British Banking School facts for kids

The British Banking School was a group of smart thinkers (called economists) from the United Kingdom in the 1800s. They wrote about how money should work and how banks should be managed. This group disagreed with another group called the British Currency School. The Banking School believed that banks could naturally control how much paper money was in circulation. They thought this would happen because people would want to exchange their paper money for gold if banks printed too much.

Some of the main members of the Banking School were Thomas Tooke, John Fullarton, James Wilson, and J. W. Gilbart. They believed that the amount of paper money moving around was well-controlled by how banks competed with each other. As long as people could always swap their paper money for gold, the amount of money wouldn't get too high for what businesses needed. Because of this, they were against a rule from 1844 that said banks had to keep a certain amount of gold for every banknote they issued.

Banking School vs. Currency School

In the early and mid-1800s, Britain had some tough money problems. This was partly because they changed their money system. They moved from using gold coins to using paper money that couldn't always be exchanged for gold. This change led to a financial crisis, meaning the economy struggled a lot.

During this time, two main groups of financial experts formed: the British Banking School and the British Currency School.

"Both groups wanted to find the best way to manage banks and money to keep the economy stable (steady and strong)."

What the Banking School Believed

The British Banking School had different ideas from the British Currency School about paper money (notes) and money in bank accounts (deposits). The Banking School had two main points:

• First, they thought that both paper money and bank deposits did the same job in the economy.
• Second, they argued that there shouldn't be any strict rules on how much paper money or how many deposits banks could have. The only rule should be that paper money could always be swapped for gold or coins.

They believed that money is a way to exchange things, and it's created naturally by traders and businesses. As one expert, Viner, explained, they thought that the amount of paper money in circulation was well-controlled by how banks competed. If banks always allowed people to convert paper money to gold, the amount of money wouldn't go beyond what businesses needed for long. This meant that how much credit businesses needed depended a lot on bank rules and their interest rates.

Reaction to Peel's Act

In 1844, a law called the Bank Charter Act (also known as Peel's Act) was passed. At first, this law seemed like a loss for the British Banking School. It split the Bank of England into two parts: one for issuing banknotes and one for handling deposits. The law basically forced the banknote part to keep a lot of gold (a "100-percent reserve") for every banknote it issued.

However, in 1847, serious financial problems happened because of Peel's Act. To stop banks from failing, the rule about keeping a 100-percent gold reserve was temporarily stopped. This crisis in 1847 actually showed that many of the Banking School's ideas were right. They had argued that money should not be strictly controlled but should flow naturally.

Even though the Currency School seemed to win legally with Peel's Act, the Banking School actually won in practice. As another expert, Mises, said, "Although the Currency School enjoyed the de jure (by law) success, de facto (in reality) victory went to the Banking School."