For quite some time,
we have been making references to the “Currency Principle” versus the “Banking
Principle.” Understanding the
differences between the two is key to understanding today’s problems with money
and credit, and why adherence to the Currency Principle precludes restoring Say’s
Law of Markets and establishing and maintaining a society characterized by
widespread capital ownership. So here
goes —
Let’s go back to
London in the year 1844. . . .
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| Sir Robert "Orange" Peel |
Sir Robert Peel
(1788-1850), Colonel Robert Torrens (1780-1864), and Samuel Jones-Loyd,
(1796-1883) — soon to become First Baron Overstone, did not look very much like
revolutionaries. Despite that, they were
able to effect a change in the British financial system that has had profound
consequences throughout the world down to the present day. This was an alteration in the science of
finance and government monetary and fiscal policy that would bring about the
rise and fall of governments, and affect the daily lives of billions of people.
So who were these
guys?
Sir Robert Peel, 2nd Baronet, FRS
was a British statesman of the Conservative Party who served twice as Prime
Minister of the United Kingdom (1834-1835 and 1841-1846) and twice as Home
Secretary (1822-1827 and 1828-1830). He is regarded as the father of modern British
policing and as one of the founders of the modern Conservative Party. He is given credit for Catholic Emancipation,
but this was only after being forced to face the possibility of widespread
rebellion if it wasn’t granted as promised.
Daniel O’Connell (), who was really the one responsible for
Emancipation, called him “Orange” Peel for his open sympathy with anti-Catholics,
anti-Irish, and anti-Home Rule elements in the United Kingdom. His understanding of money and credit,
banking, and economics was dictated by Torrens and Overstone.
 |
| Colonel Robert Torrens |
Colonel Robert Torrens FRS
was a Royal Marines officer, political economist, Member of Parliament, owner
of the influential Globe newspaper, and a prolific writer. Born in Derry,
Ireland, he was the son of Robert Torrens of Hervey Hill. He was an independent discoverer of the
principle of comparative advantage in international trade, anticipating David
Ricardo by two years. He was a strong
advocate of Catholic Emancipation, publishing a tract and a novel on the
subject. Against free trade, he was a
founder member of the Political Economy Club. He was also one of the first to
theorize about the optimal tariff, predating J. S. Mill's thoughts on the
subject by eleven years. Evidently a
Malthusian, Torrens advocated state-sponsored emigration to relieve population
pressure in Ireland; he argued that Irish living standards could only be
improved by making Irish agriculture more profitable . . . which meant getting
rid of inefficient people and replacing them with machinery. He chaired the first commissioners to oversee the
new South Australia colony until he was dismissed for financial improprieties
and conflicts of interest.
 |
| Samuel Jones-Loyd, 1st Baron Overstone |
Samuel Jones-Loyd, 1st Baron Overstone
was a British banker and politician. He
was very rich. He boasted his bank had
never accepted a bill of exchange, thereby demonstrating a complete lack of
understanding of commercial and central banking. He was therefore an expert.
In 1844, the charter
of the Bank of England was up for renewal.
The Bank, an institution established in 1694, had weathered many crises
in the century and a half of its existence.
The most recent, resulting from the financial upheavals in the United
States following President Andrew Jackson’s “war” on the Second Bank of the
United States, had ended in 1839.
Unfortunately, as can
be seen from the brief profiles presented above, Peel, Torrens, and Overstone
were foremost among a group of politicians who, having only a rudimentary
knowledge of political economy, money and credit, banking, and finance, had
attained to positions of great power. The
Act they sponsored was therefore based on a partial understanding of the
principles articulated by David Ricardo (1772-1823). This led to the British Bank Charter Act of
1844 (7
& 8 Vict. c. 32) embedding false principles and concepts of
insufficiency into law and the financial system, even into the culture itself. This was congealed into “the Currency
Principle, of which Charles A. Conant said,
 |
| Charles A. Conant |
This doctrine embodies the ideas that
bank-notes are a form of currency entirely distinct from other commercial paper
and forms of credit; that an expansion of bank-note issues, even when
redeemable in coin on demand, is a potent cause of commercial crises; and that
the way to prevent crises is to place fixed limits upon bank-note issues. Few advocates of this theory have undertaken
to place definite limits upon the volume of bills of exchange or of other forms
of commercial paper issued by solvent borrowers, but they have maintained that
bank-notes were money for all practical purposes of daily use; that an undue
expansion in the volume of money has stimulated speculation and expelled gold
under the operation of Gresham’s law; and that the curtailment of note issues
would maintain sobriety in the mercantile world and restore the equilibrium of
the foreign exchanges. (Charles A. Conant, A
History of Modern Banks of Issue.
New York: G.P. Putnam’s Sons, 1927, 119-120.)
Obviously, this comes
into conflict with the legal definition of money as “anything that can be
accepted in settlement of a debt” (“all things transferred in commerce”). It views “money” (including credit, of
course) as a commodity instead of as a contract facilitating exchange. This seemingly simple error laid the
groundwork for much of the monetary and fiscal confusion that rules the modern
world.
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