fundamental futility of any such discussion does not exclude the possibility that participants learn and produce valuable results thereby. 5 See Cannan’s edition mentioned above (The Paper Pound of 1797–1821). England had been on a gold standard when restriction was decreed in 1797. Within a few years a strong political current set in that was to carry her toward the legal adoption of it (1816) and eventually toward the resumption of specie payments at the prewar par (Peel’s Resumption Act of 1819, actual resumption 1821). 6 The possibilities of continuing the paper regime of the war (the course recommended by Lord Keynes in 1923) or of adopting bimetallism—or the silver standard—were advocated but not seriously considered. It should be mentioned, however, that Ricardo’s Plan, according to which the monetary metal should not enter into hand-to-hand circulation but be held by the Bank for the purpose of redeeming notes, not in coin but in ingots of bullion, was actually embodied in the Resumption Act of 1819, though, meeting with complete indifference on the part of the public and with little favor on the part of the Bank, the relevant permissive clauses did not become operative. Resumption impinged upon a depressive situation. Postwar readjustments were in any case bound to cause difficulties, particularly in the agrarian sector. Not only the inevitable fall of prices from the war peak—though the exact dates and figures given by Silberling have been criticized, there is little doubt that the price level, by 1819, had fallen by something like 30 per cent in about five years—but also the adaptation of production to entirely new situations presented problems of the kind which it always takes a depression to straighten out. In addition, there was the fact, realized by many but not all the experts, that the prospects of gold production were distinctly unfavorable. Finally, however, there was something else which these experts—just as the experts of 1918—entirely failed to see: quite independently of the preceding war inflation, the English economy was then entering upon one of those prolonged periods of falling prices, interest rates, and profits, of unemployment and instability, that always follow upon ‘industrial revolutions.’ The last decades of the eighteenth century had witnessed such a revolution—the new cotton machinery, the steam engine, and canal building are but the most conspicuous instances of the events that transformed the very bases of manufacturing and trade. Results began to pour forth from 1815 on, upsetting the pre- existing industrial structure and exerting primarily depressive effect, until the economic process was steadied again, weakly in the 1830’s, more strongly in the 1840’s, by the beginnings of investment in railroad construction. In a situation such as this, even a slightly restrictive monetary policy is not the matter of indifference which it would be in a situation that is located on an upward trend of prices. And a slightly restrictive effect resumption undoubtedly had. 6 The outstanding symptom of the increasing momentum of that current was Lord Liverpool’s Treatise on the Coins of the Realm…(1805), which, its complete valuelessness notwithstanding, has retained its place in the history of the subject owing to the political position of its author. Symptomatic of small middle-class feelings and a powerful influence in shaping them into a political force was William Cobbett’s agitation against paper (see his Paper against Gold, 1810– 11, reprinted 1817). It is said that Sir Robert Peel was quite frightened of Cobbett’s ‘thunder.’ History of economic analysis 662 The surviving sponsors of the policy of resumption recommended in the Bullion Report had therefore little reason for celebrating its ultimate success. They had in fact become silent or apologetic a few years before the event. They shared with their opponents the erroneous diagnosis according to which the responsibility for the further fall in the price level throughout the 1820’s rested exclusively with resumption. Also, they were glad to join these opponents in entirely irrational accusations against the universal scapegoat, the Bank, which was supposed to have mismanaged resumption and in particular to have caused international depression by raising the value of gold. We cannot go beyond pointing out that Tooke was almost the only writer of note to realize the absurdity of this and to come near to a more reasonable diagnosis in terms of non- monetary factors. For the rest, discussion went against the advocates of the unfettered gold standard until the upswing of 1830–35 and the emergence of another issue deflected attention, and until Russian, Australian, and Californian gold changed the monetary situation and the humors of economists: after 1850, Peel’s Act of 1819 became in fact quite popular with them; toward the end of the century irrational admiration for the measure had largely replaced irrational condemnation. (c) Bank Reform. Largely, though not exclusively, the literature on banking in which we are interested centers upon advocacy and criticism of another Peel act, the Bank Charter Act of 1844, which tried to give effect to ‘the theory that banking ought to be separated from the control of the currency’ 7 and actually enforced what may be described as a ‘100 per cent reserve plan’ for bank notes. Again—like resumption—the measure grew out of a strong current of public opinion that crystallized in the vicissitudes of the years 1836–9 and was thereafter impervious to argument: both public and politicians saw no causes of those vicissitudes other than misconduct or irresponsibility on the part of note-issuing banks. Notes and any troubles that arose about them were clearly visible. Whereas deposits, the use of which was as yet confined to a much smaller sector of the public, passed practically unnoticed, notes circulated widely and their issue was to the man in the street the typical form of the Iniquity of Banking. 8 What the average M.P. presumably thought he was doing, when he cast his vote for Sir Robert Peel’s bill, was that he was stopping a flagrant abuse and protecting the people’s money. By 1800, England’s banking system had reached an advanced stage of development. In the metropolis there were, besides the Bank of England, a 7 See P.Barrett Whale, ‘A Retrospective View of the Bank Charter Act of 1844,’ Economica, August 1944. In view of the facts that we are not primarily interested in the Act itself and in its sociological and economic interpretation and that, in addition, it would be quite impossible to do justice to this topic even if we were, perusal of this admirable three-page article is strongly recommended. As regards the history of English banking, we are in a similar position: for facts and figures the reader is referred primarily to the work of E.Wood (mentioned at the beginning of this chapter); our own text cannot aim at more than focusing the reader’s attention on a few points necessary to understand the setting in which analysis and controversy ran their courses. 8 This is the title of an anonymous pamphlet published in 1797. Money, credit, and cycles 663 number of private banking houses (partnerships; the joint stock banks put in appearance after 1826, giving a decisive impulse to deposit banking because they did not have the right to issue notes) and bill brokers. Outside the metropolis, and so far as merchants did not directly bank with London (or, after 1826, with one of the branches of the Bank of England), industry and trade were served by the country banks, whose number declined in the 1820’s after having greatly increased during the Napoleonic Wars, and also by bill brokers. Two features must be particularly noticed. First, these country banks, though they had some deposit business, chiefly financed their customers by the issue of bank notes (promissory notes payable on demand in coin or Bank of England notes) in discounting commercial bills. Against these notes they held reserves in varying proportions that were not fixed by law. This practice was obsolescent even before it was killed by Peel’s Act of 1844. 9 But for many English writers on banking—and still more so for their continental brethren—the bank note that originates in the discount of a trade bill remained the backbone of the theory of banking throughout the period and beyond. 10 Second, there was another practice which was very common all over England outside of London and especially in Lancashire and which is so interesting for us because it teaches us better than anything else what money really is: traders used bills of exchange for making payments. That is to say, a firm that had sold some commodity would draw a bill on the buyer who accepted it, and then endorse it and hand it on to another firm in discharge of some obligation to the latter. Thus bills of exchange, accumulating endorsements, actually went from hand to hand, often without interest, and were, for the time being, no longer elements in the total demand for money but elements in its supply. 11 9 The issue of notes of banks other than the Bank of England was only limited at a fixed amount and not stopped by Peel’s legislation of 1844 and 1845. But the intention and the effect were to induce country banks to abandon their note issue voluntarily. 10 This fact is important to keep in mind, not only because it invited the interpretation of the banking process which we shall presently discuss under the label of Commercial Theory of Banking, but also because it is essential in order to understand fully the point at issue in the controversy around Peel’s Act: the advocates of this measure (the so-called Currency School) looked upon the notes of the Bank of England not as instruments of credit, means of payment that originate in commodity trade, but rather as what they actually were by that time, a kind of reserve money; whereas the opponents of the measure (the so-called Banking School), and especially most of its continental adherents who were influenced by the partly different banking practice before their eyes, still clung to the trade-bill bank-note schema. In part, therefore, the whole controversy rested upon a question of fact or, so far as this was being overlooked, on a misunderstanding. The theory of central banking that linked the bank note to the trade bill proved an extremely hardy plant: its influence dominated banking legislation on the Continent beyond the nineteenth century; it asserted itself strongly in the Federal Reserve Act of 1913. For an excellent exposition of this theory, see Vera Smith, The Rationale of Central Banking (1936). 11 This practice received much attention. There were businessmen who went so far as to put bona- fide trade bills ‘in the first class of our currency’ (see J.W.Bosanquet, Metallic, Paper, and Credit Currency, 1842). History of economic analysis 664 The London bankers acted as agents or correspondents for the country banks and stood in a relatively close relation to one another—the London Clearing House was, by the end of the eighteenth century, already a well-established institution. Thus we behold an organic system rather than a number of individual billiard balls. Moreover, the system either had already found, or was rapidly finding, its central organ in the Bank of England, as the lender of dernier resort as Sir Francis Baring put it. 12 But even if we had space, it would be extremely difficult to describe the process by which the Bank came to realize this responsibility, to accept it, and to develop routine principles by which to implement it; and it would be still more difficult to appraise, in the light of the conditions of that time, the success which attended its action or inaction at each of the stages of that process. One of the difficulties we experience in finding out what it was the Bank meant to do at any given time, or even what its practice actually was, is the reticence of its official spokesmen who, even when they were forced to say something, did their best to confine themselves to innocuous trivialities that would give as little scope to hostile criticism as possible. Practitioners of business are rarely able to formulate their own behavior correctly. But in this case there were particular reasons for reticence. The reader will readily understand them if we view the position of the Bank realistically. As I have already stated, the Bank had few friends. Control is now a popular word. It was the reverse of popular in the epoch of intact capitalism. To say openly that the Bank was trying to control the banking system, let alone to manage the general business situation, would have evoked laughter if not indignation: the thing to say was that the Bank was modestly looking after its own business; that it simply followed the market; and that it harbored no pretensions at controlling anything or anybody. Moreover, in the formative stage of its policy, it would have been madness to assume in so many words the responsibilities that we now attribute to a central bank as a matter of course. This would have meant commitments which the Bank could not have been sure of being able to fulfil. Moreover, any spectacular announcement of policy would have brought down upon directors hosts of unbidden advisers, every one of them convinced that he knew much better what the Bank ought to do—and there would have been the danger of public outcries for legislation to force the Bank to take, or to refrain from taking, particular courses of action. Moreover, cool 12 Observations on the Establishment of the Bank of England (1797). In the same year, H.Thornton, in his Evidence before the committees of both the House of Lords and the House of Commons, gave a preview of his ideas on central-bank policy that he was to present more fully in his famous book of 1802. There are two things to be distinguished, which are both covered by the last-resort slogan. On the one hand, the Bank of England was the last source of cash and, in this sense, the guardian of the currency. On the other hand, it was the banking system’s (the money market’s) last source of credit and, in this sense, by virtue of its situation if not from choice, the guardian of the credit structure which entailed the consequence, as Thornton saw or foresaw, that its policy had to be essentially different from that of any other individual bank. Money, credit, and cycles 665 refusal to take responsibility in crises did not necessarily mean what it seems to mean. In 1782, 1792, 1811, 1825 the result of such refusals was that the government was forced into action: it issued exchequer bills to merchants in difficulty and thus provided them with material which the Bank was ready enough to discount—and the motive of the refusals may have been precisely to open up this delightfully safe way of coming to the market’s aid. There is thus less reason for the indignant surprise some critics of the Bank seem to feel at the reluctance the Bank displayed ‘to recognize its responsibilities’ and at such sentiments as those of Thomson Hankey (Governor, 1851–2) who, as late as 1867 (in his Principles of Banking), came near to denying any responsibility of the Bank for the money market—though what he really denied was only that ‘good Bills of Exchange…ought at all times to be discounted at the Bank of England’ (p. 33 of 2nd ed., 1873). If we add that fine steering looks like no steering, we cannot exclude the possibility that both the insight and the practice of the directors were above—and especially ahead of—what they have been credited with. Actually, owing to the mere size of the Bank, nothing that happened in England or indeed in the world can, from the first, ever have been irrelevant to its decisions. A little reflection will convince the reader that directors, even if they had been guided exclusively by the Bank’s long-run profit interest and even if they had recognized no responsibility to anyone except the Proprietors (stockholders), would have had to do most of the things which, in the historical conditions of every stage of the Bank’s career, constituted the functions of a central bank. There is more to the old theory that a central bank serves the economy best if it attends to its own profit interest than we are at present willing to admit. Precisely when directors, clearly and consciously, began to attend to larger considerations is not known. Symptoms that admit of such an interpretation are certainly observable in the Bank’s behavior during the Napoleonic Wars, when some methods of credit control developed, such as rationing, irrespective of the standing of borrowers, and possibly also attempts at influencing, through the London market, the behavior of country banks. 13 After 1815, the Bank began to shape its permanent peace- time policy by an eminently healthy method of trial and error, much as the Federal Reserve System evolved what was believed to be its permanent policy from 1918 to 1923. We get two interesting glimpses of some milestones on this road from statements made by the Governor, J.Horsley Palmer, in his evidence before the Parliamentary Committee of 1832 on the Bank of England Charter. The one refers to an empirical rule (‘Palmer’s rule’) that had been adopted in 1827, namely, the rule to keep the Bank’s ‘securities’ (discounts, loans, investments) approximately constant so that changes in circulation would occur only as gold flowed into or out of the country and circulation would behave as if it were wholly metallic. This rule—not meant to be obeyed strictly— 13 On incipient open market operations through the management of government deposits, special deposits, and special advances, see the work of E.Wood (English Theories of Central Banking Control, 1819–1858) mentioned above. History of economic analysis 666 anticipated the principle of Peel’s Act to some extent and may in fact have been adopted in expectation of some such regulation. More important is the other statement that actually embodied a piece of analysis. Slightly reformulating Palmer’s answer to Question 678, we may put it like this. Accepting an unfavorable turn of foreign exchanges as a sign of an ‘unduly’ great expansion of credit, he averred that the Bank could prevent or stop an outflow of gold by raising its rate: the increased rate would reduce borrowing; reduced borrowing would mean a smaller volume of transactions and employment, and lower prices; reduced prices would increase exports and decrease imports; and this would turn the balance of payments, hence exchange rates. It is gratifying to note that this proposition does not stand in the name of some professor of economics. But it sounded too academic for professors to miss it. And it became the basis of the ‘classic’ theory of central-bank policy as taught in nineteenth century textbooks. The much more important short-run effect of an increase in bank rate—that it will attract short balances from abroad—was also discovered as we shall see (Thornton, 1802; Tooke, 1838). We cannot go any further into the evolution of central-bank policy during the period— the increasing importance, within the Bank’s deposits, of bankers’ balances, its varying policies with respect to its own discount business, its changing attitudes to the money market, and so on. One point cannot be passed by, however. Some critics have averred that the Bank, when it had realized its responsibilities at long last, allowed itself to be guided exclusively by the state of the foreign exchanges, that is, by actual or expected gold movements. Available information does not lend support to this view. Directors seem to have been guided by their diagnoses and prognoses of the general business and political conditions at home and abroad. There was indeed strong correlation between the bank rate and foreign-exchange rates. But this correlation is easily accounted for by the fact that, under the unfettered international gold standard, gold movements were a sensitive index of general business conditions. 2. FUNDAMENTALS 1 We shall not expect that writers of the type that created the literature we are about to survey would be greatly interested in the logical fundaments of the theory of money and credit—the kind of thing that the German term Grundlagenforschung denotes. There is indeed a flavor of primitivity, not to say crudity, about the conceptualization of those economists, which at the time and later led to various misunderstandings and futile controversies. This is no mere matter of terminology. In the case before us, hazy terminology was the result of haziness of thought about what money is and what money does. From the first (Thornton, ‘Evidence before the Committees of Secrecy,’ 1797), a comprehensive category was formed of all means of payment—also called the circulating medium and sometimes ‘currency’—that included full-value 1 The chief authority on the purely theoretical part of that period’s work is Arthur W. Marget (Theory of Prices, 1938–42, passim). Money, credit, and cycles 667 and token coins, bank notes, deposits subject to check or, alternatively, the checks themselves, and, under certain conditions, bills of exchange. This was all right: obviously, the total of All We Pay With is a meaningful notion; its chief analytic value consists in the recognition it implies of the fact that there is no essential difference between bank notes and deposits. And that this fact was not self-evident but had to be ‘discovered’ is proved by the further fact that some writers refused to recognize it. Lord Overstone and the advocates of Peel’s Act of 1844 generally drew a sharp dividing line between bank notes and deposits which was clearly not merely terminological and the precise significance of which is not easy to ascertain, because none of those authors was sufficiently explicit about logical fundaments. 2 Tooke was at first one of those who fought against the conceptual merger of bank notes and deposits, until 1840, when the third volume of his History appeared. By 1844 (Inquiry), he had changed his mind and adopted it, perhaps—as it is hardly too uncharitable to suspect—because this merger offered a convenient argument against Overstone and Peel’s bill. But even most of those who used that comprehensive concept of Means of Payment 3 did not, as do most of us, identify it with the concept of Money. 4 The great majority of leading authors, among them Thornton, Ricardo, Senior, Fullarton, J.S.Mill, and Marx, defined money, as it had been defined by Galiani, Beccaria, and Smith, as a commodity that has been chosen for means of exchange, measure of value, et cetera. Roscher expressed dominant opinion when he said that the false theories of money may be divided into two groups: those that hold that money is more, and those that hold that money is less, than the most salable commodity. This, on the face of it, makes them Theoretical Metallists (see above, Part II, ch. 6, sec. 2). 2 The nature of the resulting difficulty of interpretation will be realized if we consider separately the case of English bank notes, Bank of England notes, and Bank of England notes in wartime. As regards the first, as has been pointed out already, there are technical and practical reasons why a man who puts bank notes and deposits on a par on logical principle might still refuse to do so for purposes of policy. As regards the second, as we have also seen, the notes of the Bank of England, being ‘reserve money’ for the other banks, had in fact a distinctive place in England’s monetary system, recognition of which was again compatible with treating them like deposits on principle. As regards the third, it may be held—and this is important to remember in order to understand Ricardo’s attitude—that the notes of the Bank of England changed character in wartime and turned into something not essentially different from government fiat. Which of these possible standpoints an author takes makes a lot of difference to his fundamental construction. Yet, unless he is very explicit about it, it is difficult to say which of these standpoints he actually did take—and, in addition, whether he adhered to it consistently. 3 This was not always done explicitly. Thus this concept must, as we shall see, be attributed to J.S.Mill, whose theoretical construction nevertheless avoids its explicit use. 4 An example of such identification has been pointed out by Viner (op. cit. p. 247): E.Hill, Principles of Currency (1856). Currency, however, did not always, though it did often, mean the same thing as money, but was also used as a synonym for means of payment in the widest sense. History of economic analysis 668 To establish this proposition we must take account of several facts that apparently contradict it. First, not all writers accepted the metallist doctrine as explicitly as did Fullarton (who included in money only full-value coin) and, above all, Marx. Others, notably Thornton (see the first page of Paper Credit) implied it rather than stated it. Second, all or most included irredeemable government paper or would have included it if pressed. But this does not contradict our proposition, because paper money may be construed in such a manner as to come within a metallist definition of money. Thus Ricardo, not inelegantly, construed paper money as money, the whole cost of which ‘may be considered as seigniorage’ (Principles, ch. 27). Nor should it be urged that Ricardo cannot have been a metallist because he advocated a monetary system (Proposals for an Economical and Secure Currency, 1816) in which gold would be completely eliminated from circulation and because he held that ‘a currency is in its most perfect state when it consists wholly of paper money’ (Principles, ch. 27), for the sentence goes on like this: ‘but of paper money of an equal value with the gold which it professes to represent.’ Such a goldcertificate currency would function exactly like a gold-coin currency and differs from it not by any basic principle but merely by certain economies. The very idea was to make sure that the value of the monetary unit should fluctuate according to the value of gold: such a system is still metallist. Third, however, we must take into account the tendency to assimilate bank notes with paper money. Sir Robert Peel, in introducing his bill, defined money to cover coin of the realm and bank notes, the latter being ‘paper currency,’ and this manner of speaking was very common. But it does not signify that credit means of payment were to be considered as money but merely that, in the opinion of Ricardo and Overstone, bank notes were not credit means of payment but de facto money though they should not be. Or to put it differently, using a phrase of Roscher’s: they were money paper that had illegitimately usurped the role of paper money and were now to be forced to behave as if they were legitimate gold money. This is the whole philosophy of Peel’s Act. Therefore, the inclusion in money of bank notes that are viewed in this light does not contradict our proposition. J.S.Mill excluded bank notes precisely because, having departed from the Ricardo-Overstone teaching, he did not view them in this light. 5 But if we claim the majority of writers for theoretical metallism—since most of them also held that it was practical wisdom to base the currency upon gold (or silver), they were also practical metallists—we must be careful to make sure precisely how much this means. It does mean that they—and with unmistakable clearness Ricardo, Senior, Mill, and Marx—construed the phenomena of money from the case of full-value metallic money, as we shall presently see. It also means that this impaired their analysis of the subject of Money and Credit, as will be explained in Section 4. But it does not mean 5 Hence he was in error when he believed that inclusion or exclusion of bank notes from money was a terminological issue, a mere ‘question of nomenclature’ (Principles, Book III, ch. 12, 7). Money, credit, and cycles 669 that this metallist basis of their analysis hampered them at every step. Sometimes it was happily forgotten. And at other times apposite constructive devices prevented it from doing harm. One such device we have observed already. Some later German writers have held that the metallist starting point makes it impossible to do analytic justice to the facts of irredeemable paper money. Yet Ricardo and J.S.Mill experienced no difficulty at all in fitting these facts into a metallist theory. As in the subsequent period, the central problem of monetary theory was the value of money. More definitely than in the preceding period, this value was identified with the exchange ratios between money and goods or the former’s Purchasing Power. 6 But the fact that all money prices do not normally change in the same direction, let alone proportion, that is, the fact that gives rise to the problem of the general purchasing power or its reciprocal, the general price level, caused difficulties that were very obvious in the discussion on war inflation and were never really overcome. Most of us—uncritically perhaps—believe that we may solve them by the method of index numbers, and this method, as we know, was already available. But few theorists took kindly to it. Wheatley was the first one to do so as far as I know. Most of the rest, up to and including J.S.Mill, distrusted it or even did not grasp its possibilities, the efforts of Lowe and Scrope notwithstanding. Neither did they develop any articulate theory of the price level. They talked loosely about prices in general or general prices or, more precisely, about the scale of prices (Cairnes), but they cannot be said to have done more than adumbrate the idea, and some, among them Ricardo, definitely rejected it. 7 This is the reason why his proof that bank notes were depreciated during the Napoleonic Wars relied primarily on the premium on bullion and why, in dealing with the monetary aspects of foreign trade, he compared prices of individual commodities at home and abroad, though he and others may have believed that these were representative of more general variations. The leading ‘classics’ solved the problem of this rather dubious value of money simply by extending to it their general theory of value. Accordingly, 6 Confusion occasionally arose from the usance of businessmen that identifies value of money with the monetary rate of interest. Economists’ anxiety to avoid this confusion may be responsible for the aversion of some of them to recognize the relations between purchasing power and interest. The former term was, however, also used in a different sense, e.g. by J.S.Mill, namely in the sense of the maximum of purchases an individual can effect. 7 See, e.g., his categorical statement in the Proposals. Professor Viner (op. cit. p. 313, where the reader also finds that statement) points out, however, that Ricardo used the term price level in his correspondence. The refusal to recognize the price level as a meaningful, or measurable, concept is, however, a point against Ricardo only from the standpoint of modern economists, who handle it as a matter of course. From the standpoint of the small but distinguished group who believe neither in price index numbers nor in the price-level concept itself (like Professor von Mises, von Hayek, and, with some qualifications, also von Haberler) it is, of course, a point in his favor and proof of sound insight. History of economic analysis 670 they distinguished a natural or long-run normal value of money and a short-run equilibrium value. The former or, as they also said—misleadingly—the ‘permanent’ value was determined by the cost of producing (or obtaining) the precious metals, 8 the latter by supply and demand. Observe three things. In the first place, this procedure ratifies our calling them theoretical metallists. In the second place, both propositions are obviously equilibrium propositions, though they refer to different types of equilibrium. In the third place, the words ‘determined by’ are misleading and should be replaced by ‘determined at.’ For there is no particularly strong causal connotation to this determination. The reader can easily satisfy himself of this by considering the following case: suppose that the public changes its habits of payment permanently so that henceforth everybody holds less cash (in gold coins) than he did before; less gold will then be ‘required’ at a given level of prices; gold production will, within the assumptions of this analysis, certainly so adjust itself that (marginal) costs equal the new and lower value of the monetary unit; but it should be clear that in this case costs are being adapted to value at least as much as the new value is adapted to the new costs. In other words, our long-run equilibrium proposition is one of many long-run equilibrium conditions and can acquire causal connotation only by the grace of the theorist, that is, by the latter’s decision to freeze all other factors in the situation. Even then, a change in the marginal costs of gold will affect the value of money only through affecting the supply of money, as Senior and J.S.Mill recognized. 9 Of course, it must be borne in mind that, owing to the extreme durability of gold, the total stock of it varies but slowly in response to the annual rate of production and that, hence, the pattern of short-run equilibrium will in the case of gold be of greater importance relatively to the pattern of long-run equilibrium than it is in the case of other commodities. Even Ricardo, in spite of his bent for long-run analysis, reasoned about money chiefly in terms of the former, that is, in terms of supply and demand. We are now prepared to consider the vexed and vexing questions how far the ‘classics’ accepted the quantity theorem and whether or not it acquired illegitimate authority with them. For three of the leading writers, Thornton, Senior, and Marx, the negative answer is so clear as not to require proof. 10 8 This is how it was put by J.S.Mill (Principles, Book III, ch. 12, 1; but the sedes materiae is ch. 9), who emphasized the fact that gold is an imported commodity. But, less elaborately, Ricardo and, much more elaborately, Senior and Marx were of the same opinion. Senior was the only one, however, who worked up that theorem into a comprehensive theory: he saw the cost of production of money not only in its relation to the demand for gold in the arts but also in its relation to the public’s demand for cash to hold (Three Lectures on the Value of Money, delivered 1829, printed 1840, London School Reprint, 1931). 9 Ricardo should not have admitted it because, in his general theory of value, the price of a commodity can fall without an increase in its supply. 10 Something will have to be said about Thornton’s position, however. The only one of the three to repudiate the quantity theorem altogether was Marx, who called it an Money, credit, and cycles 671 . (like Professor von Mises, von Hayek, and, with some qualifications, also von Haberler) it is, of course, a point in his favor and proof of sound insight. History of economic analysis. advances, see the work of E.Wood (English Theories of Central Banking Control, 1819–1858) mentioned above. History of economic analysis 666 anticipated the principle of Peel’s Act to some. does not stand in the name of some professor of economics. But it sounded too academic for professors to miss it. And it became the basis of the ‘classic’ theory of central-bank policy as taught