n February 22, 1797, three frigates from the French navy sailed into the harbor of the tiny fishing village of Fishguard on the southwest coast of Wales and proceeded to land about twelve hundred armed soldiers. This little foray was confronted almost immediately by the local militia under the command of Lord Cawdor.* The French also caught sight of an approaching troop whose red cloaks and tall black hats convinced them that they were facing a contingent of the crack British unit, the Grenadier Guards-an even more serious danger.

This fearsome band was nothing of the sort. The French soon discovered that it was nothing more than a gathering of Welsh women in traditional festival costumes.t The costumes did not inhibit the women from beating up the bewildered French soldiers. One of these women, Jemima Nicholas, was so adept at wielding her pitchfork that she was credited with the capture of fourteen French soldiers.' The French commander, an Irish-American general, was compelled to submit to an ignominious surrender.

Rumors of an impending French invasion had been circulating for several months, with a series of reports from Paris referring to that danger. French warships had gathered at Brest at the end of 1796 and had headed off toward northern Ireland around Christmas, evidently hoping that the Irish would join in their invasion. On February 21, there was a false rumor of French ships off Beachy Head on the southeast coast, which provoked English warships to head out to sea from Portsmouth. The next day, the battle of Fishguard took place.

Just what the French had in mind with this expedition remains obscure. Napoleon was off invading Italy, and Fishguard was about as far away from British power centers as anyone could get. The most reasonable explanation is that the French were making a low-cost but deliberate effort to create a panic in England. Seen from this viewpoint, their project was a smashing success.

Like so many other events in this history, the foolish French effort had profound unintended consequences. Its ultimate impact reached far beyond the village of Fishguard or the nationwide panic that this comic opera episode ignited. The sequence of events that got under way as a result of Fishguard would lead in time to a great debate about gold, the causes of inflation, the international position of the pound sterling, and the proper function in all this of the Bank of England. The views of the highest political leaders and the most respected economists and bankers on these matters would command front-page attention. The debate would reach all the way back to the controversies between Locke and Lowndes at the time of the Great Recoinage about one hundred years earlier, and it would reverberate once again 125 years later in the wake of the terrible war of 1914-1918. It would guide British policy all the way up to the outbreak of World War II, when the farce of Fishguard had long since been forgotten.

The excitement provoked by the French invasion launched a rush to withdraw gold from the banking system as frightened citizens stormed banking offices to cash in their paper money, almost all of which consisted of banknotes issued by the Bank of England as well as notes issued by smaller banks. While the Bank of England notes were the most widely accepted form of paper money in circulation-and traditionally referred to as Bank notes-the greatest fear was over what would happen to those small banks and the acceptability of their banknotes as means of payment in the event of an invasion.

In contrast to the paper currency, gold was perceived as the ultimate money, indestructible in value and forever acceptable no matter who would be running the government, even if it were the French. The very idea that the Bank's gold reserve was rapidly diminishing therefore served as a self-fulfilling prophecy as people dashed to the banks to convert the paper notes into gold while there was still some gold left to withdraw.

On Saturday, the 18th of February, even before the incident at Fishguard, fears of a French invasion had provoked a run on the banks in Newcastle (some 350 miles from Fishguard), forcing the local banks to shut their windows on the 20th. The panic soon spread to London and other major centers. The withdrawals were draining the Bank of England's gold stock at the rate of C100,000 a day, out of a gold reserve that had already shrunk under wartime conditions from f7 million at the end of 1794 to C5 million at the end of 1795 and then to only about _f2 million at the end of 1796.2

Word of the "invasion" at Fishguard reached London on the morning of Saturday the 25th, three days after the fact, forcing the management of the Bank to face the unprecedented and unpleasant prospect of refusing to redeem Bank notes in gold. The Directors informed Prime Minister Pitt, who sent an urgent message to King George III at Windsor on Saturday evening to join a council to be held at the Bank on Sunday. In addition to the King, the Sunday meeting included Pitt, the Lord Chancellor, the Governor and Deputy Governor of the Bank, and two of the Directors. At the conclusion of the meeting, the government issued an Order-in-Council whose most important passage read as follows:

It is indispensably necessary for the public service that the Directors of the Bank of England should forbear issuing any cash [i.e., gold] in payment until the sense of the Parliament can be taken on that subject and the proper measures adopted thereupon for maintaining the means of circulation.3

On March 9, the House of Commons transformed the Order-inCouncil into a full-fledged act, the so-called Restriction Bill, which indemnified the Bank against the legal consequences of refusing to pay out gold in exchange for the Bank notes. The bill also made it official that all payments in Bank notes were to be "deemed payments in cash."

A public relations campaign swung into action at once to reassure the public and to prevent the gold crisis from turning into an even more intense panic. On Monday, February 27, in words that sounded like the exhortations of the darkest days of the Battle of Britain in 1940, the Times of London published a lead editorial invoking the spirit of the embattled English at the time of the Spanish Armada, when the danger to life and property was much greater. At noon that day, the leading bankers and merchants of London met at the Mansion House, home of the Lord Mayor, where they passed a unanimous resolution declaring that it was their intention to receive without hesitation notes of the Bank up to any sum of money that would be owed to them and that they would make their own payments in Bank notes as well. This resolution, which received four thousand additional signatures, was published in newspapers throughout the country. The Directors of the Bank then issued a notice declaring that the Bank was in a "most affluent and prosperous situation, and such as to preclude every doubt as to the security of its notes," with assets (primarily claims on borrowers) some £4 million in excess of liabilities, not even counting the debt owed by the government of close to £12 million.4 This reassurance about the financial condition of the Bank was critically important, as many smaller banks had either failed or suffered a dangerous deterioration in their condition during the excitement provoked by the original declaration of war against the French Revolution in 1793.5

Despite the soothing words about the Bank, the Order-in-Council of February 26 and the Restriction Bill that followed were shockers. The crisis was unique up to that point in history. Governments had often devalued and debased their coinages in other wars, but then only coins were involved. The Chinese had made a mess with their paper currency, but then no coins were involved. This was the first time that the markets had attacked a paper currency freely convertible into gold coins or bullion, a right that had existed for over a century. The Bank of England itself had been established as the paradigm of financial soundness and responsibility. The Bank's notes had been "as good as gold." Indeed, Bank of England currency, decorated with the corporation's seal and engraved with Britannia seated on a bank of money, was deemed more acceptable than obligations of the government itself.

Suddenly, all that changed. With the vaults almost bare of gold, the Bank notes were now no more than pieces of paper. The claims on borrowers may have exceeded the Bank's liabilities, but those claims were far from the same thing as gold; even if the borrowers repaid all their loans, the Bank would still have only Bank notes on hand to pay out.

The impact of this unexpected rupture can be gathered from the memoirs of a Scotch banker, Sir William Forbes, who recalled the experience in his Memoirs of a Banking House, published in 1803. Forbes describes how he felt on the morning of March 1 when the first word of "this interesting event" reached Edinburgh:

Now it was that I certainly did think the nation was ruined beyond redemption, when so novel and alarming a circumstance had taken place at the Bank of England, which had ever been considered the bulwark of public and private credit.... All ceremony or etiquette... was now out of the question when we had to think of what was to be done for our joint preservation on such an emergency.... The instant this resolution of paying no more specie was known in the street, a scene of confusion and uproar took place of which it is utterly impossible for those who did not witness it to form an idea. Our counting house ... was instantly crowded to the door with people clamorously demanding payment in gold of their interest-receipts ... they were mostly of the most ignorant classes ... all bawling out at once for change.... Both gold and silver specie was hoarded up and instantly disappeared.`'

Nevertheless, the way the English dealt with these matters, once the crisis had passed, was as extraordinary as the decisiveness of the authorities at the moment of a crisis that none of them had ever faced before. As Forbes continued his account, "It was a matter of agreeable surprise to see in how short a time after the suspension of paying in specie, the run on us ceased [and] how quietly the country submitted ... to transact all business by bank notes for which issuers give no specie as formerly."

There was no argument against the principle that gold must continue to be the central foundation of the monetary system, and that some day redemption in specie would be restored. The language of the long sequence of government orders that was to follow gives every indication that most people believed that the arrangements were temporary, with normal conditions soon to be restored. The entire objective was to reach a point where notes could once again be converted into gold on demand. The embargo would endure for 24 years, until 1821, a length of time that even the most pessimistic observers never anticipated. But widespread confidence in an ultimately happy ending to the tragedy meant that acceptability of the Bank notes was at no point brought into question anywhere. The notes continued to function as though nothing had happened to the gold reserves. When Winston Churchill observed during World War II that "England loses every battle but the last one," he was reflecting a spirit that had long been typical of English perceptions of themselves and their state.

Let us step back for a moment, in order to gain better perspective on these dramatic events. Some brief history and overview of the mechanics of the English monetary system might be helpful.

It is important to recognize that the English monetary system-like the English political system-had evolved by trial and error, without the rigidities of legal stipulations and regulations that characterized the French system of government and that Napoleon and his successors did nothing to diminish. Public and private money circulated together and reinforced each other. The government's money was the coinage, most of which consisted of the golden guinea, although silver coins and token coins of smaller denominations also circulated.; More than one hundred years before the crisis of 1797, however, private paper money had begun to substitute for coins in large transactions. Bills of exchange, as we have already seen, were often endorsed over from one holder to another and thereby became a kind of paper money. In addition, many people who owned gold coins would deposit them with a goldsmith for safekeeping, accepting in exchange a receipt for the gold that could then be used as a means of payment because it was redeemable in gold on demand. Indeed, the total output of gold during the century as a whole averaged only twenty tons a year.'

More important, banking grew at a rapid rate throughout the eighteenth century, and it was customary for banks to pay out the proceeds of their loans in the form of promissory notes to customers; these notes, in a variety of denominations and engraved and watermarked to defy forgers, would then circulate from hand to hand as money. When the Bank of England was established in 1694 and made the original loan of £1.2 million to the government, part of the proceeds paid out to the government was in the form of Bank notes, which the government used to purchase supplies for its campaign against Louis XIV. Those notes circulated among businesses and the public as money but were also held by other banks as a reserve to cover withdrawals of deposits.

The consequences of this unplanned structure were profound. As the volume of banknotes replaced the coinage of government in daily circulation, the supply of money in daily use was now joined directly to the volume of credit provided by the privately owned banking system. In essence, the private sector overtook the public sector as the primary engine of money creation. Although most money in use today is in the form of checking accounts rather than paper currency, the basic eighteenth-century relationship between bank credit and money supply remains intact. By the end of the eighteenth century, in fact, a rising share of money was already being held in the form of checks and deposits much as we know them today.

These developments do not mean that gold coins or bullion ceased to be important because their hand-to-hand circulation declined. English money was clearly defined by its weight in gold-the 129.4 grains of gold in the guinea that worked out to an ounce of gold being equal to £3 17s 10%d. Even though guineas resided for the most part in the safes of goldsmiths or the faithfully guarded vaults of the Bank, the assurance that they were there was what appeared to make the system work. The various forms of private paper-bills of exchange, goldsmiths' receipts, and banknotes issued by commercial banks throughout the countrycould always be exchanged for the notes of the Bank of England, and Bank notes could always be exchanged for gold, or specie as it was often called in those days. For example, before February 26, 1797, anyone with £210 in notes could go to the Bank at any time and receive two hundred golden guineas in exchange.

Most of the time, nobody bothered. Yet when business was boom ing and the price of gold in the marketplace was rising, or when sterling was losing value in the foreign exchange markets, two hundred golden guineas could command more than £210 in the City markets or the equivalent of more than £210 in foreign financial markets. At that point, it would be profitable to convert £210 in notes into two hundred guineas and then exchange the guineas for some larger amount in the financial markets.

In 1783, after the end of the American Revolution, the Bank had made an energetic effort to halt such a process before it had much opportunity to begin. Private business activity was expanding rapidly, with prices about 10 percent higher than they had been four years earlier, and the Bank's stock of gold coins began to shrink.' In response, the Directors of the Bank of England refused additional credits to merchants and other borrowers, who had to turn elsewhere for credit. The result was a sharp rise in interest rates, a cooling of speculative fevers, an immediate improvement in the exchange rate between sterling and continental currencies, and a return flow of guineas to the vaults of the Bank.9 Thus, the staunch faith in gold had transformed the shiny metal that most people viewed as the ultimate form of wealth into a powerful vehicle of checks and balances (a role that gold would continue to play, in one form or another, and not just in Britain, for the next 174 years). What everyone considered to be the riskless asset seemed to subdue the risks in the entire economy.

The crisis of 1797 and the Restriction Bill that sundered the linkage between Bank notes and gold tore apart this unofficial but powerful system of controls. With the golden counterweight no longer operative, the economy was now operating completely on paper currency.* Hien Tsung's inadvertent innovation, which, with "continentals" and assignats, had caused disasters in financing the American and the French revolutions just a short time back, was now about to make its debut on the more conservative shores of Great Britain. In the words of Lord Lansdown, contemplating the consequences of the Restriction Bill, "A fever is as much a fever in London as in Paris or Amsterdam; the fall will be slow perhaps, and gradual for a time; but it will be certain.""'

The original issue of the assignats in December 1790 had amounted to eight hundred million livres; on October 23, 1795, over twenty billion were outstanding. The Paris riots that ensued paved the way for Napoleon's rise to power and forced the government to abandon the worthless assignats for a metallic-based system based on gold and silver.

Where did the French gold come from? Much of it was a return of capital that had fled the country during the assignat regime. In fact, the events in France were the main reason that the Bank of England's gold reserves were so low when the Fishguard adventure occurred: gold that had earlier been transferred to England by frightened Frenchmen now began to return to France, driving the Bank of England's gold reserve from C6 million in early 1795 to only £2 million in early 1797. Napoleon had inadvertently laid the groundwork for the panic that ensued from the Battle of Fishguard."

In addition, however, acting in the tradition of the great conquerors of the past, Napoleon lost no time in launching his career as a ruthless accumulator of monetary treasure (among other things) from vanquished nations. In a note to the Directoire Executif on June 1, 1796, he informed his colleagues that "Two millions of gold are en route [from Italy]. They leave tomorrow with a hundred carriage horses, the most beautiful one can find in Lombardy. They will replace the mediocre horses that pull our carriages."12

Napoleon remained steadfast as a "hard-money" man throughout his reign. He had no choice. If he had even whispered the possibility of issuing an inconvertible paper currency, the nightmare of the assignat experience would have provoked an immediate flight of all the gold in France to safer havens abroad. Thus, Napoleon's keen monetary management skills enabled him to succeed where every other leader had failed. This was probably the only major war in history to be conducted without currency depreciation in one form or another.i3

Lord Lansdown was right: the fall was slow and gradual, but inflation ultimately took hold in Britain. Prices in 1802 were lower than they had been in 1800, but they climbed 30 percent between 1802 and 1807 and by another 15 percent over the next three years. Prices had doubled from their 1797 level when Napoleon succumbed at Waterloo in 1815.'

The inflation was associated with a substantial increase in money and credit. No longer constrained by the gold supply, the Bank's loans to business-so-called commercial bills under discount-more than quadrupled between 1797 and 1810. The Bank has never supplied the financial markets with such an explosion of credit except during the extraordinary conditions of the two World Wars of the twentieth century. By no coincidence, the Bank's note issue expanded from approximately £10 million to k25 million over the same period of time, with half the increase having occurred just since 1807, while deposits at the Bank were increasing at about the same pace. The Bank's holdings of coin and bullion fluctuated with the fortunes of war but were at no point equal to as much as 50 percent of the Bank notes outstanding; in 1794, before all these troubles began, the gold reserve had been equal to 70 percent of the outstanding notes.15

Beginning in 1808, the price of gold began a rapid ascent. By 1809, the gold in a guinea was fetching k4 10s an ounce in the marketplace, well above the price of £3 17s 1 OV2d that had defined the value of gold when Isaac Newton was pondering the matter back in 1717. Sterling was also losing value relative to the currencies of other nations-toward the end of 1809, the pound was exchanging in Hamburg, Amsterdam, and Paris from 16 percent to more than 20 percent below its official par values.16 The result was a 50 percent decline in the Bank's holdings of gold coins and bullion between February 1808 and August 1809, even though these holdings had been replenished since the low point at the enactment of the Bank Restriction Act in 1797. The restoration of convertibility appeared further off than ever.

The financial community was outraged." On August 29, a 38-yearold stockbroker as spokesman for this community submitted the first of three letters on this matter to the Morning Chronicle, complaining that the public "do not seem to be sufficiently impressed with the importance of the subject, nor of the disastrous consequences which may attend the further depreciation of the paper."" His name was David Ricardo, and this was the first time his name had appeared in print. The letters and additional commentary subsequently appeared as a tract titled "The High Price of Bullion."

Ricardo was born in 1772, when Adam Smith was fifty years old and Thomas Malthus, Ricardo's beloved friend and unremitting intellectual opponent, was six years old; Ricardo first met Malthus in 1809 at the very moment he was sending in his letters to the Morning Chronicle.19 Ricardo's father was a Jewish merchant banker and stockbroker jobber, as the English call it-who took his son in as an employee when the boy was only fourteen. The firm prospered, even though it had to limit its trading activity to a section of the Royal Exchange known as Jews Walk. Ricardo remained in business with his father for seven years, until he fell in love with a Quaker girl. At the age of 21, he broke with his family, married Miss Wilkinson, adopted the Quaker religion, went into business at the Exchange on his own, and, more than most people, lived happily until he died suddenly at the age of 51.

Ricardo scored an enormous success as a stock jobber, years before he had any idea that he would become one of the most famous theoretical economists of all time with the publication of The Principles of Political Economy and Taxation in 1817. His brother once observed that "Perhaps in nothing did Mr. R. more evince his extraordinary powers than he did in business. His complete knowledge of all its intricacies ... his capability of getting through, without any apparent exertion, the immense transactions in which he was concerned-his coolness and judgment-enabled him to leave all his contemporaries at the Stock Exchange far behind."20

As the English government debt climbed ever higher during the course of the Napoleonic conflict, Ricardo became one of the major underwriters of those government securities each time they were issued to the public. Like investment bankers today who like to take care of their friends, Ricardo would occasionally allot a small cut of these deals to his chum Malthus, a parson and academic of modest means whose fame as an economist would in time rival Ricardo's. In 1815-at the moment when the battle of Waterloo was approaching-Malthus could not stand the strain of being exposed to what might happen to his little nest egg if Wellington were to lose. He pleaded with Ricardo "to take an early opportunity of realizing a small profit on the share you have been good enough to promise me."21 Ricardo obliged but held on to his own much more substantial position. For Malthus, Napoleon's defeat at Waterloo was good news and bad news: good news as it was for all Englishmen but bad news for the enormous opportunity missed. For Ricardo, it was 100 percent stupendous news. Just two years later, he published his magisterial work, The Principles of Political Economy and Taxation. The remarkable friendship with Malthus survived these events unscathed. After Ricardo's death, Malthus declared that "I never loved anybody out of my own family so much. "222

Ricardo's letters to the Morning Chronicle about Britain's shrinking gold reserve and the depreciation of the pound in the foreign exchange markets attracted much attention. About six months after the publication of Ricardo's letters, and after extended debate in Parliament and the press, a little-known member of Parliament named Francis Horner moved for the establishment of a parliamentary committee to look into the whole matter in detail, to examine expert witnesses, and to prepare a report and recommendations for the House of Commons upon the completion of their task. Eighteen days later, the House announced the appointment of "The SELECT COMMITTEE to enquire into the Cause of the High Price of GOLD BULLION, and to take into consideration the State of the CIRCULATING MEDIUM, and of the EXCHANGES between Great Britain and Foreign Parts."2i

What came to be known as the Bullion Committee numbered 22 members, most of whom were experts from the world of finance; some, such as the joint Paymaster of the Forces, were civil servants. The hearings ran for a total of 31 days between February 22 and May 25, 1810, during which the Committee took testimony from 29 witnesses from business, finance, academia, and government. The Committee's report provides the full identity of all the witnesses, except on page 19, where it refers to a "very eminent Continental Merchant," who, according to further commentary on page 25, was "intimately acquainted with the trade between this Country and the Continent"; Ricardo's testimony refers to this gentleman simply as "Mr. -." Edward Carman, who wrote an authoritative commentary on the whole matter in 1919, concludes that "An obvious conjecture is that this modest Mr. Blank was the great N. M. Rothschild."24

The report never indicates which members asked the questions of the witnesses, on the theory that the questions were being raised by the committee "as a body."25 The most active members, and the primary authors of the Committee's final report, were Francis Homer, Henry Thornton, and William Huskisson. A barrister, Homer was one of the founders of the Edinburgh Review, to which he had contributed several articles on banking. Like Adam Smith before him, he had been born and educated in Edinburgh but had spent two years in England "to rid himself of the disadvantages of a provincial dialect."26 Thornton, a banker; had written an early textbook on banking theory that had issued dire warnings about the abuses of paper credit. Huskisson had earlier been associated with some of the leaders of revolutionary France and had publicly expressed his disapproval of their plan to issue the assignats. He subsequently became President of the Board of Trade (equivalent to Secretary of Commerce in the United States) and, as the economist Glyn Davies phrased it, "suffered the final dubious distinction of being killed by a train at the ceremonial opening of the Liverpool to Manchester Railway in 1830."27

In June, while the report was still in the hands of the printer, Horner wrote the following to a friend:

The Report is in truth very clumsily and prolixly drawn; stating nothing but very old doctrines on the subject it treats of, and stating them in a more imperfect form than they have frequently appeared before.... One great merit the Report, however, possesses; that it declares in very plain and pointed terms, both the true doctrine and the existence of a great evil growing out of the neglect of that doctrine.... We shall in time (I trust) effect the restoration of the old and only safe system.28

Despite Homer's demurrer about its literary quality, the report was a best-seller for its time; it was out of print three months after its appearance in August. For someone who encounters it nearly two hundred years after its publication, the report is an extraordinary document. Homer's letter indicates that there was nothing wishy-washy about the effort: the conclusions and recommendations are indeed plain and pointed. A reader could disagree with the hard line taken by the authors and still be startled by the sophistication of the economic analysis. At its best, the report accurately reflects the most important economic ideas developed by David Hume and Adam Smith even while anticipating concepts that would appear in theory books only years in the future, especially in relation to the theory and practice of the gold standard system that would develop over the course of the nineteenth century. Indeed, the clarity and thoroughness of the presentation of monetary theory matches Milton Friedman at his best. A document of equivalent quality written by today's members of Parliament or the U.S. Congress would be inconceivable.

The issues confronted by the Bullion Committee were essentially the same as the arguments between Lowndes and Locke in the period before the Great Recoinage of 1695. The Committee's report builds on the basis of an overarching assumption that was never open to question at any point-that gold is the paramount asset. The authors refer at the outset to "the sound and natural state of the British currency, the foundation of which is gold. "29 A few pages later, echoing Ricardo's affirmation in his third letter to the Morning Chronicle that "Gold Coins are now become, in the practice and opinion of the people, the principal measure of property, 11311 the report asserts, "In this Country, Gold is itself the measure of all exchangeable value, the scale to which all money prices are referred."31 And, finally, "Gold in Bullion is the standard to which the Legislature has intended that the coin should be conformed and with which it should be identified as much as possible. ... It is most desirable for the public that our circulating medium should again be conformed, as speedily as circumstances will permit, to its real and legal standard, Gold Bullion. "32

Gold is not only the standard for the domestic currency: "Bullion is the true regulator both of the value of a local currency and of the rate of Foreign Exchange."" This statement is the core of the "true doctrine" to which Homer's letter refers. The "great evil growing out of the neglect of that doctrine" was the price inflation that was cutting so deeply into the purchasing power of money.

To the Committee, following upon the analysis in Ricardo's letters to the Morning Chronicle, the whole problem was obvious and its solution was simple. The problem arose because "A general rise of all prices, a rise in the market price of Gold, and a fall of the Foreign Exchanges, will be the effect of an excessive quantity of circulating medium in a country which has adopted a currency not exportable to other countries, or not convertible at will into a Coin which is exportable."34 The "great evil" had developed from what Homer had characterized as "the neglect of that doctrine." The solution, therefore, was to restore convertibility of the currency into gold at the earliest possible mo:::ent.

Meanwhile, the Committee took the position that the Directors of the Bank of England should act as though gold were still functioning as the true regulator despite the embargo on the free convertibility of paper currency into gold. That is, the Bank should ignore the reality of the pure paper currency system that had been forced upon the nation and respond instead to the unambiguous signals provided by increases in the price of gold and the weakness of the pound in the foreign exchanges. Upon the appearance of those signals, the Bank should curtail its credit activities, thereby restraining the growth in the money supply, just as it had done under identical conditions in 1783, 1793, and 1797. The Bank should manage its affairs under the restraints of a virtual gold standard, to put it in today's lingo. Ricardo would emphatically endorse this view in his 1816 tract on the high price of bullion. He asserted that "fIf the Directors] had acted up to the principle which they have avowed to have been that which regulated their issues when they were obliged to pay in specie ... we should not have been exposed to all the evils of a depreciated, and perpetually varying currency"35 (italics in original).

The report angrily contradicts the evidence of several witnesses that the increase in the price of gold was merely the result of a scarcity, or excess demand, for gold. If that were the case, the report asks, why was the price of gold stable in France and the other continental countries? There was no scarcity of gold: "That guineas have disappeared from the circulation, there can be no question; but that does not prove a scarcity of Bullion, any more than the high price proves that scarcity." No, no, no! The authors cite the testimony of a dealer who acknowledged that "he found no difficulty in getting any quantity [of gold] he wanted, if he was willing to pay the price for it. 1116 The price of gold rose because of the "excessive quantity of circulating medium." The high price of gold was in fact proof that the supply of money was "excessive." No greater authority than that "very eminent Continental Merchant" agreed that the fall in the foreign exchange value of the pound would never have happened if paper money had been convertible into guineas: "I value everything by Bullion," he declared. He went on to inform the Committee that the whole problem had arisen simply because the Bank was "not allowing Bullion to perform those functions for which it seems to have been intended by nature."37

The Committee then proceeded to interview the Directors of the Bank to determine whether they "held the same opinion and derived from it a practical rule for the control of their circulation. 1131 The flatout response from the Directors was that they held no such opinion. The controversy rages back and forth, but the Bank's position was succinctly set forth in the statement of Mr. Whitmore, the former Governor, who informed the Committee that "The present unfavorable state of the [foreign] Exchange has no influence upon the amount of [the Bank's] issues, the Bank having acted precisely as they did before.... The amount of our paper circulation has no reference at all to the state of the Exchange."39 The current Governor, Mr. Pease, agreed: "I cannot see how the amount of Bank notes issued can operate upon the price of Bullion, or the state of the Exchanges.... I never think it necessary to advert to the price of Gold, or the state of the Exchange, on the days on which we make our advances.""'

The Directors stubbornly refused to yield, to a point where their testimony sounds almost as though they could not even comprehend what the Committee members were driving at. Ricardo, in a letter to Malthus some years later, characterized them as "indeed a very ignorant set.";' Sixty-five years later, in reviewing these events, the great Victorian economist Stanley Jevons was just as impatient as Ricardo had been with the opponents to the Committee's arguments. Their refusal to get the point provoked him to write, "So unaccountable are the prejudices of men on the subject of currency that it is not well to leave anything to discretionary management. "4--

Nevertheless, the Directors perceived themselves as merely doing what they were retained to do-meeting the demands of creditworthy borrowers. One could hardly accuse them of forcing Bank notes into circulation. As Mr. Whitmore explained to the Committee, "There will not remain a Note in circulation more than the immediate wants of the public require.... The Bank Notes would revert to us if there was a redundancy in circulation, as no one would pay interest for a Bank Note he did not want to make use of "a3 Another director, Mr. Harman, declared that by acting in that manner the Bank "cannot materially err. "44

After the Committee's report refuses to accept any of these arguments, it expresses some second thoughts about the Bank. Despite "great practical errors," the report goes on to admit that the Directors had in fact shown "a degree of forbearance" and that the Bank should continue to merit the public's confidence in "the integrity with which its affairs are directed, as well as in the unshaken stability and ample funds of that great establishment. 114' The root of the problem lay in the failure of the Bank Directors to distinguish between what appears to be a legitimate loan to a deserving merchant and the impact of the resulting increase in money supply on the economy as a whole. But one can hardly blame the Directors, for the Restriction Bill itself imposed upon them an excessive amount of responsibility that had become tangled in massive conflicts of interest between private objectives and public needs.

This line of reasoning leads to the Committee's most important conclusion. Their words here are worth quoting at some length. Echoing the principles about the role of gold originally set forth by David Hume and Adam Smith, the report provides the first and perhaps the most authoritative justification for the establishment of the gold standard as the superior system for managing an economy's money supply. The entire thrust of the statement is to throw up a sharp contrast to what can happen when money is not convertible into metal and such decisions are left to just plain human judgments.

After pointing out the power over the economy that the suspension of cash payments transferred to the Directors of the Bank, the Committee goes on to contend:

In the judgment of the Committee, that is a trust, which it is unreasonable to expect that the Directors of the Bank of England should ever be able to discharge. The most detailed knowledge of the actual trade of the Country, combined with the profound science of all the principles of Money and Circulation, would not enable any man or set of men to adjust, and keep always adjusted, the right proportion of circulating medium in a country to the wants of trade.

When the currency consists entirely of the precious metals, or of paper convertible at will into the precious metals, the natural process of commerce, by establishing Exchanges among all the different countries of the world, adjusts, in every particular country, the proportion of circulating medium to its actual occasions.... If the natural system of currency and circulation be abandoned, and a discretionary issue of paper money substituted in its stead, it is vain to think that any rules can be advised for the exact exercise of such a discretion.46

Ricardo, writing on the subject a year later, affirmed the superiority of the decisions of the markets over those of bankers with responsibility to regulate the currency: "The exportation of the specie," he wrote, "may at all times be safely left to the discretion of individuals."47

In short, the markets know best; their signals must determine policy. The Committee's logic leads them to a clear and unqualified recommendation: "That the system of the circulating medium of the Country ought to be brought back, with as much speed as is compatible with a wise and necessary caution, to the original principle of Cash payments at the option of the holder of Bank paper." Nothing else would provide "sufficient remedy for the present, or security for the future."" These words would continue to echo through the endless debates over money that lay ahead.

The House of Commons did not provide an opportunity to debate the findings of the Bullion Conunittee until the spring of 1811. In the meantime, pamphlets on the subject appeared in great quantity, instructing the public on the fine points of the issues involved. This was also the moment for the appearance of Ricardo's The High Price of Bullion and the Depreciation of Bank Notes. The topic became so hot that one newspaper bribed a clerk at the Bank to steal a confidential copy of the names of the Bank's borrowers, which appeared the next day on the paper's pages.

On May 6, 1811, by which time the note issue had risen by another L2 million and the price of gold had extended its climb, Francis Homer finally transformed words into action by submitting to the House sixteen resolutions designed to implement the proposals contained in the Bullion Committee's report. Homer begins by tracing the sequence of events in the crisis that led to the formation of the Committee, after which he carefully defines the legal definition of a pound sterling in terms of its weight in gold and declares that Bank notes are promises to pay in such money.

His resolutions end with two specific recommendations. First, that for as long as the suspension of convertibility continues, "it is the duty of the Directors of the Bank of England to advert to the state of the Foreign Exchanges, as well as to the price of Bullion, with a view to regulate the amount of their Issues.""y The second proposal urges all possible haste in returning to convertibility by moving the end of the suspension of cash payments from "Six Months after the Ratification of a Definite Treaty of Peace," as originally stipulated in the Restriction Bill, to "Two Years from the present Time. "'"

Henry Thornton then added an extended analysis of runaway inflations in Sweden, France, Russia, and America. He went on to explain that the longer the depreciation in the value of the paper pound persisted, the more difficult it would be to reestablish the old standard. This was a point of primary importance, similar in its substance to the dispute in 1717 between Locke and Lowndes. "If the inflation provoked by the paper pound were to continue for eight, ten, or even fifteen or twenty years," Thornton declared, "then it may be deemed unfair to restore the ancient value of the circulating medium, for bargains will have been made and loans supplied under an expectation of the continuance of the existing depreciation."-"

That is, when a rising price of gold significantly reduces the amount of gold that a pound can buy, all who owe money would be badly hurt if they were forced to pay the equivalent of the amount of gold that a pound would have bought when they had originally signed their contracts. Such misgivings reappear on every occasion when the authorities have been faced with the painful choice of snuffing out depreciation of their money or allowing it to continue.

Homer's resolutions were debated in the House for four days. The first fifteen resolutions were defeated by a vote of 150 to 75; the final resolution to change the cutoff date went down by 181 to 47.

What happened? Despite all its eloquent arguments, the Bullion Committee had simply ignored the brutal reality that Britain was engaged in the greatest war in history up to that time-a true precursor to the total wars of the first half of the twentieth century. The most important financial objective for the government was to encourage the highest possible level of production of food, coal, ships, guns and ammunition, and uniforms. Consequently, the leadership of the government was reluctant to put any brakes on the money supply as long as the war continued and the government was spending more money than it was receiving in tax revenues. Although the Bank had increased its holdings of government debt by very little up to 1810, its position in government securities would more than double between 1810 and the end of the war in 1815.52 The Chancellor of the Exchequer was vehement on the subject, announcing that the Committee's recommendations were equivalent to "a declaration that we must submit to any terms of peace rather than continue the war."5'

Other members of the House, concerned about precisely the problem that agitated Thornton, were reluctant to return to the old relationship between the pound and gold when prices were already so much higher than they had been when the rupture took place-the very issue that would nearly tear Britain apart in the 1920s. A third group resented the attack on the management of the Bank and rose to their defense. It is amazing that the most vocal part of the opposition came from sheer incredulity that the Bullion Committee could have figured out matters properly and that the Bank's notes were actually "depreciating."

The most dramatic response to all of the extended debate, and the defeat of Homer's sixteen resolutions, was provided by a young nobleman named Peter King. Because he was a nobleman, he was known by the delightful name of Lord King. As a member of the House of Lords, Lord King had been denied the opportunity to participate in the debate, and so he decided to drop his own private bombshell to underscore the validity of the Bullion Committee's analysis and Henry Thornton's worries about the impact of changing monetary values on contracts drawn in fixed sums.

"For the defence of his property," Lord King informed his tenants that he would no longer accept Bank notes at face value in payment of their rents. He maintained that there was no reason why he should suffer just because prices had risen so much since they signed their various leases. Consequently, he proposed to give each of his tenants a choice of two options. They could pay him their rent in an amount in gold equal to the amount of gold that could have been purchased with Bank notes at the time their lease was signed, or they could pay him a sufficient amount of Bank notes to purchase that amount of gold at its present price. He even went so far as to declare his preparedness to pay his own creditors in similar fashion and to reduce the rent payments from his tenants if prices were to decline and the purchasing power of Bank notes improved. He then published his speech in a pamphlet that incorporated tables to help his tenants and any other interested parties to figure out what the adjusted payments would be.54 Lord King's announcement caused such a furor that Parliament passed special legislation declaring that the face value of contracts was inviolate and could not be so revised.

There were more crises, more hearings, more public debates, more inflation, and even deflation before Parliament finally restored the convertibility of Bank notes into gold in 1821. By that time, the usual period of deflation that has followed major wars had driven the price level all the way back down to its level in 1797. The distortion that bothered Lord King in 1810 had been washed out of the system. Full cash payments in gold were restored and a new coin was issued, the sovereign, equal to twenty shillings and 21,Y21 of the amount of gold in a guinea; in preparation for this moment, the Mint produced a total of 35 million sovereigns in 1821.5' The gold standard was now an acknowledged reality, enshrined in official legislation. The British arrangements became the model for the rest of the world to follow for nearly one hundred years.

The system put metal above man in managing the nation's money supply. Nobody ever thought that it would be easy to figure out how much money is the right amount. Most people want more money than they happen to possess, but easy money can lead to inflation in which all the extra money loses value. Consequently, managing a money system is a task mired in ambiguity, which is why today's central bankers are better at double-talk than plain English. Baron Rothschild is rumored to have said on one occasion that he knew of only three people who understood money, and none of them had very much of it.

The act of faith underlying the gold standard was in the ability of free markets, expressed by changes in the price of gold, to do a better job than policymakers at this complex task. In this structure, gold was expected to support a system of checks and balances so that the supply of moneylike Goldilocks's chair-would never be too large or too small.

But what happens when the quantity of the ultimate standard of value itself begins to grow? What, in essence, is the difference between the Bank of England creating paper money by generously accommodating their commercial customers in the early 1800s and the cornucopia of gold that the rash and daring prospectors of the nineteenth-century gold rushes contributed to the supply of cash in the United States, Australia, and South Africa? If Francis Horner had been alive when Francis Drake poured a flood of gold into the English economy in the late 1500s, would he have complained?

Gold is a product of the earth, not some construct dreamed up by economists and financiers. Although the sober members of the Bullion Committee acknowledged that new supplies of gold might be discovered, they never contemplated anything to match the enormous gold strikes around the world between 1848 and the end of the century. The golden nuggets in the stream at Sutter's Mill in California made Croesus look like a piker, and Australia, the Klondike, and South Africa were yet to come.

The excitement generated by the gold rushes was a vivid reminder of the central role that gold has played in our civilization. It is time to take a closer look at precisely how that happened.