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• Preface
• Studies In the Theory of International Trade
• Chapter I: English Theories of Foreign Trade, Before Adam Smith: I
• I. Introduction
• II. “ Mercantilism” and “bullionism”
• III. the Balance-of-trade Doctrine
• IV. Reasons For Wanting More Bullion
• V. Employment and the Balance of Trade
• Chapter II: English Theories of Foreign Trade, Before Adam Smith: Ii
• I. Legislative Proposals of Mercantilists
• II. the Collapse of Mercantilist Doctrine
• III. Some Modern Interpretations of English Mercantilism
• Chapter III: The Bullionist Controversies: I. The Inflation Phase
• I. the Participants In the Controversy
• II. the Factual Background
• III. Premium On Bullion As Evidence of Excess Issue: the Bullionist Position
• IV. Qualifications Conceded By the Bullionists
• V. Possible Objections to the Bullionist Position
• VI. the Anti-bullionist Position
• VII. the Balance of Payments Argument
• VIII. the Possibility of Excess Issue By Banks
• IX. Responsibility For the Excess Issue: Bank of England Vs. Country Banks
• X. Responsibility For Excess Issue: the Credit Policy of the Bank of England
• Chapter IV: The Bullionist Controversies: II. The Deflation Phase
• I. the Resumption of Cash Payments
• II. Responsibility of Resumption For the Fall In Prices
• III. the Economic Effect of Changing Price Levels
• IV. Ricardo's Position On the Gold Standard
• V. Reform Without Departure From the Metallic Standard
• VI. Paper Standard Currencies
• Chapter V: English Currency Controversies, 1825–1865
• I. Introduction
• II. the “currency School” -“banking School” Controversy
• III. the “palmer Rule ”
• IV. the Bank Act of 1844
• V. the Possibility of Overissue of Convertible Bank Notes
• VI. the Role of Deposits, Bills of Exchange, and “credit” In the Currency System
• VII. the Technique of Credit Control
• VIII. the Relation Between Bank of England Operations and Specie Movements
• IX. Currency Reform Proposals
• Chapter VI: The International Mechanism Under a Simple Specie Currency
• I. Introductory
• II. the Mechanism According to Hume
• III. an Omitted Factor? Relative Changes In Demand As an Equilibrating Force
• IV. Prices In the Mechanism: the Concept of “price Levels ”
• V. the “terms-of-trade” Concept
• VI. the Prices of “domestic” Commodities
• VII. the Mechanism of Transfer of Unilateral Payments In Some Recent Literature
• VIII. a Graphical Examination of Pigou's Analysis 1
• IX. Some Elaborations On the Basis of Pigou's Analysis
• X. an Alternative Solution
• XI. Types of Disturbance In International Equilibrium
• XII. Specie Movements and Velocity of Money
• XIII. Commodity Flows and Relative Price Levels
• XIV. Exchange Rates
• XV. A Criticism of the Purchasing-power Parity Theory 1
• Chapter VII: The International Mechanism In Relation to Modern Banking Processes
• I. Automatic Vs. Managed Currencies
• II. Primary and Secondary Expansion of Means of Payments
• III. Short-term Loans In the International Mechanism
• IV. Primary and Secondary Expansion In Canada , 1900–13
• V. the International Mechanism and Business Cycles
• Chapter VIII: Gains From Trade: the Doctrine of Comparative Costs
• I. the Nature and Origin of the Doctrine
• II. the Division of the Gain From Trade
• III. Trade In More Than Two Commodities
• IV. Trade Between More Than Two Countries
• V. Transportation Costs
• VI. Increasing and Decreasing Costs
• VII. Prices, Money Costs, and Real Costs
• VIII. Dependence of Comparative Cost Doctrine On a Real-cost Theory of Value
• IX. Differences In Wage Rates In Different Occupations
• X. Variable Proportions of the Factors and International Specialization
• XI. Variable Proportions of the Factor and Comparative Real Costs
• XII. “ Opportunity Cost” Analysis As a Substitute For Real Cost Analysis
• Chapter IX: Gains From Trade: the Maximization of Real Income
• I. “ Mass of Commodities” and “sum of Enjoyments”: Ricardo and Malthus
• II. Reciprocal Demand and the Terms of Trade
• III. Terms of Trade and the Amount of Gain From Trade
• IV. “ Net Benefit” In International Trade: Marshall
• V. Total Net Utility Derived From International Trade: Edgeworth
• VI. the Gain From Trade Measured In Money
• Appendix: a Note On the Scope and Method of the Theory of International Trade

III. The Economic Effect of Changing Price Levels

There was general agreement at the time that changes in price levels resulted in arbitrary and inequitable redistribution of wealth and income. There appeared, however, during this period some new arguments in support of the doctrine that falling prices had adverse effects on the volume of wealth and production which made them particularly undesirable, and that rising prices might bring advantages for production and wealth-accumulation to compensate for their inequitable influence on distribution. The general trend of these arguments was such as to constitute at least a partial defense of the wartime inflation and to strengthen the opposition to resumption at the old par. Whether by implication or expressly, these doctrines gave encouragement to the advocates of a national paper currency free from the limitations to which an international metallic currency was subject. To Ricardo these doctrines were for this as well as for other reasons unpalatable, and later “orthodox” economists, following in his path, tended to ignore or to ridicule them. They were, no doubt, carried to extreme and even absurd lengths. They represent, nevertheless, a substantial contribution to economic analysis which in later years had to be rediscovered.

According to Thomas Attwood, it was the lack of uniformity in a fall in prices which made it injurious:

If prices were to fall suddenly, and generally, and equally, in all things, and if it was well understood, that the amount of debts and obligations were to fall in the same proportion, at the same time, it is possible that such a fall might take place without arresting consumption and production, and in that case it would neither be injurious or beneficial in any great degree, but when a fall of this kind takes place in an obscure and unknown way, first upon one article and then upon another, without any correspondent fall taking place upon debts and obligations, it has the effect of destroying all confidence in property, and all inducements to its production, or to the employment of laborers in any wav.1

A contraction of the currency, on the other hand, was injurious because the rigidity of costs prevented it from being followed immediately by a reduction in prices. During the interval consumers, finding themselves possessed of reduced funds, would buy less physical quantities of goods. Workmen would thus lose employment, “until the action of intense misery upon their minds, and of general distress upon all, shall so far have reduced their monied wages and expenses, as to reduce the price [of their product] ... within the reduced monied means of the capitalist.” 2

Wheatley, abandoning his original views, now argued similarly that falling prices, unless they resulted from increasing per capita output, were a burden on farmers and manufacturers because rent, wages, and taxes would not fall in proportion:

All the distress arises from an inability to make good the contracts, which individuals entered into with each other and the state when prices were high, and nothing can remove the embarrassment, but altering the contracts, lowering rent, wages, and taxes, according to the reduction of prices, or raising prices to their former standard by increasing our currency to its former amount.3

These and other writers argued in like manner that an increase in the quantity of money operates to increase employment and prosperity. The argument took two forms. In one of them, the “forced-saving” doctrine now first introduced in England,4 it is held that the increase in money results in an increase in commodity prices unaccompanied by a corresponding increase in the prices of the factors. There results a forced saving on the part of the recipients of the relatively fixed incomes, not in the monetary sense of an increase in the amount of unspent funds, but in the opposite sense of a decrease in the amount of real consumption while money expenditures are maintained. The increase in money is retained by entrepreneurs, who invest it in additional production. In the other form of the argument, commodity prices do not rise immediately or do not rise in as great proportion as the increase in money, and the money left over is available for additional expenditures and consequently for the employment of additional labor. This form of the doctrine, of course, was not novel, but goes back to Hume, and even earlier to William Potter and John Law,5 and rests on the assumption that there are idle resources.

The first stages of the development in England of the doctrine of forced saving have been ably traced by Hayek.6 He finds the first statement in print of the doctrine in the following passage from Henry Thornton:

It must be also admitted that, provided we assume an excessive issue of paper to lift up, as it may for a time, the cost [read prices?] of goods though not the price of labor, some augmentation of stock will be the consequence; for the laborer, according to this supposition, may be forced by his necessity to consume fewer articles, though he may be exercise the same industry. But this saving, as well as any additional one which may arise from a similar defalcation of the revenue of the unproductive members of the society, will be attended with a proportionate hardship and injustice.7

Jeremy Bentham had shortly before completed an extended exposition of the same doctrine, but it remained in manuscript form until published in 1843 as his Manual of political economy.8 According to Bentham, if an increase of money passes in the first instance into hands which employ it “productively,” it results in reduced consumption, because of higher prices, on the part of all who use their income for “unproductive expenditure,” until the new money reaches hands which will use it unproductively. During this interval the reduced consumption of wage earners and recipients of fixed incomes results in corresponding additions to the national stock of capital.9

Hayek refers also to reasoning along similar lines by Malthus, Dugald Stewart, Lauderdale, Torrens, and Ricardo,10 with the caution that he would “not be surprised if a closer study of the literature of the time revealed still more discussions of the problem.” Some important additions can be made to Hayek's citations, including both further discussions of the problem by the writers whom he has cited11 and discussions by other writers, and most notably by Joplin.12

In the other form of the doctrine that an increase in money meant an increase in production, it was argued that an increase in the quantity of money would increase the monetary volume of purchases more rapidly than it would increase prices, with the result that there would be a substantial interval during which the increase of spendable funds would be absorbed by increased employment in the production of consumers' goods rather than by increased prices.13 In this form of the doctrine, the increase in money results in increased real consumption, whereas in the forced-saving form it results in increased investment, but in both forms it makes possible increased employment.

The contributions of Joplin to the discussion are interesting because of the way in which, in the midst of much confused analysis, there appear concise statements anticipating some of the “innovations” in both terminology and concepts of present-day monetary theory. Hayek credits Wicksell with “a contribution of signal importance” by his rediscovery of Thornton's doctrine of the effect of the rate of interest, through its influence on the volume of bank loans, on the volume of money, and his combination therewith of the doctrine of forced saving resulting from an increase in the quantity of money.14 But Joplin has claims of priority in this respect. Hayek has himself pointed out15 that Joplin in 1823 and later had ably analyzed the influence of the rate of interest on the quantity of money. Joplin not only stated clearly the doctrine of forced saving, but on the basis of these two doctrines reached conclusions as to the proper criteria of currency management which in their essentials seem to anticipate Hayek's “neutral-money” doctrine.

Joplin stated the forced-saving doctrine in several of his writings. There follows one such statement:

If a person borrows one thousand pounds of a banker who issues his own notes, the banker has seldom any means of knowing whether he has lent him money that has been previously saved or not. He lends him his notes, and if either he or some other banker should not have previously had a thousand pounds' worth of notes deposited with them, he has at once added a thousand pounds to the capital and a thousand pounds to the currency of the country. To the party who has borrowed the money, he has given the power of going into the market and purchasing a thousand pounds' worth of commodities, but in doing this he raises their price and diminishes the value of the money in previous circulation to the extent of one thousand pounds, so that he acquires the commodities by depriving those of them who held the money by which they were represented and to whom they properly belonged. On the other hand, if a person pays a thousand pounds into the hands of a banker, and the currency is contracted to that extent, both one thousand pounds of capital and one thousand pounds of currency are destroyed. The commodities represented by the money thus saved and cancelled, are thrown on the market, prices are reduced, and the power of consuming them is obtained by the holders of the money left in circulation.16

Joplin does not approve of forced saving. It involves a fraud on those who were holders of money prior to the increase in its issue. At first it results in a stimulus to trade such as “in all probability would more than compensate the holders of the money in previous circulation for the loss they incurred,” but if the increase of issue continues, definite injury and injustice results.17 “Legitimately a banker can never lend money which has not been saved out of income. Money saved represents commodities which might have been consumed by the party who saves it. Interest is paid for the use of the commodities and not for the money.” 18 If banks have the power to issue money, the amount of such issue is determined by the rate of interest which the banks charge on loans. If forced saving is to be avoided, banks should charge “the natural rate of interest,” which he defines as the rate which keeps savings and borrowings equal.19 Under a purely metallic currency in its most perfect state, the quantity of money (and/or the scale of value) would be “fixed and unchangeable” and banks would be able to lend only what others had saved. But where banks acquired the right to issue paper currency not fully covered by gold, the quantity of money, “which ought, if possible, to be as fixed as the sun-dial, came to depend upon the credit of bankers with the public, and the credit of the public with the bankers, upon the supply of bills, the value of capital, and innumerable contingencies, which ought no more to affect the amount of currency in circulation than the motions of the sun.” 20 To remedy this situation he would confine the circulation of paper money to certificates of deposit of bullion exchangeable for and issued only in exchange for bullion.21

Other doctrines were presented during this period which tended similarly to lead to the conclusion that the inflation of the war period had contributed to the augmentation of the national wealth or the national income. Bentham had argued that if taxation fell on funds which otherwise would have been spent on consumption, and if the proceeds of the taxes were not spent unproductively by the government, the “forced frugality” on the part of the taxpayers would operate to increase the national wealth.22 Lauderdale, to the same effect, argued that the sinking-fund involved a “forced accumulation of capital ... annually raised by taxation,” thus “transferring from the hands of the consumers a portion of their revenues to commissioners, who are bound by law to employ it as capital, whilst, if it had remained in the hands to whom it naturally belonged, it would have been expended in the purchase of consumable commodities.” Like Bentham, Lauderdale disapproved of this “forced accumulation,” but not on the grounds of equity to which Bentham appealed. Lauderdale claimed that when the government's current expenditures fell below its revenues, there resulted a diminution of “effectual demand” and consequently of production. While the war continued, he wanted the government to carry on its increased wartime expenditures by borrowing, and without forcing individuals, through taxation, to decrease their expenditures.23 After the war had ended, he urged the government to offset the decline in military expenditures by increased civil expenditures on public works, in order to restore the demand for labor.24

William Blake similarly argued that increased government expenditures financed by borrowing operated to increase prices, profits, and production, by bringing into activity capital which if left in private hands would have remained “dormant,” by which he meant apparently that it would have been kept either as idle cash or as idle stocks of goods. He explained the post-war difficulties as due to “the transition from an immense, unremitting, protracted, effectual demand, for almost every article of consumption, to a comparative cessation of that demand.” 25

John Rooke believed that spending on consumption contributed to prosperity whereas savings, apparently even if invested, did not. He therefore held that the cessation of military expenditures, unless offset by deliberate currency inflation, would operate to cause deflation and depression, especially if these military expenditures had been financed by borrowing:

As the funds which had supported them [i.e., soldiers] in a military capacity, particularly in England, were partly derived from borrowed money, the savers who had supplied this money did not become spenders in the place of government; nor would the war-taxes which were remitted immediately pass into circulation through the medium of consumption, the basis of all income.26

In one of his earliest essays, John Stuart Mill denied Blake's argument that it was the cessation of the government's war expenditures which brought about the depression:

... every argument is [fallacious] which proceeds upon the supposition that a fund becomes a source of demand by being spent, while it would not have become so by being saved. A loan is a mere transfer of a portion of capital from the lender to the government: had it remained with the lender it would have been a constant and perennial source of demand: when taken and spent by the government, it is a transitory and fugitive one.27

Mill is here tacitly assuming that the government borrowed funds which the lenders would otherwise have themselves invested. But Blake had argued that if left in private hands these funds would have remained “dormant,” i.e., would have been kept either as idle hoards of cash or as idle stocks of commodities. He could even more effectively have argued that the funds borrowed by the government were in large part created by the banks for the purpose of being lent to the government and therefore might not have existed at all in the absence of the government borrowings.28 Mill also objected that Blake's contention that there could be oversaving rested on the reasoning that although the savers were the only persons who could purchase the (net?) products of their investment, men saved because they did not wish to consume. Mill replied, that on the contrary, men saved because they wished to consume more than they saved.29 Mill is here once more clearly identifying saving with investment. He overlooks the possibility that men may save without investing because for the time being they wish neither to consume nor to invest, but merely to preserve their capital resources without risk of loss through unprofitable investment, and that this is especially likely to be the case when prices are falling rapidly and no investment seems profitable or secure.30

It is not surprising that Ricardo, with his loyalty to the metallic standard and his temperamental reluctance to explore the shortrun and intermediate phases of economic process, also did not take kindly to these doctrines.31 His references to them are few, and tend to be obscurantist in nature. As in other cases, he alternated between outright denial of their validity, on the one hand, and qualified admission of their correctness for the short run but with minimization of their importance, on the other hand.

To Malthus's argument, that an increase in the quantity of money would operate to transfer purchasing power from those with fixed money incomes, an “idle and unproductive class,” to farmers, manufacturers, and merchants, and would thus result in an increase of capital, Ricardo replied that an increase of prices resulting from such increase of money, by reducing real fixed incomes, might reduce the savings of those receiving such incomes to an equal degree instead of reducing their consumption.32

In answer to questions put to him by the Lords Committee in 1819, Ricardo dealt further with the question of forced saving. He denied that bank credit created capital:

Credit, I think, is the means which is alternately transferred from one to another, to make use of capital actually existing; it does not create capital; it determines only by whom that capital should be employed ... Capital can only be acquired by saving.33

Asked what in his opinion was the difference between “a stimulus ... by fictitious capital34 arising from an overabundance of paper in circulation, and that which results from the regular operation of real capital employed in production,” he merely replied:

I believe that on this subject I differ from most other people. I do not think that any stimulus is given to production by the use of fictitious capital, as it is called.

He conceded that an increase in paper money circulation, by changing the proportions in which the national income is divided in favor of the saving classes, “may facilitate the accumulation of capital in the hands of the capitalist; he having increased profits, while the laborer has diminished wages.” This is not an acceptance of the forced-saving doctrine, for the increase of investment is held to result indirectly and voluntarily from the redistribution of real income from a non-saving to a saving group, rather than directly and involuntarily from the rise in the consumer's cost of living. Ricardo, moreover, added that “This may sometimes happen, but I think seldom does.” 35

Although Ricardo conceded that a sharp fall in prices was a serious evil, the only undesirable consequence of such a fall which he emphasized was the arbitrary redistribution of wealth which resulted therefrom.36 He admitted also that economic depression was likely to follow the end of war, but he attributed it to a relative shift in the demands for particular commodities, to which the capital equipment of the country had not yet had time to adjust itself.37 Ricardo's position on these questions was closely related to his acceptance of the James Mill-J. B. Say doctrine that production, if properly directed, created the demand for its product, and that a general insufficiency of demand to absorb all of the possible output of industry was impossible. This doctrine leads naturally to a denial that a fall in prices would operate to restrict production or a rise in prices to increase it. It rests on concepts of “supply” and “demand” too physical and an implicit assumption of price and money-cost flexbility too unrealistic to serve adequately the purposes of analysis of short-run disturbances in a monetary economy. If “supply” and “demand” are interpreted, as they should be, not as simply quantities of commodities but, in the modern manner, as schedules of quantities which would be produced or purchased, respectively, at specified schedules of prices, it becomes easy to see that if money costs are inflexible the schedules of demand prices may fall more rapidly than the schedules of supply prices, with a consequent reduction, not only in prices, but also in volume of sales, in output, in employment, in willingness of capitalists to invest, and in willingness of bankers to lend even if there were would-be borrowers.

Malthus was convinced that there was something wrong in the James Mill doctrine, including its Ricardian version. He failed, however, ever satisfactorily to expose the fallacy which underlay it, because he was himself insufficiently emancipated from the purely physical interpretation of “supply” and “demand.” In the following passage, confused though it is, it appears to me that he comes nearest to exposing this fallacy successfully:

The fallacy of Mr. Mill's argument depends entirely upon the effect of quantity on price and value. Mr. Mill says that the supply and demand of every individual are of necessity equal. But as supply is always estimated by quantity, and demand only by price and value; and as increase of quantity often diminishes price and value, it follows, according to all just theory, that so far from being always equal, they must of necessity be often very unequal, as we find by experience. If it be said that reckoning both the demand and supply of commodities by value, they will then be equal; this may be allowed; but it is obvious that they may then both greatly fall in value compared with money and labor; and the will and power of capitalists to set industry in motion, which is the most general and important of all kinds of demand, may be decidedly diminished at the very time that the quantity of produce, however well proportioned each part may be to the other, is decidedly increased.38

It was not Malthus39 but the two Attwoods, and especially Thomas Attwood, who first explained in reasonably satisfactory fashion the dependence of the “demand and supply” of price theory on the state of the currency:

... while it is certain that a reduction of the quantity of money in circulation necessarily occasions a reduction in the monied prices of all commodities; it is of equal necessity, that the price of no commodity whatever can decline, without some alternation in its relative proportion of supply and demand. The manner, therefore, in which a lessened quantity of money reduces monied prices, is by operating on those ulterior principles by which supply and demand are themselves governed. A scarcity of money makes an abundance of goods. Increase the quantity of money, and goods become scarce. The relative proportion between money and commodities can never alter without producing these appearances. Mr. Tooke, and Mr. Ricardo, will find in this obvious principle an exposition of many of the difficulties and inconsistencies in which they have involved the subject.40

Money is as necessary to constitute price, as commodities: increase the supply of money, and you increase the demand for commodities; diminish the supply of money, and you diminish the demand for commodities. The supply of commodities is the demand for money, and the supply of money is the demand for commodities. The prices of commodities, therefore, depend quite as much upon the “proportion” between the supply of, and demand for, money, as they do upon the “proportion” between the supply of, and demand for, commodities. This is a truth which Sir Henry Parnell has altogether overlooked, and his neglect in this respect has led him into a labyrinth of errors. He has considered the supply of, and demand for, commodities as acted upon by some obscure, uncontrollable, and capricious principles, having no reference to the state of the currency, and none to the legislative enactments, which, at one period, have introduced cheap money and high prices, and, when enormous monied obligations have been contracted in such cheap money, have then, at another period, introduced dear money and low prices, and have thus strangled the industry of the country by compelling it to discharge monied obligations which its monied prices will not redeem.41

[1]Prosperity Restored, 1817, pp. 78–79. Italics in the original.

[2]Thomas Attwood, Observations on currency, population, and panperism, 1818, p. 10.

[3]John Wheatley, A Letter ... on the distress of the country, 1816, p. 16. Cf. also: C.C. Western, A letter ... on the cause of our present embarrasment [sic] and distress, and the remedy, in Pamphleteer, XXVII (1826), 228–229; G. Poulett Scrope, The currency question freed from mystery, 1830, p. 2; ibid.,On credit-currency, and its superiority to coin, 1830, pp. 20 ff. Malthus (Principles of political economy, 1820, pp. 446–47) appears also to attribute the decline of production resulting from a fall in prices to the lag of wages behind prices and the consequent destruction of the incentive to investment, but his analysis is much inferior to Thomas Attwood's.

[4]An elaborate exposition of the doctrine of forced saving is to be found in a book published in 1786 by one of the minor French physiocrats, Saint Peravy. Unlike most of the English writers, Saint Peravy expounds the doctrine in terms of an expansion of a metallic currency. When an increased amount of money first enters into the circulation, it raises the prices of products without immediately raising contract rents, wages, etc. Producers, therefore, have an extra profit, which they invest in an increase in production, but the general public suffers temporarily a corresponding diminution of real income. Saint Peravy regards the increased investment as a desirable phenomenon, but he asserts that unless other countries experience an equal increase in their stock of currency, their competition will prevent a rise in prices, which must be equal in all countries. Guérineau de Saint Peravy, Principes du commerce opposé au trafic, Ire partie, 1786, pp. 80–83.

[5]Cf. supra, pp. 37–38.

[6]F. A. von Hayek, “A note on the development of the doctrine of ‘forced saving,’” Quarterly journal of economics, XLVII (1932), 123–33.

[7]Paper credit, 1802, p. 263.

[8]An abstract of his forced-saving doctrine is presented in Bentham, The rationale of reward, 1825, pp. 312–13.

[9]Manual of political economy, in The works of Jeremy Bentham, John Bowring ed., 1843, III, 44 ff. Bentham here surely exaggerates the importance of the identity of the hands into which the money first flows.

[10]Hayek's citations are: Malthus, “Depreciation of paper currency,” Edinburgh review, XVII (1811), 363 ff. Stewart, in a memorandum on the Bullion Report sent to Lord Lauderdale in 1811, but first published in The collected works of Dugald Stewart, 1856, VIII, 440 ff.; Lauderdale, in a letter to Dugald Stewart which is quoted in the preceding reference; Torrens, An essay on the production of wealth, 1821, pp. 326 ff.; Ricardo, High price of bullion, appendix to 4th ed. [1811], Works, p. 299, and ibid.,Principles of political economy, 3d ed., Works, p. 160.

[11]Torrens, Essay on money and paper currency, 1812, pp. 34 ff.; Malthus, review of Tooke, Quarterly review, XXIX (1823), 239; Lauderdale, Further considerations on the state of the currency, 1813, pp. 96–97; Ricardo, see infra, pp. 195 ff.

[12]John Rooke, A supplement to the remarks on the nature and operation of money, 1819, pp. 68–69; Tooke, Considerations on the state of the currency, 2d ed., 1826, pp. 23–24; Joplin, see infra, pp. 190 ff.

[13]Cf. T. P. Thompson, “On the instrument of exchange,” Westminster review, I (1824), 200; Henry Burgess, A letter to the Right Honorable George Canning, 1826, pp. 79–82; G.Poulett Scrope, On credit-currency and its superiority to coin, 1830, p. 31. Wheatley, in 1803, had denied that an increase in the quantity of money could bring about an increase in production, since this could occur only if it took more time to increase commodity prices than to increase production, which was not the case. (Remarks on currency and commerce, 1803, pp. 19 ff.) The answer, of course, is that it takes, or may take, more time for prices to increase sufficiently to absorb all of the increase in the quantity of money than for some increase of production to be initiated.

[14]Prices and production, 1931, p. 20.

[15]Ibid., pp. 15–16.

[16]An illustration of Mr. Joplin's views on currency, 1825, p.28. Joplin reprints this passage from a letter to the Courier of Aug. 23, 1823. He restates the doctrine in his Views on the subject of corn and currency, 1826, pp. 35. ff., and again in his Views on the currency, 1828, p. 146, where he expressly distinguishes between “forted economy” and “voluntary economy.”

[17]Views on the subject of corn and currency, 1826, pp. 36–37. Cf also An illustration of Mr. Joplin's views, 1825, pp. 28–29, 37. Bentham had also treated forced saving as an undesirable result of changes in the quantity of money: “national wealth is increased at the expense of national comfort and national justice.” (Works, III, 45.) Cf. also the citation from Thornton, supra, p.188.

[18]Views on the subject of corn and currency, 1826, p.35.

[19]An illustration of Mr. Japlin's views, 1825, pp. 28–29, 37.

[20]Views on the subject of corn and currency, 1826, p. 37.

[21]Ibid., pp. 63 ff.

The objection to forced saving which in his own discussions of the phenomenon Hayek emphasizes so strongly, namely, that it results in a distortion of the capital structure of the country and thus in an eventual loss of the added investment, was not raised in the early literature, although somewhat later James Wilson seems to have in part anticipated Hayek's doctrine to some extent. (Capital, currency, and banking, 1847, pp. 147 ff.) But the early writers were dealing with a deflation-depression, marked by unemployed resources and by underinvestment rather than overinvestment, and under such circumstances there is no a priori reason for expecting the added investment resulting from forced saving to prove wasteful in the long run. There seems to underlie the contrary doctrine the tacit assumption that while much which goes on during a boom is highly irrational even from the individualistic point of view, all that individuals do of their own accord during a depression is sensible and proper. But if one accepts instead what seems to be the sufficiently plausible assumption that the behavior of mankind is as likely to be irrational during depression as during prosperity, and that overinvestment is the outstanding manifestation of this irrationality during the boom and underinvestment during the depression, then forced saving (in so far as the manner of bringing it about does not induce voluntary savers to retrain from investment) is as much indicated as a corrective measure during a depression as would be currency contraction, or its equivalent, forced hoarding, during a boom.

[22]Manual of political economy, Works, III, 44.

[23]Lord Lauderdale, Sketch of a petition to the Commons House of Parliament, 1822, pp. 5–7. Lauderdale was afraid of underconsumption. Writing in 1798, he had already attacked the sinking-fund on similar grounds. If the government financed its military expenses by borrowing from the Bank of England, this resulted in an increase of circulation. Taxes on income to liquidate these loans reduced the demand for bank notes by cutting down private expenditures. Since “all encouragement to reproduction depends on demand” and “demand can alone be created by expenditure,” he concluded that “funding is the best and most prudent means of defraying the extended expenses of modern warfare.” (A letter on the present measures of finance, 1798, pp. 18–24.)

[24]Cf. his “Protest,” Journals of the House of Lords, LII (Dec. 17, 1819), pp. 961–62.

[25]Observations on the effects produced by the expenditure of government, 1823, pp. 60–67, 88.

[26]Remarks on the nature and operation of money, 1819, pp. 37–38. Cf. also pp. 58–59: “There is never any fear that the people will not have any inclination to save; the greatest difficulty is to get men to spend unnecessarily.”

[27]Review of Blake's Observations, Westminster review, II (1824), 39.

This identification of saving with investment by the saver, involving a denial either of the possibility or of the possible importance of hoarding, was common among the classical economists. Cf. Ricardo, Notes on Malthus [1820], p. 231: “I know no other way of saving, but saving from unproductive expenditure to add to productive expenditure”; ibid., p. 245; “Mr. Malthus never appears to remember that to save is to spend, as surely, as what he exclusively calls spending.” Cf. also “Mr. Owen's plans for relieving the national distress,” Edinburgh review, XXXII (1819), 473: “With the exception of a few insane misers who hoard their treasures, all persons are desirous of consuming whatever wealth they can command, either productively with a view to improving their condition, or else unproductively with a view to immediate enjoyment.” (Ricardo believed that Torrens was the author of this article—cf. Letters of Ricardo to ... Trower, p. 108—but it was more probably written by McCulloch). Cf. also John Craig's objection to Lauderdale's argument that the postwar depression was due to a decrease in demand resulting from the cessation of government spending in excess of its revenue: “... circulating capital is annually consumed as regularly as income, though by a different set of people; capital by hired workmen, the produce of whose labor restores it, with a profit, to its proprietor; income by the proprietor himself, without any kind of reproduction, for his own gratification. No new demand therefore arises from changing capital into income, but merely an alternation of the persons by whom it is consumed, together with this material difference, that there is no longer any new production in consequence of that consumption.” (Remarks on some fundamental doctrines in political economy, 1821, p. 214.) “... our own profuse expenditure during the war, ... never, in any possible circumstances, can be the parent of even a temporary semblance of national prosperity.” (Ibid., p. 219)

Malthus attributed the depression, apparently, to an increase in saving unaccompanied by a corresponding increase in investment, and thought that, given the absence of sufficient incentive for investment under prevailing conditions, the remedy was to be found in increased private expenditures on consumption. (Principles of political economy, 1820, 463 ff.) It seems much more probable, however, that the amount of saving was less—rather than greater—during the depression than during the prosperous war years, but that the decline in ability to save in the post-war years was associated with an even greater decline in willingness to invest such savings as were made.

The only member of the Ricardian school I have found who gave any attention to the fact that saving might have other motives than securing interest on current investment, and who showed some recognition that the “transmutation of savings into capital” was not an automatic and certain process was William Ellis.—“Employment of machinery,” Westminster review, V (1826), 106 ff.

[28]Cf. John Ashton Yates, Essays on currency and circulation, 1827, p. 28: “... the bankers who issue the paper not only lend the real capitals which are deposited with them, but they lend their own credit....”

[29]Mill, Westminster review, II (1824), 43.

[30]Cf. Thomas Attwood, A letter ... on the creation of money, 1817, p. 13:

“The contractive action then [i.e., 1810] commenced, and ever since then, until the present period, in a greater or less degree, there has been a greater profit in locking up money in a chest, than in any possible way in which human knowledge, care, and industry could have employed it.” Cf. also C. C. Western, A letter ... on the cause of our present embarrassment [sic] and distress, in Pamphleteer, XXVII (1826), 228–29.

[31]Ricardo appears to have seen, and taken issue with, Bentham's Manual of political economy before it reached the printed stage. Cf. the statement of the Due de Broglie to Senior: “I remember a conversation at Coppet, which lasted for one or two days, between Ricardo and Dumoht, as to Bentham's political economy. Dumont produced many manuscripts of Bentham's on that subject. There were few of his doctrines to which Ricardo did not object, and, as it seemed to me, victoriously.” (N. W. Senior, Conversations with M. Thiers, 1878, II, 176.)

[32]High price of bullion, appendix to 4th ed. [1811], Works, p. 299. Cf. also, ibid.,Notes on Malthus [1820], pp. 212–16. To the extent that this occurred, there would be no net increase in investment as the result of currency expansion. This argument, however, could scarcely be applied to wage earners, who could be assumed to spend the bulk of their earnings whatever their level might be.

[33]Lords Committee, Report, 1819, pp. 192–93.

[34]The first Earl of Liverpool had applied this term merely to signify paper money in his Treatise on the coins of the realm [1805], 1880 reprint, p. 255, and Huskisson had quoted him in this sense, substituting “factitious,” however, for “fictitious,” in 1811. (Hansard, Parliamentary debates, 1st series, XIX, 731.) But Lauderdale had used the term in his letter to Dugald Stewart in 1811, and again in his Further considerations on the state of the currency, 1813, with reference to the phenomenon of forced saving: “It has been argued, and hitherto the reasoning has remained incontroverted, that an excess of paper produces its injurious effects on the exchange with foreign countries and in increasing the value of commodities, not by its operation of circulating medium, but by creating a mass of fictitious capital.” (Further considerations, p. 96.) Since Lauderdale was a member of the Lords Committee of 1819, he may have been the person who put the question to Ricardo.

[35]Lords Committee, Report, 1819, pp. 198–99.

[36]Cf. John Rooke, A supplement, 1819, p. 15: “Neither Mr. Wheatley, nor Mr. Ricardo, appears to have had any conception of the effects produced upon public wealth by an expending, or a contracting currency.” Wheatley's later writings must have been unknown to Rooke.

[37]Ricardo, Principles of political economy, 3d ed., Works, p. 160. Malthus asked Ricardo to specify the industries offering unused opportunities for the profitable investment of capital. (Malthus, Principles of political economy, 1800, pp.333–34.)

[38]Review of Tooke, Quarterly review, XXIX (1823), 232, note.

[39]J. M. Keynes, however, finds Malthus's doctrines on these matters entitled to less qualified praise. Cf. “Commemoration of Thomas Robert Malthus,” Economic journal, XLV (1935), 233: “A hundred years were to pass before there would be anyone to read with even a shadow of sympathy and understanding his powerful and unanswerable attacks on the great Ricardo. So Malthus' name has been immortalized by his Principle of Population, and the brilliant intuitions of his more far-reaching Principle of Effective Demand have been forgotten.”

[40]Mathias Attwood, Letter to Lord Archibald Hamilton, 1803, pp. 48–49. Attwood clearly means, by scarcity of goods, scarcity relative to demand at the hitherto prevailing price; not reduction of output. He has been arguing that an increase in the quantity of money will increase output, not decrease it.

[41]Thomas Attwood, The Scotch banker, 2d ed., 1832, pp. 70–71. (Except for a different title-page, the second edition is identical with the first edition of 1828.) Cf. also ibid.,A letter ... on the creation of money, 1817, pp. 18 ff., where he incidentally makes the modern distinction between transaction velocity and income velocity of money, estimating roughly the former at 50 and the latter at 4 per annum. For a sympathetic account of Thomas Attwood's doctrines, see R. G. Hawtrey, Trade and credit, 1928, pp. 65–71.