The belief that capital formation can only be financed out of existing accumulations of savings means there has to be a class of people who, owning capital that generates far more income than they can possibly consume, are forced to reinvest the surplus to form capital. This, in turn, provides jobs for the great mass of people. The greater accumulations of the wealthy (and the less wealth held by ordinary people) the better off the economy will be. Harold G. Moulton, the author of The Formation of Capital, responded to this claim a little over a century after the British Bullionist debate in the following manner:
In view of this basic assumption that the fundamental requirement for progress was the restriction of consumption as a prerequisite to the formation of capital, it is not surprising that the doctrine of economic salvation through individual thrift should have been so strongly emphasized. The restriction of consumption and the setting aside of funds for investment purposes were regarded not only as the means by which the individual obtained security and got ahead in the world, but also as the road to social progress.
In line with this reasoning, institutional devices which promoted inequality in national wealth and income were held to be not necessarily disadvantageous — from the long-run point of view. Economists have been wont to point out that the growth of economic inequality might even turn out to be a blessing in disguise.
Unfortunately for the Bullionists, however, the idea that you cannot engage in productive activity — invest — before you save falls apart when we ask where the original savings came from to finance the productive activity that generated the savings to invest. If we stop to reflect on this for a moment, it means that production can only take place after production has taken place. This is an obvious contradiction and a logical fallacy.
The Bullionists only recognized as "real money" existing accumulations of gold, and claims by the State on those accumulations: government debt backed by the State's power to tax away the citizens' gold. That is, the State's power to redistribute existing wealth through inflation. The Bullionists therefore made the argument that if banks were not required to exchange their banknotes into gold, the banks would issue banknotes without regard to the supply of "real money" available. This would lead automatically to inflation, so that to maintain a stable currency, it was necessary to restore convertibility to the currency, that is, require that banknotes be exchangeable into gold on demand.
The two most prominent spokesmen for the Bullionist position were John Wheatley and David Ricardo. In a bizarre twist of fate, Henry Thornton, who supported the real bills doctrine and the quantity theory of money that discredited the Bullionist position, is considered one of the Bullionist's strongest supporters, and a leading figure in the Currency School!
