6. Monetary and Banking Thought, II: The Bullion Report and the Return to Gold

0:00CHAPTER VI. MONETARY AND BANKING THOUGHT II. THE BULLYON REPORT AND THE RETURN TO GOLD. 1. RICARDO ENTERS THE FRAY. The bullionist controversy sank into oblivion for five years after 1804, largely because a cautious policy on the part of the banks of England and Ireland temporarily abated the monetary inflation and its unwelcome consequences. Then during 1809, the heating up of the war with Napoleon rekindled the inflation, banknotes circulation increasing from 17.5 million pounds in November 1808 to 19.8 million pounds the following August, consequently the pound rapidly depreciated by the summer to a discount of David Ricardo was first and foremost a monetary economist, and as Professor Peek has reminded

1:26In 1799, Ricardo had come upon the wealth of nations in 1799 and had steeped himself in political economy ever since, his practical life as a wealthy young stock and bond broker naturally leading him to emphasize monetary affairs. The rapidly growing depreciation of the pound in 1809 led Ricardo to his first published works on economics, beginning with a letter on the price of gold in the Morning Chronicle, 29 August. Ricardo's letter made a great impact, particularly by his unique blend of hardcore theorizing and impressive command of the empirical and institutional facts of the monetary scene.

2:20His first letter to the Morning Chronicle was followed by two more, with the letters being shortly expanded into a renowned and highly influential work, Ricardo's first book, The High Price of Bullion, a proof of the depreciation of banknotes. The point is summarized in the title, published at the beginning of 1810. The high price went into no less than four editions by the following year. The various positions in the bullionist controversy had been set during the first phase of the debate, 1800 to 1804. It was Ricardo's intention to revive and establish the bullionist position not only against the anti-bullionists, but more importantly against the more respected and influential moderate Anti-Bullionist Doctrine of Henry Thornton. Thornton was the most important theoretical opponent of bullionism, and so Ricardo set out to take up the cudgels for Lord King, although, in doing so, he unfortunately, as we shall see, reverted to and elaborated the rigid and mechanistic approach of John Wheatley. It was Thornton, however, who was his leading

3:41," and Ricardo set out to convert him, as he wrote in high price. Mr. Thornton must, therefore, according to his own principles, attribute it, the premium on gold bullion, to some more permanent cause than an unfavorable balance of trade, and will, I doubt not, whatever his opinion may formerly have been, now agree that it is to In the course of the high price, Ricardo set forth clearly the important point that there is no such thing as a shortage of specie, or a great need for more of it, that, in effect, any level of the money supply is optimal.

4:29If the quantity of gold or silver in the world employed as money were exceedingly small or abundantly great, the variation in their quantity would have produced no other effect than to make the commodities for which they were exchanged comparatively dear or cheap. The smaller quantity of money would perform the functions of circulating medium as well as the larger. As soon as the high price was published in January 1810, Ricardo, hitting on the right tactic to spread his views, sent a copy to that leading moderate and influential member of parliament on monetary questions, Francis Horner.

5:15The effect on Horner was electric, and he was moved the following month to introduce and get past a resolution in the House of Commons setting up a select committee to inquire into the cause of the high price of bullion. The justly famed Bullion Committee of 22 illustrious members of Parliament, chaired by Horner, issued its report in June 1810, recommending the bullionist policy of a return to the gold standard in two years' time. The Bullion Committee report touched off an intense controversy within Parliament and in the general pamphlet literature over the following year. David Ricardo had partially accomplished his objective of converting Henry Thornton, who was perhaps the most influential member of the Bullion Committee, and who co-wrote its report, along with Horner and William Huskisson.

6:14Characteristically, it was not Ricardo's bullionist theory that had swayed Thornton, but the impressive marshalling of evidence that convinced him at long last that this particular inflation and depreciation were being caused by overissue of Bank of England notes. Thornton, in short, had joined his disciple Horner before him in remaining a moderate, and being converted from anti-bullionist to bullionist on empirical grounds. In the parliamentary debate on the bullion report in May 1811, Thornton conceded that the idea of poor harvests and subsidies to foreigners being the cause of the depreciation was an error to which he himself had once inclined, but he stood corrected after a fuller consideration of the subject.

7:10Thornton's conversion was all the more remarkable because his own bank was financially tied to the fiat expansion of bank credit, and the mere issuance of the report, even though it did not carry the day in Parliament, was enough to cause a minor run on Thornton's bank. Furthermore, a period of difficulties that were never fully overcome now set in for the Bank until it finally failed in 1825, ten years after Thornton's death. Thornton's conversion, however, was only empirical. Thus, in the course of the debates on the bullion report, he still brought up the bogey of deflation and suggested that the pound be devalued to its existing market levels in order to ward off a deflation when resumption finally arrived.

8:05Since Ricardo's main focus was combating the views of Henry Thornton, it is not surprising that he overreacted and, instead of adopting the complete, sophisticated bullionism of Lord King, went on to the rigid and mechanistic doctrines of John Wheatley. In particular, in order to rebut Thornton completely, Ricardo believed that the dispute had to be elevated totally to the theoretical plane, so that he felt forced to maintain that only monetary factors, even in the short run, could ever have any influence whatever on prices or exchange rates. Money, Ricardo felt obliged to maintain, is ever and always, even in the short run, totally neutral to the rest of the economy, to everything, that is, except overall prices.

9:02As Professor Peek puts it, in large part Ricardo's early works represented a reaction to Henry Thornton's non-neutral monetary economics. And, in challenging Thornton's views, Ricardo committed himself to an explanation of output, value and distribution in real terms, consistent with neutral money. To accomplish his impressive, if unbalanced, task, David Ricardo had to concentrate exclusively on long-run equilibrium states, and to ignore the market processes towards them. In that way, Ricardo set the stage for his later approach to all economic questions.

9:48Ricardo summarized his methodology in the course of his famous correspondence with Thomas Robert Malthus on monetary questions from 1811 to 1813. You always have in mind the immediate and temporary effects. I fix my whole attention on the permanent state of things which will result from them. For money to be strictly neutral to everything except a general level of prices, Ricardo had to assert a strict, radical dichotomization between the monetary and the real worlds, of Worlds, with values, relative prices, production and incomes determined only in the real sphere, while overall prices were set exclusively in the monetary sphere.

10:41And never the two spheres could meet. And here began the fateful and all-pervasive modern fallacy of a severe split between two Two hermetically sealed worlds, the micro and the macro, each with its own determinants and laws. Furthermore, as Salerno writes, it was Ricardo's strong affirmation of the neutral money doctrine in his bullionist writings that was to serve as the source of the classical conception of money as merely a veil hiding the real phenomena and processes of the economy. In particular, if money is neutral, then value or relative prices had to have only real determinants, which Ricardo discovered in embodied quantities of labor.

11:35In the macro area, in contrast, Ricardo set forth a mechanistic, strictly proportional causal relation between the quantity of money and the level of prices, a strictly proportionate Quantity Theory of Money. Again, Peek summed it up very well. Theoretically, Ricardo challenged Thornton by developing a strict quantity theory neutral money analysis, which resulted in his well-known dichotomization of the economy into goods and money sectors, with no role for money other than to determine the general level of prices. Analytically, this required asked him to convert Thornton's model into a dichotomized model by demonstrating real market equilibrium independent of the money market.

12:29A fundamental theme linking all of Ricardo's later works is the continuing search for neutral money. Thus, Ricardo writes that the value of the circulating medium of every country bears some proportion to the value of the commodities which it circulates. No increase or decrease of its quantity, whether consisting of gold, silver or paper money, can increase or decrease its value above or below this proportion. If the mine cease to supply the annual consumption of the precious metals, money will become more valuable, and a smaller quantity will be employed as a circulating medium.

13:15The diminution in the quantity will be proportioned to the increase of its value. The value of inconvertible paper money, declared Ricardo, becomes determined in the same way. Hence, under any restriction of specie payment, any excess of bank notes would depreciate the value of the circulating medium in proportion to the excess. If 20 millions had been the circulation of England before the restriction, and if the bank were successively to increase it to 50 or 100 millions, the increased quantity would would be all absorbed in the circulation of England, but would be in all cases depreciated to the value of the 20 millions.

14:05Under inconvertible currency, furthermore, strict proportionality then gets carried over to the determination of exchange rates. Like Wheatley, Ricardo concluded that only monetary factors ever determine the exchange Exchange Rate, and hence that the depreciation of the exchange rate must precisely measure the extent of monetary inflation and of the over-issue of paper money. In the same way and to the same precise proportion, the rise in the price of bullion and the rise in prices of commodities will also reflect the self-same over-issue and depreciation. David Ricardo's arrival on the monetary scene brought him into the first rank of bullionist champions, not because of anything original he had to say, but because of his empirical knowledge of money, his grasp of the literature, and his willingness to refute in detail the arguments of the numerous distinguished men of the anti-bullionist establishment ranks.

15:14Thus, in the course of the storm over the bullion report, Charles Bozenkett, 1769-1850, a London merchant governor of the South Seas Company, as well as a son of a former governor of the Bank of England, wrote a pamphlet attacking the report, sneering at it from the point of view of a practical man scoffing at wild and irrelevant theorists. In his Practical Observations on the Report of the Bullion Committee, two editions in 1810, Bosonkett's pamphlet drew a famous reply to Mr. Bosonkett's Practical Observations 1811 by Ricardo the following year.

16:00Ricardo's pamphlet was a brilliant and effective polemic in which he marshaled an impressive in the course of a lofty defense of high and mechanistic theory as against the dim-wittedness of self-proclaimed practical men. The reply was particularly effective because Ricardo could match Bozenkett in realistic practical knowledge, a ploy which led many people to overlook the strident unrealism of his theoretical apparatus. In some, Jacob Hollander rightly explained Ricardo's influence on behalf of bullionism not as the result of any original contributions, but because, not content with restating a positive theory, Ricardo set up in succession and demolished in turn, sometimes completely, always plausibly, every opposed argument in a written criticism or current opinion.

17:02A theory which had a dignified parentage was refurbished, defended from doctrinal attacks, justified by contemporary events, vitalized by urgent timeliness, and vindicated against current criticism. A standard was planted, the field cleared, and an alert and resourceful champion held the list. But even at this early date, the hard-money champion was beginning to buckle and, if not abandon, at least to flounder in the cause. For in his reply to Malthus' review of the high price in the Edinburgh Review, reprinted as an appendix to the fourth edition, Ricardo advanced a plan for ending the restriction that abandoned the heart of the gold standard.

17:53Specifically, he proposed that the pound sterling be redeemable in gold bullion rather than in coin. But a gold bullion standard means that the average person cannot redeem paper money in a commodity medium of payment, and that gold redemption is confined to a handful of wealthy international financiers. Ricardo's desertion of the gold coin standard was motivated first by a Smithian desire to economize on the gold metal, and more prominently by a fear of deflation that was conspicuously inconsistent with his dismissal of all non-price-level effects of changes in the supply of money.

18:39In this phobia about deflation and in this inconsistency, Ricardo followed his mentor or in Mechanistic Bullionism, John Wheatley. In addition to Francis Horner, another person inspired by Ricardo's reawakening of the bullion controversy was Robert Muschett, 1782-1818. A Scotsman born near Edinburgh, young Muschett had entered the service of the Royal Mint in 1804 and by the time of the new controversy had risen to the post of First Clerk to the Master of the Mint. Mushett's An Inquiry into the Effects Produced on the National Currency and Rates of Exchange by the Bank Restriction Bill came out early in 1810 before the appointment of the Bullion Committee and went quickly into three editions.

19:36was able to add his expertise at the Royal Mint to the hardcore bullionist cause. 2. The Storm over the Bullion Report Although Francis Horner, who formed and chaired the famed Bullion Committee, was a Whig, the Committee itself was scarcely stacked against the Tory Government. On the contrary, the Committee's 22 members included seven Whigs, seven clear-cut Tories, including even the Prime Minister and Chancellor of the Exchequer, Spencer Percival, and eight, including Thornton and Alexander Bering of the renowned banking family, who were independents, friendly to the Tory administration.

20:26Of the co-authors of the report, Thornton was still considered at the time of appointment of the Committee, perhaps the leading defender of Bank Restriction, and William Huskisson, 1770-1830, was a leading Tory member of Parliament of the canning wing of the party, who had been a member of the Tory government for several years until 1809. The modal committee member may be summed up as a thoughtful Tory, a supporter of the restriction, Now Troubled by the Developing Inflation and Depreciation of the Pound While David Ricardo was acquainted with Thornton, both had been co-founders of the London Institution and its Library in 1805, his only close friend on the Bullion Committee was another London Institution co-founder, Richard Sharp, 1759-1835, a Whig and West Indies merchant.

21:27The only member of the committee who shared Ricardo's bullionist hostility to the Bank of England was Henry Brooke Parnell. Indeed, Thornton's presence on the committee and support for the report in Parliament shocked the anti-bullionists and led his wife to offer embarrassed explanations to their friends. Frank W. Fetter summed it up clearly when he wrote that the position of Thornton and President Huskisson in the Bullion Committee and in their subsequent defense of its report was taken more in sorrow than in partisanship. It was the outgrowth of their increasing concern over the apathy of the government and the bank about the condition of the foreign exchanges and the bullion market, and over the support by the bank and the government spokesmen for the real bills doctrine in its most extreme inform, that is, that as long as the bank's advances were made only on sound commercial assets, the amount of the advances could have no effect on prices or the foreign exchanges.

22:36Most important, the bullion report itself was neither Kingian nor Ricardian, but squarely in the Thornton-Horner moderate bullionist camp. Thornton himself only supported the committee's call for resumption of specie payment in protest at the failure of the bank and the government to be chastised and to agree to restricting further issuance of money.

23:24As for Ricardo, he only became the leading champion of the committee after the policy conclusions of its report supported his call for resumption of payment in specie. Indeed, Malthus, in his defense of the report, hailed the committee for taking his own moderate Stance rather than adopting the Ricardian error of holding a solely monetary explanation of the depreciation. The report was approved in the full bullion committee by a vote of 13-6 and was submitted to Parliament on 8 June 1810. While Prime Minister Percival was one of the six voting nay, along with his paymaster general In a few months, however, the administration reversed its course.

24:31The best evidence suggests that a command decision was made by the Government and the The Bank of England in late August or early September to launch an all-out assault upon the bullion report. Leading the battle in Parliament for the government was Nicholas van Sittert, 1766 to 1851, many times Secretary to the Treasury and soon to be Chancellor of the Exchequer. In the 1809 debate on resumption of specie payment, van Sittert had coined the patriotic if irrelevant and absurd argument that the national resources of the country sufficed for backing the currency so that there was no need for gold.

25:17In the bullion report debate, van Sittert pushed a spectrum of anti-bullionist arguments. First, that immediate resumption was, as usual, inexpedient. Second, that the restriction had nothing whatsoever to do with the depreciation of the pound. And third, that Bank of England notes were esteemed every bit as highly as gold coin, an assertion so preposterous and so out of tune with the facts as to bring down upon Open Ridicule by George Canning, the leader of a Tory faction out of power Masterminding and orchestrating the campaign against the bullion report for Percival and van Sittert were four shadowy aides and advisers.

26:05One was John Charles Harrys, 1778-1855, son of a London merchant and long-time treasury Official, at this time private secretary to the Chancellor of the Exchequer and a past and future top financial advisor of Tory leaders. He was himself to be a Chancellor of the Exchequer in later years. A second figure was Henry Beek, professor of modern history at Oxford, friend of Van Sittert and prominent advisor of Tory politicians. A particularly mysterious but influential colleague was Jasper Atkinson, 1761-1844, about whom little is known except that he was, for a quarter century, an official advisor to the government and to the bank, and wrote thirteen pamphlets from 1802 to the late 1820s in support of government and bank policy.

27:08It seems that he was a country banker and active in trade with Holland. He of course published a pamphlet in opposition to the Bullion Report. Atkinson prepared the pamphlet at the instigation of Harry's and was assisted by his old friend and advisor, Henry Beek. Perhaps even more curious was the leading role of a Geneva refugee, Sir Francis de Venois, of Van Sittert, who had been a British secret agent in Europe and had been a confidential advisor to the British government on relations with France. It was Devernoy who first waved the bloody shirt against the bullion report by dragging into the debate the palpably false charge that the report had given aid and comfort to the Napoleonic enemy, had stimulated Napoleon to strengthen his embargo measures against of Great Britain, and had emboldened the United States to take a nasty turn toward England.

28:10This effective, if mendacious, red herring was taken up in Parliament by Van Sittert and by a leader of the Anglo-Irish establishment, Robert Stuart, Viscount Castle Ray, the Marquis of Londonderry, 1769-1822. Indeed the major parliamentary motif of the critics of the report was that the restriction was vital for pursuing the war effort against France. Prime Minister Percival charged that adopting the report would be tantamount to a declaration that they would no longer continue those foreign exertions which they had hitherto considered indispensable to the security of the country. If parliament should adopt the report and its policies, Percival thundered, they would disgrace themselves forever by becoming the voluntary instruments of their country's ruin.

29:07Ringing changes on this wartime necessity stab in the back theme were Viscount Casselray, the High Tory Foreign Secretary and War Secretary Robert Banks Jenkinson, the Earl of Liverpool School, 1770-1828, and the Treasurer of the Navy and former Secretary to the Treasury, George Rose, 1744-1818, who also contributed two pamphlets to the controversy. Rose was the highest of high Tories, a friend of King George III, an opponent of parliamentary Reform, an extreme pro-war advocate, a supporter of the Corn Laws, and an adversary of the abolition of slavery.

29:54In late 1810 and early 1811, a host of pamphlets were published, attacking the Bullion Report, and many of them, both signed and anonymous, were products of the behind-the-scenes campaign of the governmental and bank circles. In addition to Atkinson's pamphlet, Harry's weighed in with an anonymous tract, a review of the controversy respecting the high price of bullion and the state of our currency. Charles Bozenkett's Practical Observations, rebutted by Ricardo, was another product of this campaign. Particularly important in this effort was the publication of a speech by a prominent Attorney, Randall Jackson, 1757-1837, which purported to be the views of a concerned bank stockholder.

30:48In reality, Jackson was apparently hired by the bank to present its case, sub rosa, against the report. Jackson presented the state-of-the-art critiques by the government. The report had greatly injured commercial credit. The committee was dominated by chronic oppositionists to the government, and it is impossible for banknotes ever to be excessive or to have higher prices than par because they were issued only against value received, a non sequitur if there ever was one. Indeed, the main economic arguments of bank spokesmen before the bullion committee and in the parliamentary debates by men such as Governor John Whitmore and Deputy Governor John Pierce were an extreme, almost absurd version of the real bills doctrine, namely that if bank loans were issued on short-term bills of real value representing real transactions, then bank note issue can never be excessive and never have any inflationary or depreciating in effect on the pound. Walter Badgett was later to call these arguments almost classical by their nonsense. Perhaps the acme of this nonsense was the pamphlet of the Tory Commissioner

32:12of Audit, Francis Percival Elliott, circa 1756 to 1818, who went so far as to maintain that the problem with Huskisson's argument was that he considered the gold guinea to be the standard of value, whereas it is actually the pound sterling. According to Elliott, the pound, precisely because it is fiat money, is the ideal money of account, because it is by definition invariable in value. On the other hand, Elliott opined, gold or silver, being made of a substantial commodity, must be variable in value. Meanwhile, a different kind of critic of the report appeared prominently in the pamphlet literature and in Parliament.

33:04The eccentric Sir John Sinclair, 1754-1835, first and also current President of the Board of Agriculture, was born to a Scottish noble family and was educated at the universities Studies of Edinburgh and Glasgow, graduating from Trinity College, Oxford in 1775. A member of Parliament from 1780 until 1811, Sinclair was a man of great energy and enthusiasm and a prolific writer in the causes he held dear. In his lifetime, Sinclair published no less than 367 tracts and pamphlets. An advocate of parliamentary reform, Sinclair championed the cause of peace and wrote several pamphlets attacking Pitt's war policy and calling for peace with England's enemies.

33:58He even went so far as to publish a booklet calling for Britain's surrender of Gibraltar to Spain during the American Revolutionary War. Sinclair's prime enthusiasm was for agriculture, an art he learned from managing his Scottish of British Estates. Not only was he the first president of the Board of Agriculture, but he also founded the British Wool Society. Sinclair was also engrossed in statistical and monetary and fiscal questions. An indefatigable collector of statistics, Sinclair actually introduced the words statistics and statistical into the English language, and during the In the decade of the 1790s, he collected and published in 21 volumes a statistical account of Scotland More relevant to our concerns, Sinclair had published from 1785 to 1790 a three-volume history of the public revenues of the British Empire In this work, Sinclair had displayed a determined and all-out zeal for monetary inflation and government spending As soon as the Bullion Report was issued, Sinclair wrote to Prime Minister Percival asking help for reprinting his work as part of the task of rebutting the Bullion Committee.

35:22You know my sentiments regarding the importance of paper circulation, he wrote to Percival, which is, in fact, the basis of our prosperity. In fact, Sinclair's observations on the report of the Bullion Committee, published in September 1810, was the very first of many pamphlet attacks on the Bullion Report. A storm of pamphlets raged over the Bullion Report, hoping to influence the parliamentary decision as well as the tides of public opinion. David Ricardo was a host unto himself. In the month of September 1810 alone, Ricardo in the Morning Chronicle defended the conclusions of the report, taking of course the hardcore Ricardian line, attacked the pamphlet of Sir John Sinclair and also denounced the speech of Randall Jackson, which Ricardo as a bank stockholder had heard delivered in person.

36:24Malthus wrote two effective articles in the Edinburgh Review the following year, taking in the Thornton Horner Moderate Bullionist Position. Particularly effective defending the report was the Canning-Huskisson faction of Tories, centered in their journal The Quarterly Review. As firm Tories, the support of this faction shielded the Bullion Committee from charges of Whig partisanship. The most widely circulated and one of the most influential pamphlets supporting the The Report was written by its eminent co-author, William Huskisson. Huskisson's The Question Concerning the Depreciation of Our Currency, stated and examined, was published in late October 1810 and went into no less than eight editions in rapid succession, the ninth appearing in 1819.

37:19The quarterly review carried on a coordinated campaign on behalf of The Report, with contribution by High Tory George Ellis, 1753-1815, Huskisson and even the great George Canning himself. It is not without charm that William Huskisson contributed some passages to Ellis's laudatory review of Huskisson's own pamphlet in the quarterly review. All in all, about 90 pamphlets were published in a short period on both sides of the great bullion controversy. The climax came in May 1811, when Parliament finally got around to debating the report. After four days of debate, all Francis Horner's resolutions incorporating the essence of the report went down to a ringing defeat.

38:13The most important resolutions were his first and his last. The first outlined the responsibility of the bank's overissue for the price inflation and the depreciation of the pound. This resolution was defeated by a vote of 151 to 75. Horner's final resolution, providing for resumption of the gold standard in two years, Lost by a Far Wider Margin, 180-45 Nicholas van Sittert then rubbed it in for the government, getting parliament to pass resolutions defending the government's and the bank's view of the controversy. Most characteristic was van Sittert's third resolution, restating the classic nonsense in a declaration almost as fatuous as King Canute's command to the tides, or a State Legislature's redefinition of PIE, Parliament declared that the promissory notes of the said company, the Bank of England, have hitherto been and are at this time held in public estimation to be equivalent to the legal coin of the realm and generally accepted as such in all pecuniary transactions.

39:30Even though the inflation and the depreciation proceeded apace, the monetary controversy died out for the duration of the Napoleonic Wars. In despair, and perhaps to reveal the absurdity of van Sittert's case, the great Peter Lord King now decided to take direct personal action in protest against the depreciating paper pound. While the pound was not officially legal tender, it was treated as such by government and public alike. To dramatize the true situation, Lord King in 1811 proclaimed that henceforth he would only accept rent from his tenants either in gold coin or in banknotes at their market discount.

40:19In short, he would insist on the gold equivalent in pounds. King's heroic action forced the government to impose legal tender for payment of rent at the official par of 21 shillings to the gold guinea, and the following year, parliament completed the coup by extending legal tender coercion to all payments of every type. 3. DEFLATION AND THE RETURN TO GOLD Needless to say, the self-same establishment politicians who had used war as their supreme excuse for continuing the restriction, failed to jump with alacrity to go back to the gold standard when the war finally ended in 1815.

41:10And yet conditions were certainly ripe. In a pattern that would set the tone for over a century, the inflationary credit boom of wartime was quickly succeeded by a post-war deflation of money, credit and prices. The wartime inflation was succeeded by a post-war deflationary recession. There is no evidence whatever that the Bank of England deliberately contracted the money supply to pave the way for a return to gold at the pre-war par. It was simply the beginning of the classic pattern of fractional reserve banking powered by a central bank, the creation of boom and bust.

41:55Total Bank of England credit fell from £44.9 million on 31 August 1815 to £34.4 million a year later, a drop of 24%. Bank deposits fell by about 15% in the same period, while bank notes fell by 11%. The bank contraction exerted a powerful leverage effect on the country banks. Many country banks failed from 1814 to 1816, and country bank note circulation fell from 22.7 million pounds in 1814 to 19 million pounds in 1815, and then to 15.1 million pounds in 1816.

42:47In short, country banknotes outstanding fell by 33.5% over the two-year period, and by 20.5% from 1815 to 1816. We may now arrive at a rough estimate of the total contraction of the money supply from August 1815 to August 1816. Total money supply, banknotes plus bank deposits plus country banknotes, amounted to approximately 60.7 million pounds in 1815. It fell to 50.4 million pounds the following year, a drop of 17% in one year.

43:34The monetary contraction, combined with general public expectations of a return to gold, drove the market gold premium over the official par down nearly to the par price. The monetary inflation had driven the market gold price up to 5.1 pounds at the end of 1813, which was 145 percent of the old official pre-restriction par of 3 pounds 17 shillings, 10 and a half pence. After Napoleon's retirement to Elba, the gold price fell to 4 pounds 5 shillings, A premium of only 8%. Then, on Napoleon's return to France, the gold price of the pound shot up nearly to its 1813 peak.

44:27After Waterloo, once again, the gold price fell sharply and steadily, reaching £3.18.06 in October 1816, a premium of less than 1%. Similarly, the market price of silver fell from a peak premium of 38% in 1813 to a premium of only a little over 2% in the first post-war year of 1816, and the price of foreign exchange at Hamburg fell from a premium of 44% in 1813 down to par in 1816. This deflation accompanied the monetary contraction, British prices falling from a peak of 198 in 1814, 1790 being equal to 100, to 135 in 1816.

45:24Conditions were now perfect to return to gold, and immediate resumption could have been achieved with no further transition problems. But the British establishment dithered, its only constructive step in 1816 being Parliament's dropping of the formal bimetallic standard, which had only resulted in a de facto gold standard in the 18th century and the adoption of a formal gold standard. Silver, from then on, would only be subsidiary coin, but apart from stating that when Britain did go back to a specie standard, it would be going back to gold, nothing else was done. The problem was a pervasive desire in the establishment to resume cheap credit and inflation, as well as an even more widespread phobia about deflation that marred the analysis and and policy conclusions of even the most influential champions of a return to gold payments.

46:27The bulk of anti-bullionists displayed their hypocrisy and intellectual bankruptcy by reversing their supposed analytical stance. In short, those who stoutly denied all during the era of inflation that over-issue of banknotes had any impact on domestic prices or foreign exchange rates, now reversed their course and blamed the fall in prices, as well as the post-war depression, squarely on the contraction of the money supply and the eventual resumption of specie payments. What they wanted, therefore, was easy money and inflation, and they were willing to use What they seemed unwilling to realize is that any inflationary boom, especially that of a lengthy and major war, will collapse at war's end into depression and deflation.

47:29Much of the deflation was the result of the post-war depression and bankruptcies, for The initial post-war deflation occurred years before the actual return to gold, or even the passage of the Resumption Act. The post-war depression was the market's way of readjusting the economy to the enormous distortions of production and investment brought about by the skewed demands of wartime and the inflationary credit boom. In short, the post-war depression was the painful but necessary process of liquidating the distortions of the wartime inflation and of returning to a healthy, peacetime economy efficiently serving the consumers.

48:16Another cause of the deflation was industrial and economic progress. The end of the war liberated England to launch one of the greatest periods of economic growth in its history. The Industrial Revolution could at last develop freely and raise the standard of living of the mass of Englishmen, something it could not do when the industrial engine had been diverted to the unproductive waste of war. As a result of the great increase of production, prices kept falling in Britain throughout the 1820s. Long past the time when this welcome drop in the cost of living, this deflation could should plausibly be blamed on the return to gold in 1821.

49:04The anti-deflation hysteria and the desire to keep inflating delayed the return to gold for five years after 1816. When it became clear that there would be no immediate resumption, the pound began to depreciate And again, the price of silver bullion rising from 2% above par in 1816 to 12% premium on 1818. Similarly, the foreign exchange rate at Hamburg rose from par to 5% above, and domestic prices rose from 135 in 1816 to 150 two years later. The weakening of the pound by disappointed expectations of immediate resumption was also greatly compounded by an expansion of bank advances and note issues.

50:01When the restriction came up for one of its periodic renewals in the spring of 1816, Chancellor of the Exchequer, Van Sittert, pleaded for two more years of renewal so that business could acquire more needed cheap credit. Hans Sittert was easily able to defeat Francis Horner's resolution for resumption of specie payment in two years. Agriculturists, as usual, had over-expanded and went heavily into debt during the wartime inflation, and then complained heavily when the bubble burst and turned to the government to inflate or expand spending on their behalf. The quarterly review, reflecting Tory devotion to the interests of aristocratic large landlords, shifted gears from favoring the bullion report to bitterly denouncing deflation.

50:55The most extreme of the inflationists now emerged in the form of two banker brothers from Birmingham, Thomas 1783-1856 and Mathias Atwood 1779-1851, who also served as the spokesman for the iron and brass industry of the city. Birmingham, as the center of armaments manufacture, had been a major beneficiary of the war boom. Thomas Robert Malthus, as we have seen, for for a few years urged the government to increase deficits to cure the alleged ills of under-consumption, but abandoned this line of thought as soon as the post-war agricultural and economic depression was over.

51:44But the prolific Atwoods were able to make inflation and permanent, inconvertible fiat paper money a lifelong crusade. Nothing, for example, could be more starkly opposed to Say's crucial law of markets than the unabashed assertion of Thomas Atwood, in an 1817 open letter to van Sittert, that it is the chief purpose of this letter to show that the issue of money will create markets, and that it is upon the abundance or scarcity of money that the extent of all markets principally depends. Along with fiat money and monetary inflation, the Atwoods and their counterparts in the northern industrial city of Liverpool were able to persuade the government to embark on a large-scale program of deficits, relief and public works to try to generate another inflationary boom.

52:42James Mill warned Ricardo in the autumn of 1816 that some villainous schemes of finance were afoot, and sure enough the government proposed a deficit bond issue to finance public works, and also loaned out three quarters of a million pounds during 1817. The temporary resurgence of inflation and prosperity in 1818 was the result, according to the fiery, erratic, hard-money radical journalist William Cobbett, of the prodding by Mathias Atwood upon van Sittert, who caused bales of paper money to be poured out via Bank of England loans to the government. Indeed, it was undoubtedly the weakening of the pound in 1817 and 1818 that tipped the scales and led to parliaments passing the act of resuming payments in gold in May 1819.

53:43Resumption in gold coin was supposed to begin four years hence, but actually gold coin payments were launched on the banner day of 8 May 1821. Even though the resultant gold coin standard served as the cornerstone of Britain's economic growth and prosperity for nearly a century, the fierce opposition, confusion and vacillating of the government made arriving at the proper results seem almost a miracle. The bank opposed resumption down to the very passage of the law in 1819, and it was the government's temporarily cooling relations with the bank that allowed room for the resumption law.

54:28Yet, even though a determined effort was launched by men such as Alexander Bering, 1774 to 1848, the Atwoods and the Birmingham manufacturing interests and the landed aristocrats to overturn resumption, The gold standard held and was even resumed earlier than scheduled in 1821. Thus the Earl of Carnarvon in mid-1821, denouncing the Resumption Act for lowering agricultural prices and calling for monetary expansion and greater government expenditures, openly raised the standard of the landed aristocracy as against the cosmopolitan moneymen and financiers.

55:15He called upon the House to consider the consequences of destroying, by its means, the aristocracy of the country, the gentleman and the yeomanry of England, on whose existence our institutions alone could rest. The moneyed interest had been formed by the calls of our finances. They could be removed. They were inhabitants of this or of any other country. But the stability of our institutions and the safety of the throne itself depended on our agricultural population. And yet, the gold coin standard held. It held even though two of the most influential champions of resumption were weak reeds when it came to resisting the anti-deflation hysteria.

56:04At the end of the war, Ricardo, in his Proposals for an Economical and Secure Currency, 1816, reverted to his 1811 gold bullion proposal, in which resumption would take place not in coin, but in large ingots or gold bars, thereby limiting the gold standard to a few wealthy traders. Gold would not then be the true standard currency of the realm, and would be but a flimsy After the publication of his Principles of Political Economy in 1817, David Ricardo was the most celebrated economist in England, and his views on currency, as well as other economic problems, carried great weight.

56:57At the urging of his mentor, James Mill, Ricardo then entered Parliament in 1819 to to battle for his economic views until his death in 1823. He particularly lent his great prestige to urging resumption of gold payments, and somehow his bullion plan lost out rapidly to the more consistent and more thorough going gold coin standard. The most important single politician responsible for the return to gold was the remarkable The story statesman Robert Peel the Younger, 1788-1859, who gave his name, Peel's Act, to the Resumption Law. Peel was later, as Prime Minister, to be responsible during the mid-1840s for the repeal of the notorious Corn Laws, as well as the attempt to establish the currency principle into law in Peel's Act of 1844. Peel's accomplishments were were particularly remarkable for being bred to the political purple by his distinguished High Tory father.

58:07Peale was the eldest son of Sir Robert Peale the Elder, a leading Lancashire cotton manufacturer whose own father had established the first Calico cotton factory in Lancashire. Sir Robert was a dyed-in-the-wool Tory statist, a fervent supporter of William Pitt, who had had written a pamphlet in 1780 praising the national debt productive of national prosperity. As a member of parliament, the Elder Peel had ardently backed the war against France, had put through the First Factory Act and had opposed the Bullion Report in 1811. When young Robert was born, Sir Robert dedicated his firstborn son to the world of politics.

58:53The brilliant youth went to Harrow, where he was a friend and classmate of Lord Byron, and entered Christchurch College in Oxford in 1805. In 1808, Peel graduated with high honors, and his doting father promptly purchased him a seat in parliament the following year. The precocious 21-year-old member of parliament soon became undersecretary for war and the Colonies, whose ministry conducted the war against France, and in 1812 he became for six years the Chief Secretary for Ireland. There he followed his father's high Tory principles by fiercely repressing the Irish and taking the lead in opposing the emancipation of Catholics in Great Britain.

59:41In 1811, young Peel joined his father in bitter opposition to the Bullion Report. In 1819, when the House of Commons named a committee to study the resumption of specie payments, young Robert Peel was chosen chairman over far more experienced members, such as Huckison, Canning, and the ardent bullionist and member of the bullion committee, the Whig, George Tierney. Yet Robert Peel orchestrated the report favorable to resumption, and it was Peel who shepherded and the Resumption Law through Parliament. Peel thereby displayed the beginning of his memorable lifelong series of shifts away from high Tory statism and towards classical liberalism, towards, in short, hard money, free trade and emancipation of the Roman Catholics of Britain.

1:00:38George Canning was in awe at Peel's achievement in attaining the gold coin standard, calling In effecting this feat the greatest wonder he had witnessed in the political world, it was particularly piquant that in effecting this notable change of heart, the younger Peel had to break with his father, who not only opposed resumption, but also signed the petition of several hundred merchants, bankers, traders and others of the City of London warning of great distress should the committee's recommendation ever become law. A crucial question, then, is how Robert Peale came to change his mind. Professor Rashid has performed the service of unearthing as the likely instrument of Peale's conversion, his former tutor at Oriel College, Oxford, the Rev. Edward Copleston 1776-1849.

1:01:37Copleston was the son of a rector in Devonshire and was descended from an ancient landed Devon and Family. Graduating from Corpus Christi College, Oxford in 1795, Copleston became a fellow at Oriel College, getting his M.A. from there in 1797 and becoming a tutor at Oriel and professor of poetry at Oxford. Copleston later became dean at Oriel and by 1814 had had risen to Provost of Oriel College. He was highly influential at Oxford, and one of the main persons responsible for the raising of academic standards and the subsequent rise of Oxford to its once high estate. Although a staunch Tory and an influential clerical counselor to the Tory leadership, Copleston was a moderate liberal in the Anglican Church and an Advocate of Catholic Emancipation.

1:02:35As early as 1811, Copleston had become a determined opponent of inflation and depreciation, especially criticizing its destructive effect on creditors and holders of fixed incomes. In 1819, he decided to intervene in the new bullionist struggle by publishing two pamphlets directed to his former pupil. The first, Letter to the Right Honorable Robert Peale on the Pernicious Effects of a Variable Standard of Value, was published on 19 January 1819, and it was quickly recommended on the floor of the House of Commons by the fiery Whig and proponent of immediate resumption, George Tierney.

1:03:21The pamphlet was also praised in an editorial in the Times. The first edition of the letter was sold out immediately, and within a month, three editions had been printed. In March, Copleston published a second letter, elaborating on the arguments of the first, particularly on the ill effects that inflation and a depreciating pound had on the poor. The large printing of the second letter was quickly sold out, and a second edition was issued in May. Points of Copleston's influence on Peel comes from the latter's correspondence with his favorite tutor at Oxford, his close friend, the Rev. Charles Lloyd. Lloyd, who was indeed a rival Anglo-Catholic force to Copleston at Oxford, wrote to Peel recommending Copleston's letter at the same time that Peel was recommending it to him.

1:04:19Peel notes that the pamphlet has made a great impression in Parliament, including among its admirers Canning and Huckason. In fact, it seems likely from Peel's remarks that Coppleston's clear-cut restatement of bullionist principle was the first pamphlet he had ever read on the subject. Mathias Atwood, indeed, went so far as to claim that Peel and Huckason were followers of Coppleston's ideas. If Copleston was crucially influential, then his violent attack in the pamphlet on what Peale referred to as the imbecility of Nicholas van Sittert might have played a large role in reducing van Sittert's influence and getting government policy on resumption changed.

1:05:08Yet, in the post-resumption debate, even Copleston floundered, claiming in the quarterly review He argued in 1821 that while he had upheld the principle of specie payments, he had been opposed to immediate resumption. Complaining about the agricultural distress, he blamed the immediate resumption on the influence of Ricardo, ignoring the latter's own phobia about deflation. Thus the two most influential writers pushing parliament into resumption, Ricardo and Edward Coppelston, each was uncertain about the gold coin standard in the face of deflation. Robert Peel's achievement appears, then, all the more miraculous.

1:05:55Of particular interest is Copleston's brilliance and possible originality in his challenge to Ricardo by reviving, perhaps unwittingly, the complete bullionist or pre-Austrian monetary tradition of Catillon and Lord King. Copleston in the first place attacked Ricardo's mechanistic assertion that exchange rates measure the degree of depreciation. This doctrine resting on the equally mechanistic view that a variation in price caused by an altered value of money is common at once to all commodities. Copleston countered that it was precisely because prices do not adjust smoothly, instantly and uniformly to inflation that the inflation process is so painful and destructive.

1:06:51The fact undoubtedly is that the altered value of money does not affect all prices at the same time, but that wide intervals occur, during which one class is compelled to buy deer while they sell cheap, and others have no prospect whatever of indemnity or of regaining the relative position they once occupied. In short, Copleston pointed out the profound truth that in a transition period to a new monetary equilibrium, there are always gains by those whose selling prices rise faster than their buying prices, and losses by those whose costs rise faster than selling prices, and who are late in receiving the new money.

1:07:40But even further, Copleston points out that some of these changes in relative income and wealth will be permanent. In short, changes in the money supply are never neutral to the economy, and their effects are never confined to the level of prices. Taking issue with David Hume's famous assertion that an increase of the quantity of money in a country generates prosperity, Copleston pointed to the impoverishment of the Spanish and English peasantry from the monetary and price inflation of the 16th century. He noted shrewdly in a lesson that could well be heeded today that while pure theory inculcates the neutral and necessary tendency towards an equitable adjustment, It also leaves the intermediate difficulties and delays out of the question as frictions in a mechanical problem.

1:08:39On the other hand, Copleston was perceptive enough to point out that the path toward equilibrium is faster in monetary than in real matters. In monetary affairs, he noted, the level is found almost immediately. Other commodities require some time to produce them, and the fortunate holder of large quantities may make great profits before an adequate competition can grow up. But in these, money, the time and labor required for the production count for nothing. The commodity is always afloat, waiting only the impulse of profit to determine its direction to the best market.