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Two Views of Monetary Policy: the Attwood-Mill Debate Revisited

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Two Views of Monetary Policy: the Attwood-Mill Debate Revisited Thomas M. Humphrey price stability is an essential prerequisite for an effi- ciently functioning economy and a sustained high average level of employment, (2) recommends that the monetary authority gracluaily approach and there- after permanently adhere to a target path of money are again in full en~plojwenf at ample mages. growth consistent with a zero rate of inflation, (3) THOW% ATTWOOD (1819) prescribes that discretionary fine-tuning be replaced by fixed monetary rules, in particular the noninfla- Mr. Attwood opines, that the multiplication of tionary constant money growth rate rule, and (4j the circulating p>zedEClizlm,and the consequent di- warns that the social cost of accepting inherited n&&ion of its value, do not wzerely ditninislz the inflation far exceeds the cost of eradicating it. pressure of taxes and debts, and other fixed The debate between policy activists and stable charges, but give en@oy+newt to labor, and fhaf money proponents is not new. The essentials of the to an indefinite extent . Mr. Attwood’s debate can be traced back more than 140 years to a error is that of supposing that a depreciation of celebrated controversy between Thomas Attwood and the currency really increases the demand for all John Stuart Mill over gold versus paper monetary articles, and conseqztently their prodlrction, be- standards in post-Napoleonic war Britain. This cause, zcnder sogme circumstances, it nzay create debate occurred during a long deflationary period a false opinion of an increase of depnand; which that abruptly succeeded a wartime inflationary boom. false opinion leads, as tlze reality would do, to an The postwar deflation brought severe unemployment. increase oj production, followed, however, by a industrial stagnation, and economic distress. .Qt- fatal revulsion as soon as the delusion ceases. wood, a Birmingham banker and political reformer, JOHK STUART MILL (1833) sought to relieve rhe distress by replacing the esist- ing gold-based currency with an inconvertible paper Accompanying the current recovery, now well into currency geared to the level of employment. He was its third year, is a heated debate over the role of opposed by Mill, the famous philosopher-economist monetary policy in restoring and maintaining eco- who, as a leading member of the orthodox British nomic stability. Two groups of participants dominate Classical school, defended the gold standard and the debate, namely advocates of activist expansionary dismissed all paper currency schemes as purely in- policies at one extreme and proponents of steady flationary. The debate centered on such modern monetary growth at the other. The policy views of policy issues as unemployment versus inflation, rules these competing groups have been conveniently sum- versus discretion, and the benefits and costs of ac- marized by Professor Karl Brunner [ 131. himself a cepting and eliminating inflation. This article es- member of the stable money group. amines the Attwood-Mill controversy and shows how According to Brunner, the activist group (1 j as- similar it is in essentials to the current policy debate.’ signs top priority to the speedy return to full em- ployment, (2) urges rapid mone! growth to help Attwood’s Views Thomas Attwood was the achieve that objective, (3) prescribes monetary fine- policy activist of his day. He advocateci full employ- tuning to maintain full employment once it is reached, ment and gently rising prices, both to be achieved by and (4) recommends acceptance of inherited infln- monetary fine-tuning. He stated these views in more tion on the grounds that the cost of accepting it is far less than the cost of eradicating it. The stable i The literature on the Attwood-Mill debate includes the references listed at the end of the article. Reaardinr Attwood’s views. see money group, by contrast, (1) attaches top priority Checkland r141. Cony 115. pp. ~1-957. Fetter 112, pp. vii-xxviii] Link IIS, PP. 6-351, O’Brien 119, PP. 164-53. and Viner 122. pp: to the elimination of inflation on the grounds that 173. 1S6-r. 195, 199, 212-14, 2S91. On Mill. see Link 116, pp. 14~~61 168-72,177-91. The present article draws heaviiy from these sources: 14 ECONOMIC REVIEW, SEPTEMBER/OCTOBER 1977 than a dozen pamphlets, in numerous letters to the explicitly puts an upper as well as a lower bound on press as well as in private correspondence, in testi- the appropriate quantity of money. Thus he states mony before three Parliamentary committees, and in that “Whenever . , . the money of a country is suffi- several speeches before the House of Commons cient to call every laborer into action, upon the system where he served as representative for the district of and trade best suited to his habits and his powers, Birmingham from 1832 to 1839. His views can be the benefits of an increased circulation can go r> organized under five headings corresponding to the farther. .” Beyond that point, further &crease is central themes of his analysis. These include ( 1) full “nugatory or injurious” [2, p., 68, cited in 22, p. employment as the policy goal, (2) primacy of mone- 213n.l. In short, hq_spec.,lc‘;“--d a .unique ideal money tary policy, (3) feasibility of monetary fine-tuning, stock target consistent with full employment. (4) benefits of price inflation, and (5) costs of price In specifying his full employment target, Attwood deflation. was confronted with a measurement problem created by the lack of employment or unemployment sta- Full Employment as Policy -Goal To Attwood, tistics. He tried to solve this problem by suggesting full employment was the overriding policy goal. three proxy measures of full employment. These “Employment,” he said, “is a right which a good included the price of wheat (a crude index of the citizen may claim of his country without any kind of cost of living), the wages of agricultural labor (Att- degradation or obligation” [4, pp. 4.5-6, cited in 16, wood’s “par of labor”) and the rate of interest, re- p. 201. He reiterated this view in 1832 in his testi- spectively. He assumed that full employment existed mony before the Parliamentary Bank Charter Cow when these variables reached certain levels. Spe- wzittee. When asked the question: cifically, wheat prices at 15 shillings a bushel, weekly Do you consider that as long as there exists a wages at 18 shillings, and interest rates at 5 percent labourer in the country not fully employed, an in- creased issue of currency may be made with ad- spelled the existence of full employment. Departures vantage, whatever it be? from these norms indicated corresponding departures Attwood replied : from full employment and the need for monetary As a general principle, I think, unquestionably, action. Thus lower prices and wages and higher that so long as any number of industrious honest interest rates signaled unemployment and the need workmen in the Kingdom are out of employment, supposing such deficiency of employment not to be for monetary expansion. Deviations in the opposite local but general, I should think it the duty, and direction meant overfull employment and the need certainly the interest, of Government, to continue the deureciation of the currencv until full emolov- for monetary contraction. Attwood assumed that ment & obtained and general p;osperity [9, p. 467, these proxies were mutually consistent and would cited in 15, p. 861. not produce conflicting signals for the authorities. Elsewhere he stated that “the first and most impor- He also assumed, in effect, that employment could tant duty for the Legislature to attend to, is to take be maintained at the desired level by pegging nominal care that an ample demand for labor is restored and wage, price, and interest rate variables. maintained throughout the country” [ 11, p. 171. Attwood’s association of given wage and price Attwood defined full employment as an excess of levels with a given level of employment corresponds vacant jobs over unemployed people, or, as he put it, to present-day use of Phillips curve relationships be- “a greater demand for labor, than labor can possibly tween inflation and unemployment. Likewise, as supply” 14, p. 39, cited in 16, p. 341. This excess will be shown later, John Stuart Mill’s criticism of vacancy measure also provided tlzc criterion of an Attwood on this point is similar to modern criti- appropriate quantity of money, as can be seen from cisms of the Phillips curve. Like modern critics of Attwood’s statement that money creation “cannot be the Phillips curve, Mill argued that one could not said to be carried to too great an extent, until the peg real economic variables by pegging nominal general demand for labor, in all the great departments variables (whether wages, prices, interest rates, or of industry, becomes permanently greater than its the money stock) since there exists no permanent supply. There is no other correct measure of a re- relation between the two kinds of variables, i.e., they dundant, or deficient, circulating medium” [ 10, cited are independent of each other in the long run. Note in 14, p. lo]. Thus if labor is in excess supply, the also that Attwood’s version of the Phillips curve money stock is too small and should be expanded. referred to wage and price levels rather than to the Its expansion should he continued until excess de- rate of inflation. In his time it was natural to think mand just begins to develop in the labor market. At in terms of a stable long-run price level, with low or this point the correct amount of money is in existence high prices corresponding to low or high rates of and expansion should therefore cease.
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