Schools of Thought in Economics
Edited by Gilbert Faccarello and Heinz D. Kurz
Chapter 12: Banking and currency schools
The Banking School/Currency School controversy is typically viewed as the second major British monetary controversy of the nineteenth century. Perhaps a more just assessment of the controversy sees it as a long-running debate between the followers of the two great monetary theorists of the first two decades of the century: Henry Thornton and David Ricardo. Although the controversy came to a head in 1844, when a parliamentary committee was formed to take evidence from a wide variety of British bankers and businessmen on the occasion of the renewal of the Bank of England’s charter, in reality, the controversy had cropped up repeatedly, from the time of the Bullion Committee hearings in 1810. The crisis of 1825 re-ignited the controversy. A variety of writers then began contesting the question of how the British banking system – and the Bank of England – should be organized and regulated in the wake of the banking crisis of 1825. The crisis of 1825 came on the heels of an economic boom in 1824. Agricultural and commodity prices rose sharply, and speculation in the stock market drove share prices sharply higher. Commercial banks, seeking higher earnings, loaned freely, as did the Bank of England, and commodity prices began to rise, while the pound sterling fell against foreign currencies. The fall in the exchange was accompanied by an outflow of capital, which generated fears that some banks would not be able to pay in specie on demand. In an attempt to prop up the British banking system, the Bank of England loaned freely, putting itself in some danger of having to suspend payments in gold. In the event, the bank managed to weather the storm without suspending payments in gold, but had the drain on the bank been only a little larger, or had it lasted only a little longer, suspension would have been required.
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