7. Monetary and Banking Thought, III: The Struggle Over the Currency School (continued)

0:005. The Crisis of 1839 and the Escalation of the Currency School Controversy A mild boom in 1837 and 1838 was followed by another economic crisis towards the end of 1838 and during 1839. Bankruptcies and bank runs ensued and the Bank of England's Mises' gold reserve fell from £9.8 million in December 1838 to an extremely low £2.4 million by September 1839. Not only that, but in the teeth of shrinking reserves, the bank, instead of following anything like its own Palmer rule, let alone the more rigorous currency principle, expanded credit still further, thus precipitating an even greater drain of gold from the bank.

1:00By July and August 1839, the Chancellor of the Exchequer was beginning to contemplate another restriction, another suspension of specie payment on behalf of the bank. The bank was saved only by massive credits from the Bank of France and from Hamburg. Clearly the banking situation was becoming intolerable and something had to be done. Parliament appointed a select committee on banks of issue in 1840 and again in 1841 and massive hearings were held on the question. Disputes in parliamentary testimony and pamphlet controversy were redoubled and were made more urgent by Horsley Palmer's concession that the bank was finding it almost impossible to adhere to his rule.

1:54Several other groups now arose to challenge the growing currency school consensus. The free banking adherents took a lead from the currency school in lashing out at the Bank of England's responsibility for inflation and for the business cycle. But the force of their opposition to the bank was vitiated by their uniform apologia for the country and joint stock banks. While it is true that those banks were largely governed by the actions of the bank, it was egregious for them to claim that the private banks were totally passive and blameless in the entire process. The Free Banking School was particularly discredited by the fact that virtually all of its spokesmen with the exception of Sir Henry Parnell, who died in 1842 in the middle of the controversy, were themselves joint stock or country bankers, so that the special pleading in their stance was all too evident.

2:56If this group had confined their advocacy of free banking to the largely political point that the bank would inevitably be more inflationary and dangerous than competitive banking, they would have been far more persuasive, but such restraint is not the usual practice of special pleaders. The only distinguished economist to take up the free banking cause was Samuel Bailey, the subjective value theorist. But Bailey had founded and was now chairman of the Sheffield Banking Company, and his fervent apologia was all too suspect. Bailey indeed was one of the worst offenders in insisting on the passivity of the country and joint-stock banks, and in attacking the very idea that there is something wrong with worrying about changes in the quantity of the money supply.

3:52By assuring his readers that competitive banking would always provide nice adjustment of the currency to the wants of the people, Bailey overlooked the fundamental Ricardian truth that there is never any social value to increasing the money supply once the commodity is established, and that inflationary increases in bank credit take place as a process of fraudulent issue of fake warehouse receipts to standard money. Another school of thought arising in this period was the banking school, at this early Point Consisting Solely of One Prominent Man, Thomas Took. Took, 1774-1858, was by now an elderly merchant in the Russian trade, who, born the son of a chaplain, had started working in St. Petersburg at the age of 15 and had become a partner in a mercantile firm in London.

4:56Being interested in economic matters, Took had been one of the founders of the Political Economy Club and continued to attend meetings of the club until his death. In the bullion controversy, Took was a staunch bullionist and he strongly supported the resumption of specie payments in 1819. At best, however, Took was a confused and inchoate thinker and whatever theoretical acumen Inductive play with his statistics was able to convince Took, for example, as early as was his 1838 volumes, first, that high and rising prices during the Napoleonic periods were solely due to bad harvests, lowering the supply of farm products, as well as obstructions of foreign trade, while second, falling prices after the war were caused by better harvests and the resumption of trade.

6:16Having concluded that, Tooke was able to press on in his third volume of The History of Prices in 1840, and in his parliamentary testimony the same year, to launch the banking school with the absurd proposition, to quote from a crystal clear formulation of Tooke four years later, that, the prices of commodities do not depend upon the quantity of money indicated by the amount of banknotes, nor upon the amount of the whole of the circulating medium. But that, on the contrary, the amount of the circulating medium is the consequence of prices. To be fair to Took and his banking school colleagues, they did not mean, or profess to mean, to apply this old fallacy to inconvertible currency, as their anti-bullionist forebears had done, but only to convertible currency.

7:16But this did not make their analysis or conclusion one whit less absurd. The masterful critique by Torrens deserves to be quoted at some length. Torrens first points out that Took has the deserved reputation, which even he himself cannot destroy, of having shown by an extensive induction from existing and from historical The Theory of Money and Credit

8:40Trusts. Like Adam Smith, the banking school was blithely assuming that the adjustments and restraints of redeemability were instantaneous, and therefore that no problems would be created in the actual processes of the real world. A particular Rapier thrust against Took by Torrens four years later cannot be resisted. Throughout interminable pages of inconsistent Affirmation in the Multi-Volume History of Prices, he reiterates the inference that the value of commodities has fluctuated in relation to money, and that therefore the value of money has not fluctuated in relation to commodities.

9:29The corollary proposition of the banking school, taken from the anti-bullionists and now brought again to the fore by Took, is that the Bank of England cannot increase the supply of money. As Took put it starkly, the Bank of England has not the power to add to the circulation. Even applying this claim only to convertible currency, as the banking school did, it is difficult to hold such a manifest absurdity at length. In practice, therefore, Took and the other banking school adherents usually modified this blunt statement to apply only to banknotes issued in loans to private borrowers and not to purchases of government securities.

10:18To the question, what's the difference? The main contribution to Took's doctrine was made in 1844 by John Fullerton, namely, Bank notes issued in purchase of government securities are paid away and remain permanently in circulation, thus adding to the quantity of money, whereas bank notes are only lent and are returnable to the issuers, and presumably therefore do not add to the money supply. This was what Fullerton dubbed the principle of reflux, of notes returning to the banks. Once again, the incisive refutation came from Colonel Torrens, who pointed out that to carry any weight, the vaunted principle of reflux requires instantaneous repayment of all loans.

11:11Allow any interval to elapse between the loan and the repayment, and no regularity of reflux can prevent redundancy from being increased to any conceivable extent. The same, as well as many other strictures, apply to a variant of Fullerton's and others in the banking school, which, again, stemming from the anti-bullionists, held that banks can never over-issue notes, provided that their notes are only issued in the course of making short-term, self-liquidating loans matched by inventories of goods in process, and the so-called Real Bills Doctrine. Torren's role in the currency versus banking controversy has a fascinating reverse symmetry with the path taken by Took.

12:05Whereas Torrens began as an anti-bullionist and apologist for the Bank of England and now ended as a currency schoolman and opponent of bank credit inflation, Took began as a is a solid bullionist, yet ended his days as a pro-bank anti-bullionist. Among the various grave inconsistencies in the banking school approach, one particularly stands out. If it is true that banks can do no wrong, at least in a convertible currency, that they cannot over-issue notes or over-expand credit, and that even if they did, it could have no no effect in raising prices or causing a business cycle, then why not adopt free banking?

12:54Why have a privileged monopoly like the Bank of England? Yet the banking school remained a determined enemy of free banking and devoted apologists for the bank. Thomas Tooke's most famous dictum was the striking, free trade in banking is synonymous with free trade in swindling. Fair enough, but if we analyze this pronouncement logically and we find that banking is synonymous with swindling, then what is the rationale for placing the power of state privilege behind a monopoly swindler? Even if banking is swindling, isn't competitive swindling better than a state-privileged and dominant monopoly swindler?

13:41and yet took fiercely fought to preserve the bank and its exclusive privileges in London and environs. His only proposed reform was to induce the bank to hold a higher reserve of specie to liabilities. The one contribution of the banking school was to continue to emphasize what Torrens knew but Lloyd and Norman did not, that bank notes and bank demand deposits were equal School and Coordinate Parts of the Supply of Money. Because of their grave error on this point, in Torren's case to dismiss deposits as always in a fixed ratio to notes, the currency school and its embodiment in Peel's Act left deposits as the big hole in their attempt to make the money supply conform to movements in gold.

14:36As we have noted, the currency school counterparts in the United States did not make that error. Free trade and laissez-faire thought was growing in dominance in Great Britain during this era, led by the intrepid merchants, manufacturers and publicists from Manchester. But where to stand on the vexed question of banking? Could banking be free, or is fractional reserve banking really swindling, and therefore different from normal honest enterprise? Was Chancellor of the Exchequer Thomas Spring Rice correct when he stated in Parliament in 1839, I deny the applicability of the general principle of freedom of trade to the question of making money?

15:26Of one thing, the men of Manchester were certain, there was no quarter to be given the Bank of England. Thus, John Benjamin Smith, the powerful president of the Manchester Chamber of Commerce, reported to the Chamber in 1840 that the crisis of 1839 was caused by the Bank of England's contraction, following inexorably from its own earlier undue expansion of the currency. Smith denounced the undue privileges of the bank as the source of its control over the nation's economic life. Testifying before Parliament that year, Smith endorsed the currency school by criticizing the fluctuations of note issues by all the banks as well as the Bank of England, and went on to state, It is desirable in any change in our existing system to approximate as nearly as possible to the operation of a metallic currency. It is desirable also to divest the plan of all mystery and to make it so plain and simple that it may be easily understood by all. Not only did he thus endorse the currency principle, he went further to endorse Ricardo's

16:44scheme of creating a governmental national bank for the purpose of issuing banknotes. A similar course was taken by Richard Cobden, the Shining Prince of the Manchester laissez-faire movement. Attacking the Bank of England and any idea of discretionary control over the currency, Cobden fervently declared, I hold all idea of regulating the currency to be an absurdity, the very terms of regulating the currency and managing the currency I look upon to be an absurdity. The currency should regulate itself. It must be regulated by the trade and commerce of the world. I would neither allow the Bank of England nor any private banks to have what is called the management of the currency. I should never contemplate any remedial measure which left it to the discretion of individuals to regulate the amount of currency by any Any Principle or Standard Whatever. Rejecting both private and central bank management, Cobden was perceptive enough to see that the goal was not free banking per se, but to have a currency that mirrors genuine market forces of supply and demand, that is, the fortunes

18:09of gold or silver money. He saw that the currency principle aimed to do just that, and hence represents his endorsement. And while his support for a government national bank of issue was too much like leaping out of the frying pan into the fire, it was understandable in the light of his refusal to trust the Bank of England to cleave to the currency path. I should be sorry to trust the Bank of England again, having violated their principle, the and the Palmer Rule, for I never trust the same parties twice on an affair of such magnitude. 6. The Renewed Threat to the Gold Standard Thus a consensus was building rapidly after the crisis of 1839 on behalf of the currency principle.

19:03But perhaps the precipitating factor in bringing Sir Robert Peel and the establishment and to enact the principle was a renewed threat to the gold standard. The gold standard had been the agreed-upon consensus of all parties since the 1820s, and since the return to gold, the assaults of inveterate statists and inflationists, like Birmingham's Atwood brothers, had faded away. But now, under the stimulus of economic crisis, fiat paper agitation and other inflationist If Manchester was the home of laissez-faire and sound money, Birmingham, its sister manufacturing town in the north, had long been the home of state-sponsored inflationism.

19:57Economic recession struck the Birmingham area in 1841, and Birmingham moved once more to a powerful attack upon gold. Thomas Atwood himself had retired from Parliament two years before, but Birmingham's representatives were more than willing to take up the old cause. Atwood had been replaced by merchant and manufacturer George Frederick Muntz, who agreed with the former's currency views, and Richard Spooner, the Tory whom Muntz had defeated for the seat, was an inflationist and a banking partner of Atwood's. The following year, the Birmingham Chamber of Commerce, presided over by Richard Spooner, launched a furious campaign pressuring the Prime Minister, Sir Robert Peel, into going off gold.

20:50Months put out a new edition of an old anti-gold tract, and, roaring back to the wars, Thomas Atwood, as might be expected, published articles and wrote numerous letters on his currency nostrums. The most influential of this outpouring of Birmingham inflationism was The Gemini Letters, published anonymously by Thomas B. Wright and John Harlow of Birmingham, first as 35 letters in a country newspaper during 1843, and then in book form the following year as The Currency Question, The Gemini Letters. The Gemini plea was straight proto-Keynesian inflationism. Inconvertible paper money should be issued by the government in sufficient amount to stimulate consumer purchasing power and ensure full employment. In addition, the public debt should be inflated away. Thus, as Wright and Harlow put it, the proper plan, it appears to us, is to raise the capacity of the Consumer by securing high wages and ample profits, and by these means making light the fixed national obligations of the people.

22:10The only limit they would affix to the issue of paper money would be the degrees of prosperity which the different amount of issues would produce. There is every reason to believe that the Gemini Letters and the Birmingham Agitation were influential throughout the country. Henry Burgess and his committee of country bankers used the interchanges between the Birmingham Chamber and Robert Peel to denounce the gold standard. Both the Times and the New Weekly Economist were forced to expend a great deal of energy in defending the gold standard from its unsound enemies. At any rate, it is known that Peale owned a copy of the currency question and marked key passages in the book.

23:01The threat to gold was reinforced by a renewed agitation to dump gold for a bimetallic gold-silver standard. Heedless of the fact that bimetallism never works in practice, since Gresham's law pushes is the undervalued metal out of circulation and encourages the overvalued. The pro-silver forces found in bimetallism a way to support monetary inflation while remaining respectably in favor of precious metals as money. Silver supporters therefore began with a core from the fiat paper group, including Spooner, Mathias Atwood, George Muntz, and Henry Burgess and added numerous bankers and businessmen such as Richard Page, Henry W. Hobhouse, Chairman of the Committee of Country Bankers, William D. Haggard, and the eminent banker Alexander Behring, now Lord Ashburton.

24:047. Triumph of the Currency School, Peel's Act of 1844 At the heart of the triumph of the currency principle in Peel's Act of 1844 was one man, the statesman and political genius Sir Robert Peel. Peel has been habitually derided by by Historians as a confused middle-of-the-roader, a flexible political opportunist at best, a transitional figure unwittingly performing the historical function of ushering in the conservative and liberal party system in England. But as Professor Boyd Hilton has helped to point out, Peel was a far different figure, A statesman in the best sense, a Tory liberal who was consistent and even unyielding in principle and purpose, and flexible and entrepreneurial only in attaining the best tactics to arrive at his fixed ideological goals.

25:10As Hilton has demonstrated in every important sense, economic, financial and moral, Robert Peale was the John the Baptist, the founder, the progenitor of Gladstonian liberalism. During the 1820s, Peale was for most years head of the Home Office in Tory governments. He had long been opposed to Catholic emancipation and had even resigned his cabinet post in 1827 in protest at the accession to the Prime Ministry of George Canning, head of Tory liberalism and Champion of Catholic Rights. Two years later, however, after the death of Canning, Peel, back as Home Secretary, was converted to Catholic Emancipation as part of his ever-increasing devotion to the classical liberal laissez-faire cause.

26:05At his conversion, Peel had the good grace to honor the prophets and warriors for Catholic Emancipation, whom he had opposed for so long, Fox, Gratton and Kenning himself. From 1831 on, Peel headed the Tory, now conservative, party, and also was the heart and soul of the liberal faction of the party. Peel's great prime ministry took place in 1841 to 1846. Here he fought vigorously for a peaceful foreign policy, battling against the pro-war imperialist Palmerston wing of the Liberal Party, and managed to conclude peace with the United States in the menacing Oregon boundary controversy.

26:55Peel also managed to lower tariffs, but lost in his fight for all-out free trade. His great accomplishment on that front was victory over the furious opposition of the Tory agriculturists, led by Benjamin Disraeli, in the complete repeal of the infamous Corn Laws, which had for decades established an enormous import tariff on wheat. In this fight against the artificially high price of food, Peel was spurred by the growing famine in Ireland. Again, gracious in victory, Peel hailed his political opponent, the laissez-faire liberal Richard Cobden, as the true architect of the repeal of the Corn Laws.

27:41For his success, Peel's government was toppled by Disraeli, and he died in a hunting accident four years later, in 1850. Robert Peel's proudest achievement, however, was his banking reform, his Act of 1844. The Bank Charter Act of 1833 had provided for possible change in the charter during 1844. So that was the year of potential banking reform. As recent research has revealed, Peel's Act did not originate as a hostile straight jacket fastened on a reluctant, though subsequently complacent, bank by the efforts of the currency school.

28:26Rather, the act came from within the bank itself, as an attempt by the bank to find for itself a shortcut to currency management, as well as a means of obtaining its long sought monopoly over bank note issue. First, the ardent currency school leader, George Ward Norman, had, as a bank director, been promoting the plan since 1838. Although Norman lost within the bank on his currency proposal in 1840, he persisted, and the following year he became part of a five-man standing committee of the bank to discuss the scheme. By January 1844, William Cotton, the Governor of the Bank of England and a member of the Standing Committee, had been converted to the Currency Plan, and when, in early January, Peel asked Cotton and the Deputy Governor, J.B. Heath, also a member of the Standing Committee, to confer with him and Chancellor of the Exchequer, Henry Colburn, about fundamental banking reform, study. In response to these discussions, Cotton and Heath, on 2 February, submitted to Peel the complete outline of what was soon to become Peel's Act.

29:52In essence, Peel's Act established the currency principle. It divided the Bank of England into an issue department, issuing banknotes, and a banking department, lending and issuing Banking Demand Deposits. True to the rigid currency school separation of notes and deposits, deposits would be totally free and unregulated, while notes would be limited to a ceiling of 14 million pounds matched by assets of government securities, roughly the extent of existing note issue. Any further notes could only be issued on the basis of 100% reserve in gold. The second main provision was to grant the Bank of England its long sought monopoly of the note issue.

30:44This was not done immediately, but to be phased in over a period of time. Specifically, no new banks were to issue any bank notes, existing banks were to issue no No Further Notes, and the Bank of England might contract with bankers to buy out their existing notes and replace them with the bank's own. In this way, private bank notes were grandfathered in, and the private, that is, joint-stock plus country, banks were neatly cartelized under the direction of the bank, with the private banks able to keep out all further competition. This grandfather cartel clause was not only designed to make the transition to the new order gradual, its main effect, and presumably its intent as well, was to bring the private banks, which might be expected to be the chief opponents of the new bill, around to become enthusiastic supporters.

31:49In his maneuvering within the cabinet before publicly presenting Peel's Act, the Prime The Minister made it clear that if we were about to establish in a new state of society a new system of currency, he would have preferred the Ricardian plan of government notes with no Bank of England or any other bank notes allowed, but that this plan would be impracticable in the existing state of the real world where a coalition must be built among such contending Banking Forces as the bank itself, Ricardians, free bankers and country bankers. The Desideratum, Peel shrewdly advised, was to determine to propose the course which they may conscientiously believe to reconcile, in the greatest degree, the qualities of being consistent with sound principle and suited to the present condition of society.

32:50News of Peel's coming bank charter bill had spread by the end of February, and the country banks, as expected, vigorously protested the bill during March and April. Finally, Peel introduced the bill to Parliament on 6 May. Shrewdly splitting his opposition, he applied the bill fully only to England. The ban on new banks issuing notes was extended to Scotland and Ireland, but the limitations on existing banks were applied to England alone. For the rest, Scotland and Ireland were left alone for the time being. The introduction of Peel's bill touched off a flurry of controversy, including a pamphlet war over the act.

33:38In particular, the new controversy gave rise to the banking school, which beforehand had been represented only by Took. Took weighed in with an inquiry into the currency principle, and John Fullerton entered the fray with his aforementioned pamphlet on the regulation of currencies, a widely circulated and influential tract, even though it was published in August 1844 after the passage of Peel's Act. S. J. Lloyd published a defense of the bill, while the formidable Colonel Torrens blasted Took in another pamphlet. The new banking school was noteworthy for being more royalist than the King, more favorable to the Bank of England than the Bank itself. In short, the banking school, along with most of the London bankers, favored the vesting of a monopoly of bank note issue in the Bank Bank of England. Its quarrel was solely with currency principle restrictions on the bank's issue of notes. This was surely the kind of opposition that the Bank of England could live with. While the banking school correctly spotted the main weakness of the currency

34:56school in not treating notes and deposits alike, this objection was scarcely directed to extending any sort of reserve requirements to bank deposits as well as notes. On the contrary, they would have been all the more outraged by, say, a consistent peels act that would have placed a 100% reserve requirement on all further bank liabilities, deposits as well as notes. One bit of curiosa about the emergence of the banking school is the lateness of its arrival, coming as it did almost when the fight over Peel's Act was over and flourishing for a while after.

35:42Its importance was more for raising theoretical issues and for raising the interest of historians of economic thought than in actually influencing the political battle. Another noteworthy aspect of the fray was the advent of a new and important star in the economic firmament, John Stuart Mill, 1806-1873, who joined the banking school side of the debate in an anonymous article, The Currency Question, in the radical Westminster Review. Actually, Mill had foreshadowed the banking school in an article written at the age of of 20, Paper Currency and Commercial Distress, in the short-lived Radical Parliamentary Review.

36:32Like so many others, Mill was first moved to turn his attention to banking and business cycles by the economic and financial crisis of 1825 and 1826. But in contrast to many others, he abandoned instead of extending his basic Ricardianism in this area. Instead of seeing the new phenomenon of business cycles as created by monetary disturbances, he saw them as caused by waves of speculation presumably generated by over-optimism. Money and banks were purely passive respondents to fluctuations in the economy. From this there followed his conclusion that movements in the money supply, at least under under a gold standard had no effect on prices or trade.

37:27Within the framework of a gold standard, prices rose first, dragging the money supply upwards, and later fell, pulling the money supply down. How could Mill square this odd doctrine with his overall Ricardianism and its thesis of the influence of the supply of money upon its value? We did so by an ingenious, though bizarre and fallacious, theory of what constitutes the supply of money. The money supply was made up not only of coin, notes and demand deposits, Mill opined, but also of the creditworthiness of every member of the public.

38:12When a bank made loans to some member of the public, then, it might increase notes or deposits is outstanding, but that increase is exactly compensated by a decrease in the credit worthiness of the borrowing citizens. Therefore, when banks lend money to individuals and businesses, the money supply does not increase at all. On the contrary, when banks purchase government securities or finance its deficit, they add Add directly to the total money supply by the same amount. In fact, they even add to the money supply when they lend to private citizens beyond the degree of their genuine credit worthiness.

39:00How is such credit worthiness to be determined? By banks confining their loans to sound borrowers and to the discounting of real bills that are short-term, matched by inventories of goods in process, and are therefore self-liquidating in a short period of time. Bank credit then happily follows the needs of trade upwards or downwards, and cannot raise prices. While completely fallacious, Mill's theory at least had the merit of providing some plausible No logical explanation for the banking school creed, one that was scarcely matched by any of his colleagues. Furthermore, Mill's doctrine provided a good reason for his devotion to the gold standard, and for his bullionist denunciation of inconvertible fiat money.

39:59Within his theory, if government or the central bank issues inconvertible fiat paper, that paper adds directly to the money supply and to inflation, rather than being neutralized by subtracting from credit worthiness. And, devoted to the gold standard, he remained. We have already seen Mill's denunciation of Thomas Atwood's inflationary fiat paper scheme in 1833. And what of the alleged free banking school, which Professor White has put forward as equal as White himself ruefully admits, they were nowhere to be found, their alleged devotion to free banking failing the most acid of all tests when Peel's Act was about to bring all commercial banks under Bank of England control.

41:01For not only would the bank now have a virtual monopoly of note issue, but in order to obtain notes in exchange for cashed-in deposits, the other banks would now be obliged to keep the great bulk of their reserves at the Bank of England. White tries to explain away the defections of the free bankers as having been bought out by Peel's cartelization grandfather clause. for the banks could continue to issue at their current level and no new competing banks would be permitted. But while this explanation is true enough, it raises the crucial question, how devoted were Professor White's heroes to free banking to begin with?

41:50Wasn't the free banking school simply a group devoted to the economic interests of the private commercial banks? Like for example the newly founded The Banker's Magazine, which had supposedly been a leading mouthpiece for free banking for the previous year. A writer in the June 1844 issue, while critical of the currency principle and the move towards monopoly issues for the bank, frankly approved the Peel Act as a whole for aiding profits of Existing Banks by Prohibiting All New Banks of Issue. And let us take in particular James William Gilbert, 1794-1863, leading spokesman for the country bankers, manager of the London and Westminster Bank, and, according to Professor White, one of the main theoreticians of the Free Banking School.

42:50Gilbert, born in London and descended from a Cornish family, had worked all his life as a bank official and had written works on banking since the late 1820s. Since 1834 he had been manager of the London and Westminster Bank, continually clashing with the Bank of England. Despite Professor White's assurance that the free banking school men were even more fervent than the currency men in attributing the cause of the business cycle to monetary inflation, Gilbert held, typically of the banking school, that bank notes simply expand and contract according to the wants of trade, and therefore such notes, being matched by the production of goods, could not raise prices.

43:40Furthermore, the active factor goes from trade to prices to the requirement for more banknotes to flow in the economy. Thus, Gilbert, if there is an increase of trade without an increase of prices, I consider that more notes will be required to circulate that increased quantity of commodities. If there is an increase of commodities and an increase of prices also, of course you would require a still greater amount of notes. In short, whether prices rise or not, the supply of money must always increase. One wonders who the you is who would have such requirements.

44:30In the free market, on the contrary, if there is an increase in the production of commodities, prices will tend to fall and not rise. Furthermore, increased production of trade does not require or call forth an increase in bank money. The causal chain is the other way round. Increased banknote issue raises the money supply and prices, and also the nominal money value of the goods being produced. All historians of economic thought, except for Professor White, have placed Gilbert squarely in the banking school camp as one of its leaders. Since White seems to agree with Gilbert's fallacious wants of trade analysis, and since As he admits that this creed is similar to that of the banking school, his creation of an important new school of free banking, challenging both of the others, appears all the more tenuous and artificial.

45:35The main difference seems to be marginal and political. While all the banking school hailed the banking system as useful and harmless, most of them William laid special honors on the Bank of England, while Gilbert, as a joint-stock banker himself, placed most approval upon the commercial banks. When it came to the test, then, Gilbert, like his colleagues on the Bankers Magazine, caved in on what Professor White alleges to be his free banking principles. Thus, White concedes, He, Gilbert, was relieved that the Act did not extinguish the Joint Stock Bank's right of issue and was frankly pleased with its cartelizing provisions.

46:24Our rights are acknowledged, our privileges are extended, our circulation guaranteed, and we are saved from conflicts with reckless competitors. James Gilbert's open status as a banking school inflationist and Robert Peel's staunch devotion to hard money were both revealed in Peel's questioning of Gilbert when the latter testified that country banknotes are only issued in response to the wants of trade, and therefore that they could never be over-issued. He also claimed that the Bank of England could never overissue so long as it only discounted commercial loans and did not buy government bonds.

47:11At this point, Sir Robert Peel unerringly zeroed in and drew forth Gilbert's apologia for the banking system. Peale. Do you think, then, that the legitimate demands of commerce may always be trusted to as a safe test of the amount of circulation under all circumstances? To which Gilbert admitted, I think they may. Nothing about exempting the Bank of England from that trust. Peale then asked the critical question. The banking school all claimed to be devoted to the gold standard, so that the needs of trade justification for bank credit did not apply to inconvertible currency.

47:57Peale, suspicious of that devotion to gold, then asked, In the bank restriction days, do you think that the legitimate demands of commerce constituted a test that might be safely relied upon? To which Gilbert evasively replied, That is a period of which I have no personal knowledge. This was a particularly disingenuous point coming from the author of The History and Principles of Banking, 1834. Moreover, the issue is, of course, a theoretical one, and no personal knowledge is necessary to make a reply, a point made immediately by Peel, at which point Gilbert threw in the towel on the gold standard.

48:46I think the legitimate demands of commerce even then would be a sufficient guide to go by. When Peel pressed Gilbert on the point, Gilbert began to vacillate, changing his views, returning to them, and then again falling back on his lack of personal experience. Peel was right in being suspicious of the strength of the banking school's devotion to gold. Apart from Gilbert's damaging revelations, his colleague at the London and Westminster Bank, J.W. Bosonkett, kept urging bank suspensions of specie payment whenever times became difficult. And while Thomas Tooke often proclaimed his abhorrence of the Birmingham School, he wrote in 1844 that a crucial limit on any over-issue of banknotes was the needs of trade in addition to gold convertibility.

49:46The opening was sufficient to allow Robert Torrens to score a palpable hit. After a careful examination of Mr. Took's recent publication, 1844, I cannot discover any very essential or practical difference between his principles and those of the Birmingham of the Birmingham Economists, once deviate from the gold rule of causing the fluctuations of our mixed circulation to conform to what would be the fluctuations of a purely metallic currency, and the floodgates are opened, and the landmarks removed, between the abandonment of a metallic standard as recommended by the Birmingham Economists and the adoption of of Arrangements Hazarding the Maintenance of a Metallic Standard Recommended by Mr. Took.

50:38The difference in the practicable result might ultimately be nothing. John Fullerton's admission was even more damaging than Took's, avowing in his popular 1844 tract that he wholeheartedly agreed with the decried doctrine of the old bank directors of 1810, namely the anti-bullionist position that so long as any bank sticks to short-term real bills, it cannot go wrong in issuing as many notes as the public will receive from it. And, of course, 1810 was a year of inconvertible money. It is no wonder that Robert Peel considered all opponents of the currency principle as Essentially Birmingham Men.

51:28Thus the opposition to Peel's Act, while theoretically important, was politically scattered and ineffective. The bill sailed through overwhelmingly and became law on 19 July. A second Peel bill, designed to make it more difficult to establish new joint stock banks, sailed through in September. The result of this tightening of bank control and monopoly as well as cartel privileges to existing banks was indeed the creation of virtually no new joint stock banks in England for the next eight years. At this point, Peel completed his currency task by extending its sway to Scotland and and Ireland in two bills that became law on 21 July 1845.

52:22Cautious in the face of regional traditions, Peel was not as tough on the Scottish and Irish banks as he had been on the English. Whereas the English commercial banks could issue no more banknotes period, the Scottish Scottish and Irish banks were treated as Peel's Act of 1844 treated the Bank of England. Their further banknote issues were limited to 100% gold reserves. Scotland had never had its banking restricted, having been free to establish joint stock banks and issue notes and deposits throughout Scotland. The Scottish bankers, however, like Gilbert and the English bankers, were easily bought off by cartel privileges even more lucrative than in England.

53:13As White admits, Peel in essence bought the support of all existing banks by suppressing potential entrants and competition for market shares. In addition, Peel shrewdly permitted the Scottish banks to keep the privilege denied to English Acts, including the Bank of England since the 1820s of continuing to issue their cherished small one-pound notes. The only important development in the year between the two Peel's Acts was the highly belated entry into the great debate of a new leader of the banking school, James Wilson, Wilson, 1805 to 1860, had founded The Economist for the express purpose of battling for free trade and laissez-faire.

54:12He criticized Peel's Act when it came up in 1844, but devoted most of his energies to free trade. Finally, in the spring of 1845, Wilson wrote a famous series of nine articles on currency and banking in The Economist, attacking the extension of Peel's Act to Scotland and Ireland. Wilson took an orthodox banking school approach, except that each of his positions was so emphatic that the inner inconsistencies and contradictions of the banking school were brought out particularly Starclay. Thus Wilson was far more emphatic and militant than Took or Fullerton about the importance of preserving the gold standard, so much so that Torrens was later to call Wilson the most able of the opponents of the Act of 1844.

55:08And yet, of the big four of the banking school, Took, Fullerton, Mill and Wilson, Wilson was was the only one who stated flatly and clearly that short-term self-liquidating real bills would be sufficient to protect the banks from over-issue, even without specie convertibility. Thus, Wilson declared that, in convertible paper notes might be issued to any extent that legitimate transactions required them, provided such issues were confined to the to the discount of good bills of exchange and to loans for short periods, without any risk of depreciation, because a larger quantity never could be so issued than was again shortly returnable to the bank in payment of such loans.

56:03In addition of all the big four, Wilson was the friendliest to free banking and desirous of saving the alleged free banking system in Scotland. And yet, he also claimed that the Bank of England could never over-issue in a convertible and the Federal Money System, which was quite the opposite of the free banking approach.