Banking School

The Banking School was a group of nineteenth-century British monetary economists, principally Thomas Tooke, John Fullarton, James Wilson and John Stuart Mill, who opposed the Currency School's argument that banknote issue should be mechanically tied to gold reserves. Tooke and Fullarton's central idea, the reflux principle, held that banknotes issued against sound commercial lending could never permanently oversupply the market, because any notes not genuinely needed for circulation would flow back to the issuing banks as loan repayments or deposits, so that ordinary competitive banking practice already kept note issue in check without a rigid statutory rule. The school accordingly opposed the Bank Charter Act of 1844, arguing that the Act mistook banknotes for the whole of the money supply while ignoring the larger and more flexible role of bank deposits and credit. The Banking School's position drew support from the financial panics of 1847, 1857 and 1866, when the Bank of England had to suspend the Act's own gold-backing limits to meet demand for credit. Later monetary economists have generally credited the Banking School with a more accurate understanding of how bank deposits and credit, not just banknotes, make up the money supply, even though the debate at the time was won politically by the Currency School's Act. This description is adapted from Wikipedia contributors under CC BY-SA 4.0; changes were made. https://creativecommons.org/licenses/by-sa/4.0/