“Early 19th century origins of the Natural Rate of Interest,” Economicreflections, 15 October, 2014.This discussion of the “natural rate” comes in one of Joplin’s letters (which was later noted by Jacob Viner 1955: 191 over a hundred years later):
“The circulation of each district must bear a certain proportion with that of the rest of the kingdom, in order that its internal trade may balance, and if the general circulation be ever so deficient, the Banks of no district can increase their issues, unless the others do so; nor yet, in the regular course of banking reduce them, be it ever so redundant, unless the reduction be general. If the prices of any district were either above or below their due proportion with the rest, an exportation or importation of corn and cattle, as we explained in our last letter, would bring them in, probably, a few weeks to their level. Any internal cause, therefore, by which a general extension or contraction of the currency is produced must be common to all.This appears to be a monetary “natural rate” that clears the market for loanable funds, when the money supply is limited strictly to a given supply of commodity money (for Joplin’s other works, see Joplin 1823 and 1832).
We also pointed out, in our former letters, that money had two values,—its value as currency, and its value as income, or capital; and that the issues of our banks are founded upon a demand for the latter, governed evidently by principles that ought to have no connexion whatever with the currency. There was no want of currency when the banks first issued notes; but by forcing the original metallic money out of circulation, they have created a want, and this want, is a sum of paper, precisely equal to the amount of metallic money, which would have been in circulation if there had not been any paper money at all.
The interest demand for money, or capital is also subject to great fluctuations. During war, when Government borrows largely, it is infinitely greater than during peace, when it does not borrow any. In the former period, the natural market-rate of interest has often been seven or eight per cent, and is generally above five; in the latter it has often been at two per cent, and is generally under four.
The natural rate of interest, however, can never be properly known with our system of currency. It depends, as we have stated, upon the quantity of income saved, proportioned to the demand for capital. But, with the power possessed by our banks of cancelling money which has been saved, or manufacturing it when it has not, this supply and demand can never be ascertained. Consequently, the banks have an arbitrary charge, some of four, but most of five per cent., from which they do not vary; but which, being neither the natural war-rate nor the peace-rate, is as little likely to be the true rate as any other between these two extremes they could have pitched upon.
The natural rate of interest is pretty uniform throughout the kingdom; and when money is scarce or plentiful it operates upon all the banks at the same time. When, therefore, during the war, it was above five per cent, there was a constant tendency in the banks to increase their issues; since the war, except for a short interval, it has been considerably under that rate, and a great reduction of their issues has taken place.” (Letter IX. To the Editor of the Courier, in Joplin 1825: 37–38).
According to Glasner (1997: 56), Thomas Joplin had the clearest expression of the idea of a “natural rate” before Wicksell, although Henry Thornton (1760–1815) was also another early theorist with a proto-natural rate concept.
I am not quite sure what relationship Joplin had to the Currency School, but their ideas seem similar, and Hayek even considered Joplin the “inventor of the currency [sc. school] doctrine” (Hayek 1935: 15). The Currency School’s ideas were seen by the early Austrians like Mises and Hayek as the precursor to their Austrian business cycle theory (Mises 2006 [1978]: 101–103; Garrison 1997: 23).
Addendum
Another point that strikes me (as brought out in the Economicreflections blog post) is that there was a great deal of intense discussion of economic issues in the early 19th century, but now largely forgotten.
In addition to the development of writings in Classical Political Economy following Adam Smith, there was the following:
(1) the last phase of the bullionist controversies from 1800 to 1819 (Glasner 1997);BIBLIOGRAPHY
(2) the debates after 1819 between the Banking School, the Currency School, and Free Banking School over what caused the business cycle and other monetary issues (White 1997).
(3) the emerging anti-laissez faire, protectionist writings of Friedrich List (1789–1846), Henry Clay (1777–1852), and the early German Historical School.
(4) the writings of the proto-Keynesian “Birmingham School” of economists (Checkland 1948), including the following economists:Birmingham School
Thomas Attwood
George Frederick Muntz
Matthias Attwood
Arthur Young
Patrick Colquhoun
Sir John Sinclair
Robert Montgomery Martin.
Checkland, S. G. 1948. “The Birmingham Economists, 1815–1850,” The Economic History Review n.s. 1.1: 1–19.
Garrison, R. W. 1997. “Austrian Theory of Business Cycles,” in D. Glasner and T. F. Cooley (eds.), Business Cycles and Depressions: An Encyclopedia. Garland Pub., New York. 23–27.
Glasner. D. 1997. “Bullionist Controversies,” in D. Glasner and T. F. Cooley (eds). Business Cycles and Depressions: An Encyclopedia. Garland Pub., New York. 56–58.
Hayek, F. A. von. 1935. Prices and Production (2nd edn). Routledge and Kegan Paul.
Joplin, Thomas. 1823. Outlines of a System of Political Economy: written with a View to Prove to Government and the Country, that the Cause of the Present Agricultural Distress is Entirely Artificial: and to suggest a Plan for the Management of the Currency. Baldwin, Cradock, and Joy, London.
Joplin, T. 1825. An Illustration of Mr. Joplin’s Views on Currency, and Plan for Its Improvement; together with Observations applicable to the Present State of the Money; in a series of Letters. Baldwin, Cradock, and Joy, London.
Joplin, Thomas. 1832. An Analysis and History of the Currency Question: Together with an Account of the Origin and Growth of Joint Stock Banking in England: Comprised in a Brief Memoir of the Writer’s Connexion with these Subjects. James Ridgway, London.
Mises, L. von. 2006 [1978]. The Causes of the Economic Crisis and Other Essays Before and After the Great Depression. Ludwig von Mises Institute, Auburn, Ala.
O’Brien, D. P. 1997. “Joplin, Thomas (c. 1790–1847),” in D. Glasner and T. F. Cooley (eds). Business Cycles and Depressions: An Encyclopedia. Garland Pub., New York. 344–345.
Viner, Jacob. 1955. Studies in the Theory of International Trade. Allen & Unwin, London.
White, Lawrence H. 1997. “Banking School, Currency School, and Free Banking School,” in D. Glasner and T. F. Cooley (eds). Business Cycles and Depressions: An Encyclopedia. Garland Pub., New York. 47–49.
Hume had a similar proposition. But he thought in terms of a quantity target instead of a price target. Thus putting him closer to Friedman than Wicksell. As you know from my paper, in contradistinction to some Post-Keynesians like Keen, I do not see a great deal of difference between the two theories as they are both loanable funds theories.
ReplyDelete"From the whole of this reasoning we may conclude, that it is of no manner of consequence, with regard to the domestic happiness of a state, whether money be in a greater or less quantity. The good policy of the magistrate consists only in keeping it, if possible, still encreasing; because, by that means, he keeps alive a spirit of industry in the nation, and encreases the stock of labour, in which consists all real power and riches." (Hume, Of Money)