WEBVTT NOTE 7. Monetary and Banking Thought, III: The Struggle Over the Currency School (continued) 1 00:00:00.000 --> 00:00:09.800 5. The Crisis of 1839 and the Escalation of the Currency School Controversy 2 00:00:09.800 --> 00:00:17.400 A mild boom in 1837 and 1838 was followed by another economic crisis towards the end 3 00:00:17.400 --> 00:00:26.300 of 1838 and during 1839. Bankruptcies and bank runs ensued and the Bank of England's 4 00:00:26.300 --> 00:00:35.500 Mises' gold reserve fell from £9.8 million in December 1838 to an extremely low £2.4 5 00:00:35.500 --> 00:00:39.920 million by September 1839. 6 00:00:39.920 --> 00:00:46.440 Not only that, but in the teeth of shrinking reserves, the bank, instead of following anything 7 00:00:46.440 --> 00:00:53.440 like its own Palmer rule, let alone the more rigorous currency principle, expanded credit 8 00:00:53.440 --> 00:01:00.320 still further, thus precipitating an even greater drain of gold from the bank. 9 00:01:00.320 --> 00:01:06.360 By July and August 1839, the Chancellor of the Exchequer was beginning to contemplate 10 00:01:06.360 --> 00:01:12.560 another restriction, another suspension of specie payment on behalf of the bank. 11 00:01:12.560 --> 00:01:20.400 The bank was saved only by massive credits from the Bank of France and from Hamburg. 12 00:01:20.400 --> 00:01:26.880 Clearly the banking situation was becoming intolerable and something had to be done. 13 00:01:26.880 --> 00:01:34.640 Parliament appointed a select committee on banks of issue in 1840 and again in 1841 and 14 00:01:34.640 --> 00:01:38.760 massive hearings were held on the question. 15 00:01:38.760 --> 00:01:44.600 Disputes in parliamentary testimony and pamphlet controversy were redoubled and were made more 16 00:01:44.600 --> 00:01:50.500 urgent by Horsley Palmer's concession that the bank was finding it almost impossible 17 00:01:50.500 --> 00:01:54.240 to adhere to his rule. 18 00:01:54.240 --> 00:02:00.100 Several other groups now arose to challenge the growing currency school consensus. 19 00:02:00.100 --> 00:02:05.480 The free banking adherents took a lead from the currency school in lashing out at the 20 00:02:05.480 --> 00:02:11.080 Bank of England's responsibility for inflation and for the business cycle. 21 00:02:11.080 --> 00:02:16.680 But the force of their opposition to the bank was vitiated by their uniform apologia for 22 00:02:16.680 --> 00:02:20.400 the country and joint stock banks. 23 00:02:20.400 --> 00:02:26.000 While it is true that those banks were largely governed by the actions of the bank, it was 24 00:02:26.000 --> 00:02:32.000 egregious for them to claim that the private banks were totally passive and blameless in 25 00:02:32.000 --> 00:02:34.380 the entire process. 26 00:02:34.380 --> 00:02:41.040 The Free Banking School was particularly discredited by the fact that virtually all of its spokesmen 27 00:02:41.040 --> 00:02:48.360 with the exception of Sir Henry Parnell, who died in 1842 in the middle of the controversy, 28 00:02:48.360 --> 00:02:54.520 were themselves joint stock or country bankers, so that the special pleading in their stance 29 00:02:54.520 --> 00:02:56.880 was all too evident. 30 00:02:56.880 --> 00:03:02.760 If this group had confined their advocacy of free banking to the largely political point 31 00:03:02.760 --> 00:03:10.120 that the bank would inevitably be more inflationary and dangerous than competitive banking, they 32 00:03:10.120 --> 00:03:16.120 would have been far more persuasive, but such restraint is not the usual practice of special 33 00:03:16.120 --> 00:03:18.240 pleaders. 34 00:03:18.240 --> 00:03:24.080 The only distinguished economist to take up the free banking cause was Samuel Bailey, 35 00:03:24.080 --> 00:03:26.860 the subjective value theorist. 36 00:03:26.860 --> 00:03:32.560 But Bailey had founded and was now chairman of the Sheffield Banking Company, and his 37 00:03:32.560 --> 00:03:36.680 fervent apologia was all too suspect. 38 00:03:36.680 --> 00:03:41.680 Bailey indeed was one of the worst offenders in insisting on the passivity of the country 39 00:03:41.680 --> 00:03:47.620 and joint-stock banks, and in attacking the very idea that there is something wrong with 40 00:03:47.620 --> 00:03:52.640 worrying about changes in the quantity of the money supply. 41 00:03:52.640 --> 00:03:59.040 By assuring his readers that competitive banking would always provide nice adjustment of the 42 00:03:59.040 --> 00:04:05.640 currency to the wants of the people, Bailey overlooked the fundamental Ricardian truth 43 00:04:05.640 --> 00:04:14.040 that there is never any social value to increasing the money supply once the commodity is established, 44 00:04:14.040 --> 00:04:20.880 and that inflationary increases in bank credit take place as a process of fraudulent issue 45 00:04:20.880 --> 00:04:26.180 of fake warehouse receipts to standard money. 46 00:04:26.180 --> 00:04:31.600 Another school of thought arising in this period was the banking school, at this early 47 00:04:31.600 --> 00:04:37.200 Point Consisting Solely of One Prominent Man, Thomas Took. 48 00:04:37.200 --> 00:04:46.420 Took, 1774-1858, was by now an elderly merchant in the Russian trade, who, born the son of 49 00:04:46.420 --> 00:04:52.720 a chaplain, had started working in St. Petersburg at the age of 15 and had become a partner 50 00:04:52.720 --> 00:04:56.260 in a mercantile firm in London. 51 00:04:56.260 --> 00:05:01.020 Being interested in economic matters, Took had been one of the founders of the Political 52 00:05:01.020 --> 00:05:07.620 Economy Club and continued to attend meetings of the club until his death. 53 00:05:07.620 --> 00:05:13.740 In the bullion controversy, Took was a staunch bullionist and he strongly supported the resumption 54 00:05:13.740 --> 00:05:17.600 of specie payments in 1819. 55 00:05:17.600 --> 00:05:24.480 At best, however, Took was a confused and inchoate thinker and whatever theoretical acumen 56 00:05:24.480 --> 00:05:49.920 Inductive play with his statistics was able to convince Took, for example, as early as 57 00:05:49.920 --> 00:05:57.640 was his 1838 volumes, first, that high and rising prices during the Napoleonic periods 58 00:05:57.640 --> 00:06:05.220 were solely due to bad harvests, lowering the supply of farm products, as well as obstructions 59 00:06:05.220 --> 00:06:13.080 of foreign trade, while second, falling prices after the war were caused by better harvests 60 00:06:13.080 --> 00:06:16.200 and the resumption of trade. 61 00:06:16.200 --> 00:06:22.260 Having concluded that, Tooke was able to press on in his third volume of The History of Prices 62 00:06:22.260 --> 00:06:29.240 in 1840, and in his parliamentary testimony the same year, to launch the banking school 63 00:06:29.240 --> 00:06:35.520 with the absurd proposition, to quote from a crystal clear formulation of Tooke four 64 00:06:35.520 --> 00:06:43.280 years later, that, the prices of commodities do not depend upon the quantity of money indicated 65 00:06:43.280 --> 00:06:50.320 by the amount of banknotes, nor upon the amount of the whole of the circulating medium. 66 00:06:50.320 --> 00:06:58.000 But that, on the contrary, the amount of the circulating medium is the consequence of prices. 67 00:06:58.000 --> 00:07:04.040 To be fair to Took and his banking school colleagues, they did not mean, or profess 68 00:07:04.040 --> 00:07:12.160 to mean, to apply this old fallacy to inconvertible currency, as their anti-bullionist forebears 69 00:07:12.160 --> 00:07:16.680 had done, but only to convertible currency. 70 00:07:16.680 --> 00:07:22.260 But this did not make their analysis or conclusion one whit less absurd. 71 00:07:22.260 --> 00:07:27.840 The masterful critique by Torrens deserves to be quoted at some length. 72 00:07:27.840 --> 00:07:33.600 Torrens first points out that Took has the deserved reputation, which even he himself 73 00:07:33.600 --> 00:07:40.720 cannot destroy, of having shown by an extensive induction from existing and from historical 74 00:07:40.720 --> 00:08:10.720 The Theory of Money and Credit 75 00:08:40.720 --> 00:08:46.840 Trusts. Like Adam Smith, the banking school was blithely assuming that the adjustments 76 00:08:46.840 --> 00:08:54.240 and restraints of redeemability were instantaneous, and therefore that no problems would be created 77 00:08:54.240 --> 00:09:01.760 in the actual processes of the real world. A particular Rapier thrust against Took by 78 00:09:01.760 --> 00:09:09.600 Torrens four years later cannot be resisted. Throughout interminable pages of inconsistent 79 00:09:09.600 --> 00:09:16.320 Affirmation in the Multi-Volume History of Prices, he reiterates the inference that the 80 00:09:16.320 --> 00:09:23.080 value of commodities has fluctuated in relation to money, and that therefore the value of 81 00:09:23.080 --> 00:09:29.160 money has not fluctuated in relation to commodities. 82 00:09:29.160 --> 00:09:35.360 The corollary proposition of the banking school, taken from the anti-bullionists and now brought 83 00:09:35.360 --> 00:09:43.500 again to the fore by Took, is that the Bank of England cannot increase the supply of money. 84 00:09:43.500 --> 00:09:50.420 As Took put it starkly, the Bank of England has not the power to add to the circulation. 85 00:09:50.420 --> 00:09:56.760 Even applying this claim only to convertible currency, as the banking school did, it is 86 00:09:56.760 --> 00:10:01.360 difficult to hold such a manifest absurdity at length. 87 00:10:01.360 --> 00:10:07.240 In practice, therefore, Took and the other banking school adherents usually modified 88 00:10:07.240 --> 00:10:14.800 this blunt statement to apply only to banknotes issued in loans to private borrowers and not 89 00:10:14.800 --> 00:10:18.120 to purchases of government securities. 90 00:10:18.120 --> 00:10:20.820 To the question, what's the difference? 91 00:10:20.820 --> 00:10:28.400 The main contribution to Took's doctrine was made in 1844 by John Fullerton, namely, 92 00:10:28.400 --> 00:10:34.880 Bank notes issued in purchase of government securities are paid away and remain permanently 93 00:10:34.880 --> 00:10:41.820 in circulation, thus adding to the quantity of money, whereas bank notes are only lent 94 00:10:41.820 --> 00:10:49.240 and are returnable to the issuers, and presumably therefore do not add to the money supply. 95 00:10:49.240 --> 00:10:56.240 This was what Fullerton dubbed the principle of reflux, of notes returning to the banks. 96 00:10:56.240 --> 00:11:02.320 Once again, the incisive refutation came from Colonel Torrens, who pointed out that to carry 97 00:11:02.320 --> 00:11:11.320 any weight, the vaunted principle of reflux requires instantaneous repayment of all loans. 98 00:11:11.320 --> 00:11:18.680 Allow any interval to elapse between the loan and the repayment, and no regularity of reflux 99 00:11:18.680 --> 00:11:25.900 can prevent redundancy from being increased to any conceivable extent. 100 00:11:25.900 --> 00:11:31.200 The same, as well as many other strictures, apply to a variant of Fullerton's and others 101 00:11:31.200 --> 00:11:37.760 in the banking school, which, again, stemming from the anti-bullionists, held that banks 102 00:11:37.760 --> 00:11:43.940 can never over-issue notes, provided that their notes are only issued in the course 103 00:11:43.940 --> 00:11:52.100 of making short-term, self-liquidating loans matched by inventories of goods in process, 104 00:11:52.100 --> 00:11:55.500 and the so-called Real Bills Doctrine. 105 00:11:55.500 --> 00:12:02.580 Torren's role in the currency versus banking controversy has a fascinating reverse symmetry 106 00:12:02.580 --> 00:12:05.420 with the path taken by Took. 107 00:12:05.420 --> 00:12:11.580 Whereas Torrens began as an anti-bullionist and apologist for the Bank of England and 108 00:12:11.580 --> 00:12:19.000 now ended as a currency schoolman and opponent of bank credit inflation, Took began as a 109 00:12:19.000 --> 00:12:26.660 is a solid bullionist, yet ended his days as a pro-bank anti-bullionist. 110 00:12:26.660 --> 00:12:32.460 Among the various grave inconsistencies in the banking school approach, one particularly 111 00:12:32.460 --> 00:12:34.360 stands out. 112 00:12:34.360 --> 00:12:40.460 If it is true that banks can do no wrong, at least in a convertible currency, that they 113 00:12:40.460 --> 00:12:47.620 cannot over-issue notes or over-expand credit, and that even if they did, it could have no 114 00:12:47.620 --> 00:12:54.980 no effect in raising prices or causing a business cycle, then why not adopt free banking? 115 00:12:54.980 --> 00:12:59.180 Why have a privileged monopoly like the Bank of England? 116 00:12:59.180 --> 00:13:05.540 Yet the banking school remained a determined enemy of free banking and devoted apologists 117 00:13:05.540 --> 00:13:07.500 for the bank. 118 00:13:07.500 --> 00:13:13.660 Thomas Tooke's most famous dictum was the striking, free trade in banking is synonymous 119 00:13:13.660 --> 00:13:16.700 with free trade in swindling. 120 00:13:16.700 --> 00:13:23.980 Fair enough, but if we analyze this pronouncement logically and we find that banking is synonymous 121 00:13:23.980 --> 00:13:30.140 with swindling, then what is the rationale for placing the power of state privilege behind 122 00:13:30.140 --> 00:13:32.760 a monopoly swindler? 123 00:13:32.760 --> 00:13:39.060 Even if banking is swindling, isn't competitive swindling better than a state-privileged and 124 00:13:39.060 --> 00:13:41.980 dominant monopoly swindler? 125 00:13:41.980 --> 00:13:48.020 and yet took fiercely fought to preserve the bank and its exclusive privileges in London 126 00:13:48.020 --> 00:13:49.780 and environs. 127 00:13:49.780 --> 00:13:56.100 His only proposed reform was to induce the bank to hold a higher reserve of specie to 128 00:13:56.100 --> 00:13:58.880 liabilities. 129 00:13:58.880 --> 00:14:04.500 The one contribution of the banking school was to continue to emphasize what Torrens 130 00:14:04.500 --> 00:14:11.420 knew but Lloyd and Norman did not, that bank notes and bank demand deposits were equal 131 00:14:11.420 --> 00:14:15.620 School and Coordinate Parts of the Supply of Money. 132 00:14:15.620 --> 00:14:22.020 Because of their grave error on this point, in Torren's case to dismiss deposits as always 133 00:14:22.020 --> 00:14:29.900 in a fixed ratio to notes, the currency school and its embodiment in Peel's Act left deposits 134 00:14:29.900 --> 00:14:36.780 as the big hole in their attempt to make the money supply conform to movements in gold. 135 00:14:36.780 --> 00:14:44.460 As we have noted, the currency school counterparts in the United States did not make that error. 136 00:14:44.460 --> 00:14:49.820 Free trade and laissez-faire thought was growing in dominance in Great Britain during this 137 00:14:49.820 --> 00:14:56.840 era, led by the intrepid merchants, manufacturers and publicists from Manchester. 138 00:14:56.840 --> 00:15:01.180 But where to stand on the vexed question of banking? 139 00:15:01.180 --> 00:15:07.820 Could banking be free, or is fractional reserve banking really swindling, and therefore different 140 00:15:07.820 --> 00:15:10.940 from normal honest enterprise? 141 00:15:10.940 --> 00:15:16.400 Was Chancellor of the Exchequer Thomas Spring Rice correct when he stated in Parliament 142 00:15:16.400 --> 00:15:24.140 in 1839, I deny the applicability of the general principle of freedom of trade to the question 143 00:15:24.140 --> 00:15:26.640 of making money? 144 00:15:26.640 --> 00:15:32.080 Of one thing, the men of Manchester were certain, there was no quarter to be given the Bank 145 00:15:32.080 --> 00:15:33.080 of England. 146 00:15:33.080 --> 00:15:39.480 Thus, John Benjamin Smith, the powerful president of the Manchester Chamber of Commerce, reported 147 00:15:39.480 --> 00:15:46.840 to the Chamber in 1840 that the crisis of 1839 was caused by the Bank of England's 148 00:15:46.840 --> 00:15:54.800 contraction, following inexorably from its own earlier undue expansion of the currency. 149 00:15:54.800 --> 00:16:00.080 Smith denounced the undue privileges of the bank as the source of its control over the 150 00:16:00.080 --> 00:16:02.800 nation's economic life. 151 00:16:02.800 --> 00:16:08.760 Testifying before Parliament that year, Smith endorsed the currency school by criticizing 152 00:16:08.760 --> 00:16:15.040 the fluctuations of note issues by all the banks as well as the Bank of England, and 153 00:16:15.040 --> 00:16:22.620 went on to state, It is desirable in any change in our existing system to approximate as nearly 154 00:16:22.620 --> 00:16:30.140 as possible to the operation of a metallic currency. It is desirable also to divest the 155 00:16:30.140 --> 00:16:36.940 plan of all mystery and to make it so plain and simple that it may be easily understood 156 00:16:36.940 --> 00:16:44.940 by all. Not only did he thus endorse the currency principle, he went further to endorse Ricardo's 157 00:16:44.940 --> 00:16:52.540 scheme of creating a governmental national bank for the purpose of issuing banknotes. 158 00:16:52.540 --> 00:17:00.140 A similar course was taken by Richard Cobden, the Shining Prince of the Manchester laissez-faire movement. 159 00:17:00.140 --> 00:17:06.580 Attacking the Bank of England and any idea of discretionary control over the currency, 160 00:17:06.580 --> 00:17:09.060 Cobden fervently declared, 161 00:17:09.060 --> 00:17:14.500 I hold all idea of regulating the currency to be an absurdity, 162 00:17:14.500 --> 00:17:22.180 the very terms of regulating the currency and managing the currency I look upon to be an absurdity. 163 00:17:22.180 --> 00:17:28.820 The currency should regulate itself. It must be regulated by the trade and commerce of 164 00:17:28.820 --> 00:17:34.900 the world. I would neither allow the Bank of England nor any private banks to have what 165 00:17:34.900 --> 00:17:41.700 is called the management of the currency. I should never contemplate any remedial measure 166 00:17:41.700 --> 00:17:47.980 which left it to the discretion of individuals to regulate the amount of currency by any 167 00:17:47.980 --> 00:17:55.660 Any Principle or Standard Whatever. Rejecting both private and central bank management, 168 00:17:55.660 --> 00:18:02.180 Cobden was perceptive enough to see that the goal was not free banking per se, but to have 169 00:18:02.180 --> 00:18:09.580 a currency that mirrors genuine market forces of supply and demand, that is, the fortunes 170 00:18:09.580 --> 00:18:16.860 of gold or silver money. He saw that the currency principle aimed to do just that, and hence 171 00:18:16.860 --> 00:18:18.700 represents his endorsement. 172 00:18:18.700 --> 00:18:24.380 And while his support for a government national bank of issue was too much like leaping out 173 00:18:24.380 --> 00:18:31.440 of the frying pan into the fire, it was understandable in the light of his refusal to trust the Bank 174 00:18:31.440 --> 00:18:35.180 of England to cleave to the currency path. 175 00:18:35.180 --> 00:18:40.980 I should be sorry to trust the Bank of England again, having violated their principle, the 176 00:18:40.980 --> 00:18:48.980 and the Palmer Rule, for I never trust the same parties twice on an affair of such magnitude. 177 00:18:48.980 --> 00:18:54.980 6. The Renewed Threat to the Gold Standard 178 00:18:54.980 --> 00:19:03.980 Thus a consensus was building rapidly after the crisis of 1839 on behalf of the currency principle. 179 00:19:03.980 --> 00:19:09.980 But perhaps the precipitating factor in bringing Sir Robert Peel and the establishment 180 00:19:09.980 --> 00:19:15.760 and to enact the principle was a renewed threat to the gold standard. 181 00:19:15.760 --> 00:19:22.500 The gold standard had been the agreed-upon consensus of all parties since the 1820s, 182 00:19:22.500 --> 00:19:28.480 and since the return to gold, the assaults of inveterate statists and inflationists, 183 00:19:28.480 --> 00:19:32.840 like Birmingham's Atwood brothers, had faded away. 184 00:19:32.840 --> 00:19:39.620 But now, under the stimulus of economic crisis, fiat paper agitation and other inflationist 185 00:19:39.620 --> 00:19:50.940 If Manchester was the home of laissez-faire and sound money, Birmingham, its sister manufacturing 186 00:19:50.940 --> 00:19:57.460 town in the north, had long been the home of state-sponsored inflationism. 187 00:19:57.460 --> 00:20:04.460 Economic recession struck the Birmingham area in 1841, and Birmingham moved once more to 188 00:20:04.460 --> 00:20:07.340 a powerful attack upon gold. 189 00:20:07.340 --> 00:20:14.320 Thomas Atwood himself had retired from Parliament two years before, but Birmingham's representatives 190 00:20:14.320 --> 00:20:18.540 were more than willing to take up the old cause. 191 00:20:18.540 --> 00:20:24.660 Atwood had been replaced by merchant and manufacturer George Frederick Muntz, who agreed with the 192 00:20:24.660 --> 00:20:31.500 former's currency views, and Richard Spooner, the Tory whom Muntz had defeated for the seat, 193 00:20:31.500 --> 00:20:36.140 was an inflationist and a banking partner of Atwood's. 194 00:20:36.140 --> 00:20:41.780 The following year, the Birmingham Chamber of Commerce, presided over by Richard Spooner, 195 00:20:41.780 --> 00:20:48.220 launched a furious campaign pressuring the Prime Minister, Sir Robert Peel, into going 196 00:20:48.220 --> 00:20:50.500 off gold. 197 00:20:50.500 --> 00:20:57.540 Months put out a new edition of an old anti-gold tract, and, roaring back to the wars, Thomas 198 00:20:57.540 --> 00:21:03.700 Atwood, as might be expected, published articles and wrote numerous letters on his currency 199 00:21:03.700 --> 00:21:05.640 nostrums. 200 00:21:05.640 --> 00:21:12.600 The most influential of this outpouring of Birmingham inflationism was The Gemini Letters, 201 00:21:12.600 --> 00:21:20.080 published anonymously by Thomas B. Wright and John Harlow of Birmingham, first as 35 202 00:21:20.080 --> 00:21:27.280 letters in a country newspaper during 1843, and then in book form the following year as 203 00:21:27.280 --> 00:21:31.360 The Currency Question, The Gemini Letters. 204 00:21:31.360 --> 00:21:38.560 The Gemini plea was straight proto-Keynesian inflationism. Inconvertible paper money should 205 00:21:38.560 --> 00:21:44.640 be issued by the government in sufficient amount to stimulate consumer purchasing power 206 00:21:44.640 --> 00:21:52.680 and ensure full employment. In addition, the public debt should be inflated away. Thus, 207 00:21:52.680 --> 00:21:59.240 as Wright and Harlow put it, the proper plan, it appears to us, is to raise the capacity 208 00:21:59.240 --> 00:22:06.640 of the Consumer by securing high wages and ample profits, and by these means making light 209 00:22:06.640 --> 00:22:10.400 the fixed national obligations of the people. 210 00:22:10.400 --> 00:22:16.620 The only limit they would affix to the issue of paper money would be the degrees of prosperity 211 00:22:16.620 --> 00:22:21.480 which the different amount of issues would produce. 212 00:22:21.480 --> 00:22:26.720 There is every reason to believe that the Gemini Letters and the Birmingham Agitation 213 00:22:26.720 --> 00:22:30.000 were influential throughout the country. 214 00:22:30.000 --> 00:22:35.400 Henry Burgess and his committee of country bankers used the interchanges between the 215 00:22:35.400 --> 00:22:40.920 Birmingham Chamber and Robert Peel to denounce the gold standard. 216 00:22:40.920 --> 00:22:46.680 Both the Times and the New Weekly Economist were forced to expend a great deal of energy 217 00:22:46.680 --> 00:22:51.880 in defending the gold standard from its unsound enemies. 218 00:22:51.880 --> 00:22:57.880 At any rate, it is known that Peale owned a copy of the currency question and marked 219 00:22:57.880 --> 00:23:01.000 key passages in the book. 220 00:23:01.000 --> 00:23:09.080 The threat to gold was reinforced by a renewed agitation to dump gold for a bimetallic gold-silver 221 00:23:09.080 --> 00:23:10.640 standard. 222 00:23:10.640 --> 00:23:17.040 Heedless of the fact that bimetallism never works in practice, since Gresham's law pushes 223 00:23:17.040 --> 00:23:23.400 is the undervalued metal out of circulation and encourages the overvalued. 224 00:23:23.400 --> 00:23:30.000 The pro-silver forces found in bimetallism a way to support monetary inflation while 225 00:23:30.000 --> 00:23:36.080 remaining respectably in favor of precious metals as money. 226 00:23:36.080 --> 00:23:42.560 Silver supporters therefore began with a core from the fiat paper group, including Spooner, 227 00:23:42.560 --> 00:23:49.560 Mathias Atwood, George Muntz, and Henry Burgess and added numerous bankers and businessmen 228 00:23:49.560 --> 00:23:56.440 such as Richard Page, Henry W. Hobhouse, Chairman of the Committee of Country Bankers, William 229 00:23:56.440 --> 00:24:04.120 D. Haggard, and the eminent banker Alexander Behring, now Lord Ashburton. 230 00:24:04.120 --> 00:24:13.480 7. Triumph of the Currency School, Peel's Act of 1844 231 00:24:13.480 --> 00:24:20.920 At the heart of the triumph of the currency principle in Peel's Act of 1844 was one man, 232 00:24:20.920 --> 00:24:27.840 the statesman and political genius Sir Robert Peel. Peel has been habitually derided by 233 00:24:27.840 --> 00:24:35.200 by Historians as a confused middle-of-the-roader, a flexible political opportunist at best, 234 00:24:35.200 --> 00:24:41.360 a transitional figure unwittingly performing the historical function of ushering in the 235 00:24:41.360 --> 00:24:46.000 conservative and liberal party system in England. 236 00:24:46.000 --> 00:24:51.720 But as Professor Boyd Hilton has helped to point out, Peel was a far different figure, 237 00:24:51.720 --> 00:24:58.640 A statesman in the best sense, a Tory liberal who was consistent and even unyielding in 238 00:24:58.640 --> 00:25:06.640 principle and purpose, and flexible and entrepreneurial only in attaining the best tactics to arrive 239 00:25:06.640 --> 00:25:10.480 at his fixed ideological goals. 240 00:25:10.480 --> 00:25:17.060 As Hilton has demonstrated in every important sense, economic, financial and moral, Robert 241 00:25:17.060 --> 00:25:24.860 Peale was the John the Baptist, the founder, the progenitor of Gladstonian liberalism. 242 00:25:24.860 --> 00:25:31.760 During the 1820s, Peale was for most years head of the Home Office in Tory governments. 243 00:25:31.760 --> 00:25:37.900 He had long been opposed to Catholic emancipation and had even resigned his cabinet post in 244 00:25:37.900 --> 00:25:46.380 1827 in protest at the accession to the Prime Ministry of George Canning, head of Tory liberalism 245 00:25:46.380 --> 00:25:49.660 and Champion of Catholic Rights. 246 00:25:49.660 --> 00:25:55.940 Two years later, however, after the death of Canning, Peel, back as Home Secretary, 247 00:25:55.940 --> 00:26:02.020 was converted to Catholic Emancipation as part of his ever-increasing devotion to the 248 00:26:02.020 --> 00:26:05.960 classical liberal laissez-faire cause. 249 00:26:05.960 --> 00:26:11.760 At his conversion, Peel had the good grace to honor the prophets and warriors for Catholic 250 00:26:11.760 --> 00:26:20.400 Emancipation, whom he had opposed for so long, Fox, Gratton and Kenning himself. 251 00:26:20.400 --> 00:26:28.440 From 1831 on, Peel headed the Tory, now conservative, party, and also was the heart and soul of 252 00:26:28.440 --> 00:26:31.360 the liberal faction of the party. 253 00:26:31.360 --> 00:26:37.720 Peel's great prime ministry took place in 1841 to 1846. 254 00:26:37.720 --> 00:26:44.960 Here he fought vigorously for a peaceful foreign policy, battling against the pro-war imperialist 255 00:26:44.960 --> 00:26:50.400 Palmerston wing of the Liberal Party, and managed to conclude peace with the United 256 00:26:50.400 --> 00:26:55.500 States in the menacing Oregon boundary controversy. 257 00:26:55.500 --> 00:27:02.720 Peel also managed to lower tariffs, but lost in his fight for all-out free trade. 258 00:27:02.720 --> 00:27:07.640 His great accomplishment on that front was victory over the furious opposition of the 259 00:27:07.640 --> 00:27:14.760 Tory agriculturists, led by Benjamin Disraeli, in the complete repeal of the infamous Corn 260 00:27:14.760 --> 00:27:21.840 Laws, which had for decades established an enormous import tariff on wheat. 261 00:27:21.840 --> 00:27:27.680 In this fight against the artificially high price of food, Peel was spurred by the growing 262 00:27:27.680 --> 00:27:29.560 famine in Ireland. 263 00:27:29.560 --> 00:27:41.560 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. 264 00:27:41.560 --> 00:27:51.560 For his success, Peel's government was toppled by Disraeli, and he died in a hunting accident four years later, in 1850. 265 00:27:51.560 --> 00:28:00.560 Robert Peel's proudest achievement, however, was his banking reform, his Act of 1844. 266 00:28:00.560 --> 00:28:08.560 The Bank Charter Act of 1833 had provided for possible change in the charter during 1844. 267 00:28:08.560 --> 00:28:12.560 So that was the year of potential banking reform. 268 00:28:12.560 --> 00:28:19.560 As recent research has revealed, Peel's Act did not originate as a hostile straight jacket 269 00:28:19.560 --> 00:28:26.560 fastened on a reluctant, though subsequently complacent, bank by the efforts of the currency school. 270 00:28:26.560 --> 00:28:37.560 Rather, the act came from within the bank itself, as an attempt by the bank to find for itself a shortcut to currency management, 271 00:28:37.560 --> 00:28:43.560 as well as a means of obtaining its long sought monopoly over bank note issue. 272 00:28:43.560 --> 00:28:54.560 First, the ardent currency school leader, George Ward Norman, had, as a bank director, been promoting the plan since 1838. 273 00:28:54.560 --> 00:29:01.560 Although Norman lost within the bank on his currency proposal in 1840, he persisted, 274 00:29:01.560 --> 00:29:08.560 and the following year he became part of a five-man standing committee of the bank to discuss the scheme. 275 00:29:08.560 --> 00:29:38.560 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, 276 00:29:38.560 --> 00:29:46.520 study. In response to these discussions, Cotton and Heath, on 2 February, submitted to Peel 277 00:29:46.520 --> 00:29:52.400 the complete outline of what was soon to become Peel's Act. 278 00:29:52.400 --> 00:29:58.760 In essence, Peel's Act established the currency principle. It divided the Bank of England 279 00:29:58.760 --> 00:30:05.400 into an issue department, issuing banknotes, and a banking department, lending and issuing 280 00:30:05.400 --> 00:30:07.960 Banking Demand Deposits. 281 00:30:07.960 --> 00:30:14.720 True to the rigid currency school separation of notes and deposits, deposits would be totally 282 00:30:14.720 --> 00:30:21.840 free and unregulated, while notes would be limited to a ceiling of 14 million pounds 283 00:30:21.840 --> 00:30:29.800 matched by assets of government securities, roughly the extent of existing note issue. 284 00:30:29.800 --> 00:30:36.660 Any further notes could only be issued on the basis of 100% reserve in gold. 285 00:30:36.660 --> 00:30:42.480 The second main provision was to grant the Bank of England its long sought monopoly of 286 00:30:42.480 --> 00:30:44.420 the note issue. 287 00:30:44.420 --> 00:30:50.320 This was not done immediately, but to be phased in over a period of time. 288 00:30:50.320 --> 00:30:57.420 Specifically, no new banks were to issue any bank notes, existing banks were to issue no 289 00:30:57.420 --> 00:31:03.460 No Further Notes, and the Bank of England might contract with bankers to buy out their 290 00:31:03.460 --> 00:31:07.900 existing notes and replace them with the bank's own. 291 00:31:07.900 --> 00:31:14.820 In this way, private bank notes were grandfathered in, and the private, that is, joint-stock 292 00:31:14.820 --> 00:31:21.380 plus country, banks were neatly cartelized under the direction of the bank, with the 293 00:31:21.380 --> 00:31:26.460 private banks able to keep out all further competition. 294 00:31:26.460 --> 00:31:32.100 This grandfather cartel clause was not only designed to make the transition to the new 295 00:31:32.100 --> 00:31:40.060 order gradual, its main effect, and presumably its intent as well, was to bring the private 296 00:31:40.060 --> 00:31:46.700 banks, which might be expected to be the chief opponents of the new bill, around to become 297 00:31:46.700 --> 00:31:49.900 enthusiastic supporters. 298 00:31:49.900 --> 00:31:55.700 In his maneuvering within the cabinet before publicly presenting Peel's Act, the Prime 299 00:31:55.700 --> 00:32:01.860 The Minister made it clear that if we were about to establish in a new state of society 300 00:32:01.860 --> 00:32:08.780 a new system of currency, he would have preferred the Ricardian plan of government notes with 301 00:32:08.780 --> 00:32:15.620 no Bank of England or any other bank notes allowed, but that this plan would be impracticable 302 00:32:15.620 --> 00:32:21.820 in the existing state of the real world where a coalition must be built among such contending 303 00:32:21.820 --> 00:32:28.840 Banking Forces as the bank itself, Ricardians, free bankers and country bankers. 304 00:32:28.840 --> 00:32:35.260 The Desideratum, Peel shrewdly advised, was to determine to propose the course which they 305 00:32:35.260 --> 00:32:42.100 may conscientiously believe to reconcile, in the greatest degree, the qualities of being 306 00:32:42.100 --> 00:32:50.020 consistent with sound principle and suited to the present condition of society. 307 00:32:50.020 --> 00:32:55.980 News of Peel's coming bank charter bill had spread by the end of February, and the country 308 00:32:55.980 --> 00:33:01.900 banks, as expected, vigorously protested the bill during March and April. 309 00:33:01.900 --> 00:33:07.260 Finally, Peel introduced the bill to Parliament on 6 May. 310 00:33:07.260 --> 00:33:13.580 Shrewdly splitting his opposition, he applied the bill fully only to England. 311 00:33:13.580 --> 00:33:20.280 The ban on new banks issuing notes was extended to Scotland and Ireland, but the limitations 312 00:33:20.280 --> 00:33:24.680 on existing banks were applied to England alone. 313 00:33:24.680 --> 00:33:30.860 For the rest, Scotland and Ireland were left alone for the time being. 314 00:33:30.860 --> 00:33:36.800 The introduction of Peel's bill touched off a flurry of controversy, including a pamphlet 315 00:33:36.800 --> 00:33:38.960 war over the act. 316 00:33:38.960 --> 00:33:44.720 In particular, the new controversy gave rise to the banking school, which beforehand had 317 00:33:44.720 --> 00:33:48.260 been represented only by Took. 318 00:33:48.260 --> 00:33:54.020 Took weighed in with an inquiry into the currency principle, and John Fullerton entered the 319 00:33:54.020 --> 00:34:00.740 fray with his aforementioned pamphlet on the regulation of currencies, a widely circulated 320 00:34:00.740 --> 00:34:07.720 and influential tract, even though it was published in August 1844 after the passage 321 00:34:07.720 --> 00:34:15.580 of Peel's Act. S. J. Lloyd published a defense of the bill, while the formidable Colonel Torrens 322 00:34:15.580 --> 00:34:19.660 blasted Took in another pamphlet. 323 00:34:19.660 --> 00:34:25.700 The new banking school was noteworthy for being more royalist than the King, more favorable 324 00:34:25.700 --> 00:34:31.780 to the Bank of England than the Bank itself. In short, the banking school, along with 325 00:34:31.780 --> 00:34:37.700 most of the London bankers, favored the vesting of a monopoly of bank note issue in the Bank 326 00:34:37.700 --> 00:34:44.340 Bank of England. Its quarrel was solely with currency principle restrictions on the bank's 327 00:34:44.340 --> 00:34:49.980 issue of notes. This was surely the kind of opposition that the Bank of England could 328 00:34:49.980 --> 00:34:56.020 live with. While the banking school correctly spotted the main weakness of the currency 329 00:34:56.020 --> 00:35:02.860 school in not treating notes and deposits alike, this objection was scarcely directed 330 00:35:02.860 --> 00:35:10.020 to extending any sort of reserve requirements to bank deposits as well as notes. 331 00:35:10.020 --> 00:35:16.220 On the contrary, they would have been all the more outraged by, say, a consistent peels 332 00:35:16.220 --> 00:35:24.460 act that would have placed a 100% reserve requirement on all further bank liabilities, 333 00:35:24.460 --> 00:35:27.620 deposits as well as notes. 334 00:35:27.620 --> 00:35:33.220 One bit of curiosa about the emergence of the banking school is the lateness of its 335 00:35:33.220 --> 00:35:40.060 arrival, coming as it did almost when the fight over Peel's Act was over and flourishing 336 00:35:40.060 --> 00:35:42.040 for a while after. 337 00:35:42.040 --> 00:35:48.700 Its importance was more for raising theoretical issues and for raising the interest of historians 338 00:35:48.700 --> 00:35:55.600 of economic thought than in actually influencing the political battle. 339 00:35:55.600 --> 00:36:01.160 Another noteworthy aspect of the fray was the advent of a new and important star in 340 00:36:01.160 --> 00:36:10.060 the economic firmament, John Stuart Mill, 1806-1873, who joined the banking school side 341 00:36:10.060 --> 00:36:16.320 of the debate in an anonymous article, The Currency Question, in the radical Westminster 342 00:36:16.320 --> 00:36:17.320 Review. 343 00:36:17.320 --> 00:36:23.280 Actually, Mill had foreshadowed the banking school in an article written at the age of 344 00:36:23.280 --> 00:36:32.280 of 20, Paper Currency and Commercial Distress, in the short-lived Radical Parliamentary Review. 345 00:36:32.280 --> 00:36:37.720 Like so many others, Mill was first moved to turn his attention to banking and business 346 00:36:37.720 --> 00:36:45.300 cycles by the economic and financial crisis of 1825 and 1826. 347 00:36:45.300 --> 00:36:51.780 But in contrast to many others, he abandoned instead of extending his basic Ricardianism 348 00:36:51.780 --> 00:36:54.220 in this area. 349 00:36:54.220 --> 00:37:01.140 Instead of seeing the new phenomenon of business cycles as created by monetary disturbances, 350 00:37:01.140 --> 00:37:09.040 he saw them as caused by waves of speculation presumably generated by over-optimism. 351 00:37:09.040 --> 00:37:15.700 Money and banks were purely passive respondents to fluctuations in the economy. 352 00:37:15.700 --> 00:37:21.520 From this there followed his conclusion that movements in the money supply, at least under 353 00:37:21.520 --> 00:37:27.560 under a gold standard had no effect on prices or trade. 354 00:37:27.560 --> 00:37:34.400 Within the framework of a gold standard, prices rose first, dragging the money supply upwards, 355 00:37:34.400 --> 00:37:39.300 and later fell, pulling the money supply down. 356 00:37:39.300 --> 00:37:45.960 How could Mill square this odd doctrine with his overall Ricardianism and its thesis of 357 00:37:45.960 --> 00:37:50.400 the influence of the supply of money upon its value? 358 00:37:50.400 --> 00:37:56.800 We did so by an ingenious, though bizarre and fallacious, theory of what constitutes 359 00:37:56.800 --> 00:37:59.520 the supply of money. 360 00:37:59.520 --> 00:38:07.220 The money supply was made up not only of coin, notes and demand deposits, Mill opined, but 361 00:38:07.220 --> 00:38:12.960 also of the creditworthiness of every member of the public. 362 00:38:12.960 --> 00:38:19.700 When a bank made loans to some member of the public, then, it might increase notes or deposits 363 00:38:19.700 --> 00:38:27.500 is outstanding, but that increase is exactly compensated by a decrease in the credit worthiness 364 00:38:27.500 --> 00:38:29.700 of the borrowing citizens. 365 00:38:29.700 --> 00:38:36.260 Therefore, when banks lend money to individuals and businesses, the money supply does not 366 00:38:36.260 --> 00:38:38.440 increase at all. 367 00:38:38.440 --> 00:38:44.880 On the contrary, when banks purchase government securities or finance its deficit, they add 368 00:38:44.880 --> 00:38:49.780 Add directly to the total money supply by the same amount. 369 00:38:49.780 --> 00:38:55.800 In fact, they even add to the money supply when they lend to private citizens beyond 370 00:38:55.800 --> 00:39:00.320 the degree of their genuine credit worthiness. 371 00:39:00.320 --> 00:39:04.760 How is such credit worthiness to be determined? 372 00:39:04.760 --> 00:39:11.860 By banks confining their loans to sound borrowers and to the discounting of real bills that 373 00:39:11.860 --> 00:39:19.340 are short-term, matched by inventories of goods in process, and are therefore self-liquidating 374 00:39:19.340 --> 00:39:22.620 in a short period of time. 375 00:39:22.620 --> 00:39:29.100 Bank credit then happily follows the needs of trade upwards or downwards, and cannot 376 00:39:29.100 --> 00:39:31.540 raise prices. 377 00:39:31.540 --> 00:39:38.260 While completely fallacious, Mill's theory at least had the merit of providing some plausible 378 00:39:38.260 --> 00:39:45.020 No logical explanation for the banking school creed, one that was scarcely matched by any 379 00:39:45.020 --> 00:39:52.000 of his colleagues. Furthermore, Mill's doctrine provided a good reason for his devotion to 380 00:39:52.000 --> 00:39:59.720 the gold standard, and for his bullionist denunciation of inconvertible fiat money. 381 00:39:59.720 --> 00:40:06.580 Within his theory, if government or the central bank issues inconvertible fiat paper, that 382 00:40:06.580 --> 00:40:13.400 paper adds directly to the money supply and to inflation, rather than being neutralized 383 00:40:13.400 --> 00:40:20.920 by subtracting from credit worthiness. And, devoted to the gold standard, he remained. 384 00:40:20.920 --> 00:40:26.560 We have already seen Mill's denunciation of Thomas Atwood's inflationary fiat paper 385 00:40:26.560 --> 00:40:30.380 scheme in 1833. 386 00:40:30.380 --> 00:40:36.560 And what of the alleged free banking school, which Professor White has put forward as equal 387 00:40:36.560 --> 00:41:01.560 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. 388 00:41:01.560 --> 00:41:09.360 For not only would the bank now have a virtual monopoly of note issue, but in order to obtain 389 00:41:09.360 --> 00:41:15.800 notes in exchange for cashed-in deposits, the other banks would now be obliged to keep 390 00:41:15.800 --> 00:41:20.880 the great bulk of their reserves at the Bank of England. 391 00:41:20.880 --> 00:41:26.520 White tries to explain away the defections of the free bankers as having been bought 392 00:41:26.520 --> 00:41:31.240 out by Peel's cartelization grandfather clause. 393 00:41:31.240 --> 00:41:37.680 for the banks could continue to issue at their current level and no new competing banks would 394 00:41:37.680 --> 00:41:39.600 be permitted. 395 00:41:39.600 --> 00:41:45.940 But while this explanation is true enough, it raises the crucial question, how devoted 396 00:41:45.940 --> 00:41:50.480 were Professor White's heroes to free banking to begin with? 397 00:41:50.480 --> 00:41:56.660 Wasn't the free banking school simply a group devoted to the economic interests of the private 398 00:41:56.660 --> 00:41:59.320 commercial banks? 399 00:41:59.320 --> 00:42:05.340 Like for example the newly founded The Banker's Magazine, which had supposedly been a leading 400 00:42:05.340 --> 00:42:09.140 mouthpiece for free banking for the previous year. 401 00:42:09.140 --> 00:42:16.620 A writer in the June 1844 issue, while critical of the currency principle and the move towards 402 00:42:16.620 --> 00:42:24.060 monopoly issues for the bank, frankly approved the Peel Act as a whole for aiding profits 403 00:42:24.060 --> 00:42:30.340 of Existing Banks by Prohibiting All New Banks of Issue. 404 00:42:30.340 --> 00:42:39.380 And let us take in particular James William Gilbert, 1794-1863, leading spokesman for 405 00:42:39.380 --> 00:42:45.680 the country bankers, manager of the London and Westminster Bank, and, according to Professor 406 00:42:45.680 --> 00:42:50.900 White, one of the main theoreticians of the Free Banking School. 407 00:42:50.900 --> 00:43:01.900 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. 408 00:43:01.900 --> 00:43:10.900 Since 1834 he had been manager of the London and Westminster Bank, continually clashing with the Bank of England. 409 00:43:10.900 --> 00:43:40.900 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. 410 00:43:40.900 --> 00:43:48.780 Furthermore, the active factor goes from trade to prices to the requirement for more banknotes 411 00:43:48.780 --> 00:43:50.900 to flow in the economy. 412 00:43:50.900 --> 00:43:59.020 Thus, Gilbert, if there is an increase of trade without an increase of prices, I consider 413 00:43:59.020 --> 00:44:06.100 that more notes will be required to circulate that increased quantity of commodities. 414 00:44:06.100 --> 00:44:12.100 If there is an increase of commodities and an increase of prices also, of course you 415 00:44:12.100 --> 00:44:16.940 would require a still greater amount of notes. 416 00:44:16.940 --> 00:44:24.740 In short, whether prices rise or not, the supply of money must always increase. 417 00:44:24.740 --> 00:44:30.480 One wonders who the you is who would have such requirements. 418 00:44:30.480 --> 00:44:36.560 In the free market, on the contrary, if there is an increase in the production of commodities, 419 00:44:36.560 --> 00:44:45.000 prices will tend to fall and not rise. Furthermore, increased production of trade does not require 420 00:44:45.000 --> 00:44:52.840 or call forth an increase in bank money. The causal chain is the other way round. Increased 421 00:44:52.840 --> 00:45:00.600 banknote issue raises the money supply and prices, and also the nominal money value of 422 00:45:00.600 --> 00:45:03.960 the goods being produced. 423 00:45:03.960 --> 00:45:10.000 All historians of economic thought, except for Professor White, have placed Gilbert squarely 424 00:45:10.000 --> 00:45:14.280 in the banking school camp as one of its leaders. 425 00:45:14.280 --> 00:45:20.320 Since White seems to agree with Gilbert's fallacious wants of trade analysis, and since 426 00:45:20.320 --> 00:45:26.200 As he admits that this creed is similar to that of the banking school, his creation of 427 00:45:26.200 --> 00:45:33.720 an important new school of free banking, challenging both of the others, appears all the more tenuous 428 00:45:33.720 --> 00:45:35.720 and artificial. 429 00:45:35.720 --> 00:45:40.000 The main difference seems to be marginal and political. 430 00:45:40.000 --> 00:45:46.820 While all the banking school hailed the banking system as useful and harmless, most of them 431 00:45:46.820 --> 00:45:53.180 William laid special honors on the Bank of England, while Gilbert, as a joint-stock banker 432 00:45:53.180 --> 00:45:58.620 himself, placed most approval upon the commercial banks. 433 00:45:58.620 --> 00:46:04.820 When it came to the test, then, Gilbert, like his colleagues on the Bankers Magazine, caved 434 00:46:04.820 --> 00:46:10.500 in on what Professor White alleges to be his free banking principles. 435 00:46:10.500 --> 00:46:13.000 Thus, White concedes, 436 00:46:13.000 --> 00:46:24.500 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. 437 00:46:24.500 --> 00:46:36.500 Our rights are acknowledged, our privileges are extended, our circulation guaranteed, and we are saved from conflicts with reckless competitors. 438 00:46:36.500 --> 00:47:00.500 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. 439 00:47:00.500 --> 00:47:11.300 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. 440 00:47:11.300 --> 00:47:20.620 At this point, Sir Robert Peel unerringly zeroed in and drew forth Gilbert's apologia for the banking system. 441 00:47:20.620 --> 00:47:32.620 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? 442 00:47:32.620 --> 00:47:41.620 To which Gilbert admitted, I think they may. Nothing about exempting the Bank of England from that trust. 443 00:47:41.620 --> 00:47:57.220 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. 444 00:47:57.220 --> 00:48:02.220 Peale, suspicious of that devotion to gold, then asked, 445 00:48:02.220 --> 00:48:12.220 In the bank restriction days, do you think that the legitimate demands of commerce constituted a test that might be safely relied upon? 446 00:48:12.220 --> 00:48:15.220 To which Gilbert evasively replied, 447 00:48:15.220 --> 00:48:20.220 That is a period of which I have no personal knowledge. 448 00:48:20.220 --> 00:48:29.220 This was a particularly disingenuous point coming from the author of The History and Principles of Banking, 1834. 449 00:48:29.220 --> 00:48:41.220 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, 450 00:48:41.220 --> 00:48:46.220 at which point Gilbert threw in the towel on the gold standard. 451 00:48:46.220 --> 00:48:53.620 I think the legitimate demands of commerce even then would be a sufficient guide to go by. 452 00:48:53.620 --> 00:49:01.320 When Peel pressed Gilbert on the point, Gilbert began to vacillate, changing his views, returning to them, 453 00:49:01.320 --> 00:49:07.320 and then again falling back on his lack of personal experience. 454 00:49:07.320 --> 00:49:13.620 Peel was right in being suspicious of the strength of the banking school's devotion to gold. 455 00:49:13.620 --> 00:49:28.620 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. 456 00:49:28.620 --> 00:49:40.620 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 457 00:49:40.620 --> 00:49:46.540 was the needs of trade in addition to gold convertibility. 458 00:49:46.540 --> 00:49:52.680 The opening was sufficient to allow Robert Torrens to score a palpable hit. 459 00:49:52.680 --> 00:50:00.020 After a careful examination of Mr. Took's recent publication, 1844, I cannot discover 460 00:50:00.020 --> 00:50:06.220 any very essential or practical difference between his principles and those of the Birmingham 461 00:50:06.220 --> 00:50:12.140 of the Birmingham Economists, once deviate from the gold rule of causing the fluctuations 462 00:50:12.140 --> 00:50:18.860 of our mixed circulation to conform to what would be the fluctuations of a purely metallic 463 00:50:18.860 --> 00:50:26.100 currency, and the floodgates are opened, and the landmarks removed, between the abandonment 464 00:50:26.100 --> 00:50:31.660 of a metallic standard as recommended by the Birmingham Economists and the adoption of 465 00:50:31.660 --> 00:50:38.140 of Arrangements Hazarding the Maintenance of a Metallic Standard Recommended by Mr. Took. 466 00:50:38.140 --> 00:50:44.780 The difference in the practicable result might ultimately be nothing. 467 00:50:44.780 --> 00:50:51.980 John Fullerton's admission was even more damaging than Took's, avowing in his popular 1844 468 00:50:51.980 --> 00:50:57.780 tract that he wholeheartedly agreed with the decried doctrine of the old bank directors 469 00:50:57.780 --> 00:51:06.100 of 1810, namely the anti-bullionist position that so long as any bank sticks to short-term 470 00:51:06.100 --> 00:51:13.180 real bills, it cannot go wrong in issuing as many notes as the public will receive from 471 00:51:13.180 --> 00:51:14.180 it. 472 00:51:14.180 --> 00:51:18.780 And, of course, 1810 was a year of inconvertible money. 473 00:51:18.780 --> 00:51:24.620 It is no wonder that Robert Peel considered all opponents of the currency principle as 474 00:51:24.620 --> 00:51:28.180 Essentially Birmingham Men. 475 00:51:28.180 --> 00:51:36.020 Thus the opposition to Peel's Act, while theoretically important, was politically scattered and ineffective. 476 00:51:36.020 --> 00:51:41.860 The bill sailed through overwhelmingly and became law on 19 July. 477 00:51:41.860 --> 00:51:48.620 A second Peel bill, designed to make it more difficult to establish new joint stock banks, 478 00:51:48.620 --> 00:51:51.100 sailed through in September. 479 00:51:51.100 --> 00:51:57.460 The result of this tightening of bank control and monopoly as well as cartel privileges 480 00:51:57.460 --> 00:52:05.340 to existing banks was indeed the creation of virtually no new joint stock banks in England 481 00:52:05.340 --> 00:52:08.540 for the next eight years. 482 00:52:08.540 --> 00:52:14.860 At this point, Peel completed his currency task by extending its sway to Scotland and 483 00:52:14.860 --> 00:52:22.660 and Ireland in two bills that became law on 21 July 1845. 484 00:52:22.660 --> 00:52:28.220 Cautious in the face of regional traditions, Peel was not as tough on the Scottish and 485 00:52:28.220 --> 00:52:31.940 Irish banks as he had been on the English. 486 00:52:31.940 --> 00:52:38.060 Whereas the English commercial banks could issue no more banknotes period, the Scottish 487 00:52:38.060 --> 00:52:45.340 Scottish and Irish banks were treated as Peel's Act of 1844 treated the Bank of England. 488 00:52:45.340 --> 00:52:52.740 Their further banknote issues were limited to 100% gold reserves. 489 00:52:52.740 --> 00:52:58.100 Scotland had never had its banking restricted, having been free to establish joint stock 490 00:52:58.100 --> 00:53:03.000 banks and issue notes and deposits throughout Scotland. 491 00:53:03.000 --> 00:53:08.200 The Scottish bankers, however, like Gilbert and the English bankers, were easily bought 492 00:53:08.200 --> 00:53:13.860 off by cartel privileges even more lucrative than in England. 493 00:53:13.860 --> 00:53:20.280 As White admits, Peel in essence bought the support of all existing banks by suppressing 494 00:53:20.280 --> 00:53:25.440 potential entrants and competition for market shares. 495 00:53:25.440 --> 00:53:32.280 In addition, Peel shrewdly permitted the Scottish banks to keep the privilege denied to English 496 00:53:32.280 --> 00:53:39.220 Acts, including the Bank of England since the 1820s of continuing to issue their cherished 497 00:53:39.220 --> 00:53:43.380 small one-pound notes. 498 00:53:43.380 --> 00:53:49.020 The only important development in the year between the two Peel's Acts was the highly 499 00:53:49.020 --> 00:53:56.360 belated entry into the great debate of a new leader of the banking school, James Wilson, 500 00:53:56.360 --> 00:54:09.240 Wilson, 1805 to 1860, had founded The Economist for the express purpose of battling for free 501 00:54:09.240 --> 00:54:12.060 trade and laissez-faire. 502 00:54:12.060 --> 00:54:18.400 He criticized Peel's Act when it came up in 1844, but devoted most of his energies 503 00:54:18.400 --> 00:54:20.000 to free trade. 504 00:54:20.000 --> 00:54:27.560 Finally, in the spring of 1845, Wilson wrote a famous series of nine articles on currency 505 00:54:27.560 --> 00:54:36.080 and banking in The Economist, attacking the extension of Peel's Act to Scotland and Ireland. 506 00:54:36.080 --> 00:54:42.440 Wilson took an orthodox banking school approach, except that each of his positions was so emphatic 507 00:54:42.440 --> 00:54:49.200 that the inner inconsistencies and contradictions of the banking school were brought out particularly 508 00:54:49.200 --> 00:54:50.920 Starclay. 509 00:54:50.920 --> 00:54:56.840 Thus Wilson was far more emphatic and militant than Took or Fullerton about the importance 510 00:54:56.840 --> 00:55:03.080 of preserving the gold standard, so much so that Torrens was later to call Wilson the 511 00:55:03.080 --> 00:55:08.120 most able of the opponents of the Act of 1844. 512 00:55:08.120 --> 00:55:15.200 And yet, of the big four of the banking school, Took, Fullerton, Mill and Wilson, Wilson was 513 00:55:15.200 --> 00:55:22.660 was the only one who stated flatly and clearly that short-term self-liquidating real bills 514 00:55:22.660 --> 00:55:29.960 would be sufficient to protect the banks from over-issue, even without specie convertibility. 515 00:55:29.960 --> 00:55:37.360 Thus, Wilson declared that, in convertible paper notes might be issued to any extent 516 00:55:37.360 --> 00:55:43.580 that legitimate transactions required them, provided such issues were confined to the 517 00:55:43.580 --> 00:56:03.580 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. 518 00:56:03.580 --> 00:56:09.860 In addition of all the big four, Wilson was the friendliest to free banking and desirous 519 00:56:09.860 --> 00:56:14.580 of saving the alleged free banking system in Scotland. 520 00:56:14.580 --> 00:56:20.400 And yet, he also claimed that the Bank of England could never over-issue in a convertible 521 00:56:20.400 --> 00:56:25.400 and the Federal Money System, which was quite the opposite of the free banking approach.