The Currency School and the Banking School – Who Got it Right?

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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.

Posted for comments on 21 Jun 2016, 11:33 am.

Comments (2)

  • Pierluigi Ciocca says:

    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.

  • Patrizio Lainà says:

    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.

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