The Currency and Banking Schools
Mill's monetary theory was a
compromise between the Currency School and the Banking School. He agreed with
the Banking School that banks should be able to issue notes more flexibly than
the Currency School advocated, but he also agreed with the Currency School that
the supply of money should be limited to prevent inflation.
Mill believed that the Banking
School was correct during normal times, when markets were quiet. However, he
also believed that speculative financial booms could occur, and in such times
the Currency School's policy of tying the issuance of notes to gold was the
appropriate policy.
In other words, Mill believed that
the central bank should have some flexibility in managing the money supply, but
that it should also be careful to prevent inflation.
This is a simple idea, but it is an
important one. It is the basic principle that underlies most modern central
banking policies.
Wages
Fund
The wages fund theory, also known
as the wages fund doctrine, was a theory used in classical economics to explain
the determination of wage rates.
According to this theory, the wages
rate was determined by the size of the labor and the size of the wages fund.
In the short run, the wage rate is
determined by dividing the wages fund by the number of persons in the labor
market.
The wages fund doctrine does not
consider the long-run supply of labor, which led to its criticism and eventual
rejection.
The theory was used by some popular
writers as an argument against labor unions, although many economists who
supported the wages fund doctrine also approved of labor unions.
J.S. Mill initially accepted the
wages fund doctrine but later recanted his support and argued that labor unions
could raise wages through the bargaining process.
Written by:
W. J. K. V. Tekla Tharushi
K. A. D. Ishini Sulochana
Wanigarathne
References
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