WEBVTT NOTE 7. Monetary and Banking Thought, III: The Struggle Over the Currency School 1 00:00:00.000 --> 00:00:09.000 CHAPTER VII. MONETARY AND BANKING THOUGHT 3. THE STRUGGLE OVER THE CURRENCY SCHOOL 2 00:00:09.000 --> 00:00:15.000 1. THE TRAUMA OF 1825 3 00:00:15.000 --> 00:00:26.000 In 1823, the British economy finally recovered from the post-Napoleonic War and post-1819 agricultural depression. 4 00:00:26.000 --> 00:00:34.720 In fact, an expansionary boom got underway, so much so as to quieten the vociferous agricultural 5 00:00:34.720 --> 00:00:40.600 advocates of higher prices and the opponents of the return to gold. 6 00:00:40.600 --> 00:00:47.240 Unsurprisingly, Bank of England credit expansion led the way in this new inflationary boom, 7 00:00:47.240 --> 00:00:56.480 Its total credit rising from 17.5 million pounds in August 1823 to 25.1 million two 8 00:00:56.480 --> 00:01:07.180 years later, a huge increase of 43% or 21.7% uncompounded per annum. 9 00:01:07.180 --> 00:01:13.300 Much of the monetary and credit boom came through investment in highly speculative Latin 10 00:01:13.300 --> 00:01:16.020 American mining stocks. 11 00:01:16.020 --> 00:01:23.060 The great hard-money radical William Cobbett kept up a drumfire of attack on this inflation, 12 00:01:23.060 --> 00:01:29.640 but significantly he was also joined, if more privately, by such moderate hard-money men 13 00:01:29.640 --> 00:01:36.160 as William Huskisson, who worried that this universal jobbery in foreign stock will turn 14 00:01:36.160 --> 00:01:40.440 out the most tremendous bubble ever known. 15 00:01:40.440 --> 00:01:47.800 By late 1824, the exchanges turned unfavorable and gold began to flow abroad. 16 00:01:47.800 --> 00:01:54.320 By the following year, Britons began to demand gold from the banks in increasing numbers. 17 00:01:54.320 --> 00:02:00.960 Huskisson repeatedly warned the cabinet in the spring of 1825 that the bank, in its greedy 18 00:02:00.960 --> 00:02:06.760 folly, was playing over again the game of 1817. 19 00:02:06.760 --> 00:02:13.300 In late June, a bank in Bristol refused outright to give gold to a note-holder who spurned 20 00:02:13.300 --> 00:02:19.960 payments in Bank of England notes, and this ominous incident was widely publicized by 21 00:02:19.960 --> 00:02:26.420 Cobbett. Bank of England cash reserves were at their lowest in five years at the end of 22 00:02:26.420 --> 00:02:33.820 February at 8.86 million pounds, and from that low point they fell alarmingly to no 23 00:02:33.820 --> 00:02:58.820 No more than three million pounds at the end of October. Bank runs and a bank panic ensued and at the height of that panic in mid-December a note holder of the recalcitrant Bristol Bank distributed a leaflet warning the citizens of the city as there is no knowing what may happen, get gold, for if restriction come it will be too late. 24 00:02:58.820 --> 00:03:19.820 During the panic, the late Henry Thornton's important bank, Pol Thornton & Company, went under, despite last-minute borrowing from the Bank of England, and despite the fact that Sir Peter Pol, head of the bank, was connected by marriage with the governor of the Bank of England, Cornelius Buller. 25 00:03:19.820 --> 00:03:40.820 After a week of hysteria in mid-December, the Bank of England, pursuing a highly risky policy of massive loans to the banks and re-discounting of bills, managed to stem the run, even though its cash reserves had been reduced to one million pounds by the end of the year. 26 00:03:40.820 --> 00:03:48.820 The country was saved by a hair's breadth from another suspension of specie payments by the Bank of England. 27 00:03:48.820 --> 00:04:00.820 The bank pleaded with the government to order such a suspension, but the Tory government, largely due to the ardent pressure of Huskisson and Canning, resisted the bank's demands. 28 00:04:00.820 --> 00:04:16.820 The Prime Minister, Robert Banks Jenkinson, the Earl of Liverpool, much to the disgust of his fellow high Tories of the Duke of Wellington faction, agreed with Huskisson that, in the words of one prominent Wellington man, 29 00:04:16.820 --> 00:04:22.120 and, if the bank stopped payment, it would be a good opportunity of taking their charter 30 00:04:22.120 --> 00:04:26.340 from them for letting the bank break. 31 00:04:26.340 --> 00:04:33.400 The boom and crisis of 1825 dealt a traumatic lesson to thoughtful analysts of the monetary 32 00:04:33.400 --> 00:04:40.120 and economic scene, for these dramatic events demonstrated that the gold standard, important 33 00:04:40.120 --> 00:04:47.080 And as it was as a check on monetary and banking inflation, was not enough. 34 00:04:47.080 --> 00:04:53.380 Bank failures and boom and bust cycles could and would still occur. 35 00:04:53.380 --> 00:04:58.440 Something further then was needed to fulfill the promise of the bullionists. 36 00:04:58.440 --> 00:05:03.940 Something more than the gold standard was needed to counter the ills of boom and bust 37 00:05:03.940 --> 00:05:07.700 and of fractional reserve banking. 38 00:05:07.700 --> 00:05:14.740 The most concrete and immediate response to the Panic of 1825 was a decision of the government 39 00:05:14.740 --> 00:05:22.780 to outlaw small denomination under five pound banknotes, a measure that even the pro-bank 40 00:05:22.780 --> 00:05:26.100 credit Adam Smith had favored. 41 00:05:26.100 --> 00:05:32.520 In that way, at least for these popular and widely used small denominations, the public 42 00:05:32.520 --> 00:05:36.660 would be using only specie as money. 43 00:05:36.660 --> 00:05:45.040 On 22 March 1826, Parliament forbade banks in England and Wales to issue new small notes, 44 00:05:45.040 --> 00:05:50.840 or to reissue any old ones after April 1829. 45 00:05:50.840 --> 00:05:58.820 After June 1826, the Bank of England continued to obey this edict for a little over a century. 46 00:05:58.820 --> 00:06:04.040 In another banking reform, Parliament ended the system that had prevailed since the turn 47 00:06:04.040 --> 00:06:06.280 of the 18th century. 48 00:06:06.280 --> 00:06:11.840 The Bank of England had a monopoly of all commercial banking except for partnerships 49 00:06:11.840 --> 00:06:14.720 of less than six persons. 50 00:06:14.720 --> 00:06:17.560 This monopoly was now shaken. 51 00:06:17.560 --> 00:06:23.280 Corporate and large partnership banks were now permitted in England by an act of 26 May 52 00:06:23.280 --> 00:06:25.280 1826. 53 00:06:25.280 --> 00:06:31.240 Unfortunately, this liberalization was greatly weakened by the acts preserving the bank's 54 00:06:31.240 --> 00:06:39.360 and its monopoly of corporate and large-scale banking inside a 65-mile radius of London. 55 00:06:39.360 --> 00:06:47.040 In short, corporate or joint-stock banking was permitted only to the country banks. 56 00:06:47.040 --> 00:06:52.900 Political pressure by Scottish Tories gained an exemption from these reforms for Scotland. 57 00:06:52.900 --> 00:07:00.080 In the first place, Scotland already had joint-stock banking, and more importantly, Scotland had 58 00:07:00.080 --> 00:07:04.920 had long been a swamp of small banknote inflationism. 59 00:07:04.920 --> 00:07:11.360 Even after resumption of the gold standard in 1821, Scotland did not have a gold standard 60 00:07:11.360 --> 00:07:13.240 in practice. 61 00:07:13.240 --> 00:07:17.800 Frank Fetter discloses the solution as follows. 62 00:07:17.800 --> 00:07:24.480 Even after the resumption of payments in 1821, little coin had circulated, and to a large 63 00:07:24.480 --> 00:07:34.480 To a large degree there was a tradition, almost with the force of law, that banks should not be required to redeem their notes in coin. 64 00:07:34.480 --> 00:07:40.480 Redemption in London drafts was the usual form of paying note-holders. 65 00:07:40.480 --> 00:07:46.480 There was a core of truth in the remark of an anonymous pamphleteer, 1826. 66 00:07:46.480 --> 00:07:53.560 Any southern fool who had the temerity to ask for a hundred sovereigns, gold coins, might, 67 00:07:53.560 --> 00:07:59.360 if his nerves supported him through the cross-examination at the bank counter, think himself in luck 68 00:07:59.360 --> 00:08:02.360 to be hunted to the border. 69 00:08:02.360 --> 00:08:10.280 To work, a gold standard must, of course, be truly in effect, in practice as well as 70 00:08:10.280 --> 00:08:13.440 in the official statutes. 71 00:08:13.440 --> 00:08:20.440 The Scottish Tories, led by the eminent novelist Sir Walter Scott, successfully blocked application 72 00:08:20.440 --> 00:08:24.760 of the anti-small note reform to Scotland. 73 00:08:24.760 --> 00:08:30.960 The mouthpiece for Scottish high Toryism, Blackwood's Edinburgh Magazine, after hailing 74 00:08:30.960 --> 00:08:36.940 Scott's campaign, published two articles on the country banks and the Bank of England 75 00:08:36.940 --> 00:08:46.660 in 1827 and 1828, in which it wove together two major strains of ultra-inflationism, going 76 00:08:46.660 --> 00:08:51.340 off the gold standard and praising the country banks. 77 00:08:51.340 --> 00:08:57.140 Blackwoods also attacked the Bank of England as overly restrictionist, thus helping to 78 00:08:57.140 --> 00:09:04.020 launch the legend that the bank was too restrictive instead of being itself the main engine of 79 00:09:04.020 --> 00:09:05.180 inflation. 80 00:09:05.180 --> 00:09:11.540 In contrast, the Westminster Review, mouthpiece for the philosophical radicals, scoffed at 81 00:09:11.540 --> 00:09:17.340 the Scots for threatening a civil war in defense of the privilege of being plundered by the 82 00:09:17.340 --> 00:09:20.020 bank credit system. 83 00:09:20.020 --> 00:09:26.440 It was also in this period, in 1827, that Henry Burgess founded the powerful Committee 84 00:09:26.440 --> 00:09:33.500 of Country Bankers and edited, for over 20 years, the committee's influential periodical, 85 00:09:33.500 --> 00:09:35.740 circular to bankers. 86 00:09:35.740 --> 00:09:43.180 For that entire period Burgess kept up a drumfire of inflationist vilification of the gold standard, 87 00:09:43.180 --> 00:09:50.820 of those ignorant, vain and obstinate projectors, Huskisson, Peel and Ricardo, and of the Bank 88 00:09:50.820 --> 00:09:55.220 of England for being too restrictive of bank credit. 89 00:09:55.220 --> 00:10:00.740 He also denounced the political economists as being the curse of the country because 90 00:10:00.740 --> 00:10:04.240 Because of their generally hard-money views. 91 00:10:04.240 --> 00:10:10.380 For its part, Blackwood's Edinburgh Magazine pursued a similar unwavering line for nearly 92 00:10:10.380 --> 00:10:18.700 three decades, denouncing the return to gold in 1819 as having given the Jews, stockbrokers 93 00:10:18.700 --> 00:10:26.820 and attorneys of the country an enormous advantage at the expense of classes connected with land. 94 00:10:26.820 --> 00:10:33.940 On the other hand, William Cobbett continued his hard-hitting anti-bank paper stance, proclaiming 95 00:10:33.940 --> 00:10:41.780 in 1828 that ever since that hellish compound, paper money, was understood by me, I have 96 00:10:41.780 --> 00:10:44.980 wished for the destruction of the accursed thing. 97 00:10:44.980 --> 00:10:50.420 I have applauded every measure that tended to produce its destruction, and censured every 98 00:10:50.420 --> 00:10:54.220 measure having a tendency to preserve it. 99 00:10:54.220 --> 00:11:01.620 Blasting the inflationist and privileged Scottish country banks as the Scottish monopolists, 100 00:11:01.620 --> 00:11:08.240 Cobbett also denounced the Scotsman John Ramsay McCullough for defending bank paper. 101 00:11:08.240 --> 00:11:14.380 This Scotch stupidity, conceit, pertinacity and impudence. 102 00:11:14.380 --> 00:11:19.280 Cobbett escalated the attack by asserting that these ravenous rooks of Scotland have 103 00:11:19.280 --> 00:11:23.540 been a pestilence to England for more than 200 years. 104 00:11:23.540 --> 00:11:30.380 It might be commented, of course, that one simple way for England to cast off that pestilence 105 00:11:30.380 --> 00:11:37.260 was for England to give Scotland back its independence, a solution that Cobbett and the other nationalist 106 00:11:37.260 --> 00:11:42.020 English radicals somehow failed to consider. 107 00:11:42.020 --> 00:11:47.780 Despite the continuing inflationism of the high Tories and of the Birmingham Atwoods, 108 00:11:47.780 --> 00:11:54.580 And despite the eminent clash of economic opinion over banking reform, the bulk of economists 109 00:11:54.580 --> 00:12:01.900 stood four-square from the mid-1820s on in defense of the gold standard. 110 00:12:01.900 --> 00:12:05.540 That much had been agreed upon and accomplished. 111 00:12:05.540 --> 00:12:12.380 Their differences on banking did not prevent unity on this fundamental monetary question. 112 00:12:12.380 --> 00:12:20.740 John Ramsey McCullough, James Mill and Nassau W. Sr. stood solidly in favor of gold. Even 113 00:12:20.740 --> 00:12:28.020 the alleged radical, and for a time pre-Keynesian Malthus, expressed complete support for return 114 00:12:28.020 --> 00:12:36.380 to the gold standard in 1823 and thereafter. Archbishop Waitley, Mountefort Longfield, 115 00:12:36.380 --> 00:12:43.740 Thomas Perinette Thompson, even the archinductivist and historicist Richard Jones of Cambridge, 116 00:12:43.740 --> 00:12:50.500 were all staunch supporters of gold. Even the often confused and ironic John Stuart 117 00:12:50.500 --> 00:12:57.100 Mill was hard-hitting in defense of gold. The younger Mill, upon reading the testimony 118 00:12:57.100 --> 00:13:06.340 in 1821 of Thomas Atwood in favor of a combined silver and inconvertible fiat paper standard, 119 00:13:06.340 --> 00:13:13.700 denounced the idea of depreciating the standard as a gigantic plan of confiscation. 120 00:13:13.700 --> 00:13:19.220 Mill thundered that men who are not knaves in their private dealings should understand 121 00:13:19.220 --> 00:13:26.380 what the word depreciation means and yet support it, speaks but ill for the existing state 122 00:13:26.380 --> 00:13:30.260 of morality on such subjects. 123 00:13:30.260 --> 00:13:36.380 2. THE EMERGENCE OF THE CURRENCY PRINCIPLE 124 00:13:36.380 --> 00:13:42.580 The prohibition of small notes, however, scarcely tackled the main problem. The first to go 125 00:13:42.580 --> 00:13:48.240 beyond this minor aspect of banking and go straight to the heart of the matter was a 126 00:13:48.240 --> 00:13:53.820 brilliant and influential thinker who has remained as little known to historians as 127 00:13:53.820 --> 00:13:56.940 as he was obscure in his own day. 128 00:13:56.940 --> 00:14:06.340 It is with justice that Lionel Robbins has wittily referred to James Pennington, 1777-1862, 129 00:14:06.340 --> 00:14:13.580 as the Mycroft Holmes of the later monetary controversy of the Classical period. 130 00:14:13.580 --> 00:14:19.520 James Pennington was born into a prominent Quaker family in the town of Kendall in West 131 00:14:19.520 --> 00:14:20.740 Moreland. 132 00:14:20.740 --> 00:14:26.200 His father, William, was a bookseller, printer and architect who eventually became mayor 133 00:14:26.200 --> 00:14:28.600 of Kendall. 134 00:14:28.600 --> 00:14:34.260 Graduating from a first-rate Quaker school at Kendall, Pennington moved to London. 135 00:14:34.260 --> 00:14:39.580 Little is known of his personal life thereafter except that he lived in Clapham and that he 136 00:14:39.580 --> 00:14:46.620 and his large family of seven children were parishioners and James a trustee of the famous 137 00:14:46.620 --> 00:14:53.300 Clapham Anglican Parish Church, obviously abandoning the Quakerism of his youth. 138 00:14:53.300 --> 00:14:58.700 Apart from that, we know that he was a merchant, gentleman and accountant, and briefly became 139 00:14:58.700 --> 00:15:04.080 a member of the Board of Control for India in 1832. 140 00:15:04.080 --> 00:15:10.260 From then on, retired from commerce, he would be consulted repeatedly in technical financial 141 00:15:10.260 --> 00:15:13.420 matters by the government. 142 00:15:13.420 --> 00:15:20.360 In the wake of the great banking crisis of December 1825, London was agog with discussions 143 00:15:20.360 --> 00:15:22.600 of money and banking. 144 00:15:22.600 --> 00:15:28.740 The august political economy club dealing with this topic in its meetings of 9 January 145 00:15:28.740 --> 00:15:32.840 and 6 February 1826. 146 00:15:32.840 --> 00:15:39.460 At the latter occasion, Pennington was present as a guest, and stimulated by the discussion, 147 00:15:39.460 --> 00:15:48.460 He sat down to write a memorandum on the subject to the powerful president of the board of trade, the liberal Tory, William Huskisson. 148 00:15:48.460 --> 00:15:56.460 Huskisson did not request the memo, but he was known to be receptive to intelligent memoranda on crucial topics, 149 00:15:56.460 --> 00:16:03.460 and this method of promoting his views may have been suggested to Pennington by his longtime friend 150 00:16:03.460 --> 00:16:09.780 and one of the original founders of the political economy club, the merchant and economist Thomas 151 00:16:09.780 --> 00:16:11.580 Took. 152 00:16:11.580 --> 00:16:17.940 In this first memo to Huskisson on 13 February on the private banking establishments of the 153 00:16:17.940 --> 00:16:26.340 metropolis, Pennington outlined with crystal clarity how private banks, by expanding loans, 154 00:16:26.340 --> 00:16:31.500 create demand deposits which function as part of the money supply. 155 00:16:31.500 --> 00:16:37.180 Walter Boyd and others had pointed this out, but Pennington's exposition was unmatched 156 00:16:37.180 --> 00:16:45.460 in its lucidity, and when published as an appendix to Took's Letter to Grenville, 1829, 157 00:16:45.460 --> 00:16:49.660 greatly influenced the banking controversies of the era. 158 00:16:49.660 --> 00:16:55.680 Unfortunately, the letter did not sufficiently influence Pennington's own camp, the Currency 159 00:16:55.680 --> 00:17:03.000 School, who stubbornly and tragically failed to realize that bank demand deposits formed 160 00:17:03.000 --> 00:17:08.560 part of the supply of money, equivalent to bank notes. 161 00:17:08.560 --> 00:17:13.400 Without any encouragement from Huskisson, Pennington followed up his first memorandum 162 00:17:13.400 --> 00:17:21.880 with another, a year later, 16 May 1827, on observations on the coinage. 163 00:17:21.880 --> 00:17:27.060 After explaining the technical procedures of the gold standard, Pennington detailed the 164 00:17:27.060 --> 00:17:34.880 dangers to gold of the existence of a paper currency, and then added a tantalizing hint. 165 00:17:34.880 --> 00:17:41.440 It is possible to regulate an extensive paper circulation to render its contraction and 166 00:17:41.440 --> 00:17:48.480 expansion subject to the same law as that which determines the expansion and contraction 167 00:17:48.480 --> 00:17:53.800 of a Currency Wholly and Exclusively Metallic. 168 00:17:53.800 --> 00:17:59.960 Here was the first indication in Great Britain of the currency principle, that more than 169 00:17:59.960 --> 00:18:08.920 simple gold redeemability was needed to transform bank money into a mere surrogate of gold. 170 00:18:08.920 --> 00:18:15.140 William Huskisson finally sat up and took notice, writing to Pennington that, I perceive 171 00:18:15.140 --> 00:18:20.180 I believe that towards the end of your paper on coinage you state an opinion that means 172 00:18:20.180 --> 00:18:26.500 may be found of preventing those alternations of excitement and depression which have been 173 00:18:26.500 --> 00:18:31.500 attended with such alarming consequences to this country. 174 00:18:31.500 --> 00:18:36.860 This for a long time has appeared to me to be one of the most important matters which 175 00:18:36.860 --> 00:18:39.620 can engage the attention. 176 00:18:39.620 --> 00:18:45.800 The too great facility of expansion at one time and the too rapid contraction of paper 177 00:18:45.800 --> 00:18:52.900 credit at another is unquestionably an evil of the greatest magnitude. 178 00:18:52.900 --> 00:18:59.300 In short, bank credit and paper money were perceived by Huskisson as responsible for 179 00:18:59.300 --> 00:19:01.440 the business cycle. 180 00:19:01.440 --> 00:19:03.780 What then could be done about it? 181 00:19:03.780 --> 00:19:09.440 He urged Pennington to elaborate on his tantalizing suggestion. 182 00:19:09.440 --> 00:19:12.240 The upshot was an ironic one. 183 00:19:12.240 --> 00:19:17.600 While James Pennington's third memorandum in reply on the management of the Bank of 184 00:19:17.600 --> 00:19:25.720 England, 23 June, was the first fateful elaboration of the justly famous currency principle, it 185 00:19:25.720 --> 00:19:30.340 was scarcely action-oriented enough to suit the minister. 186 00:19:30.340 --> 00:19:37.000 At any rate, monetary matters faded temporarily, and Huskisson himself resigned his post the 187 00:19:37.000 --> 00:19:41.160 the following year to die three years later. 188 00:19:41.160 --> 00:19:46.640 But Pennington's memorandum, nevertheless, was very important, for it declared that to 189 00:19:46.640 --> 00:19:53.880 make bank paper currency stable and tied to gold, it must be regulated to conform to the 190 00:19:53.880 --> 00:19:56.860 movements of the gold supply. 191 00:19:56.860 --> 00:20:03.280 If the Bank of England were the monopoly issuer of notes, Pennington prophetically counseled, 192 00:20:03.280 --> 00:20:10.280 It would be easy for it to control the total supply. In lieu of that, the private banks, 193 00:20:10.280 --> 00:20:18.000 London and country, could in some way be totally and immediately controlled by the bank. In 194 00:20:18.000 --> 00:20:24.360 either case, the bank could then be compelled to keep its securities, that is, its earning 195 00:20:24.360 --> 00:20:32.200 assets, fixed in total amount. If so, its note issues would move in the same direction 196 00:20:32.200 --> 00:20:36.360 and to the same extent as its stock of gold. 197 00:20:36.360 --> 00:20:43.720 While the bank would not have 100% gold reserves to its notes, the legally fixed gap between 198 00:20:43.720 --> 00:20:50.840 them would mean that banknotes and, by extension, the total money supply would move in the same 199 00:20:50.840 --> 00:20:59.480 way and to the same extent as the gold supply, thus arriving at the equivalent of 100% specie 200 00:20:59.480 --> 00:21:04.680 Money for All Further Operations of the Bank. 201 00:21:04.680 --> 00:21:13.520 Here was the seed of Peale's great act of 1844, the embodiment of the currency principle. 202 00:21:13.520 --> 00:21:20.680 But Huskisson could not seize on this point because of Pennington's hesitations and qualifications. 203 00:21:20.680 --> 00:21:26.680 In particular, Pennington, of all people, knew full well that bank deposits are just 204 00:21:26.680 --> 00:21:42.560 It becomes a mystery that Pennington, the founder of the currency principle, should 205 00:21:42.560 --> 00:21:49.580 have been so alert to bank deposits' role as money, while the currency school concentrated 206 00:21:49.580 --> 00:21:54.320 with such fierce insistence on bank notes alone. 207 00:21:54.320 --> 00:22:01.680 They applied this variant of 100% gold money to notes exclusively, leaving deposits to 208 00:22:01.680 --> 00:22:06.360 go unchecked and unregulated on their own. 209 00:22:06.360 --> 00:22:12.100 Some historians speculate that the currency school made the conscious decision to avoid 210 00:22:12.100 --> 00:22:19.600 applying their principle to deposits because of an alleged difficulty in practical application, 211 00:22:19.600 --> 00:22:25.240 and because they believed that note holders, presumably being a broader or less wealthy 212 00:22:25.240 --> 00:22:32.640 section of the population, were more likely to cash in for gold than deposit holders. 213 00:22:32.640 --> 00:22:39.380 If so, then this practical decision to forget about deposits proved in the long run to be 214 00:22:39.380 --> 00:22:49.400 the height of impracticality, indeed fatal to the currency, or 100% gold, cause. 215 00:22:49.400 --> 00:22:55.600 For Peel's Act's prohibitions on further fractional reserve note issue simply induced 216 00:22:55.600 --> 00:23:02.080 the banking system, led by the Bank of England, to shift their inflationary and expansionary 217 00:23:02.080 --> 00:23:10.080 attentions to deposits alone, a condition that still prevails throughout the world. 218 00:23:10.080 --> 00:23:15.520 Currency school myopia on demand deposits scarcely extended to their cousins in the 219 00:23:15.520 --> 00:23:17.280 United States. 220 00:23:17.280 --> 00:23:25.520 On the contrary, such 100% gold leaders and Jacksonian theorists as Condi Raquet, Amos 221 00:23:25.520 --> 00:23:34.640 Kendall and the magnificent Jacksonian William M. Gouge of Philadelphia, 1796-1863, were 222 00:23:34.640 --> 00:23:41.680 perfectly aware of deposits' equivalent role to notes in the issue of bank money. 223 00:23:41.680 --> 00:23:48.480 A Philadelphia editor, Gouge became a treasury official in the 1830s and remained there from 224 00:23:48.480 --> 00:23:56.480 that point on. Gouge held firmly that deposits are, in all cases, equal to notes, that they 225 00:23:56.480 --> 00:24:02.880 may be created by bank lending and that they have the same inflationary effect on prices 226 00:24:02.880 --> 00:24:11.000 as bank notes. He called for a return to the 100% gold reserves backing the deposits of 227 00:24:11.000 --> 00:24:14.640 of the original banks of Hamburg and Amsterdam. 228 00:24:14.640 --> 00:24:20.800 Gouge was also the main theoretician of the Van Buren Polk independent treasury system 229 00:24:20.800 --> 00:24:27.320 in which the Federal Government would separate itself totally from banking, first by keeping 230 00:24:27.320 --> 00:24:35.060 no deposits in any banks, spending its funds directly in specie, and second by accepting 231 00:24:35.060 --> 00:24:40.980 in taxes only specie and no banknotes or deposits. 232 00:24:40.980 --> 00:24:47.820 In that way, the American banking system would be free not only of a central bank, as insured 233 00:24:47.820 --> 00:24:55.820 by President Jackson in the early 1830s, but also of any link to or support by the Federal 234 00:24:55.820 --> 00:24:58.140 Government. 235 00:24:58.140 --> 00:25:04.800 Other influential expressions of the currency principle emerged from the Panic of 1825. 236 00:25:04.800 --> 00:25:13.260 The highly influential Sir Henry Drummond, 1786-1860, banker and Member of Parliament, 237 00:25:13.260 --> 00:25:20.760 in the 4th edition, 1826, of his Elementary Propositions on the Currency, was driven by 238 00:25:20.760 --> 00:25:28.440 the crisis to the realization that mere specie convertibility was not enough to avoid boom-bust 239 00:25:28.440 --> 00:25:32.040 crises in money and in prices. 240 00:25:32.040 --> 00:25:38.120 He therefore concluded that the quantity of paper money should be kept constant, so that 241 00:25:38.120 --> 00:25:44.960 variations in the money supply would only reflect changes in the stock of specie. 242 00:25:44.960 --> 00:25:51.600 In the same year, Richard Page, writing as Daniel Hardcastle, stated the currency principle 243 00:25:51.600 --> 00:25:54.640 in crystal clear form. 244 00:25:54.640 --> 00:26:01.200 That only is a sound and well-regulated state of things when no greater numerical amount 245 00:26:01.200 --> 00:26:07.400 of Paper is in circulation than would have circulated of the precious metals if no paper 246 00:26:07.400 --> 00:26:10.400 had existed. 247 00:26:10.400 --> 00:26:18.040 After the crisis of 1825, then, a consensus began to form, beginning with James Pennington 248 00:26:18.040 --> 00:26:23.520 and spreading through knowledgeable circles in Britain, that the gold standard is not 249 00:26:23.520 --> 00:26:30.260 enough and that bank credit must not be allowed to expand unduly. 250 00:26:30.260 --> 00:26:35.460 At the ultimate pole were the currency school, who believed that commercial banks must be 251 00:26:35.460 --> 00:26:43.020 restricted to 100% of gold, at least for any further note issues. 252 00:26:43.020 --> 00:26:48.820 Most of the school unfortunately left demand deposits out of their reckoning as not part 253 00:26:48.820 --> 00:26:51.340 of the money supply. 254 00:26:51.340 --> 00:26:57.500 Other established leaders, such as bank governor John Horsley Palmer, developed the far more 255 00:26:57.500 --> 00:27:04.700 A qualified view advocating more control by the Bank of England. Bank money should pyramid 256 00:27:04.700 --> 00:27:12.920 on top of a fixed ratio of reserves to liabilities maintained by the Bank of England. 257 00:27:12.920 --> 00:27:19.740 But if bank credit was to be confined to movements of gold, and thereby to end the threat of 258 00:27:19.740 --> 00:27:26.620 inflation and the business cycle, by what mechanism was this to be accomplished? In 259 00:27:26.620 --> 00:27:32.220 In most cases, and certainly among virtually all adherents of the currency school, the 260 00:27:32.220 --> 00:27:38.720 answer was to be the Bank of England itself, the very institution which bullionists and 261 00:27:38.720 --> 00:27:45.980 their successors had long seen to be the central agent of inflation and credit expansion. 262 00:27:45.980 --> 00:27:52.740 The idea was that the bank would either ride herd over the private banks, or, in the developing 263 00:27:52.740 --> 00:28:00.020 and Census to assume a monopoly over all issue of banknotes, leaving banks to issue demand 264 00:28:00.020 --> 00:28:05.220 deposits in a way that tied them inexorably to the Bank of England. 265 00:28:05.220 --> 00:28:11.300 In short, the modern banking system, with all its deep inflationary flaws, was what 266 00:28:11.300 --> 00:28:16.060 was envisioned and brought forth by the currency school. 267 00:28:16.060 --> 00:28:23.380 In the name of ultra-hard money, they unwittingly imposed upon Great Britain and later the world, 268 00:28:23.380 --> 00:28:30.020 the modern centralized inflationary fractional reserve and central bank-dominated banking 269 00:28:30.020 --> 00:28:31.520 system. 270 00:28:31.520 --> 00:28:37.020 The theory was that the bank would control the private banks through monopoly of note 271 00:28:37.020 --> 00:28:44.340 issue and other measures, while the government would rigidly control the bank itself. 272 00:28:44.340 --> 00:28:50.220 The other main instrument of bank control over private banks was to centralize gold in the 273 00:28:50.220 --> 00:28:58.420 hands of the bank and to make Bank of England notes legal tender for all citizens and banks. 274 00:28:58.420 --> 00:29:04.940 In that way, the banks would be induced to surrender their gold to the bank and to happily 275 00:29:04.940 --> 00:29:10.380 pyramid their loans and deposits on top of their bank reserves. 276 00:29:10.380 --> 00:29:17.140 Their demand deposits at the bank could always be cashed in for legal tender currency. 277 00:29:17.140 --> 00:29:23.540 In short, as this proposed structure came to be established in Britain and then elsewhere, 278 00:29:23.540 --> 00:29:28.340 the world was saddled with the modern banking system. 279 00:29:28.340 --> 00:29:35.660 It is still a mystery how men so keenly aware and critical of the cartelizing and inflationary 280 00:29:35.660 --> 00:29:53.660 The monetary role of the Bank of England should have proposed centralizing control into the hands of the very same bank, and all in the name of stopping inflation and tying the monetary system closely and one-to-one to gold. 281 00:29:53.660 --> 00:29:58.660 It was truly putting the fox in charge of the proverbial chicken coop. 282 00:29:58.660 --> 00:30:05.260 A minority of currency men, it is true, favored another variant, first recommended by the 283 00:30:05.260 --> 00:30:11.340 spiritual father of the currency school, David Ricardo himself. 284 00:30:11.340 --> 00:30:18.380 Already at the end of his 1816 pamphlet on economical and scarce currency, Ricardo had 285 00:30:18.380 --> 00:30:27.100 hinted at this solution, influenced by an unpublished proposal of J. B. Say in 1814. 286 00:30:27.100 --> 00:30:33.660 In his last posthumous work, published in 1824, The Plan for the Establishment of a 287 00:30:33.660 --> 00:30:41.060 National Bank, Ricardo put forward and elaborated the new plan, the appointment of a government 288 00:30:41.060 --> 00:30:47.580 board to be in charge of a national note-issue monopoly with the Bank of England essentially 289 00:30:47.580 --> 00:30:51.660 confined to credit and deposit banking. 290 00:30:51.660 --> 00:30:57.300 The idea was that since the bank could not be trusted to be in charge of monopoly note 291 00:30:57.300 --> 00:31:02.300 issue, that function should be trusted to the central government. 292 00:31:02.300 --> 00:31:09.140 But surely here was even more of a fox, if not a wolf, to be placed in command. 293 00:31:09.140 --> 00:31:15.820 Government is just as much, if not more, inclined toward monetary and credit inflation as any 294 00:31:15.820 --> 00:31:18.940 private central bank. 295 00:31:18.940 --> 00:31:25.540 Bank can always use inflation to finance the deficits it desires and to subsidize credit 296 00:31:25.540 --> 00:31:28.460 to its political allies. 297 00:31:28.460 --> 00:31:34.780 There were other, far more effective ways to restrict bank credit expansion. 298 00:31:34.780 --> 00:31:42.660 During the Jackson Van Buren era in the United States, approximately 1828 through the 1840s, 299 00:31:42.660 --> 00:31:47.860 which roughly coincided with the period of the currency banking school controversies 300 00:31:47.860 --> 00:31:53.740 in Britain, the program of the hard money Jacksonian movement was far more thorough 301 00:31:53.740 --> 00:32:01.420 going and ultimately far more realistic than their spiritual cousins of the currency school. 302 00:32:01.420 --> 00:32:07.900 Both groups aimed at achieving hard money tied very closely to specie in order to end 303 00:32:07.900 --> 00:32:11.440 inflation and the boom bust cycle. 304 00:32:11.440 --> 00:32:17.380 But instead of maintaining and strengthening the central bank, the Jacksonians far more 305 00:32:17.380 --> 00:32:22.520 more logically made it their first order of business to destroy it. 306 00:32:22.520 --> 00:32:29.080 The next step for Gouge, Kendall, Raguet and their followers, who included Presidents Jackson 307 00:32:29.080 --> 00:32:35.480 and Van Buren, was to separate the Federal Government totally from money by establishing 308 00:32:35.480 --> 00:32:42.900 an independent treasury system passed by the Van Buren administration in 1840, repealed 309 00:32:42.900 --> 00:32:51.420 by the Whigs and then permanently reestablished by the Jacksonian Polk Administration in 1846. 310 00:32:51.420 --> 00:32:58.380 The idea of the independent treasury was, first, for the treasury to keep its own funds 311 00:32:58.380 --> 00:33:05.400 without depositing them in any banks, and, second, for the treasury to accept in taxes 312 00:33:05.400 --> 00:33:12.900 Banknotes and Other Fees, Only Specie and Not Even Notes of Specie Redeeming Banks. 313 00:33:12.900 --> 00:33:18.560 In that way, the Federal Government would give no encouragement whatever to the circulation 314 00:33:18.560 --> 00:33:21.740 of banknotes or deposits. 315 00:33:21.740 --> 00:33:28.320 Another plank in the Van Buren program, considered but never passed as being too hard hitting, 316 00:33:28.320 --> 00:33:34.340 was a Federal bankruptcy law which would have forced any bank to close its doors whenever 317 00:33:34.340 --> 00:33:41.740 or it failed to meet its contractual obligations to redeem its notes or deposits in specie 318 00:33:41.740 --> 00:33:43.840 on demand. 319 00:33:43.840 --> 00:33:49.300 Other parts of the Jacksonian program were state enforcement of bankruptcy, the moment 320 00:33:49.300 --> 00:33:56.260 a bank should fail to pay in specie, and even the outlawing of all fractional reserve banking 321 00:33:56.260 --> 00:34:03.880 as inherently fraudulent, as promising something that could not possibly be fulfilled, instantaneous 322 00:34:03.880 --> 00:34:09.840 and its redemption of all demand liabilities in specie. 323 00:34:09.840 --> 00:34:15.600 Less thorough going than the Jacksonian proposals, but better than the currency school's reliance 324 00:34:15.600 --> 00:34:23.200 on the central bank, were the proposals of a free banking group that arose after 1825, 325 00:34:23.200 --> 00:34:26.860 calling for elimination of the Bank of England. 326 00:34:26.860 --> 00:34:32.440 The free banking proponents, however, were scarcely united in their theoretical outlook 327 00:34:32.440 --> 00:34:38.320 or in their goals. Some wanted free banking in order to eliminate what they considered 328 00:34:38.320 --> 00:34:45.000 to be Bank of England restraint on bank credit expansion, while others wanted it for the 329 00:34:45.000 --> 00:34:52.380 opposite reason, to approach the currency school goal of pure specie money. 330 00:34:52.380 --> 00:34:58.140 In the former category, for example, was the veteran inflationist and anti-bullionist Sir 331 00:34:58.140 --> 00:35:13.140 by Sir John Sinclair. On the other hand, a particularly important example of the latter, hard money category, was the long-time bullionist and clerk at the Royal Mint, Robert Mushet. 332 00:35:13.140 --> 00:35:27.140 In his substantial book, An Attempt to Explain from Facts the Effects of the Issues of the Bank of England, 1826, Mushet set forth a currency principle type of business cycle theory. 333 00:35:27.140 --> 00:35:34.700 The Bank of England, he pointed out, set into motion an expansionary policy that created 334 00:35:34.700 --> 00:35:42.340 an inflationary boom, and that later had to be reversed into a contractionary depression. 335 00:35:42.340 --> 00:35:48.860 Like the later currency school, Muschit's aim was to arrive at a purely metallic currency 336 00:35:48.860 --> 00:35:55.300 or its equivalent, but he saw that free banking rather than central banking was a better way 337 00:35:55.300 --> 00:35:57.460 to Achieve it. 338 00:35:57.460 --> 00:36:04.620 Thus Muschit hailed the Act of 1826, allowing joint-stock banking outside of the environs 339 00:36:04.620 --> 00:36:11.060 of London as an improvement on the previous system, but still leaving intact the main 340 00:36:11.060 --> 00:36:17.540 evil, because they do not take the power from the Bank of England of adding extensively 341 00:36:17.540 --> 00:36:19.720 to the currency. 342 00:36:19.720 --> 00:36:26.720 But when the monopoly of the bank expires in 1833 and the trade in money is perfectly 343 00:36:26.720 --> 00:36:30.900 free, a better order of things may arise. 344 00:36:30.900 --> 00:36:38.240 The better order included stability, a currency not suffering from over-expansion and an end 345 00:36:38.240 --> 00:36:41.720 to the boom-bust cycle. 346 00:36:41.720 --> 00:36:47.560 But by far the most important hard-money free banking advocate was the veteran bullionist 347 00:36:47.560 --> 00:36:53.280 Sir Henry Brooke Parnell, a leading member of Parliament who had taken the bullionist 348 00:36:53.280 --> 00:37:00.560 side in the Irish Money Question in 1804, was a prominent member of the Bullion Committee 349 00:37:00.560 --> 00:37:04.940 and had supported resumption in 1819. 350 00:37:04.940 --> 00:37:12.200 As early as 1824, Parnell had moved in Parliament for an investigation of the Bank of England's 351 00:37:12.200 --> 00:37:21.720 Carter. In 1826, he denounced the bank's exclusive and mischievous privilege. In 1826 and again 352 00:37:21.720 --> 00:37:28.760 the following year, Parnell organized a discussion at the Political Economy Club on the theme, 353 00:37:28.760 --> 00:37:34.760 Might not a proper currency be secured by leaving the business of banking wholly free 354 00:37:34.760 --> 00:37:50.720 Parnell set forth his free banking views in his 1827 tract, Observations on Paper Money, 355 00:37:50.720 --> 00:37:57.760 Banking and Overtrading, 1827, 2nd edition, 1829. 356 00:37:57.760 --> 00:38:04.720 He began following Mushet by placing the blame for the panic of 1825 on the Bank of England 357 00:38:04.720 --> 00:38:21.720 The problem was that the law had taken away from the bank the great check over abuses in issuing paper money, namely the competition of rival banks. 358 00:38:21.720 --> 00:38:29.720 Going beyond Muschit, Parnell was not willing to wait for the bank's charter to expire in six years. 359 00:38:29.720 --> 00:38:35.840 No, the power of the bank over money, and thereby over prices and the general state 360 00:38:35.840 --> 00:38:43.240 of business, was so entirely repugnant that it ought not be tolerated any longer. 361 00:38:43.240 --> 00:38:49.680 Parnell concluded that the remedy was a free system of banking, and overlooking a few pages 362 00:38:49.680 --> 00:38:55.600 at the end of Mushet's work, proclaimed that he himself was the first man in England to 363 00:38:55.600 --> 00:38:59.560 raise the banner of free banking. 364 00:38:59.560 --> 00:39:05.400 It is hardly surprising, on the other hand, that George Paulette Scroop, the inveterate 365 00:39:05.400 --> 00:39:11.280 under-consumptionist, should also have been an inflationist advocate of free banking in 366 00:39:11.280 --> 00:39:13.220 this period. 367 00:39:13.220 --> 00:39:18.600 In several books and in an article in the quarterly review, heralded by articles of 368 00:39:18.600 --> 00:39:24.360 other like-minded men in that leading Tory journal, Scroop called for the legalizing 369 00:39:24.360 --> 00:39:29.740 Banking of Small Bank Notes and an End to the London Note Issue Monopoly of the Bank 370 00:39:29.740 --> 00:39:37.140 of England. His program was designed to fit inflationist ends. Thus the competing banks 371 00:39:37.140 --> 00:39:43.960 would be able to redeem their notes in bullion rather than coin. The proclaimed goal of this 372 00:39:43.960 --> 00:39:50.680 banking program was, in Scroop's words, to everywhere lower the values of the metals, 373 00:39:50.680 --> 00:39:54.880 and with them, that of money. 374 00:39:54.880 --> 00:39:57.840 3. 375 00:39:57.840 --> 00:40:01.560 Re-chartering the Bank of England 376 00:40:01.560 --> 00:40:08.520 The Bank of England's charter expired in 1833 and this seemed to offer critics of the existing 377 00:40:08.520 --> 00:40:14.080 system a golden opportunity to effect a fundamental reform. 378 00:40:14.080 --> 00:40:21.440 A Bank Charter Committee was selected by the House of Commons in 1832 to engage in a detailed 379 00:40:21.440 --> 00:40:27.560 inquiry into the banking system, focusing on the question of the bank's existing monopoly 380 00:40:27.560 --> 00:40:32.160 of bank note issue in London and environs. 381 00:40:32.160 --> 00:40:37.400 The committee's hearings and inquiry was the most thorough examination of British banking 382 00:40:37.400 --> 00:40:43.520 to date, but Parnell, the only member of the committee to vote against re-chartering the 383 00:40:43.520 --> 00:40:49.500 Bank, complained with some justice that the roster of witnesses was stacked against the 384 00:40:49.500 --> 00:40:55.320 proponents of free banking by the maneuvers of the Chancellor of the Exchequer in Lord 385 00:40:55.320 --> 00:41:00.600 Grey's Whig government, the Viscount Althorpe. 386 00:41:00.600 --> 00:41:06.300 It was clear that a consensus of witnesses was building towards centralizing note issue 387 00:41:06.300 --> 00:41:12.680 in the hands of a strengthened Bank of England, a policy both the currency school and its 388 00:41:12.680 --> 00:41:19.520 in its misguided way, and the moderately inflationist establishment could support. 389 00:41:19.520 --> 00:41:26.000 Only a few witnesses favored bank competition in note issue in London, and only one, the 390 00:41:26.000 --> 00:41:32.360 Manchester merchant and joint stock banker Joseph Chesborough Dyer, opposed the fateful 391 00:41:32.360 --> 00:41:39.320 proposal to invest Bank of England notes with legal tender power. 392 00:41:39.320 --> 00:41:46.280 Based on the committee inquiry, Viscount Althorpe presented Parliament in 1833 with his legislative 393 00:41:46.280 --> 00:41:54.000 program, to keep the status quo of bank charter and bank note issue monopoly in London and 394 00:41:54.000 --> 00:42:01.240 a 65-mile radius, and to centralize banking further by granting banknotes legal tender 395 00:42:01.240 --> 00:42:02.720 power. 396 00:42:02.720 --> 00:42:08.600 This meant that from then on, private and joint-stock banks need not keep any of their 397 00:42:08.600 --> 00:42:17.600 and their reserves in gold, since depositors and note holders would be compelled by law to accept bank notes in payment, 398 00:42:17.600 --> 00:42:28.600 and that only the Bank of England itself would have to meet its contractual obligations to redeem its notes or deposits in gold. 399 00:42:28.600 --> 00:42:35.600 This measure of 1833 went a long way to reduce the role of gold coin in everyday life 400 00:42:35.600 --> 00:42:40.600 and to encourage its replacement by banknotes and bank deposits. 401 00:42:40.600 --> 00:42:46.600 In presenting his program, Althorpe noted that since the committee hearings, 402 00:42:46.600 --> 00:42:52.600 the public have been more inclined to look favorably on the management of the Bank of England. 403 00:42:52.600 --> 00:42:56.600 In short, the loaded committee had done its work well. 404 00:42:56.600 --> 00:43:01.600 He further provided a harbinger of the future by stating that his goal 405 00:43:01.600 --> 00:43:11.600 The goal was to have all banknotes issued by the Bank of England, which of course is the modern centralized banking system. 406 00:43:11.600 --> 00:43:19.600 The powerful country banking lobby, however, rose up in high dudgeon at this threat to its note-issue privileges, 407 00:43:19.600 --> 00:43:26.600 and the Cabinet was forced to back down on its goal of note-issue monopoly for the Bank of England. 408 00:43:26.600 --> 00:43:34.480 Lord Althorpe was so chagrined at this successful pressure that he almost resigned from the government. 409 00:43:34.480 --> 00:43:49.420 Although there was only one witness against it, the legal tender provision for Bank of England notes only carried in commons by virtue of support from arch inflationists opposed to the gold standard. 410 00:43:49.420 --> 00:43:58.260 The vote for legal tender was 214 to 156, with hard money stalwarts Sir Henry Parnell 411 00:43:58.260 --> 00:44:05.440 and Sir Robert Peel, the leader of the Tory opposition, voting against. 412 00:44:05.440 --> 00:44:10.780 Outrage against the legal tender law among the public was led, as might be expected, by 413 00:44:10.780 --> 00:44:12.420 the country bankers. 414 00:44:12.420 --> 00:44:17.860 The Committee of Country Bankers, led by Henry William Hobhouse, pointed out that the law 415 00:44:17.860 --> 00:44:24.700 Law would violate private rights and secure to the Bank of England an unjust and perpetual 416 00:44:24.700 --> 00:44:26.460 monopoly. 417 00:44:26.460 --> 00:44:31.820 The committee's memorial justly pointed out that the government had taken measures against 418 00:44:31.820 --> 00:44:37.780 the expansionary tendencies of the country banks, but had ignored the operation of the 419 00:44:37.780 --> 00:44:44.520 same principle at work in the Bank of England, in its case unchecked by the competition of 420 00:44:44.520 --> 00:44:46.820 other banks. 421 00:44:46.820 --> 00:44:52.580 Facing the public reaction against legal tender was the prolific free banking advocate, the 422 00:44:52.580 --> 00:44:56.260 Scottish attorney Alexander Mundell. 423 00:44:56.260 --> 00:45:02.700 Mundell warned that the 1833 law would lead to the centralization of specie reserves in 424 00:45:02.700 --> 00:45:06.660 the country into the hands of the Bank of England. 425 00:45:06.660 --> 00:45:13.000 He charged that your English industry, which has been already taxed by the exclusive privileges 426 00:45:13.000 --> 00:45:21.000 Because of the Bank of England as it now exists, is thus to be taxed still more, by extension of it. 427 00:45:22.000 --> 00:45:30.000 4. THE CRISIS OF 1837 AND THE CURRENCY SCHOOL CONTROVERSI 428 00:45:30.000 --> 00:45:40.000 For the first time, the law of 1826 had allowed joint stock banking, except for the Bank of England, to exist in England. 429 00:45:40.000 --> 00:45:47.000 But various remaining restrictions had held the number of joint-stock banks down to 14. 430 00:45:47.000 --> 00:45:57.000 The Act of 1833 had removed these restrictions, and the result was a veritable orgy of joint-stock banks formed in England. 431 00:45:57.000 --> 00:46:08.000 44 new banks were added from 1831 to 1835, topped by no less than 59 in 1836 alone. 432 00:46:08.000 --> 00:46:16.160 alone. 15 of them established between 1 May and 15 June of that year. A powerful joint 433 00:46:16.160 --> 00:46:24.240 stock bank, the London and Westminster Bank, was even established in London itself in 1834, 434 00:46:24.240 --> 00:46:29.320 although of course it was banned from issuing notes. 435 00:46:29.320 --> 00:46:35.760 Along with the increase in the number of banks came an expansion in bank money. Thus the circulation 436 00:46:35.760 --> 00:46:46.560 Production of country bank notes rose from £10 million at the end of 1833 to over £12 million in mid 1836. 437 00:46:46.560 --> 00:47:00.160 Of this growth, almost all came from the issue of the new joint stock banks, from £1.3 million to £3.6 million in the same period. 438 00:47:00.160 --> 00:47:05.660 Although the Bank of England and the private country banks complained at the new competition, 439 00:47:05.660 --> 00:47:13.020 The expansion of credit by the bank fueled this new burgeoning of banks and banknotes. 440 00:47:13.020 --> 00:47:23.900 Discounts of the bank expanded from £1 million in April 1833 to £3.4 million in July 1835, 441 00:47:23.900 --> 00:47:29.660 and rose to over £11 million by the end of the latter year. 442 00:47:29.660 --> 00:47:38.140 Federal bank credit in turn rose from £24 million in 1833 to over £35 million at the 443 00:47:38.140 --> 00:47:41.100 beginning of 1837. 444 00:47:41.100 --> 00:47:47.300 This expansion took place in the teeth of the bank's loss of specie reserves from £11 445 00:47:47.300 --> 00:47:54.940 million in 1822 to less than £4 million at the end of 1836. 446 00:47:54.940 --> 00:48:00.940 So much for the currency principle and for its modified Palmer Rule, which the Bank's 447 00:48:00.940 --> 00:48:07.760 Governor John Horsley Palmer had explained to the Bank Charter Committee in 1832 that 448 00:48:07.760 --> 00:48:11.020 the Bank of England had been following. 449 00:48:11.020 --> 00:48:17.580 There is no way that such a practice of expanding credit while specie reserves were falling 450 00:48:17.580 --> 00:48:23.580 could be tortured into even an approximation of the currency ideal that the money supply 451 00:48:23.580 --> 00:48:29.460 Why should move as if it were the stock of specie in the country? 452 00:48:29.460 --> 00:48:36.100 To top it off, the bank credit expansion led, in what was becoming the usual way, to a financial 453 00:48:36.100 --> 00:48:44.380 crisis and panic at the end of 1836 and the beginning of 1837, replete with bank runs, 454 00:48:44.380 --> 00:48:46.740 especially in Ireland. 455 00:48:46.740 --> 00:48:53.340 There followed the typical signs of recession, contraction of bank credit, decline of production, 456 00:48:53.340 --> 00:48:59.700 expansion, collapse of stock prices, numerous bankruptcies of banks and other businesses, 457 00:48:59.700 --> 00:49:02.740 and a swelling of unemployment. 458 00:49:02.740 --> 00:49:08.860 It is not surprising that the new boom-bust cycle gave rise to parliamentary inquiries 459 00:49:08.860 --> 00:49:18.700 by committees on joint stock banks in 1836, 1837, and 1838, and even more so to vigorous 460 00:49:18.700 --> 00:49:26.460 Debates on the Banking Situation in Pamphlets and in the Press. Indeed, more than 40 pamphlets 461 00:49:26.460 --> 00:49:33.380 were published on the banking system in 1837 alone, and a large number continued the following 462 00:49:33.380 --> 00:49:35.020 year. 463 00:49:35.020 --> 00:49:41.340 The pamphlet war was touched off by a remarkable pamphlet by Colonel Robert Torrens, remarkable 464 00:49:41.340 --> 00:49:48.140 not only for being the best presentation of the currency school, but also because it signified 465 00:49:48.140 --> 00:49:53.140 a sudden conversion of torrents into the currency ranks. 466 00:49:53.140 --> 00:49:59.220 For torrents, though a distinguished political economist, a friend of Ricardo and a founder 467 00:49:59.220 --> 00:50:06.580 and leading member of the political economy club, had been an ardent, almost wild inflationist 468 00:50:06.580 --> 00:50:10.980 and anti-bullionist during the bullion report struggles. 469 00:50:10.980 --> 00:50:16.780 Indeed, torrents inflationism had continued at least into 1830. 470 00:50:16.780 --> 00:50:24.780 Then, in the course of confused and bewildering speeches in Parliament in the critical year of 1833, 471 00:50:24.780 --> 00:50:33.780 Torrens continued his old bitter anti-deflationist attacks on the Resumption Act of 1819, 472 00:50:33.780 --> 00:50:41.780 but in the midst of them also inconsistently enunciated the currency principle in clear form. 473 00:50:41.780 --> 00:51:03.280 Extensive and calamitous experience had established the fact that a currency consisting of precious metals and of paper convertible into these metals on demand was liable to sudden and very considerable fluctuation between the extremes of excess and of deficiency. 474 00:51:03.280 --> 00:51:10.280 A mixed currency would suffer a much more considerable contraction than a purely metallic. 475 00:51:10.280 --> 00:51:28.280 Unless our present system of currency were amended by the timely interference of the legislature, it would go on to occasion periodical and aggravated distress, until, in a national bankruptcy, it would find its euthanasia. 476 00:51:28.280 --> 00:51:52.280 In another speech on re-chartering the Bank of England, Torrens warned that the adoption of the measures proposed by government for continuing and increasing the exclusive privileges of the Bank of England would inflict upon the country a periodic recurrence in aggravated forms of revulsions of trade and of panics in the money market. 477 00:51:52.280 --> 00:52:03.280 In his notable letter to Lord Melbourne, all hesitation finally fell away, and Colonel Torrens joined the leadership of the currency school ranks. 478 00:52:03.280 --> 00:52:17.280 He began by pointing out, in contrast to most of his currency colleagues, that bank deposits were money equally with banknotes, paying tribute to James Pennington for pointing this out. 479 00:52:17.280 --> 00:52:23.840 Torrens explained the nature of deposits as money very clearly, showing that a shift of 480 00:52:23.840 --> 00:52:30.360 bank liabilities from notes to deposits, or vice versa, would not change the amount of 481 00:52:30.360 --> 00:52:35.480 bank money by which merchants and others can make purchases. 482 00:52:35.480 --> 00:52:41.760 He also noted that while most people have learned how an increase in coin and bank notes 483 00:52:41.760 --> 00:52:48.720 raises prices and depreciates foreign exchanges. Neither the government nor the directors of 484 00:52:48.720 --> 00:52:56.440 the Bank of England understand how loans and deposits do the same thing. But tragically, 485 00:52:56.440 --> 00:53:03.000 Torrens then inconsistently dismissed deposits as unimportant, apparently on the ground that 486 00:53:03.000 --> 00:53:10.000 the bank, not the public, decides whether to keep its liabilities in notes or deposits, 487 00:53:10.000 --> 00:53:15.880 and on the further erroneous assumption that country and joint stock banks pyramid at a 488 00:53:15.880 --> 00:53:23.520 fixed ratio upon bank notes as their reserves but not upon bank deposits. 489 00:53:23.520 --> 00:53:31.400 From then on, Torrens wrote and acted as if deposits were irrelevant to the money supply. 490 00:53:31.400 --> 00:53:37.640 Torrens also unfortunately conceded that the bank must function as a lender of last resort 491 00:53:37.640 --> 00:53:44.900 to Banks in Distress, but then confined his attack on the bank to its stoking the fires 492 00:53:44.900 --> 00:53:51.920 of inflationary credit and not conforming to the currency principle from the beginning. 493 00:53:51.920 --> 00:53:57.920 In order to force the currency principle upon the bank, Torrens, for the first time in print, 494 00:53:57.920 --> 00:54:04.080 urged that Parliament rigidly separate the bank into an issue department and a banking 495 00:54:04.080 --> 00:54:05.680 department. 496 00:54:05.680 --> 00:54:12.400 The issue department would be forced to limit its note issues to its actual supply of gold, 497 00:54:12.400 --> 00:54:18.780 so that banknotes could only fluctuate to the extent that the bank's stock of gold increases 498 00:54:18.780 --> 00:54:20.960 or decreases. 499 00:54:20.960 --> 00:54:27.160 In that way, wrote Torrens, the circulation of banknotes would always remain in the same 500 00:54:27.160 --> 00:54:33.840 state, both with respect to amount and to value, in which it would exist were it wholly 501 00:54:33.840 --> 00:54:42.080 The problem is that the banking department in Torrens and hence the currency plan would 502 00:54:42.080 --> 00:54:48.480 be left totally free and unregulated on the assumption that the bank could issue credits 503 00:54:48.480 --> 00:54:54.960 and deposits and that those loans and demand deposits would be totally irrelevant to the 504 00:54:54.960 --> 00:54:56.920 money supply. 505 00:54:56.920 --> 00:55:03.400 The neglect of deposits was the tragic flaw in the currency plan. 506 00:55:03.400 --> 00:55:09.040 General Toren's assault on the bank was, in effect, though not by name, answered in a 507 00:55:09.040 --> 00:55:14.960 pamphlet by bank director and former governor John Horsley Palmer. 508 00:55:14.960 --> 00:55:20.960 As in the case of bank apologists for decades, Palmer put the blame for the inflation and 509 00:55:20.960 --> 00:55:29.880 recession on every institution but the bank, on shipments of funds abroad, on bank runs, 510 00:55:29.880 --> 00:55:36.920 on Reckless Credit Expansion by Private and Joint-Stock English and Irish Banks. 511 00:55:36.920 --> 00:55:42.720 He concluded that the solution, a particular favorite of the bank, was that the bank must 512 00:55:42.720 --> 00:55:45.880 have a monopoly of all note issue. 513 00:55:45.880 --> 00:55:52.760 Ironically, the currency school, so hostile to the bank, proposed the same plan for different 514 00:55:52.760 --> 00:55:59.860 reasons so that the government could have but one central bank to regulate. 515 00:55:59.860 --> 00:56:06.800 In his letter to Lord Melbourne, Torrens had given credit to the banker Samuel Jones Lloyd 516 00:56:06.800 --> 00:56:12.960 for originating the idea of the separation of the Bank of England into issue and banking 517 00:56:12.960 --> 00:56:15.100 departments. 518 00:56:15.100 --> 00:56:20.660 Lloyd now weighed in with a pamphlet attack on Palmer, in which he assumed the leadership 519 00:56:20.660 --> 00:56:23.140 of the currency camp. 520 00:56:23.140 --> 00:56:30.500 Far more simplistic than Torren's, Lloyd dogmatically but fatally asserted that notes and deposits 521 00:56:30.500 --> 00:56:38.540 are forever absolutely different, and therefore can and must be treated totally differently. 522 00:56:38.540 --> 00:56:45.140 Professor Fetter offers an amusing and accurate explanation of the triumph of Lloyd's simple-minded 523 00:56:45.140 --> 00:56:46.140 stance. 524 00:56:46.140 --> 00:56:52.780 He, Lloyd, stated as a fundamental that no man in his right mind could question that 525 00:56:52.780 --> 00:56:59.460 Note-issuing and deposit business were completely separate, and that a mixed circulation of 526 00:56:59.460 --> 00:57:06.980 coin and notes should fluctuate exactly as would an all-metallic circulation. 527 00:57:06.980 --> 00:57:13.420 Despite its theoretical vacuity, there was no denying the effectiveness of Lloyd's argument. 528 00:57:13.420 --> 00:57:19.800 Lloyd's prestige as a successful banker undoubtedly made his words carry conviction to many who 529 00:57:19.800 --> 00:57:24.760 who felt that something ought to be done about the Bank of England, and that a man who made 530 00:57:24.760 --> 00:57:30.240 money in banking must understand banking. 531 00:57:30.240 --> 00:57:38.360 Throughout 1837 and 1838, the currency principle was advocated in highly influential pamphlets, 532 00:57:38.360 --> 00:57:45.560 again by Lloyd, by David Ricardo's brother Samson, and, in a particularly important pronouncement, 533 00:57:45.560 --> 00:57:50.920 by long-time Bank of England director George Ward Norman. 534 00:57:50.920 --> 00:57:57.380 Like Lloyd, Torrens and Pennington, Norman was a member of the Political Economy Club. 535 00:57:57.380 --> 00:58:05.320 His pamphlet of 1838 was a revision of a pamphlet that he had privately printed five years earlier. 536 00:58:05.320 --> 00:58:11.060 Norman agreed with Lloyd that notes and deposits are totally different, and also suggested 537 00:58:11.060 --> 00:58:16.380 Granting to the Bank of England a Monopoly of All Bank Notes. 538 00:58:16.380 --> 00:58:21.620 Since Norman was a powerful bank director, it would seem that his adoption of the allegedly 539 00:58:21.620 --> 00:58:28.220 anti-bank currency principle was akin to Brer Rabbit urging not to be thrown into the Briar 540 00:58:28.220 --> 00:58:30.540 Patch. 541 00:58:30.540 --> 00:58:35.940 Another economist lending his prestige as one of the last of the Ricardians to the currency 542 00:58:35.940 --> 00:58:42.920 Principle, was the prolific John Ramsey McCullough, both in a review of some of the year's pamphlets 543 00:58:42.920 --> 00:58:50.360 in the Edinburgh Review for April 1837, and again in a new edition of Smith's Wealth of 544 00:58:50.360 --> 00:58:54.380 Nations, which he published the following year. 545 00:58:54.380 --> 00:59:00.160 In 1840, at the next stage of the debate, another leading economist joined the fray 546 00:59:00.160 --> 00:59:07.240 Murray on behalf of the Currency Principle. S. Mountefort Longfield in a notable four-part 547 00:59:07.240 --> 00:59:14.900 article, Banking and Currency, in Dublin University Magazine, an article influenced heavily by 548 00:59:14.900 --> 00:59:16.400 McCullough's writings.