Front Page Titles (by Subject) II. The Currency School -Banking School Controversy - Studies in the Theory of International Trade
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II. The “Currency School” -“Banking School” Controversy - Jacob Viner, Studies in the Theory of International Trade 
Studies in the Theory of International Trade (New York: Harper and Brothers, 1965).
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II. The “Currency School” -“Banking School” Controversy
The currency controversies of this period were carried on mainly by the members of two groups, with divergent views, who came to be known as the “currency school” and the “banking school,” respectively.1 The most prominent members of the currency school were Lord Overstone (Samuel Jones Loyd), G. W. Norman, R. Torrens, and William Ward. Thomas Tooke, John Fullarton, James Wilson, and J. W. Gilbart were the leaders of the banking school. There was not complete unanimity of doctrines within each group, and the currency school, under the impact of their opponents' criticisms, modified their doctrines fairly substantially in the course of the controversy. An attempt is nevertheless made in the next few pages to summarize the general position of the two schools, as a preliminary to a more detailed examination of such of the particular doctrines expounded in the course of the controversy as are of importance for the theory of international trade. The discussion between the two schools turned wholly, however, on short-run issues. On the question of what determined the quantity and the value of a metallic currency in the long run, both schools followed the “classical” or “Ricardian” doctrines.
The currency school maintained that under a “purely metallic currency” any loss of gold to foreign countries or any influx of gold from abroad would result immediately and automatically in a corresponding decrease or increase, respectively, in the amount of currency in circulation. The actual currency was a “mixed currency,” that is, convertible paper notes were a constituent element of the currency. A mixed currency would operate properly only if it operated precisely as would a metallic currency, i.e., only if any efflux or influx of gold resulted in a corresponding (absolute, not proportional) decrease or increase in the quantity of the currency—the “currency principle.” But a mixed currency would not operate in this manner automatically and immediately unless the issue of paper money were deliberately regulated so as to make the changes in its quantity conform to the changes in the quantity of gold held by the issuing agencies. In the absence of such regulation, paper money would at times be issued to excess, at other times unduly contracted; the maintenance of convertibility would not be definitely assured; the improper fluctuations in the currency would accentuate the tendency inherent in the economic structure toward recurrent booms and crises.
Since the ultimate objective of the currency school was that the value of the monetary unit, or the level of prices, should be the same under a “mixed currency” as it would be under a purely metallic currency, this could be accomplished by their rule of making the fluctuations in the amount of bank notes correspond to the fluctuations which would occur in the amounts of specie under a purely metallic currency only if the velocity of circulation of bank notes and of specie would under like circumstances be identical. This was apparently overlooked by the members of the currency school,2 although it may be that they took for granted that there would be such identity.3
The banking school denied almost all of these propositions. Generally waiving the question as to whether it was desirable that a mixed currency should operate precisely as would a purely metallic currency, they denied that a purely metallic currency would operate in the manner claimed by the currency school. They pointed out that under a purely metallic currency there existed in addition to specie, and under a mixed currency there existed in addition to specie and paper notes, a large quantity of bank deposits and bills of exchange which, they claimed, were also “currency” and in any case operated on prices in the same manner as did bank notes and specie. Under a purely metallic currency, moreover, some of the gold was not in circulation, but was in “hoards,” in modern times held mainly in the bullion reserves of the Bank of England and other banks. Changes in the amounts of these hoards could not possibly have any effect on prices.4 Even under a purely metallic currency, therefore, a gain or loss in the nation's stock of gold need not result in corresponding fluctuations of the currency, but might merely change the amount of gold in hoards, or might be offset by an inverse fluctuation in the amount of deposits. Without control of hoards and of deposits, limitation of the note issues could not suffice, therefore, to attain the objective of the currency school of enforcing correspondence between the fluctuations in the total circulation and the fluctuations in the total stock of gold. The banking school did not present an alternative program of statutory control of the currency. They held that statutory control of the deposits was not demanded by anyone, was impossible, and even if possible was undesirable. The amount of paper notes in circulation was adequately controlled by the ordinary processes of competitive banking, and if the requirement of convertibility was maintained, could not exceed the needs of business for any appreciable length of time—the “banking principle.” If unsound banking practices did occasionally lead to excess grant of credit, this brought its own corrective penalties. In any case it could not be prevented by legislative measures, and especially by mere limitation of note issue.
The bullionists, it will be remembered, had insisted that under an inconvertible paper money currency the issues should be so regulated as to conform to the aggregate circulation of specie and paper which could be maintained under a convertible currency, but usually maintained—or took it for granted, without argument—that if the requirement of convertibility were enforced there was no need of further regulation to insure against excess—or deficient—issue of paper money.5 The anti-bullionists, on the other hand, had ordinarily maintained that a paper currency could not be issued to excess whether convertible or not, if issued only by banks as loans on the security of good short-term commercial paper. The currency and the banking schools both rejected the anti-bullionist doctrine that an inconvertible paper money could not be issued to excess.6 The currency school went further; they claimed that even a convertible paper currency could be issued to excess, not permanently, but for sufficiently long periods to endanger the maintenance of convertibility and to generate financial crises. The “currency principle,” i.e., the doctrine that a mixed currency should be made to operate as would a “purely metallic” currency, did resemble, however, the bullionist doctrine that an inconvertible paper currency should be made to operate as would a convertible currency, and was obviously derived from it.
The currency principle appears first to have been formulated during the 1820's. Joplin, in 1823, proposed a system of regulation of the issue of paper notes whose essence was the requirement of 100 per cent bullion reserves, so that “a paper circulation, by this system, would dilate and contract precisely in the same manner as a metallic currency.” 7 Henry Drummond, in 1826, similarly urged that the amount of paper money should be kept constant, so that all variations in the quantity of the currency should consist of corresponding variations in the quantity of specie.8
William Ward, a member of the currency school group, referred to its main doctrine in 1832 as “the principle of the currency.” Samuel Jones Loyd, in testimony before the Committee on Banks of Issue in 1840, referred to the doctrines of the two groups as the “currency principle” and the “banking principle,” respectively. After 1840, the groups holding these views were commonly distinguished by the labels “currency school” and “banking school.”
Cf., however, Sir Charles Wood: “The real question to be solved is, how to regulate the quantity of the paper circulation, so as to keep its value identical with what the value of the metallic currency would be. It is not necessary, perhaps, that a paper circulation should be of precisely the same quantity as the metallic currency which would be required if the paper did not exist, because the greater convenience of paper money may reader it possible that the same functions shall be performed by a less quantity of paper as easily as by a greater quantity of gold or silver.” (Hansard, Parliamentary debates, 3d series, LXXIV (May 20, 1844), 1356.
For reasons why such identity need not exist, see supra, p. 131.
Cf. Fullarton, On the regulation of currencies, 2d ed., 1845, p. 140: “[The currency school] never even allude to the existence of such a thing as a great hoard of the metals, though upon the action of the hoards depends the whole economy of international payments between specie-circulating communities, while any operation of the money collected in hoards upon prices must, even according to the currency hypothesis, be wholly impossible.”
Cf., however, Ricardo, supra, p. 205. The currency school were not aware that on this point they could derive support from Ricardo.
A clear statement of the grounds on which they held that a paper currency could be issued to excess if inconvertible but not if convertible is not to be found in the writings of the banking school. Their reasoning seems to have been, however, that under convertibility the national price level, and therefore the quantity of money, was even in the short run internationally determined, whereas under inconvertibility this external limitation would not be operative.
Thomas Joplin, Outlines of a system of political economy, 1823, p. 276.
Henry Drummond, Elementary propositions on the currency, 4th ed., 1826, p. 47.