------------ 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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