The Bullionist Controversy: Origins Of Monetary Economics

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The Bullionist Controversy: Origins of Monetary Economics Developments
Amanda A. Wirinhayu
(1A122G20)
Waseda University

History of Macroeconomics
Prof. Norikazu Takami
November 5, 2014

In 1797, rumors of France invasion provoked bank runs that forced the Bank of England to suspend its convertibility of bank notes to gold. It marked a watershed in the history of monetary economics as the subsequent events constituted the foundation of monetary thought developments. The debates during the suspension of convertibility until 1821 revolved around what is now called the Bullionist controversy, which initially focused on the problems of monetary management under a flexible exchange rate and roused further arguments that represented a significant contribution to economic analysis about the goals of monetary policies and the quest to discover the optimal level of freedom or limitation in banking practices to ensure economic stability. At the start of the Bullionist
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Moderate Bullionists, like Henry Thornton, did not dispute the possibility of instability due to real shocks and came up with the transfer theory. Initially, Thornton even supported the decisions made by the Bank of England for not interfering with temporary external drains in fear of magnifying the problem, but he changed his viewpoint in 1809 when a second phase of inflation hit Britain. The Bank of England's insistence on the Real Bills Doctrine convinced him that the institution did not understand that what mattered was the quantity of the bills, not the quality, since demand would increased continuously as interest rate was lower than the expected capital returns. In the Bullion Report, which was largely written by Thornton, he expanded his arguments by rebuking the notion that repayments of the bills would directly return to the bank rather than staying in
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