Banking Policy and the Price Level: An Essay in the Theory of the Trade Cycle

by Dennis Holme Robertson

Robertson's breakthrough study was among the first works to fully grasp the concepts of savings and investment, and to explore the relationship between the two, employing a step-by-step, period-to-period analysis. "It is not too extravagant to claim this work ... not Keynes' General Theory as the fountainhead of modern macroeconomic analysis." M. Blaug Great Economists Before Keynes

120 pages, Hardcover

First published September 1, 1988

Reviews

[Frank Stein · Rating 3 out of 5]

Obviously this book, written in 1926 by a Cambridge Economist, is of more personal than general interest, but it provides some real important insights into inter-war thinking on monetary policy and the trade cycle. (Pretty wonkish analysis follows.)

This book is perhaps most famous because, in the introduction, the author notes that two chapters were largely written in consultation with John Maynard Keynes, and Keynes himself later said that this book helped him break with his old obsession with an orthodox quantity theory of money (the idea that the price level and inflation are purely determined by the amount of money in the system).

The book is very difficult to wrap one's head around, however, because the author uses almost a personal language to describe the processes of savings and investing (awkward neologisms such as Spontaneous Lacking, Induced Dis-Hoarding, and Automatic Stinting and Automatic Splashing litter the book). Equally confusing, though perhaps more interesting to dis-entangle, are the unstated assumptions which economists of his era used and which under-gird his results. For instance, the author seemed to believe that an important determinant of output was how much each sector's output was worth in other "consumable" goods, perhaps because lower prices for other goods were thought to stimulate more work and production, as stated by Arthur Pigou. Yet at the same time he also seems confused in positing that there are different supply curves for goods produced in exchange for money than in exchange for other goods, and believes that without an increase in the price level to allow more exchange, there can be no increase in production.

In the end, the author comes to the conclusion that booms and busts are somewhat inevitable, and somewhat tied to respective rises and falls in the price level. Though monetary policy can cut the peaks and the valleys, allowing innovation to take place requires rising prices from more investing, and then declines when "overproduction" requires disinvestment. Though Keynes would not advocate these positions, one can see many of Keynes's later innovations incipient in this vision. For instance, the author emphasizes the importance of "hoarding" in lowering the price level and preventing investment, and how rises in interest rates cause "dis-hoarding" and more circulation of money. He also emphasizes the interactions between the overall price level and output, and the need to manage both, in the form of "effective demand" for goods in terms of money income held by other consumers. Keynes would take many of his insights and forge a new economics from them.