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.

Monday, November 27, 2017

Birth of the British Currency School

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. . . .
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.