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• Preface
• Studies In the Theory of International Trade
• Chapter I: English Theories of Foreign Trade, Before Adam Smith: I
• I. Introduction
• II. “ Mercantilism” and “bullionism”
• III. the Balance-of-trade Doctrine
• IV. Reasons For Wanting More Bullion
• V. Employment and the Balance of Trade
• Chapter II: English Theories of Foreign Trade, Before Adam Smith: Ii
• I. Legislative Proposals of Mercantilists
• II. the Collapse of Mercantilist Doctrine
• III. Some Modern Interpretations of English Mercantilism
• Chapter III: The Bullionist Controversies: I. The Inflation Phase
• I. the Participants In the Controversy
• II. the Factual Background
• III. Premium On Bullion As Evidence of Excess Issue: the Bullionist Position
• IV. Qualifications Conceded By the Bullionists
• V. Possible Objections to the Bullionist Position
• VI. the Anti-bullionist Position
• VII. the Balance of Payments Argument
• VIII. the Possibility of Excess Issue By Banks
• IX. Responsibility For the Excess Issue: Bank of England Vs. Country Banks
• X. Responsibility For Excess Issue: the Credit Policy of the Bank of England
• Chapter IV: The Bullionist Controversies: II. The Deflation Phase
• I. the Resumption of Cash Payments
• II. Responsibility of Resumption For the Fall In Prices
• III. the Economic Effect of Changing Price Levels
• IV. Ricardo's Position On the Gold Standard
• V. Reform Without Departure From the Metallic Standard
• VI. Paper Standard Currencies
• Chapter V: English Currency Controversies, 1825–1865
• I. Introduction
• II. the “currency School” -“banking School” Controversy
• III. the “palmer Rule ”
• IV. the Bank Act of 1844
• V. the Possibility of Overissue of Convertible Bank Notes
• VI. the Role of Deposits, Bills of Exchange, and “credit” In the Currency System
• VII. the Technique of Credit Control
• VIII. the Relation Between Bank of England Operations and Specie Movements
• IX. Currency Reform Proposals
• Chapter VI: The International Mechanism Under a Simple Specie Currency
• I. Introductory
• II. the Mechanism According to Hume
• III. an Omitted Factor? Relative Changes In Demand As an Equilibrating Force
• IV. Prices In the Mechanism: the Concept of “price Levels ”
• V. the “terms-of-trade” Concept
• VI. the Prices of “domestic” Commodities
• VII. the Mechanism of Transfer of Unilateral Payments In Some Recent Literature
• VIII. a Graphical Examination of Pigou's Analysis 1
• IX. Some Elaborations On the Basis of Pigou's Analysis
• X. an Alternative Solution
• XI. Types of Disturbance In International Equilibrium
• XII. Specie Movements and Velocity of Money
• XIII. Commodity Flows and Relative Price Levels
• XIV. Exchange Rates
• XV. A Criticism of the Purchasing-power Parity Theory 1
• Chapter VII: The International Mechanism In Relation to Modern Banking Processes
• I. Automatic Vs. Managed Currencies
• II. Primary and Secondary Expansion of Means of Payments
• III. Short-term Loans In the International Mechanism
• IV. Primary and Secondary Expansion In Canada , 1900–13
• V. the International Mechanism and Business Cycles
• Chapter VIII: Gains From Trade: the Doctrine of Comparative Costs
• I. the Nature and Origin of the Doctrine
• II. the Division of the Gain From Trade
• III. Trade In More Than Two Commodities
• IV. Trade Between More Than Two Countries
• V. Transportation Costs
• VI. Increasing and Decreasing Costs
• VII. Prices, Money Costs, and Real Costs
• VIII. Dependence of Comparative Cost Doctrine On a Real-cost Theory of Value
• IX. Differences In Wage Rates In Different Occupations
• X. Variable Proportions of the Factors and International Specialization
• XI. Variable Proportions of the Factor and Comparative Real Costs
• XII. “ Opportunity Cost” Analysis As a Substitute For Real Cost Analysis
• Chapter IX: Gains From Trade: the Maximization of Real Income
• I. “ Mass of Commodities” and “sum of Enjoyments”: Ricardo and Malthus
• II. Reciprocal Demand and the Terms of Trade
• III. Terms of Trade and the Amount of Gain From Trade
• IV. “ Net Benefit” In International Trade: Marshall
• V. Total Net Utility Derived From International Trade: Edgeworth
• VI. the Gain From Trade Measured In Money
• Appendix: a Note On the Scope and Method of the Theory of International Trade

II. The Factual Background

An excellent statistical compilation of the significant banking, price, and exchange rate data relating to the suspension of cash payments, presented in both tabular and graphical form, is to be found in Silberling's essays, and much of this material is reproduced by Angell. Silberling has computed and compiled some of the important series from original data not hitherto available in print or available only in raw shape. There need be presented here, therefore, only the minimum amount of information as to the nature of the currency and banking system of the time and the course of monetary events essential for an understanding of the theoretical issues raised in the course of the controversy.

From the outbreak of the war with France in 1793, the Bank of England had been under a strain mainly because of the great demands for advances made upon it by the government, which it had resisted, but unsuccessfully. Early in 1797, a general panic, induced apparently by rumors of a French landing on English soil, and accentuated by failures and suspensions on the part of the country banks, led to a general clamor for gold. On February 25, 1797, there were only £1,272,000 of specie and bullion in the Bank, as compared to ordinary reserves of £5,000,000, or over. On February 26, 1797, the government, at the request of the Bank, issued an Order in Council prohibiting specie redemption of its notes by the Bank. By an Act of May 3, 1797, the restriction of cash payments was validated and continued in effect, subject to minor qualifications, until June 24, 1797, and by a succession of later acts the suspension of specie payments was enforced until after the end of the war. With the factors responsible for the suspension of specie payments in 1797, we need not here concern ourselves.1 The suspension of specie payments was quickly followed by an inward flow of bullion, recovery of the Bank from its strained condition, and general restoration of confidence, and it was not until toward the end of 1799 that the exchange on Hamburg fell substantially below the pre-Restriction par and a premium was quoted on bullion over paper. From 1804 to 1808 the exchanges were again at or near parity, and paper was at no or a small discount in relation to bullion. But from 1809 to the end of the war there again prevailed low sterling exchanges and substantial premiums of bullion over paper.2

England, prior to the Restriction, although legally on a bimetallic basis, had for some time been in effect on a gold standard basis, since the mint ratio of silver to gold was such as generally to undervalue silver and thus keep it out of circulation. The metallic currency consisted of guinea pieces (= 21 shillings) and multiples and subdivisions thereof, and of silver coins from the crown (= 5 shillings) down. Of the silver coins, only the underweight coins remained in circulation. Except for coins surviving from ancient issues, the sovereign (= 20 shillings) was only a money of account. English coin could not legally be melted down unless underweight, and was not legally exportable, and gold bullion was exportable only subject to oath that it had not been obtained by melting down English coin. The metallic currency was supplemented by Bank of England notes in denominations of £5 or over, redeemable in specie upon demand, and by country bank notes, also in denominations of £5 or over, payable upon demand in specie or in Bank of England notes. London bankers had in 1793 voluntarily ceased to issue their own notes. Outside of the London area the Bank of England notes circulated freely only in Lancashire, where the local banks did not issue notes but where bills of exchange of small denominations were extensively employed as a medium of exchange. Bank deposits subject to check were also in existence, and constituted a part of what would today be regarded as the circulating medium, although this was not yet widely recognized. Checks payable to order had only recently come into common use even in London and only for large payments. The private or non-governmental deposits at the Bank of England were small in amount throughout the Restriction period, and for the years after 1806, for which alone their precise amounts are known, they reached a yearly average of £2,000,000 in only one year.3 In the provinces also deposits seem to have been relatively unimportant, and to have been drawn upon mainly for cash, but the available evidence on this point is conflicting.4

[1]A good account is given by R. G. Hawtrey, Currency and credit, 3d ed., 1928, pp. 320–32.

[2]See table I, p. 144, infra.

[3]Report from the Committee of secrecy on the Bank of England charter, 1832, appendix No. 32, p. 41.

[4]Vincent Stuckey, a country banker, testified in 1819 that in his bank the deposits were about one-third in amount of the note issues, although this proportion fluctuated. (Report from the [Commons] Committee on the expediency of the Bank resuming cash payments, 1819, p. 245.) James Pennington, writing as late as 1861, stated that “The deposits with country bankers are generally converted into notes or coin, or into a bill upon London, before ultimate payment is accomplished.” (“Letter from Mr. Pennington on the London banking system,” in John Cazenove, Supplement to thoughts on a few subjects of political economy, 1861, p. 50, note.) Cf., however, the statement of another writer, for which I can find no independent confirmation: “A country bank was a kind of clearing-house, where, without any actual interchange of notes or money, the greater part of all payments between man and man was effectuated by mere transfers in the books of their bankers.... It was merely the smaller payments for wages and weekly bills which required notes.” Samuel Turner, Considerations upon the agriculture, commerce and manufactures of the British Empire, 1822, pp. 54–55.