7.1 The trauma of 1825

In 1823, the British economy finally recovered from the post-Napoleonic War and post-1819 agricultural depression. In fact, an expansionary boom got under way, so much so as to quieten the vociferous agricultural advocates of higher prices and the opponents of the return to gold. Unsurprisingly, Bank of England credit expansion led the way in this new inflationary boom, its total credit rising from £17.5 million in August 1823 to £25.1 million two years later, a huge increase of 43 per cent or 21.7 per cent uncompounded per annum. Much of the monetary and credit boom came through investment in highly speculative Latin American mining stocks. The great hard-money radical William Cobbett kept up a drumfire of attack on this inflation but, significantly, he was also joined, if more privately, by such moderate hard-money men as William Huskisson, who worried that ‘this universal Jobbery in Foreign Stock will turn out the most tremendous Bubble ever known’.

By late 1824, the exchanges turned unfavourable, and gold began to flow abroad; by the following year, Britons began to demand gold from the banks in increasing numbers. Huskisson repeatedly warned the Cabinet in the Spring of 1825 that ‘the Bank, in its greedy folly, was playing over again the game of 1817’. In late June, a bank in Bristol refused outright to give gold to a noteholder who spurned payments in Bank of England notes, and this ominous incident was widely publicized by Cobbett. Bank of England cash reserves were at their lowest in five years at the end of February, at £8.86 million; and from that low point they fell alarmingly to no more than £3.0 million at the end of October. Bank runs and a bank panic ensued and at the height of that panic, in mid-December, a noteholder 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’. During the panic, the late Henry Thornton's important bank, Pole, Thornton & Co. went under, despite last-minute borrowing from the Bank of England and despite the fact that Sir Peter Pole, head of the bank, was connected by marriage with the governor of the Bank of England, Cornelius Buller.

After a week of hysteria in mid-December, the Bank of England, pursuing a highly risky policy of massive loans to the banks and rediscounting of bills, managed to stem the run, even though its cash reserves had been reduced to £1.0 million by the end of the year.

The country was saved by a hair's breadth from another suspension of specie payments by the Bank of England. 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. 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, ‘if the [Bank] stopped payment, it would be a good opportunity of taking their Charter from them,... for letting the Bank break’.

The boom and crisis of 1825 dealt a traumatic lesson to thoughtful analysts of the monetary and economic scene. For these dramatic events demonstrated that the gold standard, important as it was as a check on monetary and banking inflation, was not enough;: bank failures, and boom and bust cycles, could and would still occur. Something further, then, was needed to fulfil the promise of the bullionists; something more than the gold standard was needed to counter the ills of boom-and-bust and of fractional-reserve banking.

The most concrete and immediate response to the panic of 1825 was a decision of the government to outlaw small denomination (under £5) bank notes, a measure that even the pro-bank credit Adam Smith had favoured. In that way, at least for these popular and widely used small denominations, the public would be using only specie as money. On 22 March 1826, Parliament forbade banks in England and Wales to issue new small notes, or to reissue any old ones after April 1829. After June 1826, the Bank of England continued to obey this edict for a little over a century. In another banking reform, Parliament ended the system that had prevailed since the turn of the eighteenth century: the Bank of England had a monopoly of all commercial banking except for partnerships of less than six persons. This monopoly was now shaken. Corporate and large partnership banks were now permitted in England, by an act of 26 May 1826. Unfortunately, this liberalization was greatly weakened by the act's preserving the bank's monopoly of corporate and large-scale banking inside a 65-mile radius of London. In short, corporate or joint-stock banking was permitted only to the ‘country’ banks.

Political pressure by Scottish Tories gained an exemption from these reforms for Scotland. In the first place, Scotland already had joint-stock banking and, more importantly, Scotland had long been a swamp of small-bank note inflationism. Even after resumption of the gold standard in 1821, Scotland did not have a gold standard in practice. Frank Fetter discloses the solution as follows:

Even after the resumption of payments in 1821 little coin had circulated; and 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. Redemption in London drafts was the usual form of paying noteholders. There was a core of truth in the remark of an anonymous pamphleteer (1826): Any southern fool who had the temerity to ask for a hundred sovereigns [gold coins], might, if his nerves supported him through the cross examination at the bank counter, think himself in luck to be hunted to the border.¹

To work, a gold standard must, of course, be truly in effect – in practice as well as in the official statutes.

The Scottish Tories, led by the eminent novelist Sir Walter Scott, successfully blocked application of the anti-small-note reform to Scotland. The mouthpiece for Scottish High Toryism, Blackwood's Edinburgh Magazine, after hailing Scott's campaign, published two articles on ‘The Country Banks and the Bank of England’, in 1827–28, in which it wove together two major strains of ultra-inflationism: going off the gold standard, and praising the country banks. Blackwood's also attacked the Bank of England as overly restrictionist, thus helping to launch the legend that the bank was too restrictive instead of being itself the main engine of inflation. In contrast, the Westminster Review, mouthpiece for the philosophical radicals, scoffed at the Scots for threatening ‘a civil war in defence of the privilege of being plundered’ by the bank credit system.

It was also in this period in 1827, that Henry Burgess founded the powerful committee of country bankers, and edited for over 20 years the committee's influential periodical, Circular to Bankers. For that entire period, Burgess kept up a drumfire of inflationist vilification of the gold standard, of ‘those ignorant, vain, and obstinate, projectors – Huskisson, Peel, and Ricardo’, and of the Bank of England for being too restrictive of bank credit. He also denounced the ‘Political Economists’ as being ‘the curse of the country’ because of their generally hard-money views. For its part, Blackwood's Edinburgh Magazine pursued a similar unwavering line for nearly three decades, denouncing the return to gold in 1819 as having given ‘the Jews, stockbrokers, and attorneys of the country, an enormous advantage, at the expense of classes connected with land...’.

On the other hand, William Cobbett continued his hard-hitting anti-bank paper stance, proclaiming in 1828 that ‘Ever since that hellish compound Paper-money was understood by me, I have wished for the destruction of the accursed thing: I have applauded every measure that tended to produce its destruction, and censured every measure having a tendency to preserve it’. Blasting the inflationist and privileged Scottish country banks as ‘the Scottish monopolists’, Cobbett also denounced the Scotsman John Ramsay McCulloch for defending bank paper – ‘this Scotch stupidity, conceit, pertinacity and impudence’. Cobbett escalated the attack by asserting that ‘these ravenous Rooks of Scotland have been a pestilence to England for more than two hundred years’. It might be commented, of course, that one simple way for England to cast off that ‘pestilence’ was for England to give Scotland back its independence, a solution that Cobbett and the other nationalist English radicals somehow failed to consider.

Despite the continuing inflationism of the High Tories and of the Birmingham Attwoods, and despite the imminent clash of economic opinion over banking reform, the bulk of economists stood foursquare, from the mid-1820s on, in defence of the gold standard. That much had been agreed upon, and accomplished. Their differences on banking did not prevent unity on this fundamental monetary question. John Ramsay McCulloch, James Mill and Nassau W. Senior, stood solidly in favour of gold. Even the alleged radical, and for a time, pre-Keynesian Malthus expressed complete support for return to the gold standard in 1823 and thereafter. Archbishop Whately, Mountifort Longfield, Thomas Perronet Thompson, even the arch inductivist and historicist Richard Jones of Cambridge, were all staunch supporters of gold. Even the often confused and irenic John Stuart Mill was hard-hitting in defence of gold. The younger Mill, upon reading the testimony, in 1821, of Thomas Attwood in favour of a combined silver and inconvertible fiat paper standard, denounced the idea of depreciating the standard as a ‘gigantic plan of confiscation’. Mill thundered ‘that men who are not knaves in their private dealings should understand what the word “depreciation” means, and yet support it, speaks but ill for the existing state of morality on such subjects’ ²