5. The Crisis of 1839 and the Escalation of the Currency School Controversy
A mild boom in 1837 and 1838 was followed by another economic crisis towards the end
of 1838 and during 1839. Bankruptcies and bank runs ensued and the Bank of England's
Mises' gold reserve fell from £9.8 million in December 1838 to an extremely low £2.4
million by September 1839.
Not only that, but in the teeth of shrinking reserves, the bank, instead of following anything
like its own Palmer rule, let alone the more rigorous currency principle, expanded credit
still further, thus precipitating an even greater drain of gold from the bank.
By July and August 1839, the Chancellor of the Exchequer was beginning to contemplate
another restriction, another suspension of specie payment on behalf of the bank.
The bank was saved only by massive credits from the Bank of France and from Hamburg.
Clearly the banking situation was becoming intolerable and something had to be done.
Parliament appointed a select committee on banks of issue in 1840 and again in 1841 and
massive hearings were held on the question.
Disputes in parliamentary testimony and pamphlet controversy were redoubled and were made more
urgent by Horsley Palmer's concession that the bank was finding it almost impossible
to adhere to his rule.
Several other groups now arose to challenge the growing currency school consensus.
The free banking adherents took a lead from the currency school in lashing out at the
Bank of England's responsibility for inflation and for the business cycle.
But the force of their opposition to the bank was vitiated by their uniform apologia for
the country and joint stock banks.
While it is true that those banks were largely governed by the actions of the bank, it was
egregious for them to claim that the private banks were totally passive and blameless in
the entire process.
The Free Banking School was particularly discredited by the fact that virtually all of its spokesmen
with the exception of Sir Henry Parnell, who died in 1842 in the middle of the controversy,
were themselves joint stock or country bankers, so that the special pleading in their stance
was all too evident.
If this group had confined their advocacy of free banking to the largely political point
that the bank would inevitably be more inflationary and dangerous than competitive banking, they
would have been far more persuasive, but such restraint is not the usual practice of special
pleaders.
The only distinguished economist to take up the free banking cause was Samuel Bailey,
the subjective value theorist.
But Bailey had founded and was now chairman of the Sheffield Banking Company, and his
fervent apologia was all too suspect.
Bailey indeed was one of the worst offenders in insisting on the passivity of the country
and joint-stock banks, and in attacking the very idea that there is something wrong with
worrying about changes in the quantity of the money supply.
By assuring his readers that competitive banking would always provide nice adjustment of the
currency to the wants of the people, Bailey overlooked the fundamental Ricardian truth
that there is never any social value to increasing the money supply once the commodity is established,
and that inflationary increases in bank credit take place as a process of fraudulent issue
of fake warehouse receipts to standard money.
Another school of thought arising in this period was the banking school, at this early
Point Consisting Solely of One Prominent Man, Thomas Took.
Took, 1774-1858, was by now an elderly merchant in the Russian trade, who, born the son of
a chaplain, had started working in St. Petersburg at the age of 15 and had become a partner
in a mercantile firm in London.
Being interested in economic matters, Took had been one of the founders of the Political
Economy Club and continued to attend meetings of the club until his death.
In the bullion controversy, Took was a staunch bullionist and he strongly supported the resumption
of specie payments in 1819.
At best, however, Took was a confused and inchoate thinker and whatever theoretical acumen
Inductive play with his statistics was able to convince Took, for example, as early as
was his 1838 volumes, first, that high and rising prices during the Napoleonic periods
were solely due to bad harvests, lowering the supply of farm products, as well as obstructions
of foreign trade, while second, falling prices after the war were caused by better harvests
and the resumption of trade.
Having concluded that, Tooke was able to press on in his third volume of The History of Prices
in 1840, and in his parliamentary testimony the same year, to launch the banking school
with the absurd proposition, to quote from a crystal clear formulation of Tooke four
years later, that, the prices of commodities do not depend upon the quantity of money indicated
by the amount of banknotes, nor upon the amount of the whole of the circulating medium.
But that, on the contrary, the amount of the circulating medium is the consequence of prices.
To be fair to Took and his banking school colleagues, they did not mean, or profess
to mean, to apply this old fallacy to inconvertible currency, as their anti-bullionist forebears
had done, but only to convertible currency.
But this did not make their analysis or conclusion one whit less absurd.
The masterful critique by Torrens deserves to be quoted at some length.
Torrens first points out that Took has the deserved reputation, which even he himself
cannot destroy, of having shown by an extensive induction from existing and from historical
The Theory of Money and Credit
Trusts. Like Adam Smith, the banking school was blithely assuming that the adjustments
and restraints of redeemability were instantaneous, and therefore that no problems would be created
in the actual processes of the real world. A particular Rapier thrust against Took by
Torrens four years later cannot be resisted. Throughout interminable pages of inconsistent
Affirmation in the Multi-Volume History of Prices, he reiterates the inference that the
value of commodities has fluctuated in relation to money, and that therefore the value of
money has not fluctuated in relation to commodities.
The corollary proposition of the banking school, taken from the anti-bullionists and now brought
again to the fore by Took, is that the Bank of England cannot increase the supply of money.
As Took put it starkly, the Bank of England has not the power to add to the circulation.
Even applying this claim only to convertible currency, as the banking school did, it is
difficult to hold such a manifest absurdity at length.
In practice, therefore, Took and the other banking school adherents usually modified
this blunt statement to apply only to banknotes issued in loans to private borrowers and not
to purchases of government securities.
To the question, what's the difference?
The main contribution to Took's doctrine was made in 1844 by John Fullerton, namely,
Bank notes issued in purchase of government securities are paid away and remain permanently
in circulation, thus adding to the quantity of money, whereas bank notes are only lent
and are returnable to the issuers, and presumably therefore do not add to the money supply.
This was what Fullerton dubbed the principle of reflux, of notes returning to the banks.
Once again, the incisive refutation came from Colonel Torrens, who pointed out that to carry
any weight, the vaunted principle of reflux requires instantaneous repayment of all loans.
Allow any interval to elapse between the loan and the repayment, and no regularity of reflux
can prevent redundancy from being increased to any conceivable extent.
The same, as well as many other strictures, apply to a variant of Fullerton's and others
in the banking school, which, again, stemming from the anti-bullionists, held that banks
can never over-issue notes, provided that their notes are only issued in the course
of making short-term, self-liquidating loans matched by inventories of goods in process,
and the so-called Real Bills Doctrine.
Torren's role in the currency versus banking controversy has a fascinating reverse symmetry
with the path taken by Took.
Whereas Torrens began as an anti-bullionist and apologist for the Bank of England and
now ended as a currency schoolman and opponent of bank credit inflation, Took began as a
is a solid bullionist, yet ended his days as a pro-bank anti-bullionist.
Among the various grave inconsistencies in the banking school approach, one particularly
stands out.
If it is true that banks can do no wrong, at least in a convertible currency, that they
cannot over-issue notes or over-expand credit, and that even if they did, it could have no
no effect in raising prices or causing a business cycle, then why not adopt free banking?
Why have a privileged monopoly like the Bank of England?
Yet the banking school remained a determined enemy of free banking and devoted apologists
for the bank.
Thomas Tooke's most famous dictum was the striking, free trade in banking is synonymous
with free trade in swindling.
Fair enough, but if we analyze this pronouncement logically and we find that banking is synonymous
with swindling, then what is the rationale for placing the power of state privilege behind
a monopoly swindler?
Even if banking is swindling, isn't competitive swindling better than a state-privileged and
dominant monopoly swindler?
and yet took fiercely fought to preserve the bank and its exclusive privileges in London
and environs.
His only proposed reform was to induce the bank to hold a higher reserve of specie to
liabilities.
The one contribution of the banking school was to continue to emphasize what Torrens
knew but Lloyd and Norman did not, that bank notes and bank demand deposits were equal
School and Coordinate Parts of the Supply of Money.
Because of their grave error on this point, in Torren's case to dismiss deposits as always
in a fixed ratio to notes, the currency school and its embodiment in Peel's Act left deposits
as the big hole in their attempt to make the money supply conform to movements in gold.
As we have noted, the currency school counterparts in the United States did not make that error.
Free trade and laissez-faire thought was growing in dominance in Great Britain during this
era, led by the intrepid merchants, manufacturers and publicists from Manchester.
But where to stand on the vexed question of banking?
Could banking be free, or is fractional reserve banking really swindling, and therefore different
from normal honest enterprise?
Was Chancellor of the Exchequer Thomas Spring Rice correct when he stated in Parliament
in 1839, I deny the applicability of the general principle of freedom of trade to the question
of making money?
Of one thing, the men of Manchester were certain, there was no quarter to be given the Bank
of England.
Thus, John Benjamin Smith, the powerful president of the Manchester Chamber of Commerce, reported
to the Chamber in 1840 that the crisis of 1839 was caused by the Bank of England's
contraction, following inexorably from its own earlier undue expansion of the currency.
Smith denounced the undue privileges of the bank as the source of its control over the
nation's economic life.
Testifying before Parliament that year, Smith endorsed the currency school by criticizing
the fluctuations of note issues by all the banks as well as the Bank of England, and
went on to state, It is desirable in any change in our existing system to approximate as nearly
as possible to the operation of a metallic currency. It is desirable also to divest the
plan of all mystery and to make it so plain and simple that it may be easily understood
by all. Not only did he thus endorse the currency principle, he went further to endorse Ricardo's
scheme of creating a governmental national bank for the purpose of issuing banknotes.
A similar course was taken by Richard Cobden, the Shining Prince of the Manchester laissez-faire movement.
Attacking the Bank of England and any idea of discretionary control over the currency,
Cobden fervently declared,
I hold all idea of regulating the currency to be an absurdity,
the very terms of regulating the currency and managing the currency I look upon to be an absurdity.
The currency should regulate itself. It must be regulated by the trade and commerce of
the world. I would neither allow the Bank of England nor any private banks to have what
is called the management of the currency. I should never contemplate any remedial measure
which left it to the discretion of individuals to regulate the amount of currency by any
Any Principle or Standard Whatever. Rejecting both private and central bank management,
Cobden was perceptive enough to see that the goal was not free banking per se, but to have
a currency that mirrors genuine market forces of supply and demand, that is, the fortunes
of gold or silver money. He saw that the currency principle aimed to do just that, and hence
represents his endorsement.
And while his support for a government national bank of issue was too much like leaping out
of the frying pan into the fire, it was understandable in the light of his refusal to trust the Bank
of England to cleave to the currency path.
I should be sorry to trust the Bank of England again, having violated their principle, the
and the Palmer Rule, for I never trust the same parties twice on an affair of such magnitude.
6. The Renewed Threat to the Gold Standard
Thus a consensus was building rapidly after the crisis of 1839 on behalf of the currency principle.
But perhaps the precipitating factor in bringing Sir Robert Peel and the establishment
and to enact the principle was a renewed threat to the gold standard.
The gold standard had been the agreed-upon consensus of all parties since the 1820s,
and since the return to gold, the assaults of inveterate statists and inflationists,
like Birmingham's Atwood brothers, had faded away.
But now, under the stimulus of economic crisis, fiat paper agitation and other inflationist
If Manchester was the home of laissez-faire and sound money, Birmingham, its sister manufacturing
town in the north, had long been the home of state-sponsored inflationism.
Economic recession struck the Birmingham area in 1841, and Birmingham moved once more to
a powerful attack upon gold.
Thomas Atwood himself had retired from Parliament two years before, but Birmingham's representatives
were more than willing to take up the old cause.
Atwood had been replaced by merchant and manufacturer George Frederick Muntz, who agreed with the
former's currency views, and Richard Spooner, the Tory whom Muntz had defeated for the seat,
was an inflationist and a banking partner of Atwood's.
The following year, the Birmingham Chamber of Commerce, presided over by Richard Spooner,
launched a furious campaign pressuring the Prime Minister, Sir Robert Peel, into going
off gold.
Months put out a new edition of an old anti-gold tract, and, roaring back to the wars, Thomas
Atwood, as might be expected, published articles and wrote numerous letters on his currency
nostrums.
The most influential of this outpouring of Birmingham inflationism was The Gemini Letters,
published anonymously by Thomas B. Wright and John Harlow of Birmingham, first as 35
letters in a country newspaper during 1843, and then in book form the following year as
The Currency Question, The Gemini Letters.
The Gemini plea was straight proto-Keynesian inflationism. Inconvertible paper money should
be issued by the government in sufficient amount to stimulate consumer purchasing power
and ensure full employment. In addition, the public debt should be inflated away. Thus,
as Wright and Harlow put it, the proper plan, it appears to us, is to raise the capacity
of the Consumer by securing high wages and ample profits, and by these means making light
the fixed national obligations of the people.
The only limit they would affix to the issue of paper money would be the degrees of prosperity
which the different amount of issues would produce.
There is every reason to believe that the Gemini Letters and the Birmingham Agitation
were influential throughout the country.
Henry Burgess and his committee of country bankers used the interchanges between the
Birmingham Chamber and Robert Peel to denounce the gold standard.
Both the Times and the New Weekly Economist were forced to expend a great deal of energy
in defending the gold standard from its unsound enemies.
At any rate, it is known that Peale owned a copy of the currency question and marked
key passages in the book.
The threat to gold was reinforced by a renewed agitation to dump gold for a bimetallic gold-silver
standard.
Heedless of the fact that bimetallism never works in practice, since Gresham's law pushes
is the undervalued metal out of circulation and encourages the overvalued.
The pro-silver forces found in bimetallism a way to support monetary inflation while
remaining respectably in favor of precious metals as money.
Silver supporters therefore began with a core from the fiat paper group, including Spooner,
Mathias Atwood, George Muntz, and Henry Burgess and added numerous bankers and businessmen
such as Richard Page, Henry W. Hobhouse, Chairman of the Committee of Country Bankers, William
D. Haggard, and the eminent banker Alexander Behring, now Lord Ashburton.
7. Triumph of the Currency School, Peel's Act of 1844
At the heart of the triumph of the currency principle in Peel's Act of 1844 was one man,
the statesman and political genius Sir Robert Peel. Peel has been habitually derided by
by Historians as a confused middle-of-the-roader, a flexible political opportunist at best,
a transitional figure unwittingly performing the historical function of ushering in the
conservative and liberal party system in England.
But as Professor Boyd Hilton has helped to point out, Peel was a far different figure,
A statesman in the best sense, a Tory liberal who was consistent and even unyielding in
principle and purpose, and flexible and entrepreneurial only in attaining the best tactics to arrive
at his fixed ideological goals.
As Hilton has demonstrated in every important sense, economic, financial and moral, Robert
Peale was the John the Baptist, the founder, the progenitor of Gladstonian liberalism.
During the 1820s, Peale was for most years head of the Home Office in Tory governments.
He had long been opposed to Catholic emancipation and had even resigned his cabinet post in
1827 in protest at the accession to the Prime Ministry of George Canning, head of Tory liberalism
and Champion of Catholic Rights.
Two years later, however, after the death of Canning, Peel, back as Home Secretary,
was converted to Catholic Emancipation as part of his ever-increasing devotion to the
classical liberal laissez-faire cause.
At his conversion, Peel had the good grace to honor the prophets and warriors for Catholic
Emancipation, whom he had opposed for so long, Fox, Gratton and Kenning himself.
From 1831 on, Peel headed the Tory, now conservative, party, and also was the heart and soul of
the liberal faction of the party.
Peel's great prime ministry took place in 1841 to 1846.
Here he fought vigorously for a peaceful foreign policy, battling against the pro-war imperialist
Palmerston wing of the Liberal Party, and managed to conclude peace with the United
States in the menacing Oregon boundary controversy.
Peel also managed to lower tariffs, but lost in his fight for all-out free trade.
His great accomplishment on that front was victory over the furious opposition of the
Tory agriculturists, led by Benjamin Disraeli, in the complete repeal of the infamous Corn
Laws, which had for decades established an enormous import tariff on wheat.
In this fight against the artificially high price of food, Peel was spurred by the growing
famine in Ireland.
Again, gracious in victory, Peel hailed his political opponent, the laissez-faire liberal Richard Cobden, as the true architect of the repeal of the Corn Laws.
For his success, Peel's government was toppled by Disraeli, and he died in a hunting accident four years later, in 1850.
Robert Peel's proudest achievement, however, was his banking reform, his Act of 1844.
The Bank Charter Act of 1833 had provided for possible change in the charter during 1844.
So that was the year of potential banking reform.
As recent research has revealed, Peel's Act did not originate as a hostile straight jacket
fastened on a reluctant, though subsequently complacent, bank by the efforts of the currency school.
Rather, the act came from within the bank itself, as an attempt by the bank to find for itself a shortcut to currency management,
as well as a means of obtaining its long sought monopoly over bank note issue.
First, the ardent currency school leader, George Ward Norman, had, as a bank director, been promoting the plan since 1838.
Although Norman lost within the bank on his currency proposal in 1840, he persisted,
and the following year he became part of a five-man standing committee of the bank to discuss the scheme.
By January 1844, William Cotton, the Governor of the Bank of England and a member of the Standing Committee, had been converted to the Currency Plan, and when, in early January, Peel asked Cotton and the Deputy Governor, J.B. Heath, also a member of the Standing Committee, to confer with him and Chancellor of the Exchequer, Henry Colburn, about fundamental banking reform,
study. In response to these discussions, Cotton and Heath, on 2 February, submitted to Peel
the complete outline of what was soon to become Peel's Act.
In essence, Peel's Act established the currency principle. It divided the Bank of England
into an issue department, issuing banknotes, and a banking department, lending and issuing
Banking Demand Deposits.
True to the rigid currency school separation of notes and deposits, deposits would be totally
free and unregulated, while notes would be limited to a ceiling of 14 million pounds
matched by assets of government securities, roughly the extent of existing note issue.
Any further notes could only be issued on the basis of 100% reserve in gold.
The second main provision was to grant the Bank of England its long sought monopoly of
the note issue.
This was not done immediately, but to be phased in over a period of time.
Specifically, no new banks were to issue any bank notes, existing banks were to issue no
No Further Notes, and the Bank of England might contract with bankers to buy out their
existing notes and replace them with the bank's own.
In this way, private bank notes were grandfathered in, and the private, that is, joint-stock
plus country, banks were neatly cartelized under the direction of the bank, with the
private banks able to keep out all further competition.
This grandfather cartel clause was not only designed to make the transition to the new
order gradual, its main effect, and presumably its intent as well, was to bring the private
banks, which might be expected to be the chief opponents of the new bill, around to become
enthusiastic supporters.
In his maneuvering within the cabinet before publicly presenting Peel's Act, the Prime
The Minister made it clear that if we were about to establish in a new state of society
a new system of currency, he would have preferred the Ricardian plan of government notes with
no Bank of England or any other bank notes allowed, but that this plan would be impracticable
in the existing state of the real world where a coalition must be built among such contending
Banking Forces as the bank itself, Ricardians, free bankers and country bankers.
The Desideratum, Peel shrewdly advised, was to determine to propose the course which they
may conscientiously believe to reconcile, in the greatest degree, the qualities of being
consistent with sound principle and suited to the present condition of society.
News of Peel's coming bank charter bill had spread by the end of February, and the country
banks, as expected, vigorously protested the bill during March and April.
Finally, Peel introduced the bill to Parliament on 6 May.
Shrewdly splitting his opposition, he applied the bill fully only to England.
The ban on new banks issuing notes was extended to Scotland and Ireland, but the limitations
on existing banks were applied to England alone.
For the rest, Scotland and Ireland were left alone for the time being.
The introduction of Peel's bill touched off a flurry of controversy, including a pamphlet
war over the act.
In particular, the new controversy gave rise to the banking school, which beforehand had
been represented only by Took.
Took weighed in with an inquiry into the currency principle, and John Fullerton entered the
fray with his aforementioned pamphlet on the regulation of currencies, a widely circulated
and influential tract, even though it was published in August 1844 after the passage
of Peel's Act. S. J. Lloyd published a defense of the bill, while the formidable Colonel Torrens
blasted Took in another pamphlet.
The new banking school was noteworthy for being more royalist than the King, more favorable
to the Bank of England than the Bank itself. In short, the banking school, along with
most of the London bankers, favored the vesting of a monopoly of bank note issue in the Bank
Bank of England. Its quarrel was solely with currency principle restrictions on the bank's
issue of notes. This was surely the kind of opposition that the Bank of England could
live with. While the banking school correctly spotted the main weakness of the currency
school in not treating notes and deposits alike, this objection was scarcely directed
to extending any sort of reserve requirements to bank deposits as well as notes.
On the contrary, they would have been all the more outraged by, say, a consistent peels
act that would have placed a 100% reserve requirement on all further bank liabilities,
deposits as well as notes.
One bit of curiosa about the emergence of the banking school is the lateness of its
arrival, coming as it did almost when the fight over Peel's Act was over and flourishing
for a while after.
Its importance was more for raising theoretical issues and for raising the interest of historians
of economic thought than in actually influencing the political battle.
Another noteworthy aspect of the fray was the advent of a new and important star in
the economic firmament, John Stuart Mill, 1806-1873, who joined the banking school side
of the debate in an anonymous article, The Currency Question, in the radical Westminster
Review.
Actually, Mill had foreshadowed the banking school in an article written at the age of
of 20, Paper Currency and Commercial Distress, in the short-lived Radical Parliamentary Review.
Like so many others, Mill was first moved to turn his attention to banking and business
cycles by the economic and financial crisis of 1825 and 1826.
But in contrast to many others, he abandoned instead of extending his basic Ricardianism
in this area.
Instead of seeing the new phenomenon of business cycles as created by monetary disturbances,
he saw them as caused by waves of speculation presumably generated by over-optimism.
Money and banks were purely passive respondents to fluctuations in the economy.
From this there followed his conclusion that movements in the money supply, at least under
under a gold standard had no effect on prices or trade.
Within the framework of a gold standard, prices rose first, dragging the money supply upwards,
and later fell, pulling the money supply down.
How could Mill square this odd doctrine with his overall Ricardianism and its thesis of
the influence of the supply of money upon its value?
We did so by an ingenious, though bizarre and fallacious, theory of what constitutes
the supply of money.
The money supply was made up not only of coin, notes and demand deposits, Mill opined, but
also of the creditworthiness of every member of the public.
When a bank made loans to some member of the public, then, it might increase notes or deposits
is outstanding, but that increase is exactly compensated by a decrease in the credit worthiness
of the borrowing citizens.
Therefore, when banks lend money to individuals and businesses, the money supply does not
increase at all.
On the contrary, when banks purchase government securities or finance its deficit, they add
Add directly to the total money supply by the same amount.
In fact, they even add to the money supply when they lend to private citizens beyond
the degree of their genuine credit worthiness.
How is such credit worthiness to be determined?
By banks confining their loans to sound borrowers and to the discounting of real bills that
are short-term, matched by inventories of goods in process, and are therefore self-liquidating
in a short period of time.
Bank credit then happily follows the needs of trade upwards or downwards, and cannot
raise prices.
While completely fallacious, Mill's theory at least had the merit of providing some plausible
No logical explanation for the banking school creed, one that was scarcely matched by any
of his colleagues. Furthermore, Mill's doctrine provided a good reason for his devotion to
the gold standard, and for his bullionist denunciation of inconvertible fiat money.
Within his theory, if government or the central bank issues inconvertible fiat paper, that
paper adds directly to the money supply and to inflation, rather than being neutralized
by subtracting from credit worthiness. And, devoted to the gold standard, he remained.
We have already seen Mill's denunciation of Thomas Atwood's inflationary fiat paper
scheme in 1833.
And what of the alleged free banking school, which Professor White has put forward as equal
as White himself ruefully admits, they were nowhere to be found, their alleged devotion to free banking failing the most acid of all tests when Peel's Act was about to bring all commercial banks under Bank of England control.
For not only would the bank now have a virtual monopoly of note issue, but in order to obtain
notes in exchange for cashed-in deposits, the other banks would now be obliged to keep
the great bulk of their reserves at the Bank of England.
White tries to explain away the defections of the free bankers as having been bought
out by Peel's cartelization grandfather clause.
for the banks could continue to issue at their current level and no new competing banks would
be permitted.
But while this explanation is true enough, it raises the crucial question, how devoted
were Professor White's heroes to free banking to begin with?
Wasn't the free banking school simply a group devoted to the economic interests of the private
commercial banks?
Like for example the newly founded The Banker's Magazine, which had supposedly been a leading
mouthpiece for free banking for the previous year.
A writer in the June 1844 issue, while critical of the currency principle and the move towards
monopoly issues for the bank, frankly approved the Peel Act as a whole for aiding profits
of Existing Banks by Prohibiting All New Banks of Issue.
And let us take in particular James William Gilbert, 1794-1863, leading spokesman for
the country bankers, manager of the London and Westminster Bank, and, according to Professor
White, one of the main theoreticians of the Free Banking School.
Gilbert, born in London and descended from a Cornish family, had worked all his life as a bank official and had written works on banking since the late 1820s.
Since 1834 he had been manager of the London and Westminster Bank, continually clashing with the Bank of England.
Despite Professor White's assurance that the free banking school men were even more fervent than the currency men in attributing the cause of the business cycle to monetary inflation, Gilbert held, typically of the banking school, that bank notes simply expand and contract according to the wants of trade, and therefore such notes, being matched by the production of goods, could not raise prices.
Furthermore, the active factor goes from trade to prices to the requirement for more banknotes
to flow in the economy.
Thus, Gilbert, if there is an increase of trade without an increase of prices, I consider
that more notes will be required to circulate that increased quantity of commodities.
If there is an increase of commodities and an increase of prices also, of course you
would require a still greater amount of notes.
In short, whether prices rise or not, the supply of money must always increase.
One wonders who the you is who would have such requirements.
In the free market, on the contrary, if there is an increase in the production of commodities,
prices will tend to fall and not rise. Furthermore, increased production of trade does not require
or call forth an increase in bank money. The causal chain is the other way round. Increased
banknote issue raises the money supply and prices, and also the nominal money value of
the goods being produced.
All historians of economic thought, except for Professor White, have placed Gilbert squarely
in the banking school camp as one of its leaders.
Since White seems to agree with Gilbert's fallacious wants of trade analysis, and since
As he admits that this creed is similar to that of the banking school, his creation of
an important new school of free banking, challenging both of the others, appears all the more tenuous
and artificial.
The main difference seems to be marginal and political.
While all the banking school hailed the banking system as useful and harmless, most of them
William laid special honors on the Bank of England, while Gilbert, as a joint-stock banker
himself, placed most approval upon the commercial banks.
When it came to the test, then, Gilbert, like his colleagues on the Bankers Magazine, caved
in on what Professor White alleges to be his free banking principles.
Thus, White concedes,
He, Gilbert, was relieved that the Act did not extinguish the Joint Stock Bank's right of issue and was frankly pleased with its cartelizing provisions.
Our rights are acknowledged, our privileges are extended, our circulation guaranteed, and we are saved from conflicts with reckless competitors.
James Gilbert's open status as a banking school inflationist and Robert Peel's staunch devotion to hard money were both revealed in Peel's questioning of Gilbert when the latter testified that country banknotes are only issued in response to the wants of trade, and therefore that they could never be over-issued.
He also claimed that the Bank of England could never overissue so long as it only discounted commercial loans and did not buy government bonds.
At this point, Sir Robert Peel unerringly zeroed in and drew forth Gilbert's apologia for the banking system.
Peale. Do you think, then, that the legitimate demands of commerce may always be trusted to as a safe test of the amount of circulation under all circumstances?
To which Gilbert admitted, I think they may. Nothing about exempting the Bank of England from that trust.
Peale then asked the critical question. The banking school all claimed to be devoted to the gold standard, so that the needs of trade justification for bank credit did not apply to inconvertible currency.
Peale, suspicious of that devotion to gold, then asked,
In the bank restriction days, do you think that the legitimate demands of commerce constituted a test that might be safely relied upon?
To which Gilbert evasively replied,
That is a period of which I have no personal knowledge.
This was a particularly disingenuous point coming from the author of The History and Principles of Banking, 1834.
Moreover, the issue is, of course, a theoretical one, and no personal knowledge is necessary to make a reply, a point made immediately by Peel,
at which point Gilbert threw in the towel on the gold standard.
I think the legitimate demands of commerce even then would be a sufficient guide to go by.
When Peel pressed Gilbert on the point, Gilbert began to vacillate, changing his views, returning to them,
and then again falling back on his lack of personal experience.
Peel was right in being suspicious of the strength of the banking school's devotion to gold.
Apart from Gilbert's damaging revelations, his colleague at the London and Westminster Bank, J.W. Bosonkett, kept urging bank suspensions of specie payment whenever times became difficult.
And while Thomas Tooke often proclaimed his abhorrence of the Birmingham School, he wrote in 1844 that a crucial limit on any over-issue of banknotes
was the needs of trade in addition to gold convertibility.
The opening was sufficient to allow Robert Torrens to score a palpable hit.
After a careful examination of Mr. Took's recent publication, 1844, I cannot discover
any very essential or practical difference between his principles and those of the Birmingham
of the Birmingham Economists, once deviate from the gold rule of causing the fluctuations
of our mixed circulation to conform to what would be the fluctuations of a purely metallic
currency, and the floodgates are opened, and the landmarks removed, between the abandonment
of a metallic standard as recommended by the Birmingham Economists and the adoption of
of Arrangements Hazarding the Maintenance of a Metallic Standard Recommended by Mr. Took.
The difference in the practicable result might ultimately be nothing.
John Fullerton's admission was even more damaging than Took's, avowing in his popular 1844
tract that he wholeheartedly agreed with the decried doctrine of the old bank directors
of 1810, namely the anti-bullionist position that so long as any bank sticks to short-term
real bills, it cannot go wrong in issuing as many notes as the public will receive from
it.
And, of course, 1810 was a year of inconvertible money.
It is no wonder that Robert Peel considered all opponents of the currency principle as
Essentially Birmingham Men.
Thus the opposition to Peel's Act, while theoretically important, was politically scattered and ineffective.
The bill sailed through overwhelmingly and became law on 19 July.
A second Peel bill, designed to make it more difficult to establish new joint stock banks,
sailed through in September.
The result of this tightening of bank control and monopoly as well as cartel privileges
to existing banks was indeed the creation of virtually no new joint stock banks in England
for the next eight years.
At this point, Peel completed his currency task by extending its sway to Scotland and
and Ireland in two bills that became law on 21 July 1845.
Cautious in the face of regional traditions, Peel was not as tough on the Scottish and
Irish banks as he had been on the English.
Whereas the English commercial banks could issue no more banknotes period, the Scottish
Scottish and Irish banks were treated as Peel's Act of 1844 treated the Bank of England.
Their further banknote issues were limited to 100% gold reserves.
Scotland had never had its banking restricted, having been free to establish joint stock
banks and issue notes and deposits throughout Scotland.
The Scottish bankers, however, like Gilbert and the English bankers, were easily bought
off by cartel privileges even more lucrative than in England.
As White admits, Peel in essence bought the support of all existing banks by suppressing
potential entrants and competition for market shares.
In addition, Peel shrewdly permitted the Scottish banks to keep the privilege denied to English
Acts, including the Bank of England since the 1820s of continuing to issue their cherished
small one-pound notes.
The only important development in the year between the two Peel's Acts was the highly
belated entry into the great debate of a new leader of the banking school, James Wilson,
Wilson, 1805 to 1860, had founded The Economist for the express purpose of battling for free
trade and laissez-faire.
He criticized Peel's Act when it came up in 1844, but devoted most of his energies
to free trade.
Finally, in the spring of 1845, Wilson wrote a famous series of nine articles on currency
and banking in The Economist, attacking the extension of Peel's Act to Scotland and Ireland.
Wilson took an orthodox banking school approach, except that each of his positions was so emphatic
that the inner inconsistencies and contradictions of the banking school were brought out particularly
Starclay.
Thus Wilson was far more emphatic and militant than Took or Fullerton about the importance
of preserving the gold standard, so much so that Torrens was later to call Wilson the
most able of the opponents of the Act of 1844.
And yet, of the big four of the banking school, Took, Fullerton, Mill and Wilson, Wilson was
was the only one who stated flatly and clearly that short-term self-liquidating real bills
would be sufficient to protect the banks from over-issue, even without specie convertibility.
Thus, Wilson declared that, in convertible paper notes might be issued to any extent
that legitimate transactions required them, provided such issues were confined to the
to the discount of good bills of exchange and to loans for short periods, without any risk of depreciation, because a larger quantity never could be so issued than was again shortly returnable to the bank in payment of such loans.
In addition of all the big four, Wilson was the friendliest to free banking and desirous
of saving the alleged free banking system in Scotland.
And yet, he also claimed that the Bank of England could never over-issue in a convertible
and the Federal Money System, which was quite the opposite of the free banking approach.