Martin Hutchinson and Kevin Dowd*
* Hutchinson (karlmagnus.aol.com) is the author of the Bear’s Lear column, http://www.tbwns.com/category/the-bears-lair/. Dowd (kevin.dowd@durham.ac.uk) is professor of finance and economics at Durham University and a senior fellow of the Cobden Centre.
The following is an excerpt from Martin Hutchinson’s forthcoming book, “Britain’s Greatest Prime Minister”, a biography of Robert Banks Jenkinson, 2nd Earl of Liverpool (1770-1828). Lord Liverpool was Prime Minister from 1812 to 1827 and had led Britain through the later part of the Napoleonic Wars.
He was the decisive player in Britain’s resumption of the gold standard in 1821.
Parliamentary background
Definitive reports on cash payments resumption from the Commons and Lords Select Committees were presented on May 6 and 7, 1819. By this time, the economy had definitively turned down, with the temporary euphoria of 1817-18 having ended and a deflation in anticipation of the return to gold having set in.
The Commons report showed that, while the Bank of England, had in 1817 enjoyed gold and cash reserves larger than at any previous time in its history, redemption of old notes had since drained £6.76 million of bullion from it, which had mostly been sold by speculators at a profit, of which around £5 million had been carried to France, according to Alexander Baring.[1] The Commons Committee had accordingly recommended that notes redemption should cease temporarily, since only by a sharp contraction in its notes issue could the Bank reduce the bullion price to a level at which arbitrage was unprofitable.
Bank advances to the government totalled £19.4 million in Exchequer Bills at April 29, 1819, down from a maximum of £34.9 million in August 1814. Conversely, the public balances held by the Bank had declined from around £11 million in 1807 to £7 million currently (in consideration of which the Bank had lent the government £3 million interest-free in 1808). For the Bank to resume cash payments fully, around £10 million of the Bank’s Exchequer Bills outstanding would have to be funded through longer-term government debt, or the Bank would have to reduce its accommodations to private traders, which would cause economic damage.
An immediate resumption of cash payments would require the Bank to eliminate suddenly most of its £25 million of notes outstanding, which would be highly deflationary and damaging to trade. Alexander Baring estimated that accumulating the necessary £20 million of bullion in the country would take an additional 4-5 years. Accordingly, the Committee recommended that the Bank should be forced to deliver not less than 60 ounces of gold against their notes at £4/1/- in February 1820, and the same amount at par in May 1821, with full cash payments being resumed in May 1823. Finally, the Committee proposed the repeal of the laws preventing the melting down of currency, since they were wholly ineffectual, with almost the entire 1817 issue of gold sovereigns having disappeared.
The Lords Committee report largely reflected that of the Commons Committee. The unfavourable movement of the gold exchange rate in 1817-18 had been largely caused by the large volume of foreign loans incurred in those years, especially those to France. However, the rapid expansion of the money supply in 1817 had caused over-trading, which had subsequently led to distress. The total note circulation from the Bank of England and country banks had between 1810 and 1818 varied between 42-48 million, which demonstrates a massive increase in monetary velocity since the 1790s, given the roughly 60% increase in the volume of trade over the period. The Committee thus recommended that the Bank should be compelled to pay its notes in bullion at gradually declining premiums over the period 1819-21, with full resumption of cash payments in coin in May 1823 or later, on Parliament giving one year’s note.[2] On presenting the Lords Committee report, Lord Harrowby, Lord President of the Council and leader of the Lords committee, after some discussion proposed to produce and debate resolutions based on it on May 21 1819.
After a petition had been presented by Lord Lauderdale[3] from 500 merchants of the City of London protesting against a resumption of cash payments, the debate proper on May 21 began with Liverpool producing a letter written by the Directors of the Bank of England. They proposed that the Bank repay its Notes at the market bullion price, the government should repay its Exchequer Bills, and both parties should then observe what effect these two payments had on the markets and the economy. The attempt by the Bank to redeem its pre-1817 notes had itself indicated the dangers of return to a fixed parity, so the Bank was not prepared to commit to its ability to maintain such a parity once it was established.
Harrowby then proposed six Resolutions. The first proposed to continue the payment restrictions for a limited time. The second provided for the Bank to exchange its notes for bullion at £4/1/- for some period before full resumption. The third provided for a subsequent period, during which the Bank would exchange its notes for bullion at the mint price of £3/17/10. The fourth provided for an intermediate period, with exchange for gold at an intermediate price, with no ability to reverse the price decline. The fifth provided for the Bank to resume cash payments after being given notice by Parliament after bullion was exchangeable at the mint price. The final Resolution provided for repeal of all laws prohibiting the melting down or export of gold.
Lauderdale then proposed an alternative set of resolutions providing for a bimetallic system with no fixed parity, while Grey, the Whig leader, proposed a further delay to allow further consideration of the topic.
Lord Liverpool’s May 21 1819 speech
After deprecating further delay, Liverpool proceeded to give his views on the question of Gold Standard resumption, avoiding extraneous subjects and personalities, as the topic itself was highly complex. There were three questions to be considered: whether to return to a fixed standard of value, whether to return to the pre-1797 standard and how it was to be done. On the first issue, while there was no doubt that the bank restriction had enabled Britain to survive the war, it could not be a permanent part of the country’s economic system, even in future wars, which were unlikely to be so total as that against Napoleon. As for the question of whether there should be a fixed standard: “No body of men, I believe, was ever entrusted with so much power as the Bank of England, or has less abused the power entrusted to them: but will Parliament consent to commit to their hands what they would certainly refuse to the sovereign on the throne, controlled by parliament itself – the power of making money, without any other check or influence to direct them, but their own notions of profit and interest?” It would make more sense for the government to issue bank notes directly, but no country in the world had ever established a currency without a fixed standard of value.[4]
As for returning to the former standard, “Policy, good faith and common honesty call on the state to return to this ancient standard, if possible. … The engagement was to pay to a certain standard; and those who engaged to do so were bound by that engagement, if they meant to act honestly. … I am prepared to show that it is not only practicable, but that no permanent inconvenience can arise from the adoption of the principle I recommend.” Gold had returned from a price 30% above the standard between 1813 and 1816, its price was now only 3% above the standard. If the Bank had to contract the existing money supply, there might be some inconvenience, but far less than had been incurred in bringing the price down 30%.
As for the Parliamentary Committees, they had adopted a plan of returning to the old standard as gradually as possible, thus minimizing any inconvenience. It thus made no sense for Lauderdale to denounce their plan as a “forced, precipitous and highly injurious contraction of the circulating medium” when the contraction was not to begin until next February, and at a price 3% above the current gold price. As for the question of whether the Bank could bring gold to par simply by contracting its note issue: “I never could entertain a doubt, that if the circulating medium were gold, a reduction of the amount from £50 to £30 millions must increase its value, on the principle that the value of all property increases in proportion to the diminution of its amount: the same must also take place with reference to a circulating medium of paper.”
As for the Committees’ plan itself, its advantage was “that the Bank might open with a much smaller amount of treasure than if they were obliged to commence their operations by the resumption of cash payments. The next and the most striking advantage of the proposed measure is, that the Bank will begin to put it in operation upon a perfectly fair principle. Without recognizing any permanent depreciation of the standard, the report recommends to arrest the evil where it is.” By starting with bullion rather than coin, the Bank could begin at the present market price, and gradually work to the desired consummation.
Liverpool agreed that some reduction in the Bank’s advances to government was necessary; these were currently below £20 million, and he believed that a reduction of £6 million rather than £10 million should give the Bank enough liquidity to undertake a gradual return to cash payments.
There was much difference of opinion on the money supply needed for Britain’s commercial transactions. “It will be found to be the opinion of some of the witnesses examined by the committee, that the commercial world will always be against the resumption of cash payments, as it would diminish the facility with which they at present obtain accommodation.” Indeed, Alexander Baring had said so “than whose statements and sentiments on the whole of this important subject I have never heard anything more intelligent and comprehensive.” The present system “must frequently give ease and facility to commercial transactions, and enable individuals engaged in those transactions to surmount obstacles, which in the ordinary state of the circulation, would be impossible.” However, “the consequence of it is too often an encouragement to speculation, to unsound dealings, to the accumulation of fictitious capital; from all of which, in the course of a given number of years, a greater quantity of evil would probably accrue than of real advantage. Even, therefore, on that narrow ground, although nobody could deny that the existing system gives occasional and valuable facilities to trade, yet it is manifest that in the long run it tends to destroy that solid and secure foundation on which the commerce of a great nation ought to rest.”
Turning to the circulating medium itself, it was no greater than in 1792, before the war, in spite of the tripling or quadrupling of British trade, which caused many to argue that a return to gold might be unduly restrictive. However, the fallacy of this came from not recognizing the difference between a gold and a paper circulation. Before the war, the circulation consisted of £30 million of gold and £20 million of paper; now it consisted of £50 million of paper. Before the close of the American war there were few country banks, so people kept their wealth in small hordes of specie, but by the extension of the banking system, this habit had been almost done away. “There is now scarcely such a thing as dead capital, except the small proportion which is kept in the respective banks.” Besides this, the system of bank clearing enabled £1,457 million of merchants’ payments annually to be cleared by exchanging only £220,000 per day, or £68 million a year.
Liverpool then presented statistics on the circulation of Bank of England notes, showing that the £1,000 notes were in circulation for only 13 days on average compared with 22 days in 1792. Thus, the increased efficiency of payments systems, and of paper over gold, would enable an unchanged circulation to satisfy a greatly increased volume of trade. “In the county of Lancashire, where enterprise of every kind is carried to a greater extent than in any other district in the island, the greatest part of the circulating medium is carried on by bills of exchange; and when a respectable and intelligent individual, connected with that county, was asked whether any inconvenience resulted from that system, he replied ‘None whatever.’”
Liverpool ended by discussing the Mint regulations, and pointing out that since silver was not legal tender beyond 40 shillings, and consisted of only around £5 million in total value, fluctuations in price between gold and silver were most unlikely to have a significant effect on the overall circulating medium. He ended by advocating that the House follow the recommendations of the Committee. “My own persuasion is … that most, if not all the inconveniences that might be incurred from the experiment, have been incurred already, and that if parliament will steadily adhere to the course recommended, it will see the ancient standard of the country restored without material distress to any class of His Majesty’s subjects.”[5]
Liverpool’s judgement that gold payments could be resumed at the old rate “without material distress” seems overstated; the deflation necessary to accomplish this caused a 28% further decline in prices between 1818 and 1821,[6] and a further sharp recession. Nevertheless, the 1819 recession, while nearly as deep as that of 1816-17 and quite unexpected, was also very short; it had still not begun at the time of the Prince Regent’s speech in late January, and it was already lifting rapidly by the time of the autumn Parliamentary session of November-December in which the Six Acts were introduced. With no government providing Keynesian remedies and prolonging the suffering, and with a sound monetary system, even deep recessions were blessedly brief.
End Notes
[1] The Bank of England had a temporary surplus of gold in 1817, and consequently began redemption of notes that had been issued before January 1, 1817; in conjunction with the large loans to France in 1817-18, this had caused a drain of gold.
[2] The House of Commons Committee report is contained in “The Parliamentary Debates from the year 1803 to the present time,” T.C. Hansard, 1819 Vol XL col 152-78; the House of Lords Committee Report is contained in ibid., colds 199-224.
[3] James Maitland (1759-1839), 8th Earl of Lauderdale (Scottish) from 1789, 1st Baron Lauderdale (GB) from 1806. MP for Newport and Malmesbury, 1780-89. Radical and proto-Keynesian economic theorist.
[4] It is not clear how aware were British historians of Liverpool’s time of the Chinese Song Dynasty’s paper money system (1120s-1274) though that was mostly regional in its application.
[5] “The Parliamentary Debates from the year 1803 to the present time,” T.C. Hansard, 1819 Vol XL col 610-28, May 21, 1819.
[6] Rousseaux Overall Price Index, 1818=160, 1821=116. British Historical Statistics, ed. B.R. Mitchell, Cambridge University Press, 2011, p722.
