![Sample our Economics, Finance,Business & Industry journals, sign in here to start your access, latest two full volumes FREE to you for 14 days]({"type":"image" , "src" : "/sda/5931/TOC-Subject-Sample-2021-Economics-Finance-Business-Industry.jpg"})
Abstract
Approval of the quantity theory, of the Humean price-specie-flow mechanism (PSFM) and of lender of last resort analysis are characteristics of British monetary orthodoxy in the 1870s. But this does not mean that this orthodoxy achieved a synthesis between the Banking School and the Currency School. On the contrary, we show that it marks the victory of the Currency Principle that, in fact, did evolve after 1847, but did not rejoin Banking School ideas. The PSFM, which is essential to the Currency Principle, cannot be confused with the gold points mechanism described by Thornton and Tooke. The lender of last resort and money market theories developed by Bagehot are compatible with the dichotomy between currency and credit, a characteristic of the Currency Principle, and contrary to the thought of Thornton's and Tooke.
Acknowledgements
The authors are grateful to the referees of this journal for their useful comments. The usual disclaimer applies.
Notes
1 Laidler's arguments are somewhat ambiguous. He agrees with the post-1960s interpretation of Banking School theory in terms of a ‘monetary approach to the balance of payments’. This allows for a rehabilitation of the Banking School, previously the subject of criticism. But use of the ‘monetary approach to the balance of payments’ analysis requires the conception of a demand for money. However, as Laidler (Citation1988: 75, 93) notes, the Classical economists did not employ this idea. We shall not discuss here the difficulties presented by interpretation of the Smith and Tooke's monetary analysis in terms of a monetary approach to the balance of payments.
2 It is also difficult to maintain that, firstly, British monetary orthodoxy in the 1870s adopted the quantity theory of money and the PSFM; and, secondly, that this is a continuation of Thornton and the Banking School, since their theories are thought to be related to another framework; namely, ‘the monetary approach to the balance of payments’.
3 Bagehot (Citation1848: 235–7, 244–6, 260–2), Bagehot (Citation1873 chapter 2: 28 Fr. ed., 30 Eng. ed., chapter 5: 113 Fr ed. and Eng. ed, chapter 7: 154 Fr. ed. and Eng. ed.). Jevons (Citation1875 chapter XXIV §3: 256–7, conclusion 279 Fr. ed.).
4 Hume (Citation1752: 486–90) used the expression ‘money’ to refer to gold and silver. He was seeking to demonstrate the groundlessness of the popular fear that, under certain circumstances, all of a country's gold and silver might end up abroad (Hume Citation1752: 486). He then showed how adding paper (‘paper-credit, bank bills, chequer-notes’) to the money-forms led to an outflow of money.
5 Or a fall in the quantity of goods that should be circulating (e.g. when harvests are poor).
6 He did this in his criticism of Thornton. For a further discussion on this point, see de Boyer (Citation2003, Citation2007).
7 Torrens (1858), pp. 335–336.
8 In this section, we shall restrict our analysis of the GPM to the convertibility of bank money into gold.
9 See Thornton (Citation1802: 194–205) who criticised Smith for a failure to explain how an outflow of gold offsets excessive issue. In Thornton's view, this correction could be achieved via a price mechanism (whereas Smith reasoned in fixed prices), and via a foreign exchange mechanism (which Smith did not consider).
10 See Tooke (Citation1838–56 (Citation1838) Vol. 1: 163).
11 See Tooke (Citation1838–56 (1848) Vol. 4: 101).
12 Viner (Citation1924: chapter IX).
13 Viner (Citation1924: 193). Viner's analysis of Thornton (1802: 151, para. 1) is faulty. See the following footnote, no. 14.
14 Viner (Citation1924: 196). In his aforementioned criticism of deflationist policy, Thornton showed the need to consider that a deficit can only be synonymous with excessive issue if a reduction in such issue would remedy this deficit (cf. Thornton Citation1802: 150–1).
15 Laidler (Citation1988: 93, Citation1991: 27) defends the idea of continuity between Thornton, Ricardo, the Currency School, J. S. Mill and Jevons.
16 It is important not to misinterpret two excerpts from Thornton's Paper Credit, where he mentioned the ‘cheapness of gold coins’: the first on pages 149–50, the second on pages 199–200. In both passages, the issue was not the falling value of coins relative to goods, but the falling value of coins (not melted) relative to their value as a metal (melted coins). Thornton positioned himself in the double context of a suspended convertibility of bank money, and of falling exchange rates due to poor harvests and the payment of subsidies to England's allies in the wars against France. Here the exchange rate fell below the gold export point and the price on the gold market shifted permanently above its legal price (as set by the Mint). Thus the legal rate for the guinea, a legal means of payment for a debt of 22 shillings, fell below the market price for the 7.6878 grams of fine gold it contained. This fall in the external value of bank money meant that guineas became ‘cheap’. In Thornton's words, ‘ gold coin will partake in the cheapness of the paper’ (1802: 149).
17 In fact, both foreign exchange market and exchange rate are absent from this description.
18 ‘For that balance must be paid in bullion’ (Thornton Citation1802: 141). ‘Gold has been spoken (…) as that article by which a balance of trade is discharged …’ (Thornton Citation1802:145). ‘… as far as the debt is paid by the transmission of bullion, this transmission (…) is owing precisely to the cause mentioned by Mr. Thornton (…) The willingness (of the creditor nation) to receive bullion – the currency of the commercial world … (Malthus Citation1811 quoted by TookeCitation1838–56 Vol. 4: 102).
19 Tooke (Citation1838–56 (1848) Vol. 4: 224). In this excerpt, Tooke quoted an excerpt from Tooke (Citation1844).
20 Not to forget the Smithian legacy that Tooke claimed: see de Boyer (Citation1985, Citation2003) and Smith (Citation2001). See also infra.
21 Tooke quotes Thornton on this point (Tooke Citation1844: 29).
22 ‘It appears then, that there is neither authority nor reasoning in favour of the definition which invests Bank notes with the properties of money, or paper currency, to the exclusion of all other forms of paper credit’ (Tooke Citation1838–56 (1848) Vol. 4: 163).
23 We find the same in Tooke (Citation1838–56 (1848) Vol. 4: 174 and sq.). On this point, we agree with Smith (Citation2003: 44), who criticises Arnon (Citation1991). See Diatkine (Citation2002: 117–18) and de Boyer and Solis (Citation2003).
24 ‘… that, as by the supposition the market rate of interest in this country would, by such an operation of the Bank, be depressed below its ordinary rate relatively to other countries, there would be every inducement to the individuals who thus had their capitals disengaged to seek investment in securities abroad, whether public or private; as there would not, by the operation of the Bank, be necessarily any additional inducement to export commodities, the capitals to be transmitted abroad for such investments would be remitted in bullion …’ (Tooke Citation1838–56 (Citation1840) Vol. 3: 274). See also Fullarton (1845: 130–3, 149–51).
25 We agree with Humphrey (1987, as reprinted in Humphrey 1993: 6). Humphrey (1996: 5–6) includes Joplin (1841) and Pennington (1826) among those who had understood the multiplier mechanism.
26 Torrens gives a numerical example in which he shows that the bankers will not keep the whole of the amount deposited with them ‘… locked in their coffers. They would reissue the greater part of the sum, (say £8.000.000 – of £10.000.000) – in the discount of merchant bills, or in the purchase of government securities …’ (Torrens Citation1837: 11). After several rounds of credit multiplication ‘we see that, in consequence of the system of banking prevalent in this country, a fixed amount of circulating money be the basis of a fluctuating amount of credit money, even though the circulating money should be purely metallic …’ (Torrens Citation1837: 11–16).
27 ‘Now it is the portion of the circulation previously in the till of the Bank, and not the credit entry in its books, which confers upon the depositor the power of effecting purchases and payments … The portion of the circulation in the till of the Bank may be regarded as a constituent body, the credits in its books as an assemblage of delegates …[B]anking reserves … are the economising instruments which sustain the efficacy of the vast mass of book credits, and convert them into a species of auxiliary or delegate money. … The advantages derived from discount banking consist in the economy effected by substituting auxiliary for actual money … The operations of discount banking have a considerable effect in increasing the activity of the circulation. They impart to it an elasticity which enables any given sum to perform many functions in rapid succession’ (Torrens 1858: 318–19).
28 ‘Through the writings of the Currency School, Torrens's doctrines of deposit multiplication on a reserve base and deposit control via that base became sufficiently well established by the mid-nineteenth century to be bequeathed to future generations of monetarists’ (Humphrey Citation1987: 6).
29 We agree with Smith (Citation2001: 35).
30 Torrens (Citation1837: 18).
31 ‘Previous to the separation of the functions of issue and of discount it was difficult, if not impossible, to ascertain how much of the evils of a monetary panic might be due to excessive issue of notes, and how much to excessive advances from deposits … Thus the separation of functions gives us a clearer insight into the nature and possible extent of the mischief of which over-banking is the single and exclusive cause; and this more accurate knowledge of the cause of the mischief gives us a surer indication of the appropriate remedy’ (Torrens, 1858: 329).
32 As a matter of fact, Torrens proposed that ‘when bankers depart from the rules of legitimate banking, when they endanger their own stability and the security of the funds entrusted to their keeping by failing to maintain a due proportion between their reserves and their advances’ (Torrens 1858: 321) (the problem) ‘will demand the serious consideration of Government and Parliament’ (Torrens 1858: 329) such as ‘…a weekly notification of the amount of the deposits, securities, and reserves of all the joint-stocks banks throughout the country’ (Torrens 1858: 331).
33 Bagehot quoted Tooke once, but not Thornton.
34 In 1848, a 22-year-old Bagehot published in Prospective Review an account of the first edition of John Stuart Mill's Principles, deeming this author to be as worthy as Adam Smith and David Ricardo.
35 Laidler (Citation1988: 85–6, 1991: 36).
36 See Bagehot (Citation1873: 154).