Credit Where Credit Is Due: Henry Thornton and the Evolution of the Theory of Fiduciary Money

Perceptive thinkers have been writing intelligently about money for at least five centuries. However, nearly all of the early thinkers developed theories designed to explain the behavior of full-bodied metallic money or the opposite extreme, fiat money issued by governments. However, late in the eighteenth century Great Britain gave rise to a fiduciary monetary system in which the assets regularly used to make commercial payments were debt instruments issued not only by the Bank of England but also by a myriad of country banks. Furthermore, a variety of privately issued commercial paper was regularly used to make commercial payments. While thinkers of the stature of David Hume and Adam Smith utilized the quantity theory of money or the real bills doctrine to explain the monetary system, Henry Thornton broke new ground by developing a theory that recognized the essential truth that most of the “monies” used in England (and Scotland) were merely promises to pay.