History of Political Economy 16-2

0 1984 by Duke University Press

The transformation in Thomas Tooke’s monetary

theory reconsidered

Arie Arnon

I. Introduction
Even though he was a founding member of the London Political Economy
Club and the author of the monumental History ofprices, Thomas Tooke
(1774-1 858) has received little attention in most modem discussions of
the history of economic thought. Schumpeter’s (1954) attitude is charac-
teristic. His review of Tooke’s thought is sketchy and articulates the com-
mon tendency to dismiss Tooke as a painstaking collector of data but not
a serious theoretician. This view is reflected in Schumpeter’s complaint
that Tooke is a “wooly thinker.” Even Rist (1940), who admired Tooke,
stated that “Tooke was no theorist.” On the other hand, Gregory, whose
introduction to the reissue of the History of prices in 1928 represents the
only comprehensive study of Tooke published to date,2presents a different
picture. His analysis indicates that apart from collecting data, Tooke also
made a significant contribution to the development of monetary thought in
the nineteenth century, and especially to the emergence of the Banking
School in the 1840s. The views of his contemporaries were similar. Thus
J. S . Mill notes:
Beyond, perhaps, any other man, he brings to the consideration of
mercantile phenomena an intimate practical knowledge of the ele-
ments upon which they depend, combined with habits of reflecting,
or, to give the operation its proper name, of theorizing, which qualify
him to discriminate and analyse the influence of those various ele-
ment~.~
The present article follows Gregory and not Schumpeter in considering
Tooke’s writings to include an at least implicit theoretical structure, which
Correspondence may be addressed to Dr. Arie Arnon, Depart. of Economics, Ben-Gurion
University, Beer-Sheva 84 120 P. 0.B . 653, Israel.

1 . One comprehensive study of Tooke is Gregory 1928. Another interesting account is

Laidler 1972. One can find useful references also in Daugherty 1941; Daugherty 1942,
140-55 and 241-51; Marget 1942, 2:311-27; Viner 1937, 218-89; Wicksell 1935, 2:168-
90.
2 . See also Arnon 1980.
3. Mill 1844; see also Malthus 1823.

311

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 3 12 History of Political Economy 16:2 ( 1984)

merits scholarly attention on several grounds. Tooke was a major contrib-

utor to the rise of the Banking School which proposed an innovative for-
mulation of monetary theory contrary to the existing Currency School’s
basically traditional continuation of Ricardo’s views. Furthermore, Tooke’s
first publications are largely within the mainstream of Ricardian monetary
theory and thus analysis of the developments which led to his later radical
transformation can shed interesting light on the Currency School-Banking
School debate in general. In addition, the present analysis will reveal that
this transformation also rested on changing approaches to certain broad
concepts which remain relevant to this day, such as the application of free
trade to banking. The present article will propose an analysis of the trans-
formation in Tooke’s thought. This analysis will take issue with Gregory’s
interpretation of this transformation and will highlight Tooke’s place within
the monetary developments of his day.
11. Tooke’sEarly and Late Views
Tooke developed an interest in public questions relatively late, after
many years as a successful merchant in the Russian trade. In 1819 he was
sufficientlyrespected in economic circles to be invited to appear before the
Parliamentary committees which discussed the resumption of cash (specie)
payments. This taste of public life seems to have appealed to him, since
he immediately became active in two important ventures: the Merchants’
Petition in favour of Free Trade, which he himself initiated and wrote, and
the establishment of the Political Economy Club, which brought together
the leading political economists of the day to discuss economic issues and
to support free-trade principles. In the same period, Tooke was elected a
Fellow of the Royal Society, even though he had not yet published any-
thing. After his sudden appearance on the public scene, Tooke was to
remain in the limelight on economic issues almost continuously until his
death.
It is agreed that Tooke’s early publications reflect an approach to mon-
etary issues quite different from that which characterises his late works.
Those publications (Tooke 1823; 1826; 1829a; 1829b; 1928a) which ap-
peared before and during 1838 were mainly concerned with price fluctua-
tions and with a defence of convertibility based on a theoretical approach
which can be described in O’Brien’s terms (1975) as “moderate bullionist.”
Tooke argued-a view which was later to characterise the currency school-
that prices are determined by the quantity of the medium in circulation,
which he then defined as coins plus banknotes. He thought that this me-
dium of circulation ought to behave as would a pure gold circulation.
In 1844 Tooke published a pamphlet, An inquiry into the currency prin-
ciple (Tooke 1959), expressing monetary views entirely different from those
of his first period. These new views constituted a theoretical declaration

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 Arnon - Thomas Tooke reconsidered 3 13

of the principles of the famous Banking School. In brief, Tooke now ar-
gued that there was no theoretical or empirical basis for the Currency
School’s distinction between bank notes and other means of payment such
as cheques and bills of exchange. Second, Tooke argued that the quantity
theory, which stated that prices are determined by the quantity of the me-
dium in circulation, was wrong. Tooke, and the Banking School, thought
that in fact the quantity of the medium in circulation was determined by
prices. Prices, he now argued, are determined ultimately by the incomes
of the consumers.
In his analysis of this transformation in Tooke’s thought, Gregory argues
that a clear break can be identified between the young Tooke and the
mature one, between Tooke the modified Ricardian until 1840, and Tooke
the supporter of the Banking School after 1840. According to Gregory,
this break occurred in 1840, between the publication of the third volume
of History of prices and the evidence given by Tooke to the Committee on
Banks of Issue4 in the same year:
The fact that Tooke was a witness in that year, and the further fact
that the third volume of the History appeared in the same year, are
important circumstances in the chronology of Tooke’s mental evolu-
tion. For, in the period between the writing of the third volume and
his appearance before the Committee of Inquiry, Tooke definitely shifted
his ground and, from being a modified Ricardian in currency matters,
he had become a definite opponent of the Currency School [Gregory
1928, 711.
He further argues that the main difference between Tooke’s early and late
views lay in his revised perception of the role of deposits. My article will
present a different analysis of Tooke’s transformation, which will take is-
sue with Gregory’s dating and with his understanding of its content. Rather
than a sudden break, it is more fruitful to talk of a transitional period
following the 1838 publication and preceding that of 1844, during which
Tooke was gradually rejecting certain of his earlier premises but had not
yet consolidated a complete alternative theory. This argument can be ver-
ified by analysis of this transitional period.
HI. A Critique of GregoryS Interpretation of
Tooke’s Transformation
The publications of 1840 appeared against the background of the crisis
of 1838-39 which had caused a revival of interest in the question of cur-
rency as a major economic issue. This renewed interest led to what Fetter
4. Parliamentary Papers (1 840) Reportfrom the Select Committee on Banks of Issue with
minutes of evidence (603,53), IV. Tooke’s evidence: Questions 3292-3306, 3615-3623;
3722-3792.

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 314 History of Political Economy 16:2 (1984)

(1965, 130) describes as the third stage in the search for a stable monetary
system. The first stage, in 1819-21 marked the return to the metallic stan-
dard which was to prevent the Bank of England from issuing notes at its
own discretion. The second, after the 1825 crisis, revealed the instabilities
created by circulation based on paper, and saw the attempt to reduce the
amount of the country bank notes and increase those of the Bank of En-
gland, which appeared to be more stable. However, the search for a perfect
circulation which would answer the needs both of commerce and industry
and of foreign trade was far from complete. The crisis in the late 1830s
threatened the solvency of the Bank of England and rendered urgent a new
reform. The Currency School’s solution to the continuous threat to con-
vertibility was to transform the whole medium of circulation to a gold
dummy; i.e., notes would be made to function as gold by the imposition
of rules which would force them to fluctuate exactly as gold would have
done. This view prevailed and was implemented in the Bank Act of 1844,
which divided the Bank of England into separate departments, one for
issuing notes and one for dealing with deposits.
Gregory’s view that Tooke’s theories underwent an abrupt and marked
change within a few months in 1840 is based on the primary importance
that he attributed to Tooke’s view of the relationship between bills of ex-
change, deposits, and notes. Gregory claims that previously Tooke thought
it correct to distinguish between notes as substituting for gold and notes as
means for raising credit. Whereas the latter are dangerous for the function-
ing of the circulation because credit usually expanded at exactly those
times when it was necessary to contract the amount of notes in circulation,
the former are just an ‘economised’ gold. Tooke’s thesis was that the cir-
culating medium needed to behave as if it were gold: “there is very often
an excess of issue through the medium of private credit, which would not
occur if the issues were regulated upon the principle of substitution of
paper for what otherwise would have been the circulation of gold.”5 This
principle was exactly the “fundamental thesis of the ‘Currency School,’”
as Gregory correctly remarks.
The distinction between the forms of means for current payments which
are “part of the paper money, or, properly speaking the currency of the
Kingdom”6 and those which are not, is, in Gregory’s view, the core issue
to which the intellectual break in Tooke’s writings should be traced. In
1832 the distinction is between notes which influence prices and other
media of transaction such as deposits and bills of exchange which do not.
Gregory claims that in Volume III “Tooke is still not completely won
over to the view that deposits and notes in circulation can be treated as
identical from the standpoint of Bank of England policy” (Gregory 1928,

5 . Parliamentary Papers 1832, Q.3960.

6 . Ibid. Q.3030.

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 Arnon Thomas Tooke reconsidered 3 15

78). Tooke, claimed Gregory, argued in 1840 in Volume I11 that they differ
in that deposits, as long as they remain deposits, are
money that is unemployed and inert. Whereas the Bank notes issued
are so much money, all, or the greater part of which is in actual
employment, as a part of the medium, with the metallic circulation
for current payments. . . . The blending, therefore, of the deposits
with the Bank notes, under the term of paper circulation, and treating
of them as in their origin proceeding from designed operations of the
Bank, and as being identical in their action upon prices both of se-
curities and of commodities, or, to speak in language less technical,
on the rate of interest and on the prices of produce, leads inevitably
to confusion, and is quite incompatible with any consistent applica-
tion of their variations to elucidate the working of the system [Greg-
ory 1928,78-79, quoting Tooke 1928b, 124-251.
This is, in my view an erroneous interpretation of the 1840 (1928b) text.
At this point, Tooke had, in fact, already rejected the view apparently
suggested by Gregory’s quotation above that one should distinguish be-
tween deposits and bank notes. The passage quoted by Gregory is in fact
part of Tooke’s criticism of the theory that Hume developed in 1839 about
the identity of bank notes and deposits. In the same volume of History of
prices, in another place, Tooke also criticised the other ‘extreme’ argu-
ment, that of Loyd, Norman, and other Currency School supporters, that
notes and deposits are to be completely distinguished. Tooke defined his
approach as taking a middle course between these two views: “I had oc-
casion, some pages back, to deny Mr. Hume’s position of the complete
identity of circulation and deposits; and I must equally call in question
Mr. Loyd’s view of their incompatibility for the purpose in view” (Tooke
1928b, 256).
This was the view adopted by Tooke also in 1844. Convinced of his
Banking School views, he distinguished between deposits and notes in
some aspects and in others treated them as identical. His view on this
subject, complicated as it is, did not change after Volume 111: “the sub-
stances, agreeing in some, differ in other properties; and it depends upon
the object to be answered, whether, for that particular purpose, a com-
pound of these qualities may not form a very useful mixture” (1928b,
256).
Thus a close reading of Volume I11 indicates that Tooke’s views on notes
and deposits had already changed-i.e., that Gregory’s dating of what he
sees as the shift in Tooke’s thought is wrong. Moreover, examination of
the text reveals several additional differences from Tooke’s previous views.
For the first time Tooke presents the argument, which was to become so
central in the period to come, that banks cannot increase the amount of
their notes in circulation. In this Tooke (1928b, 156) is partially accepting

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 3 16 History of Political Economy 16:2 (1984)

Gurney’s argument that any additional supply of notes by the Bank would
find its way back to the Bank, which “would lock them in their tills.” This
idea developed later into the famous Law of Reflux. In this, Tooke was
arguing against the common tendency to blame speculation on the banks
(1928b, 156-66). It is already clear to Tooke that
there is no foundation in fact or in reasoning for the theory which
ascribes a necessary and direct influence to the occasional expansion
or contraction of Bank issues on the Prices of commodities, by gen-
erating a spirit of speculation on the one hand, or by compelling a
resort to forced and ruinous sales on the other [1928b, 1711.
In addition, Volume 111includes the first formulation of Tooke’s income
theory of prices. This theory explains changes in prices as resulting from
changes in income and expenditure and not from changes in the quantity
of the medium in circulation. Tooke summarized this new theory as follows:
It is the quantity of money constituting the revenues of the different
orders of the state, under the head of rents, profits, salaries and wages,
destined for current expenditure, according to the wants and habits of
the several classes, that alone forms the limiting principle of the ag-
gregate of money prices,-the only prices that can properly come
under the designation of general prices. As the cost of production is
the limiting principle of supply so the aggregate of money incomes
devoted to expenditure for consumption is the limiting principle of
demand for commodities [ 1928b, 2761.
This marks Tooke’s first blow at the rigid quantity theory and his first
criticism of the accepted relation between circulation and prices. This new
line of argument paved the way for an examination of the working of the
different forms of mediums of exchange, including both money and credit,
and their relation to prices. His main argument is that prices do not depend
on the amount of notes, since notes are only a means of clearing debts
made in other forms of paper, which are just as important in determining
prices:
Nine tenths, or more probably ninety-nine hundredths, of the pur-
chases and sales of the wholesale markets, are transacted through the
medium of book debts, or simple credit, and cheques on bankers. It
is the balances only of these transactions that require the intervention
of bank notes [ibid. 2751.
In conclusion, Tooke came to believe that the quantity of banknotes does
not determine prices, both because other forms of paper money influence
prices and because prices are primarily determined by income and expend-
iture. As a result, the Currency School proposal to control the quantity of

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 Arnon Thomas Tooke reconsidered 317

notes in circulation by separating the Bank of England’s operations into

two departments seemed to him to be an erroneous solution to the problem
of convertibility.
A careful reading thus reveals that in this volume Tooke’s Banking School
approach was already taking shape, but he still appears indecisive about
these unorthodox views. All the same, one can already distinguish the
emergence of those new principles which were to make him an opponent
of the Currency School. In this context it is interesting to note that during
this period Tooke met regularly in the Political Economy Club with leading
Currency School figures such as Norman, Torrens and Loyd. These meet-
ings helped Tooke clarify to himself those points on which he was begin-
ning to disagree with the Currency School. For example, after the appearance
of Loyd’s 1840 publication7 Tooke felt the need to add a supplementary
chapter to Volume 111 (1928b, 247). In this chapter one finds a clear and
concise presentation of Tooke’s opposition to mainstream theory. Several
of the views towards which he had been groping in earlier chapters are
now clarified. For example, the above quoted formulation of the income
theory of prices is taken from the supplement and is far clearer than a
rough presentation in the earlier pages? Thus one can find a gradual de-
velopment in Tooke’s thought actually during the writing of Volume 111.
This interpretation is reinforced by Tooke’s evidence before the Com-
mittee on Banks of Issue later in 1840. Although Gregory dates Tooke’s
transformation from this evidence, reanalysis reveals that this testimony in
fact adds almost nothing new to Tooke’s arguments in Volume 111 of the
History of prices. Instead, Tooke is facing the implications of his new
theory and restricting its validity only to convertible situations. His first
point was to distinguish very clearly between inconvertible paper-money,
which, together with changes in the amount of gold, influenced prices,
and all other forms of means of payments such as bills of exchange, de-
posits and convertible notes which did not influence price^.^ Tooke’s em-
phasis on this distinction stemmed from the special role attributed to income
in his new theory of prices. In his view, previous writers on money had
erred in failing to make this distinction. Before the Committee he ex-
plained that these writers had been misled by the apparent similarity be-
tween notes such as the assignats, which had real power over prices, and
convertible bank notes, which had not.
Q. 3304: Perhaps I might be allowed to add, that it is the analogy
that has been commonly considered as subsisting between the paper
7 . On the Management of Circulation and on the Condition and Conduct of the Bank of
England, and ofthe Country Issues During the Year 1839.
8. See ‘A note on Gurney’s evidence,’ Tooke 1928b, 157-58.
9. See Parliamentary Papers (1840) Q. 3297, QQ. 3300-3303. Tooke republished ex-
tracts from evidence in Tooke 1928c, 461-95.

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 3 18 History of Political Economy I6:2 ( I 984)

issued by Government without liability to repayment and paper is-

sued upon securities and payable in gold upon demand, that has led
to the very general and, as I believe, erroneous theory, which as-
cribes the alterations in the amount of the circulating medium so
issued as the cause of a rise of prices [italics by Tooke].
As in Volume 111, Tooke’s main consideration remained convertibility,
which is “the condition sine qua non of any sound system of currency.”
Now he is able to present a solution of his own instead of that of the
Currency School. The proposals made by the Currency School in favour
of separating the Bank into two departments could only aggravate fluctua-
tions in the rate of interest. The answer to such undesirable fluctuations
was a reserve of gold in the Bank which would be large enough to protect
the Bank and prevent its active interference during transitory movements
of gold. Tooke’s response to the practical question of the right policy in
cases of gold drain (unfavourable exchanges) was simply to wait; this
would serve the interests of the whole society and not just those of “mer-
cantile convenience” (Q. 379 1).
Finally this testimony is interesting because it is now clear to Tooke
himself that his views have changed. Tooke was asked about a previous
appearance before the 1832 Committee, where he had stated: “If an en-
larged issue takes place, coincidentally with circumstances favouring spec-
ulation and general over-trading, there can be no question but that it
contributes to increase that tendency, and to aggravate very considerably
the consequent revulsion.” He was asked, “Do you still retain that opin-
ion?” “I do not” was Tooke’s direct answer. “I had not then divested myself
of the opinion which had been, and I believe is, the prevailing one, that
there is a connection between the amount of bank notes in the hands of the
public and the state of prices” (Q. 3622).
To conclude, Gregory traces Tooke’s changing views to the relation
between deposits and notes in circulation alone, although Gregory himself
declared that this was not the crux of the conflict between the Currency
School and the Banking School. My reading of the texts indicates that
Tooke’s views were in the process of changing already during the writing
of Tooke’s third volume, and that these changes can be seen reflected in
several issues and not just in that of deposits.

A Reanalysis-Tooke’s Transformation and

IV
the Concept of Free Trade in Banking
The following analysis will clarify the argument that the transformation
in Tooke’s views can best be understood as reflecting tension between his
monetary theory on the one hand and his more ideological belief in free

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 Arnon * Thomas Tooke reconsidered 3 19

trade on the other. This tension characterises the transitional period and is
resolved in his final formulations.
Tooke’s monetary theory, both before and after the transitional period,
consisted of general statements on free trade and its application to banking
on the one hand, and of more concrete and less ‘ideological’ statements
about such matters as the relation between the quantity of money and
prices and the role of bank notes. In his first period, Tooke’s claims on
both levels of theory were complementary and consistent. Thus, in this
period we are faced with a single, cohesive approach to monetary matters.
A similar cohesiveness characterises the (albeit different) body of theory
produced from 1844. In between, during the years which I have labelled
the transitional period, the picture seems on the surface very confused.
However, it is of great importance to emphasise not only that there is
reason in this madness, a point misinterpreted by other writers, but that
this period of confusion marks an important stage in the crystallization of
Tooke’s mature theory.
After 1838 Tooke gradually questioned several of his premises and con-
clusions on the level of monetary theory. The immediate result of these
initial doubts was the new income theory of prices. At the same time, it is
important to note that Tooke’s meta-theory is still that of his first period,
even though the original harmony between the two levels was rapidly dis-
integrating. This process is familiar both with respect to the development
of theory in general and to that of the individual scholar who replaces one
world view with another. Interpreters of both levels (cf. Kuhn, Althusser,
Piaget) emphasise that transitional periods are characterized by the uneasy
coexistence of apparently contradictory concepts. These contradictions can
be understood as reflecting a process in which previous concepts which
are still considered adequate are applied simultaneously with ones which
are already new. Only when the tendency to coherence and internal con-
sistency outweighs that to conserve existing concepts, will the meta-theory
itself be placed in doubt. Hence the paradox that the focal assumptions are
often those which are the more resistant to change. In Tooke’s case one
can argue that the central pillar of his theory in both cases was his attitude
to free trade in banking. Thus his transitional period was that during which
contradictions in his theorising were rampant, but he was not yet able to
draw the necessary conclusions on the level of meta-theory. When he was
able to draw these conclusions, the result was his mature theory. Such an
examination of the role of free trade principles in monetary theory can also
contribute to further understanding of the famous controversy between the
Currency and Banking Schools.
Ricardo and the early Tooke based their rejection of free trade in banking
on one central argument-that money is not productive. The classical

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 320 History of Political Economy 16:2 (1984)

school-and in this sense Ricardo was certainly a classicist-held that

money does not influence real variables. Money increases convenience and
facilitates exchange, but has no influence on production and distribution.
Free trade was supposed to yield more wealth in the field of production,
but its implications in exchange were different. In 183 1 , according to Mal-
et’s diaries,IOTooke still held the view that in the interests of “public
security,” free trade should not be applied to banking. Lord Althorp, the
Chancellor of the Exchequer, was in the habit of privately consulting econ-
omists such as Tooke, Norman, and Parnell. After one such meeting, Malet
reported, “Tooke told me that they had quite satisfied the Chancellor of
the Exchequer that the principles of Free Trade could not safely be applied
to Banking; and some limitations and some checks were absolutely nec-
essary for the Public Security.”11The same point was discussed at the
Political Economy Club meeting of March 2, 1832. At this meeting, Par-
nell supported the view that Free Trade should be applied to banking, to
the business of issuing paper. l 2 Nobody else, claimed Malet, supported
this view.I3Tooke, who was present at this meeting, “placed the question
in its true light, and was so far the most distinct and sensible”, at least in
Malet’s view (ibid., p. 232). It is a great pity that we do not know what
Tooke argued at another meeting of the Political Economy Club on June
30, 1830, when he spoke on the subject “Are there any, and what, excep-
tions to the benefits of Free Trade?’14
In all events, Tooke’s opposition to free trade in banking derived at least
in part from his lack of confidence in the Bank’s managers, and his general
tendency to try to limit the power of the banking system. This attitude was
also expressed in the June 8, 1832, meeting of the Political Economy Club,
when Loyd raised the question of issuing notes. This led to agreement that
a “Distinct Body” should have the monopoly over issuing notes. There
was disagreement about the desirable limitations to be placed on such a
body. In Malet’s words, “The greater number of persons present seemed
to think that the Bank of England should continue to issue its notes by
means of discount-others, such as Tooke, Loyd, Pennington, were of
the opinion that it should have no other money transactions than the pur-

10. Political Economy Club 1921: Malet diaries, Jan. 13, 1831, p. 220.
1 1 . Many modem economists seem to share Malet’s view on this kind of consultation:
“If one is to judge by his [Lord Althorp’s] financial measures, he does not seem to have
gained much by his intercourse with economists!”
12. See Malet diaries: Political Economy Club 1921, 232: “Parnell would carry the
principles of Free Trade into the issue of Paper Money.”
13. “No one thought that the principles of Free Trade had any proper reference to and
would be usefully applied to the issuing of Paper Money, which is after all coining Money
without any definite standard of value” (ibid. 232).
14. See Political Economy Club 1883, 105.

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 Arnon Thomas Tooke reconsidered 321

chase and sale of Government securitie~.”~~ Apart from the agreement

between Tooke and Loyd, who were later to become rivals, the point to
note is that Tooke in this period was a supporter of the Bank of England
as a “Paper Mint” as against its being a “Mercantile Establishment,” in
Malet’s terms. The Bank should not be a supporter of trade through the
medium of credit; it is not, in Tooke’s view, its business to help the mer-
chants in bad times by advancing money, since this could hurt public in-
terests. This view, which remained the Currency School view and led them
to propose the famous separation of the Bank of England, was later to be
completely rejected by Tooke.
In the 1832 Committee a cornerstone of Tooke’s views on banking was
his complete rejection of competition in the issuing business. The banks’
task is to supply notes equal in their value, i.e., purchasing power, to gold
(Parliamentary Papers 1832, Q. 3830). The only security against a new
Restriction is publicity which will prevent many failures in banking. The
existing system of currency, with few modifications, is the best medium
for supplying the country with money. Banks will not enter into competi-
tion with one another, and were they to do so, this would be against the
public interest. In this testimony Tooke argued as follows:
Q. 3893. Is there not a danger, supposing there were rival Compa-
nies, either they would counteract each other by competition, or they
would find the expediency of coming to an understanding, which
would deprive the Public of the advantage of that competition?-I
think I include that consideration in one of my answers, as giving, in
my opinion a complete negative to any prospect of advantage from
rival banks.
Competition might result in overissuing of notes (QQ. 3866-68). Tooke
prefers the existing system, with the modification of new “Branches of the
Bank of England to Joint Stock Companies” (Q. 3947). The latter are
better than a “system of circulation conducted by the competition of private
individuals” (Q. 3945). The whole argument in this testimony is in favour
of centralising the banking system.
In the third volume of the History ofprices ( 1840; Tooke 1928b) written
during his transitional period, Tooke still considers banking to be part of
the domain which should not be governed by free trade. Tooke discussed
and rejected two suggestions for reform in the banking system. The first,
termed Ricardian, proposed that a national bank should issue notes and
that the mixed circulation of coins and notes should behave like a pure
metallic circulation in that changes in the amount of notes would equal

15. See Political Economy Club 192 1, 238.

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 322 History of Political Economy 16:2 (1984)

changes in the bank’s reserves of gold. The second possible scheme, ac-
cording to Tooke, is competition in issuing notes. Such a scheme is not
convenient for the merchants, and Tooke is “convinced” that they and the
bankers “would have good sense and unanimity enough most strenuously
to resist the introduction of so heterogenous, so inconvenient, and so un-
safe a medium for daily current payments” (1928b, 202-4, 245-46).
Tooke’s criterion for preferring the present scheme is the degree of fluc-
tuations in prices and in the rate of interest in each of them. According to
this criterion he preferred the “Ricardo” scheme to the “competitive” one,
and the present scheme to both. Tooke declares:
I am here assuming, as an undoubted right on the part of the state,
the principle that banks of issue are properly subjects for regulation.
As to free banking, in the sense in which it is sometimes contended
for, I agree with a writer in one of the American papers, who observes
that free trade in banking is synonymous with free trade in swin-
dling. . . .
. . . The claims of right to such [unqualified] freedom of action in
banking ought to be strenuously resisted. They do not rest in any
manner on grounds analogous to the claims of freedom of competi-
tion in production. The claims for such freedom of competition are,
on the part of the public, and are alone, of paramount consideration.
But the issue of paper substitutes for coin is no branch of productive
industry. I t is a matter for regulation by the state, with a view to
general convenience, and comes within the province of police [1928b,
206-7; italics in the original].
In this spirited rejection of the arguments in favour of free trade in
banking, one feels that Tooke is driven by his own awareness of the conflict
between his general attitude towards free trade and his continued adher-
ence to his initial position-a total rejection of its application to banking.
It must be remembered that Tooke was expressing these views at the be-
ginning of his transitional period, when he was already beginning to think
that the Bank’s influence on prices had been overestimated-an essentially
free trade position. It is tempting to speculate that here we are seeing
Tooke’s last attempt to retain the body of his early views intact, despite his
growing doubts. It is significant that this attempt is made around the central
assumption of free trade in banking.
This point of view changed completely in 1844. Although most of the
Inquiry (Tooke 1959) consists of ‘technical’ discussion, Tooke found it
necessary to clarify his position on free trade and banking in a supplement
which he attached to the second edition of the Inquiry after the debate in
Parliament in which Tooke’s position was defeated and “Ricardo’s scheme”

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 Arnon Thomas Tooke reconsidered 323

adopted. Now he argues that free trade in banking is not dangerous to the
production of wealth, its influence on prices is negligible, and so there is
no reason not to leave this business outside the “province of police,” out-
side the hands of the greedy state. This supplementary chapter is devoted
to arguing against Peel’s speech in Parliament, in which Peel opposed
competition in banking. Tooke answered that for “the quality of the paper
Sir Robert Peel argues justly against the notion of competition and free
trade in banking. . . . The interference of the legislature therefore is per-
fectly justifiable” (Tooke 1959, 151); i.e., to retain convertibility is part
of the “province of police”. But, with regard to the quantity of the medium
in circulation Peel argued that it “is to be governed by quite other principles
than those of competition.’’According to Tooke’s mature views, this was
an erroneous argument:

In the following passage of his speech, Sir Robert Peel objects to the
unlimited competition in the issue of paper currency, although per-
fectly and immediately convertible . . . convertibility not only de jure
but de fucto . . . convertibility into gold, together with unlimited
competition as to issue, does give sufficient security against an exces-
sive issue of paper currency; by which I mean (and such must be the
meaning of Sir Robert Peel, as he expressly excludes bills of ex-
change and cheques from coming under that designation) banknotes
in circulation among the public [ 1959, 154-561.

While in the early 1830s Tooke’s opposition to free trade in banking was
compatible with the monetary theory he had developed at the time, it may
seem that developments in his monetary theory forced the change in his
attitude to free trade in banking that we find in 1844. However, it seems
more reasonable to argue that just as it is possible to fully understand both
his early and later formulations only in the context of the attitude to free
trade underlying each, so the change in Tooke’s views can be understood
as a process of resolving the contradictions between meta-theory and mon-
etary theory. As argued above, it is generally the case that theoretical
inadequacies are first admitted on less abstract theoretical levels. The ten-
dency is first to try to absorb the contradictions within the existing meta-
theoretical framework, and to adopt a new meta-theory only when it is
clear that such attempts at resolution are impossible. In the present case,
it was no accident that despite, or rather because, of its centrality, Tooke’s
view on free trade in banking was one of the last to change. By 1844,
Tooke’s attitude towards such ‘technical’ questions as deposits and notes,
credit and prices, pure metallic and mixed circulation, is again compatible
with his broad views on free trade in banking.

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 324 History of Political Economy 16:2 (1984)

V. An Omission-Free Trade and Credit

One cannot leave this topic without mentioning that Tooke’s mature
theory seems to avoid one important question-that of credit. It is possible
to argue that this strange omission was also determined by Tooke’s attitude
to free trade. Tooke rejected the Currency School’s argument that the quan-
tity of the medium in circulation can affect prices, and that free trade
should therefore not be applied to banking. However, his view of credit is
more complicated. It is clear that while the mature Tooke thought the real
bills doctrine to be a true theory for currency, he was not sure of its validity
for credit (see Laidler 1975, 172-74). Tooke thought that credit does not
adjust itself automatically to the needs of the economy through the Law of
Reflux as does currency:
Banks, whether of issue or not, may, in the competition for business,
make advances to persons undeserving of credit, and may discount
large amounts of doubtful bills, thus adding to the circulating me-
dium, without adding directly to the amount of the circulation, that
is, of notes . . . and prices may experience a temporary inflation from
credit so unduly extended.
Now there is no provision in the proposed measures to prevent such
over advances by banks, whether joint-stock or not [ 1959, 157-591.
In a note, Tooke explains that both banks of issue and non-issuing banks
have the power “to add to the circulating medium, including in that term
deposits and bills of exchange.”
This view implies that free trade should not be applied to credit, since
credit does affect real factors in the economy. Tooke did not relate directly
to the crucial problem of free trade and credit. On the one hand this is
surprising, since proposals for regulating credit and money, such as, for
example, Palmer’s rule, were well-known and much talked about. One can
only suggest an explanation for this omission in Tooke’s mature theory.
Tooke thought it important to prevent overlegislation and what he consid-
ered to be unnecessary interference in the banking system. His method
was to discredit his rivals’ arguments, but not to build a counterargument
or complete system, which would, probably, have necessitated a rejection
of the application of free trade principles to credit.
Gregory’s inaccurate dating of the radical transformation in Tooke’s
thought derives from his overemphasis on the question of deposits and his
misreading of Tooke’s third volume. The change from one theoretical ap-
proach to the other was in fact gradual and encompassed not only several
aspects of monetary theory but also a complete reversal in Tooke’s attitude
to free trade in banking. This latter change, rather than that in the role of
deposits, seems most important to an understanding of the background of

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 Arnon Thomas Tooke reconsidered 325

Tooke’s revision of his own views. This interpretation can also shed new
light on the debates between the Currency and Banking Schools.

I would like to thank H. Barkai and L. Harris for very productive discussion. Of course,
any errors are all my own.

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