The Currency School and the Banking School – Who Got it Right?
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Abstract
The Currency and Banking School dispute is usually regarded by historians of economic thought as representative of divergent views on the nature and role of money and banking within society. However, there is more to be said of the dispute that is of interest. Because contextual disparities, and methodological and motivational issues remain largely neglected in the discussion, many important similarities and differences between the two schools are usually glossed over, whilst the broader cultural context of a transformation in the discipline of political economy itself is generally ignored. By exploring this wider context a more nuanced appreciation of the two sides in the dispute can be achieved, although with such a revisionist approach the luxury of simplistic notions of ‘right’ and ‘wrong’ is necessarily relinquished, and the similarities between the two schools become more salient.
I have read this paper paper and discovered a lot from it (things I did not know). I do remain convinced that the schools differ somewhat. But after Zimmermann I am inclined to attach more value to the similarities between the two.
The paper is learned, crispy, well written, and it is positively short. My only critical remark is that my favourite actor in the debate does not appear in the paper. Henry Thornton (see Hicks + Ciocca-Sannucci) could be regarded as the link between the two parties: rigor (convertibility) for long term stability, flexibility in the short term to avoid recessions and banking crises.
Anna Zimmerman’s manuscript “The Currency and the Banking School – Who Got It Right?” presents a sophisticated review of the Currency and Banking School. Contrary to typical oversimplified presentations, the author offers a balanced and nuanced view of both Schools. The author also situates the analysis to a methodological, historical and normative context.
Anna Zimmerman finds that neither School is purely right or wrong. Zimmerman shows that to judge either School as right or wrong has to involve a very simplified exposition of a School while neglecting many reservations and nuances. In fact, the author shows that both Schools were remarkably similar in many aspects.
The issue is once again topical. The manuscript provides valuable insight for the current debate on monetary arrangements. The manuscript is concise, clearly written and full of vivid language.
However, although the manuscript proceeds logically, it is unstructured. There are no headings and the manuscript is not even divided into clearly distinguishable sections. The manuscript should contain, at least, an introductory section, a couple of main sections and a concluding section. The main sections could, for instance, be divided as follows: brief exposition of the Schools; differences of the Schools; methodological commitments of both Schools; substantive similarities of both Schools (including aspects which both Schools neglected).
The key findings of the manuscript could be highlighted more. For instance, what exactly are the similarities and omissions of both Schools (e.g. inflation targeting, deductive method) could be elaborated at least in the introduction and conclusions. Now, those are stated in the beginning only on a very general level (stated that there are similarities between the Schools, but not explicated what they are).
The manuscript could also link the analysis more strongly to current academic discussion. Now, most references date decades back, which is, of course, not a bad thing in itself, but it neglects the ongoing debates on the issue. For instance, in a recent issue of Economic Thought (vol. 4, no. 2) Charles Goodhart and Meinhard Jensen provided a commentary on my paper in “A Commentary on Patrizio Lainà’s ‘Proposals for Full-Reserve Banking: A Historical Survey from David Ricardo to Martin Wolf’”. They trace the current debate over full-reserve banking to the differences between the Currency and Banking School, although I somewhat disagree with them on to which extent contemporary proposals for full-reserve banking can be associated with the Currency School (I would argue that at least Sovereign Money proposals build mostly on the Banking School).
To me it seems that scholars often confuse how things are versus how things should be. Although not Zimmerman’s fault, this seems to be the case with the debate between the Currency and Banking School, too. Especially when taking into account complexities indicated by Zimmerman, it becomes less obvious that an advocate of the Currency School’s analysis how things are would support a simple growth rule for the money supply (accomplished through full-reserve banking or otherwise). Similarly, it becomes ambiguous whether a supporter of the Banking School’s analysis how things are would promote the “real bills doctrine” as a policy prescription.
Specific remarks:
On page 4, paragraph 2 the author introduces the “principle of the reflux” of Thomas Tooke and John Fullarton. Zimmerman could give some references where these authors have presented their ideas (indirect references at least if original references are hard to find).
On page 5, paragraph 2, line 4 Zimmerman contrasts eighteenth century economists and their intellectual descendants. Given the context, isn’t it rather a similarity?
On page 6, paragraph 1 there seems to be a typo in the sentence starting as “The Banking school were closer…”. “Were” should be replaced with “was” or the sentence should be reformulated in another way.
On page 8, paragraph 3 (starting: “The Bank’s evident desire…”) is interesting, but how does it relate to the Currency/Banking School? Could the paragraph be dropped? Furthermore, on line 3 Zimmerman states that “Although note-issuing power was stripped from the Bank,…” indicates that the Bank of England could not issue notes. As is evident from the paragraph, surely, this is not what Zimmerman means. Should it be “Although note-issuing power was stripped from banks, the 1844 Act showed little interest in limiting the commercial dominance of the Bank of England vis-à-vis other banks”? The paragraph also mentions Bagehot’s Doctrine, but does not elaborate what it means.
On page 9, paragraph 2 in “the Thomas Chalmers” Zimmerman might want to drop the article “the”.
On page 11 in the list of references there seems to be a typo in Daugherty (1943): “Park 2” should be “Part 2”.
Other minor remarks:
When referring to a single page, use only “p.” not “pp.” throughout the manuscript.
Make the spelling uniform throughout the manuscript: either Banking/Currency School or school.
This is an intriguing attempt to look again at the Currency and Banking Schools’ controversies, using a methodological angle to distinguish this from previous discussions of the controversies. The effort is rather weakened early on when, at the bottom of page 4, the author admits that ‘when it came to methodological issues, there was increasingly little to choose between the Schools.’ One obvious reason for this was that the two schools engaged with each other to a degree that is remarkable today, when different school of thought keep firmly in their silos, if only to avoid the complications of confronting alternative ideas and explanations of what is obvious. A more historic reason is that the protagonists in the Banking and Currency debates directed their analysis at banking and monetary legislation, and therefore kept at the forefront of their arguments the legal and institutional implications. In other words, their monetary theory was a more practical matter than it is for academics today. This institutional concern also explains why, despite his ‘Ricardian vice’, David Ricardo was by no means as deductive in his monetary analysis as he was in his theory of value and distribution. This methodological divide between the two great branches of economic theory, nowadays called macroeconomics and microeconomics, still largely holds today.
Having stated that there was not much methodological difference between the Banking and the Currency Schools, the author is left somewhat adrift and throws in various, even religious, considerations, in an effort to sustain an argument. There is more that could be said. One possible avenue is the role of repeated banking crises in moderating the implementation of Currency School legislation, up to the victory of the Banking School with the adoption, in practice, of the Bagehot Doctrine in the 1870s. (The Doctrine itself, that in a panic the Bank of England should supply all the funds required in the discount market, but at penal rates of discount, deserves more than just a passing mention on p. 8). Indeed, more could be made of the nexus between monetary theory, justifying particular frameworks of monetary policy, and the financial crises that periodically compromise those frameworks and result in a demand for new monetary theory to justify and provide consistency in a new framework. In recent years, it is not only monetary theory which ‘progresses’ through the disasters that befall central banks. What has been perhaps an unique methodological feature of this branch of economic theory came to embrace the whole of ‘mainstream’ economics, now widely regarded as discredited by the 2008 crisis.
Finally, the author has trawled widely through the secondary literature of the great banking controversies of the first half of the nineteenth century. But it is a pity that, in that trawl, the works of Bernard Corry, David Laidler and Karl Niebyl did not turn up to throw more light on controversies that still reverberate today.