The so-called Bullion Report, published on June 8, 1810, ranks with the most famous documents in the history of monetary theory. The report was actually written by Henry Thornton, a prominent banker and economist. Thomas Malthus and David Ricardo, the most famous economists of the day, rallied to support the conclusions of the report, which cited fiat money (money inconvertible into a precious metal at an official rate) as the cause of the high price of bullion. Actually, the first volley had come from the pen of Ricardo, who wrote newspaper articles and pamphlets on the subject, one entitled The High Price of Bullion (1810).
During the French Revolution and Napoleonic Wars, the Bank of England suspended convertibility of banknotes into metallic coinage and precious metal, an action that would become common practice during future wars but was then unprecedented. Inflation measures calculated from price indices were unavailable at the time, but the price of gold bullion in British pounds soared and the British pound depreciated relative to other European currencies in foreign exchange markets. Discussions on the high price of bullion and currency depreciation led to the appointment of a select committee to make an inquiry.
The current state of knowledge of monetary theory would have the finger of suspicion immediately turn to the issuance of fiat money, but at the threshold of the 19th century other causes were cited for the high price of bullion and the depreciation of the British pound. To the observation that the high price of gold was due to increased demand for gold to
supply French armies, the Report answered:
Your Committee is of the opinion that in the sound natural state of the British currency the foundation of which is gold no increased demand for gold from other parts of the world however great or from whatever causes arising can have the effect of producing here for a considerable period of time a material rise in the market price of gold. . . . it was to be expected that those who ascribed the high price here to a great demand abroad, would have been prepared to state that there were corresponding high prices abroad. . . . [I]t does not appear that during the time when the price of Gold bullion was rising here as valued in our paper there was any corresponding rise in the price of Gold bullion in the market of the Continent as valued in their respective currencies. (Chown, 1994, 239)
The select committee was equally unimpressed with theories that attributed the depreciation of the pound to harvest failures, Napoleon’s blockade, subsidies of foreign allies, and support of armies in foreign lands. In the words of the report:
From the foregoing reasoning relative to the state of the Exchanges if they are considered apart, YourCommittee find it difficult to resist an inference that a portion at least of the great fall which the Exchanges lately suffered must have resulted not from the state of trade but from a change in the relative value of our domestic currency. But when this deduction is joined with that which your Committee have stated respectingthe market price of Gold, that inference appears to be demonstrated. (Chown, 1994, 241)
The report recommended a return to convertibility as soon as possible, but the exigencies of war outweighed the logic of the report and a resumption of convertibility had to wait until 1821.
The bullionist controversy demonstrated the difficulty of pinpointing the causes of currency depreciation and inflation. Often the blame was laid at the feet of shortages, greedy labor unions, monopolies, and speculators, when a more careful examination placed the cause in undisciplined growth in money stocks. The report recommended a return to convertibility as a means of maintaining monetary discipline.
Chown, John F. 1994. A History of Money.
Spiegel, Henry Williams. 1971. The Growth of Economic Thought.