The Bullionist Controversy: Theory and New Evidence

Abstract

The Bullionist Controversy in the United Kingdom is one of the first debates about the determination of the price level and the exchange rate under a paper money standard. Despite the importance of the debate in the development of monetary theory, there remains little empirical evidence that uses modern, multivariate time series techniques. The evidence that does exist provides support for the Anti-Bullionist position that the balance of trade determines the exchange rate and thereby the price level. The purpose of this paper is to review the debate and develop a dynamic general equilibrium model that is capable of capturing key features of the 19th-century British financial system. The model is estimated using Bayesian estimation to test the competing hypotheses. The paper provides support for the Bullionist position.