Sunday, March 20, 2011

Some British Nineteenth Century Controversies In Monetary Theory

Britain suspended convertibility during the Napoleonic wars. During that period, until 1821, money in England was paper, unbacked by gold. The restoration of convertibility was followed by a stagnant period in British development, with a crisis in 1825 and a reform in 1844 called the Bank Charter Act.

This post recalls some debates in monetary theory among British political economists while these events were occurring. (I don't consider myself expert on monetary theory during the Classical period.) Table 1 shows some schools of thought in monetary theory. The term schools is traditional with respect to the currency and banking schools, but should not be interpreted too strongly for any groups in the table. These schools, unlike, say, the Physiocrats, do not have a recognized leader, followers, popularizers, etc. Rather, they are more like the Mercantilists, a diverse set of pamphleteers and politicians grouped together by later writers.

Table 1: Some "Schools" and Example Members
YearsContending Schools
  • Henry Thornton
  • David Ricardo
  • Robert Torrens
  • Robert Malthus
1825-1844Currency School
  • Robert Torrens
  • Samuel Jones Lloyd
  • Mountifort Longfield
Banking School
  • Thomas Tooke
  • John Stuart Mill
2nd Half
of the
20th Century
Quantity Theory
  • Milton Friedman
Endogenous Money
  • Nicholas Kaldor

In each period shown in the table, I have listed two schools. Economists in the first school in each row argued that the money supply was exogenous and that the price level varied with amount of money issued by central bank. Economists in the second school in each row argued that the money supply was endogenous, that is was not capable of being controlled by the central bank, and that it varied with demand for it. The details of these arguments varied among these and other economists.

The last row suggests that these arguments are still current. In fact, advocates of Modern Monetary Theory currently argue that the money supply is endogenous.


Anonymous said...

Well, in terms of Friedman and Kaldor the case is closed -- Kaldor was right. Attempts to apply Friedman's ideas failed and proved Kaldor's previous critique correct.

An Anarchist FAQ

Robert Vienneau said...

Thanks for reminding me that I should have tagged this post with "Milton Friedman". I chose not to use Kaldor, Robinson, or Sraffa's names as tagged because I thought I would get almost every post.