------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (June 2008)
D. P. O'Brien, _The Development of Monetary Economics: A Modern
Perspective on Monetary Controversies_. Cheltenham, UK: Edward Elgar,
2007. xv + 265 pp. $115 (hardcover), ISBN: 978-1-84720-260-4.
Reviewed for EH.Net by Robert W. Dimand, Department of Economics,
Brock University.
The eminent historian of classical political economy Denis O'Brien,
Professor Emeritus of Economics at the University of Durham, has
gathered together his work on monetary economics from Jean Bodin in
the sixteenth century to Thomas Joplin and Walter Bagehot in the
nineteenth century. Some of the chapters have been previously
published, while others are new. All have been written since his
_Thomas Joplin and Classical Economics_ (1993) (one chapter of which
is reprinted here) and since his earlier collection, _Methodology,
Money and the Firm_ (2 volumes, 1994). A companion volume collects
his writings in the same period on non-monetary aspects of classical
economics. Seven of the nine chapters (not counting the five-page
introduction) have been published from 1993 to 2003, but the book is
a unified, coherent historical analysis of the classical theory of
monetary policy and its roots, parts of which were published as the
project progressed, rather than an ex post assemblage of disparate
essays. Any scholar interested in the Currency School/Banking School
debate or in the emergence of the concept of a lender of last resort
will need, and want, to read this material. Any such scholar will,
indeed, have already read parts of the book that have appeared in
prominent and easily accessible places, such as the three chapters
published in _History of Political Economy_ (on Jean Bodin's
quantity-theoretic analysis of inflation in 2000, on monetary base
control and the 1844 Bank Charter Act in 1997, and on the concept of
lender of last resort in 2003). An essay on Bagehot and stabilization
appeared in the _Scottish Journal of Political Economy_ in 2001, and
two chapters, on the Banking School/Currency School controversy and
on the stability analysis of those two schools, are reprinted from
Blaug et al., _The Quantity Theory of Money from Locke to Keynes and
Friedman_ (1995). But the two new chapters, on John Law's _Money and
Trade_ (1705) and on John Locke's debate with his critics about the
rate of interest (the two chapters being linked by Law's borrowing of
Locke's argument that a plentiful supply of money encourages economic
growth), are also necessary reading for anyone studying that era of
monetary economics, and it is well worth rereading the other essays
together as components of a connected historical narrative and
analysis. O'Brien argues that a close look at the critiques of Locke
by Joseph Massie and David Hume, and at their empirical claims about
how the interest rate is related to the profit rate, reveals that
historians of economics have been too generous to Massie and Hume as
critics of Locke, and too harsh on Locke. Given the extent and
accessibility of the reprinted chapters, and given the price of
academic books, the temptation is to persuade one's university
library to order the book, rather than buying a personal copy. Apart
from the chapter on Jean Bodin, in which the Salamanca School is also
discussed, the story is exclusively British (and David Hume appears
primarily as a critic of Locke, rather than as a pioneering theorist
of international monetary equilibrium).
As O'Brien's readers have come to expect, these essays are erudite
and clearly argued, and include rational reconstruction of earlier
theorizing as formal models. Chapter 9, the one chapter from O'Brien
(1993) reprinted in the present volume, is "Joplin's Model: A Formal
Statement." (O'Brien discerns in Joplin a complex model that
anticipated the neo-Keynesian synthesis of income-expenditure and
monetary models.) Chapter 3 includes "A Formal Statement of Law's
Model." Chapter 8, on Bagehot, includes "A Formal Treatment of
Stability" (showing that the model is stable when Bagehot's
prescription is followed for the Bank Rate, emphasized by Bagehot as
the core policy tool). Chapter 10 is a formal treatment of the
stability analysis of the Banking and Currency Schools with an
inbuilt cycle and with the money supply (rather than the Bank Rate)
as the policy variable. As O'Brien (p. 5) summarizes the findings of
Chapter 10, "Employing a formal treatment, it proves possible to
demonstrate that the prescriptions of the Currency School would, had
they targeted the right money supply, have been stabilizing, while
those of the Banking School left the price level indeterminate and
magnified fluctuations. At best, and only after filling a major gap
in the theoretical position of the Banking School, any equilibrium
would only be a saddle point." The clause about targeting the right
money supply is crucial. O'Brien presents careful regression analysis
in Chapter 6 to argue that the British price level was controlled by
the country bank note issue rather than by the Bank of England note
issue, and that the Bank of England note issue did not act as a
monetary base controlling the country bank note issue, so that Thomas
Joplin (in many ways the hero of O'Brien's story) was correct that
the Bank Charter Act of 1844 targeted the wrong money supply. The
Currency School's advocacy of counter-cyclical control of the money
supply by the Bank of England to stabilize the price level and the
balance of payments had a sounder theoretical basis than the Banking
School's leaning to a more passive money supply, but, as a matter of
fact rather than theory, the Bank of England did not control the
British money supply.
Not only was Joplin insightful in his critique of the Bank Act of
1844, but, according to O'Brien, Joplin's analysis of the liquidity
crisis of 1825 set out the case for a lender of last resort that is
usually attributed to Walter Bagehot (with earlier partial
discussions by Sir Francis Baring and Henry Thornton). Joplin
stressed the importance of a central reserve that would enable the
lender of last resort to lend freely at a penalty rate during a
liquidity crisis (contrast the actions of the Federal Reserve since
August 2007, expanding credit during a liquidity squeeze but also
repeatedly lowering its target for the overnight inter-bank rate) and
argued that lending by the lender of last resort during a liquidity
crisis would not raise the price level because of the increase in
demand for precautionary balances. O'Brien (pp. 163-66) notes that
Joplin's 1825 analysis was immediately taken by Vincent Stuckey, of
the banking firm Stuckey and Bagehot, and speculates that, through
Stuckey, Joplin's 1825 article influenced Stuckey's nephew Walter
Bagehot.
O'Brien's blend of careful reading, historical context,
representation by formal models, and cliometrics is skilful and
lucid. These essays are of lasting value and have established O'Brien
alongside David Glasner, Thomas Humphrey, David Laidler, Anna
Schwartz, and Neil Skaggs as one of the foremost authorities on
British classical monetary economics. This has been one of the most
studied areas of the history of economic thought, yet, as O'Brien
demonstrates, there are still new and important things to say about
the subject.
References:
Mark Blaug, Walter Eltis, D.P. O'Brien, Don Patinkin, Robert
Skidelsky, and G. Wood, 1995. _The Quantity Theory of Money from
Locke to Keynes and Friedman_. Aldershot, UK: Edward Elgar.
John Law. 1705. _Money and Trade Considered with a Proposal for
Supplying the Nation with Money_. Edinburgh: Andrew Anderson.
Reprinted New York: A. M. Kelley, 1966.
D.P. O'Brien, 1993. _Thomas Joplin and Classical Macroeconomics: A
Reappraisal of Classical Monetary Thought_. Aldershot, UK: Edward
Elgar.
D.P. O'Brien, 1994. _Methodology, Money and the Firm_, 2 volumes.
Aldershot, UK: Edward Elgar.
Robert W. Dimand is Professor of Economics, Brock University, St.
Catharines, Ontario, Canada. Email: [log in to unmask] He recently
published on "Macroeconomics, Origins and History of" and "Monetary
Economics, History of," in _The New Palgrave Dictionary of
Economics_, second edition (2008).
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