Table Of ContentCOPYRIGHTED
fey
JOHN SAGAN, JR.
1951
A STUDY OF THE DEVELOPMENT OF MONETARY
THEORY OF ENGLISH ECONOMISTS IN THE
CLASSICAL TRADITION, 1776-1848
BY
JOHN SAGAN, JR.
B.A., Ohio Wesleyan University, 1948
A.M., University of Illinois, 1949
THESIS
SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS
FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN ECONOMICS
IN THE GRADUATE COLLEGE OF THE
UNIVERSITY OF ILLINOIS, 1951
URBANA, ILLINOIS
UNIVERSITY OF ILLINOIS
THE GRADUATE COLLEGE
JM&3LJL7, 19-51-
I HEREBY RECOMMEND THAT THE THESIS PREPARED UNDER MY
SUPERVISION BY_ JTohn Sagaru Jjtu
FNTfTT.F.n A RTTTDY OF THE DEVELOPMENT OF MONETARY THEORY OF
ENGLISH ECONOMISTS IN_THE.CLASSICALTRADITION, 1776-1848
BE ACCEPTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR
THE DEGREE OF- Doctor of Philosophy
Recommendation concurred inf
Committee
on
<*>. r -^ r ^ u^ Final Examination!
t Required for doctor's degree but not for master's.
M440
TABLE OP CONTENTS
page
PREFACE v
CHAPTER
I. INTRODUCTION , 1
II. ADAM SMITH (1723-1790)
His Period 7
The Relationship of Prices, Production and
Employment in the Smithian System 10
Savings, Investment and the Interest Rate 21
Smith's Emphasis on Changes in Production in
the Quantity Theory of Money 29
Credit, Paper Money and Banks 34
Role of the State 44
Summary 48
III. HENRY THORNTON (1762-1815)
The Restriction Period 51
Thornton's T/ork 53
Thornton's Definition of Money ^S
Thornton's Emphasis on Velocity in the
Quantity Theory 63
The Relationship of Production, Credit and
Prices in Thornton's Writing 68
The Bank of England Becomes the Central Bank
of England 81
Thornton's Contribution to the Theory of Inter
national Trade ^S
Summary 98
IV. JEAN - BAPTISTS SAY (1867-1832)
Introduction 99
The Law of Markets, a Theoretical Model 103
Deviations From the Validity of the Law of
Markets 115
iv page
Say on Money 127
Capital and the Role of the Interest Rate 132
Conclusions 137
V. JAMES MILL (1773-1836)
Introduction 140
Mill and the Law of Markets 141
Savings and Capital Formation 145
Money 150
Conclusions 154
VI. DAVID RICAKDO (1772-1823)
Introduction 157
The Theories of Rent, Wages and Profit 162
The Use of the Law of Markets in Ricardian
Economics 171
Price, Relative and Absolute 180
The Process of Accumulation and the Rate of
Return 192
Money and the Banking System . . . . . . . . . . .. 204
Conclusions 214
VII. JOHN STUART MILL (1806-1873)
Introduction 219
Value, Price and Distribution 225
The Law of Markets 231
Money, Credit and Prices 240
The Mechanism of the Interest Rate 255
Conclusions 266
VIII. THE CLASSICAL SYSTEM, A CONCLUSION 270
BIBLIOGRAPHY 292
PREFACE
Since the publication of J. M. Keynes' General Theory in
1936, the monetary theory of the classical economists has required
reexamination in the light of this new criticism. The question has
constantly been raised in recent years as to the value of the mone
tary writings of these earlier economists. Are they interesting
merely as historical curiosa, or were they laying the foundation
upon which modern monetary theory is based? This study, it is hoped,
will make some contribution toward resolving this question.
The study of any social science must lay particular emphasis
on the institutional setting within which it is developed. With
this point in mind, care has been taken to present the theories of
these writers in the context of their times.
I would like to take this opportunity of expressing my
gratitude to those persons whose guidance and help were a source of
inspiration to me throughout the period of this study. To Professors
Evertt E. Hagen, E. T. Weiler and J. Fred Bell who gave generously
of their time and counsel, my debt is uppermost. They painstakingly
worked through the original draft of this study, and it is hoped
that these pages do justice to their efforts. Dr. Myron Watkins
made available to me some unpublished materials. Mrs. H. E. Johnson
carefully prepared the final copies of the manuscript. Lastly, I
wish to express my gratitude to Margaret Pickett Sagan for her en
couragement and her aid in preparing the manuscript.
The sources of inspiration were many, the shortcomings are
mine.
May 1951 John Sagan
Champai p.n . T1 1 -irio-i a I
CHAPTER ONE.
INTRODUCTION
To begin this study of monetary theory with the writings of
Adam Smith is, of course, an arbitrary step. The beginnings of
monetary theory reach back many centuries and any complete treatise
in the history of monetary theory would have to examine the works of
Plato, Aristotle, Thomas Aquinas, Nicholas Oresme, Nicholas Barbon,
Richard Cantillon, John Law, William Petty, Sir Josiah Child, Thomas
Mun, John Locke, Charles Davenant, David Hume and a host of others.
An examination would also have to be made of the many institutional
factors which shaped the monetary thought of each period, for
monetary theory is the result of the combination of ideas and
events. Each has contributed to the other and for each period of
time there has evolved the monetary theory appropriate for that time,
a theory which attempted to answer the problems confronting that
particular generation.
Each generation of thinkers considered itself promulgating
eternal and universal truths which would solve the problems for all
times. Just as certainly each succeeding generation found itself
faced with different problems, a different institutional setting,
and the necessity to rethink the theories and to readapt them to the
changing circumstances. In most cases this means that the ceteris
paribus of one generation cannot include those factors of the pre
ceding generation. We concede causal influence to factors which we
disregarded in past years, either because we were not aware of their
importance or because these factors are important and causal only
2
within the context of the given institutional setting. In other
words, we must continually reform or at least change the variables
and givens in our equations.
The history of monetary theory is a story of development,
with each generation not only building an edifice for its own period,
but also contributing a foundation for the work of succeeding gener
ations.
This is a study of a chapter in the development of our modern
monetary theory. It is primarily a study of the theories found in
the writings of the English political economists from 1776 to I848.1
It is no accident that we start with Adam Smith and end with John
Stuart Mill, for these are the writers of the classical period of
economics. In a broader sense, however, the period really had no
beginning nor has it any end. Its ideas have been growing and
adapting from the earliest writers and are still part of our modern
economics.
Monetary theory is the study of money and its functioning in
an economy. In a barter economy there is no money and monetary
theory. Once, however, that money is introduced, certain economic
procedures become modified by virtue of this new factor. It is
actually a commodity, or more exactly, is it an institution? Does
it possess some magical powers not present in other institutions or
commodities?
Any study of the monetary theory of a period or of the men
1Jean-Baptiste Say, a Frenchman, is included in this study
since his influence on his contemporaries was more evident in England
than on the Continent. No study of English monetary theory of this
period can be complete without an analysis of Say and his writings.
representative of a period should answer certain questions. First
we must consider what were the monetary problems which faced each
writer, and what was the institutional setting which brought these
problems to the fore? Me should therefore examine the monetary in
stitutions in an attempt to see what was considered money, what were
considered to be its proper functions, how was its quantity deter
mined, and what were the current views as to its proper amount?
What was the effect of money on prices and on production, and more
important, what was the process of adjustment? This leads to the
effects of money on employment. To what extent were these writers
considering the degree of employment of factors of production? How
did they explain growth in the economy and the part money played in
this process? What of the role of savings and investment, the pro
cess of capital accumulation and the function of the interest rate?
These were some of the questions which each writer had to face.
Some of our writers treated these problems and their solutions ex
plicitly, in others the area is dealt with implicitly.
The charge has been hurled at this group that Say's law of
markets ran like a red thread through all of its thinking.1 If so,
was the monetary theory of this classical group that which follows
from Say's law? This vrould be that money is but a veil, production
creates its ovm demand, all income will bo spent and full employment
of all factors is the normal condition for the economy. If this is
so, how do tho classical writers answer the reality of crises, of
unemployment, of hoarding? Or is the monetary theory of these
•'-Paul M. Sweezy, "Keynes, the Economist,1' in The ilew Economics,
Edited by Seymour E. Harris, Knopf, New York, 1948, p. 105.
Hans ITeisser, "General Overproduction," in Readings in Business Cycle
Theory, American Economic Association, Blakiston, Philadelphis, 1944,
IP. 385.
'— — —'
4
writers more complex and sophisticated than we are now led to be
lieve? Did they use the lav; of markets in a different way than is
now imputed to them? Is Say's law Itself more or less than theend-
less modern polemic on the law^would have us believe? Much depends
on the assumptions which these men use, both explicit and implicit.
Much depends on the goals or purposes for which they expounded their
theories, and much depends upon the institutional background within
which their theories are framed. The monetary relations of any
period and the function ascribed to them are merely a reflection of
ever-changing economic reality. Thus, the functions of money given
by Adam Smith in 1776 might have been correct for his period. But
while money as an institution has evolved, so have its functions.
Clearly, one of the present functions of money is to serve as a link
between the saver and the investor. Credit and its evolution has
made this more evident. However, was this so in the monetary world
of which Smith wrote and was it recognized as one of the problems of
that period? Too often our thinking becomes so rigidified by the
concepts of the past that we do not even recognize the reality or
the problems of the present. Similarly, we consider that monetary
manipulation and regulation are a part of our monetary theory for
achieving certain goals. What part did this play in the theories of
this classical group?
In all of these questions, an attempt shall be made to ana
lyze the position of the writers of the period. However, this shall
be done in the light of modern monetary theory and this way we shall
see to what extent the problems and analysis of the earlier period are
similar to those prevalent today. We shall discover the changes and
modifications which have taken place in monetary theory, and why
they took place. New techniques and new tools of analysis have made
