5. Monetary and banking thought, I: the early bullionist controversy

5.1 The restriction and the emergence of the bullionist controversy

5.2 The bullionist controversy begins

5.3 Boyd's Letter to Pitt

5.4 The storm over Boyd: the anti-bullionist response

5.5 Henry Thornton: anti-bullionist in sheep's clothing

5.6 Lord King: the culmination of bullionism

5.7 The Irish currency question

5.8 The emergence of mechanistic bullionism: John Wheatley

5.9 Notes

5.1 The restriction and the emergence of the bullionist controversy

The Bank of England had been the bulwark of the English (and, by serving as bankers' bank, of the Scottish) banking system since its founding in 1694. The bank was the recipient of an enormous amount of monopoly privilege from the British government. Not only was it the receiver of all public funds, but no other corporate banks were allowed to exist, and no partnerships of more than six partners were allowed to issue bank notes. As a result, by the late eighteenth century, the Bank of England was serving as an inflationary engine of bank deposits and especially of paper money, on top of which a flood of small partnership banks (‘country banks’) were able to pyramid their own notes, using Bank of England notes as their reserve. As if this were not enough privilege, when the bank got into trouble by overinflating, it was permitted to suspend specie payment, that is, refuse to meet its obligation to redeem its notes and deposits in specie. This privilege was granted to the bank several times during the century after it opened its doors. However, each time the suspension, or ‘restriction’ of specie payment lasted only a few years.

In the 1790s, however, a startlingly new epoch began in the history of the British monetary system. In February 1793, a generation of fierce warfare broke out between revolutionary France and the crowned heads of Europe, led by Great Britain. While not exactly continuous, the war lasted, with slight interruptions, until Napoleon was finally defeated in 1815 and the monarchies of Europe reimposed the Bourbon dynasty upon the French nation. This massive war effort meant a rapid escalation of monetary inflation, government spending, and public debt by the British government.

During the 1780s, the inflationary process of bank credit expansion had managed to double the number of country banks in England, totalling nearly 400 by the outbreak of war. The shock of the war led to a massive financial crisis, including runs on the country banks, as well as numerous bankruptcies among banks and financial houses. One-third of the country banks suspended specie payment during 1793.

For a few years, the bank saved itself by pursuing a cautious and conservative policy. But soon, inflationary war finance, the drain of gold abroad in response to higher purchasing power elsewhere, the alarms of war, and the increased demand for gold upon the banks, all combined to precipitate a massive run on banks, including the Bank of England, in February 1797. The country banks suspended specie payments, and the government brought matters to a head by ‘forcing’ the bank to suspend specie payments, a ‘Restriction’ which the Bank of England of course was all too delighted to accept. For the bank could now continue operations, could expand credit, inflate its supply of notes and deposits, and insist that its debtors must repay their loans, while it could avoid the bother of redeeming its own obligations in specie. In effect, bank notes were unofficially legal tender, indeed virtually the only legal tender, and they were made official legal tender in 1812 until the resumption of specie payments in 1821.

At the beginning, the general view held the restriction to be strictly temporary, and indeed the decree, at any given time, was only supposed to last for a few years. But the restriction was extended repeatedly, and was eventually continued for 24 years, from 1797 to 1821. Until the end of the eighteenth century, it was unthinkable that Great Britain could be on an irredeemable fiat standard for an entire generation.

Apart from a few years during the continental paper period of the American Revolution, the South Sea and Mississippi bubbles of the early eighteenth century, the hyperinflated assignats during the French Revolution, or a few brief suspensions of specie payment, the world had always been on some form of gold or silver standard. All these episodes had been mercifully brief if catastrophic. But now, after a while, it began to dawn on the British public that the era of inflationary fiat paper would continue indefinitely.

Great Britain suspended specie payments indefinitely so as to permit the Bank of England, and the banking system as a whole, to maintain and greatly expand the previously inflated system of fractional reserve banking. Accordingly, the bank was able to greatly inflate credit and the money supply of notes and deposits. Statistics for the period are sparse, but it is clear that from 1797 until the end of the Napoleonic Wars the supply of money approximately doubled. This monetary inflation had several predictable – and generally unwelcome – consequences. Domestic prices skyrocketed, the price of silver and especially of gold bullion vaulted upwards in relation to the official par with the pound, and the pound depreciated in the foreign exchange market.¹ The monetary inflation, as usual, proceeded in fits and starts rather than as a smooth line, and so the various consequences in domestic prices, bullion, and foreign exchanges were themselves scarcely uniform or proportional. But the rough general trend was unmistakeable, with the three latter effects each eventually rising to a peak of approximately 40 or 50 per cent over their pre-restriction levels.

Before 1800, decades of inconvertible paper money in England would have been considered unthinkable, and so previous monetary theorists had scarcely contemplated or analysed such an economy. But now writers were forced to come to grips with fiat paper, and to propose policies to cope with an unwelcome new era.

The political controversies during the restriction period centred on explaining the price inflation and depreciation and on assessing the role of the Bank of England. The ‘bullionists’ pointed out that the cause of the price inflation, the rise in the price of bullion over par, and the depreciation of the pound was the fiat money expansion. They further maintained that the central role in that inflation was played by the Bank of England, freed of its necessity to redeem in specie. Their opponents, the ‘anti-bullionists’, tried absurdly to absolve the government and its privileged bank of all blame, and to attribute all unwelcome consequences to specific problems in the particular markets involved. Depreciation in foreign exchange was charged to the outflow of bullion caused by excessive imports or by British war expenditures abroad (presumably unrelated to the increased amount of paper pounds or to the lowered purchasing power of the pound). The rise in the price of bullion was supposedly caused by an increased ‘real’ demand for gold or silver (again unrelated to the depreciated paper pound). The increases in domestic prices received less attention from the two sides of the debate, but they were attributed by the anti-bullionists to wartime disruptions and shortages in supply. Any ad hoc cause could be seized upon, so long as the great integrating cause, the expansion of bank credit and paper money, was carefully ignored and let off the hook. In short, the anti-bullionists reverted to mercantilist worry about ad hoc causes and the balance of trade on the market. The previous hard-won analysis of money and overall prices went by the board.

5.2 The bullionist controversy begins

The announcement of the restriction brought a flurry of activity, pro and con, consisting not of extensive theoretical analyses but of general statements of approval or warnings of things to come. The prime minister, William Pitt the Younger (1759–1806), and his followers egregiously maintained that there was no cause for alarm, since unlike the assignats of the evil French Revolutionaries, the Bank of England was issuing ‘private’ rather than government paper. Hence the reluctance of the government to make bank notes legal tender until nearly the end of the war, although its policies made them legal tender de facto. The opposition leader, Charles James Fox (1749–1800), denounced the restriction and called for resumption of specie payments, and also pointed out that the war against France bore ultimate responsibility for the plunge into fiat paper. And the distinguished playwright and Whig M.P. Richard Brinsley Sheridan (1751–1816) warned that ‘we were doomed to all the horrors of a paper circulation’.

The inflationist economic historian Norman Silberling summed up the Fox-Sheridan position unsympathetically as follows:

Fox and Sheridan constituted themselves the leaders of a persistent tirade against the Bank Suspension, not upon grounds of financial principle, but because the Suspension permitted that institution to support the activities of what they regarded as a militaristic, reactionary, and withal bankrupt administration...[T]hey concentrated their eloquent invective against this alliance of Bank and State which was productive of ‘robbery and fraud’; and they urged that the Bank be divorced forthwith from their public responsibilities and their participation in the War. Let the Ministry repay the debts of the Bank (if it could!) and let the bank resume the honest payment of their Notes.²

For the first few years, however, all seemed well. The initial caution of the bank and the minimal expansion of government demands on its credit, combined with the inevitable time lag between issue of new money and rise in prices to lull Britons into a false sense of security. The price of food rose substantially in 1799, but it was easy for the anti-bullionists and other administration apologists to dismiss this rise in a flurry of pamphlets as the product of crop failure and wartime disruption in the import of grain. Even the Rev. Thomas Robert Malthus, afterwards to emerge as at least a partial bullionist, diffidently raised the monetary question, and then dismissed the increase of paper money as ‘rather... the effect than the cause of the high price of provisions’.³

In the Spring of 1800, however, war expenditures and bank financing government debt accelerated, leading to a depreciation of the pound by 9 per cent in the main foreign exchange market of Hamburg, and gold bullion appreciated to 9 per cent above its official par value. In addition, domestic prices rose even more sharply than before. The depreciation of the pound had evidently begun.

The first phase of the bullionist controversy (1800–4) started when one of the best of the bullionists published his remarkable pamphlet on the cause of the depreciation. Certainly there was little in the previous career of Walter Boyd (c.1754–1837), a wealthy adventurer and seeker of state privilege, to prepare one for a pamphlet of keen insight into the calamitous consequences of irredeemable paper money. Boyd had been a wealthy English banker in Paris, the chief partner of Boyd, Ker and Co., who had to flee for his life in 1793 from the wrath of the French Revolution, which also confiscated his property. Back in London, Boyd established the banking firm of Boyd, Benfield and Co., of which he was principal partner. A close friend of Prime Minister William Pitt for many years, Boyd rode high in the British Establishment, becoming an MP in 1796 from his partner Paul Benfield's pocket borough. In 1794, the firm floated an important loan to the Austrian emperor. Furthermore, Boyd, Benfield received the enormous contract of £30 million in government debt after the beginning of the war with France.

Things began to go sour for Boyd in 1796, however, when the Bank of England, whose loans had been keeping Boyd, Benfield and Co. afloat, failed to renew its discounts. Boyd tried desperately to get Parliament to establish a new board for the issue of a massive amount of notes, and the scheme received considerable support, but it was ended by the opposition of William Pitt.

The only thing left for Boyd was to try to get more Bank of England loans, and in Parliament during 1796 and 1797 he denounced the bank for too tight a credit policy, presumably not mentioning himself as one of the prominent sufferers from its allegedly tight money. Facing ‘ruin’ Boyd managed to obtain financial aid from friends in the Navy Office, and he finally got the bank to lend Boyd, Benfield & Co. £80 000 in 1798. But Samuel Thornton (1755–1838), deputy governor of the Bank of England, and MP, warned Pitt that Boyd, Benfield & Co. was only being kept alive by bank largesse, and as a result, Pitt refused to let the House of Boyd contract for the 1799 public loan. Finally, Boyd, Benfield & Co. went bankrupt in March 1800, and the result was total financial ruin, so much so that Walter Boyd was reluctant to show his face in Parliament.

As might be expected, Boyd put the blame for his failure not on his own reckless feeding at the public trough, but on the niggardly policies of the Bank of England. In November 1800, Boyd wrote A Letter to the Rt. Hon. William Pitt published in 1801, which won quick fame and caused Boyd to publish a second edition later that year. With Boyd's Letter, the bullionist controversy was born, Boyd now denouncing the Bank of England not for overly tight credit but to the contrary for generating the inflation and monetary depreciation in the first place.

His new-found fame did Boyd little personal good, however, and he promptly went to France for financial manoeuvring. There he was arrested the following year, and jailed by the French until the end of the Napoleonic Wars. He then returned to England, wrote other financial pamphlets, and once again became an MP.

5.3 Boyd's Letter to Pitt

Walter Boyd did not intend his pamphlet, the Letter to Pitt, to be a treatise on monetary theory. It was, as one historian put it, a ‘tract for the times’, written in a ‘heated temper’, and the tract assumed a generally accepted set of monetary principles on the part of his readers. Nonetheless, since Adam Smith and the other eighteenth century economists could not have addressed their analyses to a non-existent inconvertible fiat money, Boyd felt called upon to extend the conventional analysis to this unwelcome new system that had suddenly come to Great Britain. In the course of doing so, Boyd not only launched the ‘bullionist controversy’, but also set forth an excellent exposition of what came to be known as the ‘bullionist’ position in the great controversy.

Boyd pointed to the three new and unwelcome conditions: the premium of gold bullion over the paper pound, the depreciation of the pound on the foreign exchange market, and the ‘increase in the prices of almost all articles of necessity, convenients, and luxury, and indeed of almost every species of exchangeable value, which has been gradually taking place during the last two years, and which had recently arrived at so great a height’. He argued that the cause of all three troublesome phenomena was the same: a depreciation of the value of the pound, brought about by ‘the issue of Bank-notes, uncontrolled by the obligation of paying them, in specie, on demand’. An increase in the supply of money diminishes its value, whether in the form of a premium on gold bullion or of a rise in the prices of goods. And ‘the same circumstances which raise the value of Gold in the home market, necessarily tend to depreciate our currency when compared with currency of other countries’. Boyd summed up the bullionist position clearly in the preface to the second edition (1801) of his Letter. ‘The premium on bullion, the low rate of exchange, and the high prices of commodities in general, are... symptoms and effects of the superabundance of paper’.

If the supply of money is crucial to the movement of prices, bullion and exchange rates, it becomes vital to clarify what precisely that supply may be. Before Adam Smith, the eighteenth century British writers on money, such as Hume and Harris, muddied the waters by including in the concept of money virtually all liquid assets, such as bills of exchange and government securities. In the Wealth of Nations, however, Smith helped matters by distinguishing clearly between money, the general medium of exchange and the final means of payment, and other liquid instruments that are exchanged against money. Following Smith, Walter Boyd makes the distinction between money, or ‘ready money’, and other assets crystal-clear:

By the words ‘Means of Circulation’, ‘Circulating Medium’, and ‘Currency’, which are used almost as synonymous terms in this letter, I understand always ready money, whether consisting of Bank Notes or specie, in contradistinction to Bills of Exchange, Navy Bills, Exchequer Bills, or any other negotiable paper, which form no part of the circulating medium, as I have always understood that term. The latter is the Circulator, the former are merely objects of circulation.

Not only that: Boyd proceeded to go beyond Smith and to be the first to clearly identify bank demand deposits as fully ‘ready money’ as bank notes. As he put it: ‘Credits in the Books of the Banks... may be considered as Bank Notes virtually, though not really in circulation...’. Much grief and error would have been spared economic thought as well as the development of money and banking if the currency school – the mid-nineteenth century successors to the bullionists – had heeded this lesson, and understood that demand deposits were equivalent to bank notes as a part of the supply of money.

On another crucial point, too, Boyd proved to be far superior to Adam Smith. Like Cantillon and Turgot, Boyd objected to the unfortunate doctrine, propounded by Hume and then by Smith, that an increase in the quantity of money results in an equiproportional increase in the ‘price level’. Considering the essence of the Hume model, of assuming a magically great propordonate increase in the money supply and discussing the consequences, Boyd echoes Cantillon rather than Hume:

if... this country had acquired, by supernatural means, and thrown into every channel of circulation, the same additional currency in gold and silver, within the same period, this influx, altogether disproportioned to the progress of the industry of the country; within that period, could not have failed to produce a very great rise in the price of every species of property, not all with equal rapidity, but each by different degrees of celerity, according to the frequency or rarity of its natural contact with money. (Italics added.)

Internationally, such a magical influx of gold and silver according to Boyd and Smith before him, would ordinarily have rapidly flowed out of the country, thereby limiting the inflationary harm that the inflow might do. Unfortunately, as in Smith, the mechanism for this allegedly rapid outflow is highly obscure. At any rate, Boyd pressed on to be the first to apply mainstream monetary theory to the problem of inconvertible fiat currencies. He begins by showing that since bank notes cannot be exported, there is no mechanism, as there is with specie, for draining off an ‘excess’ quantity of money to foreign countries. As a result, in the first place, the price rise resulting from an influx of specie would not be ‘so great as that which has been occasioned by the introduction of so much paper, destitute of the essential quality of being constantly convertible into specie’.

More specifically, according to Boyd, the depreciation of fiat paper in terms of other currencies would be reflected in a rise in the price of gold or silver bullion, and an appreciation of foreign currencies on the foreign exchange market. This view, as Professor Salerno points out, provides the germ of the purchasing-power-parity theory of exchange rates under inconvertible fiat currencies:

Specifically, Boyd contends that an increase in the supply of inconvertible paper money effects a general rise in domestic prices or, what is the same thing, a depreciation in the exchange value of the currency in terms of commodities which necessarily drives down the value of domestic currency in terms of foreign currencies whose exchange values have remained unchanged. This fall in the value of the inflated and depreciated domestic currency relative to foreign currencies is manifested in the depreciation of the exchange rate. Contained in Boyd's argument... is the seminal formulation of the purchasing-power-parity of exchange-rate determination which, of course, is the logical outcome of the application of the monetary approach to conditions of inconvertible paper currency.⁴

In addition, Walter Boyd set the tone for the bullionists following him by placing the full blame for the monetary inflation on the Bank of England rather than the country banks. For the country banks could not have expanded their notes in circulation, Boyd pointed out, unless their reserve base had expanded proportionately. And that reserve base was constituted by notes of the Bank of England. For the country banks remain under the same ‘salutary control’ as the Bank of England had been under before the advent of restriction. Just as the bank's notes had to be redeemed on demand in specie, so do the country banks' notes still have to be redeemed in the notes of the Bank of England. The key to the problem is the escape from redeemability that the government had permitted to the Bank of England. As Boyd put it:

The circulation of Country Bank-notes must necessarily be proportioned to the sums, in specie or Bank of England notes, requisite to discharge such of them as may be presented for payment: but the paper of the Bank of England has no such limitation. It is itself now become (what the coin of the country only ought to be) the ultimate element into which the whole paper circulation of the country resolves itself. The Bank of England is the great source of all the circulation of the country; and, by the increase or diminution of its paper, the increase or diminution of that of every country-Bank is infallibly regulated...

Walter Boyd specifically cited and patterned himself on Adam Smith, and unfortunately also followed Smith in hailing the expansion of private redeemable bank notes as providing a less costly and more efficient ‘highway in the sky’ (though Boyd did not use that phrase). But, being an embattled Smithian in a new world of fiat money, Boyd stressed his militant opposition to bank notes in a context of fiat money. Boyd denounced inconvertible or ‘forced’ paper money as ‘that dangerous quack-medicine, which, far from restoring vigour, gives only temporary artificial health, while it secretly undermines the vital powers of the country that has recourse to it’. Boyd concluded that restoring the nation's currency ‘to its pristine purity’, would be ‘not only proper and practical, but indispensably necessary, in order to prevent the numberless calamities which the uncontrolled circulation of paper not convertible into specie, must infallibly produce’.

Boyd was what we may call a ‘complete’ bullionist, and was therefore a sophisticated one. He fully recognized that partial ‘real’ factors – such as government expenditures abroad, a sudden scarcity of food, or ‘a sudden diminution of the confidence of foreigners, in consequence of any great national disaster’ – could influence overall prices or the status of the pound in the foreign exchange market. But he also realized that such influences can only be trivial and temporary. The overriding causes of such price or exchange movements – not just in some remote ‘long run’ but a all times except temporary deviations – are monetary changes in the supply of and demand for money. Changes in ‘real’ factors can only have an important impact on exchange rates and general prices by altering the composition and the height of the demand for money on the market. But since market demands for money are neither homogeneous nor uniform nor do they ever change equiproportionately, real changes will almost always have an impact on the demand for money. As Professor Salerno writes:

... since real disturbances are invariably attended by ‘distribution effects’, i.e. gains and losses of income and wealth by the affected market participants, it is most improbable that initially nonmonetary disturbances would not ultimately entail relative changes in the various national demands for money...[U]nder inconvertible conditions, the relative changes in the demands for the various national currencies, their quantities remaining unchanged, would be reflected in their long-run appreciation or depreciation on the foreign exchange market.⁵

Here we must emphasize a crucial distinction between the proper status of the ‘short run’ and the ‘long run’ in economic theory. In price theory proper, the short run should take precedence, because it is the real-world market price, while the long run is the remote, ultimate tendency that never occurs, and could only take place if all the data were frozen for several years. In sum, we could only live in the improbable if not impossible world of long-run general equilibrium – where all profits and losses are zero – if all values, technologies and resources were frozen for years. But in monetary theory, the order of precedence should be different. For in monetary theory, the impact of partial ‘real’ factors on the price level, exchange rates, and on the balance of payments, are all ephemera determined by the general factors: the supply of and demand for money. These monetary influences are not ‘long-run’ in the sense of far off and remote, but are underlying and dominant every day in the real world. The monetary influence corresponding to the long run of general equilibrium would be a condition where all price levels and all real wage levels in a gold standard world would be identical, or strictly proportionate to the relative currency weights of gold. In a freely fluctuating, fiat money world, this would be the situation where all price levels would be strictly proportionate to the currency ratios at the international market exchange rates. But dominant influences of the supply and demand for money on price levels and exchange rates occur in the real world all the time, and always predominate over the ephemera of ‘real’ specific price and expenditure changes. Hence real-world analysis, which must always predominate, comprises short-run price analysis and slightly longer-run (but still far from final equilibrium) monetary reasoning.

To put it another way: in the real world, all prices are determined by the interaction of supply and demand. For individual prices, this means consumer valuations and consumer demands for a given stock: supply and demand in the real world. This is ‘short-run’ micro-analysis. For overall prices or the ‘price level’, the relevant supply and demand is the supply of and demand for money: the result of individual utility valuations of the given stock of money at any time. And while equally real and dominant in the ‘macro-sphere’, this is determinant in a slightly longer run than the superficial ‘real’ factors stressed by anti-bullionists in all ages.

5.4 The storm over Boyd: the anti-bullionist response

The Letter by someone of Boyd's renown and stature stung the British banking Establishment to the quick.⁶ The Establishment responded with a flurry of pamphlets in opposition to Boyd, some of which were subsidized by the government. The key point was to defend the actions of the Bank of England, and to attribute the undesirable consequences of the inflation and depreciation to a hodge-podge of ‘real’ rather than monetary factors. The most eminent critic whom Boyd could rebut in the second edition of the Letter, published a few months after the original, was Sir Francis Baring (1740–1810), founder of the famous banking house of Baring Brothers and Co.

Baring had been born to a clothing manufacturer in Exeter. After plunging into commerce in London, Baring founded his own mercantile firm and became a multimillionaire, and known as the leading merchant in Europe. In addition to his mercantile and banking prominence, Baring was also a director, and then chairman of the board of the East India Company, as well as a long-time Whig MP. Curiously enough, when the restriction first appeared, Baring, in his first monetary pamphlet, while strongly supporting the suspension as a necessary wartime measure, was worried about the inevitable depreciation that would accompany over-issue of paper and suggested a strict limit on the bank's issue. This pamphlet, Observations on the Establishment of the Bank of England (1797) went through two quick editions, followed by a supplementary Further Observations later the same year.

Now that the bank was under substantial attack, however, Sir Francis rallied round, his previous qualifications and warnings forgotten. In his Observations on the Publication of Walter Boyd (1801), Baring absurdly defended the bank from the charge of causing increases in domestic prices by pointing out that the depreciation of the pound on the foreign exchange market was less than the rise in price. But Boyd had not claimed equiproportional rises in all prices, as he pointed out in his rebuttal. Baring also claimed, conveniently enough, that an increase in the money supply could only affect foreign exchange rates and not domestic prices.

Another inveterate defender of the bank and an anti-bullionist who entered the controversy in this period was Henry Boase (1763–1827). Boase joined the fray in 1802, and wrote five anti-bullionist pamphlets between then and 1811. He insisted that, under conditions of inconvertibility, exchange rates had nothing to do with the supply of money, but were only determined by the balance of international payments, which in turn was supposed to be set solely by real rather than monetary factors. As Boase put it dogmatically: ‘the rate of exchange is governed by the balance of exchange operations, and (great political convulsions apart) by no other principle whatever...’. In his 1802 tract, Guineas an Unnecessary and Expensive Incumbrance on Commerce, Boase, as his title indicates, carried the fallacious Smithian ‘highway in the sky’ argument to its logical conclusion: the restriction was so beneficial that it should be made permanent, ‘a permanent measure of prudence and sound policy’.

Who was this Boase, this point man for inflation and fiat money? Born in Cornwall, he went to live for years in Brittany, and then returned to London, where he became a corresponding clerk in 1788 in the banking firm of Ransom, Morland, and Hammersley. The outbreak of the French Revolution the following year found Boase, with his extensive French connections, in a good spot to obtain considerable funds for support of a number of emigré French clergy and nobility in England. Boase then rose rapidly in the bank, becoming chief clerk and then managing partner in 1799. He was also a distinguished evangelical, being a leading member of the London Missionary Society and founder of the British and Foreign Bible Society. After retiring to Cornwall in 1809, Henry Boase became a partner in the Penzance Union Bank and mayor of Penzance.

5.5 Henry Thornton: anti-bullionist in sheep's clothing

Although the bullionist controversy has been studied at length, historians of economic thought have had great difficulty identifying and analysing the various different doctrines held in the bullionist camp. Generally, they have grouped the bullionists into an ‘extreme’ or ‘rigid’ camp, consisting of John Wheatley and David Ricardo (to appear later on), and the others, including Henry Thornton, ranked as more sophisticated ‘moderates’. The issue supposedly centres on Wheatley and Ricardo's extreme devotion to long-run factors, leading them to deny any role to real factors in determining prices, exchange rates or balances of payments. On the other hand, all the other bullionists, being ‘moderate’, are supposed to have believed that real factors can often be dominant, and that it is touch and go which factors will prevail in any given situation.

Professor Joseph T. Salerno has recently made a notable advance by providing a far superior framework of analysis of the various thinkers. He notes that Boyd (as we have seen) and Lord King, another leading bullionist, were really ‘extreme’ rather than moderate, and that they can be classified as such because they realized that monetary factors were always predominant, even though real factors could exert temporary influence. Thus the ‘extreme’ bullionist camp now includes (a) Ricardo and Wheatley, who ignore all temporary and real factors, as well as short-term processes, and concentrate exclusively and mechanistically on the long run; and (b) Boyd and later Lord King, who analyse short-run processes and real factors but realize that long-run monetary factors predominate at all times. Then there are (c) ‘moderate’ bullionists like Thornton who are agnostic about whether real or monetary factors predominate at any given time; and (d) anti-bullionists who ignore all underlying monetary causes. It is clear that Professor Salerno properly gives the accolade to group (b) as having the correct analysis.⁷

But Salerno, it seems to the present author, does not quite go far enough. While he sees fully and lucidly the crucial differences between groups (a) and (b), it is still confusing to classify these two as dwelling in the same camp. For it would clarify matters further if we totally dropped the ‘extreme’ vs ‘moderate’ distinction. Let group (b) be termed ‘complete’ bullionists and group (a) ‘rigid’ or ‘mechanistic’ bullionists. As for group (c), men like Henry Thornton do not really deserve the term ‘bullionist’ at all. They are surely ‘moderate’, though ‘confused’ might be a better term. Mired in their ad hoc approach they could just as well end up, in any given situation, as ‘anti-bullionist’ rather than ‘bullionist’. And, indeed, Henry Thornton began his career of monetary theorist as a moderate anti-bullionist, which was his position in the course of his famous contribution of 1802. Later on, as depreciation and inflation continued, Thornton concluded that the preponderance of forces had moved the other way, and he changed his mind, gaining his undeserved historiographical reputation as a bullionist by signing the famous Bullion Committee Report of 1811, which recommended resumption of the gold standard. But Thornton remained a moderate. Focusing on Thornton's later stance, and conflating it with his theoretical work of a decade earlier, only misled historians into extravagantly overpraising Thornton and into placing him unequivocally in the bullionist camp.

During the twentieth century Thornton revival, it was said that earlier historians were unfair in attributing Henry Thornton's (1760–1815) pro-Bank of England bias to his being a director of the bank. It is true that he himself was not a board member of the bank; but his elder brother, Samuel, was a director and deputy governor of the bank, and his grandfather Robert Thornton, as well as Robert's brother Godfrey, was also a director of the Bank of England.

Henry Thornton was a descendant of a long line of prominent merchants. Great-grandfather John was a merchant in Hull, in what was then Yorkshire, in the late seventeenth and early eighteenth centuries. John's sons moved to London to become important merchants there, particularly engaged in trade with Russia and the Baltic. Henry's father, also named John, continued the line of ‘Russia merchant’ in London, was a senior partner in the firm of Thornton, Cornwall & Co. and was also a leading member and financial supporter, beginning around 1750, of the first generation of evangelicals, low-church puritan Anglicans under the influence of John Wesley. John gave enormous sums to charity, especially for the distribution of countless Bibles and prayer books abroad. Since the Thornton family and several of the other leaders of the movement resided in the wealthy London suburb of Clapham, they were eventually to become known as the highly influential ‘Clapham sect’.

Henry Thornton received only a sparse education; at an early age, he began working in the counting houses of his relatives and then of his father. Soon, in 1784, he left the family firm to become a partner in the banking house of Down, Thornton, and Free, where he remained as an active partner until his death. Thornton was able to build the small banking house into one of the largest in the City of London. In 1788, Thornton joined his father and several other family members as a director of the Russia Company. Meanwhile, in 1782, he had been elected an MP, and was soon joined by his brothers Samuel and Robert. Henry was to remain in Parliament, too, for the rest of his life.

Not only was Henry Thornton a distinguished banker, MP and closely related to Bank of England directors; he was also a dedicated leader and patron of the Clapham sect, and his home at Clapham was to serve as a virtual organizing headquarters for the evangelical movement. One of Henry's closest friends, William Wilberforce III, belonged to a powerful family long friendly to and intermarried with the Thorntons. Wilberforce became an MP at about the same time as Thornton, and it was characteristic of their earnestness, personal austerity and moral fervour that they soon came to form an independent ‘party of the saints’ in Parliament. There, Wilberforce became the leading force in the eventually successful agitation for the abolition of the slave trade in the British West Indies.

In 1796, Thornton married Marianna Sykes, daughter of another ‘Russian merchant’ from Hull, and also a lifelong family friend. The couple had nine children. Most of Thornton's intellectual energies were expended on evangelical religion; though considered a distinguished expert on banking and finance, he wrote only his famous work of 1802 on paper credit and participated in writing the Bullion Committee Report. The remainder of his voluminous writings were devoted to family prayers, family commentaries on the Bible, and scores of articles on politics, literature and religion for the Clapham sect journal which he helped to found, the Christian Observer.

After Thornton’ death in 1815, his place as senior partner in the bank was taken by Sir Peter Pole. The bank prospered greatly for a while, but soon it turned out to be undercapitalized and overexpanded, and in 1825 it, along with lesser country banks, was plunged into crisis. It soon failed, despite a friendly £300 000 emergency loan from the Bank of England. Ironically, in view of Thornton's monetary views, there is some evidence that the two men most responsible for the mismanagement were Sir Peter Pole and Henry Thornton. In particular, Thornton appears to have led the way in lax practices to induce Yorkshire country banks to keep their deposits in his London bank.

Bank failure was no stranger to Thornton. Indeed, it was the temporary failure of his bank in the crisis of 1793 that turned his thoughts to problems of banking, and led him to conclude that it was necessary for the Bank of England to play a supporting, expansionist role in monetary affairs. As the banking theorist Thomas Joplin was to put it in his Analysis and History of the Currency Question (1832), on the financial crises of 1793:

Mr. Thornton, being a banker – a partner, it is curious to remark, of the house that failed on this occasion – had his attention particularly called to this subject: and a very considerable portion of his work, on public credit, is devoted to show, that, in a period of panic, the Bank ought to lean to the side of enlarging, than contracting its issues.⁸

When the restriction came in early 1797, Henry Thornton was honoured by being the only London banker asked to give testimony before the committees of the Houses of Lords and of Commons investigating the suspension of specie payment. Thornton's influence was magnified by the lifelong friendship of Wilberforce and Prime Minister William Pitt, and Pitt's brother-in-law was the first tenant of one of the houses on Thornton's estate. The results of his pondering are scarcely surprising for someone of Thornton's status and background. Taking an inflationist and Establishment line, Thornton opined that in times of crisis paper money could not be limited or suppressed, since that would constitute a shock to commerce. On the contrary, the Bank of England must suspend specie payment in order to avoid the spectre of monetary contraction and general business failure. Indeed, Thornton undoubtedly gladdened the hearts of the bank by criticizing it for not being expansionist enough!

Thornton's testimony won him the accolade of being the foremost authority on monetary affairs, and he was appointed to several parliamentary committees on money, expenditures and foreign exchange. Thornton, indeed, became one of the leading parliamentary defenders of the restriction and of expanded paper credit.

We can easily imagine Henry Thornton's sentiments towards Walter Boyd's Letter to Pitt when that tract hit the world of English opinion like a thunderbolt at the turn of 1800–1. Here was this well-connected fellow banker, but an unsound adventurer, this rogue whom his own brother had brought to ruin by persuading the Bank of England to cut off his credit. And now, only months after this man had met his deserved fate, here was Boyd again, trying to gain revenge by discrediting the noble banking and credit system of England. Thornton was stung to try to refute the dangerous Boyd, and it was in the service of this goal that he published his An Enquiry into the Nature and Effects of the Paper Credit of Great Britain a year after Boyd's tract, in February or March of 1802.⁹

But first Thornton hit out at Boyd in Parliament, in December 1800. As in his book, his words exerted all the more impact for the eminence of their author combined with their seeming judiciousness and moderation. For there are always a host of people who will hold firmly that the more qualified and tentative the judgement, the more well-balanced and sound it must therefore be. Mushiness of mind, especially in an eminent man, is all too often mistaken for wisdom.

In this early phase of the bullionist debate, Thorntonian mushiness tended inexorably in the wrong direction. The depreciation of the pound in foreign exchange was caused, he opined in his speech in Parliament, not by the increase of paper money, but by the unfavourable balance of trade and specifically by the heavy imports of provisions. Typical of the anti-bullionist view, imports and exports were assumed to have ad hoc lives of their own, and not to be determined by relative prices or by the supply and demand for money. But Thornton's anti-bullionism was nothing if not ‘moderate’, that is, he conceded the theoretical possibility that increased money supply could bring about higher prices:

as to the assertion that the increased issue of Bank paper was the cause of the dearness of provisions, he [Thornton] would not deny that it might have some foundation; but he would contend that its effect was far from being as great as was being alleged...

Henry Thornton's book on Paper Credit was a considerable expansion of his parliamentary speeches, and it was Paper Credit that took its place as not only the leading work on behalf of anti-bullionism, but also the most influential on either side of the debate. The timing was right, since the restriction was in particular need of defence in 1802. A peace with France was signed in March, and yet the British government persisted in extending the restriction another year. Soon after that year was up, war with France broke out again, but in the meantime the seeming end of the wartime emergency had taken away the apparent reason for the suspension of specie payments. Other anti-bullionist tracts appearing in 1802 were scarcely rivals for Thornton, ranging from Jasper Atkinson's anonymous pamphlet {Consideration on the Propriety of the Bank of England Resuming its Payments in Specie...) denying that inflation had taken place, to another anonymous tract applying Adam Smith's erroneous theory of an automatic limit to excess bank credit to a situation Smith would never have applied it to: fiat money (The Utility of Country Banks Considered).

Thornton disarmed many of his critics by conceding the theoretical possibility that excess issues of paper money can cause price increases, outflow of gold, higher prices of gold bullion and depreciation of the pound, but maintaining that the situation did not now apply, and that the problems of the day were due to such particular real factors as unusual demand for gold and for the importation of food, and unusual blockages to exports.

Thornton cleverly loaded the dice by spending the bulk of the book on the alleged horrors of monetary deflation and the contraction of bank credit. Deflation would lead to trade depression, unemployment and bankruptcies. Furthermore, he claimed, deflation would not even accomplish an export surplus or an inflow of gold, since it would ‘so exceedingly distress trade and discourage manufacturers as to impair... those sources of returning wealth to which we must chiefly trust for the restoration of our balance’. Thornton neglected to realize that if times were really that bad, Englishmen would scarcely earn enough income to sustain a heavy excess of imports. As in all modern agitation against deflation, he also failed to realize that deflation only causes losses and bankruptcies if it is unexpected, revealing an excessive bidding up of wage rates and other business costs. Deflation, in addition to having the healthy impact of purging unsound investments and unsound banks from the economy, would have strictly limited and temporary effect; first, because while inflation is technically unlimited until the value of the currency is totally destroyed, deflation must necessarily be limited to the amount of bank expansion over specie; and second, deflation will cease having a depressionary effect as soon as excessive costs are brought down to pre-inflated levels.

In fact, Thornton acknowledged that the fall in price and the depression brought about by monetary deflation would be ‘unusual’ and ‘temporary’. But he anticipated Keynes in focusing on allegedly sticky wage rates, for

a fall [of prices] arising from temporary distress will be attended probably with no correspondent fall in the rate of wages; for the fall of price, and the distress, will be understood to be temporary, and the rate of wages, we know, is not so variable as the price of goods. There is reason, therefore, to fear that the unnatural and extraordinarily low price arising from the sort of distress of which we now speak, would occasion much discouragement of the fabrication of manufactures.

There are two problems here. First, while the economic distress, due to faulty forecasting and excess bidding up of wage rates and other costs, will indeed be temporary, there is no reason why the fall in prices should not be permanent. Prices had previously been artificially raised by monetary and credit expansion; their decline simply reflects the contraction of credit down to more realistic levels. The knowledge that the decline is permanent should greatly speed up the adjustment mechanism. Second, if workers persist in keeping their wage demands higher than the market, they have only themselves to blame for their unemployment. Keeping any price, including a wage rate, higher than market equilibrium will always lead to an unsold surplus of the good or service: in the case of labour, unsold labour time, or unemployment. If labourers wish to change their unemployed status, they need only lower their wage demands to clear the market and allow themselves to be hired. We should also recognize that, in this situation, with prices falling and wage rates constant, workers are thereby insisting on higher real wage rates than they had enjoyed before. Why should workers holding out for higher real wage rates be able to induce an inflationist policy in the central government?

So worried about deflation was Thornton that he actually urged the bank of England to neutralize outflows of gold so as to obstruct the price-specie-flow mechanism from bringing about equilibrium in the balance of payments. Instead, he would have the bank inflate bank notes to replace gold outflows, and then hope that his vague long-run real principles of ‘economy’ and ‘exertion’, of expenditure and income, would eventually work to equilibrate imports and exports. Thus, Thornton writes that

... it may be true policy and duty of the bank to permit for a time, and to a certain extent, the continuance of that unfavourable exchange which causes gold to leave the country, and to be drawn out of its own coffers: and it must, in that case, necessarily increase its loans to the same extent to which its gold is diminished.

Thornton's work has been excessively hailed by von Hayek and other historians as being theoretically excellent if unfortunate in its political anti-bullionist conclusions. But his theoretical weakness did not only consist of his excessive horror of deflation and his stress on the alleged empirical dominance of real factors in his analysis of inflation and depreciation. For this stress itself reflected a grave if subtle theoretical flaw in Thornton's entire monetary and balance of payments analysis. His entire analysis lingered disproportionately on the real and short-term factors, to the almost complete neglect of the tendency of the economy towards long-run equilibrium. And even Thornton's perfunctory discussion of long-run equilibrium is divorced from short-run processes and also from its monetary nature. It goes without saying that Thornton therefore also neglects the monetary supply and demand nature of the short-run processes leading towards that equilibrium. Thus Professor Salerno, who has given us a notable critique of Thornton, writes:

Without the conception of international monetary equilibrium at his disposal, he is forced to explain the tendency to balance-of-payments equilibrium by a hazy reference to an alleged disposition amongst people to ‘adapt their individual expenditure to their income’. This is in sharp contrast to the extreme bullionists and their eighteenth-century forebears who invariably began their analyses of balance-of-payments phenomena with a discussion of the nature and necessity of international monetary equilibrium and then explained the tendency to balance-of-payments equilibrium as a logical implication of the necessary tendency to an equilibrium distribution of the world stock of money.¹⁰

Indeed the entire structure and organization of the book tilted Thornton heavily towards short-term real factors and away from any monetary approach towards analysing inflation or the balance of payments.¹¹

To sum up: the correct analysis of complete bullionism (such as presented by Boyd and later by Lord King) stresses monetary factors leading to monetary equilibrium, while showing that real factors can only have temporary effects. The analysis of real factors is integrated with, and at all times subordinated to, the monetary factors, and short-run and long-run monetary processes are integrated as well. In Thornton's moderate anti-bullionist position (often miscalled ‘moderate bullionist’), however, both real and monetary causal factors and processes are presented as separate and independent of each other, with real factors presented as empirically more important. Short-run factors are similarly stressed, to the neglect of long-run forces.

Henry Thornton has been extravagantly praised by Schumpeter and other historians for adding velocity of circulation to the quantity of money as a determinant of overall prices. But, in the first place, we have seen that ever since the scholastics, the demand for money – the inverse of the ‘velocity’ -had always been integrated with the supply of money in analysing the determination of general prices. It is true that Thornton analysed the different influences on, and different variabilities of, velocity in considerable and pioneering detail: e.g. frequency of payments, development of clearing systems, confidence in the money, and variations of the same stock of money over time. But unfortunately, Thornton ruined this contribution by not realizing that velocity of circulation is simply the inverse of the demand for money and by treating the velocity as somehow different, and independent of, demand in helping determine the money relation of supply, demand and price.

Thornton has been lauded by von Hayek and others for including bank deposits as well as bank notes in the supply of money. True enough; but, as we have seen, Walter Boyd preceded him in this insight by a year. But not only that: Boyd also demonstrated that bills of exchange and Treasury bills are decidedly not part of the money supply, that they are objects of circulation rather than the ‘circulator’. But Thornton restored the older error of lumping bills of exchange in with notes and deposits as part of the supply of money.

Henry Thornton did make some important contributions in the last two chapters of Paper Credit, particularly in the long-deferred paper money-as-cause of inflation sections that rested uneasily with the separate and contrary earlier chapters. Most of the anti-bullionist writers applied Adam Smith's dictum that bank credit cannot inflate the currency if confined to short-term, self-liquidating, ‘real bills’. The difference is that Smith had applied it only to a specie standard, whereas the anti-bullionists extended it to a fiat money system. Thornton replied that this criterion will not work, since an increased quantity of bank notes will also indefinitely inflate the monetary value of the real bills. So that the Smith-anti-bullionist ‘limit’ is an indefinitely elastic one that will in practice only provide an open channel for bank credit inflation. Thornton further pointed out that the current usury law in Britain of 5 per cent will aggravate the problem. For the free market interest rate or profit rate will rise higher than that in wartime (or in any boom situation). Consequently, the artificial holding down of the bank loan rate below the profit rate will stimulate an excessive borrowing, artificially high levels of investment, and a continuing monetary and price inflation. Thus, holding the bank rate of interest below the profit rate stimulates an increase in the demand for borrowing, and the continuing increase in the supply of money allows that demand to be fulfilled.

In setting forth the inflationary consequences of artificially lowering the rate of interest on bank loans, Henry Thornton anticipated the later Austrian theory of the business cycle, set forth by Ludwig von Mises and F.A. von Hayek and in turn based on the analysis of the Swedish-Austrian economist Knut Wicksell at the end of the nineteenth century. Thornton also hinted at the Austrian analysis of ‘forced saving’, pointing out that if excessive issues of paper money raise prices of goods more rapidly than wage rates, there will be some increase of capital investment, but that this increase will be at the expense of the labouring classes, and will therefore ‘be attended with a proportionate hardship and injustice’. Unfortunately, Thornton did not press on to the Austrian business cycle point: that since the public's time- and saving-preferences are not sufficient to sustain these ‘forced’ investments, a recession is bound to liquidate those investments when the artificial credit expansion stops and the true savings-consumption preferences of the public are thereby revealed.

It is very possible that, despite the author's prominence in the world of banking, Paper Credit might have sunk quickly into obscurity. It was very long (several hundred pages), badly written and organized, unsystematic, muddled, and what its greatest admirers have called ‘prolix’. Even von Hayek, Thornton's biggest modern booster, concedes that his ‘exposition lacks system and in places is even obscure’. Even his greatest disciple and popularizer, Francis Horner, admitted that Thornton had ‘little management in the disposition of his materials’; that he ‘frequently... was much embarrassed in the explanation of arguments’, that his ‘reasonings are not to be trusted’ and are sometimes ‘defective’, that he was not trained in theorizing, that his style was poor, and that ‘the various discussions are so unskillfully arranged, that they throw no light on each other, and we can never seize a full view of the plan’. In short, the ‘prolixity’ and ‘the obscurity’ of the work ‘oppress the reader’.

And yet, ironically, it was this very Francis Horner who rescued Paper Credit from these grave defects, and put the work on the map. The form Horner used was a great stroke of luck for granting Thornton's work its maximum impact. We have noted in an earlier chapter on the influence of the Smithian movement (Chapter 17, Volume 1) that Francis Horner was one of a scintillating group of young Scotsmen who studied under Dugald Stewart at the turn of the nineteenth century, and went on to conquer the British intellectual climate for Smithian doctrine. It was in 1802 that these young pupils of Stewart founded the Edinburgh Review, which struck the British intellectual world with enormous impact and quickly vaulted to the status of one of the leading journals. And it was precisely in the first, October 1802 issue of the Edinburgh Review that Francis Horner wrote his famous review-essay of Thornton's Paper Credit. In this 30-page tour de force Horner systematized Thornton's work, made as much sense of it as was possible and, as von Hayek admits, ‘gave an exposition of the main argument of the book in a form which was considerably more systematic and coherent than the original version’. Horner beat the drums for Paper Credit, trumpeted it as ‘the most valuable unquestionably of all the publications which the momentous event of the Bank Restriction had produced’. The great fame and influence of Paper Credit was unquestionably Thornton mediated through Francis Horner. It was also important to realize that Horner, though chairman of the later Bullion Committee of 1810–11 which recommended resumption of the gold standard, agreed with Thornton in his anti-bullionist stance of 1802.

While Horner hailed Thornton's work as decisive, he paved the way for his (and Thornton's) later change of mind politically by writing that he was not sure which factors – the monetary or the real – had been more decisive in the inflation and the depreciation of the pound. He expressed his fundamental theoretical confusion (along with Thornton's) by declaring himself agnostic on the causal issue, the matter to be decided later by more empirical data. In short, while Thornton, in his Paper Credit, carved out the new moderate anti-bullionist position, his follower Horner was what might be called a moderate moderate, squarely in the middle of the issue.

We might also note that Horner took his stand squarely with Thornton against Boyd on the issue of defining the money supply. Rejecting Boyd's lucid ‘circulator’ vs ‘objects of circulation’, Horner perpetuated Thornton's unfortunate and fuzzy view that there is no definite boundary between commodities and means of exchange, so that everything is a mish-mash of degrees of convertibility.

5.6 Lord King: the culmination of bullionism

When the British government asked Parliament for a year's extension of the bank restriction in April 1802, it had to justify the renewal of suspension on some ground other than the war with France, since the Treaty of Amiens had been signed the previous month. Prime minister Henry Addington (1757–1844) argued that since the balance of payments remained unfavourable to Britain, the suspension of specie payments should be extended – presumably until the balance of trade reversed itself. When the renewal came up again in February of the following year, Addington again argued for an extension of the fiat system on the same grounds. He was answered trenchantly by the great opposition leader, Charles James Fox, who pointed out that ‘perhaps even it might happen that the unfavourable turn of the exchange against this country might be owing to the very restriction on the bank’. Not only that, but Fox saw incisively that the outflow of gold was essentially a Gresham's law situation, where money undervalued by the government flows inexorably out of circulation to be replaced by overvalued (or ‘bad’) money. He essentially showed that this process applies to paper fully as much as to ‘bad gold’:

In 1772 to 1773, when there was a great quantity of bad money in the country, the course of exchange was then also much against us... As long as our currency continued bad, the exchange was against us; so is it now, because paper is not much better than bad gold... May it not therefore be expected that as in the former case, when our currency was ameliorated, the course of exchange turned in our favour, so also if the Bank now resumed its cash payments the same favourable circumstances might attend the change?

During this debate, a new voice entered the bullionist controversy, with Peter Lord King (1776–1833) denouncing the restriction in a speech in the House of Lords on 22 February. Taking the lead of the bullionist forces, Lord King zeroed in on the increase of the quantity of paper money during the restriction as the culprit: ‘from the time the restriction was first imposed, the course of exchange began to turn against this country in various proportions to the quantity of paper in circulation.’ In May, Lord King repeated these arguments in arguing against a bill to extend bank restriction in Ireland. Later in May of 1803, King elaborated his views in a highly important pamphlet: Thoughts on the Restriction of Payments in Specie at the Bank of England and Ireland, and then followed with an enlarged second edition of the pamphlet the following year, under the title, Thoughts on the Effects of the Bank Restriction. Lord King's Thoughts was widely read and highly influential, and with this pamphlet King took his place as the leader of the bullionist camp, just as Thornton, who continued to support the renewal of restriction, was established as the leader of the moderate anti-bullionists.

Lord King was a young nobleman of distinguished lineage. He was the great-grandson of Peter, the first Lord King, who became Lord Chancellor of the realm. The Whig and classical liberal tradition of the King family was emphasized by the fact that the first Lord King's mother was a cousin of John Locke, and that the first Lord King was a protégé” of Locke and a leading Whig and MP Peter King was educated at Eton and at Trinity College, Cambridge, taking his place as a follower of Charles James Fox and an important Whig in the House of Lords in 1800. In addition to his leadership of the hard-money forces in Britain, Lord King, though a great landlord, was a lifelong militant enemy of the Corn Laws. A critic of the Established Church, King was a principal battler for the unpopular cause of emancipation of the Catholics of England, as well as an opponent of the oppression of the Catholics of Ireland. In 1829, Lord King wrote a Life of John Locke, revised and expanded into two volumes in the following year.

Lord King began his Thoughts with a chapter on ‘Paper Money’. Unfortunately, King accepted Smith's fallacious argument for paper money as providing a highway in the sky, but at least he rejected Smith's idea of an automatic ‘reflux’ of any excess paper to the banking system. Instead, King applied the quantity theory (or, to put it better, the supply and demand theory) of money to the case of convertible paper. King, in a statement which Nassau Senior later referred to admiringly as ‘Lord King's principle’, stressed that it was important for paper money not to be issued to any extent greater than its ‘exact’ replacement of the quantity of gold coin in circulation; and that this equivalence is maintained by the immediate convertibility of paper into gold.

King then moved to rebut, one by one, the pro-restrictionist arguments that the Bank of England notes were not excessive and therefore not depreciated. The idea that the bank had not exceeded some abstract proportion of money to industry, or some arbitrary optimum money supply, was effectively shot down, King demonstrating that ‘there is no rule or standard by which the due quantity of circulating medium in any country can be ascertained, except the actual demand of the public’. King then shows trenchantly that the demand for money, like the demand for any product, is variable and uncertain:

The requisite proportion of currency, like that of every other article of use or consumption, regulates itself entirely by this demand; which differs materially in different countries and states of society, and even in the same country at different times...

It is manifest... that the proportion of circulating medium required in any given state of wealth and industry is not a fixed, but a fluctuating and uncertain quantity; which depends in each case upon a great variety of circumstances, and which is diminished or increased by the greater or less degree of security, or enterprise and of commercial improvement. The causes which influence the demand are evidently too complicated to admit of the quantity being ascertained by previous computation or by any process of theory...

King goes on to conclude that

If the above reasoning is well founded, it must follow that there is no method of discovering a priori the proportion of the circulating medium which the occasions of the community require; that it is a quantity which has no assignable rule or standard; an that its true amount can be ascertained only by the effective demand.

Next, King was the first to see the importance of Thornton's devastating critique of his fellow anti-bullionists' extension of Smithian real-bills doctrine, and he put the critique even more strongly. Putting their discount rates below the free market interest rate can permit unlimited extension of bank credit on real bills. Furthermore, the bank possesses no real means of distinguishing between ‘real’ and ‘fictitious’ bills, and merchants can always be induced to borrow far beyond real demands of the public by artificially low interest charged by the banks.

In the case of inconvertible paper money, King concluded, there is no way to discover the real demand for money by the public, or to figure out when paper money is excessive or not. Without convertibility, paper circulation is ‘deprived of this natural standard, and is incapable of admitting any other’. Hence, banks or governments entrusted with the task of finding the optimum level of money and credit are doomed to ‘committing perpetual mistakes’.

Building on Boyd's pioneering work and the contributions of Thornton, Lord King then set out to develop the culmination of the complete bullionist theory of inconvertible paper money, a theory consisting of a systematic and forceful development of supply and demand analysis. He first notes that inconvertible paper is subject to two distinct but related influences towards depreciation: ‘want of confidence on the part of the public, and an undue increase of the quantity of notes’. In every instance of inconvertible currency, he notes, both factors have soon gone to work. How does one know, King went on, when depreciation of inconvertible currency has occurred? Walter Boyd had asserted that one test of depreciation was a rise of the free market bullion price higher than the official mint price. King reinforced Boyd's insight by pointing out that bullion value tends to be stable in the short run, making any deviation of the two the result of a change in the value of the paper. King also provides a rigorous grounding for Boyd's second proffered test: the depreciation of the pound compared to other currencies. For a specie-convertible currency cannot depreciate, since any surplus can be exported. But inconvertible paper cannot be exported, and will there ‘remain in that country, and, if multiplied beyond the demand, must be depreciated in the degree of its excess’. Furthermore,

In the course of commercial dealings this increase of quantity is soon discovered; and prices are increased in proportion. A similar effect takes place in transactions with foreign currencies according to the status of their respective currencies.

King goes on to develop a concise statement of the purchasing-power-parity theory of exchange rates under inconvertible currencies.

While in the above passage, King appeared to adopt the mechanistic proportionality quantity theory, he made it clear later in the pamphlet that this proportionality, if it occurs at all, only does so in the long run. For King, like Boyd, was a complete bullionist, and presented by far the best and most developed statement of this position in this entire period. King demonstrates that the inflation process necessarily involves a redistribution of wealth and income. Developing hints of process analysis from Hume, King writes that the proportional effect of an increase of the quantity of paper money on prices is far from immediate, and that ‘some time must elapse before the new currency can circulate through the community and affect the prices of all commodities’. But while Hume hailed this interval as spurring business activity, King correctly focused on the coerced advantages that this process gives to the early, as opposed to the later, recipients of the new money:

It is this interval between the creation of the new paper and the rise of prices which may be a source of advantage to the persons who obtain loans from the Bank. The merchant, to whom the notes are immediately issued, employs them in the purchase of goods at the prices which they then bear. But by the very effect of these notes, when they are afterwards circulated, the price of the goods is enhanced and the merchant has the advantage of this rise in addition to the ordinary profits of trade. If he is an exporting merchant, he will receive, beside the usual profit, the amount of the depreciation which will have taken place in the currency between the time of purchasing the goods and the arrival of the remittance in return.

King also calls the depreciation of central Bank of Ireland notes like ‘an income tax which levies not for the benefit of Government, but of the proprietors of Irish Bank stock’. And on the Bank of England, he noted that the ‘undue advantage [that] has been obtained by the bank in the exact degree of the excess of their notes’ has been more than offset by ‘the loss and injury to the public, as in all cases of depreciated currency’. Hence ‘An indirect tax is thus imposed upon the community, not for the benefit of the public, but of individuals. It is levied in the most pernicious manner; and is of all taxes the least productive in proportion to the loss and inconvenience sustained’.

In short, King recognizes that the privileged beneficiaries of inflation and depreciation are, largely, the central banks themselves and their stockholders, as well as merchants who borrow from these banks, and exporters who benefit by the depreciation of foreign exchange. Ail these are bought at the expense of the public. King also perceptively notes that it is precisely these groups who had been the main apologists for the bank restriction. He suggests that these London and Dublin merchants had probably never read Hume, nor precisely traced the theoretical steps by which they obtained the privilege of bank inflation:

But their experience has undoubtedly led them to the same conclusions; and there can be no doubt that since the period of the Restriction discounts have been obtained from the Bank by commercial men with less difficulty and that these accommodations together with the profits derived from hence have given their minds a strong bias in favour of the measure.

Furthermore, Lord King's mordant analysis of the advantages accruing to the bank as against the public by inflation of its notes led him to denounce per se any ‘exclusive privilege’ in issuing notes granted to the Bank of England. For such a privilege would be ‘as unjust and impolitic as to grant a monopoly of any other branch of skill and industry to any private merchant or company’.

Tied in with his rejection of the mechanistic proportionality approach, Lord King conceded that real factors can have subordinate and temporary effects on depreciation and the exchange rate. Indeed, it is precisely this understanding of the temporary effects of real factors that helped lead King to reject the idea of strict proportionality, and hence of any precise quantitative measurement of the degree of depreciation or of the excess of paper money. As King wrote: ‘nor will the most careful reference to the two tests of the price of bullion and the state of the exchanges enable us to ascertain in what precise degree a currency is depreciated; though the general fact of a depreciation may be proved beyond dispute.’ Indeed, he gently chided Boyd for unduly stressing such a measure of excess, and thereby having ‘given an advantage to his opponents by insisting too much on the degree of depreciation...’

Finally, it is unfortunate that King followed Smith's and Thornton's confusion of bills of exchange and other evidences of debt with money, and rejected Walter Boyd's clear-cut distinction between them.

Lord King's contribution immediately vaulted him to the front rank of bullionist theorists; and when David Ricardo entered the fray almost a decade later, he hailed King's booklet as having had a great influence on him. For some reason, however, King's vital contribution has been grievously overlooked by most later historians, and even in Nassau Senior's day, in the mid-1840s, Senior found it necessary to chide posterity for neglecting Lord King's great achievement. Indeed, Senior lauded King's work as ‘so full, and in the main so true, an exposition of the Theory of Paper Money, that after more than forty years of discussion, there is little to add to it, or to correct’. Senior's reminder was afterwards echoed by Henry D. MacLeod and by Francis A. Walker, and as late as 1911, Jacob Hollander, in his famous resurrection of monetary theory between Smith and Ricardo, briefly hailed King's pamphlet as a ‘remarkable contrast to the prolix obscurity of Thornton's essay, and the heated temper of Boyd's performance’, and ‘fitted to become, as it speedily did, the epitome of what had already been written in sound criticism and in reasonable interpretation of the Bank's course no less than the inspiration of future effort in the same direction’.¹² Yet, unaccountably, appreciation of King's contribution promptly dropped completely out of sight once again, only to be resurrected in the seminal dissertation of Professor Salerno.

Perhaps the most important immediate impact of Lord King's Thoughts was on Francis Horner, for Homer was promptly converted by the booklet from his previous moderate moderate position to his permanent stance of moderate bullionist. The conversion probably rested not so much on King's theoretical analysis, as on his thorough marshalling of the statistics of the restriction period, which convinced the theoretical agnostic Horner that the facts were on the side of the cause of price inflation and depreciation from an excessive issue of paper money. Reviewing King's Thoughts in the July 1803 issue of the Edinburgh Review, Horner abandoned his previous policy agnosticism on the restriction to plumb squarely for redeemability. ‘From the very first’, he now wrote, ‘there could be no doubt of the impolicy and injustice of the restriction...’. But whereas before, he felt that the facts were too complicated to decide whether Boyd had been right about the restriction's inflationary impact on prices, Horner was convinced by King that Boyd had been right. He now concluded that ‘Throughout all these changes, one uniform effect may be perceived which, with the evidence by which it is proved, and the reasonings by which it is explained, is very ably and perspicuously described by Lord King’.

5.7 The Irish currency question

Much of Lord King's strictures were directed against the central Bank of Ireland as well as of England, and indeed, during 1803, as the restriction was extended into the future with the resurgence of war with France, attention shifted to the rapid depreciation of the currency of Ireland.

When Britain imposed the restriction in 1797, it also suspended specie payment for the Bank of Ireland and for the banking system of its Irish colony. It did so even though the Irish banking system was then in relatively sound and uninflated shape. The Bank of Ireland, however, quickly took advantage of its new-found privileges to inflate the supply of money and credit sharply, quadrupling its note circulation over the next six years. By 1803, therefore, the Irish pound had fallen over 10 per cent below its gold standard parity of 108:100 with the English pound. It was particularly evident that the problem here was the Irish supply of paper money, and nothing else, since Belfast, in the English currency orbit with no central bank of its own, remained at par with the English pound, and since the Dublin pound had depreciated to the same extent in Belfast as it had in London.

When the extension of bank restriction came up in Parliament in February 1803, an extension defended by Thornton, a bullionist critique of the Irish situation was launched by Lord King, who continued the same discussion in May when an extension of Irish restriction arose in Parliament.

With attention turned toward the Irish problem, the House of Commons in March 1804 established an Irish currency committee to investigate the matter (more precisely, the ‘Select Committee on the Circulating Paper, the Specie and the Current Coin of Ireland’). The Bank of Ireland officials, desperately trying to defend their record, proclaimed with increasing absurdity that the depreciation of the Irish pound was due not to excessive issue but to the mysteriously ‘unfavourable’ balance of payments out of Ireland. The committee, of which Henry Thornton was a leading member, issued its report in June and gave short shrift to the anti-bullionist rationalizations. It adopted squarely the bullionist insight that the depreciation of the Irish pound was due to excessive issue of paper and extension of credit by the Bank of Ireland, and that this excessive issue had been made possible by the restriction. The committee report presaged the famous bullion committee report six years later, and was notable also for the virtual conversion of Henry Thornton, following Horner, into the moderate bullionist camp. The report declared that the ‘great and effectual remedy’ for Irish currency ills was ‘Repeal of the Restriction Act from whence all the evils have flowed’, but it then drew back from such a radical solution to opt for an intermediary solution: for the Bank of Ireland at least to make its notes redeemable in the far less depreciated Bank of England currency. This, in fact, was also the intermediate solution proffered by Lord King. Above all, the committee warned that the Bank of Ireland must limit its paper issue in all times of unfavourable balances of trade, ‘and that all the evils of a high and fluctuating Exchange must be imputable to them if they fail to do so’.

Joining the bullionist camp around the Irish currency question were two important members of the Anglo-Irish Establishment. A month before the appointment of the Irish currency committee, Henry Brooke Parnell (1776–1842), the first Baron Congleton, published his pamphlet of Observations on the State of Currency in Ireland. Parnell, the son of Sir John, Chancellor of the Irish Exchequer, was educated at Eton and at Trinity College, Cambridge. An influential MP from 1802 on, Parnell's application of bullionist principles to the Irish question was largely influenced by Lord King. Parnell brought charges against the Bank of England of inundating the country with its paper; of diminishing the value of the greatest portion of the property of the country; of establishing a ruinous rate of exchange; and of bringing upon the state all the calamities attending a depreciated currency. As an intermediate remedy, Parnell also recommended King's proposal to make Irish paper redeemable in Bank of England notes. So compatible was Parnell's booklet with the Irish currency committee report, that the third edition of Parnell's essay placed a summary of the committee's evidence in its appendix.

The committee report, and the King proposal, were also backed by another member of the Anglo-Irish Establishment, the young Irish attorney in London, John Leslie Foster (d. 1842), in his pamphlet, an Essay on the Principles of Commercial Exchanges (1804). Foster, the son of an Anglican bishop, and graduate of Trinity College, Dublin, later became an Irish judge and a Tory MP in England. There is also the curious case of James Maitland, the eighth earl of Lauderdale (1759–1839), a Scottish attorney and first a Whig and then a Tory MP. On the one hand, Lauderdale was a fanatical underconsumptionist and opponent of saving – thereby anticipating Keynes – in his Inquiry into the Nature and Origins of Public Wealth (1804) and in his argument against debt repayment and for government expenditure per se {Three Letters to the Duke of Wellington, 1829). On the other hand, Lord Lauderdale was a sound hard-money man, endorsing the Irish currency report in a hard-hitting pamphlet. Not only did Lauderdale agree that excessive paper issue of the Bank of Ireland had led to the depreciation of the Irish pound and the premium on gold; he went beyond the report to insist that outright contraction of Bank of Ireland paper was the only effective remedy for the existing problem (In his Thoughts on the Alarming State of the Circulation and on the Means of Redressing the Pecuniary Grievances of Ireland (1805). It is certainly unusual for one person to be at the same time an arch-underconsumptionist and an ardent hard-money deflationist!

While the King and committee solutions did not triumph, the Irish bank officials apparently understood the situation far better than they had let on. For they soon managed to defuse the problem by pursuing harder monetary policies, and thereby bringing the Irish pound back to par with England.

5.8 The emergence of mechanistic bullionism: John Wheatley

After 1804, the Bank of England dampened its expansionist policy for a few years, and inflation and depreciation abated as well. As a result, the bullionist controversy about England and Ireland died down. Phase 1 of the great bullionist controversy was over. There had appeared on the scene three schools of monetary thought and opinion: first, the anti-bullionist apologists of the British government and the Bank of England, whose views can scarcely be dignified by the name of ‘theory’ and who simply denied that monetary issue had any relation to the evils of inflation and depreciation. Ranged against them, were, second, the complete bullionists, headed by Lord King and by Walter Boyd, who trenchantly applied supply and demand for money analysis to the new conditions of irredeemable fiat money, and who attacked the Bank of England's over-issue as the cause of the evils, with ‘real’ factors also playing a temporary and subordinate role. In the middle were, third, the moderates, consisting largely of Henry Thornton and Francis Horner, theoretical agnostics who claimed that either monetary or real factors might be responsible for any given inflation, and emphasized empirically and ad hoc which set of factors might be the culprits in any given situation. Starting as a moderate anti-bullionist, the empirical weight shifted quickly for Horner, at least, to enter the moderate bullionist camp by 1803.

Before Phase 1 had ended, however, a fourth school of thought, and the third strand of bullionism, had emerged: mechanistic bullionism. The great error of mechanistic bullionism was not simply to neglect all real influences, and to insist that monetary factors and monetary factors alone determined price levels and exchange rates. If that had been the only flaw, the error would have been a relatively minor one. The main problem was that the mechanists were also moved to neglect all other causal factors than the money supply – many of them of great importance. In brief, they neglected the demand for money, in all its subtle variations, and such vital ‘distribution’ effects – even in the long run – as changes in relative assets and incomes and changes in relative prices. In sum, the mechanists claimed that, in the short run and in the long, the only causal factors on price and exchanges were changes in the quantity of money. Hence their erroneous and distorted view that changes in price ‘levels’ are exactly quantitatively proportionate to changes in the quantity of money.

The mechanistic bullionist view, presumably emerging in over-reaction to the moderates, was first presented by a man who was neither an MP nor otherwise in the public eye: the attorney John Wheatley (1772–1830). In his first of many contributions to monetary economics, Remarks on Currency and Commerce (1803), Wheatley set forth the long-run bullionist and monetary approach in its starkest and most simplistic form. Any discussion of temporary adjustments or even temporal processes was cast aside, in order to linger exclusively on final equilibrium states. To Wheatley, all export or import of gold was exclusively determined by its demand and price, i.e. by monetary factors, and bullion prices and exchange rates were solely determined by monetary considerations. Real factors play no role in these matters even temporarily or in the short run. Hence the effect of the supply of money on price levels or exchange rates is strictly and precisely proportionate. Overall prices move, not only proportionately, but also uniformly in ‘levels’, with no changes occurring in relative prices. Thus Wheatley:

The increase of currency by paper must cause the same reduction in the value of money, in proportion to the activity of its circulation as an increase of currency by specie. But... if paper depreciate money, it must advance in similar proportion the price of articles of subsistence and luxury.

From these principles, it was easy for Wheatley to deduce that it was impossible for an expansion of the money supply ever to stimulate the economy, since by definition, ‘the wages of labour are augmented only in porportion to the increase [of currency]’. And since wages rise proportionately to the money supply and to all other prices, they can ‘purchase no greater quantity of products after the addition than before it’, and therefore ‘no greater stimulus can in reality exist, and therefore no greater effect is likely to be produced by the deception...’. A heroic conclusion, no doubt, and surely true in the long run; but such blithely dogmatic statements omit the whole point of monetary inflation and its short-run stimulus: e.g. making prices rise faster than wage rates.

Moreover, since Wheatley had an exclusively long-run, and therefore monetary, theory of exchange rates under inconvertibility, he again blithely assumed that the value of any given money was always and everywhere equal, i.e. in the long-run equilibrium, and that fiat money exchange rates always trade at precisely their purchasing-power-parities to their respective monetary purchasing powers. Hence, for Wheatley, not only was a depreciated exchange rate and a premium on specie bullion, an ‘unmistakable system’ of currency depreciation; it also provided an exact ‘measure’ of that depreciation. In contrast, King and Boyd, let alone Thornton, only saw currency depreciation when such phenomena existed for ‘any considerable time’ (Boyd) or were ‘long continued’ (King). And neither of the latter claimed that such premia or discounted exchange rates provide a precise measure of depreciation.

While John Wheatley did not enjoy anything like the prominence of his fellow debaters on bullionism, he was by no means an insignificant figure. He was born in Kent to a prominent landed and military family of the county. His father William was a high sheriff and deputy lieutenant of Kent; an older brother, William, served as a major-general in the French wars; and a younger brother, Sir Henry Wheatley, was attached for many years to the royal court. Wheatley received a BA from the aristocratic Christ Church, Oxford in 1793, and was then admitted to the bar. His wife, Georgiana, was the daughter of William Lushington, prominent London merchant and an MP for the City of London, and brother of Sir Stephen Lushington, formerly president of the great East India Company. Oddly enough, William Lushington, as chairman of the committee of the merchants of London, had petitioned the Bank of England in March 1797 to be more expansionist in its discount policy.

Wheatley's Remarks were attacked in the Edinburgh Review by the prominent Whig leader Henry Brougham, on familiar Thorntonian grounds. But while Wheatley followed up his pamphlet with the first volume of An Essay on the Theory of Money and Principles of Commerce (1807), his timing was poor, since there was little interest in the bullionist controversy at that time. Wheatley compounded his tactical problems by writing nothing on money for the next nine years, during a time when the bullionist controversy was at its height. For all these reasons, Wheatley's stance was largely overlooked, until in 1809 David Ricardo assumed the leadership of the mechanistic bullionist camp. Wheatley's influence, furthermore, was scarcely helped by his being in chronic financial difficulties virtually all his life. He acted from time to time as agent for the Lushington family in their West India dealings, but financial troubles sent him wandering abroad, and the publication of the second volume of his Essay in 1822 was followed promptly by migration to India, where he continued in financial distress, and thence to South Africa with similar problems. But throughout these problems and wanderings, he continued to publish pamphlets calling ardently for freedom of trade.

John Wheatley's exclusive emphasis on the money supply and unitary price levels foreshadowed the modern severe monetarist and macroeconomic split between the monetary and real realms. More pointedly, his mechanistic emphasis on the price level also foreshadowed the unfortunate Fisherine, Chicagoite and later monetarist preoccupation with stabilizing the ‘price level’ and with fanatically opposing any and all changes in such ‘levels’. Even in his early books of 1803 and 1807, Wheatley denounced the alleged evils of falling prices as well as of inflation, and indeed claimed that falling prices were even more damaging. Indeed, the influence of Wheatley's early tracts was gravely weakened by his being soft-core and timid in drawing any policy conclusions from his hard-core analysis. Instead of returning to the gold standard, Wheatley could only suggest the withdrawal of note issue powers from the country banks and the redemption of all small bank notes under £5.

In his 1807 work, he urged that long-term contracts be made in accordance with an index number of price levels and, in his later works, when this plea went unheeded, he began to grow hysterical about the alleged evils of price declines and their injury to the poor. By his 1822 volume Wheatley had gone so far as to urge the postponement of resumption of specie payments until more supplies might enter the country to prevent prices from falling. Indeed, by this point, Wheatley was ready to abandon the gold standard, in his frenzied opposition to falling prices. Yearning for fiat paper stabilized in value by the government, Wheatley wrote: ‘if paper were kept without increase or decrease it would be a better measure of value and medium of exchange than gold.’ And by the time of his last work, in 1828, written in South Africa, Wheatley called only for fiat paper expansion of the money supply, else ‘irremediable poverty is fixed upon as our eternal fate’.

In this way, as in the case of all too many monetarists and mechanistic quantity theorists, Wheatley began as an ardent hard-money bullionist, and was driven over the years by his frenetic hatred of deflation to wind up as a fiat money inflationist.

5.9 Notes

1. During the seventeenth and eighteenth centuries, England had been on a bimetallic standard, but the official rate consistently overvalued gold and undervalued silver in relation to the world market price. As a result, Britain had long been on a de facto gold standard. The discussion during the restriction period was complicated by the fact that during those two centuries, it was illegal for Britons to export British gold or silver coins, or bullion melted from such coin. It was legal to export foreign coin or bullion, but more important is the fact that substantial smuggling habitually nullified the export prohibition.

2. Norman J. Silberling, ‘Financial and Monetary Policy of Great Britain during the Napoleonic Wars’, Quarterly Journal of Economics 38 (1924), p. 420; quoted in Joseph Salerno, ‘The Doctrinal Antecedents of the Monetary Approach to the Balance of Payments’ (doctoral dissertation, Rutgers University, 1980), pp. 283^1.

3. In his pamphlet, An Investigation of the Cause of the Present High Price of Provisions (1800).

4. Salerno, op. cit., note 2, p. 294.

5. Ibid., pp. 299–300.

6. Heightening the impact of the Letter was Boyd's ability to point out in the Preface that in the few months since the writing of the body of the text, depreciation of the pound at Hamburg had risen from 9 to 14 per cent, and the premium on gold bullion over the pound had increased to IOV2 per cent. He further noted that in the same interval, the bank had at last been forced to disclose to Parliament statistics on the amount of its notes in circulation, confirming Boyd's strong hunch of a huge increase in Bank of England notes (from £8.6 million outstanding in February 1798 to £15.45 million in December 1800).

7. See the enlightening historiographical discussion of the bullionist controversy by Salerno, op. cit. note 2, pp. 266–82.

8. Quoted in FA. von Hayek, ‘Introduction’, in Henry Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802) (New York: Rinehart & Co. 1939), p. 36n.

9. Thornton's biographer is surely right in rejecting von Hayek's claim that Thornton had been working on Paper Credit since 1796. Thornton himself, as von Hayek concedes, states the opposite in his introduction: ‘The first intention of the writer of the following pages was merely to expose some popular errors which related chiefly to the suspension of the cash payments of the Bank of England, and to the influence of our paper currency on the price of provisions’. Von Hayek also admits that the book ‘was intended partly as a reply to Boyd’. See von Hayek, op. cit., note 8, pp. 42–6; Thornton, op. cit., note 8, p. 67; Standish Meacham, Henry Thornton of Clapham, 1760–1815 (Cambridge: Harvard University Press, 1964), p. 186.

10. Salerno, op. cit., note 2, pp. 364–5.

11. For a thorough critique of Thornton, see Salerno, op. cit., note 2, pp. 357–400.

12. Jacob Hollander, ‘The Development of the Theory of Money from Adam Smith to David Ricardo’, Quarterly Journal of Economics, 25 (May 1911), p. 456.