The British Currency School was a group of British economists, active in the 1840s and 1850s, who argued that the excessive issuing of banknotes was a major cause of price inflation. They believed that, in order to restrict circulation, issuers of new banknotes should be required to hold an equivalent value of gold as a reserve.[1] This concept was also known as convertibility and the currency principle. They argued that prices were mostly based on quantity of currency in circulation, although proponents did acknowledge that prices were also affected by deposits[1]. Therefore, by controlling prices banks could limit outflow of gold[1].
The Currency School emerged from the beliefs of the Bullionist group, which was prevalent in the early 1800’s. When the French landed on English soil in 1797, financial panic arose in Britain. Due to the 18th century banking system, there was high concern of banking panic, a financial crisis that occurs when many bank runs occur at the same time and people rush to withdraw paper money or transfer money to other assets. The British government intervened by allowing banks to suspend convertibility of the notes issued by the Bank of England[1]. The Bullionist group, composed of mostly bankers and lawyers, formed after this potential crisis. They argued for convertibility, meaning paper money should be 100% backed by gold, in order to avoid inevitable inflation.
After a long period of deflation following the Napoleonic War, the Bank Charter Act of 1844 was passed. This Act allowed only the Bank of England to print money and required all banks to hold a specific amount of reserve and currency.
In these beliefs they were supporting the provisions of the Bank Charter Act 1844, which had been passed by the Conservative government of Robert Peel.
The leading figure of the school was Samuel Jones-Loyd, Baron Overstone, the British politician and banker. More than fifty years later his role in the debate was analysed and criticised by Henry Meulen, an opponent of the Act. See Viner's book .
The Currency School was opposed by members of the British Banking School, who argued that currency issue could be naturally restricted by the desire of bank depositors to redeem their notes for gold.
- ^ a b c Skaggs, Neil (1999). "Changing Views: Twentieth-Century Opinion on the Banking School-Currency School Controversy". History of Political Economy. doi:10.1215/00182702-31-2-361. Retrieved April 16, 2016.