currency pro-vided by bankers, is all issued in the way of loans’ (Principles, Book III, ch. 23, 4), the lending by banks qua creation of currency acts upon prices and not on the interest rate. The recognition of the currency-creating power of banks (which Tooke denied in the Inquiry) is as interesting as the recognition of the relation, so strongly emphasized in the United States, between lending and repaying, on the one hand, and expansion and contraction of the circulating medium, on the other—in which relation some of the more naïve American currency doctors saw (perhaps see) the source of all sorts of evil. J.S.Mill made nothing of all this, as will presently be pointed out again. Still, nothing of it escaped his attention—or should have escaped the attention of his readers. Second, Thornton knew of course perfectly well that the inflationary process he described presupposes an uncompensated expansion of lending. If the increase in loans is compensated, for example, by saving, it will not start that process. But, preoccupied as he was with the operation of ‘paper credit’ in wartime, he did not bother about this and so he failed to state explicitly the condition for stable equilibrium in the market for loanable funds which reads, in Wicksell’s formulation of 1898, that loans should equal people’s voluntary savings. To some extent, at least, this lacuna was filled by Joplin, 15 though he got still less credit for it than he got for having anticipated the principles of banking policy that, so far as the notes of the Bank of England are concerned, were carried into effect by Peel’s Act. Like Ricardo he strongly disapproved of the power of banks to create, by their lending, net additions to the total stock of means of payments, but he did not deny its existence—this was done by others—and pointed out that, if it were done away with and if banks were accordingly prevented from increasing the total of their loans beyond the amount of the public’s current savings, then a stable equilibrium in the money market might exist. It will be observed that in this case the equilibrium theorem is nothing but a particular way of stating the Turgot-Smith theory of saving and investment. Third, Thornton realized not only that bank loans which add to the means of payment may stimulate output rather than raise prices if they impinge upon an underemployed economy, 16 but also that, even after full employment 15 Thomas Joplin, Outlines of a System of Political Economy…together with the Fourth Edition of an Essay on the Principles of Banking (1823) and Analysis and History of the Currency Question (1832). Joplin was the first to propose a 100 per cent reserve system of banking, the idea being to make money interest behave as it would behave with a purely metallic currency, and to render the creation of bank currency—the creation of means of payment by lending—impossible. In his elaborate statement, the difficulty that all such schemes meet stands out very clearly: preventing banks from creating near-money (this American term owes its origin I believe to near-beer) will not prevent the trade from doing so. Also, in his schema, gold inflows would still be allowed to disturb equilibrium in the money market. 16 The practical importance of this truth is not great because underemployment of resources will in general occur in depression when there is no demand for additional credit. But its theoretical importance is nevertheless considerable because it forces us to recognize the existence of relations between the circulating medium and output, which the Ricardian or strict type of quantity theory so steadfastly denied. History of economic analysis 692 has been reached, credit expansion may still have some effect upon output, though he immediately proceeded to show that this effect will be smaller than the inflationary one (Paper Credit, pp. 236, 239 et seq.). If some money incomes do not increase in step with prices, their recipients may be forced to curtail their purchases of goods and services, that is, to perform a kind of involuntary saving which may increase real capital as does saving in the ordinary sense. Thus he anticipated Wicksell’s doctrine of Forced Saving. But Bentham, who coined the phrase Forced Frugality, went much more deeply into the matter and so did Malthus. 17 Ricardo turned a deaf ear to Thornton’s suggestion and kept on repeating again and again 18 —almost unintelligently—that ‘fictitious’ capital cannot stimulate industry, that capital can only be created by saving and not by banking operations, and so on, without ever facing the issue squarely. There was, of course, a reason for this. Here as elsewhere Ricardo was a prisoner to once-for-all conceived ideas. In this case, he had pinned his colors to the mast of a rigid quantity theory. The quantity theory implies that there is no relation between the quantity of ‘money’ and output. And he just would not admit that there might be one after all. J.S.Mill was torn between the two opposing views. Almost certainly, under Bentham’s influence he had given full scope to the view that expansion of bank credit may result in revenue’s being ‘converted into capital’—that period’s standard formula for the effect of saving—and even used the phrase ‘forced accumulation,’ 19 which reads like an attempt to improve upon Bentham’s ‘forced frugality.’ In the Principles, as we have seen, the fact that banks create means of payment by lending is freely recognized, and this implies the recognition of forced saving. Yet we read of a ‘disposable capital’ that is ‘deposited 17 This piece of doctrinal history has been brilliantly elucidated by Professor von Hayek in ‘A Note on the Development of the Doctrine of “Forced Saving,”’ Quarterly Journal of Economics, November 1932, to which the reader is referred for further details. Bentham’s analysis of Forced Saving was a later addition to the Manual—part of which was first published in 1798 by Dumont and something less than the whole of which is included in the Works, published 1838–43—and Hayek holds that the passage in question ‘received its final form in 1804’ and was probably sketched much earlier. According to the rules I follow in matters of priority, I have, however, no choice but to date this theory 1843, although Professor von Hayek is presumably correct in thinking that Bentham made its contents known to his economist friends. Malthus’ contribution is in his review of Ricardo’s High Price of Bullion, Edinburgh Review, February 1811. Ricardo’s reply, appended to the 4th ed. of the High Price of Bullion, was that the recipients of fixed incomes might reduce their savings instead of their expenditure on consumers’ goods. But Malthus, since he had nothing to go by except the halting and inconclusive, though suggestive, remarks made by Thornton, and since there is no reason to believe that he was aware of Bentham’s analysis, must be accorded a high degree of subjective originality. Joplin, in his Views on the Currency (1828), used the terms ‘forced’ and ‘voluntary economy.’ 18 For some samples, see Viner, op. cit. p. 196. Similar sentiments are expressed in the Principles. The term ‘fictitious’ (with reference to finance bills) occurs in Thornton. 19 Essay on ‘Profits and Interest,’ publ. in Some Unsettled Questions (1844). The date of writing is not quite certain but 1830 is a common guess. Money, credit, and cycles 693 in banks, or represented by bank notes,’ which together with the funds of those who ‘live upon the interest of their property, constitute the general loan fund of the country’ (Book III, ch. 23, 2). In all this and in the whole tenor of that chapter, Ricardian influence prevails. But in the sixth edition 20 a footnote crept in that reasserted his earlier view. After that, leading economists practically forgot all about ‘creation of additional deposits’ and ‘forced saving,’ so much so that they looked askance at Wicksell’s rediscovery of them: to borrow a phrase used by Lord Keynes in another connection, these notions, so obviously important and realistic, lived from about 1850 to 1898 a dubious life in the economic underworld—another lesson about the ways of the human mind! (b) Gains from the Controversy about Peel’s Act of 1844. For our purpose, it is not necessary to go much further. Most of the (none too numerous) important things that were said in that controversy had been said before. The two groups that opposed one another on the legislative issue involved became known as the Banking and the Currency Schools. Only Tooke, Fullarton, and Gilbart of the former, and Torrens and Overstone of the latter, school are of major interest for us. Tooke and Torrens we know already, but the latter’s writings on money and banking have not been mentioned as yet. From a long list I take his earliest work in the field, An Essay on Money and Paper Currency (1812); The Principles and Practical Operation of Sir Robert Peel’s Act of 1844…(1st ed., 1848); and his Tracts on Finance and Trade (1852), all of them even now worth reading. Of course, we shall mention in passing also a few other names, but nevertheless the reader must be warned that our selection is inadequate for any purposes but our own limited one and excludes several writers of importance. Continental and American literature we do not even attempt to cover. As regards the latter, reference is once more made to H.E. Miller, Banking Theories in the United States Before 1860 (1927). John Fullarton (died 1849) made his fortune as a surgeon and banker in India and took to writing on the theory and policy of banking, after having retired from business and having settled down in England. His main work (On the Regulation of Currencies…, 1st ed., 1844) enjoyed, in England and on the Continent, a persistent success such as few contributions to an ephemeral controversy have ever enjoyed—a success that was greater than were its no doubt considerable merits: but it was the kind of sensible performance that, while meeting higher standards also, is a boon to large classes of not-quite- professional readers. Also, it was appreciated by Marx and popular in Marxist circles right into the twentieth century. R.Hilferding’s Finanzkapital (1910) drew on it largely and uncritically. J.W.Gilbart (1794–1863) was a banker all his life; the first manager of the London and Westminster Bank, which he helped to found; an able and eminently 20 This is the edition of 1865 in the preface of which Mill acknowledged, especially with reference to that chapter, his debt to the suggestions and criticisms of ‘my friend Professor Cairnes, one of the most scientific of living political economists.’ History of economic analysis 694 respectable member of his profession, which looked upon him as a leader; the exponent and in part creator of what was to be, for the rest of the century, orthodox banking doctrine. No student of banking can even now afford to miss his highly successful Practical Treatise on Banking (1st ed., 1827); his History and Principles of Banking (1834); and, at least, The London Bankers (1845). His History of Banking in America (1837) may be associated, so it seems to me, with a distinct American school of thought on banking, whose chief authority he was. Samuel Jones Loyd, commonly known as Lord Overstone (1796–1883), also a banker but of inherited wealth and position, was a much more brilliant personality and much more influential with politicians. He was the currency school’s strong man, and his perspicacity (on the one hand) and his sketchiness (on the other) have led generations of economists to moderate the range and depth of his thought. He has left no systematic work, and the best I feel able to do for the reader is to refer to his Tracts and other Publications on Metallic and Paper Currency (ed. by McCulloch in 1857) and his Evidence before the House of Commons Select Committee of 1857 (also ed. by McCulloch in 1858). Neither group was a school in our sense of the word. Within both, there were considerable differences of opinion and especially of level. In fact, it is necessary to distinguish in both cases a popular argument from what was, of may pass muster as, serious analysis—a distinction that is not always easy to carry out because few participants in the controversy presented their cases systematically 21 and in a manner that would have met with the unqualified approval of their own parties. Most participants attacked not the real views but a popularized or even distorted picture of their opponents’ positions. And most scientific economists, foremost among them Mill, ranged themselves with the banking school—on the Continent, still more decidedly than in England. 22 But among practitioners and especially among the directors of the Bank of England, Peel’s Act counted many adherents. 23 21 Torrens and Fullarton came nearest to doing so. But we may add G.W.Norman (Remarks upon Some Prevalent Errors with respect to Currency and Banking, 1833) and McCulloch, both of the currency school. McCulloch (see especially his Treatise on Metallic and Paper Money and Banks written for the Encyclopaedia Britannica, 1858; and also his comments on money and on Peel’s Act in his edition of the Wealth of Nations of 1850) supported the currency principle in a manner that overemphasized the links that exists between it and Ricardo, the Bullion Report, and the quantity theory as such. It is quite possible to approve of Peel’s Act without upholding the latter in its strict sense. I take this opportunity to mention James Wilson, a severe and able critic of the lower ranges of the currency school, founder of the London Economist, and Minister of Finance of India, one of those excellent men who fare badly in a history of analysis. See his articles, collected in Capital, Currency, and Banking…(1847). 22 See, e.g., Adolf Wagner, Beiträge zur Lehre von den Banken (1857), and Die Geld- und Credittheorie der Peel’schen Bankacte (1862). We have already noticed his boundless enthusiasm for Tooke. Both in his interpretation and in his criticism, he completely failed to do justice to Overstone. In France, the only question that excited real interest was whether or not the Banque de France should have a monopoly of issue. Those who stood for it sometimes invoked Lord Overstone’s authority, those who were opposed (Chevalier, Courcelle-Seneuil, and others) sometimes invoked Tooke’s authority. Money, credit, and cycles 695 23 It must not be forgotten that the directors had every reason to greet an act which left them absolutely free from regulatory interference, except with respect to the note issue, with a sigh of relief. The first thing that strikes the modern observer when he looks back upon that controversy is the extent of fundamental agreement between the two ‘schools.’ 24 Neither contained any radical monetary reformers. Both were equally averse to monetary management or any thoroughgoing control of banking and credit. This is obvious for the banking school that fought Peel’s Act without offering any other method of control, but it also holds for the currency school that wished to regulate the note issue precisely in order to make the currency ‘automatic’ and to leave banking business—even central banking— entirely free. That is to say, both groups consisted of laissez-faire men. Moreover, both groups were staunch supporters of the gold standard and, in particular, of the regulation of foreign exchanges by free gold movements. If we neglect those of the banking group’s objections to Peel’s Act and those of the currency group’s arguments for it that were of a purely technical nature, 25 it seems that there cannot have been much left to disagree about. Briefly and not quite adequately, we may say that the ‘banking principle’ asserted (1) that, given English conditions and banking practice, and in particular proper leadership on the part of the Bank of England, 26 convertibility of notes was enough to secure all the monetary stability of which a capitalist system is capable; and (2) that in any case, even if this were not so, there would be no point in regulating notes alone, since deposits would raise the same problem. Equally briefly and inadequately we may say that the ‘currency principle’ asserted (1) that convertibility of notes cannot be assured without special restrictions upon their issue; and (2) that the notes of the Bank of England were actually, or should be treated as, mere gold certificates—not as credit instruments like deposits or commercial bills but as ultimate (reserve) money just like the coin or bullion which they represented. 27 24 The scientific affinity between Overstone and Tooke—overshadowed though it is by what seems to have been strong personal aversion—will stand out more clearly in the last section of this chapter. Now I am speaking of their points of agreement on monetary and banking policy and on the kind of economy they meant to serve. 25 An example is the objection that the strict division of the Bank into two departments would make the gold in the issue department inaccessible to the management of the banking department, except so far as the latter held a reserve of notes. Thus, the banking department might have to refuse help to the market when the coffers of the issue department were replete with gold, as in fact happened in 1847. Let us note in passing, however, that the currency group was right in minimizing, and that the banking school was wrong in exaggerating, the importance of the recurring suspensions of Peel’s Act: the necessity of these had been foreseen by Overstone and they were really, though not officially, part and parcel of his scheme. 26 This proviso, even where not stated explicitly, is a natural one to make in the case of so severe a critic of the Bank of England as Tooke. But it should be made quite generally. The banking school, in particular, never challenged the regulatory function of a central bank. 27 It is important to note that the words ‘certificates’ and ‘represent’ are Lord Overstone’s. I believe that Lord Overstone handed out the key to the understanding of his position by using them. That is to say, he meant to deny that the notes of the Bank of England were bank notes at all, as usually understood, especially on the Continent History of economic analysis 696 Only Torrens, in reply to the objection that restriction of the note issue alone is futile, explicitly went beyond this narrow purpose: 28 believing, as we know he did, that the amount of deposits banks are able to create by lending is closely tied to the existing amount of coin plus notes, he asserted that regulation of the note issue would also do something toward regulating the creation of deposits. 29 But if we neglect this, then the agreement between the banking and the currency schools about the basic importance of convertibility of notes is immediately seen to be the fundamental thing, compared with which their disagreement on the question whether or not there was need for special guarantees of this convertibility was a secondary matter. For since the banking school did not hold that the circulating medium would regulate itself in the process of competitive banking—why should they have insisted on convertibility at all if they believed this?— and since it recognized the ever-present danger of ‘overbanking,’ all they can have meant by saying that over-issue of notes was ‘impossible’ is that, with convertibility, it will in the end be severely punished. And this is obviously true. 30 All the currency school can have meant by insisting on the possibility of an overissue of Bank of England notes is not denial of this obvious truth nor assertion of the not less obvious untruth that with convertibility overissue can go on forever, but merely that, without special restriction upon the issue of the Bank of England, over-issue might go far enough to be beyond any remedy other than catastrophe. Thus interpreted, the difference between the two positions remains no doubt of practical importance. But it involves none but minor 31 disagreements as regards analysis. (see next footnote). It is only on this hypothesis that the idea of making gold plus notes behave as gold alone would behave—which is how the ‘currency principle’ is usually expressed—becomes meaningful, i.e. that (1) the quantity of the notes should exactly correspond to the actual gold ‘represented’ by them except that (2) there should be added a constant amount of notes, which was an inheritance from the past and which it would have been highly inconvenient to eliminate. 28 Reply to the Objections of the Westminster Review (1844). 29 It stands to reason that this idea is capable of being defended, provided one does not put a greater burden upon it than it can bear. It is interesting to note that Torrens anticipated an argument that was in our time brought forth by Edwin Cannan (‘Limitation of Currency or Limitation of Credit?’ Economic Journal, 1924). Professor von Hayek in Prices and Production, p. 2, has pointed out that Dugald Stewart had already formulated the issue involved in 1811 in a Memorandum on the Bullion Report (Works, ed. by Sir W.Hamilton, 1855, vol. VIII): ‘The one opinion suggests the propriety of limiting credit through the median of a restricted currency; the other of limiting the currency through the medium of a well regulated and discriminating credit.’ 30 Fullarton (op. cit. ch. 5) did, however, go too far when he expected convertibility to operate ‘with the precision of clockwork.’ 31 Some of these minor disagreements, such as the one on the modus operandi upon credit and prices of the outflow and inflow of gold, on internal and external ‘drains,’ on how far Peel’s Act interfered (indirectly and unintentionally) with the effective management of the Banking Department of the Bank, are of considerable scientific interest. Unfortunately, we cannot go into them. Money, credit, and cycles 697 The evolution of English central-bank practice was not substantially interfered with by Peel’s Act. The changes that occurred in the attitudes of the Bank of England toward its own customers and toward the loan market, the growing importance of bankers’ balances within the total of its deposits, and other features of England’s financial history after the passing of Peel’s Act were more important than were the effects on policy brought about by that Act. Most of these changes were slow to penetrate into the theory of central banking that had become stereotyped by 1850 into what almost amounted to a cult of the bank rate, the modus operandi of which was analyzed with little regard to observable facts. All the more important is it to point out that a central-bank policy of much wider scope had been, on a much higher plane, blocked out by Thornton at the beginning of the period. His sound insight into the nature of banking credit and his keen yet balanced sense of the intimate logic of things qualified him well for dealing with this subject. He did this in a manner that anticipated practically everything that was discovered about central-bank policy for a century to come. On page 259 of Paper Credit, he summed up his analysis in a set of rules that constitute the Magna Charta of credit management in an intact private-enterprise economy. In order to establish this, I should have to copy out that page. To save space I merely refer to it. In concluding the argument of this section, we must attend to one more topic. So far we have dealt mainly with the topmost stratum of that period’s analytic work. We have noticed several important achievements and we shall notice some more in the next two sections of this chapter. But we have also noticed the failure of those achievements to come to full fruition and in particular the fact that they were not co-ordinated in such a way as to provide a good spring board for the work of the next period. In fact, we find, instead of an effective presentation of the best results, the emergence of a fairly general opinion about the nature and practice of banks that preserved many of the weak spots of the period’s analysis, rather than the strong ones, but gained wide currency among both bankers and economists and thus proved an obstacle to further advance. For brevity’s sake, no names will be mentioned except those of a few authorities who might, with more or less justification, be invoked in support of some of the propositions to be discussed. 32 These propositions are associated with what has been called the Commercial Theory of Banking and also with part of the argument of the banking school, but in using these labels we must keep in mind that neither the one nor the other is indissolubly wedded to them. Perhaps we had better dub the doctrine in question the Commercial-Bill Theory of Banking. (1) According to the commercial-bill theory of banking, the essential business of banks—the business that defines banks—is the financing of current commodity trade, national and international. It is not essential that this should be done only in the form of discounting bona-fide commercial bills, 32 The reader will find plenty of names in the work of L.W.Mints referred to at the beginning of this section. History of economic analysis 698 each drawn in connection with a particular sale, but we retain our label nevertheless, because this was considered to be the typical case. Even so, this conception of the business of banks, though still too narrow, does not individuate any particular theory. We get the commercial-bill theory if either or both of the following propositions are added to that definition of the banker’s business: (a) banks derive or should derive the funds with which they discount from deposits entrusted to them by the public; and (b) they satisfy the needs of commodity trade without influencing prices thereby and without having the power—in justice we should always add ‘normally’—to influence the amount of credit outstanding. (2) It should be obvious without further explanation how these propositions link up with definite errors which, as we have seen, were fully exploded by the work of the better writers of the period, and especially by Thornton It should also be obvious that this view of banking—the helpmate of commodity trade, who offers his money to satisfy the needs of business but does not force it upon business, who has nothing to do with price fluctuations and overtrading (to put it strongly)—expresses very well the professional ideology of bankers who like to see themselves in this light. But finally it should be observed that there are elements of practical truth and wisdom in this doctrine. If reformulated to the effect that bankers had better be careful about their cash position and maturities and that they had better look with equal care at the soft spots in the applications for credit before them, it becomes quite unobjectionable. In other words, a faulty theory, in this as it does in other cases, covers wise advice. The proposition that sound business principles of discounting are all that is needed to keep the economic ship on an even keel should indeed have been recognized as erroneous ever since Thornton; but action in conformity with it would, nevertheless, have avoided all the worst breakdowns in financial history. (3) However, we should notice a few arguments about this needs-of-trade attitude that aimed at more than inculcating responsible lending practice. First we mention one that is perfectly true so long as we confine ourselves to considering the individual banking business in a competitive system of many banks. Credit expansion for the individual bank is, in fact, severely limited by the drain on reserves that it will eventually entail. Of course, this is no longer true for all banks taken together; 33 but even for all of them, if the system be really competitive, that penalty on stepping out of line is a more effective brake upon expansion in line than critics of banking practice are usually prepared to recognize. Second, there is less but still something in Fullarton’s unjustly famous Law of Reflux, which simply recalls to the minds of reformers the commonplace fact that normally loans are repaid and that their repayment annihilates purchasing power, so that, though by itself 33 Professor Viner (op. cit. pp. 239 et seq.) has pointed out that this distinction, which we are in the habit of claiming for our own epoch, when in fact it penetrated into teaching, was widely understood ever since the 1820’s. Money, credit, and cycles 699 this does not prevent inflationary expansion of credit, there is a very material difference between the case of bank credit which does, and the case of government paper money which does not, ‘flow back’ automatically. Finally, third, we mention the central needs- of-trade argument that has been so uncritically vaunted by some and so uncritically rejected by others—the argument that the discounting of bona-fide bills carries its ‘proper’ limitation with it and that in addition it makes the circulating medium expand and contract ‘elastically’ as production and trade expand and contract. For this view, it is possible to invoke the authority of A.Smith and Tooke. It is, however, hardly necessary to point out its inadequacies. All the more necessary is it to point out its true core. Consider the most normal of all normal cases: a commodity has been produced and sold; the producer A draws on the trader B for the amount; A discounts the accepted bill at his bank and expends the money on his current production, while B, selling the commodity to ultimate consumers, collects from them the money with which to redeem the bill at maturity, the date being so chosen as to make this normally possible. Note that this is a piece of observable practice and no theoretical construct; that a bank that confines itself to this sort of business can, in fact, not increase its lending on its own, because commodities must be first produced and sold; 34 and that there is an obvious sense— though one only out of several—in which it might be averred that bank money of this kind would vary in a manner roughly corresponding to the flow of commodities, does not raise prices, and is endowed with ‘elasticity.’ We may indeed doubt whether this case has the importance attributed to it by sponsors of the doctrine. And we may not like this kind of elasticity but there is no warrant for denying its existence. I repeat that none of the errors alluded to is inseparable from either the position of the banking school or of the commercial theory of banking. 5. FOREIGN EXCHANGE AND INTERNATIONAL GOLD MOVEMENTS The period’s analysis of the monetary aspects of international economic relations, in the form that J.S.Mill imparted to it, proved an extremely durable achievement and, though now under critical fire, still underlies much of the 34 This version does not involve the error commonly implied in the statement that banks cannot give credit beyond the ‘requirements’ of their customers; and it is likely that Tooke did not mean more than this. The typical attitude of the respectable English banker may have confirmed him in this opinion as well as in the opinion that such credit does not act upon prices. On the other hand, it must not be forgotten (this has been very instructively shown by Kepper, see below, sec. 6) that Tooke did not strictly adhere to the commercial-bill theory of bankers’ money. In places, he apparently committed himself to a much wider definition of customers’ requirements, holding that no kind of short-run credit can ever be inflationary that serves a serious business purpose (he seems to have made an exception for purely speculative transactions in times of ‘overtrading’). This of course is not only difficult to defend but even difficult to understand, unless we interpret it as a corollary of his opinion that banks cannot lend more than the public saves. But in the Inquiry he admitted that they can. History of economic analysis 700 best work of our own time. 1 In order to appreciate it, we must bear in mind the following two facts. In the first place, the ‘classic’ writers, without neglecting other cases, reasoned primarily in terms of an unfettered international gold standard. There were several reasons for this but one of them merits our attention in particular. An unfettered international gold standard will keep (normally) foreign-exchange rates within specie points and impose an ‘automatic’ link between national price levels and interest rates. The modern mind dislikes this automatism, as much for political as for economic reasons: it dislikes the fetters this automatism clasps on government management of the economic process—dislikes gold, the naughty boy who blurts out unpleasant truths. But most of the economists of the period under survey liked it for precisely the same reasons. Though they compromised in practice as in theory and though they admitted central-bank management, the automatism—a phrase beloved by Lord Overstone—was for them, who were neither nationalists nor étatistes, a moral as well as an economic ideal. It stands to reason that this alone will make a lot of difference between their problems and ours and that this difference in practical outlook is bound to assert itself—though perhaps it should not—in purely analytic work. In the second place, the ‘classic’ writers were primarily concerned with commodity trade. Although they did not fail to consider international lending, subsidies, and tributes, the monetary problems of commodity trade (payment for imports and receipts from exports, the gold movements and variations in price levels incident to these, and the effects of gold movements on domestic credit structures and interest rates) were their central problems, so much so that they treated everything else from the angle of commodity trade. In consequence, international finance did not get its due in their analysis—the credit transaction that did was the transaction embodied in the commercial bill (including, it is true, the finance bill), which, directly or more distantly, corresponded to commodity transactions. But the South American loans and mining stocks, for instance, that were being issued in 1824 and that for the time being dominated the London money market left no footprints in basic theory. For us, the exactly opposite approach seems more natural: we are likely to look upon international capital transactions as the basic phenomenon to which commodity trade is subsidiary, by which it is controlled, from which it must be understood. And this point, too, would suffice in itself to divorce modern analysis from what may be described as the 1 I believe this to be true of the work not only of Taussig but also of Viner and Haberler, who no doubt developed the ‘classic’ analysis and also accepted various new tools and propositions of others, but did not challenge the ‘classic’ fundaments. These were, indeed, challenged by Ohlin and other front-rank economists but their contributions too may be formulated as improvements rather than reconstructions. Professor Viner’s survey of the situation (op. cit. ch. 6) may be referred to in support of this view. An impression to the contrary rests primarily upon the fact that modern analysis envisages other practical problems and conditions. Money, credit, and cycles 701 . and criticisms of ‘my friend Professor Cairnes, one of the most scientific of living political economists.’ History of economic analysis 694 respectable member of his profession, which. form of discounting bona-fide commercial bills, 32 The reader will find plenty of names in the work of L.W.Mints referred to at the beginning of this section. History of economic analysis. ranges of the currency school, founder of the London Economist, and Minister of Finance of India, one of those excellent men who fare badly in a history of analysis. See his articles, collected