Henry Thornton (1760-1815), banker, philanthropist, and member of Parliament, is celebrated among economists as the author of An Enquiry Into the Nature and Effects of the Paper Credit of Great Britain, published in 1802, one of the most important and original contributions to monetary theory ever written. He was born at Clapham of a pious and prosperous city family which had moved from Yorkshire earlier in the century. Both his father and grandfather had been in the Russian trade and had been directors of the Bank of England. After a schooling of which he himself was subsequently very critical, Thornton duly became a banker, joining the house of Down, Thornton, and Frere in 1784. Two years previously he had been elected member of Parliament for Southwark, and he retained the seat for the rest of his life.
In 1792 he bought a house at Battersea Rise on Clapham Common, which, after his marriage in 1796, he populated with nine children. Before that, he had shared his house with William Wilberforce, the antislavery leader, his second cousin and very close friend, and around them there grew up what came to be known as the Clapham sect, an austerely evangelical wing of the Church of England. The group included John Venn, Hannah More, James Stephen, and Zachary Macaulay, father of the historian (none of them except Thornton stayed in Clapham for very long). Thornton himself was the author of a collection of family prayers, published in 1834, and it is said of him that before his marriage he devoted six-sevenths of his income to charity; after it, one-third. He served as president of the Sunday School Society and treasurer of the Religious Tract Society, the Church Missionary Society, and the British and Foreign Bible Society, all of which were founded by the Clapham sect. These societies left their mark not only in nineteenth-century Britain but also in other parts of the world.
In Parliament Thornton rejected any party connection but tended to side with the Whigs. He supported parliamentary reform, Catholic emancipation, and the progressive income tax. But it was in dealing with problems of currency and banking that he made his great reputation, first in 1797 with his lucid and expert evidence to the committees of the House of Commons and the House of Lords inquiring into the suspension of cash payments by the Bank of England. He was a member of the committee on the Irish currency in 1804, and in 1810 he was a leading member of, and apparently part author of the famous report by, the “Bullion Committee, appointed to inquire into the cause of the high price of Gold Bullion, and to take into consideration the state of the Circulating Medium, and of the Exchanges between Great Britain and Foreign Parts.” Thornton was also a member of the committee which inquired into the corn trade in 1813, and one of his last parliamentary speeches was in the important debate on the corn laws in the following year.
Monetary theory. His contributions to monetary theory are contained mainly in his Enquiry on paper credit, although they are also to be found in his evidence to the committees of 1797 on the sus pension of cash payments and in his parliamentary speeches of 1811 on the bullion report.
In the introduction to the Enquiry Thornton stated that his original intention had been “merely to expose some popular errors” regarding the suspension of cash payments in 1797, the policy of the Bank of England, and the effects of paper currency on prices. But there existed at the time little in the way of an accepted corpus of doctrine on monetary theory and policy on which he could build; Thornton does refer to the previous writings of Smith, Hume, Steuart, Locke, and Montesquieu, which must have constituted all, or nearly all, that existed in the way of monetary theory. Moreover, banking institutions and practices had been changing and developing considerably in the closing decades of the eighteenth century, particularly with regard to the rapid growth of country banking. In order to support and elucidate.his diagnosis of the current problem, therefore—which he presented in masterly fashion—Thornton not only had to elucidate the basic concepts and hypotheses of a theory of money, but also had to explain the recent developments and workings of the British banking system. Perhaps the comprehensive character of his task, which no doubt did not emerge until his work was under way, made for a certain lack of clear-cut, systematic arrangement. His contribution to monetary theory has to be extricated from its setting amid the topical diagnosis and the expert institutional description.
In part, Thornton’s Enquiry seems to have been intended as a defense of the Bank of England against the attack by Walter Boyd in his pamphlet of 1801 ("A Letter to the Right Honourable William Pitt, on the Influence of Stoppage of Issues of Specie at the Bank of England; on the Prices of Provisions and Other Commodities"), the most prominent of a number of pamphlets attacking the Bank of England on the ground that its excessive issue of paper money had been responsible for a general rise in prices. In Chapter 4 of the Enquiry, Thornton stressed the bank’s freedom from governmental “dictation” and its devotion to “the support of commercial as well as of public credit in general” (Enquiry, p. 109). Against the charge of over-issue Thornton was particularly concerned to emphasize that it is “merely theoretic” to suppose that it is always “a paramount duty of the Bank of England to diminish its notes, in some sort of regular proportion to that diminution which it experiences in its gold” (p. 116). He stressed the danger that sudden deflationary measures could lead to falling production and unemployment (or “an intermission in manufacturing labour"). Thornton insisted that “it may be hoped, however, that at least one point has now been fully and completely established, namely, that there may be an error on the side of too much diminishing bank notes, as well as on the side of too much increasing them” (p. 124). Although Thornton was, in 1802, prepared to defend the Bank of England’s position with regard to the suspension of cash payments in 1797 and the slight degree of inflation in the ensuing five years, by 1810, as a member of the Bullion Committee, he had become thoroughly critical of the bank and in favor of a contraction of the note issue.
Thornton’s contributions to monetary theory may be summarized under four main heads: money; rapidity of circulation; interest, prices, and employment; international economic relations.
Money. He elucidated the concept of money and the range of types of money, near money, and money substitutes. He emphasized that although legally the distinction between what is “legal tender” and what is not is, of course, clear-cut, in fact, each type of money or near money is certainly a close and easy (if not a perfect) substitute for its next-door neighbor in the spectrum, so that if the supply of one type were tightened or cut off, other types could and would be resorted to:
... if bank paper were abolished, a substitute for it would be likely to be found, to a certain degree, in bills of exchange…. But further; if bills and bank notes were extinguished, other substitutes than gold would unquestionably be found. Recourse would be had to devices of various kinds…. Merely by the transfer of the debts of one merchant to another, in the books of the banker, a large portion of what are termed cash payments is effected at this time without the use of any bank paper, and a much larger sum would be thus transferred, if guineas were the only circulating medium of the country. Credit would still exist…. (Enquiry, pp. 100-101)
In fact Thornton saw that although the different means of payment may differ in legal respects, they may, as Schumpeter said, “on a certain level of abstraction be treated as essentially alike” ( 1960, p. 719).
Rapidity of circulation. Thornton analyzed “the rapidity of circulation” and its variations and how these depend on the state of confidence and business conditions. A “high state of confidence” quickens the circulation of bank notes.
[It] contributes to make men provide less amply against contingencies. At such a time, they trust, that if the demand upon them for a payment, which is now doubtful and contingent, should actually be made, they shall be able to provide for it at the moment…. When, on the contrary, a season of distrust arises, prudence suggests, that the loss of interest arising from a detention of notes for a few additional days should not be regarded. (Enquiry, pp. 96-97)
Later Thornton referred to the fact that Bank of England paper bears no interest and emphasized the “loss sustained by keeping it” (p. 234). Here, without being aware of it, Thornton was developing ideas about “the rapidity of circulation” to be found earlier in Cantillon, while, of course, also pointing forward to the Keynesian analysis of liquidity preference.
Interest, prices, and employment. Thornton made three very important theoretical contributions to the understanding of the relationships between money, interest, and the level of prices and employment.
(1) In the first of his parliamentary speeches of 1811 on the Bullion Report, Thornton analyzed the distinction between the “real” and the “nominal” rates of interest, namely, the distinction between the actual “nominal” rate and this rate corrected into “real” terms for changes in the value of money —a distinction subsequently developed by Irving Fisher (in his Appreciation and Interest, 1896) and by Marshall. He showed the significance of this distinction in a period in which rising prices are more or less anticipated by borrowers, pointing out how the unexpected gains from previous borrowings will provide “so much additional temptation to borrow” (pp. 335-336).
(2) More important than this analysis was Thornton’s anticipation of Wicksell’s distinction between the “natural” and the market rates of interest, that is, between the (expected) rate of return on investment and the market rate at which funds may be borrowed. When developing this distinction Thornton had been concerned to refute the argument that the canons of sound banking practice—with regard to lending only on good security, or discounting only “real” commercial bills—are sufficient to contain or prevent inflationary rises in prices. (He pointed out, also, how a rate of interest of 5 per cent, then the highest the Bank of England was, under the usury laws, even in time of war, statutorily permitted to charge, might be quite insufficient when the expected rate of return on borrowing might be much higher.) He showed that it is pointless to argue that “a liberal extension of loans would soon satisfy all demands” in conditions where the generally expected rate of profit on investment exceeds the market rate of interest:
In order to ascertain how far the desire of obtaining loans at the bank may be expected at any time to be carried, we must enquire into the subject of the quantum of profit likely to be derived from borrowing there under the existing circumstances. This is to be judged of by considering two points: the amount, first of interest to be paid on the sum borrowed; and, secondly, of the mercantile or other gain to be obtained by the employment of the borrowed capital, (p. 253)
(3) Thornton analyzed the effects of credit expansion on the level of output, employment, and savings. He certainly made no general assumption of full employment, arguing that if there are “antecedently idle persons,” an increase in “new capital” will first bring these into employment, but as it continues “it will set to work labourers, of whom a part will be drawn from other, and, perhaps, no less useful occupations” (p. 236). Thus, “although additional industry will be one effect of an extraordinary emission of paper, a rise in the cost of articles will be another” (p. 237). Thornton then showed how, if the rise in prices proceeds, with money wages remaining the same, “some augmentation of stock will be the consequence; for the labourer, according to this supposition, may be forced by his necessity to consume fewer articles” (p. 239). This is the process explained almost simultaneously by Bentham as “forced frugality” and by subsequent writers as “forced saving.” It is interesting to note that Ricardo, in his comments on Bentham, holding firmly to the Turgot-Smith “saving is investing” doctrine, completely rejected this analysis with the question: “Why should the mere increase of money have any other effect than to lower its value? How would it cause any increase in the production of commodities? …Money cannot call forth goods—but goods can call forth money” (see Ricardo  1951, pp. 298, 301).
International economic relations. Thornton contributed some important ideas about the monetary aspects of international economic relations. He anticipated what later came to be known as the purchasing power parity theory by showing how gold will tend to move between countries toward equilibrium, a distribution in which no profits will be possible from any further gold transfers. He went on to trace out, on the lines of Hume and others, how the mechanism of adjustment works through changes in relative prices to restore equilibrium, for example if equilibrium were disturbed by a bad harvest and were followed by an expansion of imports.
Thornton’s ideas were influential in his day; a brilliant review article by Francis Homer in the first number of the Edinburgh Review (1802) enhanced that influence. But his subtler insights came to be overshadowed by the simpler (and perhaps cruder) formulas of Ricardo, and over the decades the influence of his book receded. J. S. Mill in his Principles of Political Economy of 1848 hailed Thornton’s work as the clearest exposition of its subject, and some of Mill’s contributions to the theory of international trade may show the influence of Thornton. But after Mill, Thornton’s name almost disappeared until scholars in this century, notably Jacob H. Hollander and Jacob Viner, rediscovered his work. With the development of modern monetary theory from Wicksell to Keynes it came to be realized how much had been anticipated by Thornton, and Hayek’s valuable 1939 edition of Thornton’s work restored to him the eminent place in the history of monetary theory which is his due.
T. W. Hutchison
[For discussion of the subsequent development of Thornton’s ideas, see Banking, Central; Income and employment theory; Interest; Liquidity Preference; Money; and the biographies of Fisher, Irving; Marshall; Wicksell.]
An Enquiry Into the Nature and Effects of the Paper Credit of Great Britain (1802); Evidence Given Before the Committees of Secrecy of the Two Houses of Parliament on the Bank of England, March and April 1797; Some Manuscript Notes; and Speeches on the Bullion Report, May 1811. Edited with an introducton by F. A. von Hayek. New York: Farrar & Rinehart; London: Allen & Unwin, 1939.
Forster, E. M. 1956 Marianne Thornton: A Domestic Biography: 1797-1887. New York: Harcourt.
Horner, Francis (1802) 1957 [A Book Review of] An Enquiry Into the Nature and Effects of the Paper Credit of Great Britain, by Henry Thornton. Pages 28-56 in Francis Horner, The Economic Writings of Francis Homer in The Edinburgh Review, 1802-1806. Edited with an introduction by Frank Whitson Fetter. London School of Economics and Political Science.
Meacham, Standish 1964 Henry Thornton of Clapham: 1760-1815. Cambridge, Mass.: Harvard Univ. Press. -” Contains a bibliography of Thornton’s works on pages 163-168.
Ricardo, David (1811) 1951 Notes on Bentham’s “Sur les Prix,” 1810-1811. Pages 259-341 in David Ricardo, Works and Correspondence. Volume 3: Pamphlets and Papers, 1809-1811. Cambridge Univ. Press.
Schumpeter, Joseph A. (1954) 1960 History of Economic Analysis. Edited by E. B. Schumpeter. New York: Oxford Univ. Press. -* See especially pages 688-750, “Money, Credit and Cycles.”