The Rationale of Central Banking and the Free Banking Alternative

At about the time when the issue in England had already been decided and the discussion had practically ceased, the controversy was just beginning to take shape in France. The slow development of banking facilities in France, particularly as compared with America, was first given literary emphasis by Michel Chevalier,
*1 who was travelling in America between 1833 and 1835, just at a time when the whole banking question was foremost in the public mind in that country. Chevalier himself upheld the retention of the United States Bank, and suggested that France would greatly benefit by adopting a system of banks linked together like the twenty-five branches of the Bank of the United States.
*2 Chevalier’s remarks on the backward state of French banking were endorsed also by Carey, who testified to the beneficial effects of free competition. But an exactly opposite impression of the effects of freedom was created in France by Condy Raguet, and the translator
*3 of his book invoked it in evidence of the evils that were wrought by competition in banking and of the superiority of a restrictive system like that of France.

All attempts at this time to state the rationale of the monopoly in the note issue had recourse to the State’s exclusive right to the coining of money. This was an attitude taken up by Cieszkowski in a book
*4 purporting to deal with the theory of money and credit, but containing, in fact, very little material of theoretical value. Non-note-issuing banks may, he says, be left free from legislative interference, but the right to issue notes is the right to coin money and must be either exercised or controlled by the State. The reasons he gives are almost purely juristic.
*5 This appeal to the royal prerogative was to remain for many years the chief argument of the restrictionist school in France.

The agitation for greater freedom in the banking trade began with a pamphlet written by Courcelle-Seneuil in 1840.
*6 The discussion became more important after the presentation of the report to the Senate in that same year on the project for the renewal of the privilege of the Bank of France and the debates on this report. The rapporteur, Rossi, gave a very gloomy picture of the effects of competition in the issue of paper money, and denied emphatically that there was any similarity between the application of free trade to industry and its application to the issue of bank notes. He gave his support to the retention of the old system of a single bank for each locality,
*7 claiming at the same time that this was the only way of overcoming the French public’s “bank shyness.”

After this the free-banking party became more prominent. Coquelin, one of the leading members of the free trade association and an economist of some repute at that time in France, wrote several articles
*8 in its support and followed them up by a book.
*9 His argument was based largely on the theory that economic crises are caused by restrictions on the investment of funds in bank capital, an argument to which we have referred already in connection with Carey. A more general and comprehensive statement of the case came from Courcelle-Seneuil,
*10 whose ideas had been much influenced by the writings of James Wilson. He tries to justify his conclusions in favour of free banking by an attempt to show that over-issues of notes are not the cause of crises,
*11 and that if banks make mistakes, it is never in their issues but always in their investments. He was in favour of absolute freedom and unlimited competition and was the most uncompromising of all the free bankers in France. The sole permissible regulation, in his view, was one aimed simply at the prevention of fraud. The distinction made between deposit banks and note-issuing banks, by which freedom was tolerated for the former but denied to the latter, was, in his opinion, all the more absurd when regard was had to the fact that the deposit liabilities of any bank are usually less widely spread over large numbers of people than its note liabilities; the failure to repay deposits might cause more harm than the failure to cash notes, because default in paying back deposits was likely to bring complete ruin to several families, whereas in the case of notes the loss would be distributed among large numbers of people.

The free-banking position was also supported by Du Puynode, another adherent of the trade cycle theory of Carey and Coquelin. In common with the majority of the free bankers in France he favoured the allowance of limited liability. He looked upon the unlimited liability provisions of the English law as the chief fault of the English banking system, claiming that they had actually caused the total security given by the shareholders to the note-holders and depositors to be smaller than it would be under limited liability.
*12

Interest in the subject was greatly increased when the Bank of France raised the rate of discount early in 1857, and the discussion was soon attracting the attention of most of the better-known writers on economic subjects of the day. The circle which it interested was much wider than in England, where exceedingly few of the academic economists touched on the subject. In France it was, among economists, the leading controversy of the time. In 1857 it was taken up by the
Société d’Economie Politique, at whose meetings both the general question of the limitation of note issues,
*13 and the specific subject of ”
La Liberté des Banques,”
*14 were debated among a group which included Wolowski, Chevalier, Horn, Joseph Garnier, Courcelle-Seneuil, Paul Coq and Léonce de Lavergne.

Garnier spoke against all intervention of authority and all administrative supervision in banking, but Chevalier was not so unreservedly in favour of entirely withdrawing all intervention. He declared that he was not prepared to go so far as to demand a
régime of complete liberty for institutions of issue and credit, and this was regarded by the restrictionist school as an important admission from one of the promoters of free trade in France.
*15

The next important contributions were called out in response to the propaganda writings of anonymous pamphleteers
*16 in connection with the Bank of Savoy affair and the attack on the Bank of France,
*17and by 1864 the controversy was at its height.

The counter-attack on the pamphlets and on the general question of plurality, even of the most restricted variety, was opened by Victor Bonnet.
*18 Generalising from the case of the old departmental banking system he concluded that if there are a number of banks, the notes of each bank do not circulate beyond a certain locality. Anybody who wants to make payment in another locality has to procure notes issued by a bank in that locality and has therefore to submit to the same inconveniences and extra trouble as he does in buying foreign exchange to make payments to another country. The advantage of having a single note issuer is that all this is avoided, because the notes of this issuer circulate everywhere within the country. Bonnet gave this as the reason why the people had been far more willing to accept notes, and the total circulation had extended, since the suppression of the departmental banks. This argument against a plural system was really quite valueless, because it ignores the circumstance that the departmental banks had been deprived by law of all the normal mechanisms for the interchange of notes. He repeated also the argument used in England after the crisis of 1825 that if there are several banks, the solidarity of one tends to depend on that of the others, and if there is a run on one, the others will also be affected to a greater or lesser degree; if, on the contrary, there is one bank like the Bank of France, the public has much more confidence in it, panics are avoided and the whole credit system is thereby rendered more stable.

On the other side, the attack on the Bank of France was resumed by Isaac Pereire.
*19 He denounced the policy of raising the rate of discount as a means of protecting the metallic reserves and suggested that the proper method of procedure was first for the bank to realise its capital, and then if the effect of doing this were insufficient, to augment its capital; the resources obtained would enable it to buy the gold necessary for the specie reserve. He denied, in the second place,
*20 that there was any necessity for the Bank of France to raise her rate when a neighbouring country
(e.g., England) did the same. In his opinion the rate of discount should be invariable at 3 percent.
*21 Much the same attitude was taken by Maurice Aubry,
*22 a Paris banker. There is no better example than this book of Aubry’s of the influence active ever since the time of Napoleon,
*23 not only in France but also in Germany, of the doctrine that the chief function of banks of issue is to keep the rate of discount down, a doctrine which, when adopted as a rule of bank policy, was bound to lead to credit inflations. Aubry bases his attack on the Bank of France on the grounds that the privilege of note issue was given to the bank solely in order to favour cheap discount,
*24 and it was therefore highly improper for it to charge a high rate; and in this respect it was in an entirely different position from that of the Bank of England, since whereas the latter might legitimately use the rate of discount to control movements of specie, the Bank of France could not do so because it was its declared duty to keep the rate of interest low.
*25 So he, also, recommends an alternative policy of calling on the shareholders to supply additional capital in times of crisis and paying it back as soon as there is no further need for it.
*26

Pereire was by no means in favour of general freedom of entry into the note-issuing business.
*27 He limited his demands to one rival establishment to break the monopoly of the Bank of France,
*28 the substitution of a duopoly for a monopoly.

Aubry wanted the monopoly retained, and seemingly for no better reason than that the coining of money, and therefore the issue of bank-notes, was a royal prerogative,
*29 a proposition that was, according to him, one of the fundamental axioms of political economy. It was pointed out a little later by Etienne Duran
*30 that it was as a result of the application of the royal prerogative to the issue of paper money that most countries had had their most fatal experiences of paper money, and it was a grave mistake to reproach free banking with the errors of which the royal prerogative had been the sole cause.

The idea of free banking had raised in many people’s minds the vision of anybody and everybody becoming note issuers, and they saw insuperable difficulties in the circulation of the notes of innumerable bankers and feared that unsound firms would have a positive encouragement to set up under the shadow of the multiplicity of different notes, and the practical impossibility of the public being able to exercise a close scrutiny over all the notes they accepted. It was along these lines that the case for unity in the note issue was formulated by those among the restrictionists who succeeded in getting away from the purely political argument of the royal prerogative. Thus it was argued by Adolphe d’Eichtal
*31 that the State intervened to assure the public of guarantees because the holder of a note was almost never in a position to know the real position of the debtor,
*32 and unity in the note issue avoided the inconveniences of having to examine each note carefully to see if it was issued by a bank that was likely to be able to pay it or by one that was not likely to be in that position.

A Belgian economist
*33 of the free-banking school pointed out
*34 in reply to this line of argument, that the danger that “men of straw” would be able to obtain acceptance for their notes was much diminished when it was realised that the supervision of issues would become largely a matter for the bankers themselves. It was not to be expected that the public would exercise no scrutiny at all, and it was a reasonable assumption to make that the trader would willingly accept the notes of his own banker and the notes of such other banks as his own banker was also willing to receive. This was, of course, only a very partial solution of that particular difficulty which referred to the unduly heavy pressure of insolvencies on the small note-holder, who was unlikely to come into contact with the banks as a customer.

The case for competition was also taken up by Paul Coq, Mannequin and Chevalier. Paul Coq
*35 endorsed the views of the Pereire brothers that the rate of discount charged by the Bank of France had risen as soon as, and because, the destruction of the departmental banks had given it an unrestricted monopoly of the note issue. Mannequin’s contribution
*36 was simply a defence of free banking against the allegation that it would lead to over-issue on the usual lines of the banking school, that so long as the notes “are not thrown out of the window,” but are issued only in response to the needs of trade, they cannot be issued in excess. Chevalier was responsible for bringing the subject to the notice of a wide circle of readers by his contributions to the newspapers, notably to the
Journal des Débats. Courcelle-Seneuil also re-expounded his views in the
Journal des Economistes.*37

A publication which provoked a good deal of discussion was an article by Léonce de Lavergne,
*38 in which he proposed to replace the monopoly of the Bank of France not by completely free competition but by a limited plurality. He said it was impossible to manage a large area from one centre as the Bank of France was trying to do, and an adequate provision of banking offices could best be provided by a system of eight or ten regions, each having its parent bank with branches. This was a plea for something similar to the old departmental banks but without the old restrictions.

Probably the most influential disputants were Wolowski and Chevalier, who were on opposite sides in the controversy and undertook a direct discussion and exchange of views. Wolowski had begun his career as a lawyer, and his arguments were characteristically based on juristic rather than economic reasoning. Chevalier had been in his earlier years, before going to America, associated with the Pereire brothers in the Saint-Simonian movement. Although his arguments were much less specious than those of the Pereires, we find him again by their side in this discussion supporting the main tenets of their position. There is no doubt that all three carried with them in their later days the ideas of the Saint-Simonians on banking and credit. In the newly constructed society envisaged by the Saint-Simonians the bank was to play a great directing and centralising role. The banks were to be responsible for estimating the quality and quantity of the needs of the community for capital, and for this purpose there were to be large numbers of them specialising in the separate industries and linked up to a central bank. The outer banks were to inform the central bank of the circumstances of their localities and industries, and the central bank was to distribute the credits between them. In all discussions of the plan great emphasis was placed on the importance of credit facilities and of the wide dispersion of agencies for the distribution of credit.
*39

As a member first of the Chamber of Deputies and later of the Senate, Chevalier had plenty of opportunity of attracting public attention to his views. He adopted the attitude
*40 that since free trade and all that
laisser-faire principles implied was now the accepted policy, since the era of monopolies was said to have passed and competition was regarded as being beneficial to the community, the burden of the proof of the contention that the same system was not applicable to banking was on those who asserted it and not on those who denied it; because on the face of it those who oppose free banking oppose also freedom to build railways, and free exchange in general, which, as he knew, they did not do, and he insisted that they had as yet given no sufficient reason for the attitude they took towards banking. Wolowski took up the other side in a book
*41 of extensive proportions, which contained, however, no very original additions to what had already been said on the subject. It was almost wholly a repetition of the views expressed by others and a commentary on the trend of policy already adopted in the matter. But his doctrinal importance in the French developments must not be under-estimated, for he stood out among the French school as the most emphatic adherent of the use of the rate of discount as a means of controlling specie flows.

This brings us to the eve of the French
Banque Enquéte.*42 The enquiry arose out of the Bank of Savoy affair and the raising of the rate of discount in 1864, and was entrusted to the
Conseil supérieur de l’agriculture du commerce et des travaux publics, of which both Chevalier and d’Eichtal were members, and therefore took part in the examination of witnesses. The report is contained in six volumes and comprises altogether close on five thousand pages. The Council called as witnesses, besides the delegates from the Bank of France, all those who had gained anything of a reputation as writers on subjects connected with money and banking. A number of foreign economists were also invited to state their views, and written memoranda were submitted by Thomson Hankey, William Newmarch, R. H. Patterson and J. S. Mill, from England, Professor de Laveleye, from Belgium, and Professor Tellkampf, from Germany. In addition, Walter Bagehot had the distinction of being called as first witness before the Commission. Among the French witnesses some had already published their views
(e.g. Wolowski, Isaac Pereire, Bonnet, d’Eichtal, Aubry, Lavergne, Chevalier, Courcelle-Seneull, Paul Coq), and we shall have occasion to refer to others (Cernuschi, Coullet, and Horn), who were writing contemporaneously with the enquiry. Looked at as a whole, the evidence cannot be said to have contained any considerable amount of material of value from the point of view of monetary theory. Chevalier made clear his views on the subject of discount policy in the course of his examination of the representatives of the Bank of France. He doubted the utility or the necessity of using the rate of discount or even the restriction of credit in general, no matter what the means, as a remedy for stopping a gold efflux.
*43 The policy that was, in his opinion, the correct one, was that of the sale of its “rentes” by the Bank,
*44 and he emphasised the necessity of not immobilising the capital of the bank in quasi-irredeemable Government obligations which might not be available for this purpose. What Chevalier, along with the other supporters of the same policy, such as Aubry and the Pereires, overlooked, was that the sale of securities by the Bank must contract credit just as certainly as a direct contraction of the amount of bills discounted by the Bank. It would deprive the short-term loan market of the amount of funds acquired by the Bank for the securities it sold, and so there must be a tendency for loan rates to rise. This school thought they had discovered an ingenious device in the shape of an open market operation which would make the Bank more liquid without causing stringency in the money market.

More careful attention was by this time being given to the comparative effect of the alternative systems on the total volume of money and credit. Up to now the free bankers had by no means been of identical opinion. Some of them had held that there was no reason inherent in the free-banking system why its issue should be more expansive than the issue of a central banking system. Others had argued that a free-banking system had a positive advantage in replacing a large part of metallic money by fiduciary money which, costing nothing, could be lent cheaply and thus favour the development of trade and industry. The ideas of this school were openly inflationary and provoked the attack of a number of people who took up an anti-inflationist attitude.

Emile de Laveleye, a Belgian Professor of Political Economy, attacked
*45 the expansionist section of the free-banking school on two grounds. Firstly, he said that if what they claimed, namely, that free banking would lead to an expansion of the circulation, was true, this must be followed by a heavy drain on bank reserves of specie followed by a contraction of the circulation, and a crisis. He pointed out that the crisis would be, moreover, of greater violence under a system of a large number of banks as compared with the case of a privileged bank which, having the unlimited confidence of the public, could extend its issues at such times. But in the second place, de Laveleye argued that the free bankers might be wrong in assuming that their system would provide easier credit conditions in the upward swing of the cycle, and that it was, on the contrary, conceivable that it would involve the keeping of larger reserves than the present system and therefore would lead actually to a smaller circulation. He was himself willing to consider the free-banking system on condition that the banks should be subjected to the condition of unlimited liability.

Just at this time there began an attack on bank-notes in general. It was opened by Cernuschi,
*46 who held that the vital question was not one of whether the note issue should be in the hands of a few or of many banks, but whether banknotes should be issued at all. They had the effect of spoliating the holders of metallic money by depreciating its value, and if they had any use at all they should be made to represent mere certificates for gold deposited and the fiduciary or uncovered issue should cease entirely. But he joined in the demand for free banking because he thought that if any and every bank were allowed to issue notes, nobody would accept them any longer, and so they would disappear. The same attitude towards the bank-note was taken up by Modeste.
*47 Courcelle-Seneuil, Du Puynode and Mannequin entered the discussion on the other side.
*48

Perhaps the best analysis of the point of view of the central banking school was that made by Coullet.
*49 He sets out the advantages and disadvantages of each of the alternative systems, and decides that the weight of the argument is in favour of monopoly and centralisation. He defends the distinction commonly made between notes on the one hand, and bills of exchange and deposits on the other, because of the element of compulsion in the acceptance of the former and the fact that it is not the people who are enabled to borrow on easier terms and so benefit by the extension of the banks’ issues who are likely to suffer when the notes depreciate, since the notes will by this time have passed into the hands of third parties.
*50

Coullet believed that freedom of issue would accomplish its own destruction, and was, therefore, in a somewhat similar though not so extreme position as Cernuschi. He supposed that as the result of the numerous failures that were bound to occur under such a system one of two things would happen:
either the public, struck by the contrast between the majority of the banks and a few or even perhaps a single bank, would in future confine its dealings to these or this bank and so there would be established a
de facto monopoly,
or the whole system would be afflicted and the bank-note would be abandoned altogether. If, however, it should prove possible to build up a system of well-organised and solid banks, the result (he thought) of plurality would be not a lowering of the rate of interest but a raising of the rate, because of the anxiety of the banks (even in normal times) to keep adequate reserves. Even in ordinary times, and against the same total circulation, the united reserves of a large number of banks would have to be greater than the total reserves of a single bank. Moreover, the centralisation of reserves had an advantage as a source of strength in periods of crisis. The advantages of monopoly were, in Coullet’s opinion, more than sufficient to outweigh the avowed danger of the Government’s abusing its power over the single bank of issue.

The best exposition of the free-banking case came from J. E. Horn.
*51 In the first place he disposed of the royal prerogative argument in economic terms.
*52 While pointing out that it was private industry that had first commenced the coinage of specie, he submitted that there were probably two reasons why it had later been taken over as a State monopoly and claimed as a royal right. One was in order to facilitate the circulation of coins as a medium of exchange over wide areas at a time when the State was the only institution that was generally enough known to inspire sufficient confidence that the coins were what they professed to be in weight and fineness, and so to make it unnecessary to weigh and assay every coin before accepting it. The second reason was that the King found it the most convenient way of acquiring revenue. In our day, he continues, however, it is no longer necessary as a budgetary source,
*53 and neither is it true any more that the State is the only institution which could provide the service of coinage. If a firm like Rothschild, in Paris, or Baring, in London, were to undertake the stamping of coins, they would be just as willingly accepted as the coin of the realm.

Horn, in company with Chevalier and Courcelle-Seneuil, and also many of the less prominent writers on free banking, denied that bank-notes were money, and this became one of the major issues between these writers and Wolowski. It was an attitude which was, of course, in many cases adopted, perhaps rather unnecessarily, merely in order to bring bank-notes outside the prerogative of the Crown in the coinage of money, and was little more than the playing off of sophistry against sophistry. A great deal of space was devoted to this discussion of a matter which was, in the last analysis, a question of definition as to whether two things should be denoted by the same term because they possessed a certain characteristic in common, or whether they should be sharply contrasted because they differed in respect of a second characteristic. Wolowski was defining bank-notes as money because both bank-notes and coin exert like effects on trade and prices. Chevalier and the others were insisting on the necessity for always regarding bank-notes as merely substitutes for, and always convertible into, coin, since any view which neglected the condition of strict convertibility must lead to their over-issue and unlimited depreciation.

Turning to the positive disadvantages of a privileged monopoly, Horn called attention to the greater possibility that the liability of such a bank to pay out specie on demand would be revoked with its consequence of pure paper money in place of notes convertible into coin. A bank under State patronage always counted on the Government to relieve it of its obligation to pay when nearing insolvency, and its bankruptcy became legalised instead of its having to go into liquidation and suffer the usual penalties of insolvency. The history of privileged banks had undeniably been full of bankruptcies. If banks of issue were given to understand, however, that they were positively and irremediably responsible for their acts, and had themselves to bear the consequences, they would be as prudent in their policy as any other business concern.
*54 There was also, as Chevalier
*55 had already emphasised, the ever-present temptation for the Government to abuse its power over the privileged bank.

There can be no guarantee that failures will never occur under either system, but in the case of a plural system only the notes of the failed firms depreciate, whereas in the case of a privileged monopoly the legalised suspension, and therefore the depreciation, affects the whole of the note issue. Moreover, if banks temporarily suspended payments under a free system, the competition of banks still maintaining cash payments would wipe them out of business if they did not hasten to resume payments, and suspensions would therefore be of shorter duration.

Banking freedom in the true sense of the word, and the system which Horn favoured, was a system in which companies would be allowed to set up in the banking business, whether issue, discount or deposit, under just the same regulations as those under which companies were allowed to set up, in other industries,
*56 regulations which concentrated on the prevention of fraud. But he permitted that it was not unreasonable that people should want to add to these stipulations some others specially relating to companies undertaking the issue of notes,
*57 because of the circumstance that, in addition to the shareholders and the people who contract with the company, there is a third class involved, namely, the indirect and to a certain extent involuntary acceptors of bank-notes, and it was on these grounds that he thought the 1863 legislation of the United States was admissible. Such regulations, however, he still regarded as not entirely indispensable.

In sympathy with the tradition of the banking school, Horn was of the opinion that a crisis could never be caused by an over-issue of notes, since no more would get into circulation than just sufficed to satisfy a genuine demand. Banks, therefore, made mistakes not in the quantity of their issues but in the lines in which they made their investments, and crises were caused according to him by a scarcity of circulating capital. In periods of “over-investment” too much circulating capital is transformed into fixed capital until it is discovered that there is an insufficiency of the auxiliary materials necessary to co-operate with it.
*58

The direct discussion between Wolowski and Chevalier continued for some years, and the correspondence was published by Wolowski in his later book.
*59 Courcelle-Seneuil also made another final statement of his position,
*60 again pointing out the extreme lack of banking facilities in the provinces in general, and of agricultural credit in particular. Neither Courcelle-Seneuil nor Horn was a member of that group of free bankers who supported their case because they expected it to increase the possibilities of expansion and the lowering of the rate of interest. Courcelle-Seneuil did not regard it as certain that issues would be greater under competition, nor that the rate of interest would be lowered, and in so far as the latter was at all likely he thought it would come, not by way of increased issues, but by way of the collection and utilisation of idle savings. He was the most unyielding of all the free bankers, insisting on complete liberty as understood in other branches of trade and industry. He refused to consider the application of any special regulations to the case of banking, and emphatically denied the favourite contention of the restrictionists
*61 that banking firms, unlike those in other industries, cannot be made to bear themselves the consequences of their mistakes.

It will be remembered that in England, prior to 1844, it had been a constantly recurring complaint that the efforts of the Bank of England to contract credit in time of a specie outflow were always rendered nugatory by the failure of the country banks to do the same, and it was held up against the free note-issuing rights of these banks that they were insensitive to the foreign exchanges. This same argument was re-introduced in a slightly more sophisticated form by Clement Juglar.
*62 He used it in favour of a certain type of centralisation. His argument ran that there was a practical difficulty in a plural system in distributing the demands for specie to send abroad because the settlement of commercial operations with foreign centres tends to concentrate in the large towns and the demands for specie will fall on the banks in these places, while others are unaffected by the drain on reserves and have no incentive to check their issues. From this he drew the inference that the best system would certainly be one that was free and competitive in the sense that there should be a large number of banks spread over all localities, but that it should be controlled from the centre by the Bank of France acting as a clearing-house. The chief purpose of his central bank was to render the banks lying outside the trading centres sensitive to the forces necessitating a contraction of the currency by facilitating clearing operations. But it is extremely doubtful whether any such externally imposed institution as the Bank of France or any other is necessary to effect these operations. With reasonable communications and no artificially imposed obstacles, clearing arrangements will be made by the banks themselves. Thus, if one group of banks (A) near the ports or in Paris is affected directly by gold withdrawals for export and contracts its note issue, but another group (B) is not so affected, group A will have less notes in circulation in proportion to the circulation of B than it did before; the clearing balances will go in favour of A, who will consequently acquire claims on the gold reserves of B. This will constrain B to contract its liabilities and so the contraction will be diffused throughout the whole system. The difficulty raised by Juglar to a position of such primary importance was imaginary rather than real and would certainly not in itself provide the sole reason for the existence of institutions endowed with such privileges and position of ascendancy as the Bank of France. Juglar was really advocating a mixed system in which rights of issue should be given to the competitive banks, but in which there should be a central bank with a controlling influence, something between free banking in the pure sense and the single privileged monopoly system in vogue in France.

What is the connection between the free-banking school and the banking school, on the one hand, and between the central banking school and the currency school on the other? It is not unnatural to expect it to be very close in both cases. It is especially noticeable in France that most of the free bankers were adherents of the banking theory which denied that bank-notes could be over-issued so long as convertibility was maintained. Brasseur, Horn, Courcelle-Seneuil, Coq and Mannequin were among the most convinced of the banking theorists. Cernuschi was an exception. He was a member of the strictest section of the currency school which believed not merely that the fiduciary issue should be fixed, and any issue above this limit covered by metal, but that there should be no fiduciary circulation at all. He supported free banking, however, for the peculiar reason, as we have already explained, that he thought such a system would destroy the note issue altogether.

Adherence to the tenets of the central banking school correspondingly usually carried with it the support of the principles of the currency school. The exception in this case was Coullet, who opposed the fixing of any limits on the fiduciary issue so long as there was only one bank of issue.

Among those who opposed the unlimited right of issue of the Bank of France there began at this time a discussion of the relative merits of the fixed fiduciary issue and the fixed reserve proportion. The latter was a rather less rigid interpretation of the currency doctrine. Wolowski was a great admirer of Peel’s Act, and Cernuschi also preferred this to the reserve proportion method of controlling issues for the reason that the latter tended to cause greater embarrassment in time of specie withdrawals, but Léonce de Lavergne and Adolphe d’Eichtal both favoured the second method.

By the beginning of the ‘seventies the attention of monetary theorists had been turned to the bi-metallic question. Wolowski and Cernuschi both figured among the supporters of the retention of the double standard.