Henry Thornton (1760-1815), whose major work - An Enquiry into the Nature and Effects of the Paper Credit of Great Britain - is celebrating its bicentennary in 2002, is considered today to be one of the most prominent classical monetary economist, in particular with regard to its seminal contribution to the theory of the lender of last resort. However, Thornton's original views about the rate of interest on bank credit have barely been commented so far. In this paper, we endeavour to link these views with his theory of central banking in order to demonstrate that Thornton advocated an active use of the Bank of England's discount rate for monetary policy purpose, i.e. to safeguard the value of money, instead of any direct action on the quantity of circulating banknotes. Nevertheless, Thornton does not appear to have conceived the Bank's rate as a true " key rate " of the credit market as in modern terms.

Banque centrale, taux de l'escompte et politique monétaire chez Henry Thornton (1760-1815)

According to Hicks [1967], classical monetary theory has two main strands, one represented by Ricardo and the Currency School, who believed in relying at all costs (including deflation and unemployment) on automatic regulation of the quantity of money, the other stream by Thornton and Tooke, who favoured a permissive monetary policy and were prepared to accept a little monetary instability as the price of sustaining the level of economic activity and insulating the domestic economy from fluctuations in the balance of payments. Clearly this interpretation reflects the general acceptance of the Keynesian approach to monetary theory in those years, when Ricardo "was that able but wrong-headed man" who "shunted the car" of monetary theory on to a wrong line. On the contrary, Thomton is the economist who understood that "money matters": a monetary economy is governed by uncertainty; in monetary affairs discretion is preferable to rules, since the economy is hardly ever in full equilibrium and the equilibrating forces of market mechanisms are slow or ineffective .

Ricardo's Theory of Money Matters

Introduction Part I. Analytical and Historical Foundations: 1. Monetary theory circa 1750: David Hume 2. Mid-eighteenth-century British financial system 3. Adam Smith: the case for laissez faire in money and banking 4. 'Monetary theories of credit' in exchange Part II. Debating Monetary Theory under Inconvertibility: 5. New reality: the restriction period, 1797-1821 6. Boyd versus Baring: the early round in the bullion debate 7. Henry Thornton: ahead of his times 8. Ricardo versus Bosanquet: the famous round in the Bullion debate 9. 'Credit theories of money' in exchange and intermediation Part III. Debating: Laissez Faire, Rules and Discretion: 10. From the resumption to 1837: more crises 11. The currency school trio: Loyd, Torrens, Norman 12. The banking school trio: Tooke, Fullarton, Wilson 13. Neither discretion nor rules: Joplin and the free banking school Part IV. The Road to Defensive Central Banking: 14. Bagehot and a new conventional wisdom 15. Does Karl Marx fit in? 16. Marshall and bi-metallism Part V. A New Beginning: Towards Active Central Banking: 17. Wicksell's innovative monetary theory 18. The puzzling slow rise of a theory of central banking: between the lender of last resort, passive and active monetary policy.

Monetary Theory and Policy from Hume and Smith to Wicksell: Money, Credit, and the Economy

The debate between Ricardo and Thornton and Malthus about the causes of balance of trade deficits is reexamined. It is argued that, given the state of real trade theory in the period, the debate could not have been resolved. With the discovery of the principle of comparative advantage Ricardo changed the views he had expressed during the controversy and implicitly repudiated the arguments he had used against Thornton and Malthus.

The Bullionist Controversy Revisited

By its nature, bank money is endogenous, but its issuing is risky and presupposes the presence of banks' shareholders' funds. Shareholders' funds give banks the means of dealing with the difficulties involved in the process of money creation and which are inherent to the banking activity: convertibility constraint, credit and liquidity risks. Unlike the Richardian paradigm, Smith's ‘real bill theory’ and Thornton's ‘lender of last resort theory’ point out the functions of shareholder's funds. Therefore their monetary-banking approachs seem more complementary than contradictory. In other respects, the theory of endogenous money and credit introduces risks and capital in the analysis of exchange and lead to questioning the classical market theory constructed on the model of bartering

Charles F. Peake

Papers

Henry Thornton and the Development of Ricardo's Economic Thought

Henry Thornton: an Accurate Perspective