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• Preface
• Studies In the Theory of International Trade
• Chapter I: English Theories of Foreign Trade, Before Adam Smith: I
• I. Introduction
• II. “ Mercantilism” and “bullionism”
• III. the Balance-of-trade Doctrine
• IV. Reasons For Wanting More Bullion
• V. Employment and the Balance of Trade
• Chapter II: English Theories of Foreign Trade, Before Adam Smith: Ii
• I. Legislative Proposals of Mercantilists
• II. the Collapse of Mercantilist Doctrine
• III. Some Modern Interpretations of English Mercantilism
• Chapter III: The Bullionist Controversies: I. The Inflation Phase
• I. the Participants In the Controversy
• II. the Factual Background
• III. Premium On Bullion As Evidence of Excess Issue: the Bullionist Position
• IV. Qualifications Conceded By the Bullionists
• V. Possible Objections to the Bullionist Position
• VI. the Anti-bullionist Position
• VII. the Balance of Payments Argument
• VIII. the Possibility of Excess Issue By Banks
• IX. Responsibility For the Excess Issue: Bank of England Vs. Country Banks
• X. Responsibility For Excess Issue: the Credit Policy of the Bank of England
• Chapter IV: The Bullionist Controversies: II. The Deflation Phase
• I. the Resumption of Cash Payments
• II. Responsibility of Resumption For the Fall In Prices
• III. the Economic Effect of Changing Price Levels
• IV. Ricardo's Position On the Gold Standard
• V. Reform Without Departure From the Metallic Standard
• VI. Paper Standard Currencies
• Chapter V: English Currency Controversies, 1825–1865
• I. Introduction
• II. the “currency School” -“banking School” Controversy
• III. the “palmer Rule ”
• IV. the Bank Act of 1844
• V. the Possibility of Overissue of Convertible Bank Notes
• VI. the Role of Deposits, Bills of Exchange, and “credit” In the Currency System
• VII. the Technique of Credit Control
• VIII. the Relation Between Bank of England Operations and Specie Movements
• IX. Currency Reform Proposals
• Chapter VI: The International Mechanism Under a Simple Specie Currency
• I. Introductory
• II. the Mechanism According to Hume
• III. an Omitted Factor? Relative Changes In Demand As an Equilibrating Force
• IV. Prices In the Mechanism: the Concept of “price Levels ”
• V. the “terms-of-trade” Concept
• VI. the Prices of “domestic” Commodities
• VII. the Mechanism of Transfer of Unilateral Payments In Some Recent Literature
• VIII. a Graphical Examination of Pigou's Analysis 1
• IX. Some Elaborations On the Basis of Pigou's Analysis
• X. an Alternative Solution
• XI. Types of Disturbance In International Equilibrium
• XII. Specie Movements and Velocity of Money
• XIII. Commodity Flows and Relative Price Levels
• XIV. Exchange Rates
• XV. A Criticism of the Purchasing-power Parity Theory 1
• Chapter VII: The International Mechanism In Relation to Modern Banking Processes
• I. Automatic Vs. Managed Currencies
• II. Primary and Secondary Expansion of Means of Payments
• III. Short-term Loans In the International Mechanism
• IV. Primary and Secondary Expansion In Canada , 1900–13
• V. the International Mechanism and Business Cycles
• Chapter VIII: Gains From Trade: the Doctrine of Comparative Costs
• I. the Nature and Origin of the Doctrine
• II. the Division of the Gain From Trade
• III. Trade In More Than Two Commodities
• IV. Trade Between More Than Two Countries
• V. Transportation Costs
• VI. Increasing and Decreasing Costs
• VII. Prices, Money Costs, and Real Costs
• VIII. Dependence of Comparative Cost Doctrine On a Real-cost Theory of Value
• IX. Differences In Wage Rates In Different Occupations
• X. Variable Proportions of the Factors and International Specialization
• XI. Variable Proportions of the Factor and Comparative Real Costs
• XII. “ Opportunity Cost” Analysis As a Substitute For Real Cost Analysis
• Chapter IX: Gains From Trade: the Maximization of Real Income
• I. “ Mass of Commodities” and “sum of Enjoyments”: Ricardo and Malthus
• II. Reciprocal Demand and the Terms of Trade
• III. Terms of Trade and the Amount of Gain From Trade
• IV. “ Net Benefit” In International Trade: Marshall
• V. Total Net Utility Derived From International Trade: Edgeworth
• VI. the Gain From Trade Measured In Money
• Appendix: a Note On the Scope and Method of the Theory of International Trade

V. Possible Objections to the Bullionist Position

In addition to the qualifications which the bullionists themselves made to their argument that the existence of a premium on bullion over paper, or a fall of the exchanges below the metallic parity, was a demonstration of the existence of excess issue as compared to what could have been maintained in circulation under convertibility, there were other valid qualifications which they either deliberately abstracted from or overlooked.

Throughout the controversy, currency was generally taken to mean metallic money and bank notes, bank deposits either being overlooked or else held not to be currency. It would, of course, be possible for bank notes to depreciate even if drastically reduced in volume if at the same time deposits were increased in relatively even greater degree. But unless there was reason to suppose that mere departure from convertibility would result in a change in the relative importance of currency proper and bank deposits, the failure to give consideration to the latter would be of no significance for the main theoretical issue in controversy.

Similarly, a currency might depreciate because of an increase in its velocity of circulation, its amount meanwhile remaining constant or even falling. This was generally recognized at the time, but it was tacitly assumed, then and later, not that velocity remained constant—for it was known that it was subject to variation with the state of business confidence, with improvements in the means of communication, and with the development of clearinghouse and other arrangements for “economizing currency,” 1 but that velocity would not be altered merely by the suspension of convertibility. If changes in velocity due to changing degrees of confidence in the future of the currency be disregarded, this assumption could not be expected to be a source of serious error. Under convertibility the actually circulating medium, if deposits and bills of exchange be disregarded, was partly coin, partly paper; under inconvertibility it was wholly paper. It is conceivable that individuals would tend to hold smaller cash balances in proportion to the volume of their transactions if the currency was paper than if it was coin. Holding of paper involved risk of loss through fire, or through failure of the issues. Paper money could be shipped from one point to another more promptly, more safely, and if in small quantities more economically, than could specie, for paper money could be sent by post, whereas specie remittances required private couriers, who had to be convoyed because of the danger of robbery on the highways. This would tend to lead to the holding on the average of larger cash balances relative to volume of transactions if the currency were specie than if it were paper.2 But it seems doubtful that this could have been an important factor.

On both a priori and empirical grounds, however, velocity should be expected to rise as the volume of means of payments and the price level was rising, and thus measurement of the percentage of excess of currency from the percentage of discount of paper in terms of gold would tend to exaggerate the degree of excess during rising prices and to underestimate it during falling prices.

A more serious qualification to the validity of the bullionist position lies in the fact that under inconvertibility speculative anticipations of depreciation or appreciation of the currency would affect the willingness of individuals to hold the currency and would thus influence its velocity of circulation and its value in relation to gold, to foreign currencies, and to commodities, independently of the effects of variations in its quantity. In modern times, as we now know only too well, such speculative factors can dominate for an appreciable length of time the metallic or exchange value of an inconvertible paper currency. There is every reason to believe that such speculative factors were also operative in some degree during the period of the bullionist controversy.

Both the bullionists and the anti-bullionists were aware of the possibility that speculative factors were influencing the value of the paper pound. Neither side, however, openly charged—or conceded—that such factors were an actual influence in lowering the value of the paper pound. It may be that neither side was altogether frank in dealing with this question, which under the circumstances prevailing was a delicate one. The anti-bullionists could not maintain as they did that the management of the currency was beyond criticism and at the same time admit that there was sufficient lack of confidence in its immediate future to lead to flights from the currency to hoarded bullion, to commodities, or to foreign currencies. The bullionists, on the other hand, may have feared that if they made such a charge they would lay themselves open to attack on the ground that they were attempting to bring the national currency into “discredit” at a time of national emergency, and therefore may have refrained from saying all that they believed, although I have not found any evidence of this. In any case, the bullionists, whether from discretion or from conviction, took pains to concede that the paper currency was not “discredited.”

Silberling and Angell misread into the bullionist writings in general the positive charge that the depreciation of the paper pound in relation to bullion was in part at least a “qualitative” depreciation, and they find something absurd in such a charge. Silberling claims to find in Ricardo's writings the doctrine, which he clearly regards as a strange one, that the “fall” in paper money was due to “a mere inherent debasement in quality” of the paper currency rather than to its issue to excess. He concedes that “debasement” could readily be translated into “excess,” if by excess is meant the amount exceeding the quantity at which the price of gold in paper would be at its mint par.3 But Ricardo repeatedly and uniformly insisted that he meant just this by excess.

Angell follows Silberling in finding among the bullionists adherence to the notion of a qualitative depreciation of the currency, and in treating it as an absurd notion, but his interpretation of the bullionist position in this connection is different from Silberling's. Angell claims that Boyd, Ricardo, and other bullionists held that an excess of currency led first to “a positive degradation of the standard” and that this degradation in turn led to a rise in prices, “the degradation thus being a distinct and ‘intermediate’ step between the increase in currency and the rise in prices.” 4 Angell gives no specific references to Ricardo, but he refers to the following passage in Boyd:

He would say, that not only the currency of the country had been changed from a certain to an uncertain standard, but that the quantity of it, in all probability, had been greatly augmented by the issuing of paper, without the obligation of paying it on demand, and that thus the prices of all objects of exchangeable value necessarily feel the influence of a positive degradation of the standard, and of a probable augmentation of the quantity of money in the country, any one of them amply sufficient to discount for a considerable rise, but both united, adequate to still greater effects than any that had already been produced.5

Boyd here clearly assigns to “degradation” a distinct influence on prices over and above that resulting from any increase in the quantity of the currency. But there is no trace here of the time-sequence imputed to him by Angell. The context shows that the word “positive” which qualifies “degradation” is to be understood to mean “certain,” as contrasted to the “probable” increase of the amount of the currency. At the time Boyd wrote no report had been made as to the issues of the Bank since the Restriction, and increase in such issue could be only a matter of inference from circumstantial evidence. The question remains, what did Boyd mean by “degradation” ? No light is afforded by the context, but a reasonable explanation which makes his position intelligible is made possible by reference to a doctrine of other contemporary writers. Henry Thornton in 1797 had argued that the quantity of notes which it was proper at any time to issue depended much “on the state of the public mind, that is, on the disposition of persons to detain them.” Thus an impairment of the general credit “while Bank notes sustain their credit” would make possible, and desirable, an increase of the issue of notes without any impairment of their value.6 In 1802 he repeated this argument and supported it by reference to the effect of confidence in the paper money on the velocity of its circulation and on the size of the cash balances generally held by individuals.7 He pointed out, moreover, that while paper was falling in value, foreigners generally would expect “that the paper, which is falling in value, will, in better times, only cease to fall, or, if it rises, will experience only an immaterial rise, and this expectation serves of course to accelerate its fall.” 8 Thus the suspension of cash payments could conceivably result in a premium of bullion over paper even if no increase in the issue of paper had occurred. But Thornton denied that the loss of confidence in the English currency which could bring this about had occurred.

Lord King and George Woods expressed similar views:

But when the obligation to pay in coin ceases, the currency no longer retains this determinate value, but is in danger of being depreciated from two different causes; viz., by want of confidence on the part of the public, and an undue increase of the quantity of notes.... Though the persons who have the regulation of a currency not payable on demand should confine their issues within the most just and reasonable limits; yet if their credit or solvency is doubted, it is impossible that their notes can circulate at the full nominal value.9

Whether the depreciation of bank notes be owing to excess of issue or to the ticklish foundation upon which their present validity is built, the ever-varying standard of public opinion, the fact itself ... [i.e., of depreciation of paper in terms of bullion] is undeniable.... If it be alleged that the issues of the Bank, compared with the wants of the public, are not greater now than formerly, I answer, that this reasoning may imply a decreased confidence in the Bank of England, but that it does not throw the smallest light upon the question of depreciation.10

Ricardo likewise disclaimed any belief that in 1810 lack of confidence in the paper pound was a factor in its depreciation: “I am not aware of any causes but excess, or a want of confidence in the issues of the paper (which I am sure does not now exist), which could produce such effects as we have for a considerable time witnessed.” 11

The bullionists on this point were in error. Their error, however, lay not, as Silberling and Angell claim, in attributing some of the depreciation of the paper pound to loss of confidence in it, but in their refusal to do so, although this refusal may have been due to prudential considerations. For as Horner and Ricardo later acknowledged,12 some of the sharp fluctuations in the premium on gold could not be adequately explained as due to corresponding fluctuations in the quantity of paper money, and could be adequately explained only with reference to changes in anticipations as to the future of the paper pound, resulting in changes in willingness of Englishmen to hold cash balances in paper and of foreigners to hold securities payable in sterling.

The bullionist position is open to one further correction, but one of probably minor practical importance. Under a metallic standard, if due to foreign remittances or abnormally heavy grain imports there occurs a temporary rise in the relative demand for foreign bills, an export of specie will tend to occur, which will operate both to lower the amount of the domestic circulation and directly to increase the supply of foreign bills by the amount for which the exported specie itself can be exchanged. Under an inconvertible currency which has been on a depreciated basis for some time, so that all the bullion has already either been exported or passed into more or less permanent hoards, there will be no specie export to constitute a direct equilibrating element in the international balance of indebtedness. With the same volume of foreign remittances to be made, a greater contraction of the currency, therefore, will be necessary under inconvertibility than under a metallic standard if the exchanges are to be kept from falling by more than the cost of shipping gold, and conversely, a fall of the exchanges by more than the cost of shipping gold will not be absolute proof that the currency has been contracted in less degree than would have been necessary if the standard were metallic.

[1]Cf. the Bullion Report, pp. 63–64.

[2]Cf. Walter Hall, A view of our late and of our future currency, 1819, p. 70:

It is now discovered, that the activity of the circulation multiplies its actual amount, and that it is a point of more importance to ascertain the velocity of the motion than the size of the wheel; but it is probable that this also depends, in some degree, on the nature of the currency, and that were specie again to form the medium here, a larger amount of it would be required for the same operations than of the paper which it replaced.

[3]“Financial and Monetary Policy of Great Britain,” Quarterly journal of economics, XXXVIII, 425, 436.

[4]Theory of international prices, pp. 45, 59, 60. Angell comments that “an understanding of this chain of reasoning is important because it provides the only satisfactory key to the contradictory pronouncements upon monetary theory of the later writers, even those of Ricardo.” (Ibid., p. 45.)

[5]Walter Boyd, A letter to Pitt, 1st ed., 1801, pp. 64–65. (Italics in original.)

[6]Report of the Lords Committee, 1797, pp. 72–73.

[7]Paper credit, 1802, pp. 65–67.

[8]Ibid., p. 65.

[9]King, Thoughts on the effects of the Bank Restrictions, 2d ed., 1804, pp. 5–6. King also conceded that no loss of confidence in the English currency had as yet occurred. Ibid., p. 24.

[10]George Woods, Observations on the present price of bullion, 1811, p. 46. (Cf. also p. 184, infra.) For other instances of similar recognition of the possible contribution of speculative factors, or “discredit,” to the discount on paper, see Henry Parnell, Observations upon the state of the currency in Ireland, 1804, p. 55; Bullion Report, 1810, pp. 22, 39; David Buchanan, Observations on the subjects treated of in Dr. Smith's ... The wealth of nations, 1814, p. 88: “The value of a paper currency will ... vary from its standard, by reason either of discredit or of excess. Where the security is defective, the value will fluctuate with the risk of ultimate loss, which may at length be such as entirely to stop its circulation....” These writers also refrained from making the positive charge that the paper currency was “discredited” in this sense. Cf. also Wheatley, Theory of money, I (1807), 97: “It is to the aggregate quantity of the currency of a country that we are to look, and not to the state and quality of its coin, for the real cause of the fluctuation in the market price of its money.”

[11]Reply to Mr. Bosanquet's observations, Works, p. 363.

[12]See infra, pp. 201–02.