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.