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Tuesday, August 27, 2013

Currency and banking schools

The best overall summary of the currency and banking school controversy is Marion R. Daugherty, ‘The Currency-Banking Controversy, Part I’, Southern Economic Journal, 9 (Oct. 1942), pp. 140–55; and ‘The Currency-Banking Controversy: II’, Southern Economic Journal, 9 (Jan. 1943), pp. 241–50. The fullest and indispensable account is Frank W. Fetter, Development of British Monetary Orthodoxy, 1797–1875 (Cambridge, Mass.: Harvard University Press, 1965). Also see Jacob Viner, Studies in the Theory of International Trade (New York: Harper & Bros, 1937), Chap. V, and, on the United States as well as Britain, Lloyd Mints, A History of Banking Theory in Great Britain and the United States (Chicago: University of Chicago Press, 1945). Elmer Wood, English Theories of Central Banking Control, 1819–1858 (Cambridge, Mass.: Harvard University Press, 1939), is particularly good on the theoretical controversies in the aftermath of Peel's Act.
On the background of Peel's Act, see J.K. Horsefield, ‘The Origins of the Bank Charter Act, 1844’, in T.S. Ashton and R.S. Sayers (eds.), Papers in English Monetary History (Oxford: The Clarendon Press, 1953), pp. 109–25. Peel himself is re-evaluated in an important article by Boyd Hilton, ‘Peel: A Reappraisal’, Historical Journal, 22 (Sept. 1979), pp. 585–614. Hilton is responsible for reinterpreting Peel as a statesman with increasingly fixed classical liberal principles, within which he used superb tactics to put his principles into effect. But Hilton, on the other hand, who does not understand economic theory, misconstrues who beats whom in economic argument, and sneers at Peel as being an inflexible dogmatist in contrast to the previous historical interpretation of Peel as unprincipled opportunist.
James Pennington is collected, brought to the fore, and analysed by R.S. Sayers in his edition of the Economic Writings of James Pennington (London: London School of Economics, 1963). Robert Torrens, his theories, and his controversies, are annotated and treated in a superb work by Lionel Robbins, Robert Torrens and the Evolution of Classical Economics (London: Macmillan, 1958). The best discussion of Thomas Tooke is still T.E. Gregory, ‘Introduction’, to Thomas Tooke and William Newmarch, A History of Prices and of the State of the Circulation from 1792 to 1856 (New York: Adelphi Printing Co., 1928). Arie Arnon absurdly tries to make a key to Tooke's thought the latter's non-existent conversion to free banking. Arie Arnon, ‘The Transformation in Thomas Tooke's Monetary Theory Reconsidered’, History of Political Economy, 16 (Summer 1984), pp. 311–26. James Wilson's business cycle theory is illuminated in Robert G. Link, English Theories of Economic Fluctuations, 1815–1848 (New York: Columbia University Press, 1959), which also has a good discussion of John Stuart Mill's cycle theory. For an elaboration of Wilson's thesis, see H.M. Boot, ‘James Wilson and the Commercial Crisis of 1847’, History of Political Economy, 15 (Winter 1983), pp. 567–83.
Vera C. Smith, The Rationale of Central Banking (1936, Indianapolis: Liberty Press, 1990) is a pioneering and excellent work on free and central banking school controversies in Britain, the United States, France and Germany, and is still by far the best work on the subject.
On Johann Louis Tellkampf, see, in addition to Smith, Joseph Dorfman, The Economic Mind in American Civilization (New York, 1946), II, pp. 833–5. Smith not only highlights important but otherwise obscure writers such as Cernuschi and Modeste, but also presents a good summary of the history of banking in the four countries in the nineteenth century. Particularly important is Smith's classifying her theorists on a two-dimensional, and therefore four-term, grid, i.e. where they stand on currency principle vs banking principle, and free vs central banking. Lawrence H. White, Free Banking in Britain: Theory, Experience, and Debate, 1800–1845 (Cambridge: Cambridge University Press, 1984), performs the service of reviving emphasis on free banking thought, pro and con, after a 50-year hiatus. But while he adds more names to Smith's account for Great Britain, he is seriously misleading in shifting to a three-term classification and category mistake: free banking, banking school, and currency school. This new taxonomy ignores the fact that his free bankers are scarcely a united school, being seriously split into currency and banking men. Furthermore, the free bankers in Britain scarcely deserve being elevated to the dignity of a school of thought, since almost all of them were commercial bankers swaying to their economic interests of the moment, and not interested in consistent free banking. Moreover, White misleads by hailing Scotland in the first half of the nineteenth century as a land of free banking, when Scottish banks merely pyramided on top of the Bank of England, and were often bailed out by the bank. Neither can the Scottish banks be really said to rest on gold convertibility. They kept very little gold reserve, and greatly resisted any attempts by their customers to demand specie. White's attempt to show that the Scottish banks were superior to the English system makes not even a token effort to demonstrate that they were less inflationary; his sole evidence is a lower failure rate, which by no means shows that the banking system was working better for the economy. Sometimes, a truly competitive industry will have a higher failure rate than a privileged one, and so much the better.
For the fascinating debate among the French laissez-faire thinkers on how to apply libertarian principles to the vexed questions of banking, see, among others, Henri Cernuschi, Contre le Billet de Banque (Against Bank Notes) (Paris, 1866); Victor Modeste, ‘Le Billet Des Banques D'Emmission et la Fausse Monnaie’, (Bank Notes and False Money), Journal des Économistes, 3 (August 1866), pp. 188–212; Gustave Du Puynode, ‘Le Billet de Banque N'est Ni Monnaie Ni Fausse Monnaie’, (A Bank Note is Neither Money Nor False Money); ibid., 3 (Sept. 1866), pp. 392–5; Leon Wolowski, ibid., pp. 438–41; J.G. Courcelle-Seneuil, ‘Le Billet De Banque N'est Pas Fausse Monnie’, (‘Bank Notes Are Not False Money’), ibid., 342–9; Victor Modeste, ‘Le Billet Des Banques D'Emmission Est-Il Fausse Monnaie?’ (‘Are Bank Notes False Money?’), ibid., 4 (Oct., 1866), pp. 73–86; Gustave Du Puynode, ‘Le Billet De Banque N'est Ni Monnaie Ni Fausse Monnaie’, (‘Bank Notes Are Neither Money Nor False Money’), ibid., 4 (Nov. 1866), pp. 261–7; Th. Mannequin, ‘L'Emmission Des Billets de Banque’ (‘Bank Notes’), ibid., 4 (Dec. 1866), pp. 396–410.

Austrian Perspective on the History of Economic Thought (2 volume set)

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