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Almost everyone in government agreed with Ricardo's assessment, but, as is often the case, theoretical truth was fighting a losing battle against practical necessity. Men's opinions on the best form of money were one thing. The war with Napoleon was another, and it demanded a constant inflow of funding. England continued to use the central-bank mechanism to extract that revenue from the populace.
DEPRESSION AND REFORM
By 1815, prices had doubled again and then fell sharply. The Corn Act was passed that year to protect local growers from lower-priced imports. Then, when corn and wheat prices began to climb once more in spite of the fact that wages and other prices were falling, there was widespread discontent and rebellion. 'By 1816,' notes Roy Jastram, 'England was in deep depression. There was stagnation of industry and trade generally; the iron and coal industries were paralyzed.... Riots occurred spasmodically from May through December.'1
In 1821, after the war had ended and there was no longer a need to fund military campaigns, the political pressure for a gold standard became too strong to resist, and the Bank of England returned to a convertibility of its notes into gold coin. The basic central-bank mechanism was not dismantled, however. It was merely limited by a new formula regarding the allowable fraction of reserves. The Bank continued to create money out of nothing for the purpose of lending and, within a year, the flower of a new business boom unfolded. Then, in November of 1825, the flower matured into its predestined fruit. The crisis began with the collapse of Sir Peter Cole and Company and was soon followed by the failure of sixty-three other banks. Fortunes were wiped out and the economy plunged back into depression.
When a similar crisis with still more bank failures struck again in 1839, Parliament attempted to come to grips with the problem.
After five more years of analysis and debate, Sir Robert Peel succeeded in passing a banking reform act. It squarely faced the cause of England's booms and busts: an
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THE CREATURE FROM JEKYLL ISLAND
their banknotes were backed by gold or silver. It was a good try, but it ultimately failed because it fell short on three counts: (1) It was a political compromise and was not strict enough, allowing the banks to still create lending money out of nothing to the extent of
?14,000,000; in other words, a 'fractional' amount thought to be safe at the time; (2) The limitation applied only to paper currency issued by the Bank. It did not apply to checkbook money, and that was then becoming the preferred
THE ROLLER COASTER CONTINUES
Within three years of the 'reform,' England faced another crisis with still more bank failures and more losses to depositors. But when the Bank of England tottered on the edge of insolvency, once again the government intervened. In 1847, the Bank was exempted from the legal reserve requirements of the Peel Act. Such is the rock- steady dependability of man-made limits to the money supply.
Groseclose continues the story:
Ten years later, in 1857, another crisis occurred, due to excessive and unwise lending as a result of over-optimism regarding foreign trade prospects. The bank found itself in the same position as in 1847, and similar measures were taken. On this occasion the bank was forced to use the authority to increase its fiduciary [debt-based money]
issue beyond the limit imposed by the Bank Charter Act....
Again in 1866, the growth of banking without sufficient attention to liquidity, and the use of bank credit to support a speculative craze...prepared the way for a crash which was finally precipitated by the failure of the famous house of Overend, Gurney and Co. The Act of 1844 was once more suspended....
In 1890, the Bank of England once again faced crisis, again the result of widespread and excessive speculation in foreign securities, particularly American and Argentine. This time it was the failure of Baring Brothers that precipitated the crash.
1. Groseclose,
THE SECRET SCIENCE
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THE MECHANISM SPREADS TO OTHER COUNTRIES
It is an incredible fact of history that, in spite of the general and recurring failures of the Bank of England during these years, the central- bank mechanism was so attractive to the political and monetary scientists that it became the model for all of Europe. The Bank of Prussia became the Reichsbank. Napoleon established the Banque de France. A few decades later, the concept became the venerated model for the Federal Reserve System. Who cares if the scheme is destructive? Here is the perfect tool for obtaining unlimited funding for politicians and endless profits for bankers.
And, best of all, the little people who pay the bills for both groups have practically no idea what is being done to them.
SUMMARY
