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Money, prices, and growth in pre-industrial England

By Nick Mayhew

At a time when governments across the world are pursuing the elusive goal of economic growth, it may be instructive to consider the historical evidence for growth in Britain.

A hoard of gold angels (1470 to 1526) recently discovered in Oxfordshire.
A hoard of gold angels (1470 to 1526) recently discovered in Oxfordshire. Image courtesy of the Ashmolean Museum.

Recently, economic growth has been addressed in a Leverhulme project involving Stephen Broadberry, Bruce Campbell, Alexander Klein, Mark Overton and Bas van Leeuwen, which offers annual estimates of British GDP from 1270 to 1870. The Broadberrry-Campbell team’s estimates confirm Paul Bairoch’s proposed method of estimating pre-industrial GDP fundamentally dependent on population levels. The team’s findings associate GDP closely with population until c.1700, when industrial, agricultural, and technological developments began to liberate GDP from population. However, even before 1700 the Broadberry-Campbell team’s work suggests that economic growth may have been a pre-condition of population growth. From the thirteenth century at least, economic growth matches or exceeds demographic growth.

Given the marriage patterns in Britain, and the requirement that couples establish a means of support before setting up home, this is not surprising. Kussmall has shown how marriage in seventeenth-century south-west England correlated with economic opportunity. Even more explicitly, Langdon and Masschaele have observed that “there is a powerful conjunction between entrepreneurial activity and population growth.”

These insights also have a bearing on the influence of population change on price levels. Ever since the 1950s some, perhaps most, historians have associated rising population levels with the great inflationary periods of the thirteenth-fourteenth centuries and early modern period (1550-1650). The argument was that rising population created increased demand which pushed up prices.

This interpretation challenged the monetary explanation of price movements based on the Quantity Theory. (Traditionally Quantity Theory explains the behavior of prices as MV=PT, in which M stands for money stock, V for the velocity of circulation, P for the price level, and T for the level of transactions. Nowadays Quantity Theory usually replaces T with GDP, the measure of the size of the economy, represented by the symbol Y.) Over the last 50 years demographic and monetary interpretations of price history have contested the subject.

However, new work on economic growth suggests that while population did undoubtedly rise during the periods of inflation, so too did GDP. In other words, though demand rose, so too did supply, which might be expected to have neutralised the effect of rising population on prices.

As we have observed already, in the period 1250 to 1750 population levels and GDP were always closely associated, and estimates of the size of the money stock have little importance without an understanding of the size of the economy that the money stock has to service. In this sense, population levels find a place within the Quantity Theory, but the demographic role influences not only demand but also supply. If this is accepted, the long-standing and increasingly sterile battle between monetary and demographic explanations for the behaviour of prices can be drawn to a close. Money clearly influences the price level, as does velocity, but the size of the economy remains an essential element in the equation. Economic growth emerges as a fundamental influence on population and on price levels.

The reassertion of Quantity Theory should not be seen as a victory for the Chicago school since Keynesian observations about the role of velocity (or its inverse, demand for money to hold) and the effect of time lags remain important qualifications. Still more importantly, much depends on the quality of our estimates of GDP, prices, and the money stock.

Nick Mayhew is a fellow of St Cross College, Oxford, and director of the Winton Institute for Monetary History in the Ashmolean Museum, Oxford. He is the author of “Prices in England, 1170–1750” in a recent issue of Past and Present, which is available to read for free for a limited time.

Founded in 1952, Past & Present is widely acknowledged to be the liveliest and most stimulating historical journal in the English-speaking world.

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