Front Page Titles (by Subject) III. Premium on Bullion as Evidence of Excess Issue: The Bullionist Position - Studies in the Theory of International Trade
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III. Premium on Bullion as Evidence of Excess Issue: The Bullionist Position - Jacob Viner, Studies in the Theory of International Trade 
Studies in the Theory of International Trade (New York: Harper and Brothers, 1965).
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III. Premium on Bullion as Evidence of Excess Issue: The Bullionist Position
The central issue of the controversy was made to turn on the question of whether the paper pound was depreciated, the bullionists insisting that it was depreciated, and most—though not all—of the anti-bullionists denying this. The answer to such a question obviously depends on how “depreciation” is defined, and the controversy suffered from a constant tendency to degenerate into merely terminological issues. As one bullionist writer caustically remarked: “Whether reduction of prices [of paper in gold] be depreciation or not, or equivalent to it, is a verbal question very fit to be argued in ‘Change Alley.’” 1 But always present, even when not clearly brought into the foreground of the discussion, were genuine and important issues of fact and policy.
For the bullionists the paper currency was depreciated if issued to excess, and many of the anti-bullionists also accepted this quantitative criterion of depreciation, or at least did not explicitly reject it. Defining depreciated currency as a currency issued to excess might seem merely to substitute one term of doubtful meaning for another. But the question, What is the proper amount of currency a country should have? Is an important one. To this question, as Hollander points out,2 Adam Smith had given no answer beyond saying vaguely that it was determined by “effectual demand,” 3 and the participants in the bullionist controversy were the first seriously to tackle it. The bullionists argued, or more often simply asserted, that a circulation exceeding in amount what, under otherwise like conditions, could have been maintained under a metallic standard, was in excess. There was little express objection to this criterion of a properly-regulated currency during the inflation phase, and serious discussion of its adequacy came only with the deflation phase of the controversy.
During the inflation phase the main issue in controversy was as to the proper method of determining the existence of excess of issue. The chief test of excess issue used by the bullionists was the existence of a premium on bullion over paper currency, although since they held that the level of prices was determined by the amount of currency and that the amount of premium of bullion over paper and the amount of discount of sterling exchange from the metallic parities were closely related, they also held that a relative rise of prices in England as compared to abroad and a fall in the sterling exchanges below parity were evidence of depreciation. The bullionist position was well expressed by Boyd: “The premium on bullion, the low rate of exchange, and the high prices of commodities in general, [are] ... symptoms and effects of the superabundance of paper.” 4 Their conclusions rested on the following reasoning: the rate of exchange between two currencies depended solely or mainly on their relative purchasing power over identical transportable commodities in the two countries; on quantity theory of money grounds, prices in the two countries depended on the quantities of money circulating therein; the price of bullion in paper currency was governed by the exchange rates with metallic standard currencies; therefore, if the exchanges were below metallic parity, and if there was a premium on bullion over paper, this was evidence that prices were higher in England, and the quantity of currency in circulation greater, than would have been possible under the metallic standard prevailing prior to suspension of convertibility.5
While Wheatley and Ricardo held that the relative rise of the prices of particular commodities in England, as compared to the prices of the same commodities in foreign countries having metallic standard currencies, would be proportional to the degree of excess of the English currency, they did not suggest that the existence of excess issue could in practice be tested by such price comparisons.6 The notion of an index number was still in its infancy. Evelyn had published his crude index number of English prices for the preceding two centuries in 1798, and Wheatley had commented on it in laudatory terms.7 But no current index number yet existed for England, and there was but little information as to the prices prevailing in other countries. To Ricardo, moreover, it seemed an absurd notion that the trend of prices in general, or of the general purchasing power of money, could be measured. Since prices fluctuated even under a metallic standard, he conceded that their fluctuations under an inconvertible currency could not be attributed solely to changes in the degree of excess of the currency. The only test from English prices alone of the existence of depreciation which he could consistently have accepted, therefore, would have been a comparison of the prices prevailing under inconvertibility with the prices which would have prevailed under convertibility, other conditions remaining the same, and in his treatment of arguments from price data Ricardo always adhered to this position.8 But Ricardo held that since the premium on bullion measured the degree of excess of the currency,9 it measured also the degree in which prices at anytime, say 1810, during the suspension of cash payments were higher, not than they had been in 1797, but than they would have been in 1810 if the currency were in 1810 at the amount which could then have been maintained in circulation under a metallic standard. Ricardo, however, put much stress on the question of the extent of the depreciation, as providing an answer to the question of how great a reduction in the currency would be needed to end the depreciation.
Sir Philip Francis, Reflections on the abundance of paper in circulation, 2d ed., 1810, p. 10. Cf. also, for a similar view, Mathias Attwood, A letter to Lord Archibald Hamilton, on alterations in the value of money, 1823, p. 8.
Op. cit., Quarterly journal of economics, XXV, 436–37.
Wealth of nations, Cannan ed., I, 402.
Letter to Pitt, 2d ed., 1801, preface, p. xxxi. Ricardo, by exception, sometimes put it more strongly, and referred to the existence of a premium on bullion as not merely evidence, but as proof of the existence of depreciation and excess issue. Cf. the title of his tract, The high price of bullion, a proof of the depreciation of bank notes.
This reasoning bears a superficial relationship to Cassel's so-called purchasing-power parity theory, but as will be explained subsequently (see pp. 382 ff., infra), Ricardo's stress on the particular prices of identical transportable commodities makes this part of his reasoning a truism if transportation costs and tariffs are abstracted from, whereas Cassel's doctrine, even if it be restricted, as Cassel does not restrict it, to internationally traded commodities only, instead of being a truism, is untrue. Cassel's doctrine, moreover, makes qualifications for the effect of foreign remittances which Wheatley and Ricardo expressly refused to make, and which they would have regarded—mistakenly—as fatal to their whole position if made.
Francis Horner, however, did suggest that the relative prices in England and abroad could be used as a test of the existence of depreciation of the English currency. See his review of Thornton's Paper credit, Edinburgh review, I (1802), 201.
Remarks on currency and commerce, 1803, chap. vi.
As did also at least one anti-bullionist. Cf. The substance of a speech by Castlereagh in the House of Commons, July 15, 1811, 1811, p. 15: “With the exception of the precious metals, bank notes have the same powers of purchasing all other commodities, which they would have had at this day, if no necessity for shutting up the guineas in the Bank, or for sending gold abroad in unusual quantities, had ever occurred.... Such I wish to be understood ... is the sense, in which I deny that bank notes are now depreciated.”
Most of the bullionists did not seriously concern themselves with the problem of how to measure the extent of depreciation but were content when they had demonstrated its existence. Cf. King, Thoughts on the effects of the Bank restrictions, 2d ed., 1804, p. 40, note: “nor will the most careful reference to the two tests of the price of bullion and the state of the exchanges enable us to ascertain in what precise degree a currency is depreciated: though the general fact of a depreciation may be proved beyond dispute.” (Italics in original.)