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CHAPTER III. - David Ricardo, The Works of David Ricardo (McCulloch ed.) 
The Works of David Ricardo. With a Notice of the Life and Writings of the Author, by J.R. McCulloch (London: John Murray, 1888).
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MR BOSANQUET'S ALLEGED FACTS, IN SUPPOSED REFUTATION OF THE CONCLUSION THAT A RISE IN THE MARKET PRICE OF BULLION ABOVE THE MINT PRICE PROVES A DEPRECIATION OF THE CURRENCY, CONSIDERED.
That the Negation of the above Conclusion implies the Impossibility of melting or exporting English Coin—an Impossibility contended for by nobody.
The next proposition of the Committee, the justness of which Mr Bosanquet disputes, he has thus stated:—“That the price of gold bullion can never exceed the Mint price, unless the currency in which it is paid is depreciated below the value of gold.” But this is not exactly the principle of the Committee. Their principle, when fairly stated, is, not that gold as a commodity may not rise above its value as coin, but that it cannot continue so, because the convertibility of coin into bullion would soon equalize their value. The words of the Committee are these,—“Your Committee are of opinion that, in the sound and natural state of the British currency, the foundation of which is gold, no increased demand for gold from other parts of the world, however great, or from whatever causes arising, can have the effect of producing here, for a considerable period of time, a material rise in the market price of gold.” Nothing appears to me to be wanting to make this a self-evident proposition but the admission, that the law, which forbids the conversion of gold coin into gold bullion, cannot be successfully executed.
I should have expected, therefore, that any one who denied its truth would have contended that the law was fully efficient for the purposes for which it was enacted; and that he would have brought forward authorities to justify this view which he had taken of it. But authorities for such an opinion would have been difficult to have been found. From the days of Locke till the present time I have nowhere seen the fact disputed. It is by all writers indiscriminately allowed, that no penalties can prevent the coin from being melted when its value as bullion becomes superior to its value as coin.
Locke calls the law which forbids the melting and exporting coin, “a law to hedge in the cuckoo.” Smith observes, “that no precautions of Government can prevent it.” On this subject, too, we have the authority of practical men.
The Bank Directors, in the year 1795, when the price of gold rose to 4l. 3s. or 4l. 4s. per ounce, after acquainting Mr Pitt with that fact, observe, “our guineas being to be purchased at 3l. 17s. 10½d. per ounce, clearly demonstrates the grounds of our fears; it being only necessary to state those facts to the Chancellor of the Exchequer.” Now, what were those fears, but that there would be a run upon them for gold coin, for the purpose of melting it into bullion? Mr Newland, too, when asked (by the Committee of the Lords, 1797,) “If there were now to be a new coinage, do you think a great deal would be melted down and privately exported?” Answered, “That depends entirely upon the price of bullion.” In the same Committee Mr Newland was also asked, “Is it more difficult to prevent false coining, or to prevent the melting down or exporting, when it is for their advantage to export it?”—Answer, “I am at a loss to guess how you can prevent either.”
These are but a few of the opinions which might be brought forward in support of the fact of the coin being melted into bullion whenever the price of bullion rises above the price of coin. I shall conclude, however, with the opinion of Mr Bosanquet himself. Speaking of the Committee, he observes, “They say nothing about the price of bullion, which is expected, doubtless, to return when the Bank shall have sufficiently controlled the exchange; although Mr Locke and many other writers have clearly demonstrated that the coins of any country can only be retained within it when the general balance of trade and payments is not unfavourable.” Now, under the circumstances supposed of a low exchange, what should take our coins from us but their superior value as bullion? Who would export coins if bullion could be bought at its Mint price? It is their superior value as bullion, therefore, that is the cause of their being melted and exported.
But the Committee have not been satisfied with simply stating a position which is almost self-evident; they have appealed to facts, and distinctly assert, that for a period of twenty-four years, since the recoinage, gold bullion in standard bars had not been at a higher price than 3l. 17s. 10½d. per ounce, with the exception of one year, beginning in May 1783, and ending in May 1784, when the price was 3l. 18s. per ounce. We are indeed informed by a letter from the Bank Directors to Mr Pitt, in October 1795, and it is on that authority reported by the Committee, that gold bullion was then as high as 4l. 3s. or 4l. 4s. per ounce; and it was stated by Mr Newland to the Lords' Committee in 1797, that the Bank had been frequently obliged to buy gold higher than the Mint price; and upon one occasion gave as much, for a small quantity which their agent procured in Portugal, as 4l. 8s.∗
These are the only facts on which Mr Bosanquet relies for overturning the principle in question. Prices not known to the public; not recorded in any list; given, too, by a corporation not remarkable for the good management of their concerns, are to be deemed the fair market price; and such exceptions as these are to overturn opinions grounded on a just theory, sanctioned by practical men, and confirmed by experience.
Is there any evidence that these prices continued even for a week? If we consult the price list, we shall find, that in July of that year, 1795, the price of gold is quoted 3l. 17s. 6d.; in December it is again quoted 3l. 17s. 6d., and in the intervening four months no price is marked. Does Mr Bosanquet think it possible that such a price as 4l. 4s. for gold could have continued, whilst it was to be obtained, by melting the coin, at 3l. 17s. 10½d.? Has he so good an opinion of the self-denial and virtues of all classes of the community? If he has, why are they not now to be trusted? What is the plea urged for not paying in specie? That at the present exchange, and present price of gold, it would be advantageous to export and melt the coin, so that there would be danger that every guinea would leave the country. But when you tell us that bullion has no connexion with coin, “that there is no point of contact between English and foreign gold,” there can be no danger of any one's being particularly desirous to possess coin, as, for the mere purposes of circulation, bank notes are equally, if not more convenient.
“If, “says Mr Bosanquet, “the demand for foreign gold was at any time very great, and the melting and exportation of guineas, however abundant, by any means effectually prevented, foreign gold might rise to double its price in English gold, and yet the intrinsic value of guineas remain undiminished.”
I might apply to this if of Mr Bosanquet the observation which he has made on the same word, when used by the Committee, your, if, is, a great peace-maker. But the above is not our case; the law cannot be effectually enforced. The remark, therefore, is of no use in the question before us.
If the law, however, could be effectually enforced, it would be attended with the most cruel injustice. Why should not the holder of an ounce of gold in coin have the same advantages from the increase in the value of his property, as the holder of an ounce of uncoined gold? From the mere circumstance of its having had a stamp put on it, is he to be made to suffer all the inconveniences from the fall in the value of his gold, in consequence of the opening of new mines, or from any other circumstances, and derive none of the benefits which may result from a rise in its value? This injustice to individuals would not be compensated by the slightest advantages to the community; as the exportation of the coin, were it freely permitted, would always cease when the value of our currency had risen to its true bullion value, and that is precisely the value at which the currencies of all countries are permanently fixed.
Such, in spite of the law, was the value of our currency till the Bank restriction bill, and for some time after. There it would inevitably fix itself again, if that most impolitic act were repealed. Increase the value of your currency to its proper level, and you are sure to retain it. No policy can be worse than forcibly detaining a million, for example, to perform those offices to which 800,000l. are fully adequate.
Consequences which would follow on the Supposition that the Currencies of other Countries (exclusive of England) were diminished or increased one half.
Let us suppose that the circulation of all countries were carried on by the precious metals only, and that the proportion which England possessed were one million; let us further suppose, that, at once, half of the currencies of all countries, excepting that of England, were suddenly annihilated, would it be possible for England to continue to retain the million which she before possessed? Would not her currency become relatively excessive compared with that of other countries? If a quarter of wheat, for example, had been both in France and England of the same value as an ounce of coined gold, would not half an ounce now purchase it in France, whilst in England it continued of the same value as one ounce?∗ Could we by any laws, under such circumstances, prevent wheat or some other commodity (for all would be equally affected) from being imported into England, and gold coin from being exported? If we could, and the exportation of bullion were free, gold might rise 100 per cent.; and for the same reason, if 35 Flemish schillings in Hamburgh had before been of equal value with a pound sterling, 17½ schillings would now attain that value. If the currency of England only had been doubled, the effects would have been precisely the same.
Suppose, again, the case reversed, and that all other currencies remained as before, while half of that of England was retrenched. If the coinage of money at the Mint was on the present footing, would not the prices of commodities be so reduced here that their cheapness would invite foreign purchasers, and would not this continue till the relative proportions in the different currencies were restored?
If such would be the effects of a diminution of money below its natural level, and that such would be the consequences the most celebrated writers on political economy are agreed, how can it be justly contended that the increase or diminution of money has nothing to do either with the foreign exchanges, or with the price of bullion?
Now, a paper circulation, not convertible into specie, differs in its effects in no respect from a metallic currency, with the law against exportation strictly executed.
Supposing, then, the first case to occur whilst our circulation consisted wholly of paper, would not the exchanges fall, and the price of bullion rise in the manner which I have been representing; and would not our currency be depreciated, because it was no longer of the same value in the markets of the world as the bullion which it professed to represent? The fact of depreciation could not be denied, however the Bank Directors might assure the public that they never discounted but good bills for bonâ fide transactions; however they might assert that they never forced a note into circulation; that the quantity of money was no more than it had always been, and was only adequate to the wants of commerce, which had increased and not diminished;∗ that the price of gold, which was here at twice its Mint value, was equally high, or higher, abroad, as might be proved by sending an ounce of bullion to Hamburgh, and having the produce remitted by bill payable in London in bank notes; and that the increase or diminution of their notes could not possibly either affect the exchange or the price of bullion. All this, except the last, might be true, and yet would any man refuse his assent to the fact of the currency being depreciated? Could the symptoms which I have been enumerating proceed from any other cause but a relative excess in our currency? Could our currency be restored to its bullion value by any other means than by a reduction in its quantity, which should raise it to the value of the currencies of other countries; or by the increase of the precious metals, which lower the value of theirs to the level of ours?
Why will not the Bank try the experiment by a reduction in the amount of their notes of two or three millions for the short period of three months? If no effects were produced on the price of bullion and the foreign exchange, then might their friends boast that the principles of the Bullion Committee were the wild dreams of speculative theorists.
The trifling Rise in the Price of Gold on the Continent owing solely to a Variation in the Relation of Silver to Gold.
But the price of gold, we are told, has risen on the Continent even more than it has here, because, when it was 4l. 12s. in this country, 4l. 17s. might be procured for it at Hamburgh, a difference of 5½ per cent. This is so often repeated, and is so wholly fallacious, that it may be proper to give it particular consideration.
When an ounce of gold was to be bought in this country at 3l. 17s. 10½d., and the relative value of gold was to silver as 15.07 to 1, it would have sold on the Continent for nearly the same as here, or 3l. 17s. 10½d. in silver coin. In Hamburgh, for example, we should have received in payment of an ounce of gold 136 Flemish schillings and 7 grotes, that quantity of silver containing an equal quantity of pure metal as 3l. 17s. 10½d. in our standard silver coin.
Gold has since that period risen in this country 18 per cent., and is now at 4l. 12s. per ounce, and it is said that the 4l. 12s. with which it is paid for is not depreciated. Now, as gold has risen 5½ more abroad than it has here, it must be there 23½ per cent. higher than when it was sold for 136s. 7g., and we therefore should be led to expect that we should now obtain for it at Hamburgh 167 Flemish schillings; but what is the fact? this ounce of gold, which we are told we sell at Hamburgh for 4l. 17s., actually produces no more than 140 schillings 8 grotes, an advance only of 3 per cent.; and for this the seller is indebted to the rise in the relative value of gold to silver, which, from 15.07 to 1, is now about 16 to 1. It is true that, when the ounce of gold was sold at Hamburgh at 3l. 17s. 10½d., or for its equivalent 136 schillings 7 grotes, the currency of England was not depreciated; that sum, therefore, could only purchase a bill payable in London in bank notes for 3l. 17s. 10½d.; but the currency of England being now depreciated, and being estimated on the Hamburgh exchange at 28 or 29 Flemish schillings instead of 37, the true value of a pound sterling, 140 schillings 8 grotes, or 3 per cent. more than 136s. 7g., will now purchase a bill payable in London in bank notes for 4l. 17s.; so that gold has not risen more than 3 per cent. in Hamburgh, but the currency of England, on a comparison with the currency of Hamburgh, has fallen 23½ per cent.
In further proof of the truth of my assertion, that it is not gold which has risen 16 or 18 per cent. in the general market of the world, but that it is the paper currency, in which the price of gold is estimated in England, which alone has fallen, I will subjoin an account of the lowest prices of gold in Hamburgh, Holland, and England, in the year 1804, and the highest prices in each of those countries in the year 1810, by which we shall be enabled to ascertain the actual rise in the price of gold measured in the currencies of each. This account was furnished to the Bullion Committee by Mr Grefulhe, and is numbered 56.
Now, in Hamburgh and in Holland, where the currency is silver, gold may not rise 3 per cent. only, but 30 per cent., without its being any proof of the depreciation of the currency; it proves only an improvement in the relative value of gold to silver. But in England, where the price of gold is estimated in gold coin, or in bank notes representing that coin, a rise of 1 per cent. cannot take place without its proving a corresponding depression∗ of the coin or paper. This observation is equally applicable to the fact mentioned by Mr Bosanquet, and of which he himself seems aware, of gold having varied in Hamburgh no less than 8 per cent. within a period of two years.
As there is an acknowledged difference between the price of standard gold bars and the price of gold coin reduced to the English standard, arising out of the latter being a more marketable commodity on the Continent,∗ I cannot admit the inferences which Mr Bosanquet draws from the comparison of Mr Grefulhe's paper (No. 58) with the paper, No. 60, in the Report. It would be first necessary to ascertain whether the prices of gold, as quoted in these papers (and they do not quite agree), were for gold in coin, or for gold of any other description; and whether the prices of gold in this country at different periods were always for gold of the same quality.
Mr Bosanquet observes that, “From the calculation furnished by Mr Grefulhe to the Committee, it appears that, in the spring of 1810, an ounce of gold of English standard weight was worth at Hamburgh 4l. 17s. sterling,—the price being 101, and the exchange 29s.” The reader must recollect that it is 4l. 17s. in bank notes that is here meant, as I have already explained. But I cannot admit the perfect accuracy of this statement. The exporter of an ounce of gold, purchased here at 4l. 12s., would at least have had to wait three months before he could have received the 4l. 17s., because, after the gold is sold at Hamburgh, the remittance is made by a bill at 2¼ usances, so that, allowing for interest for this period, he would actually have obtained a profit of 4¼ per cent. only; but, as the expense of sending gold to Hamburgh is stated in evidence to be 7 per cent., a bill would at this time have been a cheaper remittance by 2¾ per cent.
Now, allowing that Mr Bosanquet is perfectly accurate in his statement, that the price of gold was in this country at 4l. 12s. during the months of June, July, August, and September 1809, as well as in the spring of 1810, and that in all these instances such price was given for gold of the same quality, his conclusion that in those months in the year 1809 a profit of 5½ per cent. could be made by the exportation of gold, over and above the expenses, is not warranted by the fact. “If, at 101 and 29,” observes Mr Bosanquet, “there was a profit on the export of gold from hence to Hamburgh of 5¼ per cent., it follows that at 104½ (the prices in Hamburgh June, July, August, and September 1809), and 28s., there was a profit of 12½ per cent.; or, deducting the expenses of conveyance, that gold, if bought here at 4l. 12s. per ounce, was a cheaper remittance by 5½ per cent. than a bill at the current exchange.” As I have already shown that when the exchange was 29, and the price of gold in Hamburgh 101, gold was a dearer remittance than by bill by 2¾ per cent., it follows that at 28s. and 104½, it was only cheaper by 4¼ per cent.
These facts prove that in June, July, August and September 1809, whilst the exchange was at Hamburgh 28s. and gold 104½, the real exchange was in favour of Hamburgh; whilst, in the spring of 1810, it was so much less favourable that it would not cover the expenses attending the importation of gold.
As for the rise of gold in Hamburgh with an invariable exchange, it is what would have been naturally expected if there had been a corresponding rise in the price of gold here. In proportion as the English currency becomes depreciated as compared with gold, will it become worth fewer of the schillings of Hamburgh, unless a rise in the value of gold at Hamburgh should counteract the depreciation, by making a gold pound sterling more valuable.
The exchanges, again, would partake in all the variations in the value of a depreciated pound sterling, whilst the price of gold continued invariable at Hamburgh.
“It appears,” says Mr Bosanquet, “by the return from the Bullion office at the Bank, No. 7 and 8 in the Appendix to the Report, that the total amount of gold bullion imported and deposited in the Bullion-office in 1809 amounted in value to only L.520,225 That during the same period, the quantity of gold delivered out of the Bullion-office amounted in value to L.805,568 of which only 592l. was not exportable.
“The amount of the importation is therefore such as, when compared with the amount of exports and imports, and that of the circulating medium, to justify the assumption of comparative scarcity; and the excess of delivery beyond the importation is sufficient evidence of unusual demand.”
The fact itself here insisted on would be of little importance in the question which we are now discussing; but it appears to me that Mr Bosanquet is not warranted in his conclusions by the statements in the accounts to which he refers.
The excess of delivery beyond the importation is not any evidence of unusual demand, as it is accounted for by the following note to No. 7, from which the larger sum is extracted.
“Note. —The above is the amount of gold which has passed the Bullion-office in the time above named, as sales and purchases by private dealers, but which may have passed more than once the Bullion-office, having no information generally from whence the seller procures his gold.”
The importations stated in No. 8 are actually deposited by importers from abroad, and can only be received once. Besides this objection, these accounts were not fair subjects of comparison, No. 7 being made up to the 18th April 1810, No. 8 to 30th March 1810.
“The point of view in which these facts are important,” continues Mr Bosanquet, “is that which places the amount of gold imported or delivered in line of comparison with the amount of paper currency, supposed to be depreciated on the evidence of the increased price of bullion. The advance of 12s per ounce on the total quantity of gold delivered in one year—about 200,000 ounces—amounts to 120,000l. or 130,000l., and this is assumed as an unequivocal symptom of a depreciation of 12 or 13 per cent. on 30 or 40 millions of paper, the probable amount of our paper currency.” “We may soon expect to be told that the value of bank notes has increased, because the paper on which they are made is somewhat dearer than heretofore.”
The value of a bank note is ascertained, not by the number of transactions which may take place in the purchase or sale of gold, but by the actual comparative value of the note with the value of the coin for which it professes to be a substitute.
As it is allowed that a Government bank might force a circulation of paper, although our Bank cannot, how would Mr Bosanquet calculate the depreciation of such forced notes but by a comparison of their value with the value of bullion? Would he think it necessary to inquire whether 100 ounces only had been the amount transacted in the year, or whether it had been a million? If gold be not a test by which to estimate depreciation, what is? Whilst it is a criminal offence to buy guineas at a premium, it does not seem probable that we can possess the only test which would satisfy these gentlemen, namely, two prices for commodities, a price in guineas, and another in bank notes. They might, even in that case, contend, that it was the scarcity of gold abroad which had raised the value of the guinea.
Failure ascribed to Mr Locke's Theory relative to the Recoinage in 1696.
It is correctly stated by Mr Bosanquet, that Mr Locke's theory was similar to that now held. He did most certainly maintain that an ounce of silver in coin could not be less valuable than an ounce of silver bullion of the same standard. And the Committee now maintain, that in the sound state of the British currency an ounce of gold bullion cannot, for any length of time, be of more value than 3l. 17s. 10½d., or an ounce of gold coin: but neither of these opinions have been yet found incorrect. The effects expected from the re-coinage in King William's reign failed of being realized, not because Mr Locke's theory was followed, but because it was not followed. It did not fail because he could not be convinced that “the value of silver bullion was become greater than the standard or Mint price” (that being impossible if estimated in silver coin), but because his suggestions were not adopted.
It was proposed by Mr Locke that silver coin should be the only fixed legal standard of currency, and that guineas should pass current in all payments at their bullion value. Under such a system, a guinea would have partaken of all the variations in the relative value of gold and silver; it might at one time have been worth 20s., and at another 25s.: but, contrary to Mr Locke's principle, the value of the guinea was first fixed at 22s, and afterwards at 21s. 6d., whilst its value as bullion was considerably below it.∗ At the same time the silver coin, for the very reason that gold was rated too high, passed in currency at a value less than its bullion value. It was to be expected, therefore that the gold coin would be retained, and that the silver coin would disappear from circulation. If the value of the guinea in currency had been lowered to its true market value in silver, the exportation of the silver coin would immediately have ceased, and, in fact, this was the remedy which was at last adopted. The matter being referred to Sir I. Newton in 1717, then master of the Mint, he reported, “the principal cause of the exportation of the silver coin was, that a guinea, which then passed for 21s. 6d., was generally worth no more than 20s. 8d., according to the relative value of gold to silver at the market, though its value occasionally varied.” “He then suggested, that 6d. should be taken off from the value of the guinea in order to diminish the temptation to export and melt down the silver coin, acknowledging, however, that 10d. or 12d. ought to be taken from the guinea, in order that gold might bear the same proportion with silver money in England which it ought to do by the course of trade and exchange in Europe.”† The same effects would have followed without the intervention of Government, if the relative value of gold and silver in the market had so varied as to have made them agree with the Mint proportions.
Lord Liverpool, in speaking of the re-coinage in 1696, is of a very different opinion from Mr Bosanquet;—so far from considering that measure as having “subjected the nation to disappointment and inconvenience, under which we still labour, and to an unprofitable expense of nearly 3 millions sterling,” he observes, “that great as this charge was, the losses which the Government as well as the people of this kingdom continued daily to suffer till the re-coinage was completed, justified almost any expense which might be incurred for their relief.”
Mr Bosanquet is not quite correct in saying, page 34, that the price of silver has never been under the Mint price since the recoinage in the reign of King William. On a reference to Mr Mushet's tables, it appears that it was as low as 5s. 1d. in 1793 and 1794, and in 1798 it fell to 5s., which was the occasion of the law for prohibiting the coinage of silver which I have already noticed.‡
MR BOSANQUET'S OBJECTIONS TO THE STATEMENT, THAT THE BALANCE OF PAYMENTS HAS BEEN IN FAVOUR OF GREAT BRITAIN, EXAMINED.
Having considered all those points deemed so important by Mr Bosanquet in contradiction of the opinion of the Committee, “that it is by a comparison of the market and Mint value of bullion, that the fact of the depreciation of the currency can be estimated;” and having, I trust, made it evident that there is no other test singly, by which we are enabled to judge of the sound or unsound state of our paper currency, I shall proceed to the consideration of the next disputed position of the Bullion Committee; namely, “That so far as any inference is to be drawn from Custom-house returns of exports and imports, the state of the exchanges ought to be peculiarly favourable.”
Mr Bosanquet has been at the trouble of consulting numerous documents to prove that the Committee have not only committed an error to the amount of 7,500,000l. in their estimate of the balance of exports, but other errors to a still greater amount; and that, in fact, so far from their opinion being well founded, that the state of the exchange ought to have been favourable to this country during the past year, the actual amount of the balance of payments to the Continent had been unusually great.
As I am desirous only of defending the principles of the Committee, and as these facts are by no means essential to those principles, I shall not enter into any examination of the correctness either of the statements of the Committee, or of those of Mr Bosanquet, but will at once concede to him the facts, difficult as he would find it to prove all of them, for which he contends.
That the balance of payments has been against this country cannot, I conceive, admit of dispute. The state of the real exchange sufficiently proves it, as that infallibly indicates from which country bullion is passing. It would, however, have been of some satisfaction to those who are desirous of clearly understanding this difficult subject, if Mr Bosanquet had acquainted us with the means which we possessed of paying the very large unfavourable balance for which he contends. Does he imagine that it has actually been discharged with our own hoard of gold? Do we usually keep unemployed such a large amount of bullion that we can afford to pay such balances year after year?
As we have no mines of our own, if we do not actually possess it, we must purchase it from foreign countries; but bank notes will be useless for such purpose. If the price of gold in bank notes be 4l. per ounce, or 10l. per ounce, we shall not obtain the slightest addition to our quantity of bullion, as it can only be procured by the exportation of goods. If we obtain it from America, for example, it is with goods we must purchase it. In that case, on a view of the whole trade of the country, we have discharged a debt in Europe by the exportation of goods to some other part of the world, and the balance of payments, however large it may be, must ultimately be paid by the produce of the labour of the people of this country. Bills of exchange never discharge a debt from one country to another; they enable a creditor of England to receive, at the place where he is resident, a sum of money from a debtor to England; they effect a transfer of a debt, but do not discharge it. That a demand for gold (if it could be allowed that our creditor would accept nothing but gold) might occasion a rise in its value, no one denies. If, therefore, goods had become exceedingly cheap, it would have been the natural effect of such a cause. But how is any rise in its price in bank notes to procure it, even if we suppose it hoarded in England?
The seller is not to be deluded with an increase of nominal value; it will be to him of little importance whether he sells his gold at 3l. 17s. 10½d., or at 4l. 12s. per ounce, provided either of those sums will procure him the commodities for which he intends ultimately to exchange his gold. If, then, bank notes to the amount of 3l. 17s. 10½d. be rendered of equal value in procuring the commodities which he seeks to purchase, with 4l. 12s., as much gold will be procured at one price as at the other. Now, can it be denied, that by reducing the amount of bank notes their value will be increased? If so, how can the reduction of bank notes prevent us from obtaining the same amount of gold, both at home and abroad, to discharge our foreign debt, as we now obtain by a nominal and fictitious price?
“At a moment,” says Mr Bosanquet, “when we were compelled to receive corn, even from our enemy, without the slightest stipulation in favour of our own manufacturer, and to pay neutrals for bringing it, Mr Ricardo tells us, that the export of bullion and merchandise, in payment of the corn we may export, resolves itself entirely into a question of interest, and that, if we give corn in exchange for goods, it must be from choice, not necessity. Whilst providing against famine, he tells us, that we should not import more goods than we export, unless we had a redundancy of currency.”
Mr Bosanquet speaks as if the nation collectively, as one body, imported corn and exported gold, and that it was compelled by hunger so to do, not reflecting that the importation of corn, even under the case supposed, is the act of individuals, and governed by the same motives as all other branches of trade. What is the degree of compulsion which is employed to make us receive corn from our enemy? I suppose no other than the want of that commodity which makes it an advantageous article of import; but if it be a voluntary, as it most certainly is, and not a compulsory bargain between the two nations, I do still maintain that gold would not, even if famine raged amongst us, be given to France in exchange for corn, unless the exportation of gold was attended with advantage to the exporter, unless he could sell corn in England for more gold than he was obliged to give for the purchase of it.
Would Mr Bosanquet, would any merchant he knows, import corn for gold on any other terms? If no importer would, how could the corn be introduced into the country, unless gold or some other commodity were cheaper here? As far as those two commodities are concerned, do not these transactions as certainly indicate that gold is dearer in France, as that corn is dearer in England?
Seeing nothing in Mr Bosanquet's statement to induce me to change my opinion, I must continue to think that it is interest, and interest alone, which determines the exportation of gold, in the same manner as it regulates the exportation of all other commodities. Mr Bosanquet would have done well, before he had deemed this opinion so extravagant, to have used something like argument to prove it so; and he would not have hurt his cause, if, even in the year 1810, he had explained his reason for supporting a principle advanced by Mr Thornton in 1802, the correctness of which was questioned in 1809.
Bullion will not be exported unless we have previously imported it for such purpose, or unless from some circumstances in our internal circulation it has been rendered cheap and less useful to us. If Milan decrees, embargoes, non-intercourse acts, &c., affect the exportation of commodities, they also affect their importation, as no country can long continue to buy unless it can also sell; and least of all, England, who by the abundance of her paper has driven from her circulation every vestige of the precious metals.
“If the currency be depreciated below the value of gold,” Mr Bosanquet tells us, “it is so positively, not relatively, and all exchanges must equally feel the influence of the depreciation.” (Page 20). Most true; and therefore if Mr Bosanquet could have shown that with any one country in the world whose currency is not debased nor depreciated, the exchange had been favourable to England, he would have successfully controverted the opinion of the Committee.
Some able writers on this subject have lately taken, I think, a mistaken view of the exportation of money, and of the effects produced on the price of bullion by an increase of currency through paper circulation.
Mr Blake observes, “All writers upon the subject of political economy that I have met with seem to be persuaded that, when the rate of exchange has deviated from par beyond the expenses of the transit of bullion, bullion will immediately pass; and the error has arisen from not sufficiently distinguishing the effects of a real and a nominal exchange;” and many pages are employed in proving, that on every addition to the paper circulation, even when a great part of the currency consists of the precious metals, the price of bullion will be raised in the same proportion as other commodities; and as the foreign exchange will be nominally depressed in the same degree, no advantage will arise from the exportation of bullion. The same opinion is maintained by Mr Huskisson, page 27.
“If the circulation of a country were supplied partly by gold and partly by paper, and the amount of that circulation were doubled by an augmentation of that paper, the effect upon prices at home would be the same as in the former case” (a rise in the price of commodities). “But gold not becoming, by this augmentation of currency, more abundant in such a country than in other parts of the world, as a commodity, its relative value to other commodities would remain unaltered; as a commodity, also, its price would rise in the same proportion as that of other commodities, although, in the state of coin, of which the denomination is fixed by law, it could only pass current according to that denomination.
“When paper is thus augmented in any country, the exportation of the gold coin, therefore, will take place; not because gold, as a commodity, is become more abundant and less valuable with reference to other commodities in such a country; but, from the circumstance of its value as currency remaining the same, while its price in that currency is increased in common with the prices of all other commodities.”
I should perfectly agree with these writers, that the effects on the value of gold, as an exportable commodity, would be as they describe, provided the circulation consisted wholly of paper; but no rise would take place in the price of bullion in consequence of an addition of paper currency, whilst the currency was either wholly metallic, or consisted partly of gold and partly of paper.
If an addition be made to a currency consisting partly of gold and partly of paper, by an increase of paper currency, the value of the whole currency would be diminished, or, in other words, the prices of commodities would rise, estimated either in gold coin or in paper currency. The same commodity would purchase, after the increase of paper, a greater number of ounces of gold coin, because it would exchange for a greater quantity of money. But these gentlemen do not dispute the fact of the convertibility of coin into bullion, in spite of the law to prevent it. Does it not follow, therefore, that the value of gold in coin, and the value of gold in bullion, would speedily approach a perfect equality? If, then, a commodity would sell, in consequence of the issue of paper, for more gold coin, it would also sell for more gold bullion. It cannot, therefore, be correct to say, that the relative value of gold bullion and commodities would be the same after, as before, the increase of paper.
The diminution in the value of gold, as compared with commodities, in consequence of the issues of paper in a country where gold forms part of the circulation, is, in the first instance, confined to that country only. If such country were insulated, and had no commerce whatever with any other country, this diminution in the value of gold would continue till the demand for gold for its manufactures had withdrawn the whole of its coin from circulation, and not till then would there be any visible depreciation in the value of paper as compared with gold, whatever the amount of paper might be which was in circulation.
As soon as the gold had been wholly withdrawn, the demand for manufactures still continuing, gold would rise above the value of paper, and would soon obtain that relative value to other commodities which subsisted before any addition had been made to the circulation by the issues of paper. The mines would then supply the quantity of gold required, and the paper currency would continue to be permanently depreciated. During this interval, the gold mines of such country, if it possessed any, could not be worked, because of the low value of gold, which would have reduced the profits on capital employed in the mines below the level of the profits of other mercantile concerns. As soon as this equality of profit were established, the supply of gold would be as regular as before. These would be the consequences of a great issue of paper in a country having no intercourse with any other.
But if the country supposed, as is the case with England, had intercourse with all other countries, any excess of her currency would be counteracted by an exportation of specie, and if that excess did not exceed the amount of coin in circulation, which could be easily collected by those who evade the law, no depreciation of the currency would take place.
Suppose England to have 1000 ounces of gold in the state of bullion, and 1000 ounces in the state of coin, whilst her exchange with foreign countries was at par; that is to say, whilst the value of gold abroad was precisely the same as here, and therefore could be neither advantageously exported nor imported.
Suppose, too, that the Bank were at such time to issue notes to an amount which should represent 1000 ounces more of gold, and that they were not exchangeable for specie. If her bullion retained the same value after as before the issue of paper (which is the point contended for), how could a single guinea be exported? Who would be at the trouble and risk of sending guineas to the Continent to be sold there for their value as bullion, while the value of bullion continued here as high as before, and consequently as high as the price abroad? Would not the coin be melted and sold as bullion at home, till the value of bullion had so much diminished in its relative value to the bullion of other countries, and therefore to the relative value of commodities here, as to pay the expenses of transportation; or, in other words, till the exchange had fallen to the price at which it would repay such expenses? At that price the whole 1000 ounces would go at once, or if any part were retained in circulation, it would not be of less value than an equal weight of gold bullion. I am all along considering the law as having no effect in preventing exportation, and if it be contended that the law could be strictly executed, that argument would be equally applicable if the addition to the currency had been made in gold coin, and not in paper currency.
It appears, therefore, evident, first, that by the addition of paper to a currency consisting partly of gold and partly of paper, gold bullion will not necessarily rise in the same degree as other commodities; and, secondly, that such addition will cause depression not in the nominal but in the real exchange, and therefore that gold will be exported.
But to return to Mr Bosanquet. He observes, “that the three propositions,” viz. those on which I have been commenting, “appear to have been brought forward by the Committee as well as by the authors on whose theories the Report is founded, to induce the admission of the depreciation of the paper currency of this country as the necessary consequence of the impossibility of accounting for the depression of the exchanges and the increased price of bullion in any other way. They may be termed negative arguments.”
Now, as far as I, who am one of the authors arraigned, am concerned, Mr Bosanquet is incorrect: the third of these propositions was not on any occasion brought forward by me. The fact of the balance of payments being for or against this country could be of little consequence, in my estimation, to the proof of the theory which I maintain. Whether a part of our exports or a part of our imports consisted of gold cannot in the least affect this question; it is abundantly certain that our currency is neither by ourselves nor by foreigners estimated at its bullion value. And why should our currency be degraded below such value more than those of America, France, Hamburgh, Holland, &c.? The answer is, because neither of those countries have a paper currency not convertible into specie at the will of the holder.
[∗]It appears that it was in 1795, and most probably in October, that the Bank gave 4l. 8s. for gold, as stated by Mr Newland. On being asked concerning the time by the Lords' Committee, he answered, “I believe it was about two years since the Bank gave about 4l. 8s. per ounce for gold; it was but a small quantity, it was soon stopt on account of its price. The Bank at that time thought it expedient to obtain gold from Portugal, which their agent could not do at a less price than 4l. 8s.”
[∗]That commodities would rise or fall in price, in proportion to the increase or diminution of money, I assume as a fact which is incontrovertible. Mr Bosanquet, in his admission of the effects on prices from the discovery of a mine, shows that he has no such doubts on this subject as the governor of the Bank, who, when asked by the Committee, “Do you conceive that a very considerable reduction of the amount of the circulating medium would not tend in any degree to increase its relative value compared with commodities, and that a considerable increase of it would have no tendency whatever to augment the price of commodities in exchange for such circulating medium?”—Answered, “It is a subject on which such a variety of opinions are entertained, I do not feel myself competent to give a decided answer.”
[∗]The Bank could not on their own principles, then, urge that most erroneous opinion, that the rate of interest would be affected in the money market if their issues were excessive, and would therefore cause their notes to return to them, because, in the case here supposed, the actual amount of the money of the world being greatly diminished, they must contend that the rate of interest would generally rise, and they might therefore increase their issues. If, after the able exposition of Dr Smith, any further argument were necessary to prove that the rate of interest is governed wholly by the relation of the amount of capital with the means of employing it, and is entirely independent of the abundance or scarcity of the circulating medium, this illustration would, I think, afford it.
[∗]This expression has been noticed by Mr Bosanquet as extremely theoretical, but I consider it so exceedingly correct that I have taken the liberty of using it after the Committee.
[∗]See last note, page 316.
[∗]It may be said, that, although guineas were by law prohibited from passing at more than 21s. 6d., they were not declared a legal tender till 1717; and, therefore, that no creditor was obliged to accept of them in discharge of a debt at that rate. But if Government received them in the payment of taxes at such value, the effects would be nearly the same as if they had by act of Parliament been made a legal tender.
[†]Lord Liverpool's letter to the King.
[‡]Since this was sent to the press I have seen the second edition of Mr Bosanquet's work, in which this inaccuracy is corrected.