Mason, 

The interesting thing about Henry Thornton’s sticky nominal wages-flexible prices theory is this: It implies that a central bank that stabilizes prices also stabilizes employment and output. Price stabilization prevents both deflation-caused unemployment and inflation-caused overfull-employment. So maybe if a Thornton-type wage-price relationship prevailed in the U. S. in the mid-to-late 20th century, the Fed’s commitment to price stabilization helped matters on the employment front, too. Perhaps as much or more than would a "dual mandate" directing the Fed to focus directly on achieving both full employment and stable prices. Of course, the validity of this conjecture depends on the existence or nonexistence of a Thornton-type relationship between sticky wages and flexible prices. Whether such a relationship actually exists is an empirical matter and likely a contentious one at that.  

> On Feb 27, 2016, at 8:07 PM, Mason Gaffney <[log in to unmask]> wrote:
> 
> In 1951 the pressure was on to rein in inflation, soaring into double
> digits.  Tsy Secy John Snyder entered into an accord with new Fed Chair Wm.
> McChesney Martin to temper the Fed's previous mission of supporting the
> price of Tsy bonds by its "Open Market Operations".  The new mission
> included controlling the price level.
> 
> 	Thanks to a strong political reaction against inflation, controlling
> prices took priority.  It was a political bargain, a shift not quite
> tectonic, but powerful, and with enough backing to last for many years. The
> original "Accord" became a "Compact".
> 
> 	Creeping inflation continued, however, and after 1970 began to
> gallop. This time Pres. Carter in 1979 apptd Paul Volcker Chair of the Fed
> with a new and stark remit to stop inflation dead, which he did. Interest
> rates soared; S&Ls collapsed.
> 
> 	I recite that familiar history just to express surprise that no one
> in this interesting and learned thread has mentioned it.  It seems central
> to causing and curing inflation, regardless of "spirals". 
> 
> 	It also is worth stressing that the power of most labor unions was
> broken during the period covered.  If there ever was a wage-price spiral it
> is now just a bogeyman.
> 
> Mason Gaffney
> 
> -----Original Message-----
> From: Societies for the History of Economics [mailto:[log in to unmask]] On
> Behalf Of Roger Sandilands
> Sent: Saturday, February 27, 2016 4:15 AM
> To: [log in to unmask]
> Subject: Re: [SHOE] Is there a history of cost-push or wage-price spiral
> analysis?
> 
> Per contra James Ahiakpor, I think it is transparently obvious that the Fed
> failed in its classical duty to be a proper lender of last resort during the
> Great Depression. Just because it accommodated the public's increased
> preference for cash rather than bank deposits does not gainsay this.
> 
> What happened is that in order to meet the public's demand for cash, the
> banks were forced to borrow from the Fed. And because the Fed did so little
> to relieve the banks of their consequential indebtedness, many of them
> closed and the survivors' repugnance to debt led them to contract their own
> lending. The result was a one-third decline in the community's total means
> of payment - defined sensibly as cash plus bank deposits subject to transfer
> by cheque to make payments every bit as effectively as if they were using
> notes and coin [and properly excluding bank reserves not in circulation from
> a sensible definition of money].
> 
> Is James seriously suggesting that if the public had $2bn more cash but $4bn
> less in the banks, they would feel they had just as much money as before?
> That they would feel the Fed was doing its job properly? And that they would
> not be inclined - or forced - to reduce their spending? And that if the
> banks remained heavily in debt they too would continue to lend as before to
> maintain the community's circular flow of income?
> 
> Even Mill (Principles, 3, XI, para 2) agreed that the maintenance of a flow
> of "credit" - by which he meant "money substitutes" in the form of bank
> deposits that were means of payment - was indispensible in "making a
> corresponding addition to the aggregate production of the community".
> 
> On this criterion, the Fed was grossly delinquent. As Lauchlin Currie wrote
> in The Supply and Control of Money in the United States (Harvard 1934:
> 146-47):
>    "Much of the current belief in the powerlessness of the reserve banks
> appears to arise from a complete misreading of the monetary history of
> 1929-32. It is generally held that the reserve administration strove
> energetically to bring about expansion throughout the depression but that
> contraction continued despite its efforts. Actually the reserve
> administration's policy was one of almost complete passivity and
> quiescence." [Cited in David Laidler, Fabricating the Keynesian Revolution,
> 1999: 236]
> 
> But James asks: "So wherein lies the validity of the claim that the Fed
> failed to act as a lender of last resort?"
> 
> The answer: Only by defining and monitoring money in the narrow sense of
> currency - and also by treating non-circulating bank reserves as money. And
> also, I would add, by treating interest-bearing time (savings) deposits as
> though they have the same economic effect on the circular flow as
> non-interest-bearing demand (transactions) deposits held for differing
> motives, hence differing turnovers.
> 
> With a one-third drop in the money supply, prices also fell drastically. And
> faster than did money wages. So real wages of those in employment rose. Ah,
> so it was the workers who were to blame for the Depression??
> 
> As a postscript, one of those who thought this way was Harvard's Joseph
> Schumpeter. Lauchlin Currie (who was Schumpeter's teaching assistant) told
> me that JAS's sole anti-depression policy prescription was to favour wage
> cuts - for Harvard's tea ladies, not for the faculty whose real incomes
> therefore rose. This accorded, said Currie acerbically, with his belief that
> "a gentleman cannot live on less than $50,000 a year."
> 
> - Roger Sandilands
> --------------------------
> James Ahiakor wrote:
>   I tried very much to avoid getting into this discussion, but I couldn't
> resist because of Tom Humphrey's latest contribution.  He employs our modern
> (Keynesian) definition of money and "money stock" to interpret Henry
> Thornton's monetary analysis along the lines of Milton Friedman.  It is
> misleading.  He argues:
> 
> So I guess Thornton did indeed anticipate bank failure and money stock
> contraction resulting from the Fed's failure to act as a lender of last
> resort in the Great Depression of the 1930s.
> 
> Thornton (1802, 90), along with the other classics, including David Hume,
> Adam Smith, and David Ricardo, defined money as specie and banknotes as
> money substitutes or "paper credit."   The notion of "the money stock," be
> it M1 or M2, is not to be found in their works.  M1 and M2 include the
> public's "savings," be they the regular savings deposits or checkable
> deposits.  The Fed did expand its liabilities (notes) by about 25%, from $4
> billion to $5 billion between 1930 and 1933 (Irving Fisher 1935); Friedman
> and Anna Schwartz (1963, 24-29) also report that currency in circulation
> rose from $3.78 billion in January 1930 to $5.57 billion by March 1933.   So
> wherein lies the validity of the claim that the Fed failed to act as a
> lender of last resort during the Great Depression?   From where did the
> money, properly so called, arise for the public to hold its additional
> quantity?  Perhaps, it is noteworthy that Friedman (1960, 88-89) also
> acknowledges that "Under present circumstances, even the stock of money is
> not directly controlled by the [Federal Reserve] System.  The System
> controls directly its own earning assets."
> 
> As for the wage-price spiral argument, it belongs firmly with Keynes and his
> followers, just as Richard Lipsey has noted.  It is all in Keynes's
> tradition of rejecting the classical quantity theory of money as the
> explanation of the price level and its changes.  In the classical analysis,
> an increase in nominal wage rates does not by itself raise the price level.
> That would rather put pressure on profits.  Thus, following David Ricardo's
> explanation of that mechanism, J.S. Mill chides those who would argue
> otherwise, noting:
> "There is no mode in which capitalists can compensate themselves for a high
> cost of labour, through any action on values or prices.  It cannot be
> prevented from taking its effect on low profits" (3: 479).  Mill (3: 699;
> italics added) further explains:
> 
> "The doctrine, indeed, that a rise of wages causes an equivalent rise of
> prices, is, . self-contradictory: for if it did so, it would not be a rise
> of wages; the labourer would get no more of any commodity than he had
> before, let his money wages rise ever so much; a rise of real wages would be
> an impossibility.  This being equally contrary to reason and to fact, it is
> evident that a rise of money wages does not raise prices; that high wages
> are not a cause of high prices.  A rise of general wages falls on profits.
> There is no possible alternative."
> 
> What von Mises should have argued regarding unions raising wage rates is
> this: Unions may succeed in raising the (nominal) wage rates of their
> members, but that may also lower the wage rates of non-unionized workers
> because of the increased rate of unemployment that would result from the
> raised union wages.    Mises's argument is one of the unfortunate results of
> some Austrians' disputing classical monetary analysis.
> 
> James Ahiakpor
> 
> On 2/26/2016 7:06 AM, Thomas Humphrey wrote:
> Robert,
> 
> Henry Thornton in 1802 obviously could not anticipate all the events of the
> Great Depression that happened 128 years after he wrote. And he most
> certainly did not postulate a downward wage-price spiral in his analysis,
> which can be found on pp. 118-19 of the standard Hayek edition of his
> (Thornton's) Enquiry Into the Nature and Effects of the Paper Credit of
> Great Britain. Instead, Thornton said that a one-time fall in prices would
> result from a monetary contraction. But nominal wages would remain
> unchanged. Nominal wages would remain unchanged because workers would
> interpret the price fall as being temporary (albeit perhaps for a protracted
> period of time), and would anticipate a later reflation of the price level.
> (Why lower wages in the face of a price fall anticipated to be temporary and
> subsequently reversed?)
> 
> Thornton was arguing that conventional domestic monetary contraction might
> not be the best way to deal with a balance-of-payments deficit and resulting
> outflow of gold. For the monetary contraction would, by causing a price fall
> which in the face of sticky nominal wages would produce rising real wages,
> lead to a fall in real output and employment in all sectors, including the
> export sector, of the economy. And depression in the export sector, Thornton
> held, was hardly the best way to correct the balance-of-payments deficit
> causing the gold outflow.
> 
> Thornton applied that same reasoning to argue that monetary expansion, not
> contraction, was the proper way to handle financial crises and panics when
> the demand for base money was increasing as bank depositors sought to
> convert deposits and notes into coin and bankers sought increases in their
> reserve/deposit ratios. Without monetary expansion to meet the increased
> monetary demand, the result would be monetary contraction, price falls,
> rising real wages, layoffs, and falling real activity. In this way,
> recession would follow from financial panics. Bank failures would also
> occur. So I guess Thornton did indeed anticipate bank failure and money
> stock contraction resulting from the Fed's failure to act as a lender of
> last resort in the Great Depression of the 1930s. But, to reiterate, he did
> not anticipate the concept of a downward wage-price spiral. Instead he
> postulated a one-time rise of real wages owing to the fall of prices in the
> face of unchanged nominal wages. One must look elsewhere for the origins of
> the "spiral" idea.
> --Tom Humphrey