Quantitative easing in 19th century Britain

Since 2008 governments and central banks have resorted to a variety of unconventional policies to revive flat-lining economies. With interest rates already at historic lows, central banks have used Quantitative Easing or QE to inject money into stricken economies. In QE, central banks create electronic money to buy government bonds from banks.  The idea is that QE quickly injects money into economies that have seized up due to the credit crunch. This enables banks to increase lending to individuals and businesses, as well as allowing banks to repair their balance sheets. QE also reduces the yield on government bonds, which lowers long-term interest rates. Since March 2009, the Bank of England has implemented three rounds of QE, creating £375 billion worth of electronic money. Although a relatively recent phenomenon, this blog shows that QE was anticipated by unorthodox economic thinkers in the 19th century.

Money came in various forms in the late 18th century: notes issued by the Bank of England and local banks, gold and silver coins, bills of exchange and exchequer bills. Bank notes were convertible into gold or ‘cash payments’: if you took a quantity of notes to a bank you could ask to have the amount paid in gold. However, the cost of paying for the wars with France led to the suspension of cash payments in 1797: notes were no longer convertible. There followed an inflationary expansion of paper money and at the conclusion of the Napoleonic Wars in 1815, politicians and economists, including David Ricardo, debated what should be the basis of the post-war monetary system. The 1819 Bank Act led to the resumption of cash payments and established a fixed price for coining gold. It was intended to check the issue of notes and provide stability.

However, although the Act received almost unanimous parliamentary approval it had plenty of critics. Many farmers, who had contracted debts in a depreciated currency, complained that the Act significantly increased the weight of their debts. A more sophisticated critique came from Thomas Attwood, a Birmingham banker. Attwood argued that currency was the ‘life-blood’ of an economy. Economic prosperity depended upon a plentiful supply of money and confidence. He argued that the Bank Act had been deflationary, depressing prices, and therefore profits and wages. In a vicious deflationary spiral, confidence and prices fell together and the economy seized up. In Attwood’s view, the contemporary economic distress was caused by depressed demand that was traceable to a change in monetary policy, namely the 1819 Bank Act.

Attwood’s solution was to reflate the economy by increasing the money supply. He argued that the increase in circulation would be used productively, to pay off debts, employ labour, and expand production, all of which would halt and reverse the fall in prices. In the short term, Attwood advocated a policy that is remarkably similar to QE. He suggested that the Bank of England issue Bank notes, or that the government print exchequer bills, specifically to purchase government stock and debt. In the longer term, he favoured a ‘national paper’ currency: notes issued by the state and sanctioned by law, but not convertible into gold. Although he was often caricatured as an advocate of inflationary paper money, Attwood envisaged a system of discretionary monetary management. Circulation would be judiciously adjusted by a state bank or the government to maintain prosperity and full employment.

Throughout the 1820s, Attwood lobbied elite politicians and published a number of pamphlets outlining his views. His lack of success led him to support political change to produce a legislature and government more receptive to his views. He founded and led the Birmingham Political Union, the most important of the popular movements that campaigned for the 1832 Reform Act. Elected for Birmingham at the 1832 general election, Attwood’s parliamentary career was a bitter disappointment. Ridiculed for his Warwickshire accent and derided as a ‘provincial banker labouring under a financial monomania’, he made little impact in the House of Commons. His repetitive and strident speaking style, poor tactics, and ignorance of parliamentary procedure made him a poor spokesman for his cause. He was profoundly disillusioned with the reformed Parliament, which had resisted his calls for currency reform. He resigned in despair in 1839 after the Chartist petition for radical political reform, which he presented, was rejected by Parliament.

Attwood later suffered from Parkinson’s disease and was described in 1849 as a ‘thin, wasted, and decrepit old man’. He died in ‘almost Spartan poverty’ in 1856. After his death, Attwood’s economic ideas were increasingly forgotten. Even in Birmingham, it was his role as a political reformer that was emphasised when a memorial statue of him was unveiled in 1859. After the Second World War, historians such as Sidney Checkland and Asa Briggs rediscovered Attwood as an economic thinker, noting that he seemed to anticipate elements of John Maynard Keynes’s ideas about aggregate demand.

For details of how to obtain free access to Thomas Attwood’s biography on the House of Commons 1832-68 preview website, please see here.

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