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Selected Economic Writings, ed. Donald Winch (Edinburgh: Oliver Boyd for the Scottish Economic Society, 1966).
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SMITH ON MONEY AND EXCHANGE
Edinburgh Review, Oct. 1808, vol. 13, no. XXV, pp. 50–68
There are two kinds of paper money, which are so remarkably different, that it is surprising any occasion should remain to point out the distinction between them; yet such confusion has prevailed on this subject, that some great errors owe their origin to the misapprehension of one for the other. Of these, one species is the paper money issued by government, and which it is rendered obligatory upon the people to receive. Of this nature were the assignats, and the mandats, issued by the revolutionary government of France; of this nature, too, was a paper money issued by the government of the United States in the crisis of revolution, and by the Dutch in their celebrated war for the independence of the republic. The second species of paper money consists in the notes of bankers, payable to bearer on demand, and which pass current for the sums there specified. Bills of exchange and other obligations, payable only at a stated time, and bearing interest, are sometimes denominated paper currency; but it will contribute to distinctness, if we exclude them from the appellation of paper money.
We are disposed to give Mr Smith very considerable praise, whether he discovered the distinction, or learned it elsewhere, for having very clearly perceived the difference between the paper money which a government may force upon the people, and the paper money circulated from banks, which nobody receives but at his pleasure. He has seen, too, that many errors may be traced to the strange inaccuracy of confounding together these two species of paper money. ‘It is very extraordinary,’ he says, ‘that many erroneous doctrines are still kept up,—the writers on this subject continuing to persevere in support of many maxims, which, in practice, have been long ago abolished. One great cause of this appears to be, that there have existed two species of paper money, perfectly separate and distinct in their nature, properties and effected but which have been hitherto confounded together by all these writers.’ It is unfortunate, after making this salutary distinction, that he should have been misled, by his own notion of an imaginary standard, into an unprofitable train of speculation; otherwise it is probable that some useful truths would have been the consequence of so hopeful a commencement.
Fortunately, it is the free and voluntary species of paper money, almost exclusively, with which we have been experimentally acquainted in this country; and as the other is abundantly simple in its nature, and moreover very circumscribed in its use (for it necessarily very soon destroys itself), it is only the paper money consisting in the notes of bankers, which calls on us for consisideration on the present occasion. The notion which we have endeavoured to establish of the nature of coined money, will speedily enable us to discover the principle and laws of paper currency.
As coins are neither more nor less than commodities which are bought and sold for their value, like other commodities, so banknotes are obviously obligations upon the issuers to pay a certain quantity of those commodities; and these obligations also are bought and sold for their value, or for that quantity of the valuable commodity, coin, which they can command. They are usually denominated the representatives or symbols of coin. It is very evident, however, that this is not only a vague but an inaccurate expression. They are no more representatives or symbols of coin than bills of exchange, or any other transferable bonds for the payment of money. They are actual obligations for the receipt of a certain quantity of specie; and they are received in payment as readily as the specie itself,—only when it is well known that specie can be received for them, without delay, and without inconvenience,—or when it is known, that they will be as readily received in the market as the coin which they specify. If bills of exchange, therefore, and other transferable bonds, are regarded in the market as mere commodities,—as goods or chattels, and are bought and sold as such, bank notes differ in no other respect than as being payable on demand, and, from that circumstance, being more conveniently received in all common purchases and sales. If the term, representative of money, is clearly understood to be a metaphorical expression, and to mean nothing more, than an obligation for money, when a people are pleased with it, may perform the business of currency, as well as money itself, we have no objection to it. But if it give occasion, as it certainly does among authors, to vague and mystical apprehensions respecting paper money, which serve to involve this subject in obscurity and confusion, it ought to be discarded. In fact, when we endeavour to assign an accurate idea to the term, representative of money, as applied to bank notes, we find it impossible. A bank note is a mere contract, of a known party, to pay to the bearer a certain quantity of gold and silver in the shape of coin. When a man takes this bank note in payment, it is not as a representative of coin; for how does it represent coin? or what advantage to him would it be, though it represented it ever so exactly? The most accurate representative of coin, are well fabricated counterfeits; yet every man, when he knows them, refuses these in payment. It is not, therefore, because the bank note represents coin, but because it is a satisfactory obligation to receive coin, that it is accepted in payments; and because it is often more convenient to receive the obligation than to receive the coin. A common cheque upon a banker, which nobody ever dreamed of calling a representative of money, is just as much a representative of it as bank notes; nay, in fact, the order which a manufacturer on the Saturday night puts into the hand of one of his workmen, to get from his clerk the wages of the week, is a representative exactly of the same description. The only real difference in practice is, that the one obligation generally passes but through one, or a few hands, till it comes upon the obligee; the other commonly passes through many hands, each accepting it as a satisfactory security for the valuable commodity which it is an order to receive.
Having satisfied ourselves with regard to the nature of paper currency, it will be no difficult matter to comprehend the phenomena which it exhibits; although these have given rise to some questions and speculations which well deserve a short consideration.
The doctrine of depreciation, on which some other conclusions depend, is that which we shall first consider. When bank paper becomes depreciated in consequence of diminished credit, the nature of this event is sufficiently understood; and no misapprehension prevails in regard to it. When a man foresees any risk or difficulty attending the payment of a bank note offered to him in exchange, he naturally refuses to accept it, unless with such a deduction as appears to him sufficient to cover the risk or difficulty which he apprehends.
There is, however, another species of depreciation, to which, it has been imagined, that paper currency may give occasion; a depreciation arising from a superabundance of the circulating medium. To those who are not acquainted with the subject, some explanation is necessary to understand the tenor of the assertion. As the price of any article, or its value in exchange, is determined by the proportion which the supply bears to the demand, it necessarily happens, if the supply is enlarged while the demand continues the same, that the price of the article diminishes. It is imagined, therefore, by the analogy of this case, that banks may cause the value of paper money to descend. Suppose, that the country is at any particular moment supplied with that quantity of currency which its occasions demand, it is concluded that the banks, by an overissue of their paper, may increase this quantity, and so produce a depreciation. Dr Smith, indeed, maintained, that a certain quantity of currency was necessary to fill the channel of circulation; that as soon, however, as it was full, any thing more thrown into it, by necessity overflowed. But this doctrine has been lately derided. Mr Henry Thornton, is his ‘Inquiry into the Nature and Effects of the Paper Credit of Great Britain,’ brought forward a speculation, which has been followed by almost all the writers who have succeeded him, to prove that, after the channel of circulation is full, banks may increase by their notes the quantity of currency; because every addition depreciates their value, or, in other words, raises the price of commodities in proportion to the increase. He thinks, therefore, that he may turn the metaphor of Dr Smith against himself, by remarking, that the channel of circulation, whatever currency may be thrown into it, can never overflow, as it immediately enlarges itself in proportion to the quantity received.
No proposition seems to be more certainly established than this,—that the precious metals, in all countries which are not exceedingly distant from one another, approach very nearly to an equality of price. We have no occasion, here, to enter into the explanation of the particular kind of traffic, by which they circulate from country to country; it is enough to know that they do circulate, and that so easily, that the smallest rise of their value, in any particular country, is sure to draw them speedily from other countries, or a fall in their value to send them out of any country, till the usual level or balance is established. Let us now see how this fact operates upon the question of depreciation. It is evident that Mr Thornton, by that depreciation which he describes as consisting in a rise of prices, does not mean a depreciation of bank notes, compared with gold and silver,—such a depreciation, for example, as would take place, if a pound note should only pass in circulation for eighteen shillings; he means that kind of depreciation which takes place when a pound note is still received for the full amount of twenty shillings,—but when neither the note nor the twenty shillings can purchase more of any commodity than eighteen shillings would do before. It is evident that such a depreciation as this, if it any where exists, does not confine itself to the paper currency, but communicates itself equally to the specie of the country. It is a depreciation of the gold and silver, in the same degree as of the bank notes. But the price of gold and silver must remain the same, or very nearly the same, in this country, for example, and all the other countries in the world. If the doctrine of Mr Thornton, then, be just, our banks are powerful instruments indeed; not only can they depreciate our own currency; they necessarily depreciate, by the same operation, the currency of nearly all the nations on the face of the earth. If, however, the currency of all nations be so immense a quantity, compared with ours, that any possible fluctuations which it can undergo, resemble the addition or subtraction of a drop in the waters of the ocean, then, no such depreciation as Mr Thorton supposes can take place; and Dr Smith, little as Mr Henry Thornton appears to respect him, was probably right in asserting, that when the channel of circulation is full, if any thing more is thrown in, it overflows.
It is a remarkable proof of the confusion and obscurity which have reigned on this subject, that many of the writers appear to have lost sight of the broad distinction between the paper money which a government compels the people to receive, and the notes of bankers, which no man receives but at his pleasure. In the first place, no man ever takes from a bank but the smallest quantity of notes he possibly can. Every man desires to have in his hands no more currency that what is absolutely necessary for his immediate payments, that he may continue to make a profit with the larger portion of his funds. This, however, is not the case with those to whom the compulsory paper of government is tendered. It is offered to them in payment of the debts which the government has contracted; and whether they want so large a quantity of currency or not, they must receive it. In the next place, the paper which is issued by a bank is perpetually returning to it; every man into whose hands a greater quantity of it comes than he has immediate occasion for, carrying it to the bank for payment. The paper, on the other hand, which is issued by government, never returns to it; because the government never pays. It is evident, therefore, that while there is no limit to the emissions of government, but its own wants, or the extreme depreciation of its paper, and that, while this species of paper may be accumulated in the country to any excess, there is a visible and impassable limit to the emission of bank notes, in the desire of every individual to draw from it as small a quantity as possible; and to the accumulation of these, a still more remarkable limit, in the utility which every man finds in remitting them to the bank, whenever a quantity of them beyond his immediate occasions is collected in his hands.
When the nature of those limits is duly considered, and when we reflect upon the fact, that a gold and silver currency can never fall below the level of the price of those metals in surrounding countries, is it not probable, that the emission of bank paper is, by its own nature, so restrained, that it cannot produce the general depreciation of currency which is supposed? There is a remakable fact, which seems entirely to confirm this inference. When the paper which was issued by the governments of Holland and America exceeded a certain amount, it began to depreciate though the confidence in the governments which emitted it was then as great as when the issue commenced. The depreciation arose, not from the credit of government having become less, but from the quantity of paper having become too great. But this depreciation, it is to be observed, affected not the gold and silver which at any time appeared,—that retained its ancient value, and could at last command ten or twenty times the amount of the paper which it could have purchased before the depreciation commenced. How should this paper have become depreciated by its excess, without affecting the value of gold and silver; and the excess of bankers' paper have carried the depreciation of gold and silver along with it? The operation upon prices must have been exactly the same in the one case as in the other. If this difference cannot be explained upon the principle of Mr Thornton, it follows the those principles are not just.
But, without proceeding further with these reasonings, which are rather argumenta ad hominem, than conclusions drawn from the nature of the thing, let us see whether we cannot arrive at some decisive evidence by aid of the principles which we have already discovered. We have seen that specie, and even bank notes, are commodities, which are bought and sold like other commodities. Now, were the commodity of notes obtained at the Bank of England for nothing,—did every man obtain them merely for the asking,—there might very easily be an extraordinary quantity of them thrown into circulation. But it so happens, that a man cannot obtain one of them, without having something to give for it. Every one which is transferred to him he has bought and paid for, with a value equivalent to the sum specified in the note. But it is abundantly certain, that no man, in general, buys more of any commodity than he has occasion for, and least of all of the commodity called money. No money is therefore ever drawn by individuals from the bank, but for the business of immediate payments; and the money wanted for immediate payments is just the money requisite for the circulation of the country.
We must entreat the excuse of our mercantile readers, when we use a language so unusual to them, as to denominate the discounting of a bill the purchase of bank notes; and must implore them, for a moment, to lay aside the consideration of the name, and endeavour, if possible, to fix their attention upon the thing. We studiously aim to avoid the technical phraseology respecting money, which, by its extreme abridgement, is admirably adapted, indeed, to the despatch of business, both in speaking and writing, but, by the same circumstance, has contributed greatly to introduce obscurity and confusion into the rationale of the subject.01 A very slight degree of reflection may convince them, that the operation is literally a purchase. What the man carries to the bank, who wants to obtain notes, is a bill of exchange, due in sixty days. The bank receives this bill, which is an obligation upon a responsible party for a sum of money, giving in exchange for that sum, with the deduction of interest. The owner has therefore sold his bill to the bank, as truly as the man who sells a bill upon ‘Change; and the commodity he has bought with it is banknotes. If we carry this analysis a step further, we shall still more clearly perceive the nature of the transaction. A bill of exchange, such as is commonly discounted at the bank, is a promise of payment, at a fixed day, for goods bought and received. Thus, a merchant purchases of the manufacturer a thousand pounds worth of goods; but as it is not convenient to give the money for them immediately, he gives his bill for payment of the sum at a future day. The manufacturer, however, wants his money. He therefore carries the bill to the bank, where he receives money for it, only deducting interest for the time which it has to run. Is not this the very same thing, in reality, to the manufacturer who gets the bill discounted, as if he had sold his goods to the bank, allowing discount for prompt payment? It is with goods, therefore, in the last resort, that notes are always bought at the bank; and it is observable, that nobody goes to the bank to receive notes for his bills, thereby losing the discount, to any greater amount than is necessary to make the payments for which he is immediately called upon. But if bank notes are never called into circulation but in the payment of goods, it would appear that they are never called but to answer the natural exigencies of business, and in this way cannot become superabundant. Their amount can never surpass that of the gold and silver coin, which would circulate if they were not in existence. This we seem now entitled to assume as an established proposition. When a man purchases bank notes with real goods, at the rate of gold and silver, he would certainly purchase gold and silver with these goods, if the notes were not present, or if they did not equally well answer his purpose. He only buys the notes because he has occasion for currency; and if the notes were not to be had, he would buy the only other species of currency,—gold and silver coin: real goods being always able to command it at the market price of the contiguous countries.
The other peculiarity attending a currency in bank notes,—that they are perpetually returning to the bank,—is likewise followed by consequences, of which it is of some importance to have a just conception. Let us suppose, that by any means a superabundance of paper money has come into circulation. Government, for example, being unable to wait for the slow influx of the taxes, prevails upon the bank, we shall suppose, to advance some millions of bank notes, which are to be paid with interest when the taxes come in. But there was already a sufficient quantity of currency in circulation, both to pay the taxes, and to perform the other payments of the country. This advance therefore to government, in bank notes, when it comes into circulation, is all surplus. The question is, what becomes of it? A considerable quantity of it—let us suppose, for the sake of simplicity, the whole—will be immediately paid away in discharging debts contracted by government in the purchase of goods. The individuals into whose hands the additional currency is first paid, discover in it no symptoms of superfluity. They sold their goods to government, and they have received payment, as they would have received it from any other purchaser. They proceed again to market with the money come in, precisely as on any other occasion. But the next step, or a few more steps, produces a difference. The money which is proceeding towards government in the shape of taxes, is not yet paid, but is partly in the hands of the contributors, and partly accumulated in other hands. When any of the additional currency, therefore, comes into the hands of any of those persons, who have already a sufficiency, and who are under no obligation, for some months, to strip themselves of what they have, by making their payments, they have a surplus, and are disposed to turn it to advantage. But, as they know that, in the course of a few months, as soon as their payments must be made, what is now surplus, will become necessary to them, it cannot be embarked in any extension of their trade, from which the return would not be sufficiently prompt; it is, therefore, by various ways, and for various considerations, allowed to accumulate in the hands of the different private dealers in money, by whom it is employed in the retiring or discounting of bills.
It now returns to the bank by the following process. When bills which have been discounted at the bank are retired, currency is directly returned to the bank; when it is employed by private money-dealers in discounting bills, it prevents the demand of discounts at the bank, and, by consequence, all fresh issues of notes. But while, by this process, a greater quantity of money is daily returned to the bank, in retiring the bills which daily become due, than issues from it in the discounting of new bills, it is evident that a diminution of currency is effected; and this process necessarily continues till the proper balance of currency is restored, and the superabundant issue is all drawn back. In this manner, likewise, does it appear, that no greater amount of bank notes can be made to circulate in any country, than would circulate of gold and silver, if paper currency were unknown; that a rise of prices, or a depreciation of the currency,2 cannot be the effect of an overissue; but that, the channel of circulation being once full, whatever flows in must run over.
Let us put, however, an extreme case. Let us suppose, that government, not satisfied with one advance, goes on demanding, and the bank granting, faster than the retiring or the bills which it has discounted, can withdraw its notes from circulation. The consequence of this would speedily be, that all its bills would be retired, and few or none would be offered for discount; yet still, by means of government, it might continue to pour its paper upon the country; and if it was exempt from the obligation of paying in cash,—but not otherwise,—the amount of this paper might extend to any degree beyond that of the gold and silver which would circulate in the country. But it is very evident, that where this is the case, i.e. wherever government distributes a paper currency which cannot be converted into cash at pleasure, there is no difference between the paper thus issued, and the compulsory emissions of government itself. They must follow, therefore, similar laws. In the first place, the precious metals would entirely disappear from the circulation, and the notes would sink to any degree of depreciation; but gold and silver would retain its price; and the man who had preserved a guinea, might soon be able to purchase with it a bank note for a hundred pounds.
From what we have thus discovered, one practical consequence of great importance may be deduced. As a bank, which issues notes, while it emits them solely in the discounting of good bills at short dates to individuals, can never issue more than the demands of business require; but, as it may, by advances to government, easily surpass the limit of those demands, it is evident that any general derangement, arising from a surplus of currency, must of necessity be owing to advances to government. What is, therefore, wanting to prevent these derangements, is a law by which all advances of that nature should be prohibited, under the most awful sanctions. We do not mean to say that government should, on all possible occasions, be prevented from anticipations on the revenue, though, on all accounts, this should be allowed as seldom as possible. We only say, that government should never be allowed to anticipate, through the medium of a bank which issues notes. When these anticipations are really necessary, the advances should be made (as loans, a much heavier concern, are) by the money-dealers, and bankers of discount, but never by banks of circulation. The difference between the cases is prodigious. What is advanced by the money-dealers, and bankers of discount, is by them, first drawn from the channel of circulation, and a vacuum is thus previously made to receive what is about to be immediately poured in by governments. What, however, is advanced by the banks which circulate notes, is not necessarily, nor generally, withdrawn first from the channel of circulation. These banks advance most frequently a quantity of new-made notes, which, being poured into a channel already full, necessarily overflow, and more or less derange and disturb the regular movement of the current. If regularity of movement in that current, then, be of any importance, banks which issue notes of circulation, should be interdicted, under pain of confiscation, from all advances to government. They should, indeed, be strictly prohibited from all connexion with government whatsoever. By this rule, the bank of England should be immediately freed from all the business of government, with which it is loaded and embarrassed, in paying the interest of the national debt, in the management of exchequer bills, and other functions; and thus have its operations limited to the issuing of its own notes in the discounting of bills. It would, in this way, be impossible that it could ever derange the channel of circulation, while the business of government might be managed with equal efficacy by banks, which, not issuing notes, could have no means to produce a surplus of currency.
After these remarks on the laws which the phenomena of depreciation in respect to paper money observe, remarks which we are fully aware require more ample illustration, but on which we have already exceeded the limits of that species of disquisition to which we are at present confined, we shall next inquire, how the obligation to pay in cash operates upon a paper currency. But, on this topic, we shall be obliged greatly to contract our observations.
The obligation to pay in cash, may be considered, 1st, in its relation to the credit of the bank; 2d, in its relation to the quantity of currency.
In the first place, it is evidently a check upon overissuing. When a bank is apt to be called upon to pay gold for its notes, it feels itself obliged to confine the quantity which it issues, within a certain proportion to the gold which it can readily command. What that proportion may be, depends upon circumstances. When the credit of a bank is firmly established, and when habit has confirmed the people in the use of paper money, cash will very seldom be demanded for notes; and the paper may safely bear a very large proportion to the gold which is reserved as its security. Where, on the other hand, the credit of a bank is suspected by the people, or where they have a taste for a good deal of gold in their circulation, there the paper must bear a less proportion to the gold which must be reserved as its security. But, in both cases, the bank has a very obvious motive in imposing limits upon the quantity of notes which it may issue, and which it is obliged to pay in cash;—it will not advance, even to the importunities of government, beyond all chance of safety, if the least pecuniary alarm should arise.
In the next place, let us consider the effects of the obligation to pay in cash, upon the state of the currency, when an overissue has really been made. It is not the immediate effect of a superabundance of paper money, to produce what is called a run upon the bank, or a demand for guineas. When the man wants, who has in his hands more notes of good credit than he has immediate occasion for, is—not to get coin for them, which would not in the smallest degree alter his situation, but—to get them employed. On the other hand, if guineas were universally obtained, it would not directly reduce the superabundant currency; because, for every note which was then withdrawn, a portion of coin would be substituted. Indirectly, however, the demand for guineas upon the bank would have a powerful effect. Whenever guineas were by this means thrown into circulation, so as in any degree to exceed the effective demand, they would experience that slight reduction of price, which so rapidly carries the precious metals out of one country into another. They would continue to be exported, till this drain from the circulation, together with the notes which the bank in the mean time would call in, should have reduced the currency to that quantity, which the transactions of the nation, and the price of gold and silver in the neighbouring countries, might require.
These effects are so visible, that they must be acknowledged by all; and so salutary, that their importance can be disputed by none: but there are certain other effects which are ascribed to them as concomitants, which are not of so agreeable a nature, and which we must now endeavour to understand. Mr Henry Thornton, our present author, and other writers who have had an interest in defending the suspension of payments in cash at the bank of England, have attempted to prove that this bank may, by means of a demand for coin, raised by an alarm, or any other cause, be drained of guineas to any possible amount, however small be the quantity of paper which she maintains in circulation. The amount of notes which she finds it useful to maintain in circulation are at present, we shall say, 15 millions. If the bank resolves to maintain these 15 millions, in circulation, and if a demand for guineas arise, she may be called upon for gold to double, or ten times, or, indeed, to any number of times that amount. Thus, for example, notes to the amount of 100,000l. we shall suppose, are brought to her for gold; but, when she has drawn back those notes, and given for them gold, her paper currency is reduced to that extent; and if she resolves to maintain her quantity of notes in circulation, she must immediately reissue the notes which have been thus returned. But no sooner are they reissued, than they are brought back for gold: again the quantity of the paper circulation is reduced; again the notes must be issued; and, if the demand for gold continues, and this process is repeated a sufficient number of times, the bank may be exhausted to any conceivable extent, while she has never had more than her usual quantity of notes in circulation. ‘Even,’ says Mr Thornton, (Inquiry into the Nature and Effects of the Paper Credit of Great Britain, p. 92.) ‘if we should suppose the bank to bring down its paper circulation to one hundred thousand pounds, and to maintain it at that sum, it is obvious that this same operation might be so reiterated from day to day, as to extract at length from the bank the greatest imaginable number of guineas.’
In order to see further into this subject, we must analyze a little the operations of this bank. Let us suppose, for the sake of simplifying the inquiry, that the sole business of the bank of England is that of issuing notes in the discounting of bills. Let us suppose that, as she discounts none at more, so she discounts none at less than sixty days date. And let us suppose, too, that she maintains 15 millions of paper currency in circulation. She has thus at all times in her coffers bills of exchange to the amount of 15 millions. But, of all this quantity of bills, the whole must be paid in sixty days; she therefore draws back in sixty days the whole of her 15 millions of notes; that is to say, she draws back, at the rate of 250,000l., or a quarter of a million, every day. But, if she draws back notes by the retiring of bills, at the rate of a quarter of a million a day, she must issue notes in the discounting of bills at the rate of a quarter of a million a day, to compensate this return, and keep the paper in circulation at its accustomed amount. That this would be the course of business in regular times, is abundantly evident. The rate of discounting bills at the bank every day would exactly balance the rate at which bills were retired; and the notes drawn in by the one operation, would exactly correspond to the notes sent out by the other. If the persons by whom the bills were retired were, on each day, an entirely distinct set of persons from those to whom bills were discounted, 250,000l. would literally every day be paid into the bank, by the one operation, and the same sum drawn out by the other. It so happens, however, in practice, that the man who has a bill to retire, has very often, on the same day, a bill to get discounted: in this manner, instead of giving one sum, and receiving another, the two sums are compared together, and the man only gives or receives the balance. But it is very evident that this common way of retiring one set of bills by discounting another, in no respect alters the nature of the case. It is still true, in fact, that a quarter of a million has been paid, and a quarter of a million drawn, though these payments and drawings may to a certain degree, have balanced one another, without the actual trouble of counting and transferring the money.
We may now discern a fact, the consequences at least of which Mr Henry Thorton and his disciples have entirely overlooked. Let us suppose, while the bank is going on in her accustomed course, discounting bills at the rate of 250,000l. a day, that a demand for guineas comes upon her to the same amount; and that her daily issues are immediately paid back for gold. What is the consequence of this? First, her fifteen millions of notes in circulation, are reduced 250,000l., or a quarter of a million. If she resolves to keep up her 15 millions, she must immediately reissue, in the discounting of additional bills, the notes which have been thus returned. On the first day, therefore, of the demand for guineas, while the usual quantity of bills, to the amount, namely, of a quarter of a million, have been retired, she has discounted double that quantity. Another consequence, then, is, that, at the end of this first day, she has added a quarter of a million to the amount of bills in her coffers, while the sum of her notes in circulation remains the same. By the same operation on the second day, she adds to her bills another quarter of a million; and the effect is every day repeated, till, at the end of sixty days, the amount of her bills is fairly doubled; that is to say, the bank has then extended her loans from 15,000,000l. to 30,000,000l.,—one half in her own notes, the other half in gold and silver.
Here, however, a very important question suggests itself; Whence is this extraordinary quantity of bills for discount to come? Or what possible use can there be in thus extending the discounts of the bank, for the sake of maintaining a certain quantity of notes in circulation? To this question Mr Thornton has an answer very ready, and an answer on which he seems to lay the greatest stress. The consideration of it will enable us to discover the whole mystery of his reasoning. He enters into a long detail to prove that any sudden revolution in the transactions of the bank of England, by which the regularity of payments in London should be interrupted, would occasion a shock to the credit of the whole country, attended with the most pernicious consequences; and to prevent this, the bank is under the necessity, he says, of always maintaining her accustomed quantity of notes. But it will appear that, in this answer, Mr Thornton has confounded two things together, of which the difference is peculiarly important;—he has confounded together the discounts of the bank and the currency of the bank. There is no doubt, that any considerable interruption to the regularity of the great payments in London, would occasion a shock to the general system of credit, which is anxiously to be avoided. It is very evident, too, that the bank, by withholding suddenly from the merchants those accommodations which they have been accustomed to receive, would produce that interruption. But wherein does the accommodation which the merchants are accustomed to receive from the bank consist? Most evidently in affording them loans,—not in giving them one kind of currency in preference to another.
If the bank, according to the foregoing supposition, has regularly afforded loans on bills to the amount of 15,000,000l., any considerable and sudden reduction of those loans, might produce the most serious consequences. But let her discounts be regularly maintained at this level, and she need give herself no trouble about the currency. Currency is a thing which always, and infallibly, provides for itself. Now, we have seen already in what manner a run upon the bank for guineas affects her discounts. If she persist in keeping out the usual quantity of notes, her discounts must be daily enlarged to the whole amount of the notes which daily return upon her for gold. But if the notes which come in for gold are merely not issued, her discounts remain invariably at 15,000,000l.,—and her business of discounting proceeds without any alteration. If the demand for gold continues till any considerable portion of her notes are withdrawn from circulation, what remain are not sufficient to retire the bills in her coffers which are daily becoming due; they must be retired, therefore, with gold; and, when this happens, she then begins to receive with one hand what she pays away with the other, and the drain upon her can proceed no further.
Mr Thornton, indeed, says, that as there is never any doubt about the credit of the bank of England notes, the guineas are drawn away to supply the discredited notes in the country. But to suppose that guineas could be accumulated in the country, and yet be impossible to be had in London, if there was occasion for them, is too absurd to require refutation. The guineas which are drawn from the bank of England to be sent to the country, are all drawn by the London bankers and money-dealers, in the first instance; and if there is any demand for them in London, there they will remain. Would a London banker send ten thousand guineas to the country to accommodate his correspondent, if to-day, or to-morrow, he had bills to that amount falling due upon himself, which he had no other means of retiring? Indubitably he would not;—he would retire his own bills in the first instance, and leave his correspondent in the country to shift for himself. It is evident, that little or none of the gold issued by the bank would go to the country, or any where else, till the circulation of London was completely supplied.
It appears, therefore, that there is no danger to the regularity of the London payments by diminishing the notes of the bank of England, provided she diminishes not her discounts; and, were the demand for guineas to continue so great as to exclude her notes from circulation, she could only be called upon to find a quantity of gold equal to her 15,000,000l. in notes, to afford the whole of the usual discounts, and preserve the regularity of the London payments. Even then, too, she would be in no worse condition, than the rest of the banks who discount without issuing notes, and find it still a very gainful trade. But it is perfectly certain that she could never be called upon, while she confined her business to the discounting of bills, for nearly so great a quantity of guineas as her notes amount to. It is always found, that when a bank can stand, with every demonstration of ease, a run for but a few days, confidence is restored, and the drain is interrupted. As to the drain which may arise from the exporting of guineas to foreign countries, it is perfectly evident, that the smallest increase to the difficulty of finding them at home gives them a value, which entirely prevents that operation, and even brings gold from abroad. Mr Henry Thornton enters into a long explanation of the difficulties and delay of bringing bullion from abroad; but he completely forgets another very obvious circumstance, that the delay and difficulties are equally great of drawing gold from this to other countries; and that these two sets of difficulties, therefore, exactly balance one another.
This doctrine is entirely confirmed by the facts connected with the crisis in our pecuniary affairs during the year 1796, and the beginning of 1797, when the suspension of payments in cash took place. From the end of 1794, or the beginning of 1795, there had been a rapid increase of the advances to government, insomuch, that these advances had risen, in the course of a few months, from six to ten millions; while the cash and bullion in the bank had, during the same months, sunk from eight millions to five. During this time, the directors of the bank continued to make loud and frequent remonstrances to the Chancellor of the Exhequer, on the dangers into which the bank was brought by these extraordinary advances, and earnestly to implore that they might be reduced. So far, however, was this from taking place, that from the urgent demands of government on the one hand, and the compliance of the bank on the other, they were carried, in the month of March 1796, to the enormous amount of 11,351,000l. From September to December they were reduced about a million and a half, but, after that, began again to rise; and on the 26th of February, when the cash and bullion in the bank scarcely exceeded one million, the advances to government, including interest, amounted to 10,762,490l. For a little time before this memorable juncture, the governors of the bank having no command over the money advanced to government, endeavoured to draw in their notes by lessening the amount of their discounts; and, by this circumstance, not by a want of currency, produced that derangement and difficulty in the London payments of which Mr Thornton complains. From the end of December to the 26th of February, the quantity of discounted bills had sunk from 3,796,000l. to 2,905,000l.
The conclusion from all this appears abundantly certain. If the bank of England, provided she never made advances to government, could not, as we have already shown, be ever drained of gold, unless she chose, beyond the amount of her notes in circulation,—and would not, to a moral certainty, be drained to nearly so great an amount,—and if we find her in advance to government, to a pitch so enormous, when she became plunged in inextricable difficulties, is it not clear that to these advances the difficulties must have been owing? It would have given us great pleasure to have entered upon the analysis of this case likewise, and to have traced the operation of these advances, step by step, to the crisis which they at last produced. But we have already so far exceeded all reasonable limits, that we are absolutely precluded from an inquiry, which would still lead us to a considerable length. Besides, the principles which we have already laid down, may be applied by any one who is at all accustomed to these inquiries, in the solution of this case, which presents no peculiar difficulty…
JAMES MILL AND DAVID RICARDO
Mill's most important contribution to classical political economy lay in his twin rôle as schoolmaster and disciple to Ricardo, whom he met in 1808 as a result of the publication of Commerce Defended. A large part of the history of their friendship and remarkable intellectual affinity can be found in Mr Sraffa's superb edition of Ricardo's correspondence. The correspondence can be divided into three main overlapping phases. First, there is the initial period of co-operation on monetary questions which begins with the revival of the bullion controversy in 1810–11, and ends with the publication of Ricardo's Economical and Secure Currency in 1816. Secondly, there are Mill's efforts, beginning in earnest in August 1815, to encourage Ricardo to extend the scope of his economic studies and to publish his Principles of Political Economy. The final phase in the correspondence, which can only be touched on here, concerns Mill's attempts to complete Ricardo's political education, and to make him the parliamentary spokesman for the Benthamite cause.
From the very beginning James Mill established a rapport with Ricardo on economic questions which was notably absent in his relations with Bentham. Bentham's economic writings were finished (though very few of them had been published) before collaboration with Mill began; by which time also, Mill's own views on economic questions had been formed and stated. The divergence of their opinions can be seen briefly in the positions which they adopted with respect to the corn trade during the period of grain scarcity at the turn of the century. In his Defence of a Maximum (1801), Bentham advocated temporary restrictions on the price of corn, whereas Mill in his essay on the corn trade roundly condemned all forms of interference in the free market for provisions. Bentham was inclined to unorthodox views on economic matters, while Mill rarely strayed from the path laid down by Smith and, later, Ricardo.
It was evidently as a result of finding themselves on the same side during the bullionist controversy of 1810–11 that Mill and Ricardo became close friends.1 Mill abandoned the equivocal position adopted in his early writings on this question in favour of Ricardo's strong, not to say dogmatic, view of the issue.2 The first letters between Ricardo and Mill that have been preserved concern Bentham's True Alarm. Dumont had sent the French translation of Bentham's MS. to Mill in 1810 for his opinion as to whether it should be published as a contribution to the current bullionist discussion. Mill was dubious, and when Ricardo also returned an unfavourable verdict on the work, Dumont reluctantly decided to give up the project.3 In September 1811, Mill sent Ricardo a paper on the bullion question which supported Ricardo's position. Apart from ‘some trifling points’, Ricardo was very favourably inclined to the paper: ‘it assails our adversaries in most of their strongholds and contains the most close reasoning that has appeared on our side of the question. I shall not rest till you publish it.’4 The idea of publication was dropped when Malthus, who had approved of Mill's earlier article, gave his opinion that: ‘The style appears to me to be rather heavy and laboured, too much abounding in repetition; and with a pretension to accuracy and precision which it does not fulfill.’5
The currency question was raised once more in 1815 when Ricardo wrote his Proposals for an Economical and Secure Currency; here he dealt with the management of paper money and the National Debt by the Bank of England. He was doubtful as to whether the pamphlet was worthy of publication and, as Mr Sraffa says, ‘Mill's encouragement was decisive.’ Ricardo called on Mill's advice as to style and on tactics. He wished to attack the existing agreement between the government and the Bank which fixed the charges for managing the currency at what he thought to be an excessive level, but was afraid that some of his ammunition might be wasted on a target which, though vulnerable, could not be destroyed.6 This was precisely the kind of question which suited Mill's dialectical skills. Mill held that it was important to ‘expose that bargain, and show that it was such a bargain as ought never to have been made’. The Bank should be forced to return its unjust gains at the expense of the public.7 In a subsequent letter Mill emphasised this point:
…the only advice which I think I can offer…is to dwell with some force on the moral part of the argument against the Bank; which will not only afford a variety in the midst of the other more abstract and less familiar topics, but will really press with a more galling weight upon the parties concerned. Hold up to view unsparingly the infamy of a great and opulent body like the bank, exhibiting a wish to augment its hoards by undue gains wrested from the hands of an overburthened people.8
Ricardo, who needed little encouragement to attack the Bank, accepted this advice and incorporated Mill's exact words into the text of his pamphlet.9 This incident is symptomatic of Mill's relationship with Ricardo as a whole. He could give Ricardo little substantive assistance, but he bolstered Ricardo's confidence and brought to the fore the political and moral issues underlying Ricardo's economic arguments. This emerges more clearly in the second phase of the correspondence which concerns the publication of Ricardo's Principles of Political Economy.
From late 1811 until the summer of 1814 both Mill and Ricardo were in London; they met frequently and went on long walks together. It seems likely that among the subjects discussed was Ricardo's theory of profits which he was working out at this time.10 Ricardo's first statement of this theory was in his Essay on Profits, and not long after its publication in 1815 we learn that Mill was urging him ‘to write it over again more at large’.11 In August, Mill set out clearly his ambitions for Ricardo; he considered that Ricardo had made enough money to satisfy his family's needs so there would now be ‘leisure for other pursuits’.
That you will devote yourself to them, in that case, with a calm but vigorous perseverance, I have no doubt; for that is part of your nature. I should advise you to do so, if I had nothing in view but to promote the happiness of a friend; even if I had no hopes of your gaining any illustration to your name, and sharing in the dignity which does attend upon the reputation for talents, and profound knowledge of an important subject. When I am satisfied, however, that you can not only acquire that reputation, but that you can very greatly improve a science on which the progress of human happiness to a singular degree depends; in fact that you can improve so important a science far more than any other man who is devoting his attention to it, or likely to do so, for Lord knows how many years—my friendship for you, for mankind, and for science, all prompt me to give you no rest, till you are plunged over head and ears in political economy.12
Ricardo's reply was typically modest: he accepted the call to action but doubted whether Mill's ambitions for him could be fulfilled. By October Mill was demanding a progress report.13 Ricardo was warming to the task, though he continued to claim that he would write more for his own amusement than for publication.14 Ricardo's main doubts centred on his inability to express his ideas clearly. On these matters Mill, as a professional journalist, had some right to think he could be of assistance, though he freely admitted that on matters of substance he had become an amateur.
Notwithstanding my passion for the science of political economy, it has so happened that for a good many years I have not been able to think of it, except when I was excited by your instructive conversation or by your writings. Why do you cry, ‘Oh that I were able to write a book!’ when there is no obstacle to your writing, but this want of confidence in your own powers. You want some practice in the art of laying down your thoughts, in the way most easy of apprehension to those who have little knowledge, and little attention; and this is to be got infallibly by a little practice. As I am accustomed to wield the authority of a schoolmaster, I therefore, in the genuine exercise of this honourable capacity, lay upon you my commands, to begin to the first of the three heads of your proposed work, rent, profit, wages—viz. rent, without an hours' delay. If you entrust the inspection of it to me, depend upon it I shall compell you to make it all right, before you have done with it.15
Mill's advice on the art of composition was for Ricardo to write as though to a friend of average understanding. He attempted to make Ricardo's style less elliptical by forcing him to write exercises like the following:
You have stated repeatedly this proposition, that improvements in agriculture (suppose in such a state as that of England at present) raises the profits of stock, and produce immediately no other effects. But you have no where stated the proof. You have left it to be inferred from your general doctrine as to rent. The additional produce cannot be received as rent, which is limited by another circumstance. And it cannot go as wages, because they too are otherwise limited. Therefore, it must be received as profit. But what I wish you to do, is, not to content yourself with this inference—but to show by what steps, in practice, the distribution would take place. As for example—By improvements, all the capital employed on the English soil becomes more productive—the same quantity of corn is consumed in cultivating the land; a greater quantity is returned: What, in their order, are the effects which follow? On this subject, I ordain you to perform an exercise—a school exercise: in other words, write me a letter. That is to say, provided you understand what I propose to you. My meaning is, that you should successively answer the question, What comes next? First of all is the improvement. What comes next? Ans. the increase of produce. What comes next? Ans. a fall in the price of corn. What comes next?—and so on. I shall see then what next is to be proposed to you. For as you are already the best thinker on political economy, I am resolved you shall also be the best writer.16
As a further aid to clarity he suggested the favourite Benthamite device of making analytical, marginal summaries of each paragraph. The extent to which Ricardo was willing to place himself in Mill's hands, even down to accepting advice as to how his every-day life should be organised, is a tribute to Ricardo's faith in Mill's counsel.
In December 1815, however, Ricardo was ‘stopped by the word price’, and Mill's vague reassurances could hardly have been of much assistance.17 As a result of his difficulties over the problem of value, Ricardo's efforts began to flag. In May 1816 he gave up writing altogether for two months and was dubious as to whether he would ever resume.18 In August Ricardo resumed work, but informed Mill that ‘I am often inclined to throw my writing aside as a task much beyond my powers to accomplish, and I believe my sole inducement to go on is the reflection that I am not obliged to publish.’19 The following bracing reply came back from Mill:
I was much delighted with your kind letter, received a few nights ago, though it continues so much in the old desponding tone. Why should a man that is not afraid to talk upon a subject before any body, be afraid to write; since writing is nothing but talking upon paper? You can not only talk before the people who are the most celebrated for their knowledge upon this subject, but you are not afraid to contest with them, and to hold your opinion in preference to theirs; and make it appear to the auditors that you are right. Well, then, just do the same thing upon paper-what more would you have?—I shall begin by and bye to think that your misgivings, and your faintness at heart, are apologies ingeniously contrived by you in defence of idleness? Or (what is a more ingenious conjecture, just come into me head) that you employ them as baits with which to fish for compliments;—as who should say,—Ah, I have not talents for the thing, my capacity is not sufficient-And then comes the kind friend, who cries with enthusiasm, My dear Sir, allow me to correct the only mistake in which in the course of your life you ever fell-your talents are admirable; your capacity is immense-only do write and astonish the world! Now I, not being much practiced in the arts of pleasing, shall say quite the contrary-that no talents are wanted, but what any body possesses-you have the thoughts in your mind already and have only to put them down upon paper-after they are down, to look them over, and see that nothing is omitted which you wish to have there-that no one thing is there in more places than one-and that every thing is in the right place. Surely there is nothing in all this to frighten any body-Well, this is all you have to do. The first thing is, to go over your subject, from the beginning to the end, in any way, no matter what. If then, it don't please you, have it back and go over the ground again, altering when you find altering to be good. If it should not please in this form, go over it again. Do you think that any man writes a good book by Divine Grace, and the favour of inspiration? Rousseau declares that he never gave anything to the public, which, so far from pleasing him the first time, had not been written five times over. I do not mean to let you retract your faith solemnly pledged that I am to be your School master, fully vested with all the rights belonging to that redoubtable office. Well then, in virtue of these rights, I solemnly command and ordain that you proceed, without loss of time, on the plan which you have already sketched out, till you have gone over the whole field of Political Economy, from the beginning to the end, thinking nothing of order, thinking nothing of repetitions, thinking nothing of stile-regarding nothing, in short, but to get all the thoughts blurred upon paper some how or another. We shall see what is to be done with it after that-that is the first thing. Surely you can do that-for it is only saying do what you can-and you will not pretend to say that you cannot do what you can.
Another command of mine is, that-as I know you have by this time a pretty mass of papers, written first and last upon the subject-you put as much of them as possible, that is all except those which are absolutely necessary for you to go on with, up in a parcel, and send them here. I have a quantity of things to learn, which I know they will teach me. And perhaps they may enable me to give some directions to you which may not be useless. I mean that you should include those which you read to me in London, because hearing a thing read is very different from reading it when you have leisure by yourself. If you can put the sheets that relate to one subject up by themselves-and give some indication of what each subdivision is about, so much the better-but if not, no matter-send them higgledy-piggledy all together.20
Ricardo promised to obey but procrastinated for two months on the grounds that he needed to copy out the papers.21 However, on 14 Oct. 1816, after further badgering, the papers covering the first seven chapters of the Principles were sent to Mill.22 A month later the second half of the book containing the principles of taxation was despatched.23 Having had these parts of the work read to him by Ricardo earlier, Mill was familiar with the general line of argument; he accepted both parts of the work wholeheartedly.
My opinion may be given in very few words; for I think you have made all your points. There is not a single proposition the proof of which I think is not irresistible. With the curious result pointed out in your letter with respect to the effects produced by the rise of wages, on the price of those commodities which are chiefly the return from fixed capital, I was very much struck; but have no doubt whatsoever as to the validity of your conclusions, the proof of which I think is incontrovertible…24
I have now gone over your inquiry into the subject of Taxation, with the same care as the former part of the work. I have also the pleasure to tell you that I am equally well satisfied. Now for the first time is the real operation of taxes explained; for this was a part of his subject on which Adam Smith was superficial, and added not a great deal to the knowledge of the world. Your doctrines are original and profound, for it was by no means an easy matter to get down to them; and I have no hesitation whatsoever in saying that they are fully and completely made out. I embrace every one of them; and am ready to defend them against all the world.25
Mill's contribution in inducing Ricardo to write his great work was very fairly assessed by Ricardo himself.
If I am successful in my undertaking it will be to you mainly that my success will be owing, for without your encouragement I do not think I should have proceeded, and it is to you that I look for assistance of the utmost importance for me-the arranging of the different parts, and curtailing what may be superfluous.26
Apart from acting as impresario and coach to a shy performer, Mill helped with the detailed preparation of the text for publication. He does not seem to have had much influence on the final arrangement of topics-he adopted a different plan for his own exposition of Ricardo's principles-but his hand can be detected at a number of points in matters of style and emphasis.27 On questions of theory Mill had little to offer Ricardo. In this respect, it might be said that Malthus, by acting as a constant antagonist, was of more help to Ricardo. But Mill's efforts on his friend's behalf were prodigious; and the vicarious pleasure which he took in Ricardo's success brings out the human side of the more familiar picture of Mill as the stern schoolmaster.
Besides wanting to place Ricardo ‘beyond all dispute at the head of Political Economy’, Mill hoped that Ricardo would become the parliamentary spokesman for ‘correct’ economic principles and ‘good government’. On the latter subject Mill was the expert, and there was good reason for him to believe in the malleability of Ricardo's mind when subjected to the hammer of reason. The first step in Ricardo's political education was to convince him that the principal source of misgovernment was the subservience of public men to their private interests.28 Ricardo, to begin with, rejected out of hand Mill's suggestion that he should enter parliament. He also felt that Mill was ‘unjustly severe’ in his strictures on the venality of public men; and that he was inclined ‘to allow too much force to the stimulus of money, and the praise of princes, and too little to the effect of public opinion’.29
For a time the matter was left in abeyance, but towards the end of 1816 it is clear that Mill had made inroads on Ricardo's firm rejection of the parliamentary scheme.30 Ricardo was now saying that he would consider entering parliament if his book was successful.31 Ricardo was true to his word and negotiations to obtain a seat began late in 1817, although they were not brought to fruition until February 1819. Throughout this period Ricardo continued to express doubts as to his ability to speak or contribute anything to the cause of reform. A good deal of his diffidence sprang from his belief that outside questions of political economy his education had been irreparably neglected. Nevertheless, he allowed Mill to take charge of his general and political education. As groundwork Mill advised Ricardo to read Locke, Hume, and Millar, and later, his own History of India.32 He felt sure that he would be able to overcome Ricardo's feeling that legislation was a ‘most difficult science’.
I have no doubt about removing all your difficulties; and showing you that instead of being a science, the practical results of which must always be uncertain, rendering it always prudent to try to remain in the state we are in, rather than venture the unknown effects of a change, legislation is essentially a science the effects of which may be computed with an extraordinary degree of certainty; and the friends of human nature cannot proceed with too much energy in beating down every obstacle which opposes the progress of human welfare.33
It is clear that Ricardo was eager to be convinced by Mill's sweeping claims. By the spring of 1818 he was an enthusiastic, though moderate, parliamentary reformer. It was at this time that he began his attempts to convert Hutches Trower to the cause, making use of arguments supplied by Mill in the course of their walks together. As further preparation for his duties as an M.P., Ricardo undertook the task set him by Mill of writing a few ‘discourses’ on the principles of reform.34 As an M.P. Ricardo was looked upon as an ‘ultra-reformer and a visionary’. Mill's influence on him in this respect was crucial. This was acknowledged by Ricardo himself when he wrote to Francis Place that: ‘I as well as you am a disciple of the Bentham and Mill school.’35 It was also apparent to neutral contemporary observers like J. L. Mallet.
He early became an advocate of the principle of utility. James Mill…a pupil of Bentham's, and a man of considerable acuteness, research and talents, was Ricardo's most intimate friend, and no doubt contributed to the formation of many of his opinions.36
1. The Elements of Political Economy
In 1819, when John Stuart Mill had reached the ripe age of thirteen, James Mill decided that it was time for him to be initiated into the mysteries of political economy. In the course of their daily walks he lectured John on the subject: these lectures were then written up in note form, and submitted for rigorous criticism the following day. The notes served as an outline for the Elements of Political Economy, which James Mill began to write towards the end of 1820.37 By April 1821 the work was nearly finished, although it was not published until November.
The Elements was intended as a ‘school-book’ for those who wished to learn the essential doctrines of the ‘new school of political economy’, but who were not willing to make the effort necessary to understand Ricardo's Principles. It was Mill's attempt to do for Ricardo what he had already done for Bentham in the field of law and government: to consolidate the Ricardian school and remove any obstacles which might bar the way to a full acceptance of ‘correct’ principles. In spite of its aim, the style of the work was not a very popular one. It is written in a manner which seems to confirm Macaulay's jibe against Mill's Essay on Government, that its author was ‘an Aristotelian of the 15th Century born out of due season’. The Westminster Review actually recommended that Mill's book should be read as Euclid and not as a novel;38 but others from the ranks of the converted considered its ‘geometric’ approach a drawback to its success. McCulloch had this to say about the book:
…it is of too abstract a character to be either popular or of much utility. Those secondary principles and modifying circumstances, which exert so powerful an influence over general principles are wholly, or almost wholly, overlooked by Mill. But although their consideration might be omitted in an original work like that of Ricardo, it is not so easily excused in an elementary treatise…The Science is very far from having arrived at the perfection Mr Mill supposed.39
John Stuart Mill put his finger on his father's weakness when he said that he trusted ‘too much to the intelligence of the abstract, when not embodied in the concrete.’40 John considered that the Elements was ‘a very useful book when first written, but which has now for some time finished its work’41 : he obviously did not think it was one of his father's more enduring contributions.
James Mill was not interested in theoretical refinements for their own sake; he merely wished to give a logical account of the Ricardian system, avoiding or cutting through any disputed areas. This is a justifiable procedure in any introductory work, but the truth is that Mill was unwilling to recognise many of the difficulties with which others struggled. When he was writing the Elements he was pleased with his success in treating the subject ‘within a narrow compass’; but clearly found sections like that on money, for example, where ‘many different circumstances had to be noticed’, tedious to write.42 Although he made fairly extensive revisions to the book when the second edition was published in 1824, these mostly took the form of fuller expositions of positions already held. He made little effort to alter those parts of the work on which Ricardo had commented; and although in the third edition he modified his treatment of international values and profits as a result of criticisms arising out of discussions of the book by the younger utilitarians led by his son, he did not go as far as they would have liked.43
At this point in time the very crudity of Mill's Elements makes it an interesting document to the modern reader. We are presented with the Ricardian interpretation of the classical model in its simplest form. Ricardo was too absorbed in his task of following through the logic of an original insight to present a balanced picture of this model. Mill brings out more clearly the continuing Smithian basis of classical thinking by emphasising the growth factor, the division of labour, and the distinction between productive and unproductive consumption. The opening chapter and the whole arrangement of the Elements make it clear that the book is addressed mainly to ‘real’ problems; that the grand, equilibrium circle-primitive accumulation, production, distribution, exchange, consumption and back to accumulation-is to occupy the centre of the stage.44 In this respect, and especially in view of his stress on the Law of Markets, Mill's Elements follows naturally on his earlier work Commerce Defended. The important difference is that at the heart of the Elements lay Ricardo's theorems linking accumulation with the distribution of the total product between wages, rent and profits. As Mill saw it, these were the final pieces in the jig-saw of political economy. ‘Till the laws were discovered, which determine the boundaries of these several portions…almost all the conclusions of Political Economy were vague and uncertain.’45
Ricardo's Principles opens with a long and tortuous chapter on the determinants of exchange value and the related question of the measure of value; for several years these were the chief topics of theoretical discussion among economists. It was Mill's original intention to concentrate on the distribution question, and ‘steer clear if possible of the difficult word value’.46 Ricardo obviously did not think this approach was impossible. He had attempted to do the same in his 1815 essay on the corn laws; and even after he had found it necessary to wrestle with the problem of value in the Principles, he maintained, on one occasion at least, that ‘the great questions of Rent, Wages, and Profits must be explained by the proportions in which the whole produce is divided between landlords, capitalists and labourers, and which are not essentially connected with the doctrine of value’.47 Nevertheless, neither Ricardo nor Mill succeeded in sidestepping the issue. In Mill's case this was probably due to the fact that Ricardo's treatment of the issue had come under fire from Torrens, and Mill felt it necessary to make good his promise to defend Ricardo's doctrines ‘against all the world’.
Mill accepted Ricardo's view that the existence of capital made little or no difference to the general rule that the quantity of labour embodied in a commodity determined its exchange value. But his dogmatic treatment of the question in the Elements obscured Ricardo's acknowledgment that the rule required modification where capital was employed in different proportions and possessed differing degrees of durability. As Ricardo said: ‘What I call exceptions and modifications of the general rule you appear to me to say come under the general rule itself.’48
Mill's plus royaliste position merely served to inflame Torrens, Bailey and Malthus, Ricardo's chief critics; but Mill himself does not appear to have been eager to enter into extended controversy on the issue. He got his son, a mere boy of sixteen at the time, to answer Torrens's criticisms of his section on value as it appeared in the first edition. It istrue that Mill may have written the reply to Bailey's attack on the Ricardian theory of value in the Westminster Review;49 but Mill did not think it worth mentioning Bailey's name in the third edition of the Elements. He also made critical notes on Malthus's Measure of Value, but made no effort to get them published.50 John Stuart Mill spoke for his father when he said that the dispute over value was ‘a question of pure curiosity and of no practical use whatever’.51
Ricardo himself reopened the question a few weeks before his death in a paper on Absolute Value and Exchangeable Value, in which he criticised Mill and McCulloch's solution to the measure of value problem. When these papers came into Mill's hands he took the decision not to have them published. He was simply following the line he had advocated earlier when he discouraged Ricardo from publishing his Notes on Malthus as an appendix to the third edition of the Principles.52 It could not serve the cause of ‘correct principles’ to confuse the public mind with prolonged disputes and revisions.
The same decided view is apparent in Mill's attitude to the Political Economy Club, of which he was a founder member in 1821. He clearly felt that the object of the Club was not so much to debate where Ricardo had or had not been mistaken, but to act in concert to defend and propagate an accepted doctrine. In the draft of the rules of the Club prepared by Mill, it was proposed that each member should answer a catechism before every meeting which contained questions like the following: ‘Do you know anything in the legislation or practice of this country, not recently under consideration of this Society, peculiarly at variance with the principles of Political Economy and has anything occurred to you with respect to the measures of remedying such evils?’53 The catechism idea was rejected, but the rules themselves contain ample evidence of Mill's desire to use the Club to influence public opinion. It was, for instance, the duty of members to watch the press ‘to ascertain if any doctrines hostile to sound views in Political Economy have been propagated; and to contribute whatever may be in their power to refute such erroneous doctrines and counteract their influence’. Mill wanted the Club to do what he had been doing constantly for the cause of parliamentary reform.
It shall be the duty of the Society to study the means of obtaining access to the public mind through as many as possible of the periodical publications of the day and to influence as far as possible the tone of such publications in favour of just principles of Political Economy.
Despite this early zeal, before 1826 Mill proposed only one question for discussion by members of the Club, concerning the effect of Irish immigration on English living standards54 ; and after this date, he attended on only three occasions. After the third edition of the Elements was off his hands, Mill was anxious to return to an early love, namely the analysis of the human mind. J. L. Mallet, however, considered that there were less flattering reasons for Mill's failure to attend the Club's meetings.
He is not enough of an oracle among us, and does not find among his equals in intellect, so far as this science is concerned, Torrens, Malthus, McCulloch, Tooke, that deference, not to say adulation, which is paid him by the younger Utilitarians and Aristocratical worshippers of Talent.55
A more charitable interpretation might be that he considered the main work in political economy to have been done already by Ricardo. The task now was simply one of spreading the good tidings; and this the Club did not seem interested in doing.
One further attempt by Mill to add to the public understanding of political economy deserves brief mention here. As a member of the Committee of the Society for the Diffusion of Useful Knowledge he was responsible for pressing the Society to publish treatises on practical aspects of political economy written by the younger utilitarians.56
A number of books have been written on Ricardian economics since the publication of Ricardo's collected works.57 It does not seem necessary, therefore, to traverse the whole of this ground by comment on Mill's exposition of Ricardo's principles in the Elements. Two topics on which Mill added to or differed from Ricardo are discussed here: more detailed comment is reserved for footnotes to the text.
2. Population and Wages
The treatment given to population and wages in the Elements provides a good example of Mill's penchant for what Ricardo called ‘strong cases’. Throughout his discussion of these matters he dramatised the remedy which he favoured for ‘the condition of the people’, by putting forward an apparently water-tight argument which minimised the value of alternative solutions or outcomes. Mill's treatment of the population question also shows the way in which he introduced socio-political arguments into what purported to be a ‘school-book’ confined to the ‘science’ of political economy.
Mill declared his support for the Malthusian principle, that population has a consistent tendency to grow faster than the means of support, in his earliest economic pamphlet.58 There were many ways in which this principle could be interpreted: Mill chose to adopt an extreme view, although it is more accurate to describe him as an extreme neo-Malthusian. His first full discussion of the problem was in his article on ‘Colonies’ for the Supplement to the Encyclopaedia Britannica written in 1817. Here he contrasts the evidence of population redundancy under a system of slavery with that of a modern wage-economy. In a slave system, the burden of redundancy falls on the slave-owner who has to meet higher food costs. In a wage economy, competition for available food supplies takes the form of the mass of the population offering more labour in exchange for food; or, in other words, accepting lower wages and living standards.
This is the point of departure for the treatment given to the subject in the Elements. In a wage economy, wages depend on the ratio of population to capital, i.e. the wage-fund doctrine, which Mill expresses in its most unqualified form. He now sets out to show that population has a universal tendency to outpace capital accumulation, and his first argument is an assertion to the effect that the consequences of this tendency are plainly in evidence throughout the world; the living standards of the masses are actually at the physical subsistence minimum.59 Here Mill typically fails to distinguish between what could happen according to his model, and what has in fact occurred: he moves directly from a ceteris paribus situation to the real world. Unlike Smith and Ricardo, Mill makes no allowance for the possibility that real wages may remain above the psychological or physical minimum for what amounts to a lengthy short run.
The next stage of the argument is based on the notion that the biological factors underlying population growth are more persistent in their operation than the social and psychological factors which determine capital accumulation. The exercise in deductive sociology used to support the proposition that capital accumulates slowly constitutes the most interesting part of the whole chapter. At one end of the scale, according to Mill, there are those societies where the many are poor and the rich are few. The poor cannot save and the rich have little incentive to add to their possessions. Alternatively, there are those societies in which both capitalists and labourers possess ‘the means of all the substantial enjoyments of life’. In this type of society neither the near-sighted nor those capable of foresight have any great incentive to accumulate; the former by definition, and the latter because they realise that what they will add to their ‘enjoyments’ by saving ‘is in a great measure fancy’. Two possible motives for saving are left: ‘the desire of a command over the sentiments of mankind’ and ‘the wish to make a provision for children’. Power and influence are difficult to acquire if most people are moderately well-provided for and independent, which is one reason why Mill considered this type of society to be ideal. As to the desire to provide for children, Mill claims that a man who has reached a satisfactory plateau of wealth is not likely to wish to place his children in a ‘better’ position. For these reasons only ‘moderate effects’ (whatever these might be) are to be expected from the motives for accumulation. Mill seems to have recognised that this type of argument did not constitute a ‘proof’ of the tendency for capital to accumulate more slowly than population; this he thinks is given by invoking the law of diminishing returns, the fall of profits and the consequent decline in the source of savings.
Mill's sociological arguments are redolent of the kind used by Adam Smith when discussing ‘the desire of every man to better his condition’. Smith too was basically an ascetic when it came to the question of individual riches; but unlike Mill, Smith seems to have thought that men were not sufficiently rational to realise that the pursuit of wealth or command over the sentiments of others was, beyond a certain point, fruitless; there was no rational millennium, the attainment of which would weaken the desire for further accumulation. John Stuart Mill is usually considered to be unique in his concept of an ideal stationary state in which further economic striving ceases60 ; but it seems clear that this notion was derived from his father.
The rest of Mill's chapter on wages is devoted to a demonstration of the futility of all remedies for the population problem other than the one which he favoured. He considers the possibility that the legislature might intervene to create capital by taxation, but concludes that forced accumulation would merely push a society more rapidly towards the stationary state by increasing population, raising rents and lowering profits. All members of society except the existing landowners would become poor wage-earners; population density would rise, and land would be increasingly subdivided. At this point Mill invokes another sociological argument to show that the elimination of the middle classes, those living on moderate incomes and enjoying sufficient leisure to cultivate the arts and sciences, would be disastrous to the progress of society.61
Since little hope of raising living standards could be expected from increased capital accumulation, the only remedy left was to control the growth of population; and by this Mill meant birth control and not simply moral restraint. In his article on ‘Colonies’ for the Supplement to the Encyclopaedia Britannica Mill became the first economist to endorse birth control in print, albeit rather circumspectly. He is discussing the question of ‘what are the best means of checking the progress of population?’
It is, indeed, the most important practical problem to which the wisdom of the politician and moralist can be applied. It has, till this time, been miserably evaded by all those who have meddled with the subject, as well as by those who were called upon by their situation to find a remedy for the evils to which it relates. And yet if the superstitions of the nursery were discarded, and the principles of utility kept steadily in view, a solution might not be very difficult to be found…62
In the Elements the advocacy of birth control is less oblique. He speaks of the form of prudence where ‘care is taken that children, beyond a certain number, shall not be the fruit’, and of ‘securing the happiness of the matrimonial union without the attendant evil of over-population’. Having started from the assumption that wages were constantly at the barest minimum, he ends by holding out boundless hopes of improvement; the limitation of births could ‘raise the condition of the labourer to any state of comfort and enjoyment which may be desired, and prevent the need for further accumulation’.
These were the beliefs which Mill instilled in the younger philosophical radicals, as his son's account makes clear.
The Malthusian principle was quite as much a banner, and point of union among us, as any doctrine specially belonging to Bentham. This great doctrine, originally brought forward as an argument against the indefinite improbability of human affairs, we took up with ardent zeal in the contrary sense, as indicating the sole means of realizing that improbability by securing full employment at high wages, to the whole labouring population through a voluntary restriction of their numbers.63
3. Taxes on Rent
In his History of British India, Mill referred to Ricardo's treatment of taxation as ‘the most profound, by far, which has yet been given to the world’.64 As one might expect, therefore, Mill's discussion of taxes in the Elements is largely derived from Ricardo. But on one important question, the feasibility and desirability of taxes on rent, Mill went a good deal further than either Ricardo or McCulloch were willing to go. This was not simply a textbook matter because, as will be seen later, in his capacity as Chief Examiner at the India Office, Mill attempted to implement the radical conclusions which he drew from Ricardo's interpretation of the rent doctrine.65 Though this is seldom realised, Mill's influence on the Indian land revenue system represents perhaps the single most important application of Ricardian economics in practice.
The first clues as to Mill's position with regard to taxes on rent can be found in the History of British India, where he discusses the Hindu system of raising revenue from the produce of the land.66 Although he levelled severe criticism at this system, he considered the objections ‘to arise from the mode rather than the essence’; it was an obvious expedient in a society dependent on agriculture but it also had ‘no inconsiderable recommendation from science itself’. By science Mill meant the rent doctrine. If rent was a pure surplus earned on intra-marginal land after the payment of wages and profits, then it could be taxed without affecting production or prices. In the early stages of society when land is owned communally, it becomes a simple matter for the state to appropriate that part of the annual produce which, under a system of private land ownership, would go to the landlord as rent. This was one case where Mill obviously felt that European progress, in the shape of the establishment of private incomes from land, had been a retrograde step: what might have gone to meet community needs had been annexed to private individuals.
This was basically the position which Mill upheld in his chapter on taxes on rent in the Elements, though here he was faced with the problem of how rent could be taxed once land had become private property, and land values reflected expectations of private rent income. He admitted that in the absence of complete land nationalisation, the solution he favoured in India, it would be unjust to meet the whole of the needs of the government by appropriating rent. But he saw no reason why a kind of generalised betterment charge should not be imposed in the form of a tax on incremental land values. This would require making a distinction between present land values, based on existing rents plus a reasonable allowance for improvement, and any increase in values beyond present levels which could be imputed to the acts of the legislature. The land-owner had acquired a right to the former but not to the latter. Any legislative measure which increased population and the demand for food gave to the land-owner an unearned increment, which Mill thought it proper for the state to tax.
In upholding the principle of taxing rent Mill was merely taking to its logical political conclusion, Ricardo's argument that there was an inherent conflict between the interests of land-owners and the rest of the community. Ricardo himself did not think that Mill's scheme was practicable; it would be difficult to separate pure rent from profit on capital invested by the land-owner, and therefore a tax on contractual rents might inhibit the improving landlord. But, as always, Ricardo was willing to face the logical consequences of his doctrines, and does not seem to have been afraid of considering the possibility of complete land nationalisation.67 The same could not be said of McCulloch who invariably stressed the harmony of the economic order68 ; he criticised Mill's argument concerning taxes on rent on the grounds that it involved discriminatory taxation. Mill replied to this criticism in the third edition of the Elements, pointing out McCulloch's inconsistency in recognising the special nature of rent income, while, for taxation purposes, regarding it as similar to profits.
The difference between Mill and McCulloch on this issue is, of course, basically political. Ricardo's rent doctrine merely provided scientific support for Mill's longstanding antagonism towards the land-owning classes; it accorded completely with his view that the politics of the day were dominated by the clash of selfish interests. McCulloch, on the other hand, was a Whig, and regretted that Mill was such an ‘incorrigible radical’. Even before Ricardo had published his Essay on the Influence of the Corn Laws on the Profits of Stock (1815), in which the idea of conflict between land-owners and the rest of the community was first emphasised, we find Mill stressing the class struggle side of the Corn Law issue.69 In a letter to McCulloch on the subject later, Mill's political motive in stressing this conflict becomes clear.
There was an excellent paragraph the other day in the Scotsman, stating the effect of the Corn-Laws in setting the rest of the community against the landlords, and showing the indispensable necessity of taking the monopoly of legislation out of their hands. The terror arising out of this view is the only thing which will work upon them. They must therefore be plied with it.70
The political implications of Mill's tax proposal did not go unnoticed. During the second reading of the Reform Bill, an opponent, Vyvyan, pointed out the danger to property if such men as Mill were allowed access to power. After quoting from Mill's chapter on taxes on rent he went on to say:
These were Mr Mill's sentiments upon the subject of rent: he is one of the class who in future are to be called upon to regulate our affairs: and I will ask any hon. Member if, after land has been so treated, the funded property can last a single hour?71
He predicted that all forms of property, including the ‘poor man's hoardings’ in the Savings Banks, would be placed in jeopardy by the passage of the Bill.
Vyvyan's fears were exaggerated. Mill believed that the Savings Banks and the Benefit Societies were valuable institutions, helping to encourage working-class prudence and foresight in the face of the Malthusian menace.72 There were special reasons for Mill's animosity towards the landed interest which did not apply to any other form of property. He believed that land-owners controlled parliament in their own interests, and that their income and influence was ‘unearned’ in the precise economic sense of the term. As we have seen in our discussion of population and accumulation, Mill shared Adam Smith's view that the possession of a large fortune, particularly as derived from large estates, was inimical to foresight and saving; it encouraged the cultivation of idle pleasures and was not conducive to the pursuit of the ‘intellectual virtues’ which Mill prized so highly. To this point of view must be added Mill's special insistence on the contribution of the hardworking, prudent, middle classes to the progress of society.
In an article on ‘Aristocracy’ for the London Review, Mill went out of his way to point out that:
Reformers are far from thinking evil of inequality of fortunes; on the contrary they esteem them a necessary consequence of things which are so good, that society itself, and all the happiness of human beings, depend upon them: a consequence of those laws whence the generations and augmentation of a property proceed. That the property of nations may advance, there must exist motives to accumulation.
Inequality was essential for cultural progress as well,
To have men of high intellectual attainments, we must have men who have their time at their command, not under necessity of spending it wholly, or in greater part, in providing the means of subsistence:—or in other words, we must have men of independent income.73
But this inequality had to be the result of the ‘natural laws of accumulation’ and not derived from ‘unnatural restraints put upon the natural laws of distribution’. By the latter Mill meant inheritance under the law of primogeniture. He opposed this law because it required ‘that a man should not leave his property to whom he will, or that it should not go in equal parts to those whose proximity of relation to him is the same.’74 Once more Mill was at logger-heads with McCulloch, who defended primogeniture as the means by which efficient farming and political stability were preserved.75
Having stated his preference for a society in which the necessary inequality was based on accumulation and intellectual merit, James Mill was anxious to combat redistributive measures.
When a man has attained eminence by intellectual acquirements, by a course of beneficent conduct to his fellow-creatures, by presenting a model of what is amiable in his amusements and tastes, or, lastly, by the honourable accumulation of wealth, why should he be robbed of any portion of the dignity which those merits confer?76
In his article on ‘Colonies’ for the Supplement to the Encyclopaedia Britannica Mill went out of his way to ‘prove’ by means of the law of diminishing utility that income redistribution reduces the total sum of happiness.
When from one of two parties, equally provided with the means of enjoyment, you take a portion to give it to the other, the fact is,—a fact too well established, and too consonant with the experience of every man, to need illustration here,—that you do not add to the happiness of the one, so much as you take from the happiness of the other, and that you diminish the sum of happiness of the two taken together. This, in truth, is the foundation upon which the laws for the protection of property rest. As the happiness of one man, is, or ought to be, of no more value to the state than the happiness of another man, if the man who takes from another man a part of his property, added to his own happiness, as much as he took from the happiness of the other, there would be no loss of happiness upon the whole, and the state would have no ground, in utility, on which to interfere.77
This is yet another example of the polemical use of the ‘strong case’. Without the question-begging assumption that both parties are ‘equally provided with the means of enjoyment’, the whole argument could be reversed.
Having isolated the land-owner from the rest of society, Mill argued that the interests of labour and capital were harmonious. This conclusion could be supported by the wage-fund doctrine, and was strengthened by Mill's belief that the working classes would be guided by ‘the most wise and the most virtuous part of the community, the middle rank’. Indeed, he considered that the working classes would ‘account it to their honour’ to adopt middle-class opinions. The ‘occasional turbulence of a manufacturing district’ was entirely due to the absence of sufficient middle-class influence.78 He was bitterly opposed to those working-class radicals who, like Thomas Hodgskin, attacked property and ‘sound’ money, and championed the right of labour to the whole produce.
These opinions, if they were to be spread, would be the subversion of civilised society; worse than the overwhelming deluge of Huns and Tartars. This makes me astonished at the madness of people of another description who recommend the invasion of one species of property, so thoroughly knavish, and unprincipled, that it can never be executed without extinguishing respect for the rights of property in the whole body of the nation, and can never be spoken of with approbation, without encouraging the propagation of those other doctrines which directly strike at the root of all property.79
If the proper information were to be made available, the working classes would realise ‘that the existence of property was not only good for the labouring man, but of infinitely more importance to the labourers as a class, than to any other’.80 Mill wished to substitute middle-class rule for aristocratic domination. He was quite unable to understand the nature of the working-class movement and its aspirations. For all his talk of ‘the people’, his view of the working class was basically paternalist; their best fate was to be guided, and perhaps ultimately assimilated, by their immediate superiors.
A very competent judge, Sir James Steuart, (see Polit. Econom. b. iii. c. 6.), has expressed himself with peculiar emphasis on this point. ‘QUEST. 1. The first question I shall propose, for illustrating this subject, shall be, Whence it comes to pass that the doctrine of money is so extremely difficult and involved?—ANSW. This I ascribe chiefly to the introduction of a money jargon, employed by the people who have had the management of mints, or who have been practical merchants, without knowing any thing of the theory of their business.’
We are aware that we have not here obviated the whole of the objections which may be made to this conclusion; and that the excess of the bullion price of gold and silver, over the mint price, has appeared to some persons a sufficient proof of actual depreciation, arising from an overissue. The full consideration of this subject, we must reserve for another opportunity; at present, we can only state it to be our opinion that the phenomenon in question may be explained from the fact of our having a currency composed of two metals, which are constantly varying in value as to each other. To those, too, who are habituated to such speculations, our whole theory of depreciation may be sufficiently explained, perhaps, by the following simple propositions. There can be no depreciation of coin, except in consequence of the wearing or adulteration of the metals; and there can be no depreciation of paper which circulates at par with coin—whatever be its quantity:—All depreciation of paper, it appears to us, is produced by suspicion of the credit of those who issue it. A suspension or postponement of cash payment, is obviously a ground for such suspicion; and the more that is issued while this continues, the more must this suspicion and depreciation accumulate. When it has once begun, it is easy to see how rapidly it must increase. But this is merely because the additional issue is an additional load on a credit already suspicious,—not because there is a surplus of currency in the country. No man receives Government paper, even in the first instance, but in exchange for something which he thinks worth the same sum in coin;—and no man ever receives paper money from another, except when he chooses to receive it for his goods or his labour;—consequently, he can never receive more than he wants; nor can there be any depreciation from mere overissuing.
Ricardo to Trower, 26 Jan. 1818, Works, vol. VII, p. 246.
Ricardo's High Price of Bullion was reviewed favourably in the Eclectic Review, March 1810, vol. VI, pp. 216–27. Mill contributed several economic articles to this journal and this review may have been written by him: if so, it would give the first indication of Mill's change of position.
A full history of the event together with Ricardo's Notes on Bentham can be found in Works, vol. III, pp. 261–341. See also the letters, vol. VI, pp. 13–20.
The paper itself has not been found; for the letters, see Ricardo's Works, vol. VI, pp. 49–56.
See ibid., p. 61.
Ibid., pp. 333–4.
Ibid., pp. 337–8.
Works, vol. VII, p. 5.
Works, vol. IV, p. 93.
See G. S. L. Tucker, ‘The Origin of Ricardo's Theory of Profits’, Economica, 1954, vol. XXI, pp. 320–33. One of the crucial points dividing Ricardo and Malthus at this time was what they called ‘Mr Mill's idea, that in reference to a nation supply can never exceed demand’. See Works, vol. VI, pp. 132, 134, 141–2, 149.
Ricardo to Say, 18 Aug. 1815, Works, vol. VI, p. 249. The first hint of Mill's efforts to encourage Ricardo to extend the scope of his contributions to the science of political economy comes earlier in Sept. 1814. See ibid., pp. 137–8.
Ibid., pp. 251–2.
Ibid., p. 309.
Ibid., pp. 315–16.
Ibid., pp. 320–1.
Ibid., pp. 339–40.
See ibid., p. 348, and Mill's reply, vol. VII, p. 7.
See vol. VII, pp. 28 and 36.
Ibid., p. 53.
Ibid., pp. 58–60.
Ibid., pp. 65–66.
Ibid., pp. 82–84.
Ibid., pp. 87–89 and pp. 91–92.
Ibid., p. 98.
Ibid., p. 106.
Ibid., p. 101.
These are enumerated by Mr Sraffa, in Works, vol. I, pp. xxi–xxii.
See Works, vol. VI, pp. 252–4, and pp. 306–9. A fuller account of ‘James Mill and the Political Education of Ricardo’ is given by T. W. Hutchison in the Cambridge Journal, Nov. 1953, vol. VII, pp. 81–100.
Works, vol. VI, pp. 310–11 and pp. 263–4.
Works, vol. VII, p. 110–11.
Ibid., pp. 113–14.
Ibid., pp. 195–8.
Ibid., pp. 210–11.
See Works, vol. V, for two of these discourses.
Works, vol. IX, p. 52.
Political Economy Club; Centenary Volume, London, 1921, pp. 208–9.
See J. S. Mill's Autobiography, pp. 19–20. Mill's intention to write a ‘popular work on Political Economy’ was mentioned by Ricardo in a letter to Malthus, 4 Sep. 1820, Works, vol. VIII, p. 229.
Op. cit., Oct. 1824, vol. IV, p. 289.
Literature of Political Economy, London 1855, pp. 17–18. Thomas Hodgskin wrote to Francis Place from Edinburgh when the Elements first appeared saying that McCulloch was not favourably disposed to the book; and he added, ‘I suppose it is not calculated to drive Mrs Marcet out of the market’. Letter, 26 Dec. 1821. B.M. Add. MSS. 35153, f. 202.
Autobiography, p. 16.
Ibid., p. 144.
See Ricardo's Works, vol. VIII, p. 327. For John Stuart Mill's remarks on his father's ‘impatience of detail’ see his preface to Analysis of the Phenomena of the Human Mind, London, 1869, pp. xix–xx.
Autobiography, pp. 84–85.
Mill was influenced by Say's Traité d'Economie Politique in his division of topics. In a letter to Place he said: ‘With the first edition of Mr Say's book I have been well acquainted since its first appearance in this country. It is an admirable production. As an elementary book it is much superior to Adam Smith's because the arrangement is much improved and the principles are stated most compleatly.’ B.M. Add. MSS. 3562, f. 95.
See below, p. 253.
See Ricardo's letter to McCulloch, 17 Jan. 1821, Works, vol. VIII, p. 337; see also ibid., p. 297.
Ibid., p. 194.
Works, vol. IX, p. 127. Ricardo's comments on the Ist edn. of the Elements are appended to the text below.
Op. cit., Jan. 1826, vol. V, pp. 157–72. For a review of the evidence supporting attribution of this article to Mill see R. M. Rauner, Samuel Bailey and the Classical Theory of Value, London School of Economics, 1961, Appx. II.
These can be found in Mill's Commonplace Book in the Mill-Taylor Collection, vol. 59, ff. 13–15 at the London School of Economics. In view of the fact that these notes are incomplete, and would require reprinting large sections of Malthus's book to make sense of them, it has been decided, reluctantly, not to include them in this volume.
See his reply to Malthus's attack on the ‘new school’ in the Westminster Review, Jan. 1825, vol. IV, p. 220.
See Works, vol. VIII, p. 333.
Political Economy Club; Centenary Volume, pp. 3–4.
Mill's correspondence with Wilmot Horton, the leading exponent of assisted emigration as a remedy for the ‘condition of the people’ in the 1820's, can be found in the Horton Papers at the Derby Borough Public Library.
Political Economy Club; Centenary Volume, pp. 224–5.
An interesting letter in the Hollander Collection at the University of Illinois to T. Hodgskin, 4 Aug. 1829, indicates that Mill found most of the members of the committee too squeamish at first to enter into this new field.
See e.g. Blaug, op. cit.; G. S. L. Tucker, Progress and Profits in British Economic Thought, 1650–1850, Cambridge University Press, 1960; B. A. Corry, Money, Savings and Investment in English Economics 1800–1850, Macmillan, 1961.
See above, pp. 55–56. Here he was chiefly concerned with its consequences for the market for corn and foodstuffs.
See below, pp. 231, 237. In his earlier work, Commerce Defended, there was an attempt, at least, to marshal evidence on this point; see above, pp. 145ff. Elsewhere, he was content with the view that the standard of living of the workers had not improved; see ‘state of the Nation’, Westminster Review, Oct. 1826, vol. III, p. 263.
See his Principles of Political Economy (ed. W. J. Ashley), pp. 748–9.
An early statement of this view can be found in his article ‘Colonies’ for the Supplement to the Encyclopaedia Britannica. See also above pp. 13-14 for further comment on the crucial rôle assigned by Mill to the middle classes.
Op. cit. as separately reprinted, pp. 12-13.
Autobiography, pp. 73-74.
See below, pp. 423.
See below, pp. 391-5.
See below, pp. 415-23. His remarks on land taxes in Commerce Defended (p.96 above) might be taken as an early indication of his attitude.
For Ricardo's comments see below p. 34on. John Stuart Mill remained closer to his father than to Ricardo on this issue; see his Principles (Ashley edn.), pp. 818-21.
See Blaug, op. cit., pp. 168-9.
See a review of pamphlets by Lauderdale, Malthus and others on the Corn Laws in the Eclectic Review, Jul. 1814, vol. II, pp. 1-17.
Letter to McCulloch, 18 Aug. 1825, reprinted in Bain, op. cit., p. 292; cf. his advice to Ricardo on the Bank of England cited above, p. 181.
Hansard Debates, 21 Mar. 1832, p. 638.
See his articles on these institutions in the Supplement to the Encyclopaedia Britannica, Edinburgh, 1824, vol. II.
‘Aristocracy’, London Review, Jan. 1836, vol. II, p. 284.
Ibid., p. 285. This subject was taken up and further developed by John Stuart Mill in his Principles (Ashley edn.), pp. 221-6.
See his Treatise on the Succession of Property Vacant By Death, London, 1848. Despite their early friendship, Ricardo's two disciples gradually drifted apart. See e.g. McCulloch's comments on Mill's Elements, quoted above, pp. 188-9; and Mill's remark to Brougham that McCulloch ‘has a knack of finding people stealing from him; though there is nothing to steal; for all that he has which is sound is either the opinion of some other previous writer or an error’. See Bain, op. cit., p. 393.
London Review, Jan. 1836, p. 294.
Op. cit., p. 22.
See Essay on Government (ed. E. Barker), Cambridge University Press, 1937, pp. 71-73.
Letter to Brougham, 3 Sep. 1832, in Bain, op. cit., p. 364.
Ibid., p. 365, see also a letter to Place, 25 Oct. 1831. ‘The fools! not to see that what they madly desire would be such a calamity for them, as no hands but their own, can bring upon them.’ B.M. Add. MSS. 35149, ff. 120-3. On the conflict at this time between middle- and working-class radicalism, see J. D. Hamburger, James Mill and the Art of Revolution, Yale University Press, London, 1963, pp. 79-80.