ABSTRACT
Prior to the Napleonic Wars, England had been on a de facto gold standard, with the circulation mainly consisting of metallic currency as well as Bank of England
and private (or country) bank notes, both of which were convertible into specie on demand. In early 1797 rumours of a French invasion resulted in a ‘general clamour for gold’ (Viner 1937: 122), and on 26 February 1797, convertibility of Bank of England notes into specie was suspended by an Order in Council, which was repeatedly confirmed and reinforced by subsequent Parliamentary Acts. This suspension of convertibility was to last until 1821. Although the restriction of specie only applied to the Bank of England, it was implicitly accepted that Scottish banks and English country banks could redeem their currency with Bank of England notes rather than specie (Fetter 1950). Such a policy was necessary because of the pyramiding of specie reserves unto the Bank of England. In other words, the Bank of England, as Bagehot (1873) was later to highlight, held a large proportion of Britain’s specie reserves (Laidler 1989: 61). Despite the reservations of many commentators, the suspension of convertibility appeared to have little initial impact, but by the beginning of the nineteenth century, there were indications that all was not well with the economy. As well as rising prices, the value of Bank of England paper in terms of bullion had fallen, as had the sterling exchange rate in Hamburg. This resulted in a flurry of pamphlet publishing which tried to explain (and allocate blame for) the inflation and posed questions as to how to determine the optimal quantity of money (Viner 1937: 125). The inflationary pressures had subsided by 1803, but their reemergence in early 1809 resulted in the renewal of the controversy, and the eventual Parliamentary appointment in February 1810 of the Select Committee on the High Price of Bullion. The parties involved in the debate surrounding the high price of bullion fell into two distinct camps. The bullionists were opposed to the government’s restriction on the convertibility of the currency. Notable amongst the bullionist contributions were those of Boyd (1800), Ricardo (1810) and Thornton (1802). Indeed, Thorton’s contribution is now viewed as a classic amongst modern monetary economists and central bankers. The opposition party were given the appellation ‘anti-bullionist’ as they defended the government and the Bank of England against the accusations of the bullionists. The most notable contributions from this party were made in Parliamentary speeches and in several tracts (Viner 1937: 121). Bullionists, although disagreeing on the minutiae of the controversy, were in accord that the suspension of convertibility had removed a check on the Bank of England’s note-issuing powers, with the result that there was an excess of notes. For the bullionists, this explained the increase in the price of gold bullion and fall in the exchanges. Most bullionists conceded that in the short run this was not evidence of an excess issue, but the fact that it was substantial and prevailed for a considerable period of time was, for them, proof positive of an excess issue by the Bank of England (Viner 1937: 127). The solution for the bullionists was simple – end the Restriction. Anti-bullionists, on the other hand, argued that the exchange-rate depreciation and premium on bullion was due to large war-time foreign remittances, and not to the Bank of England’s note-issuing policy. Although moderate bullionists
such as Thornton (1802) agreed that extraordinary remittances could cause these phenomena, this would only be the case in the short run. Some anti-bullionists also claimed that the real bills doctrine prevented the Bank of England overissuing notes. The main tenet of this doctrine is ‘that bank notes which are lent in exchange for “real bills” . . . cannot be issued in excess; and that, since the requirements of the non-bank public are given and finite, any superfluous notes would return automatically to the issuer’ (Green 1989: 310). Thornton (1802) and the 1810 Bullion Report clearly reject the notion that the Bank of England could maintain price level stability with an inconvertible currency by simply discounting only good short-term bills. Defenders of the Bank of England also argued that the increase in the price level was due to an expansion in the country banks’ note issue. However, bullionists denied the possibility of a relative over-issue of country bank notes because they were convertible, upon demand, into Bank of England notes (Viner 1975: 235). The bullionists may have won the intellectual debate, but Parliament did not accept the policy proposals of the 1810 Bullion Report – to end the suspension of convertibility within two years. However, convertibility was restored at the pre-suspension rate in 1821, and in the interim, the inflationary fears of the bullionists were not realised. Thompson and Hickson (2001) view a gold standard with an inbuilt suspension option as vital to the survival of early democracies such as Britain. They suggest that such suspensions of convertibility were necessary for emergency war finance, and that they need not necessarily result in inflation. In Britain, the independent common-law judiciary would have ensured that the government (and by extension, Bank of England) could credibly commit to redeem notes at the same rate after the emergency situation was over. Notably, this may explain the absence of inflation once the threat began to subside following the Russian defeat of Napoleon in 1812.
