The Currency School-Banking School controversy

Controversy is about the dominance of real market needs in money for payments and the role of Banks on the monetary volume with crediting. The theories of the 19th century economics schools differed in answering this question. The Currency School believed that issue about emission of money should regulated with the Bank of England's gold reserves.The Banking School believed that real bills, needs of trade should control bank operations. The Banking School claimed that competitive private banks would not overissue money, while a monopoly did so. There were some other questions that were discussed. How should money be defined? Was a central bank needed? No one point of view become the winner nowadays and some of the points that divided the schools are still debated today.The core of the controversy is that the British Currency School was a group of British economists, which was leading by Samuel Jones Overstone, Norman and Torrens, active in the 1840s and 1850s, who argued that the excessive emission of banknotes was a major cause of price inflation, and believed that, in order to restrict circulation of money, issuers of new banknotes should be required to hold an equivalent value of gold as a reserve.In contrast, the currency school was held by members of the British Banking School, Tooke and Fullarton , who argued that currency emission could be naturally restricted by the desire of bank depositors to pay back their banknotes for gold. To sum up, the main point of discussion was the definition of money in general.On the one hand, the currency school argued that fluctuations in money resources were the major cause of economic changes, an idea that is common now, and that banks were causing these fluctuations. The solution to the problem, according to the currency school, lays in establishment of a state authority providing a monopoly privilege on the emission of banknotes, a practice that is universal in modern monetary institutions. A loss of gold to other countries should cause domestic banknotes to decrease an equivalent amount of money, putting the pressure on domestic prices. A gain in gold from other countries worked in another direction. For example, at that time in England hundreds of banks issued banknotes without any coordination, and the principle of convertibility had not assured that gold flows would rule domestic money resources.on the other hand, opposed to the arguments of the currency the banking school argued that banknotes expanding and shrinking with the needs of trade were not a source of instability and that an elasticity of currency was needed to create the route to economic expansion. The banking school preferred leaving the management of banknotes to bankers. To conclude, in my opinion the theory of currency school was stronger and it shares with the modern-day monetarist school the idea that the money supply should be managed by fixed rules rather than by decisions of bankers and politicians. Modern-day monetarists would agree with the currency school that regulation of the money supply is the foundation of macroeconomic policy. The currency school and the monetarist school felt skeptic about the wisdom of politicians and a preference for politicians founded not on fixed principles but on subjective judgments made in the economic debates.

Date: 2016-01-14; view: 562