Thomas Tooke

Repayment of the government debt and contraction in 1819 and its consequences.

In Uncategorized, United Kingdom Bank restriction from February 27th 1797 to May 1st 1821 on October 29, 2012 at 11:07 pm

Thomas Tooke wrote to Lord Grenville in MDCCCXXIX (1829)

” But it has been urged, that the provisions of Mr. Peel’s Bill, by directing a repayment to the Bank of a certain amount of its advances to Government, necessarily occasioned the withdrawal of bank-notes from circulation to that extent. I am quite prepared to admit that the repayments by Government to the Bank would have the effect of diminishing the circulation, if there were no other channels through which the bank-notes cancelled by such repayment, admitted of being re-issued. But it is evident that, if the authority which I have quoted is to be relied upon, there were other channels_, including the purchases of gold, by which the sums,repaid by Government, were re-issued ; and the main question is as to the total amount of the Bank circulation, and not the manner in which the issues were made.”

“When the provisions of Mr. Peel’s Bill, directing the repayment of 10 millions to the Bank, were discussed in Parliament, it was proposed by some members, that the time of repayment should be strictly prescribed. But this was objected to by ministers as being liable to inconvenience; and it was objected to by Mr. Ricardo, because he considered,and, as the event proves, justly, that such repayment might not be necessary, or even desirable. The time, therefore, of repayment, was left open to arrangement between the Bank and Government.”

COMMENT:

Interestingly today Mr. Dalio is more concerned by Austerity than by deficit spending. I think there is an echo with Mr. Ricardo. A repayment of debt in a middle of a deflationary environment just does not help. Evidently the event considered was the repayment of debt by the Government which would contract the circulation. The contraction can force the prices down but the expansion of the bank notes is by no means creates an automatic revival of the level of the circulation on its own. Also a redeemable regime is not comparable with a conventional system or a pure metallic standard, a pure mettalic system shares more similarities with a conventional irredeemable system than with a system of bank notes convertible in bullion with a bid-ask system for Gold. This system is equivalent in some ways to a currency board where the monetary anchor is the bullion (Hong Kong Dollar). As a pure exercise it seems that Hong-Kong would have the least issues of all countries to shift to a mettalic monetary standard. It would just peg with a bid-ask system against bullion(s).

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