Views on monetary reserves before 1914

  • J. A. H. de Beaufort Wijnholds
Part of the Publication of the Netherlands Institute of Bankers and Stock Brokers book series (PIBS, volume 31)


This chapter considers the evolution of thought on monetary reserves up to the year 1914. This year may be taken as a turning point because the institutional changes brought about by the First World War deeply modified the reserve need problem.


Central Bank Bank Note Gold Coin Paper Money Gold Reserve 
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  1. 3.
    Cf. Joseph A Schumpeter, History of Economic Analysis, New York, 1954, p. 346.Google Scholar
  2. 4.
    Cf. Alexander Gray, The Development of Economic Doctrine, London, 1931, p. 70.Google Scholar
  3. 5.
    Cf. Jacob Viner, Studies in the Theory of International Trade, London, 1937, pp. 23–25.Google Scholar
  4. 1.
    Cf., for instance, Paul Einzig, The History of Foreign Exchange, London, 1962, chapters 5 and 6.Google Scholar
  5. 2.
    It may be noted in passing that the bill of exchange, which came to be increasingly used for international payments in the last centuries of the Middle Ages, became an important substitute for coins and metals for effecting international payments. As the production of precious metals before the discovery of America probably insufficiently matched the increased need for international means of payment arising from expanding trade, the bill of exchange alleviated the resulting shortage (cf. Einzig p. 70).Google Scholar
  6. 1.
    Cf. Schumpter, History of Economic Analysis, New York, 1954, p. 363.Google Scholar
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    It is laid down in his essay “Of the Balance of Trade” in Political Discourses, Edinburgh, 1752. Several mercantilist writers developed elements of the theory of the “automatic” mechanism. Especially Gerard de Malynes, who wrote early in the seventeenth century, progressed quite far along this road (cf. Schumpeter pp. 344, 345 and 365). Richard Cantillon in his “Essai sur la nature du commerce en general”, published in 1755, also developed a consistent theory of the price-specie-flow mechanism.Google Scholar
  8. 1.
    Cf. Charles Rist, History of Monetary and Credit Theory from John Law to the Present Day, New York, 1940 (originally published in French in 1938), p. 121: “The eighteenth century, which was so deeply concerned with the influence of an influx of precious metals on prices, paid no attention whatever to the inverse problem — an insufficiency of the precious metals for the maintenance of the price level reached by the national economy.”Google Scholar
  9. 2.
    “We trust with perfect security that the freedom of trade, without any attention of government, will supply us with the wine which we have occasion for: and we may trust with equal security that it will always supply us with all the gold and silver which we can afford to purchase or to employ, either in circulating our commodities, or in other uses.” Cf. The Wealth of Nations (1776), book IV, chapter I, Everyman’s Library edition, p. 381.Google Scholar
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    Cf. David Ricardo, The Principles of Political Economy and Taxation, London, 1819 (second edition), pp. 148,Google Scholar
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    Cf. David Ricardo, The Principles of Political Economy and Taxation, London, 1819 149. We have here an example of the view that money is simply a veil (see p. 7 above).Google Scholar
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    Cf. James W. Angeli, The Theory of International Prices, Cambridge ( Mass.), 1926, p. 56.Google Scholar
  13. 1.
    The dates in each year to which the figures relate are 1698–1750: end of August; 1775–1844: end of February; 1875–1913: last Wednesday in February.Google Scholar
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    England and Wales only. Figures up to 1825 are estimates.Google Scholar
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    All figures except those for 1900 and 1913 are estimates.Google Scholar
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    Estimates from various sources (mainly committee reports). Figures relating to the Bank of England are derived from “Bank of England Liabilities and Assets: 1696 to 1966”, Appendix to an article in the Bank of England Quarterly Bulletin, June 1967; others from: Emmanuel Coppieters, English Bank Note Circulation 1694–1954, Louvain/The Hague, 1955.Google Scholar
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    Specie payments were suspended by the Bank of England in 1797, however, as the drain of gold became so heavy that it was unable to meet the conversion demand. Specie payments were resumed in 1821.Google Scholar
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    These notes increasingly disappeared after 1844, the year in which the Bank Charter Act (Peel’s Act) was passed, and which prohibited country banks in England and Wales from increasing their issue of notes. Before 1844 the note issue of country banks was already declining (see table 1 above).Google Scholar
  19. 1.
    An indication of the desirable size of the (centralized) monetary reserves was given during that period by J. Horsley Palmer, Governor (1830–1833) and Director (1811–1857) of the Bank of England. He held as a point of departure for the famous “Palmer rule” (see, for instance, Viner pp. 224–229) that when the exchange rate was at par, the Bank should keep a gold reserve of one-third of its liabilities, deposits as well as notes. This ratio of one-third does not appear to rest on any deeper economic philosophy, and it seems more than a coincidence that it corresponds with the ratio of bullion to note circulation and deposits in 1827 (33.8%), the year in which, according to Viner, the “Palmer rule” was adopted.Google Scholar
  20. 4a.
    Cf. Henry Thornton, An Enquiry into the Nature and Effects of Paper Credit of Great Britain, London, 1802, pp. 71,Google Scholar
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    Cf. Henry Thornton, An Enquiry into the Nature and Effects of Paper Credit of Great Britain, London, 1802, 72,Google Scholar
  22. 4c.
    Cf. Henry Thornton, An Enquiry into the Nature and Effects of Paper Credit of Great Britain, London, 1802, 91,Google Scholar
  23. 4d.
    Cf. Henry Thornton, An Enquiry into the Nature and Effects of Paper Credit of Great Britain, London, 1802, 133,Google Scholar
  24. 4e.
    Cf. Henry Thornton, An Enquiry into the Nature and Effects of Paper Credit of Great Britain, London, 1802, 138.Google Scholar
  25. 3.
    Cf. Viner, p. 268.Google Scholar
  26. 4a.
    George Warde Norman, Remarks upon… Currency and Banking, London, 1838, p. 53;Google Scholar
  27. 4b.
    quoted from Sir John Clapham, The Bank of England: A History, Part II, Cambridge, 1944, p. 195.Google Scholar
  28. 1.
    Cf. Angell, p. 87. FuUarton, an eminent proponent of the “Banking Principle”, was, however, of the opinion that there were no other workable ‘corrective measures than specie drains. The Bank of England could therefore only try to accumulate enough reserves to enable it to meet conversion demands until the process was automatically reversed; cf. Angell, p. 77.Google Scholar
  29. 2.
    “… the reserve in the Banking Department of the Bank of England is the banking reserve not only of the Bank of England, but of all London — and not only of all London, but of all England, Ireland and Scotland too”; Walter Bagehot, Lombard Street: A Description of the Money Market, London, 1873, p. 31.Google Scholar
  30. 4.
    Lombard Street, p. 322.Google Scholar
  31. 5.
    Lombard Street, p. 323. Bagehot ventured an estimate of the “apprehension minimum”, which he put at £ 10 million.Google Scholar
  32. 1.
    Ibid., p. 33.Google Scholar
  33. 2.
    Cf. G. Clare, A Money Market Primer; London, 1891.Google Scholar
  34. 3a.
    Cf. A- Marshall, “Memorandum as to the effects which differences between the currencies of different nations have on international trade”, in Gold and Silver Commission, Final Report, 1888, and C. F. Bastable, “On Some Applications of the Theory of International Trade”, Quarterly Journal of Economics, 1889. An early and outspoken critic of these views was the French economist Nogaro;Google Scholar
  35. 3c.
    cf. Bertrand Nogaro, Le Rôle de la Monnaie dans le Commerce International, Paris, 1904.Google Scholar
  36. 4.
    R.H. Inglis Palgrave, Bank Rate and the Money Market, London, 1903.Google Scholar
  37. 5.
    Hartley Withers, The Meaning of Money, London, 1909, p. 208 et seq. Whithers attributed the decreased importance of the internal aspect to an increasingly smooth working of the machinery of internal credit and the strong development of the use of cheques and book-entry credits (in the United Kingdom). The consequence of these institutional changes was that an internal crisis would not, at least not in its early stages, lead to a large demand for bank notes.Google Scholar
  38. 1.
    In this connection an institutional change which took place in the field of international reserve management during the years around the turn of the century should be briefly mentioned. Following the example of Russia, which started it in 1894, several countries adopted the practice of holding part of their official reserves in the form of foreign exchange convertible in gold. This marked the beginning of the gold exchange standard. It has been estimated that official holdings of foreign exchange accounted for some 15% of total reserves at the end of 1913; cf. Peter H. Lindert, Key Currencies and Gold: 1900–1913, Studies in International Finance, No. 24, Princeton, 1969.Google Scholar
  39. 2a.
    Described in Evidence (including Memorandum) of Sir L, Abrahams before the Indian Exchange and Currency Committee, June 1919 (Parliamentary Papers, 1920, XIV), and in John Maynard Keynes, A Treatise on Money, Volume II, London, 1930, pp. 276,Google Scholar
  40. 2b.
    John Maynard Keynes, A Treatise on Money, Volume II, London, 1930, 277.Google Scholar
  41. 3.
    The Gold Standard Reserve (consisting of sterling as well as gold) was held separately from the Currency Note Reserve so that part of India’s reserves was at the unfettered disposal of the authorities for meeting an external drain.Google Scholar
  42. 4.
    John Maynard Keynes, Indian Currency and Finance, London, 1913, pp. 157 et seq.Google Scholar
  43. Ibid., p. 148.Google Scholar
  44. 2.
    Indian Currency p. 168. Keynes also contended that with the growth of banking there would result an increased scope for disturbances in the short-term loan market.Google Scholar
  45. 3.
    Cf. G.M. Verrijn Stuart, “Nabetrachtingen over Enkele — Werkelijke of Vermeende Spelregels van de “Klassieke” Gouden Standaard” (Contemplations on Some — Real or Imagined — Rules of the Game of the “Classic” Gold Standard) in the volume Bedrijf en Samenleving, Alphen a/d Rijn/Brussels, 1967, p. 240.Google Scholar
  46. 4.
    John Maynard Keynes “The Prospects of Money, November 1914”, Economic Journal, December 1914, p. 621.Google Scholar

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© Springer Science+Business Media New York 1977

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  • J. A. H. de Beaufort Wijnholds

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