Thomas Tooke and the Monetary Thought of Classical Economics

Matthew Smith

• Publisher: Routledge
• Year: 2011
• eBook ISBN: 9781136817182
• Edition: 1
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

The purpose of this book is to provide a comprehensive account and reconsideration of the contribution to political economy of Thomas Tooke (1774-1858), classical economist and influential monetary theorist. Its chief purpose is to examine Tooke's contributions to political economy with the aim of bringing to light its unified nature and its important legacy to contemporary economics. In doing so the book aims to throw new light on monetary analysis within the framework of classical economics.

There remains no comprehensive account of Tooke's contributions that is concerned with showing his lasting and ongoing influence on the development of monetary thought. The book provides an interpretation and analytical study of Tooke's political economy from the standpoint of the classical tradition. This enables a demonstration of how his constructive contribution throws a new light on monetary thought in this tradition.

1 Introduction

The leading theorist of the banking school and author of the monumental six-volume A History of Prices (1838–1857) and the brilliant pamphlet, An Inquiry into the Currency Principle (1844), Thomas Tooke (1774–1858) can be rightfully counted among the most prominent figures in English nineteenth-century monetary thought. In addition to an impressive number of writings on money and prices, Tooke actively participated in the discussions of the Political Economy Club from its inception in 1821 until well into the mid-nineteenth century and gave evidence before no less than ten parliamentary committees between 1819 and 1848, most of them concerned with monetary issues and chiefly responsible for shaping Britain's banking policy in the nineteenth century. A number of eminent economists important to the development of monetary thought have closely studied Tooke's writings and, in various ways, have been influenced by his ideas. These include J.S. Mill, Marx, Knut Wicksell and Alfred Marshall, the latter two being pioneers of twentieth-century monetary thought whose theories, in their essentials, still dominate. But, despite Tooke's significant contribution, there has been relatively little literature in the history of economic thought devoted solely to a comprehensive study of his work and ideas. This neglect appears to have stemmed from a lack of interest borne of an underestimation of the constructive value of his contribution. The main theme in the commentary on Tooke is that, while he made valuable contributions with his large-scale empirical analyses, with his pragmatic arguments on policy issues and with his critically minded exposure of weaknesses in the quantity theory of money, the alternative monetary theory he developed has little positive value. This opinion is well represented by Wicksell:

His [Tooke's] monetary contributions – no matter how highly one may regard them in other respects – are on the theoretical side purely critical in general outlook and negative in concept. It is quite impossible, I think, to construct out of them a positive theory of money.

(1898: 43–4)

However, this opinion stems from interpreting Tooke's contributions through the looking glass of marginalist theory, which rose to dominance from the late nineteenth century. From the standpoint of marginalist economics, most of Tooke's key banking school ideas are not logically coherent and have thereby been judged to be of little constructive value. But Tooke developed his banking school ideas on the very different theoretical foundations of English classical economics which dominated the first half of the nineteenth century. These ideas would therefore have been seen by Tooke to only have constructive value when comprehended in terms of the theoretical foundations of classical economics from which they logically sprang. Why then should any scholar of Tooke who does not understand his ideas in terms of classical economics find constructive value in them? Like many of his classical contemporaries, a full understanding and hence appreciation of Tooke's contribution has become victim to the fundamental change that has undertaken economic science since 1871. Fortunately, the rigorous reconstruction and revival of classical economics that occurred with Piero Sraffa's Production of Commodities by Means of Commodities (1960) has provided a clearer analytical perspective for better understanding the classical economists in general and, more particularly here, Tooke's economics. With this perspective, Tooke's banking school theory can be seen to make an enduring contribution to the theory of distribution, as well as monetary behaviour and the price level, relevant to modern capitalist society.

The purpose of this study is to provide a comprehensive account of the contribution of Tooke to economic science, with an evaluation of that contribution. Though his contribution will be shown to be made principally in the field of monetary economics, it is not exclusively so. Indeed, an important aim of what follows is to show that in the tradition of classical economics Tooke possessed a rich political economy encompassing explanations of various aspects of the economic system such as the fluctuation in activity and changes in income distribution as well as contributing to debate on a number of policy questions, usually as part of his wider historical analysis of price movements in England over the period 1792 to 1856. To this end, a concern of this study will be to discover Tooke's ‘system’ of political economy and what shaped it. An understanding of the unified nature of Tooke's economics will enable a more complete comprehension of his monetary thought, which is the main purpose of this study.

The chronology of this study is dictated by the manner in which Tooke developed his monetary thought over time, culminating in his banking school theory. In this regard, Tooke can be described as an ‘inductive’ thinker in the sense that he believed the robustness of economic principles could only be verified by empirical findings. Tooke's scientific method basically consisted of establishing the concrete facts by exhaustive empirical analysis upon which explanations of general application could be formulated. This method did not preclude Tooke from employing existing economic theory in empirical analysis; indeed, it would be impossible to determine the scope of empirical inquiry or interpret its finding without theory for guidance. Rather, for Tooke, the development of economic theory proceeded from empirical analysis. Tooke's scientific method involved laborious analysis, the dismissal of theories which could not be empirically verified and the slow development of principles. In this manner Tooke slowly developed his own monetary thought from his empirical work. Therefore, before considering Tooke's monetary thought, this study will examine his empirically based explanation of price movements in England over the period 1792–1856. Moreover, in conjunction with other evidence, from Tooke's empirical analysis, it is possible to ascertain his method of analysis and theoretical approach to value and distribution as well as his theory-based arguments on a range of other relevant economic issues. In this way it is shown Tooke did possess a coherent theoretical framework as a necessary starting point to conduct his empirical analyses and upon which he subsequently built.

Chapters 3, 4 and 5 are concerned with these foundational elements of Tooke's work. In Chapter 3, the theoretical framework in classical economics that Tooke employed in his empirical analysis and upon which he developed his monetary thought is elucidated. Chapter 4 is concerned with Tooke's explanation of the movement in the price of agricultural commodities, consisting principally of corn, which was an important part of his explanation of the movement in the price level in general. In Chapter 5, Tooke's explanation of the movement in the general level of prices, consisting of the change in the prices of a range of products in addition to agricultural commodities, is considered. Having expounded the foundational elements, Tooke's monetary thought is comprehensively examined in Chapters 6 and 7. There is agreement among scholars who have closely studied Tooke's monetary thought that there are two main phases in its evolution (Gregory 1928: 16–17, 69–83; Arnon 1991: 2–3; Pivetti 1991: 75). Chapter 6 is concerned with the first phase, the pre-banking school phase, comprising Tooke's writings and parliamentary evidence from 1819 to 1838 when his monetary thought remained, albeit uneasily, within the bounds of the orthodox quantity theory approach of the classical economists. Chapter 7 is then concerned with the second phase, the banking school phase, comprising Tooke's writings and parliamentary evidence from 1840 to 1857, when he developed a novel set of principles more consistent with his empirical findings and in opposition to the classical economists’ quantity theory of money. This set of principles formed the basis of Tooke's banking school theory. In these two chapters, consideration is given to the nature and causes of the transformation in Tooke's monetary thought. The last stage of this study is concerned with Tooke's legacy to economic science. By way of conclusion, Chapter 8 identifies the main lines of Tooke's influence on the development of monetary economics and the constructive value of his key ideas to contemporary economic theory.

Preliminary to undertaking the main part of this study, Chapter 2 provides an account of Tooke's life and his contributions to political economy, the latter consisting not only of his publications but also his evidence given to parliamentary committees. This survey will provide useful background to the study of Tooke's work undertaken in this book. Before this survey, an account of the commentary on Tooke is given in Section 1 of this chapter, followed in Section 2 by an exposition of the definition of classical economics employed in this study.

1.1 The commentary on Tooke

Most of the secondary literature on Tooke has consisted of brief accounts of his contributions in the context of wider historical studies of English nineteenth-century monetary economics that encompasses the currency–banking school debates of the 1840s. For a long time the most definitive account of Tooke's work was the ‘Introduction’ by T.E. Gregory to the 1928 reprint of History of Prices. It consists of a 120-page account of Tooke's writings, including a critical examination of his various views on major topics in monetary thought. While Gregory (1928) made a number of useful observations, he did not attempt an analytical exposition of Tooke's economics. Gregory believed Tooke was a ‘magnificent controversialist’ who stood not among the ‘systematic writers of history, but among the Pamphleteers, the men with an intellectual axe to grind, who are the great glory of English economic literature – do they not include Defoe and Dudley North, Ricardo and Malthus, Jevons and Keynes?’ (1928: 120). This praise masks the highly critical disposition of Gregory to Tooke's ideas (1928: 28–9, 82–91). As the French historian of monetary thought Charles Rist wrote: ‘Professor Gregory finds more to criticise than to praise in [Tooke's] works’ (1940: 182). There is no doubt that Gregory's interpretation of Tooke is heavily coloured by a strong attachment to the tradition of the quantity theory of money (see 1928: 22–3). It is not going too far to conclude that Gregory's (1928) introduction to Tooke's History of Prices ranks as one of the most unsympathetic introductions ever written for an author's re-published work in the history of economic thought.

The fullest study of Tooke so far undertaken is Arnon's book, Thomas Tooke: Pioneer of Monetary Theory (1991). In contrast to Gregory (1928), Tooke is given sympathetic treatment by Arnon, who considered ‘Tooke's writing[s] to include a theoretical structure, which merits scholarly attention on several grounds’ (1991: 1). For Arnon (1991), Tooke merits attention as the pioneer of the ‘innovative’ banking school theory. Arnon's book examines the evolution of Tooke's monetary thought from his emergence as a political economist and ‘ally’ of Ricardo to the development of his banking school views. According to Arnon (1991: 4, 74–7, 113–15), Tooke's lasting contribution to monetary thought consists of showing the important role of credit in explaining variations in economic activity and prices. However, Arnon (1991: 115) also considered Tooke's ‘silence on the determination of the quantity of credit remains the weakest point in his analysis’. Notwithstanding a sympathetic treatment, it is apparent Arnon (1991) struggles to discover a coherent system of economic analysis in Tooke's work (particularly, see 113–16). This is reflected in the many gaps in Arnon's account of Tooke's contributions, especially of the latter's explanation of price movements and of his banking school theory, as well as his substantial influence on the development of monetary thought.

Another study exclusively devoted to Tooke's contribution is Laidler's essay, ‘Thomas Tooke on Monetary Reform’ (1975). This essay deals with Tooke's views on English banking policy in the currency–banking school debates of the 1840s. Though Laidler (1975) is predominantly concerned with practical issues of policy, the discussion considers, albeit briefly, some of the central ideas of Tooke's banking school theory. For the most part, Laidler is more sympathetic to Tooke's position on banking policy than that of the currency school, concluding that ‘on the whole Tooke's programme is a more appealing one than that of the currency school’ (1975: 223). However, with respect to Tooke's banking school theory, Laidler is critical, believing it not to be ‘logically complete and rigorous . . . where critical pieces of it are missing or badly set out, and where extraneous matters intrude unduly’ (1975: 211).

Other secondary literature on Tooke has either accounted for his contributions as part of a wider study of monetary thought or been concerned with particular aspects of his monetary analysis. A lengthy account of Tooke's writings is given by Charles Rist in History of Monetary and Credit Theory: From John Law to the Present Day (1940). In Chapter 4 of this book, Rist compared Tooke's views on a range of monetary issues with those of Ricardo, concluding that ‘Tooke the Historian’ is the superior counterpart to ‘Ricardo the Logician’ because ‘[H]is conclusions are always preceded by a detailed description and analysis of facts, and are so superior to and much more comprehensive than the Ricardian simplifications’ (1940: 180). In Chapter 5, Rist (1940: 202–38) examined Tooke's banking school theory, focusing on his distinction between money and credit and the important role he ascribed to credit in the operation of the monetary system. Rist (1940: 202–38) claimed Tooke to be the ‘creator of the credit theory’, anticipating the twentieth-century approach to monetary theory of Wicksell, Hawtrey and Keynes (a view shared by Spiegel 1971: 351–2, 592). Nearly waxing lyrical, Rist further wrote ‘that his books are full of original and sound ideas’ in which ‘[H]e illuminates every aspect of every problem which he discusses – the role of banks, the nature of bank-notes and cheques, the origin of crisis, the rate of interest’ (1940: 181–2). But, while Rist had a high opinion of Tooke's writings, he did not believe them to contain a coherent monetary theory, commenting ‘Tooke was no theorist’ (1940: 191). A sympathetic account of Tooke's banking school views is also given in Green's (1992) historical study of theories of money, output and inflation in classical economics. However, Green (1992) is more concerned with examining the position of the banking school as a whole in the currency–banking school debates of the 1840s than with Tooke's position per se. Nevertheless, in relation to issues relevant to a ‘fiduciary’ and ‘credit’ system of money, Green (1992: 154–60, 171–2, 179–203) discusses many aspects of Tooke's banking school position. Essentially, Green argues that the banking school provided a more sophisticated analysis of the operation of a credit-based monetary system than Ricardo and the currency school, but that this ‘progress’ ‘was gained at the expense of internal consistency; for, by accepting the Say's Law assumption of full capacity utilisation, they could explain concrete conditions only by going beyond the limits of existing classical doctrine’ (1992: 182; on this issue, see Section 8.4: 219).

A highly critical account of Tooke and the banking school is given in Daugherty's (1942; 1943) twin articles on the currency–banking school controversy. Daugherty believed that banking school theory largely consisted of a ‘mass of obscure, disorderly, and often fallacious ideas’ (1943: 251). Unable to discover any coherency in the ‘doctrines’ of the banking school, Daugherty (1942: 148–55; 1943: 246–7) provided only a brief and unsystematic discussion of them. Another highly critical interpretation of Tooke and the banking school is given by Mints (1945: 86–100, 121–2) who was particularly critical of the idea that the quantity of money was endogenously determined by the ‘wants of trade’ and, connectedly, of the law of reflux. However, Mints’ unsympathetic account of banking school doctrine is piecemeal, being only a small part of a wider study of monetary thought.¹ By contrast, Morgan (1965: 120–43) provides a more balanced account of Tooke and the banking school in his discussion of the currency–banking schools controversy. However, Morgan (1965) gives little consideration to banking school theory, concentrating on the practical policy issues surrounding the Bank Charter Act of 1844. Morgan (1965) tends to emphasise the common ground of the two schools of thought. He believed the banking school made an important contribution toward understanding the operation of credit in the British monetary system and the motives for demanding gold, but was critical of their argument that the ‘over-issue’ of banknotes fully convertible into bullion was not possible.

A piecemeal account of Tooke and the banking school is also provided by Fetter (1965: 172–3, 187–94) in connection with the currency–banking school controversy. The main concern of Fetter (1965) is with the actual influence of these two schools on public debate and British banking policy. While believing Tooke to be inconsistent in some of his views, Fetter (1965: 173, 191–2, 204) nevertheless believed him to possess a better understanding of the practical operation of the monetary system than members of the currency school. Elsewhere, though, in a short biography of Tooke, Fetter (1968: 104) commented that Tooke ‘had little ability to develop an organised monetary theory’. In Wood's (1939) study of nineteenth-century English theories of monetary policy, Tooke's views are not systematically dealt with, but are briefly considered in relation to specific issues under discussion (see 44–5, 49–50, 56–9, 140–3, 150–1, 179–80). Nevertheless, Wood (1939: 56–9) devotes particular attention to Tooke's denial of the Bank of England's influence on prices, concluding that ‘Tooke really had no theory to explain how monetary causes were related to prices’. An account of the position of Tooke and the banking school is also given in Robbins’ (1958: 121–43) study of Robert Torrens’ contribution to classical economics. However, Robbins (1958) was concerned mainly with Torrens’ criticisms of the banking school and, for the most part, provided an unsympathetic account of their views. In a concise assessment of his contributions, Schumpeter (1954: 520–1) praised Tooke for the empirical analysis of History of Prices, but was highly critical of him as a theorist. Indeed, Schumpeter referred to Tooke as a ‘woolly thinker’, lacking a ‘theoretical edge to his thought’ and ‘deficient in command of economic theory’ (1954: 520–1). Even more damning, Schumpeter wrote that Tooke ‘had no notion of the logical relation between observation ...

Table of contents

• Frontcover
• Title Page
• Copyright
• Dedication
• Contents
• Preface
• Acknowledgements
• A note on citation practice
• 1 Introduction
• 2 Tooke's contributions
• 3 Tooke's approach to value and distribution
• 4 On Tooke's explanation of agricultural price movements
• 5 An explanation of general price movements
• 6 The monetary thought of the pre-banking school Tooke, 1819–1838
• 7 The monetary thought of the banking school Tooke, 1840–1857
• 8 Tooke's legacy
• Appendices
• Notes
• References
• Index