Assessing the Intellectual Controversy

Although the Banking School writers considered themselves the victors in the intellec­tual battle over how to manage the bank’s note issue, Currency School partisans could justifiably retort that, had the bank’s officials not engaged in an all-out effort to expand lending and increase earnings, thereby violating the most basic tenet of the Currency Principle, it would have provided a useful guide to issuing notes in an orderly manner; the note issue would not be a source of economic disturbance.

However, unfortunately for both banking and currency schools, it is probable that neither approach to issuing notes would have produced the expected results, for a very basic reason: neither school of thinkers really grasped how the British monetary system had changed over the preceding decades. The Currency School placed altogether too much emphasis on the notes of the Bank of England, while ignoring deposits and other financial instruments. They learned, to their sorrow, that controlling credit conditions was crucial to a successful monetary policy. They also learned that rigid rules can gener­ate problems that require that the rules be suspended, at least temporarily. The Banking School learned that having a better theory of credit markets and how to manage them was of little importance when the political cards are stacked against you. However, in fact, the banking theory was nearly as out of touch with the workings of the British financial system as was the currency theory.

In a paper entitled “Monetary base control and the Bank Charter Act” (1997), Denis O’Brien used such data as were available to test a number of hypotheses that focused on the changes in the British banking system that emerged between two periods: 1832-44 and 1844-1857. O’Brien’s intention was to gauge the ability of the Bank of England to control the price level through its control over the note issues of the Bank of England. While data deficiencies constrained him from answering all the questions posed, the data were sufficient to shed light on several issues. O’Brien’s major conclu­sion was that “the Act of 1844 did not succeed in its aims of introducing monetary base control for the British economy and of stabilizing the price level and the monetary aggre-

gates” (O’Brien 1997: 628). Instead, data support a viewpoint set out by Thomas Joplin (who died before the banking-currency controversy began), that the country-banknote issues for England and Wales “had the dominant influence on the price level” (ibid.: 628). Although the Bank Act failed to bring the country issues under the bank’s control, the statutory limitations placed on the note issues of the country banks prevented the country-bank note issues from being an important source of monetary instability.

Neil T. Skaggs

See also:

Bullionist and anti-bullionist schools (II); Money and banking (III); David Ricardo (I); Henry Thornton (I); Thomas Tooke (I).