WEBVTT NOTE 5. Monetary and Banking Thought, I: The Early Bullionist Controversy (continued) 1 00:00:00.000 --> 00:00:07.960 5. Henry Thornton, Anti-Bullionist in Sheep's Clothing 2 00:00:07.960 --> 00:00:13.260 Although the bullionist controversy has been studied at length, historians of economic 3 00:00:13.260 --> 00:00:19.140 thought have had great difficulty identifying and analyzing the various different doctrines 4 00:00:19.140 --> 00:00:26.040 held in the bullionist camp. Generally, they have grouped the bullionists into an extreme 5 00:00:26.040 --> 00:00:33.920 or RIDGID camp, consisting of John Wheatley and David Ricardo to appear later on, and 6 00:00:33.920 --> 00:00:40.320 the others, including Henry Thornton, ranked as more sophisticated moderates. 7 00:00:40.320 --> 00:00:47.440 The issue supposedly centers on Wheatley and Ricardo's extreme devotion to long-run factors, 8 00:00:47.440 --> 00:00:54.920 leading them to deny any role to real factors in determining prices, exchange rates or balances 9 00:00:54.920 --> 00:01:19.600 Professor Joseph T. Salerno has recently made a notable advance by providing a far superior 10 00:01:19.600 --> 00:01:23.840 framework of analysis of the various thinkers. 11 00:01:23.840 --> 00:01:30.520 He notes that Boyd, as we have seen, and Lord King, another leading bullionist, were really 12 00:01:30.520 --> 00:01:36.780 extreme rather than moderate, and that they can be classified as such because they realized 13 00:01:36.780 --> 00:01:44.480 that monetary factors were always predominant, even though real factors could exert temporary 14 00:01:44.480 --> 00:01:45.480 influence. 15 00:01:45.480 --> 00:02:03.480 Thus the extreme bullionist camp now includes, A. Ricardo and Wheatley, who ignore all temporary and real factors, as well as short-term processes, and concentrate exclusively and mechanistically on the long run, 16 00:02:03.480 --> 00:02:12.480 And B. Boyd and later Lord King, who analyze short run processes and real factors, but 17 00:02:12.480 --> 00:02:18.960 realize that long run monetary factors predominate at all times. 18 00:02:18.960 --> 00:02:25.720 Then there are C. Moderate bullionists like Thornton, who are agnostic about whether real 19 00:02:25.720 --> 00:02:30.480 or monetary factors predominate at any given time. 20 00:02:30.480 --> 00:02:37.380 and D. anti-bullionists who ignore all underlying monetary causes. 21 00:02:37.380 --> 00:02:43.480 It is clear that Professor Salerno properly gives the accolade to Group B as having the 22 00:02:43.480 --> 00:02:46.320 correct analysis. 23 00:02:46.320 --> 00:02:52.000 But Salerno, it seems to the present author, does not quite go far enough. 24 00:02:52.000 --> 00:02:58.540 While he sees fully and lucidly the crucial differences between Groups A and B, it is 25 00:02:58.540 --> 00:03:05.240 is still confusing to classify these two as dwelling in the same camp, for it would clarify 26 00:03:05.240 --> 00:03:12.300 matters further if we totally dropped the extreme versus moderate distinction. 27 00:03:12.300 --> 00:03:21.380 Let Group B be termed complete bullionists and Group A, rigid or mechanistic bullionists. 28 00:03:21.380 --> 00:03:28.260 As for Group C, men like Henry Thornton do not really deserve the term bullionist at all. 29 00:03:28.260 --> 00:03:33.140 They are surely moderate, though confused might be a better term. 30 00:03:33.140 --> 00:03:38.900 Mired in their ad hoc approach, they could just as well end up in any given situation 31 00:03:38.900 --> 00:03:42.740 as anti-bullionist rather than bullionist. 32 00:03:42.740 --> 00:03:50.140 And indeed, Henry Thornton began his career of monetary theorist as a moderate anti-bullionist, 33 00:03:50.140 --> 00:03:56.260 which was his position in the course of his famous contribution of 1802. 34 00:03:56.260 --> 00:04:02.700 Later on, as depreciation and inflation continued, Thornton concluded that the preponderance 35 00:04:02.700 --> 00:04:10.300 of forces had moved the other way, and he changed his mind, gaining his undeserved historiographical 36 00:04:10.300 --> 00:04:17.680 reputation as a bullionist by signing the famous Bullion Committee Report of 1811, which 37 00:04:17.680 --> 00:04:21.300 recommended resumption of the gold standard. 38 00:04:21.300 --> 00:04:24.180 But Thornton remained a moderate. 39 00:04:24.180 --> 00:04:31.380 Placing on Thornton's later stance and conflating it with his theoretical work of a decade earlier, 40 00:04:31.380 --> 00:04:37.880 only misled historians into extravagantly overpraising Thornton and into placing him 41 00:04:37.880 --> 00:04:41.900 unequivocally in the bullionist camp. 42 00:04:41.900 --> 00:04:47.660 During the 20th century Thornton revival, it was said that earlier historians were unfair 43 00:04:47.660 --> 00:04:57.180 Here in attributing Henry Thornton's 1760-1815 pro-Bank of England bias to his being a director 44 00:04:57.180 --> 00:04:59.060 of the bank. 45 00:04:59.060 --> 00:05:04.540 It is true that he himself was not a board member of the bank, but his elder brother 46 00:05:04.540 --> 00:05:11.420 Samuel was director and deputy governor of the bank, and his grandfather Robert Thornton, 47 00:05:11.420 --> 00:05:17.720 as well as Robert's brother, Godfrey, was also a director of the Bank of England. 48 00:05:17.720 --> 00:05:22.880 Henry Thornton was a descendant of a long line of prominent merchants. 49 00:05:22.880 --> 00:05:29.280 Great Grandfather John was a merchant in Hull, in what was then Yorkshire, in the late 17th 50 00:05:29.280 --> 00:05:32.120 and early 18th centuries. 51 00:05:32.120 --> 00:05:38.380 John's sons moved to London to become important merchants there, particularly engaged in trade 52 00:05:38.380 --> 00:05:41.280 with Russia and the Baltic. 53 00:05:41.280 --> 00:05:47.440 Murray's father, also named John, continued the line of Russia merchant in London, was 54 00:05:47.440 --> 00:05:53.420 a senior partner in the firm of Thornton Cornwall and Company, and was also a leading member 55 00:05:53.420 --> 00:06:00.940 and financial supporter, beginning around 1750, of the first generation of evangelicals, 56 00:06:00.940 --> 00:06:06.840 low-church Puritan Anglicans under the influence of John Wesley. 57 00:06:06.840 --> 00:06:14.840 and gave enormous sums to charity, especially for the distribution of countless Bibles and prayer books abroad. 58 00:06:14.840 --> 00:06:22.840 Since the Thornton family and several of the other leaders of the movement resided in the wealthy London suburb of Clapham, 59 00:06:22.840 --> 00:06:28.840 they were eventually to become known as the highly influential Clapham Sect. 60 00:06:28.840 --> 00:06:33.840 Henry Thornton received only a sparse education. 61 00:06:33.840 --> 00:06:40.600 In early age he began working in the counting houses of his relatives and then of his father. 62 00:06:40.600 --> 00:06:47.560 Soon in 1784 he left the family firm to become a partner in the banking house of Down, Thornton 63 00:06:47.560 --> 00:06:53.680 and Free, where he remained as an active partner until his death. 64 00:06:53.680 --> 00:06:58.060 Thornton was able to build the small banking house into one of the largest in the city 65 00:06:58.060 --> 00:06:59.680 of London. 66 00:06:59.680 --> 00:07:06.200 In 1788, Thornton joined his father and several other family members as a director of the 67 00:07:06.200 --> 00:07:07.760 Russia Company. 68 00:07:07.760 --> 00:07:14.720 Meanwhile, in 1782, he had been elected a member of parliament and was soon joined by 69 00:07:14.720 --> 00:07:18.200 his brothers Samuel and Robert. 70 00:07:18.200 --> 00:07:23.360 Henry was to remain in parliament, too, for the rest of his life. 71 00:07:23.360 --> 00:07:28.480 Not only was Henry Thornton a distinguished banker, member of parliament, and closely 72 00:07:28.480 --> 00:07:34.480 William Wilberforce III became a member of Parliament at about the time of his death. 73 00:07:34.480 --> 00:07:40.480 He was also a dedicated leader and patron of the Clapham sect, and his home at Clapham 74 00:07:40.480 --> 00:07:46.480 was to serve as a virtual organizing headquarters for the evangelical movement. 75 00:07:46.480 --> 00:07:54.480 One of Henry's closest friends, William Wilberforce III, belonged to a powerful family, long friendly 76 00:07:54.480 --> 00:08:00.520 and Communications. Wilberforce became a member of Parliament at about the same time as Thornton, 77 00:08:00.520 --> 00:08:06.400 and it was characteristic of their earnestness, personal austerity and moral fervour that 78 00:08:06.400 --> 00:08:13.640 they soon came to form an independent Party of the Saints in Parliament. There, Wilberforce 79 00:08:13.640 --> 00:08:19.400 became the leading force in the eventually successful agitation for the abolition of 80 00:08:19.400 --> 00:08:23.440 the slave trade in the British West Indies. 81 00:08:23.440 --> 00:08:30.240 In 1796, Thornton married Marianna Sykes, daughter of another Russian merchant from 82 00:08:30.240 --> 00:08:34.300 Hull and also a lifelong family friend. 83 00:08:34.300 --> 00:08:37.040 The couple had nine children. 84 00:08:37.040 --> 00:08:42.580 Most of Thornton's intellectual energies were expended on evangelical religion. 85 00:08:42.580 --> 00:08:48.100 Though considered a distinguished expert on banking and finance, he wrote only his famous 86 00:08:48.100 --> 00:08:56.180 This work of 1802 on paper credit and participated in writing the Bullion Committee Report. 87 00:08:56.180 --> 00:09:02.600 The remainder of his voluminous writings were devoted to family prayers, family commentaries 88 00:09:02.600 --> 00:09:09.380 on the Bible, and scores of articles on politics, literature and religion for the Clapham Sect 89 00:09:09.380 --> 00:09:14.680 journal which he helped to found, The Christian Observer. 90 00:09:14.680 --> 00:09:20.280 After Thornton's death in 1815, his place as senior partner in the bank was taken by 91 00:09:20.280 --> 00:09:22.280 Sir Peter Pole. 92 00:09:22.280 --> 00:09:27.800 The bank prospered greatly for a while, but soon it turned out to be under-capitalized 93 00:09:27.800 --> 00:09:36.800 and over-expanded, and in 1825 it, along with lesser country banks, was plunged into crisis. 94 00:09:36.800 --> 00:09:44.360 It soon failed, despite a friendly £300,000 emergency loan from the Bank of England. 95 00:09:44.360 --> 00:09:49.640 Ironically, in view of Thornton's monetary views, there is some evidence that the two 96 00:09:49.640 --> 00:09:56.600 men most responsible for the mismanagement were Sir Peter Pohl and Henry Thornton. 97 00:09:56.600 --> 00:10:02.560 In particular, Thornton appears to have led the way in lax practices to induce Yorkshire 98 00:10:02.560 --> 00:10:08.200 country banks to keep their deposits in his London bank. 99 00:10:08.200 --> 00:10:10.920 Bank failure was no stranger to Thornton. 100 00:10:10.920 --> 00:10:17.840 Indeed, it was the temporary failure of his bank in the crisis of 1793 that turned his 101 00:10:17.840 --> 00:10:23.200 thoughts to problems of banking and led him to conclude that it was necessary for the 102 00:10:23.200 --> 00:10:30.300 Bank of England to play a supporting expansionist role in monetary affairs. 103 00:10:30.300 --> 00:10:36.000 As the banking theorist Thomas Joplin was to put it in his Analysis and History of the 104 00:10:36.000 --> 00:10:45.440 Currency Question, 1832, on the Financial Crises of 1793, Mr. Thornton, being a banker, 105 00:10:45.440 --> 00:10:51.120 a partner, it is curious to remark, of the House that failed on this occasion, had his 106 00:10:51.120 --> 00:10:57.160 attention particularly called to this subject, and a very considerable portion of his work 107 00:10:57.160 --> 00:11:03.640 on public credit is devoted to show that in a period of panic, the bank ought to lean 108 00:11:03.640 --> 00:11:09.680 to the side of enlarging than contracting its issues. 109 00:11:09.680 --> 00:11:16.580 When the restriction came in early 1797, Henry Thornton was honored by being the only London 110 00:11:16.580 --> 00:11:23.080 banker asked to give testimony before the committees of the Houses of Lords and of Commons 111 00:11:23.080 --> 00:11:27.480 investigating the suspension of specie payment. 112 00:11:27.480 --> 00:11:32.680 Thornton's influence was magnified by the lifelong friendship of Wilberforce and Prime 113 00:11:32.680 --> 00:11:38.800 Minister William Pitt, and Pitt's brother-in-law was the first tenant of one of the houses 114 00:11:38.800 --> 00:11:41.280 on Thornton's estate. 115 00:11:41.280 --> 00:11:46.440 The results of his pondering are scarcely surprising for someone of Thornton's status 116 00:11:46.440 --> 00:11:48.400 and background. 117 00:11:48.400 --> 00:11:54.880 Taking an inflationist and establishment line, Thornton opined that in times of crisis, paper 118 00:11:54.880 --> 00:12:02.060 money could not be limited or suppressed, since that would constitute a shock to commerce. 119 00:12:02.060 --> 00:12:08.700 On the contrary, the Bank of England must suspend specie payment in order to avoid the spectre 120 00:12:08.700 --> 00:12:13.460 of monetary contraction and general business failure. 121 00:12:13.460 --> 00:12:19.740 Indeed, Thornton undoubtedly gladdened the hearts of the bank by criticizing it for not 122 00:12:19.740 --> 00:12:23.540 being expansionist enough. 123 00:12:23.540 --> 00:12:28.680 Thornton's testimony won him the accolade of being the foremost authority on monetary 124 00:12:28.680 --> 00:12:35.340 Affairs and he was appointed to several parliamentary committees on money, expenditures and foreign 125 00:12:35.340 --> 00:12:42.340 exchange. Thornton indeed became one of the leading parliamentary defenders of the restriction 126 00:12:42.340 --> 00:12:49.340 and of expanded paper credit. We can easily imagine Henry Thornton's sentiments toward 127 00:12:49.340 --> 00:12:56.020 Walter Boyd's letter to Pitt when that tract hit the world of English opinion like a thunderbolt 128 00:12:56.020 --> 00:13:00.400 at the turn of 1800 to 1801. 129 00:13:00.400 --> 00:13:06.760 Here was this well-connected fellow banker, but an unsound adventurer, this rogue whom 130 00:13:06.760 --> 00:13:13.460 his own brother had brought to ruin by persuading the Bank of England to cut off his credit. 131 00:13:13.460 --> 00:13:20.320 And now, only months after this man had met his deserved fate, here was Boyd again, trying 132 00:13:20.320 --> 00:13:27.280 Trying to gain revenge by discrediting the noble banking and credit system of England. 133 00:13:27.280 --> 00:13:33.280 Thornton was stung to try to refute the dangerous Boyd, and it was in the service of this goal 134 00:13:33.280 --> 00:13:40.280 that he published his Inquiry into the Nature and Effects of the Paper Credit of Great Britain 135 00:13:40.280 --> 00:13:46.880 a year after Boyd's tract in February or March of 1802. 136 00:13:46.880 --> 00:13:52.960 At first, Thornton hit out at Boyd in Parliament in December 1800. 137 00:13:52.960 --> 00:13:59.360 As in his book, his words exerted all the more impact for the eminence of their author, 138 00:13:59.360 --> 00:14:03.620 combined with their seeming judiciousness and moderation. 139 00:14:03.620 --> 00:14:09.320 For there are always a host of people who will hold firmly that the more qualified and 140 00:14:09.320 --> 00:14:15.880 tentative the judgment, the more well balanced and sound it must therefore be. 141 00:14:15.880 --> 00:14:23.760 The mushiness of mind, especially in an eminent man, is all too often mistaken for wisdom. 142 00:14:23.760 --> 00:14:29.800 In this early phase of the bullionist debate, Thorntonian mushiness tended inexorably in 143 00:14:29.800 --> 00:14:31.720 the wrong direction. 144 00:14:31.720 --> 00:14:39.040 The depreciation of the pound in foreign exchange was caused, he opined in his speech in parliament, 145 00:14:39.040 --> 00:14:45.800 not by the increase of paper money, but by the unfavorable balance of trade, and specifically 146 00:14:45.800 --> 00:14:53.920 by the heavy imports of provisions. Typical of the anti-bullionist view, imports and exports 147 00:14:53.920 --> 00:15:00.960 were assumed to have ad hoc lives of their own and not to be determined by relative prices 148 00:15:00.960 --> 00:15:07.480 or by the supply and demand for money. But Thornton's anti-bullionism was nothing if 149 00:15:07.480 --> 00:15:14.720 not moderate, that is, he conceded the theoretical possibility that increased money supply could 150 00:15:14.720 --> 00:15:18.080 would bring about higher prices. 151 00:15:18.080 --> 00:15:23.520 As to the assertion that the increased issue of bank paper was the cause of the dearness 152 00:15:23.520 --> 00:15:30.560 of provisions, he, Thornton, would not deny that it might have some foundation, but he 153 00:15:30.560 --> 00:15:38.320 would contend that its effect was far from being as great as was being alleged. 154 00:15:38.320 --> 00:15:43.760 Henry Thornton's book on paper credit was a considerable expansion of his parliamentary 155 00:15:43.760 --> 00:15:49.680 speeches, and it was paper credit that took its place as not only the leading work on 156 00:15:49.680 --> 00:15:57.080 behalf of anti-bullionism, but also the most influential on either side of the debate. 157 00:15:57.080 --> 00:16:04.120 The timing was right, since the restriction was in particular need of defense in 1802. 158 00:16:04.120 --> 00:16:10.140 A peace with France was signed in March, and yet the British government persisted in extending 159 00:16:10.140 --> 00:16:13.100 the restriction another year. 160 00:16:13.100 --> 00:16:19.140 Soon after that year was up, war with France broke out again, but in the meantime the seeming 161 00:16:19.140 --> 00:16:25.240 end of the wartime emergency had taken away the apparent reason for the suspension of 162 00:16:25.240 --> 00:16:27.560 specie payments. 163 00:16:27.560 --> 00:16:34.560 Other anti-bullionist tracts appearing in 1802 were scarcely rivals for Thornton, ranging 164 00:16:34.560 --> 00:16:40.360 from Jasper Atkinson's anonymous pamphlet, Consideration on the Propriety of the Bank 165 00:16:40.360 --> 00:16:47.520 of England Resuming its Payments in Specie, denying that inflation had taken place, to 166 00:16:47.520 --> 00:16:54.040 another anonymous tract applying Adam Smith's erroneous theory of an automatic limit to 167 00:16:54.040 --> 00:17:01.360 to Excess Bank Credit to a situation Smith would never have applied it to, fiat money, 168 00:17:01.360 --> 00:17:05.560 the utility of country banks considered. 169 00:17:05.560 --> 00:17:12.460 Thornton disarmed many of his critics by conceding the theoretical possibility that excess issues 170 00:17:12.460 --> 00:17:19.880 of paper money can cause price increases, outflow of gold, higher prices of gold bullion 171 00:17:19.880 --> 00:17:26.960 and Depreciation of the Pound, but maintaining that the situation did not now apply, and 172 00:17:26.960 --> 00:17:33.480 that the problems of the day were due to such particular real factors as unusual demand 173 00:17:33.480 --> 00:17:41.600 for gold and for the importation of food and unusual blockages to exports. 174 00:17:41.600 --> 00:17:47.120 Thornton cleverly loaded the dice by spending the bulk of the book on the alleged horrors 175 00:17:47.120 --> 00:17:53.120 of Monetary Deflation and the Contraction of Bank Credit. 176 00:17:53.120 --> 00:17:58.040 Deflation would lead to trade depression, unemployment and bankruptcies. 177 00:17:58.040 --> 00:18:04.880 Furthermore, he claimed, deflation would not even accomplish an export surplus or an inflow 178 00:18:04.880 --> 00:18:12.560 of gold, since it would so exceedingly distress trade and discourage manufacturers as to impair 179 00:18:12.560 --> 00:18:18.560 are those sources of returning wealth to which we must chiefly trust for the restoration 180 00:18:18.560 --> 00:18:21.120 of our balance. 181 00:18:21.120 --> 00:18:27.260 Thornton neglected to realize that if times were really that bad, Englishmen would scarcely 182 00:18:27.260 --> 00:18:32.000 earn enough income to sustain a heavy excess of imports. 183 00:18:32.000 --> 00:18:39.200 As in all modern agitation against deflation, he also failed to realize that deflation only 184 00:18:39.200 --> 00:18:45.960 Money causes losses and bankruptcies if it is unexpected, revealing an excessive bidding 185 00:18:45.960 --> 00:18:52.860 up of wage rates and other business costs. Deflation, in addition to having the healthy 186 00:18:52.860 --> 00:18:59.800 impact of purging unsound investments and unsound banks from the economy, would have 187 00:18:59.800 --> 00:19:07.680 strictly limited and temporary effect. First, because while inflation is technically unlimited 188 00:19:07.680 --> 00:19:15.480 until the value of the currency is totally destroyed, deflation must necessarily be limited 189 00:19:15.480 --> 00:19:22.480 to the amount of bank expansion over specie, and second, deflation will cease having a 190 00:19:22.480 --> 00:19:30.500 depressionary effect as soon as excessive costs are brought down to pre-inflated levels. 191 00:19:30.500 --> 00:19:35.840 In fact, Thornton acknowledged that the fall in price and the depression brought about 192 00:19:35.840 --> 00:19:43.680 by Monetary Deflation would be unusual and temporary, but he anticipated Keynes in focusing 193 00:19:43.680 --> 00:19:47.200 on allegedly sticky wage rates. 194 00:19:47.200 --> 00:19:54.200 For a fall of prices arising from temporary distress will be attended probably with no 195 00:19:54.200 --> 00:19:57.920 correspondent fall in the rate of wages. 196 00:19:57.920 --> 00:20:04.120 For the fall of price and the distress will be understood to be temporary, and the rate 197 00:20:04.120 --> 00:20:11.320 of Wages we know is not so variable as the price of goods. There is reason, therefore, 198 00:20:11.320 --> 00:20:17.860 to fear that the unnatural and extraordinarily low price arising from the sort of distress 199 00:20:17.860 --> 00:20:25.840 of which we now speak would occasion much discouragement of the fabrication of manufacturers. 200 00:20:25.840 --> 00:20:32.460 There are two problems here. First, while the economic distress due to faulty forecasting 201 00:20:32.460 --> 00:20:39.100 Dealing and excess bidding up of wage rates and other costs will indeed be temporary. 202 00:20:39.100 --> 00:20:44.300 There is no reason why the fall in prices should not be permanent. 203 00:20:44.300 --> 00:20:50.460 Prices had previously been artificially raised by monetary and credit expansion. 204 00:20:50.460 --> 00:20:57.100 Their decline simply reflects the contraction of credit down to more realistic levels. 205 00:20:57.100 --> 00:21:03.380 The knowledge that the decline is permanent should greatly speed up the adjustment mechanism. 206 00:21:03.380 --> 00:21:09.420 Second, if workers persist in keeping their wage demands higher than the market, they 207 00:21:09.420 --> 00:21:13.740 have only themselves to blame for their unemployment. 208 00:21:13.740 --> 00:21:20.340 Keeping any price, including a wage rate higher than market equilibrium, will always lead 209 00:21:20.340 --> 00:21:24.560 to an unsold surplus of the good or service. 210 00:21:24.560 --> 00:21:30.440 In the case of labor, unsold labor time or unemployment. 211 00:21:30.440 --> 00:21:36.540 If laborers wish to change their unemployed status, they need only lower their wage demands 212 00:21:36.540 --> 00:21:40.920 to clear the market and allow themselves to be hired. 213 00:21:40.920 --> 00:21:47.880 We should also recognize that in this situation, with prices falling and wage rates constant, 214 00:21:47.880 --> 00:21:55.200 Workers are thereby insisting on higher real wage rates than they had enjoyed before. 215 00:21:55.200 --> 00:22:01.640 Why should workers holding out for higher real wage rates be able to induce an inflationist 216 00:22:01.640 --> 00:22:05.080 policy in the central government? 217 00:22:05.080 --> 00:22:11.560 So worried about deflation was Thornton that he actually urged the Bank of England to neutralize 218 00:22:11.560 --> 00:22:17.920 and his outflows of gold so as to obstruct the price-specie flow mechanism from bringing 219 00:22:17.920 --> 00:22:21.280 about equilibrium in the balance of payments. 220 00:22:21.280 --> 00:22:28.840 Instead, he would have the bank inflate banknotes to replace gold outflows and then hope that 221 00:22:28.840 --> 00:22:36.720 his vague long-run real principles of economy and exertion of expenditure and income would 222 00:22:36.720 --> 00:22:42.040 and eventually work to equilibrate imports and exports. 223 00:22:42.040 --> 00:22:48.040 Thus Thornton writes that, it may be true policy and duty of the bank to permit for 224 00:22:48.040 --> 00:22:54.920 a time and to a certain extent the continuance of that unfavorable exchange which causes 225 00:22:54.920 --> 00:23:01.760 gold to leave the country and to be drawn out of its own coffers, and it must in that 226 00:23:01.760 --> 00:23:09.400 case necessarily increase its loans to the same extent to which its gold is diminished. 227 00:23:09.400 --> 00:23:16.540 Thornton's work has been excessively hailed by von Hayek and other historians as being 228 00:23:16.540 --> 00:23:23.300 theoretically excellent if unfortunate in its political anti-bullionist conclusions. 229 00:23:23.300 --> 00:23:29.840 But his theoretical weakness did not only consist of his excessive horror of deflation 230 00:23:29.840 --> 00:23:36.480 and his stress on the alleged empirical dominance of real factors in his analysis of inflation 231 00:23:36.480 --> 00:23:38.800 and depreciation. 232 00:23:38.800 --> 00:23:45.760 For this stress itself reflected a grave if subtle theoretical flaw in Thornton's entire 233 00:23:45.760 --> 00:23:50.200 monetary and balance of payments analysis. 234 00:23:50.200 --> 00:23:57.520 His entire analysis lingered disproportionately on the real and short-term factors to the almost 235 00:23:57.520 --> 00:24:04.400 is the most complete neglect of the tendency of the economy towards long-run equilibrium. 236 00:24:04.400 --> 00:24:10.580 And even Thornton's perfunctory discussion of long-run equilibrium is divorced from short-run 237 00:24:10.580 --> 00:24:15.560 processes and also from its monetary nature. 238 00:24:15.560 --> 00:24:21.520 It goes without saying that Thornton therefore also neglects the monetary supply and demand 239 00:24:21.520 --> 00:24:27.040 nature of the short-run processes leading towards that equilibrium. 240 00:24:27.040 --> 00:24:34.040 Thus, Professor Salerno, who has given us a notable critique of Thornton, writes, 241 00:24:51.520 --> 00:25:20.520 This is in sharp contrast to the extreme bullionists and their 18th century forebears, who invariably began their analyses of balance of payments phenomena with a discussion of the nature and necessity of international monetary equilibrium, and then explained the tendency to balance of payments equilibrium as a logical implication of the necessary tendency to an equilibrium dividend. 242 00:25:21.520 --> 00:25:28.600 and distribution of the world stock of money. Indeed, the entire structure and organization 243 00:25:28.600 --> 00:25:35.200 of the book tilted Thornton heavily towards short-term real factors and away from any 244 00:25:35.200 --> 00:25:41.720 monetary approach towards analyzing inflation or the balance of payments. 245 00:25:41.720 --> 00:25:48.440 To sum up, the correct analysis of complete bullionism, such as presented by Boyd and 246 00:25:48.440 --> 00:26:00.440 by Lord King, stresses monetary factors leading to monetary equilibrium, while showing that real factors can only have temporary effects. 247 00:26:00.440 --> 00:26:15.440 The analysis of real factors is integrated with, and at all times subordinated to, the monetary factors, and short-run and long-run monetary processes are integrated as well. 248 00:26:15.440 --> 00:26:23.040 In Thornton's moderate anti-bullionist position, often miscalled moderate-bullionist, however, 249 00:26:23.040 --> 00:26:30.140 both real and monetary causal factors and processes are presented as separate and independent 250 00:26:30.140 --> 00:26:36.520 of each other, with real factors presented as empirically more important. 251 00:26:36.520 --> 00:26:43.480 Short-run factors are similarly stressed, to the neglect of long-run forces. 252 00:26:43.480 --> 00:26:49.800 Henry Thornton has been extravagantly praised by Schumpeter and other historians for adding 253 00:26:49.800 --> 00:26:56.960 velocity of circulation to the quantity of money as a determinant of overall prices. 254 00:26:56.960 --> 00:27:02.360 But in the first place, we have seen that ever since the scholastics, the demand for 255 00:27:02.360 --> 00:27:09.640 money, the inverse of the velocity, had always been integrated with the supply of money in 256 00:27:09.640 --> 00:27:13.840 Thornton analyzing the determination of general prices. 257 00:27:13.840 --> 00:27:20.480 It is true that Thornton analyzed the different influences on, and different variabilities 258 00:27:20.480 --> 00:27:25.880 of, velocity in considerable and pioneering detail. 259 00:27:25.880 --> 00:27:32.560 For example, frequency of payments, development of clearing systems, confidence in the money, 260 00:27:32.560 --> 00:27:37.120 and variations of the same stock of money over time. 261 00:27:37.120 --> 00:27:44.240 But unfortunately Thornton ruined this contribution by not realizing that velocity of circulation 262 00:27:44.240 --> 00:27:51.680 is simply the inverse of the demand for money, and by treating the velocity as somehow different 263 00:27:51.680 --> 00:28:00.880 and independent of demand in helping determine the money relation of supply, demand and price. 264 00:28:00.880 --> 00:28:06.240 Thornton has been lauded by von Hayek and others for including bank deposits as well 265 00:28:06.240 --> 00:28:09.680 as well as bank notes in the supply of money. 266 00:28:09.680 --> 00:28:10.920 True enough. 267 00:28:10.920 --> 00:28:16.660 But as we have seen, Walter Boyd preceded him in this insight by a year. 268 00:28:16.660 --> 00:28:22.960 But not only that, Boyd also demonstrated that bills of exchange and treasury bills 269 00:28:22.960 --> 00:28:29.960 are decidedly not part of the money supply, that they are objects of circulation rather 270 00:28:29.960 --> 00:28:32.360 than the circulator. 271 00:28:32.360 --> 00:28:39.400 But Thornton restored the older error of lumping bills of exchange in with notes and deposits 272 00:28:39.400 --> 00:28:43.000 as part of the supply of money. 273 00:28:43.000 --> 00:28:49.880 Henry Thornton did make some important contributions in the last two chapters of paper credit, 274 00:28:49.880 --> 00:28:56.040 particularly in the long-deferred paper money as cause of inflation sections that rested 275 00:28:56.040 --> 00:29:01.500 uneasily with the separate and contrary earlier chapters. 276 00:29:01.500 --> 00:29:07.640 Most of the anti-bullionist writers applied Adam Smith's dictum that bank credit cannot 277 00:29:07.640 --> 00:29:14.980 inflate the currency if confined to short-term, self-liquidating, real bills. 278 00:29:14.980 --> 00:29:21.900 The difference is that Smith had applied it only to a specie standard, whereas the anti-bullionists 279 00:29:21.900 --> 00:29:25.700 extended it to a fiat money system. 280 00:29:25.700 --> 00:29:31.460 Thornton replied that this criterion will not work since an increased quantity of bank 281 00:29:31.460 --> 00:29:39.100 notes will also indefinitely inflate the monetary value of the real bills, so that the Smith 282 00:29:39.100 --> 00:29:46.780 anti-bullionist limit is an indefinitely elastic one that will in practice only provide an 283 00:29:46.780 --> 00:29:50.780 open channel for bank credit inflation. 284 00:29:50.780 --> 00:29:57.240 Thornton further pointed out that the current usury law in Britain of 5% will aggravate 285 00:29:57.240 --> 00:30:03.080 the problem, for the free market interest rate or profit rate will rise higher than 286 00:30:03.080 --> 00:30:10.640 that in wartime or in any boom situation. Consequently, the artificial holding down 287 00:30:10.640 --> 00:30:17.560 of the bank loan rate below the profit rate will stimulate an excessive borrowing, artificially 288 00:30:17.560 --> 00:30:24.900 high levels of investment and a continuing monetary and price inflation. Thus, holding 289 00:30:24.900 --> 00:30:30.180 Setting the bank rate of interest below the profit rate stimulates an increase in the 290 00:30:30.180 --> 00:30:36.580 demand for borrowing and the continuing increase in the supply of money allows that demand 291 00:30:36.580 --> 00:30:39.220 to be fulfilled. 292 00:30:39.220 --> 00:30:44.800 In setting forth the inflationary consequences of artificially lowering the rate of interest 293 00:30:44.800 --> 00:30:50.580 on bank loans, Henry Thornton anticipated the later Austrian theory of the business 294 00:30:50.580 --> 00:30:58.060 Cycle, set forth by Ludwig von Mises and F. A. von Hayek, and in turn, based on the analysis 295 00:30:58.060 --> 00:31:05.020 of the Swedish-Austrian economist, Newt Wichsel, at the end of the 19th century. 296 00:31:05.020 --> 00:31:12.020 Thornton also hinted at the Austrian analysis of forced saving, pointing out that if excessive 297 00:31:12.020 --> 00:31:18.540 issues of paper money raise prices of goods more rapidly than wage rates, there will be 298 00:31:18.540 --> 00:31:24.860 be some increase of capital investment, but that this increase will be at the expense of 299 00:31:24.860 --> 00:31:30.580 the laboring classes and will therefore be attended with a proportionate hardship and 300 00:31:30.580 --> 00:31:31.580 injustice. 301 00:31:31.580 --> 00:31:38.260 Unfortunately, Thornton did not press on to the Austrian business cycle point, that since 302 00:31:38.260 --> 00:31:44.700 the public's time and saving preferences are not sufficient to sustain these forced 303 00:31:44.700 --> 00:31:51.140 Investments, a recession is bound to liquidate those investments when the artificial credit 304 00:31:51.140 --> 00:31:59.180 expansion stops and the true savings consumption preferences of the public are thereby revealed. 305 00:31:59.180 --> 00:32:04.520 It is very possible that despite the author's prominence in the world of banking, paper 306 00:32:04.520 --> 00:32:08.620 credit might have sunk quickly into obscurity. 307 00:32:08.620 --> 00:32:16.200 It was very long, several hundred pages, badly written and organized, unsystematic, muddled, 308 00:32:16.200 --> 00:32:20.820 and what its greatest admirers have called pro-licks. 309 00:32:20.820 --> 00:32:26.740 Even von Hayek, Thornton's biggest modern booster, concedes that his exposition lacks 310 00:32:26.740 --> 00:32:31.180 system and, in places, is even obscure. 311 00:32:31.180 --> 00:32:37.020 Even his greatest disciple and popularizer, Francis Horner, admitted that Thornton had 312 00:32:37.020 --> 00:32:43.460 little management in the disposition of his materials, that he frequently was much embarrassed 313 00:32:43.460 --> 00:32:49.700 in the explanation of arguments, that his reasonings are not to be trusted and are sometimes 314 00:32:49.700 --> 00:32:57.040 defective, that he was not trained in theorizing, that his style was poor and that the various 315 00:32:57.040 --> 00:33:02.940 discussions are so unskillfully arranged that they throw no light on each other and 316 00:33:02.940 --> 00:33:07.060 And we can never seize a full view of the plan. 317 00:33:07.060 --> 00:33:13.700 In short, the prolixity and the obscurity of the work oppress the reader. 318 00:33:13.700 --> 00:33:19.940 And yet, ironically, it was this very Francis Horner who rescued paper credit from these 319 00:33:19.940 --> 00:33:24.000 grave defects and put the work on the map. 320 00:33:24.000 --> 00:33:29.740 The form Horner used was a great stroke of luck for granting Thornton's work its maximum 321 00:33:29.740 --> 00:33:31.360 impact. 322 00:33:31.360 --> 00:33:36.520 We have noted in an earlier chapter on the influence of the Smithian Movement, Chapter 323 00:33:36.520 --> 00:33:42.880 17, Volume 1, that Francis Horner was one of a scintillating group of young Scotsmen 324 00:33:42.880 --> 00:33:48.920 who studied under Dugald Stewart at the turn of the 19th century and went on to conquer 325 00:33:48.920 --> 00:33:53.480 the British intellectual climate for Smithian doctrine. 326 00:33:53.480 --> 00:34:00.280 It was in 1802 that these young pupils of Stewart founded the Edinburgh Review, which 327 00:34:00.280 --> 00:34:05.960 which struck the British intellectual world with enormous impact and quickly vaulted to 328 00:34:05.960 --> 00:34:09.520 the status of one of the leading journals. 329 00:34:09.520 --> 00:34:16.680 And it was precisely in the first October 1802 issue of the Edinburgh Review that Francis 330 00:34:16.680 --> 00:34:22.860 Horner wrote his famous review essay of Thornton's paper credit. 331 00:34:22.860 --> 00:34:29.800 In this 30-page tour de force, Horner systematized Thornton's work, made as much sense of it 332 00:34:29.800 --> 00:34:36.160 as was possible and, as von Hayek admits, gave an exposition of the main argument of 333 00:34:36.160 --> 00:34:42.080 the book in a form which was considerably more systematic and coherent than the original 334 00:34:42.080 --> 00:34:43.920 version. 335 00:34:43.920 --> 00:34:49.940 Horner beat the drums for paper credit, trumpeted it as the most valuable unquestionably of 336 00:34:49.940 --> 00:34:56.420 all the publications which the momentous event of the bank restriction had produced. 337 00:34:56.420 --> 00:35:02.620 The great fame and influence of paper credit was unquestionably Thornton mediated through 338 00:35:02.620 --> 00:35:04.500 Francis Horner. 339 00:35:04.500 --> 00:35:10.060 It was also important to realize that Horner, though chairman of the later Bullion Committee 340 00:35:10.060 --> 00:35:17.300 of 1810 and 1811, which recommended resumption of the gold standard, agreed with Thornton 341 00:35:17.300 --> 00:35:23.380 in his anti-bullionist stance of 1802. 342 00:35:23.380 --> 00:35:29.780 While Horner hailed Thornton's work as decisive, he paved the way for his and Thornton's later 343 00:35:29.780 --> 00:35:36.580 change of mind politically by writing that he was not sure which factors, the monetary 344 00:35:36.580 --> 00:35:43.540 or the real, had been more decisive in the inflation and the depreciation of the pound. 345 00:35:43.540 --> 00:35:50.140 He expressed his fundamental theoretical confusion, along with Thornton's, by declaring himself 346 00:35:50.140 --> 00:35:57.540 Agnostic on the Causal Issue, the matter to be decided later by more empirical data. 347 00:35:57.540 --> 00:36:04.220 In short, while Thornton, in his paper credit, carved out the new moderate anti-bullionist 348 00:36:04.220 --> 00:36:11.260 position, his follower, Horner, was what might be called a moderate-moderate, squarely in 349 00:36:11.260 --> 00:36:13.680 the middle of the issue. 350 00:36:13.680 --> 00:36:19.960 We might also note that Horner took his stand squarely with Thornton against Boyd on the 351 00:36:19.960 --> 00:36:23.440 The issue of defining the money supply. 352 00:36:23.440 --> 00:36:30.880 Rejecting Boyd's lucid circulator versus objects of circulation, Horner perpetuated Thornton's 353 00:36:30.880 --> 00:36:37.520 unfortunate and fuzzy view that there is no definite boundary between commodities and means 354 00:36:37.520 --> 00:36:43.600 of Exchange, so that everything is a mishmash of degrees of convertibility.