Introduction

This chapter is concerned with the behavior and determination of money demand and money supply in a particular monetary regime, the gold standard, and in a particular country, the United Kingdom. Restriction to one country plainly raises concern over how representative of the regime the results we set out may be. Although such concern is inevitable, it should not be overdone. This is partly because restriction to one country is to an extent forced on us by the data – for the United Kingdom has for this period higher-quality, more consistent and complete, data than exist for other countries under gold standard regimes. But there are more and better reasons than that for accepting the results as representative. First, they are completely unsurprising; they are as theory would lead one to expect. Second, they are from a period of comparative economic tranquillity in the United Kingdom; there is thus little chance that the results are dominated by some extraordinary, important but unique, event. There is every reason to think that the findings are what should be expected qualitatively (and quantitatively in one important respect, homogeneity of money demand with respect to the price level) in every other gold standard country.

Nonetheless, there are some institutional features which are important, and should be set out before the detailed findings are examined.

Introduction

In this chapter we examine the impact of changes in the quantity of money on aggregate economic variables in Britain over the years 1870 to 1913. This subject has been examined by two of the present authors (Capie and Wood 1984) but the statistical techniques used were fairly rudimentary, and the analytical framework within which hypotheses were tested was set out rather sparsely. This chapter sets out to remedy these deficiencies. Its structure is as follows. Section 9.1 outlines the historical background of the period; it gives an account of what is currently the conventional view of macroeconomic developments in this era. Section 9.2 sets out the analytical framework we use to organise the empirical work. This analytical framework is the traditional model of the impact of money on real and nominal interest rates. This framework has two advantages for the present purpose. It provides a most detailed account of the effect of money on key macroeconomic variables, and, secondly, it lets us consider various explanations of the Gibson Paradox, a phenomenon which, although certainly noted and discussed before this period, was named and came to prominence as a result of examination of data from the years examined in this volume. The data themselves are then described. This prepares the way for the statistical work. The chapter then concludes with a discussion of the results of that work, focusing first on the Gibson Paradox and then on how the results contribute to an understanding of the role of money in Britain in the late nineteenth and early twentieth centuries.