Controversies in Monetary Economics

Controversies in Monetary Economics

Revised Edition

John Smithin

This influential volume, which has been revised and updated for the twenty-first century, includes both new material and more detailed expositions of existing arguments. Although so-called ‘real’ theories of business cycles and growth are prevalent in contemporary mainstream economics, Controversies in Monetary Economics suggests that those economists who have instinctively focused on monetary factors in explaining macroeconomic behaviour are more genuinely ‘realistic’. The author combines an explanation of past and present monetary controversy with practical proposals for the conduct of monetary policy in the contemporary global economy. Several alternative approaches are discussed, ranging from the traditional quantity theory to post Keynesian theories of endogenous money.

Chapter 5: The Real Bills Doctrine, Interest Rate Pegging and Endogenous Money

John Smithin

Subjects: economics and finance, economic psychology, financial economics and regulation, history of economic thought


INTRODUCTION The purpose of this chapter is to discuss some of the alternatives to the quantity theory of money that have been put forward over the years. By this is meant not only views that are in direct opposition to the quantity theory, but also those that can be seen as complementary to, or developments of, quantity-theoretic reasoning, as, for example, in the case of Wicksell, discussed below. Turning first, however, to the outright opposition, it is true that in the long history of economic thought there have been several recurring episodes when views based on the quantity theory of money, and hence bearing a close family resemblance to twentieth-century monetarism, have been urged on policy makers. Naturally, on each occasion opposing views have also been advanced. In the English-language literature, numerous episodes from British monetary history, in particular, are frequently cited to illustrate these clashes. These would include the ‘bullionist controversy’ of the 1797–1821 period (Laidler, 1989a; Humphrey, 1993),1 the ‘currency school/banking school’ debates of the mid-nineteenth century leading up to the passage of Peel’s Bank Charter Act of 1844 (Schwartz, 1989; Humphrey, 1993) and the controversy over the return to the gold standard (at the prewar parity) in the aftermath of World War I (Kaldor, 1986).2 The emphasis placed by many writers on the British historical experience and debates obviously reflects the relative importance of Britain and the Bank of England in the world economy of the nineteenth and early twentieth centuries. In the...

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