Thomas Tooke

Archive for the ‘United Kingdom Bank restriction from February 27th 1797 to May 1st 1821’ Category

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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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.

COMMENT:

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?

The Fall in applications for discount of mercantile bills post Feb 1819

In United Kingdom Bank restriction from February 27th 1797 to May 1st 1821 on October 10, 2012 at 1:13 am

Thomas Tooke in his letter to Lord Grenville wrote:

” From the fall in the market rate of interest, and the little inducement to speculation, the applications for discount of mercantile bills fell off rapidly: these stood at about eight to ten millions in Feb. 1819, and it is probable that they were reduced to half that amount by the end of the year; not from any disinclination on the part of the Bank to grant the accommodation, but from the want of inducement on the part of the merchants to give five per cent, when they could readily obtain discount through private channels at on or two percent less. As as Government, from the improved state of the finances, required no further advances from the Bank, (supposing that the latter had been disposed to grant them,) there remained no medium for maintaining the circulation of Bank notes but the purchase of bullion, and possibly a reduction of the Government balances. It is owing to these two channels for the issue of notes by the Bank, that the circulation was not more reduced*.

* It may be urged that the Bank might and ought to have reduced its rate of interest on mercantile bills, in order to keep up the amount of its issues through that channel, or to have bought Exchequer Bills in the market at a premium. How far it might have been expedient to adopt either or both of these modes, It will not now stop to discuss; to have done either would, at any rate, have involved a departure from their ordinary rules, and it would have been difficult for so unwieldy a body to abandon suddenly its established habits, without the risk that its efforts might be too great in the opposite direction. The event proves that they might have ventured upon a considerable effort for enlarging their issues; and Mr. Ricardo was entitled to contend that they ought to have made this effort, and that if they had, the alteration in the value of the currency would not have been so great as it proved to be. My own opinion is, that the Directors were right, under the circumstances, in not deviating from their regular course till after they had actually resumed cash payments. And I am not at all sure that any evil consequences did arise from their having adhered to their ordinary rules. If, at the close of 1819, they had forcibly, that is, by a departure from their ordinary rules, extended their issues, they would have hastened the fall in the rate of interest, and would so far only have hastened the inducement to Government to diminish its unfunded debt, and consequently to repay the Bank, as it eventually did. ”

COMMENT:

A few critical points mentioned back in the first half of the XIX century by Ricardo and others which are still relevant today. First we see the impact of  the Government repaying its debts during a revulsion of credit which would create a contraction. This is not viewed from a Keynesian perspective of diminished spending (austerity) but in terms of reduction of collateral to issuance of  Bank notes, so the circulation would contract . We have to remember that during this period we are not in a redeemable monetary regime (Gold or bimettallic standard) we are under a compulsory regime which is irredeemable (fiat if you will). Under a redeemable monetary regime there is little a central bank do to avert a contraction/ revulsion of credit. The flip side of the price stability is steep and absolute busts.

So to continue the commentary, it is mentioned that if the BoE wanted to avert the negative consequences of a contraction, it could have bought exchequer´s bills (the equivalent of today´s QEs), or it could have lowered its discount rate on commercial bills (it seems that we are repeating the same old recipe). This was not considered for fear of negative unintended consequences of going to far in the other direction (not new either!). In summary, the QEs and  the lower discount rates are same old recipes to a contraction under a non-redeemable monetary system (fiat). The discount mechanism of the BoE was blunt, 5% always, if the market rate is lower nothing goes to get discounted at the central bank but goes in the market, if there is over excitement of trade, the BoE provides discounting at a fixed rate. Eichengreen might be right, it is a bit pro-cyclical….

Now another important lesson is that the investor should always have an eye on what is going on with money markets versus Fed Funds rates.

The contraction following August 1819: passivity from the Bank of England

In United Kingdom Bank restriction from February 27th 1797 to May 1st 1821 on October 5, 2012 at 12:31 am

As Thomas Tooke mentioned, while it can not be reasonable to ascribe to Mr. Peel’s bill, there are certain factors to consider.

Here is what Thomas Tooke wrote:

“The average of February, 1820, was somewhat more than one million and a half below that of August, 1819. Whether this reduction of bank-notes was compensated by an equal issue of sovereigns, or whether the issue of sovereigns, to which the Governor of the Bank alluded in his speech at a Court of Proprietors, of 21st March, 1822, did not take place till after February, 1820, is immaterial to my present argument, viz., — that the reduction was not rendered necessary by the provisions of Mr. Peel´s Bill.”

The state of the exchanges in August, 1819, and the influx of gold which they insured, proved that no reduction of circulation was required for the eventual resumption of cash payments. The reduction, therefore, can only be accounted for on one of two suppositions: either that the Directors designedly and forcibly contracted the circulation with a view to prepare for paying in gold; in which case, as for the reasons stated, such contraction was unnecessary, and would involve the charge of mismanagement which Mr. Ricardo made against them* on that specific ground; or the Directors were simply passive in the regulation of their issues, following the routine by which they were guided previously to 1819. The latter was the fact.”

COMMENT: Ricardo once again lost an occasion to shut-up. While many are against the current printing of the Fed, they should consider seriously the impact of the Fed not printing currrently.That being said, the best idea would probably to have prudential regulation on deposits levels, and on loan to values as well as on the curbing total debt to GDP at a certain ratio. The impediment to that are political. In Singapore and Hong-Kong those prudential measures exist, and the paper currencies of those city-states are of utmost quality.  Now given that harm already done by the lack of regulations in the US, I think we would probably have something in the order of the price plunge which was witnessed post 1819 and which was very severe and disruptive.

Thomas Tooke reviewing the napoleonic wars, and the supposed impact of Mr. Peel´s bill on the Currency.

In United Kingdom Bank restriction from February 27th 1797 to May 1st 1821 on September 29, 2012 at 11:47 pm

Thomas Tooke wrote a long phamplet to Lord Grenville and made a brilliant case against the common view that Mr Peel´s Bill had an impact in contracting the currency and fall in prices.

Many economists, including Ricardo got fooled in thinking that the bill was responsible for the fall in prices. Thomas Tooke´s position is very different:
He concludes

” That a contraction of the Currency was not a necessary consequence of, not, in point of fact, produced by, Mr. Peel´s Bill, or by any anterior preparation on the part of the Bank, with a view to cash payments: for that, according to the rules by which the Bank regulated the issues, there is every reason to believe that, without any reference whatever to that Bill, or that any anterior preparation, the circulation of the Bank of England notes and coin together, would have been neither more not less than it actually has been.”

“That the assumed contraction of the circulation did not occur in such order of time as to justify the assignment of such contraction as the originating of moving cause of the fall of prices, even supposing that there were no other adequate causes to account for it; but that the fall of prices does not admit of being explained by circumstances affecting the supply relatively to the demand, as regards commodities, independently of any alteration in the amount of the Bank circulation.”

First Thomas Tooke makes clear to everyone that Mr. Peel´s bill was not the restoration of paper currency to its mettalic standard. This was done back in 1816 – 1817.

Settting the Facts straight.

” Now, it does so happen, that the amount of Bank of England notes in circulation, on the 26th of August, 1819, was no less than 25,657,610l. ; and the price of gold had by that time actually fallen to 3l. 13s, or, in other words, to the Mint price, the difference not being worth mentioning. ”

“In that interval, viz., from February, 1819, to August, 1819, not only was there no further repayment by Government to the Bank, but an actual increase of the advances by the latter– ”  On the 26th of February 1819, the advances were P 22,628,900. On the 26th of August, 1819, the advances were P 24,528,900. ”

“Thus the restoration of the value of the paper had taken place without any reduction in the amount of Bank of England notes, and without any further repayment by the Government”.

COMMENT: It is to be noted that the Bank of England would issue notes against the advances it would provide for the government so that the a repayment by the Government, if not compensated would contract the currency in circulation.

Thomas Tooke continues:

” This was not a nominal fall in the price of gold, actual purchases having been made at the quotations. The exchange with Paris had risen rapidly from 23.50, which it had been in February, 1819, to 25.10 in August following. In the interval, not one of the ingots provided by the Bank, and which the holders of bank-notes were entitled to demand at the rate of 4l. 2s. per oz,  was called for a matter of business, although it is said that one or two were applied for a matter of curiosity. ”

COMMENT: Thomas Tooke explains that there was no pressure on foreign exchange which would coincide with pressure for bullion to exit the country. Some market participants wanted to check if the conversion was reestablished for real and ask for the bullion as a matter of test.

Thomas Tooke goes on.

” And as from the state of the exchanges, which had already reached par, and were still rising, there could be no doubt of a further influx of bullion in the actual state of circulation, it was perfectly clear that no reduction of the amount of bank-notes was necessary, at that time at least, to comply with the provisions of Mr. Peel´s Bill. No Part of those, provisions had influenced, in the slightest degree, the operations of the Bank since the passing of the Bill, or even since the appointment of the Committee — no repayments by Government in that interval, — no refusal or limitation of discounts, — no calls upon the Bank for gold at the prices scale fixed by Mr Peel´s Bill. In What conceivable way, then, can it be maintained that Mr. Peel´s Bill operated in obliging the Bank to curtail its issues, with a view to prepare for cash payments? And after the rise of the Paris exchange to an above par, with an influx, consequently, of Gold, what possible motive could the Bank of England have to reduce its issues? None, certainly. But a reduction of bank-notes did take place in the six months following August, 1819, and the average of February, 1820, was somewhat more than one million and a half below that of August, 1819.”

COMMENT: The source of this reduction is the object this fascinating pamphlet and Thomas Tooke is the unsung brilliant Sherlock Holmes about how the banking system and impact on prices really work, everyone today know Ricardo, yet Tooke time and again would debunk the theories and come up with the right predictions on prices. Ricardo is Lestrade and Tooke is Sherlock Holmes.

Keynes repeating the nonsense of war stimulation which had already been debunked by Thomas Tooke.

In United Kingdom Bank restriction from February 27th 1797 to May 1st 1821 on August 4, 2012 at 10:31 pm

In 1838 Thomas Tooke wrote:

“Those persons who consider the range of high prices which prevailed from 1793 to 1814, as being fully accounted for by the war, independently of its attendant taxation, proceed on the assumed operation of the following causes :—.
1. An extra demand or consumption arising out of a state of war in general.
2. The extra demand or consumption peculiarly characterising the last war.                                                                                                                       3. The monopoly of trade enjoyed by this country (United Kingdom).And,                                                                                                                           4. The stimulus or excitement to increased population, production, and consumption, occasioned by the profuse government expenditure during the above period.

Section 1. — Extra Demand or Consumption arising out of a state of War in general.

The reasoning in support of the opinion, that the principal phenomena of high prices may be ascribed to the effects of war in general, through the medium of extra demand, independently of any reference to circumstances affecting the supply, may be stated in substance as follows : —

That the whole of the government expenditure for naval and military purposes may be regarded as creating a new source of demand for the articles constituting that expenditure, and consequently as tending to raise the price of such articles. That not only the price of those commodities, which come directly under the description of naval and military stores, must experience an advance in
consequence of the increased demand, but that the price of corn and other necessaries must likewise be affected in a considerable degree by the additional consumption occasioned by the maintenance of the men composing the fleets and armies. That not only the demand for seamen and soldiers must tend directly to raise the rate of wages of that description of labourers from among whom these men are taken, and indirectly the rate of wages generally; but that the increased demand for various kinds of manufactured articles requisite for the equipment of fleets and armies, is calculated further to raise the rate of wages ; and that this increased demand for labour, and the consequent advance of wages in general, naturally occasion increased population and increased consumption by the labouring classes.

Thus the government expenditure in all its ramifications is thought to extend the sphere and increase the activity of demand for  necessaries, to operate directly or indirectly in promoting briskness of circulation, to vivify every branch of industry, and consequently to stimulate exertion to an increase of every kind of production.

The cessation, by the peace, of all such extra demand, the great customer war being withdrawn, (when by the stimulus of previous high prices there was a general increase of production,) would naturally, it is supposed, account for falling markets and consequent distress among the producing classes, and for reduced wages and diminished consumption ; these leading, through a long course
of suffering, to the only remedy, viz. a diminished production.

The fallacy of this doctrine, which represents a  general elevation of prices, both of commodities and labour, to be a necessary consequence of a state of war, proceeds (and cannot otherwise than so proceed) on the supposition that the money expended by the government consists of funds distinct from and over and above any that before existed ; whereas, it is perfectly demonstrable, that an expenditure by government, whether defrayed by immediate taxes to the whole amount, or by loan on the anticipation of taxes to be levied, is nothing but a change in the mode of laying out the same sum of money ; and that what is expended by government would and must have been laid out by individuals upon objects of consumption, productive or unproductive.”

Some might argue that printing new money is not included in Thomas Tooke´s objections, to which one would answer obviously that diluted capital is not the same as new capital. One would have to remember the definition of money and capital by Adam Smith.

Tooke continues:

“I am here supposing that, both on the part of government and on that of individuals, the habit of hoarding to any extent is out of the question. If government were in the practice of collecting a surplus revenue in coin in time of peace, and of accumulating it as treasure to be expended on the occurrence of a war, then indeed there would be a marked difference in general prices on the transition from peace to war; but even this addition to the circulating medium would be limited in its effect on prices to the time within which the treasure was in a course of progressive outlay, until its natural distribution into other countries was effected.

A similar effect would follow, if individuals were in the habit of hoarding, and if, for the purposes of war, they were obliged to give up their hoards to the use of government. These suppositions, however, are quite foreign to the practice of the times which are under consideration. ”  Is he referring to government taxes on the rich, the ones able to hoard? As for government expenditures outlaid out of previous hoarding from the government, it is from a timing perspective the opposite of borrowing, it is time shifting some drag on the economic activity, nothing more, nothing less. Where there is no more capacity to shift some present economic drag to the future, and this burden shifted in the future refuses to move forward, that is the point of insolvency.