Thomas Tooke

A small annoying detail for monetary policy: Quantity of money theory is very imperfect and velocity is just an accounting “plug”.

In Uncategorized, United Kingdom Bank restriction from February 27th 1797 to May 1st 1821 on October 26, 2012 at 10:41 pm

It has been maintained by Ricardo that the plunge of prices was due to the Peel bill, which forced a contraction of the quantity of money in circulation and forced a plunge in price. The Peel bill restored the convertibility of Gold and bank of England notes.

The Peel bill really restored the convertibility of Gold, the plunge of price really happened, but there is a small annoying detail for monetarist, which is that the quantity of notes in circulation actually expanded.

Here what Thomas Tooke wrote:

” The question, whether any contraction at all took place subsequently to the passing of Mr. Peel’s Bill, is confined to the six months following August, 1819 ; for, according to the following declaration of the Governor of the Bank of England, at a Court of Proprietors, held on the 21st March, 1822, the issues of the Bank were greatly extended in the two years following March, 1820 :—” If,” said he, ” the Bank had erred, it was not on the side of a reduction of the circulating medium ; for, on looking at the amount of their issues, he found that, on the 9th March, 1822, their issues exceeded, by the sum of 3,859,000P., those of the same date in the preceding year ; and that the latter, viz. the 9th March,1821, exceeded the issues of the 9th March, 1820,by the sum of 3,440,000P. It was, therefore, quite clear that the repayment of the Government debt, called for in July, 1819, did not induce the Bank to diminish their issues, for they had been increasing them in the years which had since followed.” In answer to a question from a Proprietor the Governor added : ” That the amount of issues from which he had quoted, of course, included the sovereigns issued by the Bank.”
According  to this declaration, the amount of the circulation, as emanating from the Bank of England, and forming the basis of the Currency, stood thus:

Now, this authority is quite sufficient to establish the fact, that, as far as regards the Bank issues, constituting the basis of the circulation, there was a considerable increase of the amount,notes and sovereigns together, (and from the state of the exchanges the whole of the sovereigns must have remained in the country,) between March, 1820, and March, 1822, as compared with the amount at the time of the passing of Mr. Peel’s Bill ; and this interval of two years being that ill which the principal phenomena of the fall of
prices, and the general depression ascribed to the operation of Mr. Peel’s Bill, occurred, it is of no consequence to the general argument, whether there was or was not a small reduction in the amount of the Bank issues in the six months between August, 1819, and March, 1820. It appears, then, from this statement, that, as far as regards the Bank of England issues, there was not only no contraction of the circulation following the passing of Mr. Peel’s Bill, but an actual increase of the amount (with the trifling exception ofthe six months following August, 1819) down to1822. The mere amount of bank-notes was certainly diminished, but that diminution was more than compensated by the issue of a larger amount of coin ; and whatever coin was issued in that interval must, as already observed, have remained in circulation,because there would have been a heavy loss on its exportation.


There is a striking similarity to the present conditions, a large extension of the number of Bank issues but no noticeable increase in prices in what is related to domestic basket of consumption driven itself by wages in the United States, in the case of 1819-1822 episode we have an expansion of the bank issues yet a fall in prices. It is historically interesting to observe that declining long bond yields have proven to be deflationary, so why the twist?


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