Further thoughts on the ‘trade cycle’ and the Australian right’s betrayal of history

Gerry Jackson
19 September 2022

During the last several weeks a number of people have been asking me why Australia’s establishment right deliberately ignores historical facts that refute Keynesian thinking. They are completely bewildered by the right’s refusal to acknowledge any lessons from past that counter the left’s relentless push for more and more spending.  I think Graham Young, publisher of Online Opinion and executive director of the Australia Institute of Progress, inadvertently gave us a clue as to the right’s motives. When presented with the historical data I had written up he bizarrely asserted that all the quotes I used, which were fully sourced, were not genuine! In effect, he accused me of fabricating them. (I anxiously await his expert opinion on this article.)

Young then attempted to justify his accusation with the patently absurd claim that he was “pretty knowledgeable in these areas”, going on to argue that I know nothing about the “theories” in question. To put it bluntly, Mr Young has never read any classical economists and in addition he is a complete ignoramus when it comes to the nineteenth century. What apparently aroused Young’s ire was my critique of Steve Kates’ treatment of nineteenth century trade cycle theory. It seems that Mr Young firmly believes that only the insiders have valid arguments. Moreover, dissent from those arguments will not be tolerated.

Apart from Mr Young there is also Tim Blair, an editor and columnist at the Daily Telegraph. According to this self-professed libertarian who once declared that I should be blacklisted as well as shut down. I think the opinions of  both these characters bring to light the close-mindedness of Australia’s right. A close-mindedness that underpins its refusal to even consider the vitally important economic lessons from the nineteenth century as well as Australia’s experience in the Great Depression. Their destructive stubbornness amounts to a betrayal of history.

I have now written another critique (the quotes are genuine) of Steve Kates’ approach, not because it might irritate Mr Young but because it is necessary to correct Kate’s errors. Because he continually made the point of referring to John Stuart Mill when writing about the classical economists and the trade cycle he also made it necessary to clarify the situation somewhat with respect to Mill’s true position on the issue. What does become clear is that he was not and never was the leading classical theorist on the trade cycle. This is because there were two theories, not one1. The ‘theory’ Mill promoted was not just wrong, it was dangerously wrong. Now Mill made it clear that he agreed with

Mr. Tooke and Mr. Fullarton, that bank issues, since they cannot be increased in amount unless there be an increased demand, cannot possibly raise prices; cannot encourage speculation, nor occasion a commercial crisis2.

He then proceeded to contradict himself by writing that

an increase in the quantity of money raises prices, and a diminution lowers them, is the most elementary proposition in the theory of currencies, and without it we should have no key to any of the others.

Torrens delivered the lethal blow to Fullarton’s theory by pointing out the important fact that banks possess in themselves the power of increasing and diminishing the demand for banking accommodation. When they raise the rate of discount, the demand for accommodation contracts, and when they lower the rate it expands3.”

It was this vital fact that was the key to Henry Thornton’s theory and the one which the currency school theory stressed. Torrens’ attack left Mill with no escape because he himself had stated:

 It is perfectly true that in England, and most other commercial countries, an addition to the currency almost always seems to have the effect of lowering the rate of interest; because it is almost always accompanied by something which really has that tendency. The currency in common use, being a currency provided by bankers, is all issued in the way of loans, except such part as happens to be employed in the purchase of gold or silver4.


 During that year [1847] the hands of the bank were absolutely tied, in its character of a bank of issue; but through its operations as a bank of deposit it exercised as great an influence, or apparent influence, on the rate of interest and the state of credit, as at any former period5.

So we have an admission that Thornton was right in arguing, which he did from his experience as a banker, that increasing the money supply (Thornton understood that demand deposits are also money, as did Torrens but not Jones Loyd and George Warde Norman) lowered the rate of interest which in turn triggered a boom and fuelled speculation in the process. It’s no wonder that Mill’s contradictions and twists and turns led Torrens to comment that the man’s “mental vision is somewhat obscure when directed to realities…6

The formidable Colonel Torrens was not alone in exposing the fallacies and contradictions of the banking school. George Arbuthnot, a noted civil servant, launched a highly detailed and ruthless attack on Tooke’s theory7. Now Tooke argued

P[t]hat the prices of commodities do not depend upon the quantity of money indicated by the amount of bank notes, nor upon the amount of the whole of the circulating medium; but that, on the contrary, the amount of the circulating medium is the consequence of prices[!]8

Using bank figures for notes and deposits from both the US and Britain Arbuthnot easily refuted Tooke’s absurd attempt to reverse cause and effect while also exposing the banking school’s inept use of monetary figures. Nevertheless, banking school disciples remained totally unmoved and thoroughly convinced, despite statistical evidence to the contrary, that their monetary theory, the one that Marx also took as his own, rested  on solid empirical ground and that the money supply really did adapt itself to the so-called needs of business, meaning that the money supply had to be passive.

 Despite the devastating assaults that exposed the banking school’s dangerous errors and contradictions it still emerged triumphant in its battle with the currency school. The reason was the failure of Peel’s 1844 Bank Act to prevent the 1840s “railway mania” that ended in the severe crisis of 1847.

The Bank Charter Act of July 1844, sometimes called Peel’s bank Act, was based on the currency principle that the note issue should change in the same direction and to the same extent as the Bank of England’s gold reserves and by doing so end the fractional reserve note issue system. Sir Robert Peel, in company with William Huskisson, believed that this would put an end to what Huskisson called “those alternations of excitement and depression which have been attended with such alarming consequences to this Country9.”

But Tooke, Wilson and Fullarton understood that Peel’s Act would sooner or later have to be suspended because it failed to take into account the fact that demand deposits are money, whereas the currency principle assumed that only bank notes are money. (In fact, the banking school’s recognition that demand deposits are money is the only thing it did get right.) Peel’s Act was suspended in 1847, November 1857 and again in May 1866.

 The irony is that the currency school was divided on the money issue with Sir William Clay, Colonel Robert Torrens, George Arbuthnot and James Pennington (the “Mycroft Holmes10” of  the classical school) arguing that demand deposits are money and, unlike credit instruments, are therefore part of the money supply, a fact that Jones Loyd11 and his supporters stubbornly refused to accept. In 1826 Pennington wrote a memoranda to William Huskisson, a government minister, explaining why demand deposits are money and how fractional reserve banking expands the money supply by multiplying deposits. The memorandum immediately grabbed Huskisson’s attention. His response to Pennington was swift:

This, for a long time, has appeared to me to be one of the most important matters which can engage the attention of the legislature and the councils of the country. The subject is certainly intricate and complicated, but the too great facility of expansion at one time, and the too rapid contraction of paper credit (I speak of it in the largest sense) at another, is unquestionably an evil of the greatest magnitude….12 

Huskisson resigned in 1828 and interest in monetary theory appears to have temporarily waned. (Unfortunately, two years later Huskisson gained fame as the first fatal victim of railway travel when in 1830 he accidentally fell under the wheels of Stevenson’s steam engine.) Then in 1837 Torrens wrote a letter to Lord Melbourne which revealed the deep influence that Pennington’s work had on Torrens’ thinking. Giving due acknowledgement to Pennington he did what Pennington did not do and that is give a detailed illustration of the money-creation process by which £10 million pounds deposited in London banks would be expanded to £90 million. In doing so Torrens showed the limits of the monetary expansion and the value of the multiplier as the inverse of the reserve ratio, noting that deposits would be expanded to the point where they reached the ratio that the banks considered “safe and  legitimate13”.

Now the Bank of England was supposed to treat the currency as if it were specie. This meant that as the condition of the exchanges governed the necessary monetary action, not the trade deficit: an adverse exchange meant a contraction of the note issue was in order and a favourable exchange necessitated an expansion. Using the Bank’s own figures Torrens proved conclusively that instead of adhering to this monetary principle the Bank acted “in systematic violation of it14“, leading him to emphatically state that the directors “do not know their business”. (Two years after writing this the Bank of France had to once again came to the Bank’s rescue, much to the embarrassment of the directors.) The pamphlet is a tour de force and a scathing indictment of how the Bank “mismanaged the currency”. Torrens had now revealed himself as a full-blooded member of the currency school and a firm believer in the monetary theory of the trade cycle thereby abandoning the totally unsatisfactory explanation for recessions he had given in An Essay on the Production of wealth15.

We can see that for the currency school the problem was one of monetary expansion. In a sense, it was the same for the banking school in that according to its explanation the money supply simply expands and contracts according to the ‘needs of business’. (This idea is now post-Keynesian dogma and is called endogenous money16.) In addition, the banking school also made the bizarre argument that convertible notes are credit instruments and not money17. We can see that the heart of the problem was the question of the money supply. Hence, Kates’ belief  “that the law of markets was at the very centre of the classical theory of recession” is a grave error18.

The astonishing thing is that after he wrote this pamphlet Torrens then appears to have greatly downgraded the importance of demand deposits. While Torrens was the currency school’s leading and most effective theorist Samuel Jones Loyd, an eminent London banker with an enormous amount of prestige in the city, was its undisputed leader. He, along with the majority of the currency school, adhered to the Ricardian line that demand deposits are not money. Warde Norman19, a long-standing Bank of England director, stood four-square with Jones Loyd, arguing that demand deposits are merely money-economising arrangements as are bills of exchange.  “married women”


1Mill’s theory amounted to no theory at all. It amounts to a description of what occurred during the 1825 crisis which was followed by a deep depression. His description then became the cause of booms and busts.

Mill,  Paper Currency and Commercial distress, 1826. The Collected Works of John Stuart Mill, Vol. IV, Liberty Fund, 2006.

On the other hand, Robert Mushet gave a vivid explanation of what really happened during that financially grim period and in doing so provided a correct explanation of what caused the crisis and what was needed to prevent a recurrence.

Robert Mushet, An Attempt to Explain from the Facts the Effects of the Issues of the Bank of England Upon its Own Interests, Public Credit and the Country Banks, Baldwick, Craddock, and Joy, 1826.

2John Stuart Mill, Principles of Political Economy, Vol. II, Liberty Fund, 2005,  p. 662.

3Torrens, Robert, The Principles and Practical Operation of Sir Robert Peel’s Bill of 1844 Explained and Defended against the Objections of Tooke, Fullarton and Wilson, Longman, Brown, Brown, Green, and Longmans, 1857, p. 109.

I am sure a reading of Colonel Torrens’ devastating criticism of Tooke’s monetary ideas would disabuse Graham Young of his own weird belief that money “can be created by just about anyone, including retailers.”

4Principles of Political Economy, Vol. II, p. 654. Here he admits that by expanding their note issue bankers lower  interest rates.

5Ibid, p. 658.

6Torrens, Robert, The Principles and Practical Operation of Sir Robert Peel’s Bill of 1844 Explained and Defended against the Objections of Tooke, Fullarton and Wilson, p. 162.

7George Arbuthnot, Peel’s Act of 1844 Regulating the Issue of Bank Notes Vindicated, Longman, Brown, Green, and Roberts, 1857.

8Tooke, An inquiry into the Currency Principle, Longman, Brown, Green, and Longmans, 1844, p.23.

 9Letter to William Huskisson 1827. Sayers, R. S., Economic Writings of James Pennington, London School of Economics and Political Science, University of London, 1963, p. 85.

 10Lionel Robbins, Robert Torrens and the Evolution of Classical Economics, Macmillan & Co. LTD, 1958, pp. 245-6.

11Samuel Jones Loyd became 1st Baron Ovestone on the death of his father in 1858.

12Letter to William Huskisson 1827, p. xx.

 13Robert Torrens, A Letter to the Right Honourable Lord Viscount Melbourne on the Causes of the Recent Derangement in the Money Market, and on Bank Reform, London: Longman, Rees, Orme, Brown, & Green, 1837.

14Ibid. p.

15Robert Torrens, An Essay on the Production of Wealth, Longman, Hurst, Rees, Orme, and Brown, 1821.

16Endogenous money resembles the discredited needs of business doctrine which advised that the money supply should always be allowed to accommodate the “needs of business”. The fact that the rate of interest had a direct effect on the “needs of business” was overlooked. MMT advocates go one step further by arguing that a country should never default so long as it can repay its debt with the money it ‘prints’, which amounts to inflating the debt away.

17Thomas Tooke and John Fullarton argued that convertible notes were not money but inconvertible notes were, and convertible paper could not be issued in excess unlike inconvertible notes.

Tooke, An inquiry into the Currency Principle, Longman, Brown, Green, and Roberts, 1844, pp. 70, 92,

John Fullarton, On the Regulation of Currencies, John Murray 1845, pp. 28-29, 57-58

Warran Mosler, Soft Currency Economics, p. 13.

18Steven Kates, Free Market Economics: An Introduction for the General Reader, Edward Elgar, p. 214.

19George Warde Norman, Money and the Means of Economising the Use of it, Pelham Richardson, 1841, pp. 35-37, 43, 50, 54.

5 thoughts on “Further thoughts on the ‘trade cycle’ and the Australian right’s betrayal of history”

  1. I have been chewing on this article all day. The more I think about it the more depressed I become. It’s unfathomable to me why the right refuses to use any of this information. I am also nonplussed by Graham Young’s lying and his attempt to smear you. I know he lied because I don’t think you are the sort of guy that would not put something in quotation marks unless it was true.

  2. The first three paragraphs made by blood boil who the hell do the likes of Blair and Young think they are? My eyes are fully opened now. I knew the right was hopeless but I didn’t think they were scum just out for themselves. It drives me mad to think arseholes like young are free to smear people they don’t like. At least Gerry deals with facts.

  3. Well, Michael, I came to the conclusion many years ago that our right is the main obstacle to confronting the left. Blair and Young are evidence that the obstacle is very real. It’s no wonder the left has been getting away with murder.

  4. I have never read anything like Gerry’s stuff on the trade cycle in nineteenth England and its bearing on current economic policy. I think it is shocking that we have not had anything like this before. What really grabbed my attention were the opening paragraphs. I had no idea things were so bad on our right. Young and Blair’s behaviour is absolutely disgusting. From the tone of the article I get the impression that they are far from being the only rotten apples in the right’s barrel.

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