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Money and Prices in the Nineteenth Century: An Old Debate Rejoined

Published online by Cambridge University Press:  11 May 2010

Michael D. Bordo  and
Anna J. Schwartz
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Abstract

In recent work, W. W. Rostow and W. A. Lewis have forcefully argued that real, not monetary, forces explain major periods of inflation and deflation in both the United States and Great Britain from 1797 to 1914. For them, changes in relative growth rates of agricultural and industrial output induce changes in the relative prices of major commodities and in the overall price level. A test of the substitutability of wheat for other primary products, 1870–1914, does not support the Rostow-Lewis theory.

Type
Papers Presented at the Thirty-Ninth Annual Meeting of the Economic History Association
Information
The Journal of Economic History , Volume 40 , Issue 1 , March 1980 , pp. 61 - 67
Copyright
Copyright © The Economic History Association 1980

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References

1 Rostow, Walt W., “Money and Prices: An Old Debate Revisited,” mimeo. (Austin, Tex., 1978)Google Scholar. This essay is largely a summary of the author's previously stated views in Gayer, Arthur D., Rostow, Walt W., and Schwartz, Anna J., The Growth and Fluctuation of the British Economy, 1790–1850, 2nd. ed. (Brighton, England, 1975)Google Scholar; also in his British Economy of the Nineteenth Century (Oxford, 1948)Google Scholar; “Kondratieff, Schumpeter, and Kuznets: Trend Periods Revisited,” this Journal, 35 (Dec. 1975), 719–53Google Scholar; The World Economy: History and Prospects (Austin, Tex., 1978)Google Scholar; and Rostow, and Kennedy, Michael, “A Simple Model of the Kondratieff Cycle,” Research in Economic History (forthcoming, 1980).Google Scholar See Lewis, William A., Growth and Fluctuations 1870–1913 (London, 1978)Google Scholar.

2 Lewis, Growth, p. 81; Rostow, World Economy, pp. 164–68; and Rostow, “Money and Prices,” p. 4.

3 Lewis, Growth, p. 93; Rostow, World Economy, p. xiii; and Rostow, “Money and Prices,” pp. 40, 43.

4 The Tooke view is best elucidated in Gayer et al., British Economy, pp. 629–31; and Rostow, “Money and Prices,” pp. 6–12.

5 See Friedman, Milton and Schwartz, Anna J., A Monetary History of the United States, 1867–1960 (Princeton, 1963)Google Scholar; and Cagan, Phillip, Determinants and Effects of Changes in the Stock of Money, 1875–1960 (New York, 1965)Google Scholar.

6 See Gordon, Robert J., “Recent Developments in the Theory of Inflation and Unemployment,” Journal of Monetary Economics, 2 (Apr. 1976), 185–219Google Scholar; and “Alternative Responses of Policy to External Supply Shocks,” Brookings Papers on Economic Activity, 6 (1, 1975), 183–206Google Scholar; Selden, Richard T., “Cost-Push Versus Demand-Pull Inflation, 1955–57,” Journal of Political Economy, 67 (Feb. 1959), 1–20Google Scholar.

7 See Dickey, George E., Money, Prices and Growth: The American Experience 1869–1896 (New York, 1977), p. 20Google Scholar.

8 A supply shock can induce a once-and-for-all increase in the price level by the reduction in real. output temporarily reducing the demand for money. See Karnosky, Denis S., “The Link Between Money and Prices—1971–76,” Federal Reserve Bank of St. Louis Review (June 1976), 17–23Google Scholar.

9 If the elasticity of demand for agricultural products were greater than or equal to one, we would observe a rise in the overall price level without a reduction in real output. The empirical evidence, however, is that the elasticity of demand in the United States is and has been considerably less than one. See Fox, Karl A., “Factors Affecting Farm Income, Farm Prices, and Food Consumption” in Fox, Karl A. and Johnson, D. Gale, eds., Readings in the Economics of Agriculture (Homewood, Ill., 1969), pp. 37–63Google Scholar.

10 Dickey, Money, Prices, p. 14.

11 Ibid, for evidence on 17 major agricultural and industrial commodities, 1869–96, in the United States. See also Mills, Frederick C., The Behavior of Prices (New York, 1927)Google Scholar for U.S. price dispersion pre-World War I.

12 See Goldfeld, Stephen M., “The Demand for Money Revisited,” Brookings Papers on Economic Activity, 4 (3, 1973), 577–638Google Scholar; also Laidler, David, The Demand for Money: Theories and Evidence, 2nd ed. (New York, 1977)Google Scholar; and Kahn, Mohsin, “The Stability of the Demand for Money Function in the United States 1901–1965,” Journal of Political Economy, 82 (Nov.-Dec. 1974), 1205–19Google Scholar.

13 Supporting evidence may be found in Bordo, Michael D., “The Income Effects of the Sources of New Money: A Comparison of the United States and the United Kingdom, 1870–1913,” Explorations in Economic History, 14 (Feb. 1977)CrossRefGoogle Scholar; and Cagan, Determinants.

14 Ibid.

15 Harley, C. Knick, “Prices and the Money Market in Britain, 1873–1913,” Explorations in Economic History, 14 (Feb. 1977), 69–89CrossRefGoogle Scholar.

16 See Fishlow, Albert, “Empty Economic Stages?” Economic Journal, 75 (Mar. 1965), 112–25Google Scholar; Fogel, Robert, Railroads and American Economic Growth (Baltimore, 1964)Google Scholar; Hrothgar J. Habakkuk and Phyllis Deane, “The Take-off in Britain,” Jean Marczewski, “The Take-off Hypothesis and French Experience,” and Hoffmann, Walther, “The Take-off in Germany,” all in Rostow, Walt W., ed., The Economics of Take-off into Sustained Growth (New York, 1963), 63–82Google Scholar, 95–118, 119–138.

17 The correlations of the residuals of equation (1) are as follows:

The residuals of a velocity function as a variable in equation (1) were included to eliminate possible bias due to a rise in the ratio of money to per capita real output over the period. All the equations were adjusted by the Cochrane-Orcutt technique to eliminate autocorrelations between residuals of the computed values of the dependent variable in the unadjusted equations.