John Fullarton, 1780-1849.

Scottish EIC officer, physician and banker.

John Fullarton was the son of a Glasgow academic.  In his youth, Fullarton was employed by the East India Company and dispatched as a medical officer to India in 1802.  During his stay, he set up a newspaper in Calcutta.  Fullarton resigned from the EIC in 1813, and entered as a partner in the private banking house of Alexander & Co. in Calcutta.  Fullarton acquired an immense fortune in a short time and returned to Britain a rich man, ensconsing himself in a mansion in the Mayfair district of London. 

John Fullarton was an strident advocate of the "Banking School", alongside Tooke, during the 1840s phase of the Bullionist Controversy. Although Fullarton had barely participated in economic debates before, only an occasional article in the Quarterly Review on parliamentary reform,  his entry into the banking controversy was perhaps the most theoretically interesting.  John Fullarton's great treatise, On the Regulation of Currencies was published in August 1844 - just a tad too late to influence the passage of Peel's 1844 Banking Act  (a second edition was put out the next year). Nonetheless, it was a remarkable tract, arguably the most penetrating theoretical performance in the debate, with an advanced understanding of money and banking before its time. 

Fullarton attacked the "currency principle" with vigor.  Fullarton noted the error of Currency School advocates (like Torrens) of confusing money with cash, and asserted that bank deposits were also part of the money supply (p.41), and that trying to control prices by just restricting banknotes (rather than the money supply as a whole) was "hopeless" (p.50-51).  Fullarton aligned himself with the old "real bills doctrine" of the 1810s debate (e.g. p.207).  He asserts that there is little prospect of the banks over-issuing notes by a "law of reflux" (e.g. p.67, p.84, etc.). Fullarton's law is a modification of the old real bills doctrine, although the details of the reflux mechanism has been variously interpreted.  In the simplest view, Fullarton recognized that since money is injected by banks into the economy via bank loans to private persons (rather than directly spent on goods), then the supply of bank money ("nine-tenths" of the total money supply) depends on loan demand.   And loan demand, of course, varies with the real economy, so money supply can never been in excess.  In slumps, when loan demand declines, fewer loans are forthcoming and existing loans repaid, bringing down the supply of bank money, while any excess supply of notes that happen to be in circulation will flow back to the banks that issued them.  So an excess supply of notes will not lead to increased expenditure and inflation, but be returned to the issuing banks and be extinguished before it has any effect on spending, i.e. excess money supplies correct themselves and do not spill over into goods markets.  Fullarton argued this applied to both the Bank of England and country banks, thus any quantitative restrictions are unnecessary and, indeed, undesirable. 

In sum, Fullarton argued that the money supply was an endogenous variable and would vary according to real economy. Against Torrens and quantity theorists, Fullarton asserts business cycles usually have real, and not monetary, causes, that money-income causality  runs from income to money. (p.101)  Fullarton extended this to the international situation, noting that balance of payments deficits were not monetary but caused by real factors.  He recommended the Bank simply hold enough gold reserves and wait for real factors to adjust, rather than attempt to stem the outflow of gold (from the B of P deficit) with credit contraction, which is not only futile, but has the danger of provoking a panic.

Fullarton lost - or rather came too late - to the debate in 1844.  But  when the Bank of England was forced to suspend issue in 1847 (in a review of his own book), Fullarton crowed that he had been proven right. 

While Fullarton's treatise was well-regarded by some contemporaries (e.g. John Stuart Mill), the mechanism was poorly understood, and quantity theorists of the late 19th C. (e.g. Walker) often dismissed Fullarton as a crank.  However, some (e.g. Wagner) appreciated and lauded his insights, particularly Fullarton's deeper understanding of the bank as a firm, and the increasing role of banking in a modern economy.  After a period of neglect and derision,  Fullarton's reputation has been retroactively refurbished since the Keynesian revolution, particularly among Post Keynesians.

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