British Currency School

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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, and believed that, in order to restrict circulation, issuers of new banknotes should be required to hold an equivalent value of gold as a reserve. In these beliefs they were supporting the provisions of the 1844 Bank Charter Act (known as the "Peel's Act"), which had been passed by the Conservative government of Robert Peel.

The leading figure of the school was Lord Overstone, the British politician and banker. His role in the debate was analysed and criticised by Henry Meulen.

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.

After Peel's Act

Following the passage of Peel's Act, the Bank of England, although abiding by the new restrictions on note issue, began a large-scale expansion of its deposit-banking activities. This credit expansion fueled a speculative bubble that caused a drain on the specie reserves of the bank, and resulted in severe panics in 1847. Eventually, the 100-percent reserve provision of Peel's Act was suspended so as to prop up the central bank and its subsidiaries, thus negating the whole point of having the restriction to begin with.

The crisis of 1847 was a terrible blow to the Currency School's reputation. As Rothbard and Mises emphasized, however, it was not the central doctrines of the Currency School that were at fault but only the error regarding the distinction between notes and deposits. Nevertheless, the fact that the banking system failed so soon after the Currency reform made it appear as if the Currency principle itself were at fault and that restricting the central bank could only lead to economic disaster.

Although their system was faulty (except regarding the error of the Currency School), the Banking School consequently triumphed in terms of influence. The Banking attack on the mistakes of the Currency School, coupled with the failure of Peel's Act to prevent financial crises, falsely legitimized many of the Banking School's doctrines. Economists such as Tooke and Fullarton provided much of the theory of money and banking that was adopted and developed by economists such as John Stuart Mill, Karl Marx, Rudolf Hilferding, and possibly even John Maynard Keynes. Thus its influence was felt in many economic traditions, while the Currency School's influence was relatively benign. Although the Currency School enjoyed the de jure success, de facto victory went to the Banking School.

In the eyes of the public and of many economists, it appeared that governance by the Currency principle had been disastrous, and therefore limitations on the central bank had proven, at best, unimportant for mitigating crises, and, at worst, a serious obstacle to sound banking practices. Even though Peel's Act remained nominally in effect until the First World War (and exists in highly amended form even to this day), it was repeatedly suspended during periods of crisis, and any claims the Currency School made regarding the elimination of crises were largely discredited in the public eye.[1]


  1. Matt McCaffrey. Currency and Banking Reform in 19th-Century Britain, Mises Daily, September 08, 2010. Referenced 2011-01-13.