THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Wednesday, August 19, 2009

The Reign of the British Currency School Over the United States, Part I

Much of the monetary conspiracy ideas floating around today appear to be garbled versions of the tenets of the "British Currency School" that grew out of the currency crisis of 1797. Due to a sudden drain on the gold reserves of the Bank of England due to the wars with France, the British government forced the Bank to suspend convertibility of its banknotes into gold on February 26, 1797, a ban that lasted until 1821.

Based on a distorted understanding of the work of Henry Thornton (1760-1815), the "father of central banking," a group of British economists in the 1840s and 1850s that came to be known as the British Currency School argued that excessive issues of banknotes is a major cause of inflation. To restrict the circulation of paper money and stop inflation, issuers of new banknotes should be required to have 100% gold reserves, and existing notes could not exceed a fixed amount of government debt (£14 million in the Bank Charter Act of 1844). The "real bills" doctrine so ably defended by Thornton was dismissed out of hand as "discredited." Thus, the three most basic tenets of the British Currency School were:

• The only "real" money is gold, silver, and government-issued or authorized banknotes backed by gold or government debt.

• All issues of paper money (which term is restricted to government-issued or authorized banknotes) are automatically inflationary, regardless of what backs the notes.

• Only existing accumulations of savings can be used to finance capital formation.

Henry Thornton effectively "pre-refuted" the position of the British Currency School in his 1802 book, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. Thornton supported the "real bills" doctrine and the Quantity Theory of Money, demonstrating that all credit instruments are "money," and that banknotes and other forms of paper money are non-inflationary when backed by "real" assets, i.e., constituted "real bills" as opposed to "fictitious bills" representing speculative or non-existent assets, government debt, or consumption. Dr. Harold G. Moulton conclusively proved Thornton's analysis in 1935 in The Formation of Capital, in which he showed that the real bills doctrine had been responsible for financing the tremendous growth of the United States in industry, commerce, and agriculture in the 19th century.

The British Currency School, however, ignored Thornton's actual analysis, rejected the real bills doctrine, and used their theories as the basis for the Bank Charter Act of 1844, which mandated a ceiling for banknotes backed by government debt, with the rest of currency gold sovereigns and token silver coins. They did not include demand deposits or commercial paper in their definition of "money," which permitted the private sector to obtain needed money and credit to finance economic growth and development.

Consequently, Walter Bagehot, in his 1873 book, Lombard Street, took the tenets of the British Currency School for granted, and used it as support for his assertions that the money power must be concentrated in the hands of a financial elite. The Bank Charter Act of 1844 was the basis for the United States National Bank Act of 1864, which led to the Coinage Act of 1873, the so-called "Crime of '73," which adhered strictly to the belief that only gold coin and government debt-backed banknotes constituted "real money."