Introduction

Abstract

The occasion for a book of essays carrying the name of Henry Thornton requires much less explanation now than it would have done ten years ago, and very much less than one hundred years ago. Henry Thornton is now well on the way to being established as a pre-eminent monetary theorist. Thornton’s fame in economics was based principally on his one book, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802), the greatest work on monetary theory of the nineteenth century. Schumpeter (1954) called it ‘an amazing performance’ and one that ‘outdistances all others so far as width of comprehension and analytic power are concerned’ (p. 689). It was also a great work of monetary practice, but the monetary scene was changing so quickly and dramatically in the thirty years after Thornton’s death that that part of the book was soon redundant. This is perhaps one reason why his reputation went into decline. Only in the twentieth century, chiefly as a result of Hayek’s new edition of Paper Credit, has Thornton’s position begun to be restored.

Forrest Capie, Geoffrey E. Wood

1. The Prospects for an International Monetary System

Abstract

It is particularly appropriate that the lecture I am giving this evening is in honour of Henry Thornton. There are many useful perspectives from which to observe and analyse international monetary affairs and Henry Thornton can be said to have personified many of them. He was an economist whose major work on monetary theory, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, went deeply into problems relating to foreign exchange. It was described at the time by Jeremy Bentham as ‘a book of real merit [and] ... instruction ’; by John Stuart Mill half a century later as ‘the clearest exposition ... in the English language of the modes in which credit is given and taken in a mercantile community ’; and, after many decades of neglect, Professor Hayek drew our attention to Thornton ’s work as ‘the beginning of a new epoch in the development of monetary theory’ (quoted in Hayek, pp. 50, 57–58, 36). But Henry Thornton was not only a theoretician. He, more than most, was able to bring to bear upon his understanding of the political economy his own personal experience of the worlds of politics — as MP and close friend of Pitt; of social needs ’ as Evangelical and friend of Wilberforce; of commercial banking — as a banker of whom Clapham writes that there was ‘perhaps not one so able’ (Clapham, p. 166); and more indirectly of central banking — several of his relatives were Directors and his brother Samuel a Governor of the Bank of England. I cannot hope to combine all these attributes and distinctions. My main aim tonight in providing some reflections on the world’s monetary problems and prospects will be to draw upon my own experience as a practising central banker. I venture to hope that my approach will be consonant with the spirit of Henry Thornton’s life and works.

Gordon Richardson

2. A Century of British Market Interest Rates, 1874–1975

Abstract

Henry Thornton left a spare account — best described by the Latin phrase, multum in parvo, ‘much in little’ — of his thoughts about the British monetary system during the Napoleonic era. That spare account is an incredibly rich source both of the elements of monetary theory and of instruction on the proper conduct of monetary policy. Any one of a dozen different insights recorded in Thornton’s work could serve as the subject of this lecture. He understood:

the fallacy of the real-bills doctrine; the distinction between the first-round and ultimate effects of monetary change; the lag in effect of monetary change; the problem market participants faced in distinguishing relative from general price changes; the distinction between internal and external gold drains; the factors influencing the foreign exchanges including the role of purchasing power parity; how to bring inflation under control; the relation of the Bank of England to other English banks; types of effects of monetary disturbances on interest rates; the distinction between the market rate and the natural rate of interest and between nominal and real rates of interest.

Anna J. Schwartz

3. Turbulence in the Foreign Exchange Markets and Macroeconomic Policies

Abstract

I would like to open my lecture by saying that I am greatly honoured and privileged to have been invited to deliver the Henry Thornton Lecture this year. Henry Thornton was born on 10 March 1760 and died in his 55th year on 16 January 1815. He was an extraordinary man, and a distinguished economist and the series of lectures established in his memory have performed the important function of paying tribute to this great man. As an MP he could have been honoured for his contributions to the development of the British political system; as a dedicated philanthropist who followed the tenets of Evangelism and who associated himself with the Clapham Sect he could have been honoured for his contributions to religious and social causes; and of course as an economist he is being honoured this evening for his contributions to the development of fundamental concepts and analyses in political economics.

Jacob A. Frenkel

4. Macroeconomics after a Decade of Rational Expectations: Some Critical Issues

Abstract

It has now been just over a decade since the start of the rational expectations revolution in macroeconomics. In saying that, I am accepting the conventional view that the first papers to be widely influential were those published in 1972 by Robert Lucas.¹ As is well known, these were soon followed by landmark pieces by Thomas Sargent (1973, 1976a), Sargent and Wallace (1975) and Robert Barro (1976, 1977a), as well as others by Lucas (1976, 1977).² And, as is also well known, the revolution has been highly controversial because of the criticism of prevailing views that was implicit in the above-mentioned papers and explicit in others (e.g. Barro, 1979; Lucas and Sargent, 1978).

Bennett T. McCallum

5. Keynes on Monetary Reform and International Economic Order

Abstract

Monetary reform and the international economic order were topics of enduring interest to John Maynard Keynes (JMK). He rarely overlooked an opportunity to criticise the classical gold standard. The main point of his criticism changed, however, in parallel with the development of his ideas. The mature Keynes, as in the quotation above, gave two main reasons why the gold standard is not a welfare-maximising arrangement. First, countries cannot reduce unemployment by expanding domestic demand. They must compete for exports to acquire gold and increase money. Their gain is at the expense of another country (or other countries) that loses gold and must contract. Second, the classical gold standard prevents a country from independently lowering its interest rate. Keynes often wanted a zero rate of interest, and certainly a permanently lower rate of interest, to increase investment, the capital stock and per capita income.

Allan H. Meltzer

6. The Uncertain Future of Monetary Policy

Abstract

Although the conduct of monetary policy has always been enveloped in controversy, its objectives have by and large not been controversial. These are a stable price level to give a constant purchasing power of money, a fully employed economy and reasonably stable interest rates. The problem is that these are usually incompatible, giving rise to a conflict of objectives. It falls upon the operating principles on which the conduct of monetary policy is based to resolve the conflict. The principle once followed of currency convertibility resolved the conflict in favour of a fixed value of money by giving priority to convertibility into gold, which imposed a constraint on the pursuit of the other objectives. When convertibility under the gold standard was restricted and then finally ended, the conflict of objectives became unresolved, which as could be expected has left us with continuing controversy. The two other most well-known operating principles to guide the conduct of monetary policy are interest-rate targeting and monetary targeting. Both have run into serious difficulties and have been rejected as operating targets, although not abandoned completely; both continue as partial guides for policy. What operating principle will or can in the future be the basis for the conduct of monetary policy remains unsettled and unclear. Dissatisfaction with the lack of commitment to stability of prices or foreign exchange rates has led some experts (such as my colleague Robert Mundell) to argue for a return to convertibility, but that solution to the conflict of objectives has little support.

Phillip Cagan

7. Inflation Expectations: from Adaptive to Rational to …?

Abstract

We live in turbulent macroeconomic times; even more turbulent than those of Henry Thornton. The macroeconomic performance of all the major countries through the past decade was unthinkable only ten years earlier. In the United Kingdom, for example, the first half of the 1960s saw inflation averaging 3 per cent a year, unemployment of 1.8 per cent, output growth almost 4 per cent and long-term nominal interest rates less than 6 per cent (with real rates of a little below 3 per cent). The perceived problem at that time was that output growth was too slow and inflation too fast. Keynesian demand management policies had solved the unemployment problem and all that remained was to perfect incomes policies to cap inflation and indicative planning to get output growth solidly ahead of the 4 per cent mark. Macroeconomics was in a settled and self-confident state.

Michael Parkin

8. The Disarray in Macroeconomics

Abstract

The victorious sweep of Keynesian analysis during the early post-war period promised a golden age for macroeconomics. It apparently offered relevant insights into the processes shaping employment, output and price behaviour. This understanding would provide a rational basis for the control and stabilisation of the macroeconomy. The business cycle could be removed and business cycle theory forgotten. The promise became canonised as revealed truth by an editorial in Time Magazine in the early 1960s. And the longest phase of uninterrupted economic expansion from 1961 to 1970 served to reinforce the promise.

Karl Brunner

Springer Professional

Monetary Economics in the 1980s

The Henry Thornton Lectures, Numbers 1–8

Table of Contents

Frontmatter

Introduction

1. The Prospects for an International Monetary System

2. A Century of British Market Interest Rates, 1874–1975

3. Turbulence in the Foreign Exchange Markets and Macroeconomic Policies

4. Macroeconomics after a Decade of Rational Expectations: Some Critical Issues

5. Keynes on Monetary Reform and International Economic Order

6. The Uncertain Future of Monetary Policy

7. Inflation Expectations: from Adaptive to Rational to …?

8. The Disarray in Macroeconomics

Backmatter