The Banking School

In the debates leading to the Act of 1844, the most important and weighty opponents of the Currency School (whose writings are sampled in Volume IV) were classed as the members of the Banking School. The basic distinction between these two groups (which seems to stem from George Warde Norman) is a distinction between those who believed (as the Currency School did) that the money supply should be controlled so as to maintain international equilibrium in the distribution of the precious metals (a control which they believed would minimise domestic macroeconomic fluctuation) and those who argued that the money supply should accommodate what were perceived by bankers to be ‘the needs of trade’. Control of the money supply according to the first outlook was control according to the ‘Currency Principle’; deliberately adopting a policy of allowing the money supply to be endogenous was, correspondingly, the ‘Banking Principle’. The Currency School members held that, given the existence of an endogenous trade cycle, issue according to the Banking Principle would actually magnify the amplitude of the cycle by increasing the money supply in the upswing and decreasing it in the downswing; the Banking School members held that the Currency Principle would cause economic dislocation by denying liquidity to the system when it was most in need of it.