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Abstract
With the connivance of Parliament, was the Bank of England's over issue of banknotes inflationary? The inflation stemmed from military subsidy and Peninsula campaign payments, as well as food imports, far in excess of Britain's export earnings to cover these capital transfers (particularly when crimped by the Continental Blockade), and not merely from domestic credit over issue. Neither domestic money creation nor the fiscal theory of the price level best explains the imbalance in Britain's international accounts during the Napoleonic Wars. This deficit stemmed from domestic production shortfalls in essentials (above all food production) and contractual obligations such as military spending/subsidies relative to the pound's international purchasing power which emanated from the ability of Britain to sell exports and replace imports with domestic output (raise food production internally). These types of highly inelastic transactions tended to operate independently of domestic money creation, fiscal policy (taxes) or price developments (inflation). This article tracks England's bullion debate, which concerned whether gold prices rose (and hence sterling's exchange rate fell) because military capital transfers overwhelmed the balance of payments, or because the Bank of England over issued paper money after the gold cover was removed in 1797. The issues herein are not antiquated because the primary issues in monetary debates for two centuries have concerned the cause of inflation and deflation, and whether the domestic money supply or the balance of payments is responsible. Determining actual causation is critical for the proper solution: monetary deflation, or domestic and international restructuring of trade and investment.
Notes
1 Gold or silver in bulk before coining or valued by weight.
2 Joseph Schumpeter held that economists could be parted by those who emphasized "real" analysis and regarded money as merely a "veil" and those who thought monetary institutions were essential and money could be a distinct dynamic force. This article stands with the latter view while the bullionists the former.
3 Part of the remaining surplus was consumed in the form of luxuries, but as much as possible was reinvested in industry, agriculture, and commerce and was exported to draw yet more money (bullion) into the system to finance further economic expansion.
4 Vansittart himself was appointed Chancellor of the Exchequer during 1812–1823.
5 Specie concerns have been rendered moot by fiat money coupled with the floating exchange rates. Yet in the Napoleonic era-cum-industrial revolution, the primary concern was not just with specie (gold or silver coin) but with the institutional capacity to carry on industry-and-war.
6 The bullionists were akin to monetarists as exemplified by Milton Friedman, and at the time were best represented by David Ricardo, Horner, and Wheatley. Today, their views are often acted upon by the International Monetary Fund and the World Bank.
7 Despite the qualifications of using the agio as a barometer of inflation, there was probably no better indicia available at the time, and if the public believed the agio was indicative of inflation, then to the extent their expectations subsequently endeared that very inflation, they were right in their initial assessment!
8 Despite being both well-researched and well-written, I do not agree at all with the foundational position of Professor Antipa's article. Fiscal prospects did effect price levels but were tangential to those real and nonmonetary factors alluded to throughout this article.
9 Figure 3: Price indices, 1800 = 100, 1750 to 1850. The shaded area marks the suspension of the gold standard from February 1797 to May 1821. Sources: Broadberry et al. (Citation2011).
10 Figure 2: AGIO, 1750–1850; Exchange rate on Hamburg: Schilling per pound sterling, two months’ usance, 1770 to 1828. (For both indices, January 1797 = 100.) The shaded area marks the suspension of the gold standard from February 1797 to May 1821. Sources: Neal (1993)
11 Although David Hume is generally credited with this insight from having "first" elaborated on the mechanism in a 1749 letter to Montesquieu, Irish-French Economist Richard Cantillon first developed the concept in his posthumously and anonymously published Essai sur la Nature du Commerce en Général (1755), which was actually written between 1730 and 1734.
12 Higher prices might even increase the trade balance if sufficient foreign dependency existed that customers abroad had little choice but to pay the higher prices. In other words, the demand for that export was substantially inelastic as in the case with a de facto monopoly (Spain over her colonial ports until the various Juntas said otherwise) or inability to actually pay as was often the case for South American markets.
13 Even today, money is analytically voided in the most prestigious mathematically sophisticated macroeconomic models, such as Arrow-Debreu 's general equilibrium or the capital asset pricing model of Sharpe (Citation1964)
14 Irish-French economist Richard Cantillon first developed the concept of money being nonneutral.
15 Austerity smoothly reverses the inflationary process. Reducing the money supply can cure both inflation and balance-of-payments deficits. Hence, financial austerity can cure payments imbalance by reducing price levels and freeing domestic output for export.
16 The £7,000,000 expenditure for subsidies during 1806 amounted to nearly half Britain's entire naval expense in the year of Trafalgar. The cost of the three services during 1805 was as follows: Army, £18,581,127; Navy, £15,035,630; and Ordnance, £4,456,994 (Pebrer Citation1833).
17 In essence, this is the purchasing-power parity theory of exchange rates which holds that currency values change in direct proportion to their general domestic price levels. Inflation causes currency depreciation and not vice versa.
18 Price level is determined by government debt and fiscal policy alone, with monetary policy playing at best an indirect role. This theory clashes with the monetarist view that states that money supply is the primary determinant of the price level and therefore inflation (Bassetto Citation2008).
19 For a valuable critique of available statistics of Bank credit, see Fetter (Citation1967)
20 Under the gold standard, once all banks had issued banknotes to the limit permitted by the self-imposed reserve requirement, the money-supply growth rate was restricted by the growth rate of the specie supply.
21 It was this massive money-creation from 1797 to 1810 that seemed to persuade Henry Thornton, a prominent London banker, to somewhat moderate his earlier position of anti-bullionist (1802) to bullionist (1810) as he came to believe that Bank of England was engaged in excessive money-creation. "In consequence of the additions to the public debt made during the war. the occasional enlargements of the quantity of bank paper (money) arising from this cause, have become much more considerable." (Thornton Citation1802). See also, Murphy (Citation2003) and Peake (Citation1978).
22 The banks outside London often kept their reserves in banknotes of the Bank of England, not in gold or silver coins or ingots.
23 On account of the Bank of England's unique charter, it long maintained a virtual monopoly on banking in London. Nevertheless, by 1750, there were 12 banks outside London, 150 banks by 1776, 350 by 1790, and 721 by 1810. Most of these provincial banks were outside London. "As late as 1826 it was possible for Lord Liverpool to say that the law permitted any shopkeeper, however limited his means, to start a bank … and issue banknotes purporting to be payable on demand" in Bank of England notes that were until the Suspension payable by the Bank in specie on demand (Powell Citation2017). See also Mésonnier (Citation2007).
24 Commercial paper is a promissory note issued by large commercial entities and not usually backed by any form of collateral, making it a form of short-term unsecured debt. The Bank of England would only lend to credit-worthy manufacturers or offer a substantial discount (capped by law at 5%) for the monetary advance. Provincial banks were not precluded by the Usury Law of 5%. The minimum denominations of the commercial paper offerings were substantial.
25 The removal of common rights was conducted to establish exclusive ownership of land. The General Enclosure Act of 1801 culminated this process by sanctioning large-scale land reform aimed at increasing agricultural productivity.
26 Also by increasing farm size.
27 Outside the market radius or a navigable waterway, commodities sent by wagon transportation were uneconomical. At most, a horse on a Macadam road could pull one ton of freight, but that same horse could pull a 30-ton barge. Land maintenance advancements in Flanders and the Netherlands were brought over to England in the form of canal building, land reclamation technology, and soil drainage, restoration, and maintenance. The inelastic price of food imports during the Napoleonic Wars spurred this process onwards and would pay dividends in the subsequent maturation of the Industrial Revolution in Britain (Grubler Citation1999).
28 Between 1806 and 1816 a population of less than 14 million people paid nearly £142,000,000 in income taxes alone (Hope-Jones Citation2013). Only rising wages made this amount possible.
29 Most favored nation status could also take the form of low tariffs or high import quotas.
30 Unless the sale was made for specie or in exchange for imported goods, a sale on credit would not strengthen the pound on the international exchange. Pounds needed to actually be bought, only that increased demand for the pound, and only that would most substantially curb inflation during this time period.
31 The value of British products sent to northern Europe fell from £10,320,000 in 1805 to £5,090,000 by the end of 1807. Even that was cut in half during the following year (Heckscher, Citation1922).
32 A transshipment port or trading post where imported goods are re-exported with or without any additional processing or repackaging. They played a critical role in circumventing the Continental Blockade. Today, customs areas largely accomplish what entrepôts once did, and the term now refers to duty-free ports with a significant volume of re-export trade.
33 The fall in 1808 was preceded by a short appreciation in the pound sterling, a sign of a liquidity scramble in London (Neal Citation1991).
34 Trade with Britain by 1808 was a mere £21,000.
35 The Tsar justified this "illegal" trade by correctly noting that Napoleon was granting exemption licenses to the Blockade only to French merchants, the proceeds of which financially benefitted only France, and Napoleon personally. The Tsar agreed to stop this trade if France suffered just as much from the Blockade as its "ally" Russia (De Caulaincourt Citation2012).
36 Also, once markets (British or otherwise) anticipate future inflation. If they see a policy likely to cause Britannic inflation such as the American Embargo, the Continental Blockade, or export markets closed due to military defeat, then they will tend to sell pound sterling causing it to fall in anticipation of the inflation, which causes inflation.
37 Napoleon’s customs revenues alone rose to 105,900,000 francs in the period from the Trianon tariff to the close of 1811, this as compared with only 11,600,000 francs in 1809. The auctions of confiscated goods, together with the license fees, brought in far more. According to Thiers, the auctions alone during the remaining months of 1810 yielded a cash return of almost 150,000,000 francs. See www.econlib.org/library/YPDBooks/Heckscher/hksrCS14.html.
38 Because Wellington was campaigning in allied areas (Spain and Portugal), he could not indulge in regular requisitions, so a flow of money, preferably hard cash (specie) was crucial (Esdaile Citation1990).
39 Subsidies and grain purchases, however, could be paid for by drawing on whatever credits British trade had accumulated on the Continent. But the army always had to be provided with a large amount of hard money (specie) (Atkinson Citation1912).
40 A devaluation would cause higher economic growth since higher exports and lower imports should increase aggregate demand, assuming demand for British exports is relatively elastic.
41 Parliament precluded higher wages from consuming exportable goods by increased taxation (indirect and direct) and, for the first time, instituted the income tax until victory at Waterloo.
43 Nathan Rothschild received a 2% commission.
44 250,000–300,000 French soldiers died in Iberia between 1808 and 1814.
45 After the peace of Amiens failed, unlike their Continental Allies, the Tories were not amenable to anything short of long-term peace by going back in time before The Revolution as to territory and rulership. King Louis XVIII ruled a geographical Ancien France from 1814–1824.
Additional information
Notes on contributors
Emir Phillips
Emir Phillips, is a candidate in the DBA Program at the Grenoble École de Management.