British Currency School facts for kids

The British Currency School was a group of British economists, active in the 1840s and 1850s, who argued that the excessive issuing of banknotes was a major cause of price inflation. They believed that, in order to restrict circulation, issuers of new banknotes should be required to hold an equivalent value of gold as a reserve. This concept was also known as convertibility and the currency principle. They argued that prices were mostly based on quantity of currency in circulation, but did acknowledge that prices were also affected by deposits. Therefore, by controlling prices banks could limit outflow of gold.

Evolution

Following the Napoleonic War, the Bank Charter Act of 1844 was passed. This Act allowed only the Bank of England to print money and required all banks to hold a specific amount of reserve and currency. However, crucially, the Bank of England was only allowed to print new banknotes to the extent that they were backed by additional gold reserves. This act was passed under the Conservative government of Robert Peel. The leading figure of the school was Samuel Jones-Loyd, Baron Overstone, the British politician and banker. More than fifty years later his role in the debate was analyzed and criticized by Henry Meulen, an opponent of the Act.

Repercussions

As with most debates, there is always an opposing argument. The Currency School was opposed by members of the British Banking School, who argued that currency issue could be naturally restricted by the desire of bank depositors to redeem their notes for gold. In the years following, the Banking Act was suspended three times, favoring the Banking School, but nonetheless the Currency School prevailed and convertibility was mostly maintained until World War I.