Bullionist debates

The bullionist controversy took place during the Napoleonic Wars, in particular after the policy measures of 1797 according to which Great Britain abandoned the gold stand- ard and thereby the convertibility of banknotes to gold. The commitments of Great Britain to its allies and the remittances of gold bullion to foreign countries dangerously depleted (from 10 million to 1.5 million British pounds) the Bank of England's (BoE) gold reserves. The rising military expenditures of the British government coupled with rumours of an imminent French invasion triggered a run on the banking system and led the BoE to the suspension of the gold standard and payments in metal. The prohibitions of payments in gold increased the price of the specie from its mint parity of £3/17s/10½d per ounce to £5/10s in 1813. The British pound depreciated with respect to foreign cur- rencies and the domestic price level increased. Hence, the purchasing power losses of the pound (domestically and internationally) became the focal point of the debate (Viner, 1937 [1965]).

On the one side the bullionists, whose main representative was Ricardo, argued that the loss in purchasing power of the pound was the result of the abandonment of the gold standard in 1797, which allowed the BoE to overissue banknotes. The excess of bank- notes led to purchasing power losses of the pound in both domestic and foreign-exchange markets. In short, the overissue of money resembled, to a great extent, the process of debasement attributed to the suspension of the gold standard in the post-1797 years. Another strand of bullionists, with Thornton as its main protagonist, argued that the causes of the increase in the supply of money relative to its demand were real (war financ- ing and a series of bad harvests), which led to inflation and the devaluation of the pound (Viner, 1937 [1965]). However, both strands of bullionists argued that the ultimate cause of inflation, the devaluation of the currency and the increase in the price of gold, was the expansionary monetary policy of the central bank. The policy remedy of the bullionists, and Ricardo in particular, was the decrease in the quantity of (paper) money in an effort to reverse the process and ultimately return to the gold standard.

On the opposite side, the antibullionists were critical of the quantity theory of money. They argued that the rise in prices was due to two years of poor harvests, the increased military expenditures for the Napoleonic wars, and the disruption of foreign trade due to these wars. Further, the increase in the money supply was the result of a higher demand for money. Hence, the antibullionists invoked the "real bills doctrine", according to which banks were discounting the real (short-term) bills, which represented future production (Green, 1992, pp. 114-16). Thus the increase in money supply was more or less matched with an approximately equal increase in money demand, and so there was no excess supply of money. The bullionists' counterargument was that, so long as the anticipated rate of profit was higher than the bank's interest rate, there would be an unlimited demand for money and its supply would follow suit, thus giving rise to an inflationary spiral process, whose occurrence could have been prevented had the gold standard been in place.

The antibullionists further argued that the price of gold was high because of its scarcity, and the immediate restoration of the gold standard would not be sustainable at the official mint price, thus leading to an outflow of gold. The antibullionists questioned the bullion- ists' argument that there had been an excessive issue of banknotes that resulted in rising prices, devaluation of the pound and an outflow of gold. Hence, the restriction on the issu- ance of banknotes not only would not prevent the crisis, but rather would make it worse.

The antibullionists' arguments were aimed essentially against the quantity theory of money and in favour of the view that economic crises were arising from real and not necessarily monetary causes. Thus, the resumption of international trade and the end of war with France were sine qua non conditions for the stabilization of the exchange rate of the pound and also the return to the gold standard, which the bullionists wanted so much. While the arguments of antibullionists were sensible (after all, why should the BoE abandon the gold standard, if there was no pressing need to do so), they were not advanced in any theoretically consistent and therefore convincing way, and so the debate was overwhelmingly won by the bullionists.

In 1819, the BoE started the process of withdrawing (what was believed to be) excess banknotes and gradually restored the convertibility of paper money to gold. The return to gold convertibility often gives the idyllic impression that people anytime and without difficulties could present their paper money to banks and receive the corresponding quantity of precious metal. This is not exactly true: whenever there was fear of gold runs and financial panics in general, which were not infrequent in the UK's turbulent financial history, gold convertibility was suspended or carried out with difficulty.

The issue of the gold standard reappeared in Great Britain once again in 1844, and always remained a controversial subject waiting for a definite solution. As a matter of fact, the debate from the 1850s onwards was between the Currency School (supporting the quantity theory of money and the exogenous character of the money supply, with a position similar to the bullionists) and the Banking School (arguing for the endogenous character of the money supply and sharing views akin to the antibullionist position).

In this connection it is interesting to note Marx's view, whose labour theory of value as well as his commodity theory of money put him in the antibullionist (Banking School) camp. More specifically, for Marx the quantity of money in circulation is determined endogenously, as it reflects the ratio of the value of commodities to the value of gold, both measured in terms of abstract socially necessary labour time. This ratio, which reflects the state of technology and for analytical purposes can be safely assumed to be stable, is in turn multiplied by the mint price of gold. If, for example, it takes 10 labour hours to produce a commodity and 30 labour hours to produce an ounce of gold, then the unit price of this commodity will be 1/3 of an ounce of gold. If we suppose that the price of an ounce of gold is 1,500 dollars, then the monetary expression of value (direct price) of the commodity will be 500 dollars. By multiplying the prices of all commodities by their respective quantities and dividing the product by the velocity of circulation of commodities, we arrive at the necessary amount of money to circulate the total amount of commodities (Green, 1992, pp. 91-4). If there is more money than is necessary for the circulation of commodities, then this excess money might be hoarded (Shaikh, 1980). In the case of banknotes, excess money is converted into gold, and if convertibility is not allowed, then the excess banknotes are converted into a foreign currency, which is con- verted into gold. If there is no convertibility at all, the excess banknotes are exchanged in the market for gold and thus banknotes depreciate with respect to gold. By assuming the possibility of hoarding, Marx could thus also reject Say's law, which was shared by Ricardo and the other classical economists.

See also:

Bank Act of 1844; Banking and Currency Schools; Bank of England; Endogenous money; Inflation; Marx, Karl; Money supply; Quantity theory of money; Real-bills doc- trine; Ricardo, David; Thornton, Henry.