Bullionism

Abstract

The term “bullionism” describes a belief that the price of gold, measured in domestic currency, is an appropriate indicator of inflation and the depreciation of the currency caused by an excess supply of money. The term bullionism arose from what has come to be known as the Bullionist Controversy in the United Kingdom. In 1797, while at war with France and in the midst of declining reserves at the Bank of England, Britain suspended the convertibility of Bank of England notes into gold. The British also pressured Ireland to suspend the convertibility of Bank of Ireland notes. Following the suspension of convertibility, both countries experienced a rising price of gold and a depreciation of their exchange rate. Since price indexes were not available at that time, the debate was about the cause of the rising price of gold and depreciation of the exchange rate. The Bullionists argued that the rising price of gold was an indicative of rising prices in general and that the rising prices and depreciation of the exchange rate were due to an excess supply of bank notes. The Antibullionists denied that an excess supply of bank notes was to blame for depreciation and instead argued that the cause was a combination of foreign remittances, bad harvests, and an adverse balance of trade. A similar debate took place in Sweden over a half of a century earlier when elected officials used what is now known as the Sveriges Riksbank to finance an expansion of commercial activity with new bank notes. These debates carry important lessons about the determination of the price level and the exchange rate under the gold standard and under a paper money standard. The empirical literature on these periods is somewhat limited. In this paper, I summarize the existing literature and point to areas for future research.