The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Overstone, Lord [Samuel Jones Loyd] (1796–1883)

  • D. P. O’Brien
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_1531

Abstract

Samuel Loyd (the single ‘1’ seems to have been a device adopted by his father to shake off Welsh relatives), Lord Overstone, was born on 25 September 1796, the son of Lewis Loyd, a Unitarian minister turned banker, and Sarah Loyd (née Jones), the daughter of a Manchester banker. Lewis Loyd’s drive and ability transformed an obscure provincial bank into a major concern. An MP from 1819 to 1826, Overstone only began to devote himself seriously to banking after the death of his mother in 1821. Though perhaps lacking his father’s flair, he was a shrewd and successful banker, influential with his contemporaries. He retired from business only in 1850, on his elevation to the peerage by Lord John Russell.

Keywords

Balance of payments Bank Charter Act (1844) Banking principle Currency principle Endogenous trade cycle Liquidity preference Monetary base Overstone, Lord Palmer rule Specie-flow mechanism 

JEL Classifications

B31 

Samuel Loyd (the single ‘1’ seems to have been a device adopted by his father to shake off Welsh relatives), Lord Overstone, was born on 25 September 1796, the son of Lewis Loyd, a Unitarian minister turned banker, and Sarah Loyd (née Jones), the daughter of a Manchester banker. Lewis Loyd’s drive and ability transformed an obscure provincial bank into a major concern. An MP from 1819 to 1826, Overstone only began to devote himself seriously to banking after the death of his mother in 1821. Though perhaps lacking his father’s flair, he was a shrewd and successful banker, influential with his contemporaries. He retired from business only in 1850, on his elevation to the peerage by Lord John Russell.

In 1837 he entered, with considerable effectiveness, the arena of monetary controversy with his Reflections suggested by a perusal of Mr. J. Horsley Palmer’s pamphlet on the Causes and Consequences of the pressure on the Money Market. This was not his first statement on the matter; he had been a witness before the 1832 committee on the renewal of the Bank Charter. But it was the start of his preeminence as a monetary writer, a pre-eminence which was to prove decisive in the debates leading up to the renewal of the Bank Charter in 1844 and which shaped the institutional framework of British monetary policy from that time until the First World War. Overstone’s monetary thought starts from a position that the economy contains an endogenous trade cycle – he was indeed one of the first people to identify the stages of the cycle. Monetary policy could then be procyclic, responding to the needs of customers (the Banking principle) or it could act counter-cyclically so as to stabilize the level of prices and activity (the Currency principle). The theoretical position underlying the latter was as follows. In the upswing of the cycle money income rose, exports were less competitive, and a balance of payments deficit developed. Counter-cyclical contraction of the currency, in line with the loss of specie through the balance of payments deficit, would then moderate the upswing and prevent it getting out of hand. Conversely, in the lower half of the cycle, with a balance of payments surplus, the money supply would be increased. (O’Brien 1971; O’Brien 1975; Wood 1939)

The origins of this position were threefold: Hume’s theory of the balance of payments, positing a direct link between the money supply, the price level, exports, and imports: the Ricardian theory of the equilibrium distribution of the precious metals (that when countries were in relative money income equilibria, there would be no net flows of precious metal) deriving from Hume; and the Ricardian definition of ‘excess’. The last is particularly crucial. If specie was flowing out then, by definition, there was excess currency. This idea leads in turn to the principle, formulated in 1826 by several writers, of ‘metallic fluctuation’: a paper currency should fluctuate in amount exactly as an identically circumstanced metallic one would do.

On this basis Overstone emerged as a critic of the ‘Palmer Rule’ under which the Bank allowed drains of specie to fall on deposits equally with notes: unless deposits were as important as notes in correcting the price level in relation to the balance of payments, the drain might exhaust the specie without correcting the balance of payments. Overstone’s emphasis was on control of currency as the high-powered money base, with deposits as part of an inverted credit pyramid lacking any independent effect of their own, and dependent upon the currency base if banks behaved properly with respect to reserve ratios.

Thus, fundamental to monetary control was separation of departments in the Bank: the Banking department followed Banking principles, but the Issue department must follow Currency principles and thus stabilize economic activity, following automatic rather than discretionary procedures.

The role of the rate of interest in all this was twofold: short-run balance of payments correction, although this could only be a palliative if relative money incomes were out of line, and the production of an effect on confidence which in turn affected liquidity preference through increasing precautionary reserve holdings when the rate was raised, thus reducing the effectiveness of a given money supply. This variation in liquidity preference with confidence was an important part of the analysis, and was built into the 1844 Act with weekly publication of the Bank reserves, which were supposed to cause prudent adjustment of other reserves. This in turn would avoid the Bank of England’s having to act as lender of last resort, a role which Overstone opposed as incompatible both with inducing the rest of the system to respond counter-cyclically and with the necessary limitation of the high-powered base.

Overstone was a many-sided man. But it is as a monetary theorist that he is chiefly remembered.

See Also

Selected Works

  • 1857. Tracts and other publications on metallic and paper currency. London: privately printed. London: Longmans, 1858.

  • 1858. The evidence given by Lord Overstone, before the Select Committee of the House of Commons of 1857, on Bank Acts, with additions. London: Longmans.

Bibliography

  1. O’Brien, D.P., ed. 1971. The correspondence of Lord Overstone, 3 vols. Cambridge: Cambridge University Press.Google Scholar
  2. O’Brien, D.P. 1975. The classical economists, ch. 6. Oxford: Clarendon Press.Google Scholar
  3. Wood, E. 1939. English theories of central banking control, 1819–1858. Cambridge, MA: Harvard University Press.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • D. P. O’Brien
    • 1
  1. 1.