Monetary Thought Research Articles

Milton Friedman and the Road to Monetarism: A Review Essay

Milton Friedman and the Road to Monetarism: A Review Essay

Henry C. Carey's Monetary Thought and American Industrialization in the Greenback Debate

Abstract This article seeks to reveal the links between Henry C. Carey's monetary theory in the greenback debate and the sectionalist issue within the US Reconstruction period. Sectionalism refers to the economic, political, and cultural differences between the North and South that led to the Civil War and persisted during Reconstruction. It is well known that Carey perceived those differences before the war and proposed, on grounds of his economic development theory, to alleviate sectionalism through a protective tariff. What is hardly known is that Carey continued to engage with the sectionalist issue in its new form during the Reconstruction period and tried to offer a solution to it via protectionism and greenbacks. He showed how greenbacks could put in motion a virtuous cycle of economic development and tied his solution to sectionalism to national independence.

Silver and the Social in Locke’s Monetary Thought

AbstractThis article locates Locke within broader early modern European debates about the relationship between money, precious metal, and sovereignty. Against this background, I read Locke’s metall...

The General Theory as 'Depression Economics'? Financial Instability and Crises in Keynes’s Monetary Thought

This paper revisits Keynes’s writings from Indian Currency and Finance (1913) to The General Theory (1936) with a focus on financial instability. The analysis reveals Keynes’s astute concerns about the stability/fragility of the banking system, especially under deflationary conditions. Keynes’s writings during the Great Depression uncover insights into how the Great Depression may have informed his General Theory. Exploring the connection between the experience of the Great Depression and the theoretical framework Keynes presents in The General Theory, the assumption of a constant money stock featuring in that work is central. The analysis underscores the case that The General Theory is not a special case of the (neo-)classical theory that is relevant only to “depression economics” — refuting the interpretation offered by J. R. Hicks (1937) in his seminal paper “Mr. Keynes and the Classics: A Suggested Interpretation.” As a scholar of the Great Depression and Federal Reserve chairman at the time of the modern crisis, Ben Bernanke provides an important intellectual bridge between the historical crisis of the 1930s and the modern crisis of 2007–9. The paper concludes that, while policy practice has changed, the “classical” theory Keynes attacked in 1936 remains hegemonic today. The common (mis-)interpretation of The General Theory as depression economics continues to describe the mainstream’s failure to engage in relevant monetary economics.

'Pollute the bay and poison the people': A short history of the Green Point marine sewage outfall, 1882–1992

The City of Cape Town in South Africa pumps 40 million litres of untreated sewage into the Atlantic Ocean from the Green Point outfall pipeline every day. This results in microbial and chemical pollution of the sea (including persistent organic pollutants), marine organisms and recreational beaches, breaching the City’s constitutional commitment to ‘prevent pollution and ecological degradation’ and, in doing so, it fails to uphold the constitutional right to an environment for citizens that is not harmful to ‘health or well-being’. This article explores how the decision to build this marine outfall was reached in 1895. It illustrates how narrow economic interests from the 1880s until today have driven the City’s commitment to the Green Point outfall despite a long history of opposition from citizens and scientists and repeated instances of pollution and ill-health. The findings reveal how, rather than being the cost-saving option that the City has always claimed it to be, its maintenance has cost enormous sums of money. The story of the Green Point outfall is one in which unimaginative, short-term monetary thinking has thwarted the search for an ecologically and hydrologically sustainable alternative means of sewage disposal – a legacy the City’s residents and the oceans that surround it live with today.
 Significance:
 
 The findings show that the disposal of untreated sewage into the sea at Green Point has always been controversial (scientifically, politically and socially), and has resulted in episodes of illness among Cape Town citizens. It has never been the most economic option as repeatedly asserted by the City Council. The findings also illustrate that the City Council has consistently rejected ecologically and hydrologically sustainable alternative disposal options, and has denied problems associated with the outfall, despite overwhelming evidence to the contrary, a pattern which persists. These findings are important for civic governance, desalination, water quality, environmental humanities, health (human and marine), sanitation and urban planning.

Central banking under the gold standard: Rist versus Hawtrey on the policy of the bank of France from 1928 to 1931

It is widely believed that the difficult return to the gold standard during the 1920s and its demise in 1931 intensified the Great Depression. An interesting way of thinking about national and international monetary mechanisms emerged from the debates between French and British policymakers during those years. We attempt to explain the limited cooperation between the Bank of France and the Bank of England during that period of political tension by examining the monetary thinking of Charles Rist and Ralph George Hawtrey. Both were involved in the controversy over the strategy of the Bank of France, which accumulated – and was accused of sterilizing – gold between 1928 and 1931.

Adolph Wagner’s economic thought in Brazil: money and public finance in the turn of the 20th century

This paper addresses the dissemination of German economist Adolph Wagner’s ideas in Brazil. It shows that his monetary thinking, inspired by Thomas Tooke and the Banking School, as well as his ideas on public finance, particularly the law of increasing state spending, were assimilated by two Brazilian economic thinkers: Rui Barbosa and Vieira Souto. The way these policymakers incorporated Wagner’s ideas into their texts and the arguments with which they chose to engage show the kind of economic discourse they were shaping in Brazil. This analysis reveals the different functions that the original ideas could perform in another national context.

The Economists and Monetary Thought in Interwar New Zealand: The Gradual Emergence of Monetary Policy Activism

The emergence of monetary thought in New Zealand after 1914 has not been subject to extensive analysis. This paper remedies this deficit for the interwar period. The focus is upon the propagation of monetary ideas in New Zealand and their intellectual sources. We apply a heuristic in which different monetary doctrines are situated along a continuum between extreme monetary policy ‘activism’ and extreme ‘minimalism’. In the 1920s, New Zealand economists betrayed a minimalist bias across several dimensions: money supply regulation, the role of money and the international monetary transmission process in the business cycle, and the operation of bank-credit allocation mechanisms. Incipient activism in the work of Condliffe and Belshaw was countered by Niemeyer's case for a minimalist central bank. Fisher adopted an anti-reflationist, forced savings approach to the 1930s crisis. Copland, Tocker, Belshaw and Hight downplayed these consequences. Extended debate over Reserve Bank legislation generated new meanings for the phrase ‘monetary policy independence’; it also turned most economists against extreme activism that prevailed from 1938. Throughout the interwar period, New Zealand entertained a vigorous contest of monetary ideas inherited from the work of Keynes, Hawtrey, Cannan, Robbins, and Hayek, though adapted to local conditions.

Between Money and Sovereignty: Is a New Monetary Thinking Needed to Institute the Common?

The diffusion of alternative financial and credit circuits, in which the money favours the self-management of social wealth, may curb the expropriation caused by processes of abnormal indebtedness that increasingly characterise economic systems. The article proposes an examination of four experiences with complementary currencies that have sprung up in Europe after the recent crisis, distinguishing between local currencies (Sardex, SoNantes and Sol Violette) and crypto coins (Bitcoin). The possibility of taking advantage of the monetary know-how that animates various experiences (like crypto coins and local clearing houses) would contribute to the re-thinking money as a social institution. Three main topics are discussed: 1. the “political technologies” in which the alternative monetary circuits consist; 2. democratic participation in the decision-making processes that characterise them; and 3. the meaning of the sovereignties that they potentially define

The intellectual origins of the monetarist counter-revolution reconsidered: how Clark Warburton influenced Milton Friedman’s monetary thinking

Clark Warburton’s contributions during the 1940s and early 1950s are widely considered to have anticipated the key tenets of the monetarist counterrevolution of the 1960s and the 1970s. Hitherto, however, Warburton has not been considered as someone whose views may have directly shaped the development of Milton Friedman’s monetarist views. While it is not possible to establish a direct causal line between Warburton’s views and Friedman’s monetarism, including its emphasis on the efficacy and primacy of open-market operations, the preferability of a monetary-growth rule to attain price-level stability, the need of a clear separation of a government’s fiscal operations from the monetary-policy operations of the central bank, and the destructive role played by the Fed in the Great Depression, this paper shows that the connection between Warburton’s contributions and Friedman’s monetarism is considerably tighter than previously thought.

Copernicus and the Quantity Theory of Money

This paper examines Nicholas Copernicus’ monetary thinking to ascertain whether he is an early expositor of the quantity theory of money. The paper reviews the historical setting of the 1500s, considers the history of economic thought that pertains to the quantity theory of money, and considers prior translations and interpretations of Copernicus’ manuscript On the Minting of Money with our own translation. The paper finds that Copernicus’ monetary thinking is noteworthy for associating monetary policy instability with various economic effects, but he is not a quantity theorist or an advocate of policy positions associated with quantity theorists.

Tommaso Padoa-Schioppa: Macroeconomic and Monetary Thought, and Policy-making at the European Commission

Tommaso Padoa-Schioppa was one of the great architects of the euro. He is remembered in particular as co-rapporteur for the Delors Committee and as a founding member of the European Central Bank’s Executive Board. For Padoa-Schioppa, becoming Director-General of the European Commission’s DG II (from 1979 to 1983), was a defining moment in his career and life. This period is the main focus of this paper. At the Commission, Padoa- Schioppa’s main priority was the European Monetary System, which was launched in March 1979. He was closely involved in several projects to strengthen the EMS, to improve economic policy convergence and develop the position of the ECU. The other main objective for Padoa-Schioppa was the strengthening of DG II’s analytical capacity, especially its model-building capacity and its links with the academic world. As such, he played a crucial role in the professionalization of economics at the Commission and in preparing DG II for the important role it would play in the EMU process. This also shows that, for assessing the legacy of an economist, it is not only important to look at his own writings and contributions, but also how he shapes the institutions in which he participates.

The fundamental role of money and banking in macroeconomic analysis and policymaking

The crisis that burst in 2007 has revealed a number of conceptual and methodological flaws of neoclassical economic analysis, based on rational behaviour, representative agents, and microfounded macroeconomics, where money and banking are considered as pertaining to the microeconomics of goods and business activities. Macroeconomic analysis requires a systemic approach to money and banking, both of which are essential for the working of any economic system. In this perspective, the paper explains how both have to be integrated into that analysis. It points out that macroeconomic analysis and policy making require a deep knowledge of the history of monetary thinking.

Can Sequential and Non-Dualistic Interpretation of Marx's Monetary Thought be Synthesized with the Post-Keynesian Endogenous Money Paradigm?

This article first explores mainstream and Keynesian (synthesis) monetary theories and concludes that they present a poor reflection of real-life conditions. The paper then outlines Marx's monetary theory, as understood by the temporal single-system interpretation, as an appropriate model to adopt for the future. The rest of the paper presents the view that endogenous credit-money entities, espoused by Circuitists and Post-Keynesians, could be added to this model, rather than the use of the usual commodity (gold) money.

Ivo Maes, A Century of Macroeconomic and Monetary Thought at the National Bank of Belgium (Brussels: National Bank of Belgium, 2010, 154 pp.)

Ivo Maes, A Century of Macroeconomic and Monetary Thought at the National Bank of Belgium (Brussels: National Bank of Belgium, 2010, 154 pp.)

A Century of Macroeconomic and Monetary Thought at the National Bank of Belgium

A century of macroeconomic and monetary thought at the National Bank of Belgium traces the history of economic research at the National Bank of Belgium, from the early decades of the 20th century to its present functioning in the Eurosystem. The study also goes into the major economic policy debates, as well as the specific lines of macroeconomic and monetary thinking at the National Bank of Belgium. The focus is very much on the role of the Research Department in policymaking and its dialogue (and debates) with the academic community.

Reexamination of Thornton's Innovative Monetary Analysis: The Bullion Debate during the Restriction Once Again

The Restriction period that began in England in 1797 marked a crucial turning point for monetary theory and policy. The debates during the Restriction concerning the relationship between inflation, the exchanges and monetary aggregates came to be known as the “Bullion Debate.” The Bullionists were critical of the Bank of England and supported a return to convertibility, whereas the anti-Bullionists defended both the Bank and inconvertibility.This paper re-evaluates Henry Thornton's seminal contribution to monetary theory and argues that Thornton's pathbreaking Paper Credit (1802) presents an innovative and consistent anti-Bullionist position. His views differ from those of the Bank of England and other anti-Bullionists; unlike them, he rejected the Real Bills Doctrine and Smith's monetary thinking in general as it applied to both convertible and inconvertible monetary arrangements. Thornton stressed the discretionary role the Bank played in managing the monetary system under both currency regimes.After 1802 and particularly as a member of the famous Bullion Committee, Thornton played an important role on the side of the Bullionists; later scholars therefore describe him as a “moderate Bullionist.” However, his reserved support for convertibility during this period reflects his disappointment with the Bank directors whose fundamental misunderstanding of the monetary system threatened the stability of the British economy. For this reason, the shift in Thornton's position is better understood as a pragmatic political response to an untenable situation resulting from the directors' mismanagement, not as a reversal of his monetary theory.

The Monetary Thought of Two Sixteenth-Century Muslim Scholars

Muslim scholars of the sixteenth century continued the tradition of writing on economic issues. Their work, however, is characterized by the period’s overall feature of imitation and repetition and thus reflects hardly any advancement of monetary thought since the works of earlier Muslim scholars. This is clearly reflected in the two representative treatises on money: those of al-Suyuti (d. 1506), written at the beginning of the century, and of al-Tumurtashi (d. 1598), written at its end. The history of Islamic economic thought is a well-researched area of Islamic economics. To the best of our knowledge, however, all such research stopped at the end of the fifteenth century, the age of Ibn Khaldun and al-Maqrizi. The present paper seeks to advance this research and intends to investigate the monetary thought of Muslim scholars during the sixteenth century (corresponding to the hijr¥ years of 906 to 1009.) Beginning with an overview of earlier monetary thought in Islam to provide the necessary background information, it then goes on to note that particular century’s monetary problems in order to provide a perspective for the discussion of monetary thought among Muslim scholars. For the purpose of comparison, European monetary thought of the same period is also analyzed. Due to limitations of time and space, this paper concentrates on the relevant treatises and does not deal with the piecemeal opinions scattered throughout the voluminous corpus of Islamic literature. Thus, it focuses on al-Suyuti and al-Tumurtashi, as I could locate only their two exclusively monetary works. Hopefully this modest initiative will spur others to conduct more extensive research on the subject.

David Hume’s Monetary Theory Revisited: Was He Really a Quantity Theorist and an Inflationist?

David Hume’s monetary theory has been controversial since its formulation. Lately, the focus has been on Hume’s alleged misapplication of the quantity theory of money. While he appears to subscribe to a simple quantity theory with money neutrality, in a famously contested passage in the essay Of Money, he violates the neutrality condition by claiming that an increase in the money stock has favorable output effects. While most commentators argue about the persistence of the output effect, this paper suggests that we can derive an alternative understanding of Hume’s monetary thinking by recognizing that he made an analytical distinction between endogenous and exogenous money. Realization that only the former has a favorable output effect forces us to overturn the long‐standing consensus that Hume instructed the government to use monetary or trade policy to engineer a gradually increasing money stock.

What has Happened to Monetarism? An Investigation into the Keynesian Roots of Milton Friedman's Monetary Thought and its Apparent Monetarist Legacies

It is widely perceived that today's conventional monetary wisdom, and the common practice of monetary policy based thereupon, is essentially monetarist by nature, if not by name. One objective of this paper is to assess whether monetarism has had a lasting effect on the theory and practice of monetary policy; another is to scrutinize the key dividing lines between Milton Friedman's monetary thought and that of John Maynard Keynes. Among the paper's main theoretical findings are that the key issue is the theory of interest, which is at the root of differences in approach to money demand and liquidity preference. Similarities are more pronounced with respect to the supply of money and monetary policy control issues. However, while Keynes favored a stabilized wage unit combined with a flexible central bank to steer interest rates and aggregate demand, Friedman advocated a stabilized central bank combined with a free interest rate and employment determination in financial and labor markets, respectively. Additional differences arise at the practical and empirical levels: the dynamics of adjustment processes and expectation formation on the one hand, and the relative efficiency and riskiness of market-driven versus government-guided adjustments on the other. The puzzling fact is that, despite today's dominant market-enthusiast ideology, Friedman's idea of delegation--not to independent central bankers, but to the markets--enjoys remarkably little popularity.