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Banking and Currency schools


The representatives of the two sides of opinion in a controversy which centred on Sir Robert Peel's Bank Charter Act of 1844. This Act effectively limited the creation of bank-notes to the Bank of England and regulated their issue. The Banking school argued that, given that bank-notes were convertible into gold, there was no need to regulate the note issue because the fact of convertibility would prevent any serious over-issue. 'Moreover, it was pointless to try to regulate the issue of bank-notes because the demand for currericy would be met by an expansion of bank deposits, which would have the same effect as an expansion of the note issue. The Currency school, on the other hand, argued that the check offered by convertibility would not operate in time to prevent serious commercial disruption. Bank-notes should be regatded as though they were the gold specie they in fact represent, and consequently the quantity at issue should fluctuate in sympathy with the balance of payments.

Reference: The Penguin Dictionary of Economics, 3rd edt.