchange 144

CONTENTS vii

6.6.6 Macroeconomic Variability 146

6.7 Conclusions 152

7 The Lender of Last Resort Concept 157

7.1 The 1790s: Baring and Thornton 159

7.2 The Crisis of 1825 162

7.3 Thomas Joplin and Vincent Stuckey 163

7.4 The 1832 Hearings 165

7.5 Joplin in the 1830s 168

7.6 The Bank Charter Debates 170

7.7 The 1844 Act and Last-Resort 171

7.8 The Second Crisis: 1857 174

7.9 The Aftermath: the Overend and Gurney Crisis 175

7.10 Conclusions 176

I V Macroeconomic Models

8 Bagehot and Stabilisation 179

8.1 Bagehot's Model 182

8.1.1 The Cycle 183

8.1.2 Income 184

8.1.3 Interest Rates 187

8.1.4 Savings, Investment and the Money Supply 189

8.1.5 The Price Level 189

8.1.6 The Balance of Payments 191

8.1.7 Bullion and the Banking Department Reserve 193

8.1.8 Bank Rate 194

8.2 The Question of Stability 196

8.2.1 Bagehot's Recommendations 196

8.2.2 A Formal Treatment of Stability 198

8.3 Conclusions 199

9 Joplin's Model: A Formal Statement 201

9.1 List of Variables 205

9.2 The Goods Market 205

9.3 The Money Market 208

9.3.1 Goods Market Transactions 208

9.3.2 Financial Market Transactions 211

9.3.3 The Balance of Payments 212

9.3.4 Aggregate Supply and the Labour Market 213

9.3.5 Aggregate Demand 216

9.4 Conclusions 217

viii CONTEXTS

10 Stability With an Inbuilt Cycle 219

10.1 The Currency School: Metallic Fluctuation 220

10.2 The Banking School 224

10.3 The Amplitude of Fluctuations 226

10.4 Conclusions 228

Bibliography 231

Index 253