The Theory and Practice of Central Banking 1797-1913 E. VICTOR MORGA U CO SI> IMPRESSIOS The author set out in this book to do what in the writing of modern economic hb tory has seldom been done : his study is both historical and theoretica.J ; economic hi :, tory is an avowed part of his subject, bUl he treats the theories as historical f:H.:ts and subjectS them to historical analy~ i -. At the same time his book is no mere history of economic doctrine: it pays an equal amount of ancntion to the banking policies, the monetary changes, and the movement of prices, which sometimes influenced theoretical discussion, were often themselves affected by contemporary doctrines and arc in any case essential for our comprehension of the contemporary modes of economic thought. • Fint published io 19·13 and ''cry soon out of print this re-issue will be most welcome. "But while: the monetary specialist "''ill continue, unrcpcntanl , tO gi\'e fascin- ~~c~i~~ ~ ~~~~~b1t~Jrye t:~tt ~ ~~~~~; pcnetr.tti ng summaries among the most useful tools which ha\'e so f:u come his v.'lly." Eumomica, August 1943 ":\hhough it will appeal especially tO those who do not wish to think too hard a~ut ttntr:al banking, it merits a rc:r.dmg by spccialim in the fiel d who do.•· Tht Amtrinm Ecorwmic Rnitt:, june 1944 "He has, howeve r, brought together much useful maner in :11 dear and readable ruarrati\'e, s hO\~ing wcU the wo r ~ o~ the Bank of England and iu setung m the London money market." Tilt Tima Littrary Sc1ppltmtnr, August 1943 42/- net THE THEORY AND PRACTICE OF CENTRAL BANKING 1797- 1913 THE THEORY AND PRACTICE OF CENTRAL BANKING 1797- 1913 E. VICTOR MORGAN FRANK CASS & CO. LTD. rg6s First published by Cambridge University Press in 1943 and now reprinted by their kind permission This edition published by Frank Cars & Co; Ltd., 10 Woburn Walk, London W.C.r. Fint edition 1943 Second Impression 1g65 Prinltd in Great Brilllin by Thomas Nelson (Prinllrs) Ltd., London and Erfin6urgh · Contents Editorial Preface page ix Author's Preface xiii Chapter I Banks and Banking in the Early Nineteenth Century II The Bank Restriction Period, 1797-1821 23 III Monetary Theory of the Bank Restriction Period 49 IV The First Years of Resumption, the Crisis of 1825, and the Bank Charter Act, 1833 75 v The Horsley Palmer Experiment, and the Bank Charter Act, I 844 100 VI The Currency and Banking Controversy 120 VII The Trial of the Bank Charter Act, I 844-5 8 143 VIII The Great Boom, 1858-73 165 IX The Great Depression, 1873-96 187 X The Last Years of the Gold Standard, 1897- 1913 209 XI Monetary Theory of the Second Half of the Nineteenth Century 228 Appendix Changes in Bank rate, I876-1913, with the Amount of the Reserve of the Banking Department and the "Proportion, on the preceding Wednesday 245 Index 249 vi CONTENTS TABLES page Estimated Imports, I8oS-li 29 II Estimated Re-exports, I8oS-li 30 III Estimated Balance of Payments, t8o)-li 31 IV The Exchange with Hamburg, 1797-IBll 32 v National Income and Expenditure, 179o-I816 33 VI A• Professor Silberling's Index of General Prices, . I79o-18n. Average of 1790: 100 36 B. Gotette Average Price of Wheat, I79J-I8li. Ist Q!!arter of 1793: xoo 36 VII A. Q!!arterly Average of Bank of England Notes Outstanding, 179o-18n 37 B. Q!!arterly Average of the Bank's "Total Ad- vances", 1794-I8li 37 VIII Q!!arterly Value of b and £5 Country Bank Notes Stamped, 18o6-u 38 IX Comparison of Bank of England Returns for Corre- sponding Months, May 183o-April I8Jl 94 X Comparison of Bank of England Returns for Corre- sponding Months: March I8Js-February 1837 108 XI Comparison of Bank of England Returns for Corre- sponding Months, x838-9 113 XII A. Bankers' Deposits and" Other Deposits". B. Bank of England Reserve, 1841-'7 146 XIII Share and Loan Capital Raised by Railways, 1.844-7 152 XIV Monthly Incidence of Railway Calls, 1847-8 152 XV Percentage Rate of Discount Charged by Gurneys on First Class Bills, I844-8 153 XVI Railway Construction, 1844-8 153 XVII Movements of Gold between Great Britain and other ·Principal Importing and Exporting Countries, 1871-86 188 CONTENTS vii page XVIII Bank Rate and Market Rate of Discount for Three Months' Bills, Bankers' Magazine averages, 1884-96 208 XIX Ratios of Cash and Money at Call and Short Notice to Deposits. A. The London clearing banks. B. Other English joint~stock banks. 1889-I908 212 XX London and County Bank and London and West­ minster Bank. A. Ratio of cash to deposits. B. Ratio of money at call and short notice to deposits. I 878-I 908 213 XXI Bank Rate and Market Rate of Discount for Three Months' Bills, Bankers' Magazine averages, I897-I9I3 219 XXII Government Borrowing, I899-I903 220 CHARTS General Prices, the Price of Wheat, and Notes Outstanding and "Total Advances" of the Bank of England, I79o-1821 facing page 38 II Monthly Averages of Bank of England Weekly Statements, I8)2-44 facing page 104 Editorial Preface Discerning readers will not fail to notice the pioneer quality of Mr Morgan's essay. They will also observe that its novelty lies not so much in its matter as in its theme. It is not that the matter is in any way hackneyed or stale. There are many things in the book which at least one reader found wholly new, and which other and more expert readers may find at least inter­ esting. Yet the principal characteristic of the book is not the information which it contains, but the purposes for which the information is employed. Mr Morgan has set out to do what in the writing of modern economic history has so seldom been done. His study is both historical and theoretical, and though many students before him tried to marry economic history to economic theory, few of them ever achieved the union on Mr Morgan's terms. Economic studies combining theory with history fall, as a rule, into two interrelated groups. They are conceived either as exercises in "applied economics" in which a few historical facts are used to illustrate the few economic theories which are capable of being illustrated; or else as "historical revisions" in which certain well-known episodes of economic history are re-told in terms of modern theory. Examples of the former will be found embedded in most of the better known economic treatises from Adam Smith to Marshall and Keynes. Examples of the latter have been lately produced by economists and historians alike: vide Bresciani-Turoni's book on the German inflation, Rostow's articles on the Great Depression, or Fisher's article on the commercial policy of the Tudors. Mr Morgan attempts none of these things. While his debt to modern economic theory and more especially to Keynes will be obvious to all (and economic theories are an avowed part of his subject) he treats the theories themselves as historical facts and subjects them to historical analysis. At the same time the book is no mere "history of economic doctrine". It pays X EDITORIAL PREFACE an equal if not a greater attention to the banking policies, the monetary changes and the movements of prices, which some­ times influenced theoretical discussion and were often them­ selves affected by contemporary doctrines. The two topics are run on concurrent lines, which often intersect, but are never merged or confused. For the same reasons the book is also something more than an economic history of economic theory. It is not the kind of essay on the economic determinism of economic thought which the Marxists of the older dispensation would like to have written had they known how. The parallel treatment of mone­ tary events and monetary theories reveals not only the con­ nections between the facts- and the theories, but also the occa- . sional gaps between them. Some of the gaps will be noticed in Mr Morgan's treatment of the bank restriction period, for the experiences of the time apparently failed to generate new economic ideas. In the author's own words the period "pro­ duced only a restatement of theories all of which hacl been stated before, and many of which were a century old". Simi­ larly, it does not appear as if the second half of the nineteenth century, and more especially the period between the Bank Charter Act and the passing of the Great Depression-an epoch of great changes in prices, great developments of invest­ ment, and at least two complete business cycles-witnessed any great or illuminating departures in monetary theory. In these fifty-odd years Mill and Marshall produced their great syntheses of economic doctrine, and Jevons very nearly revolu­ tionised the theory of value. Yet the theory of money, prices, credit and business cycles made relatively little progress in spite of continuous accumulation of highly relevant evidence. Giffen's essays, Jevons's index number, Bagehot's description of the money market, and Newmarch' s history of prices were perhaps the only specialised writings on currency worth Mr Morgan's commendation, and yet even they were out of scale, and per­ haps even out of touch, with the lessons of capitalist finance in the most b~isterous and turbulent stages of its growth. To his own credit and to his readers' edification Mr Morgan does EDITORIAL PREFACE xi not fail to note the "autonomous" phases in the development of economic thought, and from this point of view few passages in the book are more suggestive than those dealing with the genesis of the controversy between the banking and the cur­ rency schools.