Economic Insights FEDERAL RESERVE BANK OF DALLAS VOLUME 9, NUMBER 1 Knut Wicksell The Birth of Modern Monetary Policy For many years, the Federal Reserve Johan Gustav Knut Wicksell was born in 1851 in Stockholm. His mother has used influence on short-term interest rates died when he was 6, and his father, a to contain inflationary pressure in the Amer- moderately successful businessman and real estate investor, died when Knut ican economy and promote growth and was 15. His father’s estate provided suf- employment. The genesis of this approach and ficient funds for him to enroll at the University of Uppsala in 1869, where its theoretical foundation both lie in the work he studied mathematics and physics. of Knut Wicksell, one of the 20th century’s Within two years, he had taken his first degree and gone on to graduate work. more colorful and eclectic economists. He passed two of the three required Wicksell was a free thinker, a lifelong examinations for a doctorate in mathe- matics in 1875 but waited until 1885 to socialist, a mentor to several justifiably finish the third. By then, Wicksell had , Lund, Sweden famous Swedish economists who followed become a well-known social critic and lecturer, and his interests had changed him, and one of the most influential econo- to the social sciences, and to econom- mists of his time. His ongoing exchanges over ics in particular. Lund University Early in his life, Wicksell had stud- Knut Wicksell the role of money in generating changes in ied the Bible at great length and even prices—a dispute in which he and American contemplated a religious calling. But as resulted in much publicity for Wicksell, he read social science tracts in college, who used his notoriety to earn a mea- economist Irving Fisher were the central including George Drysdale’s influential ger living by speaking publicly, then players—predated the mid-20th century The Elements of Social Science, his call- writing his speeches for publication. ing as a social scientist became clear. In 1885, funded by the sale of clash between Keynesian and monetarist His interests turned to controversial top- some family-owned properties, Wicksell views of business cycles and correct price ics such as human sexuality and birth was able to spend a year in London control, discussed at length in Drys- reading the major works of the classical stabilization policy. dale’s essentially Malthusian tome.1 economists. During his stay, a small, For those interested in the early work In 1880, Wicksell gave his first obscure foundation—the Victor Lorén public address on such a topic at Foundation—awarded him a three- done on the quantity theory of money, the Uppsala. The lecture was titled “The year grant to study economics in relationship between interest rates, money, Most Common Causes of Habitual Germany and Austria. Although the Drunkenness and How to Remove Lorén will was contested, it was settled prices and real factors, and the ways in which Them.” At the time, the ideas Wicksell in Wicksell’s favor in 1887, and he they might affect the macro economy, we offer expressed in this lecture about the rela- received the promised funds. Had it tionship between worker alienation, not been for this grant, Wicksell might you this issue of Economic Insights. poverty, and the social ills of alcohol well not have become an economist. and prostitution were considered radi- — Bob McTeer In Vienna, Wicksell heard lectures President cal, even socialist. The controversial by Austrian economist Carl Menger. He Federal Reserve Bank of Dallas nature of this and subsequent lectures also attended lectures at the Univer- Finance, published in 1896, was a Is Money a Commodity? groundbreaking application of margi- Money’s Value and nal thinking to such issues as progres- Rational Expectations In passing, there is a point to be noticed. sive taxation, optimum tax prices for The growth in the use of money, and the in- public and semipublic goods, public All practical proposals for the improve- ment of currency systems actually proceed, crease in monetary stocks, tends more and more utilities and oligopolies characterized by to reduce the significance of the commodity though more or less consciously, from the cartel behavior. Interest and Prices, a desire to guarantee this stability of value. When characteristics of money. On the other hand, work on monetary economics, was pub- the development of the monetary system re- it is said that Governments or banks should lished in 1898. sults in a displacement of specie by credit in- seek to provide enough money of full value, or struments and so-called money substitutes, and On the strength of his published a monetary system at once sound and flexible, there exists, therefore, an important tendency economic work, Wicksell applied to the all that is really meant is that the value of towards a strengthening of the commodity University of Uppsala for a doctorate in money should be protected against violent fluc- aspect of money and of its influence on prices. economics. One was finally granted, with tuations, either downwards in the form of the It is sometimes said to be feasible to base honors, in 1896. He was still denied an depreciation of money or upwards in the form a monetary system upon gold and yet to dis- economics professorship, however, be- of a fall in commodity prices: this includes a pense entirely, or almost entirely, with the cause at that time in Sweden economics demand for the preservation of the stability of value of money in space, i.e. the maintenance employment of gold both in circulation and in was taught in law school, and Wicksell the banks’ reserves. This would be done by of the currency unit of one country at the same lacked a law degree. So he borrowed level as that of another. extending the use of cheques, by the issue of money and moved his family to Uppsala, notes of which the cover is of a purely banking Sometimes, it is true, we hear it said that where he finished the four-year law nature, and so on. This view, which is held by certain changes in the value of money, espe- some of the most prominent writers on mone- degree in two years. He became a lec- cially a gradual decline or a progressive rise in tary questions, must be regarded as utopian. In turer at the University of Uppsala, but commodity prices, might be preferred under such a system the value of money would be his income there depended solely on certain circumstances to complete stability. directly exposed to the effects of every fortu- the number of students who took his Rising prices would act as a stimulus to enter- itous incident on the side of the production of tutorials. In 1900, at the age of 49, he prise and a falling value of money would free the precious metal and every caprice on the finally received a teaching position in debtors from the burden of obligations side of its consumption. It would undergo the economics at the University of Lund, thoughtlessly incurred. This view is, however, evidently naïve. It need only be said that if this same violent fluctuations as do the values of although the position was not fully most other commodities. fall in the value of money is the result of our funded until 1904. own deliberate policy, or indeed can be antici- But it would be quite possible to maintain University life was productive for a stable value of money without the use of pated and foreseen, then these supposed ben- Wicksell. In addition to teaching classes reserves of a precious metal. Only it would be eficial effects will never occur, since the necessary for the metal to cease to serve as a in tax law and economics, he wrote approaching rise in prices will be taken into Lectures on Political Economy (volumes account in all transactions by reasonably intel- standard of value. I 1 and 2, 1901 and 1906) and numerous ligent people. What is contemplated is, there- —Interest and Prices, 34–35; articles on pre– and post–World War I fore, unforeseen rises in price. The result of original emphasis policy issues. He favored a mild form of this would seem to be that we should cross our socialism, achieved gradually and built arms and wait in order not to frustrate the ben- eficial workings of nature. But nature does not sities of Strassburg, Berlin and Paris. He on the foundations of a welfare state. always guarantee rising prices; falling prices Sweden came to represent precisely this then returned to Sweden, but his radi- also occur. cal reputation prevented him from get- vision as the 20th century unfolded. I ting a position at the University of In 1908, in a stand for free speech —Lectures on Political Economy, Stockholm. and against the advice of friends, he gave vol. 2, 128–29; In the summer of 1887, Wicksell a lecture that satirized the Immaculate original emphasis took a common-law wife, Anna Bugge. Conception. The lecture, which Wicksell By 1893, he had two sons but still no intended as a test case, resulted in a later became famous in their own right, permanent position with which to sup- two-month jail sentence. He served the such as Bertil Ohlin and joint Nobel port his family. During the 1890s, his term in 1910 after a lower court’s deci- Prize winner (with F. A. Hayek) Gun- work in economics—some of it path- sion was upheld on appeal. nar Myrdal. He died in Stockholm in breaking, such as Value, Capital and After retiring from Lund in 1916, May 1926 while working on an article Rent (1892), his first major work— Wicksell and his wife moved to Stock- on the theory of interest that was to be went largely unnoticed.