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''An Enquiry into the Nature and Effects of the Paper Credit of Great Britain'', generally shortened to ''Paper Credit'', is a book on
monetary theory Monetary economics is the branch of economics that studies the different theories of money: it provides a framework for analyzing money and considers its functions (as medium of exchange, store of value, and unit of account), and it considers how ...
in
economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...
, written by Henry Thornton and published in Britain in 1802. It is seen as prescient of modern monetary problems, having addressed paper currency, risk of inflation, and other issues that were appearing as certificates began to displace gold as currency in early 19th century Britain.


History

Along with being an advocate of liberty — siding in
Parliament In modern politics and history, a parliament is a legislative body of government. Generally, a modern parliament has three functions: Representation (politics), representing the Election#Suffrage, electorate, making laws, and overseeing ...
with
William Pitt the Elder William Pitt, 1st Earl of Chatham (15 November 170811 May 1778) was a British Whig statesman who served as Prime Minister of Great Britain from 1766 to 1768. Historians call him "Chatham" or "Pitt the Elder" to distinguish him from his son ...
in advocacy for the new United States and being one of the most important
Abolitionist Abolitionism, or the abolitionist movement, is the political movement to end slavery and liberate enslaved individuals around the world. The first country to fully outlaw slavery was Kingdom of France, France in 1315, but it was later used ...
s of slavery in England — Henry Thornton was a major force in the
mercantile Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market. Traders generally negotiate through a medium of cred ...
world and one of the top bankers in England. He had turned a small banking house into one of the largest in
London London is the Capital city, capital and List of urban areas in the United Kingdom, largest city of both England and the United Kingdom, with a population of in . London metropolitan area, Its wider metropolitan area is the largest in Wester ...
in the last decade of the 18th century. During that period,
monetary theory Monetary economics is the branch of economics that studies the different theories of money: it provides a framework for analyzing money and considers its functions (as medium of exchange, store of value, and unit of account), and it considers how ...
was largely stagnant, although monetary technology was still advancing. One result of this was a cycle of boom and bust that occurred about once per decade between 1760 and 1800. The last ground-breaking paper on monetary theory was Joseph Harris'
Essay on Money and Coins An essay ( ) is, generally, a piece of writing that gives the author's own argument, but the definition is vague, overlapping with those of a letter, a paper, an article, a pamphlet, and a short story. Essays have been sub-classified as for ...
, printed in 1757, and still seen as a primary source of money theory in Thornton's time. In the same period, country banks in England had become more common, while the Bank of England had stopped printing certificates and become a sort of
Lender of Last Resort In public finance, a lender of last resort (LOLR) is a financial entity, generally a central bank, that acts as the provider of liquidity to a financial institution which finds itself unable to obtain sufficient liquidity in the interbank ...
to other banks, much like the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...
would in the 20th century in the US. Unfortunately, it was still rather new to this role, and its results varied wildly. Its response to the crisis brought about by a new war with France in the 1790s was to suddenly contract credit right when it was needed, causing an economic crisis only reduced when the government stepped in and mandated that its activities be resumed. After a series of similarly disastrous collisions between the wartime government and the Bank of England during the rest of the decade, Parliament began setting up committees to examine the problem and suggest solutions. Thornton was on one such committee in 1797. He had already been working on a book examining the impact of paper money on the British economy for a year and appears to have used his work on the committee to help complete it over the next several years. During this time, Walter Boyd published a paper arguing that irresponsible printing of paper money by the Bank of England was causing many of England's financial woes. While Thornton agreed in part, he considered Boyd's analysis simplistic and exaggerated, and his book became a more evenhanded answer to its attacks. This history made the publication of his book in 1802 of great interest, positioning it as the next major work in monetary theory.


The Book

Thornton opens his book by explaining his intentions in publishing it. "THE first intention of the Writer of the following pages was merely to expose some popular errors which related chiefly to the suspension of the cash payments· of the Bank of England, and to the influence of our paper currency on the price of provisions." But he goes on to say that this original plan had now expanded into that of an economic treatise, describing it this way: In ''Paper Credit of Great Britain'', Thornton first examines the damage caused by the contraction of money supply and credit. He discusses the factors that can cause people to "hold money", reducing what he calls "rapidity of circulation", now known as monetary velocity, and how that can exacerbate a contraction of money supply (which would now be called a
deflationary spiral In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% and becomes negative. While inflation reduces the value of currency over time, deflation increases it. ...
). He says that people may become more likely to hold on to money and liquefiable assets as their confidence in the economy declines, creating a "loss sustained" in economic activity. All of this anticipated much more advanced monetary theory a century later, proving a basis for
classical economics Classical economics, also known as the classical school of economics, or classical political economy, is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. It includ ...
and
Austrian school The Austrian school is a Heterodox economics, heterodox Schools of economic thought, school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivat ...
monetary theory well into the 20th century. Thornton also explains the function of the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...
in great detail, including why it printed paper money, and how that was regulated, with the impact of both currency excess and shortage. ''Paper Credit'' also examines the likely impact of inflating the supply of money faster than demand, and even what would a century later be known as
purchasing power parity Purchasing power parity (PPP) is a measure of the price of specific goods in different countries and is used to compare the absolute purchasing power of the countries' currency, currencies. PPP is effectively the ratio of the price of a market bask ...
: the impact of the relative conditions of two nations' economies on trade and money between them. Likewise, Thornton identifies the "stimulus" effect of printing excess money, including its harmful side-effect of what the Austrians would later call
malinvestment In Austrian business cycle theory, malinvestments are badly allocated business investments resulting from artificially low interest rates for borrowing and an unsustainable increase in money supply. Central banks are often blamed for causing malin ...
, as one industry's exaggerated demand drew money or workers from other, potentially more important sectors. Most famously, Thornton then examines the function and impact of foreign currency exchanges on money. He notes that the excessive expansion of paper money in an economy causes a "drain" of gold out of a country. Thornton explained the reason for the failure of an attempt in the early 1700s by
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, to make widespread use of paper money in France: "He forgot that there might be no bounds to the demand for paper; that the increasing quantity would contribute to the rise of commodities: and the price of commodities require, and seem to justify, a still further increase."


The impact

Before the publication of ''Paper Credit'', Walter Boyd's competing idea was dominant. This was completely displaced by Thornton's new, self-published book, making it the basis for monetary policy discussion going forward. Not only were these various arguments fundamental to later works by Ricardo and
John Stuart Mill John Stuart Mill (20 May 1806 – 7 May 1873) was an English philosopher, political economist, politician and civil servant. One of the most influential thinkers in the history of liberalism and social liberalism, he contributed widely to s ...
, but even came to be seen as superior to its own predecessors. Ricardo, for example, assumed that inflation could only cause problems, instead of being a symptom of other things. Mill later moved back to Thornton's position of seeing inflation and gold flight as sometimes being caused by trade imbalances. In fact, a century later, the
neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption, and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a go ...
and
Austrian school The Austrian school is a Heterodox economics, heterodox Schools of economic thought, school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivat ...
of economics both continued to draw from ''Paper Credit'', or else to reinvent the same positions. It was cited by
Friedrich Hayek Friedrich August von Hayek (8 May 1899 – 23 March 1992) was an Austrian-born British academic and philosopher. He is known for his contributions to political economy, political philosophy and intellectual history. Hayek shared the 1974 Nobe ...
as an important influence, in fact he wrote the foreword for the 1939 reprint.


References

{{reflist 1802 non-fiction books Monetary economics Finance books 1802 in economic history