Saturday, September 5, 2009

Evangelical Central Bank Keynesian Henry Thornton

Lampooned in their day as "the saints"...


Henry Thornton,

*10. March 1760 (N.S.) +16. Janary 1815


Portrait of H.Thornton

Credit of Great Britain , 1802.

A highly successful merchant banker, as a monetary theorist Henry Thornton has been described as the father of the modern central bank. An opponent of the Real bills doctrine, he was a defender of the Bullionist position and a significant figure in monetary theory, his process of monetary expansion anticipating the theories of Knut Wicksell regarding the "cumulative process which restates the Quantity Theory in a theoretically coherent form".

His work on 19th century monetary theory has won praise from present-day economists for his forward-thinking ideas, along the lines of those later developed by John Maynard Keynes.

The Bullionist Controversy

19th C. British cartoon on the Bullionist Controversy

The Bullionist Controversy emerged in the early 1800s regarding whether or not paper notes should be made convertible to gold on demand. This metamorphosized later in the 1840s into the Banking-Currency School debate over the gold parity of the Bank of England notes.

The Bullionist Debate of the 1810s

In the 18th Century, there was a clearing-house system of banking in the United Kingdom. Banknotes, which circulated as money, were issued by private banks. These bearer notes were claims on gold held by the bank - hence the common preamble which still persists in modern Bank of England notes, "I promise to pay the bearer on demand X pounds." In that time period, that promise was actually true: a person could take a note to the bank which issued it and ask for it to be exchanged for gold. Thus, for a long time, all paper notes were issued by private banks on the basis of the gold they had in their vaults.

In Scotland, however, there was a slight exception: banknotes often had a clause that allowed the bank to suspend convertibility. Although banks were legally required to pay the bearer in gold bullion, they could temporarily suspend that conversion should they find that necessary. The suspension clause in Scottish banks was the way that system responded to clearing house "bullying" trick - whereby several banks would surreptitiously hold back notes issued by bank Z and then, one day, they would all collectively unload the notes upon bank Z and demand redemption. Naturally, as it was a fractional reserve banking system, bank Z would not be able to redeem them all. If convertibility was required by law, then bank Z would have to declare bankruptcy. This sort of ruination by a clearing house cartel against a loner bank was not uncommon in Europe and North America. Thus, Scottish law allowed for a temporary suspension of convertibility. This clause, however, was banned in 1765 and henceforth Scottish banks were required to pay the full amount on demand.

However, in 1797, rumors that French soldiers had landed on English soil led to a widespread bank run in Britain. Customers hurried to their banks demanding immediate redemption of their notes in gold bullion. The British government, realizing the dangerous consequences of the run allowed banks to suspend convertibility of the notes issued by the Bank of England.

The crisis, then, was properly averted, but the government did not quickly restore convertibility. Rather, they permitted banks to continue issuing notes without necessarily respecting their convertibility into gold. An intellectual debate proceeded immediately as lawyers, bankers and statesmen lined up for and against the maintenance of convertibility of notes into gold. On the one hand, there were the "Bullionist" group, which argued for convertibility; arrayed on the other side were the "Anti-Bullionist" who preferred the status quo of suspension.

The Bullionist argument was straightforward. If banks are not required to convert notes into gold, then they will be tempted to issue notes in excess of the gold in their vaults. This will lead to an excess supply of money and hence, by their view, a cheapening of the price of money, i.e. inflation. They argued that to avoid inflation, required convertibility of notes into gold should be restored. Among the spokesmen for the Bullionists were Henry Thornton and, a bit later, John Wheatley and David Ricardo (1810, 1811).

In contrast, the Anti-Bullionists appealed to some form of the Real Bills Doctrine of John Law (1705), Sir James Steuart (1767) and Adam Smith (1776). Given the afore-mentioned peculiar, long experience of Scottish banking with inconvertibility, this authorship is not surprising. Banknotes, Smith had argued, were issued by banks in exchange for merchants' bills of exchange. As long as the repayment of these bills of exchange is credible (i.e. "Real Bills" as opposed to "Fictitious Bills"), then no more banknotes will be issued than what is required by merchants. In short, the demand for banknotes by commerce is itself limited by the "needs of trade", hence even without convertibility, the bank is not going to issue more notes than what commerce demands. Thus, there will never be excess note issue.

If there happens to be excess issue by accident, however, this still would not cause inflation as it would return immediately to the banks upon the liquidation of the bills of exchange. This was called the "reflux principle" and was part of the Real Bills Doctrine. Among the Anti-Bullionists who espoused this doctrine in the early 1800s, we find Richard Torrens, Bosanquet and James Mill.

The Bullionist Henry Thornton (1802) provided an admirable critique of the Real Bills doctrine. Namely, he asked, who guaranteed that the demands of commerce were limited? Suppose actual capital yields returns higher than the rate of interest (or discount) charged by the banks? Would not merchants' demand an interminable amount of notes - however "real"? Bills offered for exchange into notes, he argued, might not readily be "limited" as the Real Bills advocates argued. Inflation must thus ensue. Thornton's analysis formed the germ for the later "cumulative process" of Knut Wicksell (1898).

Who was proved right? In fact, as Jacob Viner (1937) documents, there was indeed a period of inflation in the early 1800s, peaking in 1814. Bullionists argued that this supported their position. Anti-Bullionists explained it away by the rationing effects of government purchases during the Napoleonic Wars. A report by a parliamentary committee in 1810 supported a moderate view of the Bullionist position and argued for a phased and partial resumption of convertibility. David Ricardo (1810, 1811), however, was more more forceful - arguing for immediate and full-par resumption of convertibility.

However, the end of the Napoleonic Wars seemed to swerve the argument towards the Anti-Bullionists. From about 1815 until 1830, there was a prolonged period of deflation as opposed to inflation. Certainly, this went against the Bullionist argument? The verdict is confused however. The Resumption Act was passed in 1819 and convertibility came into effect in 1821. Hence, although there had already been about six years of deflation with suspension, the extra nine years of deflation might have resulted from the contractionary effects of the resumption of convertibility.

The Banking-Currency School Debates of the 1840s

The Bullionist debate (with slight differences) re-emerged in the 1840s and 1850s after the Banking Act of 1844 giving the Bank of England a monopoly on note issue. While not requiring convertibility, the Bank of England was required to maintain a specific par between note issue and gold reserves held at the Bank. Should that gold parity be respected or not?

Supporting the Banking Act was the so-called "Currency School". They argued that there needed to be a maximum amount of note issue (which the gold standard provided) or else inflation would result. They thus resurrected the Bullionist arguments of a few decades earlier. The Currency School was led by Lord Overstone and counted among its proponents James R. McCulloch, Thomas Joplin, Samuel M. Longfield and, now converted, Richard Torrens.

Rallied against the act was the "Banking School", who argued against gold parity -- although not accepting the old Real Bills doctrine in its entirety and arguing for some degree of convertibility. The new reflux principle was even simpler: excess note issue might induce inflation, but that would lead to a race to redeem notes in gold, thereby removing the excess money supply. The Banking School was led by Thomas Tooke, John Fullarton and the young John Stuart Mill.

As it happened, several circumstances during this period led to the suspension of the Banking Act three times, lending credibility to the position of the Banking School. Nonetheless, the Currency School won the day and gold parity to note issue was generally maintained until the First World War.

Bullionists/Currency School

  • Henry Thornton,1760-1815.
  • David Ricardo,1772-1823.
  • John Wheatley, 1772-1830.
    • Remarks on Currency and Commerce, 1803.
    • Essay on the Theory of Money and Principles of Commerce, 1805.
    • One of the major Bullionists. Developer of idea of an "optimum" quantity of money.
  • Lord Samuel Jones Loyd Overstone, 1796-1883.
    • Tracts and Other Publications on Metallic and Paper Currency, 1858.
    • Main leader of the Currency School in Parliament and the whose ideas were drafted into the 1844 Banking Act.
  • Thomas Joplin, 1790-1847. - (1)
    • Essay on Money and Bullion, 1818
    • Outlines of a System of Political Economy, 1823.
    • Developed the "currency principle" - effectively, 100% gold reserve currency - behind the Currency School's position. His notice that the Bank of England's royal charter prevented only the formation of other note-taking but not deposit-taking banks led to explosion in the 1830s of joint stock banks in London. Joplin was the founder of the National Provincial Bank.
  • James R. McCulloch, 1789-1864.
  • Samuel Montiford Longfield, 1802-1884.
  • Amasa Walker, 1799-1895.

Anti-Bullionists/Banking School

  • Colonel Robert Torrens, 1780-1864.
  • James Mill, 1773-1836.
  • Thomas Tooke, 1774-1858. - (1), (2), image
    • Thoughts and Details on the High and Low Prices, 1823.
    • Considerations of the State of the Currency, 1826.
    • On the Currency in Connection with the Corn Trade, 1829.
    • History of Prices and the State of the Circulation, with W. Newmarch, 1838-57.
    • An Inquiry into the Currency Principle, 1844.
    • On the Bank Charter Act of 1844, 1856.
    • One of the main figures of the Banking School, he rejected the Quantity Theory without actually developed a clear monetary theory of his own. Also compiled many economic statistics.
  • John Fullarton, 1780-1849.
    • On the Regulation of Currencies
    • Banking School advocate.
  • John Stuart Mill, 1806-1873.

On the Bullionist Controversies

  • Thomas Moore's Poems on Bullionism
  • Jacob Hollander's "The Development of the Theory of Money from Adam Smith to David Ricardo", 1910-1, QJE
  • Neil Skagg's "Changing Views: Twentieth-Century Opinion on the Banking School-Currency School Controversy", forthcoming, HOPE, 1999.
  • Allan Sproul's review of the Real Bills Doctrine
  • "Resumption of Specie Payments", 1838, US Democratic Review
  • "The Myth of Free Banking in Scotland" by Murray Rothbard, Rev of Austrian Econ
  • "White's Free-Banking Thesis: A Case of Mistaken Identity" by Larry Sechrest, Rev of Austrian Econ
  • "The Option Clause in Free-Banking Theory and History: A Reappraisal" by Parth Shah, 1997, Rev of Austrian Econ
  • "The Poet as Economist: Shelley's Critique of Paper Money and the British National Debt", by Paul Cantor, 1997, JLS
  • The Bullion Committee at the Peel Web


Keynes Money - Bullion - Credit Crunch - Toxic Assets

The Clapham Sect was an influential group of like-minded Church of England social reformers in England at the beginning of the nineteenth century (active c. 1790 ... 1830).

Its members were chiefly prominent and wealthy evangelical Anglicans who shared common political views concerning the liberation of slaves, the abolition of the slave trade and the reform of the penal system.

The group's name originates from Clapham, then a village south of London (today part of south-west London), where both Wilberforce and Thornton, the sect's two most influential leaders, resided and where many of the group's meetings were held. They were supported by Beilby Porteus, Bishop of London, who sympathised with many of their aims.

After many decades of work both in British society and in Parliament, the group saw their efforts rewarded with the final passage of the Slave Trade Act in 1807, banning the trade throughout the British Empire and, after many further years of campaigning, the total emancipation of British slaves with the passing of the Slavery Abolition Act in 1833. They also campaigned vigorously for Britain to use its influence to eradicate slavery throughout the world.

Lampooned in their day as "the saints", the group published a journal, the Christian Observer, edited by Zachary Macaulay and were also credited with the foundation of several missionary and tract societies, including the British and Foreign Bible Society and the Church Missionary Society.

Members of the Clapham Sect included:

* William Dealtry (1775...1847), Rector of Clapham, mathematician
* Edward James Eliot (1758...97), parliamentarian
* Thomas Gisbourne (1758...1846), clergyman and author
* Charles Grant (1746...1823), administrator, chairman of the directors of the British East India Company, father of the first Lord Glenelg
* Katherine Hankey (1834...1911), missionary and psalmist
* Zachary Macaulay (1768...1838), estate manager, colonial governor, father of Thomas Babington Macaulay
* Hannah More (1745...1835), writer and philanthropist
* Edward Parry (1750...1827), administrator, chairman of the directors of the British East India Company
* Granville Sharp (1735...1813), scholar and administrator
* Charles Simeon (1759...1836), Anglican minister, promoter of missions
* William Smith (1756...1835), M.P. for Norwich, grandfather of Florence Nightingale
* James Stephen (1758...1832), Master of Chancery
* Lord Teignmouth (1751...1834), Governor-General of India
* Samuel Thornton (1754...1838)) MP, Governor of the Bank of England[1]
* Henry Thornton (1760...1815), economist, banker, philanthropist, MP for Southwark, great-grandfather of writer E.M. Forster
* Henry Venn (1725...97), founder of the group, father of John Venn and great-grandfather of John Venn (originator of the Venn diagram)
* John Venn (175 ...1813), Rector of Holy Trinity Church, Clapham
* William Wilberforce (1759...1833), MP successively for Kingston upon Hull,Yorkshire and Bramber, leading abolitionist


Portrait of Henry Thornton displayed at

Lambeth College, 45 South Side (on site of South Lodge)

HENRY THORNTON (10 March 1760-16 January 1815)

The following article, written by a pupil, "W.B E[vans].", appeared in the Spring Term 1950 issue of the school magazine, The Thorntonian.

You may well ask why our School is called Henry Thornton? The choice fell upon Henry Thornton chiefly for two reasons: firstly, because he and his family were always closely connected with Clapham; and secondly, because no better name could have been adopted for our School.

Who was Henry Thornton? He was a philanthropist and economist, a great Clapham figure, and a #Governor of the Bank of England. He was the fourth son of John Thornton. The family was a middle-class family - the class which has built up and sustained England's greatness, for the father himself invested a great deal in trade, and was the first Treasurer of the Marine Society, and later a Director of the Russia Company, while Samuel, the eldest son, was a Director of the Bank of England.

Although his father had inherited a large fortune and invested it in trade, he appears to have been more interested in religious questions than in the education of his children, for Henry himself confessed that he started life with "next to no education", and without any political acquaintances. He was educated locally, first with a Mr. Davis on Wandsworth Common, with whom he acquired more than the usual knowledge of Latin and Greek; but from a Mr. Roberts of Point Pleasant, Wandsworth, who undertook to teach him not only Greek and Latin, but "French, rhetoric, drawing, arithmetic, reading, writing, speaking, geography, bowling, walking, fencing, besides Hebrew and mathematics," he learned nothing except "habits of idleness." But he was very successful in business, for after being a partner in his father's house, he joined the bank of Doune, Free and Thornton, and he was a member of this firm until his death.

His views upon the questions of his day reveal a broad-minded and incorruptible mind - incorruptibleness being a rare virtue in those days, for in 1792 he was invited to stand for Hull in a bye-election, but withdrew on finding that each voter expected a present of two guineas. But he was later elected for Southwark, and although he always refused the guinea which was expected there for voters, he held the seat until the end of his life. He sympathised with the early stages of the French Revolution, and although he considered war to be necessary in 1793, he supported Wilberforce in a motion to facilitate negotiations for peace. He voted in favour of Grey's motion for Parliamentary Reform in 1797; and, like Wilberforce, separated from most of his Protestant friends in supporting Roman Catholic Emancipation. Thus, on many of the subjects of his day, his opinions were far in advance of his time.

In the House of Commons he was not a great speaker, but was well-known as a high authority on all matters of finance. He was a member of the committee on the Irish Exchange and Currency, and also of the famous Bullion Committee. His reputation as a financier was further enhanced by his "Enquiry into the Nature and Effects of the Paper Credit of Great Britain," a book of which Mill said in his "Political Economy" that "it is still the clearest exposition known to him in English of the subject with which it deals."

Henry Thornton is perhaps better known to us as a close friend of Wilberforce and a prominent member of the Clapham Sect. His house at Battersea Rise became the meeting-place of the informal councils which gathered round Wilberforce. He supported Wilberforce's anti-slave trade agitation in Parliament, and took a leading part in the foundation of the Colony at Sierra Leone which was intended to provide a centre of civilisation for the African races. For this end he carried through Parliament a Bill for the formation of a Sierra Leone Company. But the company was not a success, and Thornton himself lost a great deal of money, but he held that he was "on the whole a gainer," for he had encouraged an interest in the African races.

He was a man of high ideals, and a supporter of the early evangelical movement. His health was always delicate: he broke down in 1814, and he died on 16th January, 1815, in Wilberforce's house at Kensington Gore. He was buried at [St Paul's Church] Clapham.

Thus passed away Henry Thornton, a man distinguished both for his political and social work, one of the few incorruptible men of a great age of corruption, and an ardent reformer. Intellectually he was distinguished for sincerity and calmness of judgment: in commercial matters he was conspicuous for a high standard of integrity. Surely such a man could have had no better memorial than a School! and we, as members of that School, should endeavour to render more illustrious the honoured name of Henry Thornton.

#Nick Bird, the third great-grandson of Henry Thornton (see also his Guest Book message), points out that Henry was not in fact a Governor of the Bank of England, although his elder brother Samuel (1754-1838) did hold this office from 1799 until 1801; he was also a Director of the Bank.

The photographs below show the commemorative plaque and Thornton family vault at St Paul's Church, Rectory Grove, Clapham. The missing/indistinct text on the plaque is: (third line from end) "1815" and "54"; (last line) "1815" and "50". Marianne Sykes, the daughter of Joseph Sykes, a merchant from Hull, married Henry in 1796.

An abbreviated version of the Thornton family tree is reproduced below, from the late Margaret Bryant's book "The Clapham Sect" (2004), by kind permission of the publishers, The Clapham Society:

The following extract from Henry Thornton's "Recollections" (with transcript) is from Nick Bird, his third great-grandson:



[Start] …to some of the finest of the speeches in Parliament. On some few occasions I took them down, & my memory became exceedingly perfect in this respect. I discovered that to possess a strong interest in a subject & some previous acquaintance with it rendered a long continued attention easy & operated almost like Inspiration. I make this observation for the benefit of my eldest daughter in particular. I perceive that she is easily discouraged & is too much disposed to desist from some attempts thro' the difficulties in the entrance. She is likewise eager as I was. Probably some of my other Children may resemble her. I advise them all to endeavor to direct their mental powers to various Subjects while they are young, to beware of that false Shame which makes us afraid of the discredit attending our first feeble efforts, & looking to the approbation of God rather than that of Man, to lay out their Talents whatever they may be for the public good & to the glory of Him who gave them.

The first vote which I gave in Parliament was in favor of the treaty of peace with America, & I immediately became in some measure enlisted with the friends of Mr Pitt & an opponent of the Coalition Party. I divided against Mr Fox's India Bill & again supported Mr Pitt on his return to power except in some few instances. In reviewing my… [End]

StumbleUpon PLEASE give it a thumbs up Stumble It!


Post a Comment

<< Home