would, by implication, meet other expenses by cheque, often in settlement of a tradesman’s credit account. There were disputes between the currency school and the banking school, which continued well into the nineteenth century and which were to shape subsequent developments. The terms appear to have been coined by George Warde Norman in his evidence to the 1840 Committee of the House of Commons on Banks of Issue (but see Clapham 1970 vol. ii: 181). The chief proponents of the Currency School were Samuel Jones Loyd (later Lord Overstone), George Warde Norman and Robert Torrens. They held that money derived, and should derive, its value from metal. Paper money should be issued purely for convenience and the amount of paper in circulation should not exceed the value of the bullion held in reserve. Under such a scheme, the paper circulation would be 100 per cent gold backed. (The principle would work equally well on a silver standard, but this was not then an issue in England.) Although it is an over-simplification to equate the currency school with modern day monetarism and with the hard money men in the United States in the 1890s, they all shared an underlying belief that regulation of the money supply is the foundation of economic management. They had a deep distrust of the wisdom of governments, and a strong preference for formal rules, binding on the political and monetary authorities, over administrative discretion: a regulation that depended on principle, rather than panic. They can be regarded as the successors of the Bullionist school which had had an intellectual victory in 1810 where their opponents had sought (inevitably in vain) to deny any connection between the extension of the money supply, in a period where convertibility into gold was suspended, and ‘the High Price of Gold Bullion’, meant a depreciation in the currency. The Banking School, led by Thomas Tooke, had during the first half of the nineteenth century developed an intellectual coherence far removed from the crude and nonsensical denial that printing money had anything to do with the level of prices or the strength of the currency. They did tend to cling to the naïvety of the ‘real bills’ doctrine, according to which the extension of credit could do no harm provided that it was associated with the genuine needs of trade and provided that accommodation bills were avoided. Thomas Tooke, had supported the findings of the Bullion Committee on the connection between the issue of inconvertible notes and the rise in prices but went on to argue that other means of credit are equally important. Other prominent writers were John Fullarton (1844) and James Wilson (1847). Fullarton developed the idea of a self-regulating note issue—‘the theory of the reflux’. A modern writer, Lawrence White (1984), identifies a separate ‘Free Banking School’ out of those more commonly aligned with the Currency School, and which believed in unrestricted and competitive issues of notes convertible into specie. He claims for this persuasion Sir Henry Parnell, Samuel Bailey, James William Gilbart, Alexander Mundell, Robert Musket and others, and regards James Wilson as a ‘fellow traveller’. 148 DEPOSIT BANKING IN ENGLAND The dispute between the banking and currency schools was on how to regulate the banks but there continued to be disputes over the coinage. These have been discussed in Part I (Chapter 7) but in practice the central problem of the coinage had been solved in 1819. The gold standard, though vigorously disputed, was to hold sway in England for the rest of the century. The real issue was what constituted ‘money’. The country had to adjust to the idea of ‘broad money’ constituting not just coin, or even just coin and notes, but also bank deposits. The main issues Otherwise the main issues argued between 1819 and 1844 were – Do the banks cause fluctuations and how, if at all, should money supply be regulated? – Hence, should the Bank of England have a monopoly of note issues and/or should Joint Stock Banking be encouraged in England? These were coupled with the analytical questions: – Can banks create money, and are ‘deposits’ money? – What effects does the quantity of money (however defined) have on prices? – How does (should) the banking system respond to bullion movements, i.e. payments surpluses or deficits? – Given that issuing banks should contract the note issue under foreign pressure, how should they react to commercial distress? The currency school asserted, and the banking school denied, that money supply was an immediate cause of fluctuations. They wanted ‘a regulation that depended upon principle instead of…on panic…that could be measured or regulated by a fixed rule’ (Loyd’s evidence to 1840 Committee, Q2726). They worried about controlling country note issues. The level of general public discussion during this period was far higher than at the time of the Bullion Committee. During the period of the suspension of cash payments, the public was in a state of very imperfect information upon the subject of currency. The doctrines of the Bullionists, it is true had been propounded; but had not then succeeded in making any effectual impression on the community at large. Silent contempt in some quarters, and jealously and suspicion amount almost to animosity in others, was the reception which they generally met with…the self styled practical men rather than the abstract reasoners were the popular heroes of the day. (Loyd 1837:44–5) A HISTORY OF MONEY 149 By 1819 though: ‘Here terminates the dark age of currency; and we now enter a period characterised by more enlightened views’ (Loyd 1837:53–4). Maybe. The effects of resumption Peel’s Act of 1819 had provided for a gradual resumption of payments. The effective gold price at which notes could be redeemed was to be reduced in stages and, from 1 May 1823 full convertibility would be restored. The ban on the melting of and exporting of gold was repealed: the effect of this, coupled with the plans for the repayment of £10 million by the government to the bank, was deflationary. The gold price fell, and full convertibility was resumed on 1 May 1821, two years ahead of schedule. Under the Act of 1822, notes of less than £5 were to continue in circulation until 5 January 1833. This proposal did not follow the recommendation of Ricardo, who had proposed that one pound notes issued by the Bank of England should be circulated in the place of gold. The Bank of England continued to withdraw one pound notes from circulation but country banks took advantage of the opportunity to expand their issues once more. The company promotion boom There was a speculative boom between 1824 and 1825, when over 600 new companies were floated, together with a number of South American loans. In 1825 Thomas Boys published The South Sea Bubble—a Beacon to the Unwary. In his appendix, he quotes extracts from newspapers of 1719–20 which, he said, ‘require only an alteration of dates to render them appropriate to the present period’. At first the country banks had followed the lead of the Bank in curtailing the issue of small notes. In 1822, Parliament ‘scared by the price fall and influenced by a widespread agitation against Peel’s Act’ (Clapham 1970 vol. ii: 76) extended their note issuing powers until 1833. Such notes began to be used for the payment of wages in certain parts of the country. Issues of country bank notes rose from an average £4 million in 1821–3 to £6 million in 1824 and £8 million in 1825, a major factor fuelling the boom. This enlarged circulation was in principle payable in gold. During the restriction period the public had become accustomed to accept Bank of England notes in redemption of country bank notes. This was now often impossible because the Bank of England stopped issuing notes of less than £5. The country banks actively discouraged the redemption of their notes for gold but a successful petition against a Bristol bank in June 1825 brought home to the public their right to demand redemption. 150 DEPOSIT BANKING IN ENGLAND The crisis of 1825 The Prime Minister, Lord Liverpool, had in March 1825 already warned that there would be a collapse, and that the Government did not propose to bail the banks out by the issue of Exchequer Bills. The balance of payments had deteriorated. We would have recognized this as a warning signal, as indeed would the mercantilists. However, the Bank of England, with its huge reserves, saw no cause for alarm and indeed expanded its own note issue for the purpose of loans to the Government. There was the inevitable collapse, and the Bank of England did cut back on credit by limiting the volume of bills discounted, rationing and sending back a proportion of the bills sent in by City of London banks. There were runs on several country banks. In November Elford and Company, Plymouth, failed. The Bank of England did nothing. In the words of The Times (The Thunderer): As for relief from the King’s Government, we can tell the speculating people and their great foster-mother in Threadneedle Street that they would meet with none—no, not a particle—of the species of relief which they look for. The King’s ministers know very well the causes of the evil, and the extent of it, and its natural and appropriate remedy, and we venture to forewarn the men of paper no such help as they are seeking will be contributed by the State. (Fetter and Gregory 1973:229) On the 1 December there was a panic rush to discount at the Bank, said to be like that for ‘the pit of a theatre on the night of a popular performance’ (The Times 2 December 1825, quoted by Clapham 1970 vol. ii: 98). However on 5 December a large London bank, Pole, Thornton and Company (agent for forty-four country banks) asked the Bank for assistance. They were lent £300,000 but even so did not open for business on Monday 12 December 1825. Six London and sixty-one country banks ceased payment. The problem was discussed at a meeting of the Bank directors on 15 December. It was suggested that the State issue Exchequer bills—or even authorising them, by Order in Council, to stop payment. The Government pointed out that the first solution would be useless now that Exchequer bills no longer circulated as currency. The second course was unthinkable—the Bank would be expected to pay out in full. On Tuesday, 20 December, the Bank tried to help the market by buying £500,000 of Exchequer Bills, and raised Bank Rate from 4 per cent to 5 per cent: in the event not enough. This increase did not discourage business. On Thursday 22 it agreed to lend against long bills (over ninety-five days) and approved securities (Clapham 1970 vol. ii: 100). By now A HISTORY OF MONEY 151 The ordinary, non-discounting, public was clamouring…for money, Bank notes or gold. Neither notes nor sovereigns could be made fast enough: it was the literal physical limit that impeded, for gold was below Mint price, and the Mint was working furiously. By the evening of Saturday 17th the Bank had run out of £5 and £10 notes. However, a supply came from the printers on the Sunday morning. (Clapham 1970 vol. ii: 100) The situation was partly saved when a famous ‘box of £1 notes’ was discovered locked away. Clapham says that many of the Bank’s advances were not actually on goods but on personal security and that the bank was not ‘over nice’ in its choice of that security. On page 98 he quotes Liverpool, Baring and McCulloch’s warnings and suggests …not only did it do no good, it actually contributed to the crisis. In the crash and panic of December 1825 Lord Liverpool who nine months earlier had specifically stated that the government would not bring relief to speculators, felt committed not to come to the rescue. The bank now employed Rothschilds to purchase whatever gold it could find. The purchases cost the bank £100,000 more than the mint price. The Mint worked night and day turning the bars into coin. The bank now lent freely: Government securities, Exchequer bills, commercial bills, other securities which the bank normally would never have dreamt of taking were purchased or held as collateral. The actual discounts increased from £5 to £15 millions in a few weeks. Commissioners were appointed to go to the provinces and advance money on the security of goods to merchants in difficulties. Bank notes were still signed by hand, the clerks of the Bank could not keep pace with the issues although they worked feverishly far into the night. (Fetter and Gregory 1973:222) With the new year (1826) the gold price came back to the mint price. By the time Parliament met in February ‘everyone felt that the crisis was over’. Lord Bentinck commented that the country had come within twenty-four hours of barter. Although the Bank of England blamed the country banks for the crisis, and vice versa, there was no Parliamentary enquiry as it was fairly clear already what had happened. As William Cobbett said: The Bank is blamed for putting out paper and causing high prices; and blamed at the same time for not putting out paper to accommodate merchants and keep them from breaking. It cannot be to blame for both, 152 DEPOSIT BANKING IN ENGLAND and indeed it is blamable for neither. It is the fellows that put out the paper and then break that do the mischief. (Cobbett 1828 vol. ii: 25) Lord Liverpool, with the near unanimous backing of Parliament, resolved that all notes under £5, including those of the Bank England, should go. On 13 January he and the Chancellor F.J.Robinson wrote to the Bank at length about the steps to be taken to prevent a repetition of the crisis (Palmer 1837a). Another twist to the problem was that because of the prohibition of joint stock banks, the country banks were all too small; ‘any small tradesman, a cheesemonger a butcher or shoemaker may open a country bank, but a set of persons with a fortune sufficient to carry on the concern with security are not permitted to do so’. Liverpool wanted the Bank to open branches, and to ‘give up its exclusive privilege as to the number of partners engaged in banking, except within a certain distance of the metropolis’. These, he said, were the only ways to improve the country circulation: With respect to the extension of the term of their exclusive privileges in the Metropolis and its neighbourhood, it is obvious that Parliament will never agree to it…. Such privileges are out of fashion, and what expectation can the Bank under present circumstances entertain that theirs will be renewed. But there is no reason why the Bank of England should look at this consequence with dismay. (Palmer 1837a:59) The Bank responded with a short sharp resolution effectively refusing to give up its privileges. Further letters of 23 and 28 January were more peremptory in tone, and the Government took unilateral action. The proposals were implemented by two Acts. One, (22 March 1826 7 Geo IV & 6) prohibited the issue of new notes of less than £5 in England and Wales and provided for the redemption of existing ones within three years. The other (25 May 1826 7 Geo IV & 46) permitted joint stock companies to carry on the business of banking and issuing notes in any place more than sixty-five miles from London. An attempt to extend the ban on small notes to Scotland was for the present, defeated. Walter Scott (1826), writing as ‘Malachi Malagrowther’ can claim much of the credit. Fetter suggests that In the situation of late 1825 and early 1826 the Bank of England, albeit reluctantly and belatedly, had acted much as Walter Bagehot might have recommended. But the issue was never squarely faced in any parliamentary investigation and within the Bank Court itself there seems to have been, for the next half century, considerable difference of opinion as to just what the Bank’s responsibilities were. A HISTORY OF MONEY 153 The events of 1825 and 1826 had led to widespread opinion that the bank, then subject to no legal reserve requirements of any kind, had brought on the crisis by its expansive credit policy. No well formulated proposals emerged, but there began to develop a public opinion which would be receptive to specific proposals. As early as 1827 James Pennington prepared a memorandum urging what was the basis of a bank of 1844—tying fluctuations of the Bank’s notes to fluctuations in its specie reserve. (Fetter and Gregory 1973:22) THE BANK CHARTER ACT OF 1833 In 1833, the year after the Great Reform Act, the Bank of England’s charter was due for renewal. On 22 May 1832, a Secret Committee of the House of Commons was appointed, on the motion of Lord Althorp (later Earl Spencer), to look into the question. ‘Since the members…had been specially selected with the idea of representing all points of view, it is not surprising that their Report is a somewhat disappointing document’ (Gregory 1929:xiii). Thomas Attwood was a strong advocate of inconvertible paper money and a managed currency. Carr Glyn and George Grote spoke for the London bankers. Thomas Tooke gave evidence. ‘Nathan Rothschild believed that neither the Bank nor anyone else could really control the exchanges: the balance of demand was their all-powerful regulator’ (Clapham 1970 vol. ii: 122–3). Evidence to the committee The Act owes much to the influence of Thomas Joplin, a Newcastle stockbroker. He had published a pamphlet in 1822 ‘An Essay on the General Principles and Present Practice of Banking etc’, praising the stability of the Scottish banking system and also pointing out that the law did not in fact prohibit the formation of joint stock banks provided that they did not issue notes (Clapham 1970 vol. ii: 92–3). In 1824 he had helped to promote the Provincial Bank of Ireland and in 1826 drew up a plan for a ‘Provincial Bank of England’ and later became a director of the National Provincial Bank of England, one of the constituents of the present National Westminster. In 1832 he published ‘An Analysis and History of the Currency Question’ which sums up his account of developments to that time. John Horsley Palmer, who had become Governor in 1830, was responsible for a provision which freed the discount rate from the operation of the usury law. It was provided that such law would not apply to any bill of exchange or promissory note payable within three months. So long as the Bank should maintain convertibility with notes into gold, Bank of England notes would be legal tender as such for all purposes, except by the Bank of England. This it was suggested could make it possible in future panics, for notes to be settled 154 DEPOSIT BANKING IN ENGLAND by the issue by the country bank in Bank of England notes rather than gold coin. However, to soothe doubts of the farmers, the act was reworded to provide that the Bank of England notes were only legal tender for amounts ‘over’ £5. The presenter of a single £5 note (or a succession of such notes) could therefore insist on receiving gold. Palmer had become a director of the Bank in 1811 and must have followed closely the debates on the Bullion Report. He gave authoritative evidence before the 1832 Committee. Of this, Feaveryear says ‘Palmer’s conception in 1832 of the proper relationship of the Bank to the money market…is of the utmost importance. No one had ever before worked out so complete a scheme of management’ (Feaveryear 1931:230). His most important contribution was to formulate ‘the Palmer Rule’: that the Bank should keep one-third of its assets in bullion and two-thirds in interest bearing securities (Q72). This would effectively govern the circulation of the whole country (Q73) and would apply as a reserve against deposits as well as notes (Q74), although he regarded the liabilities against deposits to be the less dangerous (Q77). Although the Bank had the power to extend or diminish the circulation on its own initiative (Q81) it would normally react to an unfavourable exchange rate not on its own initiative but by letting the public act on the Bank (Q82–3). (If there was an outflow of gold, the public would redeem notes for gold forcing an automatic contraction in the issue) (Fetter 1965:145–6, and Clapham 1970 vol. ii: 162). In response to a comment that the one-third ratio had remained virtually unchanged for four years he said that he kept it ‘as nearly the same as can be managed’ (Q84). (Faced with an outflow of gold, the Bank would sell securities to restore the balance: there would be a multiplier effect on the circulation.) He did add (Q85) that the Bank would not necessarily respond to a temporary influx of gold by increasing its holdings of securities. His replies on the response of the Bank to drains arising from other causes, such as a commercial panic, were less convincing (Q92–6). Palmer also held that the Bank should normally compete in the discount market, but should be prepared to discount at a penalty rate—the ‘lender of last resort’ (Feaveryear 1931:231; see Q 178–88). The Palmer rule has at times been honoured in the breach. Dowd (1991: 170) has asked why the Bank’s management chose to submit themselves to this discipline. Did they genuinely believe that optimal policy was to follow the right simple rule, or did they hope that a rule would give them some protection from a criticism of their policies? In 1819 the Bank had passed a ‘hostile Resolution’ denying that there was any evidence that its notes had had any influence on the foreign exchanges: as a body, it was unconvinced by Ricardian economics. Its emergence from the Dark Ages was signalled in 1827 when the hostile Resolution was rescinded (Feaveryear 1931:230; Gregory 1929:x). This was on the motion of William Ward, a foreign exchange dealer who had been elected to the Court of the A HISTORY OF MONEY 155 Bank in 1817. He had given evidence to the 1819 Committee in opposition to the views of the then governor, Harman, was a strong supporter of Palmer in 1832, and may have invented the term ‘currency school’. The 1833 Committee Report The Committee never formally reported, although the evidence was published. All except for the free trader, Henry Parnell, agreed the Bank’s charter should be renewed. There was ‘a rather fatuous motion of Cobbett’s that it should be read this day six months because the legal tender clause ‘usurped the King’s prerogative’. This was ‘brushed aside as it deserved’ (see Clapham 1970 ii: 127–30). The Act (Bank Charter Act 1833, for text see Gregory 1929 vol i: 19–27) provided that the Bank’s charter be renewed until 1855. This was subject to the government’s option to terminate on twelve month’s notice being given in the six month period from 1 August 1844 (v). Bank notes were legal tender, except at the Bank itself (vi). The monopoly of note issuing within sixty-five miles of London (ii) but there was a declaratory clause (iii) ‘whereas Doubts have arisen [it declared and enacted] That any Body Politic …although consisting of more than six persons may carry on the Trade or Business of Banking in London, or within sixty five miles thereof provided they did not issue notes’—Joplin’s point. The parties mainly interested in this provision were a group of ‘Noblemen and Gentlemen’, mainly Scottish: Bute, Lord Stuart de Rothesay, a Stewart, an Arbuthnot and a Douglas. They wanted to start a stock bank in London, which was duly formed as ‘The London and Westminster Bank’. The Bank felt ‘very bitterly’ about this provision (Clapham 1970 vol. ii: 128). Defects of the Currency School The Currency School were on less strong ground, from a modern perspective, in assuming that ‘money’ and ‘currency’ were defined only by the total of bank notes and coin in circulation and that ‘it was the fluctuation of the quantity of these two taken together which alone affected the value of the pound’ (Feaveryear 1931:245). Norman (1841) argued whether notes should be regarded as an auxiliary currency or as a means of economising the use of money. If bank notes are withdrawn they must be replaced by coin; but the abolition of arrangements for dispensing with the use of money will not need the introduction in their place of an equal amount of coin or bank notes. This, of course, is really a question of ‘velocity’. The school was therefore faced with discussing what measures need to be taken actually to regulate bank notes. There are two problems. First there were the independent issuers of bank notes. Norman had written: ‘a single issuer might be easy to deal with but how are we to deal with 500?’ (Norman 1841:84). The answer was 156 DEPOSIT BANKING IN ENGLAND gradually to extinguish the issuing rights of all banks save the Bank of England. The second problem concerned the Bank of England itself which was, until the Bank Charter Act of 1844, totally mixing its issues and banking business. Fetter quotes Palmer as having fallen into the error of regarding notes and deposits as liabilities of the same kind to which the reserve might be applied discriminately. Other commentators of the time commented on the conflict between the Bank’s public and private business (Fetter 1965:146 says that Palmer’s answer to Q.77 ‘could easily suggest to those who wanted to translate ideas into legislation that a distinction between notes and deposits had a solid pragmatic basis’). A HISTORY OF MONEY 157 [...]... 18 16 In the three years 1810–12 alone, forty-one new State banks were chartered with an aggregate capital of $7 36 million making a total of 120 banks with a nominal capital (perhaps not real) of about $ 76 million The banks mainly extended loans in the form of notes and there was a substantial increase in effective circulation In 1814, Thomas Jefferson wrote to John Quincy Adams predicting a breakdown... state of the affairs of the bank with a jealous eye [and various fears were spread abroad] as if…the bare possibility of abuse could ever furnish a good argument against the decided utility of a thing; or if a benefit were to be relinquished because all cannot be benefitted alike (Goddard 1831:50) The Charter of the Bank of North America was renewed on 7 March 1787 for fourteen years, the pro bank party... the order of the Collector of New York and the money was deposited in the vaults of the Manhattan Bank’ of which the collector was a director (Felt 1839:218) He argued that he had acted because he suspected the cash was going to Canada The money was restored after court action and after the matter had been laid before the President of the United States MONEY AND BANKING IN THE UNITED STATES 165 In the... various other banks, including six associated with Jackson’s friends and advisers and which were popularly referred to as the ‘pet banks’ Taney had given certain of the state banks a series of drafts drawn on the Bank of the United States to be used if necessary in retaliation against any hostile moves by the bank One of the pet banks, the Union Bank of Maryland faced with financial difficulties caused... There was no Federal banking law, and bank regulation was entirely a matter for the States When the government terminated its special relationship with the Second Bank in 1833, it had transferred deposits to Jackson’s pet banks This arbitrary transfer of ‘high powered money from an established bank to others unable quickly to find good outlets for loans had already caused a sharp contraction It was compounded... million was made the figure had fallen to $37 million The second distribution was made in April 1837 which helped precipitate a crisis: in April: …the serious nature of the crisis became apparent A public meeting in New York…appointed a committee of fifty, with Gallatin at its head to appeal to the administration to abandon a policy which threatened the destruction of the material interests of the nation... Morris, and a Federal charter was granted (by a narrow majority) in May 1781 It had a capital of $400,000, was limited to assets of $10 million, and commenced operations in January 1782 It was also granted charters in Massachusetts and Pennsylvania although the latter rescinded the charter in 1785 Thomas Willing was the first president When …the pressure of the times was over there were not wanting... Bank of Pennsylvania ‘by means that would not bear a critical examination according to the standards of either business or political integrity’ (Kinley 1910:24) It ceased trading for a time in October 1839, and finally went bankrupt in 1841 Galbraith is somewhat snide about Biddle, who was charged with fraud, indicted by a grand jury, but acquitted ‘His fate was that of nearly all who have dealt in... only banks established when the Federal Constitution came into operation in 1787, but were joined by the Bank of Maryland in 1791  160 A HISTORY OF MONEY FROM 1787 TO THE WAR OF 1812 Alexander Hamilton and the First Bank of the United States Alexander Hamilton was appointed first Secretary to the Treasury, established by Act of Congress on 2 September 1789 The Treasurer had a duty to ‘receive, keep and... England states, banks were liable to a penalty of 12 per cent per annum on the non-payment of their notes (Gouge 1842:254), a measure apparently to ensure sound banking in New England, and an example of how a ‘tax’ can act as a substitute for ‘regulation.’ Gouge contrasts UK experience After the Bank of England suspended payments, its notes remained at par for some time and ‘when they began to depreciate . the Provincial Bank of Ireland and in 18 26 drew up a plan for a ‘Provincial Bank of England’ and later became a director of the National Provincial Bank of England, one of the constituents of the. 18 16. In the three years 1810–12 alone, forty-one new State banks were chartered with an aggregate capital of $7 36 million making a total of 120 banks with a nominal capital (perhaps not real) of. in May 1781. It had a capital of $400,000, was limited to assets of $10 million, and commenced operations in January 1782. It was also granted charters in Massachusetts and Pennsylvania although