Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

John Wheatley's Theory of International Monetary Adjustment

Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

John Wheatley's Theory of International Monetary Adjustment

Article excerpt

Of the bullionist writers who advocated restoration of the gold convertibility of England's currency during the Bank Restriction period 1797-1821, few are as little known today as John Wheatley. Certainly his name is not as familiar as those of David Ricardo, Henry Thornton, Thomas Malthus, Francis Horner, William Huskisson, and other bullionists. Yet in some respects he was the most original of the group. His Essay on the Theory of Money and Principles of Commerce (1807) spelled out the logic and implications of the strict bullionist position more forcefully and systematically than any document before Ricardo's High Price of Bullion: A Proof of the Depreciation of Bank Notes (1810).

To Wheatley belongs much of the credit for expounding at least four hard-line bullionist propositions often attributed to Ricardo. First, money-stock changes have no effect on output and employment. Second, exchange rate depreciations, a high price of gold, and specie drains stem solely from an excess issue of currency. Third, being purely monetary phenomena, exchange rate changes, gold price movements, and specie drains are immune to real shocks operating through the balance of payments. Fourth, exchange rate depreciation and the excess of market over mint price of gold constitute proof and measure of overissue in inconvertible paper regimes. To these can be added a fifth contribution: his demonstration that monetary expansion and price inflation can continue indefinitely on a given gold base if all countries expand in step.

Wheatley derived these propositions from an analytical model characterized by sharp dichotomization of real and monetary sectors. He sought to show that monetary shocks do not affect real variables nor real shocks monetary variables. To do so, he partitioned his real and monetary variables into separate compartments and allowed little or no interaction between the two. Neutrality, block exogeneity, and absence of reverse causality--these were the hallmarks of his analysis. They allowed him to contend that his monetary indicators were uncontaminated by real disturbances. As such, they signaled overissue pure and simple and so constituted an unambiguous measure of the need for monetary contraction to correct the excess issue. More than most economists before or since, he took the extreme position that monetary shocks affect only monetary variables and real shocks real variables.(1)

Despite Wheatley's originality, his work has suffered from neglect. Ignored in his own time because of a labored, archaic expository style and a hypercritical, vitriolic attitude toward his fellow economists, he has also been underrated in ours.(2) Modern commentators, when they mention him at all, typically focus exclusively on certain striking aspects of his work rather than on his complete analytical model. Thus Schumpeter (1954) concentrates on his crude version of the quantity theory of money. Einzig (1962), Frenkel (1978), Officer (1984), and Wu (1939) emphasize his purchasing power parity doctrine. Fetter (1942) and Viner (1937) spotlight his assumption of price and exchange rate invariance to real shocks. Metzler (1948), Morgan (1943), O'Brien (1975), and Viner (1937) accent his income-expenditure theory of unilateral transfers. Chipman (1983) criticizes his theory of gold price determination. None, however, mention his integration of these elements into a consistent theory of how an open economy responds to real and monetary disturbances.

The result is a gap in our knowledge of Wheatley's theory of the international adjustment mechanism. This gap is all the more regrettable because it contributes to the notion of a monolithic classical theory based on David Hume's account of the price-specie-flow mechanism. In fact, Wheatley's theory differs from Hume's. It emphasizes continuous purchasing power parity, gold market arbitrage, and unilateral payments accomplished through income changes rather than through price adjustments. …

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