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Economic Quarterly

Fourth Quarter 2016

The Rise and Fall of the Quantity Theory in Nineteenth Century Britain: Implications for Early Fed Thinking

Robert L. Hetzel

British monetary experience in the nineteenth century was extremely rich both in terms of the development of the quantity theory and in terms of the evolution of views of the role of the Bank of England in the international gold standard. One can ask, should or could the early Federal Reserve have learned from this experience? Especially during the Depression, why didn't the Federal Reserve understand its responsibility for the monetary contraction, deflation, and economic collapse it produced? Why didn't knowledge of the quantity theory, which developed in early nineteenth century Britain, prevent such a catastrophic mistake? A short answer is that the quantity theory, which flourished in the first part of the nineteenth century, disappeared as the gold standard became orthodoxy and the counterfactual of a paper money standard became heresy. There was then very little to guide the early Fed when it created a monetary standard that in reality was a paper money standard.

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