Theory of the Credit System

The debate between the Currency and Banking Schools in the mid nineteenth century gave rise to important developments in the theoretical analysis of inflation and business cycles in the context of an increasingly sophisticated credit system. Indeed, Marx spoke of the ‘economic literature worth mentioning since 1830’ as resolving itself ‘mainly into a literature on currency, credit and crises’ (1867/94, III, pp. 492–3). The ‘bullion controversy’ in the early part of the century was addressed, as we have seen, almost exclusively to the operation of a fiduciary system; hence, the resumption of cash payments by the Bank of England in 1821 was the first occasion for any real advance in the theory of credit since Adam Smith. In this chapter, I shall begin with the concept of ‘fictitious capital’ and the determination of the rate of interest, and then attempt to deduce the laws governing the behaviour of credit instruments and their connection with economic activity and prices.