“Lord Keynes”, the blogger whose blog Social Democracy for the 21st century I regularly follow and greatly enjoy, has recently been grappling, over several posts, with the concept of the “Natural Rate of Interest”, which is generally attributed to the Swedish economist Knut Wicksell. As Lord Keynes aptly demonstrates, Wicksell advanced various definitions of his “natural rate”. Further, Lord Keynes seems to have found what, in essence, is the same notion in statements by Alfred Marshall and, perhaps, others.

I think I can take him a lot further back, to the beginning of the 19th century. I’m not doing this on purpose, but after reading parts of Viner (1937) I find that quite a lot of what was written during the time of the so-called “Bullion Controversies” of the first quarter of the 19th century in England is very relevant even today. Sometimes I wonder if all that can be written in economics had not been written up to around that period and the only thing economists have been doing ever since is to regurgitate it or rediscover it, putting it in more modern language and ever fancier maths!

Be that as it may, here’s what I found: trawling through Viner (1937:191) I discovered what appears to be (at least according to Viner) the first definition of the notion of a “natural rate of interest”, which looks remarkably similar to what Wicksell propounded almost some 80-odd years later. It is to be found in the work of Thomas Joplin, an early 19th century English country banker, and late participant in the Bullion Controversies.

Here’s Viner:

“Joplin does not approve of forced saving. It involves a fraud on those who were holders of money prior to the increase in its issue. At first it results in a stimulus to trade such as ‘in all probability would more than compensate the holders of the money in previous circulation for the loss they incurred’ but if the increase of issue continues, definite injury and injustice results. ‘Legitimately a banker can never lend money which has not been saved out of income. Money saved represents commodities which might have been consumed by the party who saves it. Interest is paid for the use of the commodities and not for the money’. If banks have the power to issue money, the amount of such issue is determined by the rate of interest which the banks charge on loans. If forced saving is to be avoided, banks should charge ‘the natural rate of interest’ which he defines as the rate which keeps savings and borrowings equal.”

I have edited out the footnote numbers from the above passage, but for the last citation Viner cites Joplin (1825:37). The relevant passage appears to be the following:

“The interest demand for money, or capital is also subject to great fluctuations. During war, when Government borrows largely, it is infinitely greater than during peace, when it does not borrow any. In the former period, the natural market-rate of interest has often been seven or eight per cent. and is generally above five; in the latter it has often been at two per cent. and is generally under four.

The natural rate of interest, however, can never be properly known with our system of currency. It depends, as we have stated, upon the quantity of income saved, proportioned to the demand for capital. But, with the power possessed by our banks of cancelling money which has been saved, or manufacturing it when it has not, this supply and demand can never be ascertained. Consequently, the banks have an arbitrary charge, some of four, but most of five per cent., from which they do not vary; but which, being neither the natural war-rate nor the peace-rate, is as little likely to be the true rate as any other between these two extremes they could have pitched upon.

The natural rate of interest is pretty uniform throughout the kingdom;”

It is not very easy to follow Joplin’s reasoning, but I think Viner’s conclusion, that Joplin defined the natural rate as “the rate which keeps savings and borrowings equal” seems a fair one. Joplin did write that the “natural rate” depends upon savings “proportioned to the demand for capital”. He seems to believe that the “natural rate” would prevail in a system of entirely metallic money (whether this is the case is another question) and it should be stressed that it seemed to him entirely self-evident that this was not the system prevailing in England at the time.

I should also note that the citation above is from a letter (“Letter X”) to the Editor of the Courier (which, presumably, was a London newspaper; in the short time I devoted to this post I was unable to find more information of it) “in the latter part of 1823” (Joplin, 1825:vii). These letters were signed “An Economist” and were later reprinted as a collection in Joplin (1825).

It should be remembered that, by 1823, England had returned to the gold standard, with the pound sterling once again convertible into gold (the new gold coins called “sovereigns” and worth exactly one pound each), after a long (1797-1821) suspension of its convertibility (the so-called “Restriction”) during the Napoleonic Wars. Far from this return being a guarantee of stability, just about the first thing that happened was a speculative bubble and a financial crisis, in 1825-1826!

There are other things to explore in the above passage from Viner, most notably the doctrine of “forced saving”. The latter was also briefly brought up by commentator “Philipp” in a comment under one of Lord Keynes’ posts; but if I want to get this one off quickly, it will have to wait for another post.


Joplin, T. (1825). An Illustration of Mr. Joplin’s Views on Currency, and plan for its improvement

Viner, Jacob. “Studies in the theory of international trade.” (1937).

O’Brien, D. P. (1993). Thomas Joplin and Classical Macroeconomics: A Reappraisal of Classical Monetary Thought. Elgar.