II. Responsibility of Resumption for the Fall in Prices

From a peak according to Silberling's index of 198 in 1814, the English price level fell to 136 in 1819, to 114 in 1822, to 106 in 1824, and to 93 in 1830. Ricardo had predicted that resumption would bring about a fall in prices not greater than the then prevailing premium on gold, or from 3 to 8 per cent. After the event Ricardo conceded that resumption had probably caused a greater fall in prices than he had anticipated. He still contended, however, that if resumption had been managed in accordance with the plan which he had proposed, it would not have caused a greater fall in prices than 5 per cent. If resumption had actually caused a fall in prices greater than this it was because the Bank of England had so mismanaged the resumption as unnecessarily to bring about a rise in the world value of gold. He held that there was no certain way of determining how much of the increase in the world value of gold was due to this mismanagement and how much to other causes, but he accepted as a plausible guess Tooke's estimate of 5 per cent as the additional fall in English prices resulting from the mismanagement of the Bank. This would make the total reduction in English prices which according to Ricardo could be attributed to the resumption some 8 to 13 per cent, with the remainder of the fall attributable to other causes operating simultaneously to raise the world value of gold. At other times, however, Ricardo assigned to the Bank's mismanagement responsibility for a greater portion of the deflation of prices than Tooke's estimate would indicate. In the absence of any index numbers, he could have had only a vague idea as to the extent of the fall in the price level which had occurred, and he seems to have seriously underestimated it.

In his ardent defense of resumption in principle, and also, though to a lesser extent, in his criticism of the management of resumption by the Bank, Ricardo occupied a somewhat isolated position. In the face of the depression which followed resumption, defenders of the resumption were few and these tended to rest their defense on the claim that a metallic standard of some sort was desirable, without undertaking to justify the restoration of the old par or to blame the Bank for the evils which they admitted had resulted from resumption as it had actually been brought into effect. Of the ardent bullionists who during the inflation period had insisted upon the desirability of a return to the metallic standard, some were now dead, or inactive as far as the currency controversy was concerned; and others, such as Wheatley and Lauderdale, when faced with falling prices, lost their earlier enthusiasm for a return to the metallic standard at the old par. Even so ardent a disciple of Ricardo as McCulloch thought that the return to cash payments at the old par had been a mistake. Much later in the century the Resumption Act of 1819 came to be generally regarded as a great achievement of economic statesmanship, but the economic distress which had followed it and the extensive literature of protest and criticism to which it gave rise had by then been largely forgotten.

Ricardo, however, had given more hostages to fortune than the other bullionists. Not only had he been still active in 1819 in advocating resumption at the old par, when other bullionists had become silent or had advised devaluation, but he alone, or almost so, among the bullionists had insisted that the premium on bullion was a measure of the extent to which the suspension of cash payments had been responsible for the rise in English prices, and therefore he alone was now bound, if he were to be consistent, to maintain that it would also be a measure of the extent to which resumption of cash payments at the old par would lower prices. The other bullionists had not committed themselves to any quantitative estimate of the inflationary effect of suspension of cash payments. They were now free to reject Ricardo's measure of the deflationary effect of resumption.

It was later frequently alleged, mainly on the evidence of Heygate, a vigorous opponent in Parliament of the Resumption Act, that Ricardo, shortly before his death in 1823, had admitted to friends that he had been wrong in forecasting that resumption would cause a fall in prices of only 5 per cent. This, however, seems doubtful. Ricardo, as we have seen, openly admitted that resumption, as actually carried out, had resulted in a greater fall of prices than 5 per cent, but he continued to deny, apparently to the end, that this greater fall had been an inevitable result of resumption. When Ricardo stated that resumption would cause a fall of 5 per cent in English prices, he did not mean that resumption might not be followed by a much greater fall in prices. Other factors might well be operating simultaneously, but independently, to lower prices. Ricardo, moreover, when forecasting in 1819 the effect of resumption on prices, assumed proper management of the resumption, and he always had reference to the level of prices and the premium on gold as they were in 1819, and not, as did some of his later critics, to the higher prices and higher premiums of the preceding years. Ricardo had been charged during the inflation period with exaggerating the extent of the depreciation of paper and of the rise in prices. He was now to be charged, sometimes by the same persons, with minimizing the extent to which paper had been depreciated and therefore also the extent to which resumption had been responsible for the fall in prices which followed it.

Ricardo had proposed that convertibility should be restored in terms of ingots of bullion instead of coin, and that the actual circulating currency should consist wholly of paper. In this way a metallic standard could be reestablished with a minimum drain on the world's supply of gold, and therefore with a minimum appreciation of the world value of gold. The Bank, however, was unwilling to follow this plan and instead engaged in what Ricardo regarded as an unnecessary contraction of credit and accumulation of gold, thus raising its world value and forcing additional deflation of English commodity prices. Ricardo believed that if the Bank had acted in accordance with his plan it would not have found it necessary to add to the stock of gold which it already had in 1819: “There was nothing in the plan which could cause a rise in the value of gold, for no additional quantity of gold would have been required.” This alleged mismanagement of resumption by the Bank aroused strong feeling on the part on Ricardo.

Table IV presents some statistical data on the operations of the Bank during the critical years of preparation for and actual establishment of cash payments. They appear in general to lend confirmation to Ricardo's criticism. But although the Bank's holdings of bullion increased greatly after 1819, they had been unusually low in that year. It is difficult to find a basis for an estimate of what would have been a conservatively safe gold reserve for the Bank at that time, in the absence of data as to the extent of the credit superstructure for which the Bank's bullion holdings were the base. If we use the ratio of its gold holdings to its own total demand liabilities as a measure of the status of the Bank's gold reserves, it would seem fairly clear that from 1821 to 1825 the Bank maintained larger reserves than were necessary. But with reserves at their peak in 1825, the Bank barely managed to survive the crisis of 1826 without suspension of cash payments. Even if the Bank's difficulties in 1826 were due to inexcusably reckless credit expansion on its part, the rapidity and the extent of the drain on its bullion reserves demonstrated that large reserves were necessary, given the quality of the Bank's management and the nervous state of public opinion with respect to the solidity of the paper circulation in times of financial strain. Information is lacking as to what the Bank's motives were in accumulating gold and in pushing it out into circulation, but one consideration seems to have been its desire

to rebut the charge that it was unduly concerned about its own profits.

The Bank's abandonment of the bullion standard was more assuredly a mistake. The Bank, and other critics of Ricardo's plan, cited the absence of any immediate demand for ingots as a demonstration of its impracticability. But under the bullion standard, and in the absence of domestic gold hoarding, there could have been a demand for ingots only for industrial purposes and for export. The fact, therefore, that from 1819 to 1821, when the Bank was contracting its discounts, when paper was not at a discount, and when the exchanges were favorable, there was no demand for ingots, in no way reflected on the practicability or the desirability of the bullion standard. If the Bank had not withdrawn its small notes from circulation, there would have been no demand for coin or ingots. The chief virtue of the ingot plan lay in the fact that at a time when the general return to metallic currencies was threatening to cause a price deflation, it would enable England to make her return to the gold standard with a minimum drain on the world supply of gold. It had the additional virtue that in times of depression, when there was still confidence in the paper currency but impaired confidence in the profitability of investment, the desire for cash liquidity could be met wholly in notes instead of in bullion, thus avoiding forced deflation by the Bank of England. It was open to the objection, however, that it would lessen the stabilizing influence of the pressure brought to bear on the Bank of England by an increase in active circulation during periods of credit expansion and of the leeway given to the Bank to expand credit in times of depression by the decline in active circulation and the consequent influx of gold to the Bank.

From February, 1819, to August, 1822, the Bank reduced its circulation of notes under £5 from £7,400,000 to £900,000, mostly by substituting gold coin for paper in circulation. This also was undoubtedly a mistake. In case of internal distrust, it was mostly the small notes which came back to the Bank for payment in gold, and these were therefore the part of the paper circulation which was most dangerous to the maintenance intact of the gold standard, and conservative opinion in England has always regarded notes of small denominations with misgivings. But the substitution of specie for paper could have been made more gradual without serious risk. Some writers argued, further, that the gold standard could not be safely operated unless there was a secondary reserve of gold in the form of circulating coin from which external drains could be met, but it is doubtful whether the Bank could ever draw in circulating gold quickly enough to serve as a means of meeting a severe external drain, and during an internal crisis in a country where gold circulates it is likely to be withdrawn from the banks into private hoards.

Samuel Turner, a director of the Bank of England at the time of the resumption, attempted to meet Ricardo's charge that the Bank after 1819 had added to the difficulties resulting from resumption by making excessive purchases of bullion by the argument that the Bank paid for the bullion in bank notes, and that in the absence of such purchase its owners would have taken the bullion to the mint to have it coined; the Bank's purchases therefore merely made the increase in circulation come more promptly than would have been the case if the holders of bullion had been obliged to wait until they could get coin in exchange for their bullion. But the data in table III make it appear probable that the bullion would not have come to England at all if the Bank had not contracted its discounts and withdrawn its small notes, and that, instead of being exchanged at the Bank for notes, the bullion imports were used, directly or indirectly, to cancel indebtedness to the Bank and as a substitute circulating medium for notes. The Bank was not a purely passive agent, as its defenders claimed, but by maintaining its discount rate unchanged, by substituting specie for small notes, and by reducing its holdings of public securities, it was promoting deflation.

The government, however, must share responsibility with the Bank for any mistakes that were made in connection with the resumption of cash payments, at least prior to 1822. The Bank had been hostile to resumption in 1819, and embarked upon it only because compelled to do so. The Resumption Act had not been a government measure, but the government had not opposed it, and there is probably some basis for Mathias Attwood's charge that the committee hearings of 1819 operated, whether intended to do so or not, to trap the opposition in Parliament to advocate measures which the government itself wished to have carried into effect, but for which it was reluctant to assume full responsibility. The committees and the government itself also yielded too readily, in spite of their misgivings, to the Bank's insistence upon a drastic reduction of its floating debt to the Bank, a measure deflationary in its effect. The substitution of gold coin for small notes was made necessary by the provision in the Act of 1816 terminating the Bank's right to issue small notes two years after resumption of cash payments. This provision received little or no mention when the Resumption Act was passed, and it has been suggested that its existence had been forgotten. But the government was no doubt aware of its existence and in any case was alone responsible for it, and it was probably also due in part to pressure from the government that the Bank had built up its gold reserves by gold purchases even when gold was still at a premium.

Whether Ricardo overestimated the influence on the world price of gold of the accumulation of bullion after 1819 by the Bank of England it seems impossible to determine. Mathias Attwood pointed out that Ricardo was not consistent in his treatment of inflation and of deflation. In accepting the premium on gold as an adequate measure of the rise in English prices caused by the suspension of cash payments, Ricardo in effect denied any importance to the inflationary influence on world gold prices of the release of a quantity of gold from English monetary use. “But if a purchase of bullion on the part of the Bank be capable of preventing bullion from falling, with an advance in the value of the currency, it must be equally clear, that a sale of bullion by the same body can prevent bullion from advancing along with a depreciation [i.e., in the value] of the currency.” It was Mathias Attwood's position, not that Ricardo was exaggerating the deflationary influence on prices of the Bank's accumulation of gold, but that, by virtue of his use of the premium on gold as a measure of the influence of the Bank's activities on prices, Ricardo had underestimated both the inflationary influence of suspension and the deflationary influence on prices of the Bank's accumulation of gold, since even at their peak the bullion holdings of the Bank of England were only an insignificant fraction of the estimated world stock of gold and silver, and since much of the gold acquired by the Bank had probably come out of English hoards rather than from the stocks of other countries. But the comparison should be between, on the one hand, the English absorption for monetary purposes of non-hoarded gold, including the gold which went into English circulation through the agency of the Bank, and, on the other hand, not the world's total stocks of gold and silver, but the world's monetary stocks of gold and silver, but with greater emphasis on gold. The fact that the greater part of the world was then in fact, if not in law, on a silver standard basis makes it seem at least plausible that resumption as it was carried out involved a significant absorption of gold by England.

But whether or not Ricardo did exaggerate the deflationary effect of the English absorption of gold on world gold prices, he probably underestimated rather than overestimated the deflationary influence on English prices of the resumption of cash payments. In taking 1819 for his base year, Ricardo overlooked the probability that the mere anticipation of early resumption would depress prices, and that the fall in the premium on gold and the decline in prices from 1816 to 1819 were also therefore to be regarded as in part at least the consequence of the agitation for resumption. One writer, George Woods, had pointed out some time before that prices would not rise in full proportion to the increase in paper issue, the physical volume of trade remaining the same, if “speculators ... invest their capital in bank paper ... in anticipation of being ultimately paid in specie or bullion.” For the same reason prices could fall before actual resumption, the paper issues and the physical volume of trade remaining the same, if speculators were hoarding paper or dishoarding gold in anticipation of resumption. But Ricardo, like most of the writers of the period, paid little or no attention to the effects of speculative factors on the value of paper money in terms of bullion or of commodities. One writer claimed also that prior to the resumption of cash payments, mechanical inventions and the subsidy to labor from the poor rates had operated to keep the money costs and therefore the prices of exports, and thus to give a temporarily high exchange value to the English currency, but it is not clear that these factors ceased to operate, or operated in lesser degree, after 1819.

The defenders of the resumption were justified, however, in denying that it had been responsible for all of the decline in prices which occurred after 1816, or even after 1819, especially as this decline continued until the 1850's. Other countries which had been on a paper basis with inflated prices during the war returned to a metallic basis at old parities after its termination and therefore participated with England in the scramble for bullion, which was not available in sufficient quantities to support the existing price levels. The long-continued decline in the English price level after resumption is probably to be accounted for, moreover, by a failure, for the world as a whole, of the production of gold to keep pace with the growth of commerce and industry. The post-Napoleonic fall in prices appears not to have been confined to England, but to have been a world-wide phenomenon.

But whether or not the resumption of cash payments was causally responsible for part or all of the decline in the English price level, in resuming cash payments at the old par England was surrendering the means by which that downward trend could have been checked if not wholly avoided. This argument was at the basis of much of the criticism of the return to a metallic standard. Even Ricardo conceded that the Bank had some power to check a fall in prices, as long as its notes were inconvertible, which it did not have under a metallic standard, and that this was an advantage. But it was an advantage offset, according to him, by the disadvantages of an inconvertible currency.