The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface.
• Chapter I.: History of American Currency.
• Chapter II.: The English Bank Restriction.
• Chapter III.: Austrian Paper Money. *
• Appendix.: Report From the Select Committee On the High Price of Gold Bullion.

CHAPTER II.

The English Bank Restriction.

In the year 1795, the currency of the British Islands consisted of the notes of the Bank ol England, the English country banks, the Scotch banks, the Bank of Ireland, and the Irish country banks, and of coin. By the monopoly clause of the charter of the Bank of England, no banking firm consisting of more than six partners could issue demand notes in England. Strong joint stock banks were therefore illegal, but tradesmen of every grade set up as “ bankers,” and issued notes. These were the “ country banks.” They were not chartered banks, but private bankers who issued notes. The Scotch system was a perfectly free one. There were three great chartered banks. The others were joint stock companies and free partnerships, and they conducted their business solely on business responsibilities. After some unlucky experiments in fancy banking, during the last century, they settled down to solid, conservative methods of operation. They meet with encomiums on every hand, and they deserve them, but the reason why they deserve them is lost sight of by those who fix their attention on the system. The system is the best conceivable; but it involves one indispensable condition of success. It requires vigilance, sagacity, science, and moderation on the part of the bankers. The freer any system is, the more it requires these characteristics. The Scotch banks have succeeded because their managers have possessed these qualities. The same system, on a “ paper basis,” or managed by unreasoning and ignorant avarice, is a short road to ruin. The Bank of Ireland and the Irish country banks were very similar in their organization and relations to the English banks.

The circulation of the Bank of England, in February, 1795, was £14,017,510; its specie,.£6,127,720. The circulation of the English country banks at this time is not known, no statistics having been collected. It was estimated in the parliamentary debate of 1811 to have been from four to six millions. The amount of specie in circulation in 1795 was estimated in the same debates at from twenty-five to forty millions. The Lords' Committee, in 1819, gave this estimate for the circulation before the Restriction:

Lord Liverpool estimated the coin, in 1797, at thirty millions; Mr. Rose, at forty millions; Tooke, after reviewing the evidence, thinks it was at most twenty-two and a half millions.

CAUSE OF THE RESTRICTION.

In 1796, the great powers being allied against France, and England assisting chiefly by subsidies, Pitt began to draw upon the Bank for the necessary supplies. Originally the Bank was forbidden to lend to government, except by permission of Parliament, but Pitt took advantage of an act of indemnity which was asked for in 1793 to cover previous cases in which the Bank had done this, to make the act so read as to repeal the prohibition entirely. His drafts becoming more and more exhaustive to the specie of the Bank, it proceeded to contract its notes. To the alarm thus occasioned, came, in addition, a rumor of intended invasion. A run on the country banks followed, which precipitated a demand on the Bank of England. In February, 1797, the specie reserve was but little over one million. The Bank was meanwhile contracting its circulation with all its energy, and had reduced it in February, 1797, to nine millions. The directors declared to the Bullion Committee, in 1810, that they thought this had been a grave error and had greatly enhanced the crisis. The necessities of the government, in the meantime, were greater than ever.

Under these circumstances an Order in Council was issued forbidding the Bank to pay specie until the will of Parliament could be known. This order was issued on the 27th of February, and was extended to the Bank of Ireland on the 2d of March, 1797. Tooke (“Prices.” I. 204), says that the suspension might have been avoided by one or two days' more perseverance, and that the run on the Bank of Ireland was over before the order to suspend was received. The directors of the Bank of Ireland did not want to suspend. On the 3d of May, Parliament passed an act suspending payments in England and Scotland until the 24th of June. Notes under £5 were at the same time allowed to be issued. From the manner in which this suspension came about, by an injunction of the government, it is known as the Bank Restriction.

ACTS CONTINUING THE RESTRICTION.

On the 22d of June, 1797, the Restriction was continued until one month after the next meeting of Parliament. On the 30th of November, 1797, it was continued until six months after the war should close. On the 3d of Jan., 1799, the Bank, having over seven millions of bullion, declared itself ready to pay sums under £5 in coin, and to redeem its notes dated before January 1st, 1798. Its notes had increased from eleven to sixteen millions. April 30th, 1802, the Peace of Amiens having been concluded, the Restriction was extended until March 1st, 1803, although the Bank was ready to resume. February 28th, 1803, it was extended until six weeks after the next meeting of Parliament. On the 13th of December, 1803, war having been declared, the Bank Restriction was extended until six months after the ratification of a definitive treaty of peace. On the 18th of July, 1814, Napoleon having abdicated, and peace being anticipated, the Restriction was extended until March 25th, 1815. March 2d, 1815, it was continued until July 5th, 1816. March 21st, 1816, it was continued until July 5th, 1818, in order, as the preamble to the act stated, to give the Bank time to prepare for resumption. May 28th, 1818, this preamble was repeated before another act which extended the Restriction until July 5th, 1819. The Bank took no measures of preparation for resumption until after the act of 1819, to be mentioned below.

BANK-NOTES NOT LEGAL TENDER.

The bank-notes were never made legal tender. The question whether they were to be such was put to Mr. Pitt in the House when the Restriction was ratified. He replied that they were to be so from the Bank to the public When pressed on this point, especially by Mr Nicholls, who asked, “whether it was his intention that the notes of the Bank of England should be a legal tender from the Bank to the public creditor,” and declared that, if so, it was an act of insolvency, the minister evaded a reply.

In 1801, Mr. Grigby demanded of Oakes & Co., country bankers, gold for a five-guinea note issued by them. They offered a £5 Bank of England note and five shillings. He refused the note, and demanded gold, and as he could not get it, he sued. He gained the suit at the assizes, and the question of law being reserved for the four judges of Common Pleas, they all agreed that the plaintiff was in his rights, and that notes were not legal tender between man and man.

EFFECTS OF THE RESTRICTION IN ITS FIRST
STAGE.

The harvest of 1800 was almost a failure. In the summer of that year the exchanges became unfavorable, and gold, which might be legally exported (i. e., that obtained by melting foreign coin), rose to a premium. The mint law provided that bullion should be coined for any one who presented it. One ounce of gold was coined into £3 17s. 10½d. of the coinage, without charge to the individual who offered it. He therefore received again just what he gave, only in a manufactured form. The only loss or expense to him consisted in the interest lost while he was waiting. The market cash price for gold was, on account of this loss, £3 17s. 6d. per ounce. At the time mentioned, June, 1800, exportable gold rose to £4 5s. per ounce in notes, and in January, 1801, it was at,£4 6s.

The premium on gold which might be “sworn off” for exportation ranged generally during this period three or four shillings per ounce higher than non-exportable gold. Tables showing the gold premium differ, some of them quoting domestic and some of them exportable gold.

When the question of the Restriction came up at the Peace, in 1802, it was argued that resumption was impossible because the exchanges were adverse. Lord King and Mr. Fox argued that to resume was the way to make them favorable. Their doctrine was that the redundancy of the paper was the cause of the premium on gold and the adverse exchange, but they found no hearers. The bank-notes in February, 1802, were fifteen millions, the specie in bank seven millions.

In 1804, the exchanges with Dublin became ad verse to that place, and a parliamentary committee was appointed to investigate the cause.

They ascribed the outflow of gold from Ireland to England to the redundancy and depreciation of the Irish paper. The doctrines they laid down were the same which were afterwards embodied in the Bullion Report, but this Irish report never attracted much attention.

COMMERCIAL AFFAIRS.

In 1806, Napoleon declared, by his Berlin decree, the coast of England under blockade, and forbade all trade with her. England retaliated by the Orders in Council blockading all ports of France and her allies. The Americans, who, as the chief neutral carriers, were the greatest sufferers, retaliated in the following year by the embargo, forbidding their ships to trade with either belligerent.

In 1806, the French invaded Spain. In 1807, Russia entered into an alliance with France. In the same year the English made an attack on Buenos Ayres and effected a lodgment there.

These political and military events had important effects on trade.

As the Baltic and Spain were closed, active speculations in timber and wool, of which the supplies were thus cut off, sprang up. The new opening in South America was also eagerly seized upon for speculative trade. At the same time great public works (bridges over the Thames, etc.,) were in progress, and a joint stock company mania broke out. The years 1808, 1809, and 1810 were marked by the progress of these speculative movements.

The Bank in the meantime was extending its issues. Following the February quotations still, we find that the note circulation in 1806 was 17 millions; in 1807, 16.9 millions; in 1808, 18. 1 millions; in 1809, 18.5 millions; in 1810, 21 millions.

This increase, however, is, in itself, a matter of very small moment. It is upon other incidental political and financial circumstances, which acted and reacted upon one another in the most complicated manner, and in regard to which our information is very meagre and unsatisfactory, that the results to be noticed depended. No one has ever made a thorough and comprehensive analysis of all the forces which were here in action, and divergent opinions have naturally arisen where men looked at the facts only in a certain point of view, or took account of only a certain limited range of facts. The present object is only to trace the broadest features of the situation, and deduce incontroverted inferences.

The country bank circulation is of the first importance amongst the factors which we have here to take into account, but unfortunately it is impossible to ascertain what it was. Its expansion, however, is certain, from the fact that the number of these banks, which had been 270 in 1797, was 600 in 1808, and 721 in 1810. Their circulation was estimated at 25 or 30 millions. That these issues were feeding the speculation is evident. It appears also that some very small notes were in circulation. Cobbett gives a representation of a seven-shilling note issued at Tunbridge Wells. (Vol. xviii. 172.)

The premium on gold was also steadily advancing during these years. In 1810, McCulloch puts the price of bullion at £4 10s. per oz., or 15 per cent, depreciation of the notes. The Bullion Committee put the depreciation at 15½ per cent. It makes a difference, as stated above, whether exportable or non-exportable gold is quoted.

THE BULLION REPORT.

The state of things above described attracted public attention, and in January, 1810, Mr. Horner moved for a committee “to inquire into the high price of gold bullion and to take into consideration the state of the circulating medium, and of the exchanges between Great Britain and foreign parts.” The report of this committee was published in August, 1810, but did not come up for discussion in the House until May, 1811.

THE QUESTIONS AT ISSUE.

As soon as the witnesses began to be examined, it appeared that there was a widespread belief that it was not the paper which had depreciated, but the gold which had advanced—a notion which has been advanced in other periods of paper money. The witnesses were bankers, merchants, and bullion brokers, and included the Governor and Deputy-Governor of the Bank of England. The first question to which the committee ad dressed itself was, therefore, this: Is the banknote depreciated in value? Is that the cause of the premium on gold, or is there some other? To us such a question may seem idle, but it certainly was not so when the Governor and Deputy-Governor of the Bank of England, and the Chancellor of the Exchequer, took the negative. As there was no public quotation of bullion, transactions being illegal, and men handled “guineas” and “shillings” in paper in ordinary trade, it is not so surprising that such a notion might at any rate be popular. It was assisted further by the great dislike to admitting that Bank of England notes were “depreciated” like the paper money on the continent.

There were facts also tending to show that disturbances in the value of the precious metals were taking place. Gold was growing dearer from obstructions in the supply, from hoarding, and from demand for war expenditures.*

Tooke (“Prices,” 1.130) infers that “there must have been a greatly increased demand for the precious metals and a consequently increased value of them during the war, more than sufficient to compensate for the utmost quantity spared from circulation as coin in this country, or even for the utmost rate of annual increase from the mines,” that is, that the enhancement of the value of gold equalled the depreciation of paper. J. S. Mill thinks that this is proved, but Chevalier (Ec. Pol. III. 454) puts the matter in the right light. If gold had risen there ought to have been less of it, and prices should have been lower. The bank paper, therefore, even if not absolutely increased, was in excess relatively to what it ought to have been and would have been under specie payments. Prices, if not bellow old specie figures, were relatively inflated.

I abstain from pursuing this suggestion, but regard it as the key to a correct solution of the contradictions in which many of the best authorities on this subject have been involved.

The second question which the committee had to consider, was: Why are the exchanges 18 or 20 per cent, against England?

The importance of this inquiry for us may not be at once apparent. We have very wisely separated the quotations of exchange from those of gold. We quote exchange in gold, and thus the fluctuations of the two are kept separate and presented independently. But when there was no quotation of gold, evidently the exchange rates were the indicator on which the variations between paper and bullion were marked.

But this is not all. The witnesses, almost without exception (and the exceptions were not clear and precise in their opinions), maintained that the adverse exchange was due to an adverse balance of trade or of payments. The question involved was, therefore, this: Is an adverse balance of trade the explanation of an outflow of gold?—or: Is a favorable balance of trade the force to which we must look to bring an influx of gold? There is no question in finance which now demands our study so imperatively as this one. The false notions of the balance of trade infest almost every discussion of our present circumstances which one reads or hears. It is assumed that the movement of the precious metals from country to country is caused by the balance of trade one way or the other, and, as the movement of the metals is a phenomenon of the first importance in any question of resumption, the reasoning which starts with this doctrine is all fallacious. The balance of trade was exploded by Quesnay and his followers a century ago, and was gibbeted in the Bullion Report, but it stalks the money market and the national treasury to-day, an uneasy ghost, which it seems impossible to lay.

It is a vexatious task, and one which always makes a scientific man feel ridiculous, to set vigorously to work to demolish an old error which no well-informed man any longer holds, but, in our present situation, and under our political system, popular errors are of the utmost importance, and no pains should be spared in patiently exposing them. The fallacy here is in the word “balance.” If it means equilibrium, it may be used correctly to denote the equality of exports and imports, but then it regulates itself, and no power can control it. If it means remainder, and suggests analogies of book-keeping, it is a mere myth to which no fact corresponds, and is to be entirely rejected. This question will be noticed further when we come to speak of the debate on the report.

The third question which the committee had to consider was offered by the conduct of the Bank. It is to be noticed that the English inconvertible paper was a bank issue of no fixed amount, while our present paper money was issued to an arbitrary limit at which it was established. The question, therefore, was: How shall the Bank know when it has given the country just the amount which it requires, and when it passes the limit so that its issues become excessive? Under a convertible system they found out, of course, by a demand on them for gold for exportation (clandestine or open, as the case might be). They could not, generally speaking, press notes on the public beyond the requirement, though with a usury law and a law against export this would be possible to some extent.

They therefore went on during the specie times, to discount all good bills, at short date, for real transactions, at five per cent, and never troubled themselves about gold or the exchanges. They pursued the same course under the Restriction, and the question before the committee was: Whether these conditions were sufficient, in the absence of convertibility, to guard against inflation, or whether the Bank might inflate while observing this rule?

This question has the highest importance for us, if we are to have “free banking” on paper.

The report of this committee is perhaps the most important document in financial literature. Its doctrines have been tested both ways, by disbelief and by belief, by experiment of their opposites and by experiment of themselves. They are no longer disputable. They are not matter of opinion or theory, but of demonstration. They are ratified and established as the basis of finance. They may be denied, as the roundness of the earth was denied even five years ago, and as Newton's theory of the solar system was denied until within twenty-five years, but they have passed the stage where the scientific financier is bound to discuss them.*

SUMMARY.

The doctrines of this report may be summed up thus:

• 1.The value of an inconvertible currency depends on its amount relatively to the needs of the country for circulating medium (only to a very subordinate degree on the security on which it is based or the credit of the issuer).
• 2.If gold is at a premium in paper the paper is redundant and depreciated. The premium measures the depreciation.
• 3.The limit of possible fluctuations in the exchanges is the expense of transmitting bullion from the one country to the other. If it costs 2 per cent, to transmit bullion, the fluctuations of the exchange due to the ratio of imports and exports never can exceed two per cent, above or below par. Par of exchange is the par of the metals, weight for weight, in the two coinages.
• 4.If there is a drain of the precious metals, It is due, aside from exportations to purchase food or pay armies, etc., to the presence of an inferior currency of some sort in the country it leaves.
• 5.If the inferior currency be removed, the exchanges will be turned, the outflow will stop, and, if any vacuum is created, gold will flow in to supply it.Gold will not flow in while the inferior currency fills the channels of circulation.
• 6.In the presence of a panic the duty of the Bank is to discount freely for all solvent parties.

The still more fundamental laws involved are these:

• 1.The amount of gold in the world will suffice to perform the exchanges of the world. If there be more or less, it will only affect the average level of prices the world over.
• 2.Every nation will have that portion of the stock of gold in the world which is proportioned to its trade. Each nation will have just as much as it needs.
• 3.A better and a worse currency cannot circulate together. The worse will drive out the better.

The committee also incidentally condemn the usury law and the law forbidding the exportation of the precious metals.

The discussion of these doctrines in the House and by the public will be noticed below. The reader will have a more correct impression of the attitude in which the doctrines of the report came up for discussion, if we present the events in their chronological order.

THE CRISIS OF 1810.

The Report of the Bullion Committee was ordered printed in June, 1810, and was before the public in August of the same year. Meantime, in July, 1810, the bubble burst. The accounts of the Bank were not published at this time and the amount of the discounts was not known. A motion of Mr. Huskisson on April 5th, 1811, to call on the Bank for such a return, was negatived. The Bullion Committee had called for a statement of discounts, and had received a paper under promise of secrecy. It leaked out in some way, and a set of figures were circulated, but their correctness seems always to have been in doubt. Macleod stated that the discounts in 1795 were £2,946,500; in 1809, £15,475,700; and in 1810, £20,070,600.

A report was made in 1832 of the state of the Bank from 1778 to 1831. It is given in Tooke's “Prices.” vol. II. There is a similar table (Feb. reports) in McCulloch's Adam Smith, p. 508, and Dickt, of Commerce, art. “Banks.” The two are combined in the diagram opposite p. 310, which presents the movements of the note circulation and bullion for each six months during the period 1790 to 1830.

Mr. Baring, in his evidence before the Bullion Committee, and Mr. Huskisson in his speech on the motion above referred to, bear ample testimony to the repetition of the old phenonemon of speculation under inflated paper issues. The enterprises undertaken were indeed of the most extravagant kind. For instance, speculations in South America took ludicrous shapes, being in no way adapted to the circumstances of that country. A company was formed to send out Scotch milkmaids to make butter in Buenos Ayres. But when the milkmaids saw the beasts they had to deal with they shrank from the encounter. A corps of laborers was required to secure the animals at milking time, and when the butter was made it was found that the people preferred oil.

The question of prices during this period leads to difficult and controverted questions which lie beyond the limits set for the present undertaking. The standard work on the subject is Tooke's “Prices,” in which a certain view is very ably defended. Mr. Tooke combated the popular notion, which seeks the explanation of all price fluctuations in the fluctuations of the amount of currency. It is permitted to doubt, however, especially in view of American experience, whether he made sufficient allowance for the radical differences between a convertible and an inconvertible currency, when he discussed the period of the Restriction on the same principles which he applied with so much justice to the convertible system. The popular metaphor of “floating,” although it is not well analyzed, is very apt. On a system of even nominal convertibility the motives of speculation and of price fluctuations lie outside of the currency in industrial and commercial circumstances. Speculation in the widest and best sense controls the amount of the currency. On an inconvertible system the amount of the currency controls speculation. If it is not redundant its effect is slight; if it is very excessive, it “floats” everything, and becomes the controlling consideration. No one believes that an inconvertible currency suspends the operation of any of the economic laws which govern prices, but, if it is redundant, it decides whether the fluctuations in price of a unit of a given commodity shall be above and below $1 or above and below $2. Every contraction or expansion alters this general level.

It is certainly erroneous to believe that redundant inconvertible paper increases all prices equally. It is one of its hardships that it increases prices of merchandise more than wages; of luxuries and comforts more than of staple articles; that is, it lessens the command of laborer, artisan, and farmer over comforts. The articles taken into account by Tooke are all staple articles, and he shows that these had not increased in price up to 1810. As a test of his argument, which cannot be regarded as conclusive, since it only shows in general that there were, ordinary economic causes to account for the direction up or down of every fluctuation of each article, but never measures the exact force of such causes, I have combined the prices given by him in his tables at periods corresponding to those for which the state of the currency is given in the diagram, (opposite p. 310) and inserted a line of prices. This balances off incidental causes, and ought to show whether the average of prices underwent any influence from the amount of the currency or not. There is no accord with the amount of the Bank of England circulation, but there is an unknown factor of country-bank circulation of which we have no estimate, save for the years 1810–1818. (See p. 284) The uppermost line in the diagram represents the total circulation during these years. The parallelism of the price line with it is evident. Also the general parallelism of the price line with the “price of gold” line is apparent, and, if the latter may be taken to indicate the fluctuation of the total amount of paper, then an influence of the amount of paper on the general average of prices seems undeniable. It is to be remembered that the English paper was never recklessly inflated, and that, up to 1810, it was managed very conservatively; secondly, that the control of the amount of currency over prices is more immediate and complete the more redundant it is (it seems that, up to 1810, at least, there had been no such inflation as to float prices); and thirdly, that political and military events were at this time exerting great and sudden effects on prices. The fluctuation of five hundred shillings on the price line in the first six months of 1817, was due to one article—oil. In the next six months, hops advanced two hundred shillings. The downfall in 1818 was due to the crisis.

The warehouse system had been introduced during the last four or five years, and large stocks of colonial produce were being carried by means of the expanded discounts above indicated. Manufactured goods found no market save as they could be smuggled to the continent. The raw materials on which speculation had fastened consequently fell in price. Commerce was almost at a stand-still. The goods exported to South America found no market, for the South Americans had nothing with which to buy, and the foolish enterprises in that direction could, of course, bring in nothing but shame and loss. British goods in the Baltic towns were confiscated, and the climax was reached when a period of fine weather restored hopes of the harvest, and ruined those who had been led by the bad weather early in the season to speculate for high prices in grain. “The crash began in July with the failure of some great commercial houses. In August a London bank stopped; and several country banks were brought down by its fall. Wild fluctuations in prices followed, and in November, the number of bankruptcies in England, which had usually been under one hundred, had risen to two hundred and seventy-three, ‘besides stoppages and compositions’ as the Commercial Report declared, ‘equal in number to half the traders in the kingdom.’ Manufacturers no longer trusted the merchants nor employed the operatives. In Manchester, ‘houses were stopping not only every day but every hour.’

“The commissions of bankruptcy for the year now amounted to two thousand three hundred and fourteen, of which twenty-six were against bankers. The hunger of the operative classes, and the outcry against machinery as the main cause, prepared the events of the succeeding dark years.”*

PUBLIC DISCUSSION OF THE BULLION
REPORT.

The Bullion Report falling in the midst of this period attracted universal attention. It was hotly discussed in all assemblages of merchants and bankers, and called forth a swarm of pamphlets. It was evident that the witnesses before the committee had fairly represented the opinions which were almost universal in the business community, and they were all contrary to those of the report. It was insisted that the paper had not depreciated; that paper was the best money; that to use gold and silver was barbarous and behind the age; that “guineas were an incumbrance” (although De Yonge was prosecuted for selling this incumbrance for export—a point which Cobbett was fond of reiterating); that a pound sterling was an “ideal unit;” that a pound sterling was the interest on £33 6s. 8d., at three per cent., which would be £1; that paper money supplied capital, made money plenty, and caused prosperity; that the country had grown up to the increased currency; that the war could not be carried on without paper; that the balance of trade “of course” drew off the gold; that it was impossible to resume while the exchanges were adverse; that Great Britain was in the debtor relation, and could not resume while she was so. In short, there is no possible fallacy now preached in the United States about paper money which was not then and there brought forward, with the single exception of the “elasticity” notion.* As their paper was not fixed in amount, that notion had no place. It seems that there can be no new fallacy to be discovered in regard to paper money. The field is exhausted.

THE PARLIAMENTARY COMMITTEE ON THE
COMMERCIAL CRISIS.

On the 7th March, 1811, a committee of the House on Commercial Credit reported. They attributed the crisis to overtrading, failure of South American speculations, and also to the warehousing system. A meeting of merchants in London passed resolutions to the effect that the crisis was mainly due to storing a large stock of goods in bond which the warehousing system had encouraged. The wealth and credit of England thus seemed to them to have caused its calamity. It was proposed in Parliament to issue six millions of Exchequer bills in loans to merchants and manufacturers, to enable them to tide over the crisis. Those who favored this plan adopted the above explanation of the crisis, though nobody explained how the colonial producers had forced Englishmen to carry their stocks for them while the continent was closed. The opponents urged that the currency was really redundant and was the favoring circumstance of the speculation, and that the issue of Exchequer bills would cause further expansion and enhance the difficulty The bill was passed, but only two millions were ever taken up.

THE DEBATE IN THE HOUSE.

Mr. Horner opened the debate on his Report on the 6th May, 1811, in a very able speech, giving an elucidation of the principles of the report. He had entered upon the investigation with no prejudices and no special knowledge of the subject, but he brought to bear upon it the resources of a well-trained mind, and a single determination to accept such results as might appear upon a full and careful investigation.

The propositions he advocated had, therefore, the character of scientific results, and the man who could so undertake an important inquiry in the face of popular clamor and prejudice, gave promise of the highest statesmanship. “He died,” in 1817, “at the age of thirty-eight, possessed of greater public influence than any other private man.”

I know of no more instructive documents for the student of finance than the debates of 1811 and 1819. They do not cover the more abstruse questions in regard to the regulation of a convertible currency, questions which yet require attentive study and a definite solution, but they avail to establish those fundamental propositions in regard to the meaning and function of money, which, if a man once thoroughly grasps them, guarantee him against the most flagrant fallacies which obscure the subject of currency, and enable him to perceive these fallacies whenever they recur in the thousand and one “schemes” which are now daily set afloat.

Of the three questions involved in the report, as stated above: Is the paper depreciated? Why are the exchanges adverse? How ought the bank to regulate its issues?—the first and third have no great importance for us. No one denies that our paper is depreciated, unless it be those who think that we have “grown up” to the currency, though that notion seems to have gone out of fashion again. The question of regulating an inconvertible bank paper is not our question, because our paper is fixed in amount. But the second question of the Bullion Committee has great importance. It is the one in regard to which doctrines opposed to those of the Bullion Report are most frequently affirmed and most profoundly believed amongst us, and there is no hope of any exit from our circumstances until we get to understand the laws which govern the distribution of the precious metals and those laws of currency which are connected therewith. It will be remembered, as stated above, that the question about the exchanges is really this question: If the exchanges are adverse to such a degree as to produce a serious and prolonged outflow of the precious metals, where must we look for the cause? Is it due to the balance of payments or to some deterioration of the currency? Or, to put the same question in another form: If we desire to produce an influx of gold, to what force must we look to cause it? Must we look to the “balance of trade,” or can we do anything in the matter save sit still and wait for the balance of trade to turn? Can we bring it about by correcting some error in the currency?

The answer to these questions given in the report and by those who supported it is, that the balance of imports and exports never can move the exchanges either above or below par more than just enough to start a movement of bullion. On a specie system, any outflow of bullion would bring down prices and immediately make a remittance of goods more profitable than one of bullion, and, if the exportation of bullion was artificially continued (as, for instance, to pay the expenses of a foreign war), it would reduce prices until a counter-current would set in and restore the former relative distribution all the world over. If all nations used specie, or even paper and specie, in only due proportion, it would be as impossible for one nation to be drained of specie as for New York harbor to be drained of water by the tide, and, on the same supposition, it would be as absurd for the Secretary of the Treasury or a committee of Congress to regulate the currency as for the same powers to see to it that New York harbor gets its fair share of water on every tide. If a country produces gold, its surplus product goes out as a commodity, without an unfavorable exchange, and does not here come into account. If therefore, there is an outflow of gold, serious and long-continued, accompanied by an unfavorable exchange, it is a sign that there is an inferior currency behind the gold, which is displacing it. The surplus of imports of goods above the exports of goods is nothing but the return payment for this export of gold, and is not a cause, but a consequence. If, finally, we want to turn this tide and produce an influx, there is only one way to do it, and that is simply to remove the inferior currency. As for waiting for the balance of trade to turn and bring gold into a country which has a depreciated paper currency, one might as well take his stand at the foot of a hill and wait for it to change into a declivity before climbing it.

The authorities of the Bank strenuously denied that their issues, so long as they were made at 5 per cent, on bills representing real transactions, at three months' date, could become excessive, or that the bank issues could affect the exchanges. The committee and their supporters held that this rule would not be a guarantee against inflation, but that, if the exchanges were adverse and bullion was being exported, it was a sign that the paper was excessive, and that the Bank should check its issues. The Bank maintained that it had nothing to do with the exchanges, and could not govern its issues by any reference to them. The bullionists maintained that while the paper was inconvertible, the adverse exchange and the premium on gold were the only signs by which the Bank could judge when its issues were excessive. Thus the real issue was, whether, in case of a drain of specie, we must look at the ratio of imports to exports, or at the ratio of paper currency to requirement, for the explanation of it, and the means of checking it.

In reviewing the debate briefly, I confine attention mainly to those parts which bear on this question of the exchange.

Mr. Horner offered sixteen resolutions, of which the most important may be condensed as follows:

• 1.That the legal tender in England is gold and silver only.
• 2.That a shilling is 1/62 of a troy pound of silver, 925/1000 fine.
• 3.That a “guinea” is 2/89 of a troy pound of gold, 11/12 fine.
• 4.That Bank of England notes promise to pay pounds sterling, a pound being 20/21 of a guinea as above.
• 5.That Bank of England notes are depreciated—are not worth what they stipulate to pay.
• 6.That the reason of this is an excessive is sue.
• 7.That the exchanges have been greatly depressed (or, as we should say, very high* ), for a long time, partly owing to heavy payments abroad, but chiefly to the depreciation of the notes.
• 8.That the Bank ought to regulate its issues by the price of bullion and the exchanges.
• 9.That the remedy is to return to convertibility.
• 10.That the law extending the Restriction be amended so as to resume in two years.

Mr. Rose criticised the report paragraph by paragraph, showing that it was contradictory to the evidence offered to the committee. This was perfectly true; the committee took the facts of their witnesses, but interpreted them in the sense diametrically opposed.

Mr. Thornton (member of the committee) cited the experience of the Bank of Paris. In 1805 it advanced indirectly on government anticipations. “The consequence of this transaction was an augmentation of the paper of the Bank of Paris. A drain of their cash followed; the diligences were found to be carrying off silver into the departments, which the bank, with a view to its own safety, had continually to bring back, with much expense and trouble. The circulating medium of the metropolis had now become evidently excessive. Greater facilities were afforded for borrowing in that quarter than in other places, and the country wished to partake in those opportunities of extending purchases which the metropolis enjoyed. But the paper of the bank would not circulate in the departments. It was therefore necessary first to exchange it for coin, and the coin being then carried away from Paris, the plenty of circulating medium would equalize itself through the French territory.... There arose a premium on silver at Paris, and an unfavorable exchange between Paris and the departments of France, and this was proportionate to the expense and trouble of bringing back the silver from the departments.... The Bank of Paris at length stopped payment. The government was consulted. The bank was directed to reduce its paper, and in the course of three months, having pursued this principle, it opened without difficulty. The discount on its paper, or, in other words, the premium on coin, had varied from 1 to 10 or 12 per cent., but after the reduction of paper it ceased. The exchanges of France with foreign countries had also turned about 10 per cent against that country.”

Mr. Vansittart opposed the resolutions. He argued that the committee ought to have recommended the repeal of the restriction on the exportation of the metals, in order to carry out their own principles. This was true; but he argued that it was illegal to export, therefore the committee were in the position of recommending by implication what was illegal. He denied that there was any “standard” in England, or ever had been, consisting of any weight of metal of a certain fineness, but asserted that it was the prerogative of the Crown to regulate the value of money. The proof of this was that silver was legal tender by tale up to £25, but everybody knew that the current shillings were worn below weight; therefore, because a man might put off smooth shillings on his creditor for a debt under £25, there was no standard of what a shilling ought to be in England. Also the law allowed guineas to be legal tender until worn 1 grain and a fraction below weight, therefore there was no fixed weight from and below which this grain and a fraction was to be reckoned.

He also made a great point of demanding to know whether “depreciation” meant depreciation relatively to bullion or to commodities, or referred to the credit of the issuer. No one took the trouble to reply that it made no difference with the fact.

He became the hero of the occasion by proposing counter-resolutions, that the pound sterling has no relation to any weight of metal of a given fineness, and that bank-notes “have hitherto been, and are at this time, held in public estimation to br equivalent to the legal coin of the realm, and generally accepted as such, in all pecuniary transactions to which such coin is lawfully applicable.” Guineas were at the time at 15 or 20 per cent premium, and members of both houses testified in the debate that, although specie had disappeared, and all prices were set in paper, yet there were two prices everywhere, when metal was offered.

This gentleman afterwards became Chancellor of the Exchequer and champion of the Sinking Fund, which was kept up by borrowing at a higher rate than it yielded. He ended life as Lord Bexley.

Mr. Huskisson (one of the committee) pointed to the fact that Spanish dollars, which had been imported for use as “change,” and which were worth 4s. 6d. in English coinage, had been rated at 5s., and then, as the depreciation went on, that it had been necessary to rate them at 5s. 6d. to keep them in circulation. He asked whether the believers in “abstract currency” ever heard of an abstract payment or an abstract dinner. Adverting to the notion that £1 was 3 per cent, of £33 6s. 8d., he asked, pertinently enough, whether this would not fit any conceivable depreciation. The conception of £1 was necessary to define £33 6s. 8d., which again was necessary to the definition of £1.

Mr. Morris stated a case which occurred in 1801, in which a creditor had refused tender of notes, and the court unanimously sustained him in his position that gold only was legal tender.

Mr. Parnell (one of the committee) took more clear and decided ground in some respects than any one else. All parties generally agreed in sparing the Bank. He refused to join them. “If, instead of one bank having been established with so immense a capital, and such great exclusive powers, the trade of banking had been left free, and several banks had been allowed to grow up with the improving wealth of the country, the public would have derived equal accomodation, without any of the risk or any of the evils to which it has been exposed by the enormous power that has been given to this one establishment.” He declared that the paper was in an unsound state before 1797. He stated the fundamental doctrine that “a country will always have as much coin as it wants, provided no impolitic act of legislation interferes to force it out of circulation.” He attacked the small notes, declaring that the notes under, £5 displaced coin equal to their amount.

Mr. Manning, who spoke for the Bank, declared himself “one of those old-fashioned, practical men who thought the balance of payments an article of great importance in the regulation of the exchanges.” Showing that the foreign remittances had been £26,000,000 the last year, he argued that the price of gold must have advanced.

Mr. A. Baring, who had been on the committee, and enjoyed high authority, gave more weight to the balance of payments than the committee, but joined them to a certain extent in attributing the unfavorable exchange to the paper. He thought the true cause for anxiety was the debt and not the paper issue.

Mr. Sharp (of the committee) showed that at Hamburg and Amsterdam, where there was no suspension, but where military oppression was at its harshest, the exchanges were favorable, and that at Paris, the only other place on the continent where inconvertible paper had not been issued, but where war expenditures were highest, exchanges were favorable and there was no drain of the metals.

The Chancellor of the Exchequer, Mr. Perceval, did not enter very deeply into the question. His point was, that no excess of circulation had been proved. He said that gold was not the standard, nor silver, but gold and silver bound down by law to a certain relation to each other. Unfortunately for this notion, no law can possibly bind them together.

Mr. Canning made by far the most eloquent speech on the subject. He advocated the resolutions of Mr. Horner, but thought it inexpedient to resume at that time. He wanted the resolutions passed, except the one for resuming in two years, in order to place the House on the record for sound financial ideas. Referring to the Chancellor's assertion that the excess had not been proved, he said that it was impossible to prove any such thing. No relation exists between the aggregate transactions and the requirements for currency, nor, if there did, would it be possible to ascertain the aggregate transactions. The rise in prices is a symptom, but only a symptom. There is no excess unless there is depreciation, and if there is depreciation there is excess. The only pertinent question is, therefore, whether there is depreciation.

“The noble lord (Castlereagh) has indeed devised a singular definition of this measure [of value]. He defines it to be a ‘sense of value in reference to currency as compared with commodities.’... ‘A sense of value!’ but whose sense? With whom is it to originate? and how is it to be communicated to others? Who is to promulgate, who is to acknowledge, or who is to enforce it? How is it to be defined? and how is it to be regulated? What ingenuity shall calculate, or what authority control its fluctuations? Is the sense of to-day the same as that of yesterday, and will it be unchanged tomorrow? It does fill me with astonishment that any man of an accurate and reasoning mind should not perceive that this wild and dangerous principle (if principle it may be called) would throw loose all the transactions of private life, all contracts and pecuniary bargains, by leaving them to be measured from day to day, and from hour to hour, by no other rule than that of the fancies and interests of each individual, conflicting with the fancies and interests of his neighbor.”

“No dream, it must be owned, could be more extravagant than the visions of those practical men who have undertaken to refine away the standard of the currency of the realm into a pure abstraction. There is indeed something perfectly ludicrous in the inconsistency and injustice with which they impute a love of abstraction to their opponents, while they are themselves indulging in the most wanton departures from substance and reality. ‘Beware of abstractions,’ say they to the Bullion Committee when they find fact and law laid down as the foundation of its report. ‘Beware of abstractions’ say they, to the honorable and learned chairman of the committee, when they find in his first seven resolutions nothing like theory or imagination, but a clear, concise,—a dry and faithful recapitulation of those rules which the statutes of the country have established for the weight and fineness of its coin.... And this admonition comes from whom?—from the inventors and champions of ‘abstract currency’—from those who, after exhausting in vain every attempt to find an earthly substitute for the legal and ancient standard of our money, have divested the pound sterling of all the properties of matter, and pursued it, under the name of the ‘ideal unit,’ into the regions of nonentity and nonsense!”

“In addition to the motives of policy, there are, as I have heard this night, not without astonishment and dismay, considerations of justice which preclude any systematic reduction of the amount of our paper currency. Such a reduction, it is argued, would change the value of existing contracts and throw into confusion every species of pecuniary transactions, from the rent of the great landed proprietor down to the wages of the peasant and the artisan. Good God! what is this but to say that the system of irredeemable paper currency must continue forever! What is it but to say that the debts incurred, and the contracts entered into, under the old established legal standard of the currency, including the debts and contracts of the state itself, are now to be lopped and squared to a new measure, set up originally as a temporary expedient?”

Referring to Mr. Vansittart's resolution about paper and gold being equal, he said:

“Speaking impartially, I must say that if I had seen this proposition anywhere but where it is, fairly printed and numbered in the right honorable gentleman's series, I should have thought it an invention of his antagonists, calculated to place the fallacy of his doctrine in the most glaring and ridiculous point of view, but carrying the license of exaggeration beyond pardonable limits, and defeating its purpose by the grossness of the caricature.”

“Suppose, for instance, ten millions sufficient to carry on all the transactions of the country, fabricate fifteen millions of paper instead of ten, the whole fifteen will circulate. The only consequence will be that the commodities for which it is exchanged will rise fifty per cent, in their nominal price. Make those fifteen millions twenty— the addition will, in like manner, be absorbed into the enhanced prices of commodities. Excess of currency cannot be proved to the conviction of those who will not admit depreciation to be the proof of it.”

Mr. Horner's resolutions were defeated by a vote, on the first, of 151 to 75, and the one for resumption in two years by 180 to 45.

Mr. Vansittart's counter-resolutions were passed on the fifteenth of May, the one declaring gold and paper equal by 151 to 75; and so the House put upon its records that a guinea was equal to a one-pound note and a shilling, when £100 paper would buy only £86 in gold.

In this debate the “theorists” and the “practical” men found themselves in sharp contrast. The Bullion Committee took the evidence of their witnesses as to fact but gave their own explanation of the facts. They carried the best thinkers in the House with them, but found the practical bankers and city men, and the great mass who did not understand the matter, and who had an invincible dislike to admitting that bank-notes were depreciated, against them. In this case, as always, theory and practice are inseparable. The city men had a theory of their facts. It was really one theory against another; the one drawn from a narrow routine: the other a philosophical and scientific generalization from a broad range of facts. The theorists were beaten, and the nation went on for eight years' further experiment of the paper. We have now to pursue the verdict of history and experience as between the two parties.

COMMERCIAL EVENTS FROM 1810 TO 1819.

“Nothing had been seen since the beginning of the century to compare with the distress of 1811 and 1812.... Our manufacturers were set fast, and could not pay wages on which their workmen could live; and workmen could not live on low wages when the average price of wheat was 112s, [the quarter, of 8 bushels], and that of meat 8d. or 9d. per pound. The ordinary course of manufacture, particularly of the hardware manufacture, was broken up. The factor* stepped in between the employer and the operative, and made his market of the necessities of both, leaving them discontented with each other. The employer sold off his stock at a loss, and the workmen made inferior wares by means of advances from the factor for materials.”†

Nature seemed to make common cause with war and bad finance. The winter of 1812 was extraordinarily severe, and the accidents by flood and fire were numerous. Crimes began to multiply in that accord between physical distress and moral decay so often noticed. Wages were down at starvation point. Spinners had 7s. 6d. per week in a time of high prices for the necessaries of life. The recent introduction of machinery and the extension of the factory system would have caused an inevitable period of pressure on hand-workers. Now these causes fell in with others to enhance the distress. The artisans, in striking analogy with our own farmers at the present time, sought their foe in the nearest and most palpable shape in which the bad circumstances of the time pressed upon them. They attacked the machines, burned the factories, and united in riotous disturbances. The corn laws were in full force, and prevented the relief which might have come from other countries in time of scarcity, while manufacturers were entangled in a mesh of restrictions of every description, more ruinous even than Napoleon's Decrees or the Orders in Council. “The war and famine price [of grain] of 1812 was reached again in the latter part of 1816, 1817, and 1818. The golden days of the deity that is found in no mythology—the anti-Ceres—were returned. But the people were starving. Misery and insurrection filled the land.” The harvest of 1815 was abundant, and to prevent importations, all such were prohibited when wheat was under 80s. In 1816, in spite of this law, the agriculturists were once more “in distress.” The years when they were not so, down to the repeal of the corn laws in 1846, were the few years when nature refused her bountiful returns.

In 1814 peace was restored, and it was believed that commerce must at once revive. Anticipating this, enormous exportations were made to the continent and to the United States, “The shippers found to their cost, when it was too late, that the effective demand on the continent for colonial produce and British manufactures had been greatly overrated, for, whatever might be the desire of the foreign consumers to possess articles so long out of their reach, they were limited in their means of purchase, and accordingly the bulk of the commodities exported brought very inadequate returns.”

They found that it is impossible to “inundate” a country with foreign commodities, or to “drain off its bullion” by foreign trade, if it does not want to be drained. As for a true exchange of goods, the laws hampered it by all sorts of restrictions and prohibitions.

Thus, in 1816, after the long endurance of the war, and the dragging misery of 1812, '13, and '14, broken only by fitful gleams of prosperity, this “overtrading” prostrated commerce and manufactures together, and agriculture was no better off.

Turning now to the currency to observe its movements contemporaneously with these expansions of speculation, we find a great difficulty in the impossibility of estimating the country bank circulation. The best information we have is given in the report of the Lords' Committee of 1819. They gave two estimates as follows. The rate of gold per oz. is added from McCulloch's Adam Smith.

The steady expansion until 1816 is at once apparent, and its effect on prices is distinctly shown by the gold premium, which advances with the expansion of the paper. In 1816, when the revulsion came, the country banks failed in great numbers. The contraction of their issues was so great that, though the Bank of England increased its issues in 1817, the gold premium fell, and the paper was within a few pence of par. Resumption at this time would scarcely have cost a struggle. However, no effort of this kind was made. On the contrary, no sooner was the immediate crisis over, than a new expansion commenced. (See the diagram at the end of this chapter.)

The harvest failing in 1817, the price of wheat rose above 80s., and the ports were opened; speculation in grain was active during that year. 1818 presented the same phenomena, but now were added speculations in silk, wool, cotton, and other raw materials. Imports were double or treble what they had been in 1816.

In 1817, the Bank voluntarily undertook to redeem its notes dated before Jan. 1st, 1817, but, adhering to the doctrine that the issues could not affect the exchanges, it continued to expand the circulation, while paying out gold. The laws against exportation having fallen into neglect, a run upon the Bank began, and a rapid exportation to France took place. The government ordered the Bank to cease paying specie. According to the doctrines of the Bullion Report, to expand the circulation with gold at a premium and the exchanges adverse, and then pay on demand, was as certain to produce exportation as it would be, if a tub full of water should be lifted on one side, that the water would run out. The fact seemed to fall in with this doctrine.

Another incident which co-operated in the financial situation of 1818 was the reduction of interest on the Exchequer bills. This, coming just at a time when several foreign nations were anxious to negotiate loans, led to a great exportation of coin for investment in such loans, the rate of interest offered being higher than the new rate for Exchequer bills. On a specie basis, and with no usury law, such a movement could have no perils; but in the existing circumstances, the Bank was led to make more advances on government securities and augment the inflation. It paid off by contract with government those who refused to hold the securities at the lower rate.

The most powerful cause, however, which was at work, and the one of which the last-mentioned was only a secondary form, was the reduction of paper issues on the continent. The loans were contracted to accomplish this. If it had not been that these issues had produced abnormal relations throughout Europe and America, which, as soon as they were rectified and the normal state of things restored, must produce a redistribution of the metals, the loans would have had no importance. The force of this cause it is impossible to estimate, but it lay at the bottom of the fluctuations of bullion at the Bank during the years 1816 to 1819.

The crash came in the fall of 1818, and numerous failures occurred during the winter. By February the Bank of England circulation had fallen to 25.1 millions. The subject of cash payments was now once more forced on public attention.

THE COMMITTEES OF 1819.

Both Houses of Parliament appointed committees on the Resumption. Each committee rendered two reports consecutively. These reports were not in themselves very able documents, but it appeared from the reports, and from the evidence of the persons examined, that the public conviction in regard to the questions discussed in 1811 had entirely changed. It was now admitted by all but very few that the currency was depreciated, and that the adverse exchanges and outflow of gold were consequences of the presence of depreciated paper, and must last so long as the paper remained—consequently, that, to resume specie payments, the whole problem was to get rid of the paper. These doctrines were disputed by no one save, strangely enough, the directors of the Bank of England. They passed a resolution that they could see no good ground for the opinion that the Bank had “only to reduce its issues to obtain a favorable turn in the exchanges, and a consequent influx of the precious metals.”

There was, however, a strong party of city men who opposed resumption, and petitioned against it on account of the ruin which contraction would bring upon the country. The Bank of England also offered a “Representation” opposed to any legislation fixing a time for resumption. The difficulties involved in contraction no one denied.

It was agreed on all sides that the movement must be gradual and careful, if made at all. Thus the question was narrowed down to this: Is it expedient, in view of the effects of the suspension which we have experienced, and in view of the benefits of a sound currency, to set to work manfully to endure the distress for the sake of the good? On that issue the city men took the negative, the statesmen the affirmative.

The plan proposed for resumption, was founded on Ricardo's theory of currency, more familiarly known as the Hamburg currency.

On this plan, metal may be deposited in the Bank, being weighed and assayed, and its value in a set denomination is put to the credit of the depositor. No coin is used, but generally business is done by transfers on the Bank's books of credits, thus made. When payments out of Bank are demanded, they are made in ingots, weighed, assayed, and stamped. It was proposed that the Bank should redeem its notes in ingots of sixty ounces weight after February 1st, 1820, and until the 1st of October, 1820, at £4 is. per ounce; from October 1st, 1820, to May 1st, 1821, at £3 19s. 6d.; from May 1st 1821, to May 1st, 1823, at £3 17s. 10½d.; and after May 1st, 1823, in coin on demand. This was amended so that it should pay in ingots at £3 17s. 10½d. after May 1st, 1822, instead of May 1st, 1821.

THE DEBATE OF 1819.

Mr. Peel opened the debate. He said: “He was ready to avow, without shame or remorse, that he went into the committee with a very different opinion from that which he at present entertained, for his views of the subject were most materially different when he voted against the resolutions brought forward in 1811, by Mr. Horner, as the chairman of the Bullion Committee. Having gone into the inquiry determined to dismiss all former impressions which he might have received,... he had resolved... to adopt every inference which authentic information or mature reflection should offer to his mind.... He conceived them [the principles of the. Bullion Report], to represent the true nature and laws of our monetary system.”

“All the witnesses examined before the committee strongly recommended the establishment of this [metal] standard, one witness alone excepted, who was an advocate for the indefinite suspension of cash payments. But when this witness was asked whether the indefinite suspension of cash payments was to exist without any standard of value, he answered: ‘No—the pound should be the standard.’ He was required to define what he meant by the pound. His answer was, ‘I find it difficult to explain it, but every gentleman in England knows it.’ The committee repeated the question and Mr. Smith answered, ‘It is something which has existed in this country for eight hundred years—three hundred years before the introduction of gold.’”

“Sir Isaac Newton... entered on the examination of this subject, but that great man came back to the old, the vulgar doctrine, as it was called by some, that the true standard of value consisted in a definite quantity of gold bullion. Every sound writer on the subject came to the same conclusion—that a certain weight of gold bullion, with an impression on it denoting it to be of that certain weight and of a certain fineness, constituted the only true, intelligible, and adequate standard of value, and to that standard the country must return, or the difficulties of our situation would be aggravated as we proceeded.”

“That the excess of commercial speculation which led to such evils was the consequence of an over-issue of paper currency was a fact not to be disputed.”

“If the continuance [of this system] should be sanctioned by the House, let it not be imagined that they ought to measure its future evils by its past.”

Silver had been demonetized in 1816, and the shillings since that time pass current at six per cent, above their value as metal. Gold is the only legal tender for sums above £2. The object of this law is to avoid the effect of fluctuations in the value of the two metals as compared with each other. The United States passed a similar law in 1853. (See p. 187.)

It was believed by many that this law would prove fatal to resumption in gold, and that only silver would circulate. The provision that silver should be legal tender only for 40s. precluded any such danger.

Mr. Tierney objected to the proposed scheme for resumption. He wanted to have the Bank thrown on its own responsibility to resume on a set day, the government repaying, as was proposed, £10,000,000 of the advances of the bank before the day of resumption. He was a very able man, with a reputation for pugnacity. For instance: “The House did not withdraw its confidence from the Bank from any doubt of its wealth or integrity, but from a conviction of its total ignorance of the principles of political economy.”

Alderman Heygate denied inflation and depreciation.

Sir H. Parnell said that any one who still denied this would pay little heed to any further elucidation. He said: “There was another subject so connected with the question before the House that he thought it peculiarly entitled to the consideration of Parliament. He meant the usury laws, for it was evident that if those laws remained in their present state they must operate very injuriously with regard to the supply of capital for the purposes of trade, by diminishing the means of obtaining discounts.”

Mr. Gurney (banker) opposed resumption He dreaded the effects of contraction, and wanted the standard lowered so that 1 oz. of gold should be £4. os. 6d.

Mr. Canning closed the debate, saying that it was “the unanimous determination of Parliament that the country should return, as speedily as possible, to the ancient standard of value in the establishment of a metallic currency.” [Loud and universal cries of “Hear! hear!”]

In the House of Lords, the Marquis of Lansdowne said: “He hoped the country would never again hear of the theories founded on the abstract idea of a pound sterling as a unit, or a bank-note and a shilling being in public estimation equal to a guinea; on the tendency of gold to fly to other countries where it was dearer, without producing any change of value, and other absurdities of that kind. These theories, which had been so ruinous to the country, deserved to be stigmatized as they were by the bill before their lordships, every enactment of which declared their falsehood. By acting on them the country had been overwhelmed by an oppressive mass of debt and grinding system of taxation, all the evils of which were augmented by the fluctuation of values.”

Lord Liverpool thought that the restriction had enabled the country to go through the war. Also, that the opposition to the plan proposed really raised the question, not of resuming sooner or later, but whether to resume at all.

Lord Lauderdale thought that the demonetization of silver had done great mischief, turned the exchanges, and driven out gold in 1817; that the paper was not really depreciated, but at par with silver coinage; that it was quackery to say the Clearing House economized currency; and that the plan proposed, together with the mint law, would bring ruin.

Lord King said that if no day was fixed, the Bank would not get ready, as it had not since the Peace.

Lord Grenville said that, “having considered this restriction as one of the greatest calamities under which this suffering country had labored; having frequently had occasion to lament and deplore the part which he had himself taken on its original proposition in prolonging it for the term of the then existing war... he could not help expressing his joy and satisfaction that the country was at last arrived at that period in which it could look forward with certainty to the repeal of this injudicious and unfortunate measure.” He declared that an irredeemable paper currency was, under any circumstances, a greater evil than good; that “he hoped it would be recorded of him as his decided conviction, that in proportion to the danger under which the country labored, he would almost say, in proportion to the extent of that danger, was the impolicy and desperate madness of such a measure as they were now considering how to rescind.... He could show how the miseries of 1816 followed on the issues of the preceding year; he could show how the excessive issues of country paper, which could not maintain itself like bank paper by legislative enactment, led to a fearful depreciation, and without any fault of individuals, by the mere force of the system, involved the whole kingdom in one general desolation. Not only its trade and commerce, but its agriculture, its landed interest, even classes the most remote from connection with, or even knowledge of, the paper system, found themselves suddenly consigned to total and inexplicable ruin. If their lordships could see at their bar, not merely the victims of commercial failure, but those numerous persons of all ages, sexes, and classes, who had unconsciously suffered without even understanding how or whence the evil fell upon them, such a spectacle would fill their lordships with horror; and he sincerely believed that not only would no voice be raised for the maintenance of such a system in commerce, but not even in war.”

He also urged strongly the necessity of making the Bank independent of government.

The bill was passed, and the government having repaid £10,000,000 of the advances of the Bank, which was recognized as an indispensable condition of resumption, the act went into operation. At the same time the law forbidding the exportation of the precious metals was repealed.

OPERATION OF PEELS ACT OF 1819.

A great fall of prices took place in 1819 as a sequel to the operations of 1818. Tooke denies strenuously that the operation of the act caused this fall. There was no run upon the Bank for gold, partly because the people did not care for it, partly because the plan of ingot redemption did not tempt them to do so, but chiefly because the fall in prices turned the exchanges and there was no profit on exportation. The Bank steadily contracted its issues, and the country banks were forced to do the same. The issues and the price of gold were as follows:

The Bank resumed payment, by its own wish and the permission of Parliament, on May 1, 1821.

Peel's act would, under any circumstances of trade, have enforced contraction and accomplished resumption, but under the series of events of the following years, it is certain that it had no direct effect whatever. The revulsion and fall of prices, and shock to credit of 1819 repeated the opportunity of 1817. The exchanges became favorable, more currency was needed, as always in a time of crisis, and the Bank contraction which did not begin until late in 1819 (the circulation was higher in August than in February) took place easily, as confidence was restored and notes, becoming abundant, flowed to the Bank, without exerting any pressure on the market, unless it might be the negative one of restraining speculation. Peel's act had only the indirect effect of setting a time for resumption which was understood to be in earnest, whereas former dates fixed had been practically indefinite adjournments. England is the only country which, after falling into the use of inconvertible depreciated paper, has returned to specie payments save through bankruptcy. It did so by taking advantage of the revulsion following a commercial crisis to reduce the amount of the paper.

On issuing from the era of redundant and depreciated paper, it is necessary to turn to prices as the test and indication of economic circumstances. (See p. 253.) The inquiry into prices, however, is the most difficult and delicate which the economist is called upon to undertake, and one of the most perilous, whenever undertaken piecemeal, or without skill, or to support a theory.

Tooke investigated prices during this period with a skill which is universally acknowledged, and proved conclusively that the fall which took place was not due to contraction. Gold was continually coming into circulation and filling up guy vacuum caused by the contraction.

The years 1819–1822 were years of abundant harvests and low prices for grain, and the agricultural interest was accordingly in distress. There were, however, additional causes for this distress. During the war, the high prices had led the farmers to increase their expenditures and raise their style of living. Poor lands had also been hired at high prices and brought under cultivation. These injudicious ventures could not be sustained in times of peace and plenty, and those who had embarked in them found themselves ruined. In 1822 Mr. Western led an assault upon Peel's bill as the cause of the distress, and the resumption then went through its last and severest peril. It is true that the proposition of Mr. Western for a committtee of inquiry into the action of the bill was negatived by a heavy vote, out it appeared that there were some active and influential men who wanted to return to paper, and others who thought a great mistake had been made in not accepting the depreciation and reducing the standard, and they were supported by a clamorous party suffering under distress. They did at last secure the concession that the notes under £5 were allowed to circulate until 1832, instead of being withdrawn in 1824 as the law then provided.

Meanwhile manufactures were steadily recovering, and wages were advancing in purchasing power by the fall of grain and imported commodities.

CRISIS OF 1825, AND ABOLITION OF SMALL
NOTES.

In the year 1824 the interest on the government five per cent, stock was reduced to 4 per cent the Bank engaging to pay off the dissentients. One result of this was to lead to large investments in foreign loans. The prosperity of manufactures led to large importations of cotton and other raw materials. Joint stock companies were organized to engage in all sorts of enterprises, some of them fanciful and absurd, and a great speculation in South American mines began. The state of the Bank was:

In 1823–4 the Bank, being strong in bullion extended its discounts, thus sustaining the advancing movement by the usual mode under the convertible system. But at the end of 1824 the exchanges became adverse, and an outflow of bullion began. The Bank, nevertheless, continued to extend its issues. In May, 1825, prices suddenly fell. The speculation came to a crisis; country banks failed in large numbers; one of the large London banking houses failed, and all had to undergo severe runs. It was not until some months later that the mercantile community sustained the shock, but it fell upon them with terrible force. The bank-note now came in to fulfil its office at such a period. During the rise of the speculation, the issues had been only gradually and slowly increased, but, in the breakdown of credit, notes were required in large numbers. The question was whether the Bank should extend its issues, and run the risk of ruining itself, or contract, and ruin the public. It adopted the former course, discounting freely at 5 per cent, for all solvent borrowers. The lucky discovery of a box of £1 notes which had been withdrawn, stored away, and forgotten, enabled them to pursue this policy to the utmost. It appeared, however, that very few of these last notes were needed. There are two elements in every commercial crisis, one the crisis of a false or exaggerated mercantile movement of some sort, and second, the panic of those who fear everything, but they do not know what. The plan here described is a specific remedy for the panic element. It was prescribed by the Bullion Report, and thus another of its doctrines was ratified.

The Bank found itself with only £2,459,510 in bullion in February, 1826. To the parliamentary Committee appointed to investigate the crisis, Mr. Horsley Palmer testified that the drain of gold was chiefly due to the £1 notes, these being in the hands of holders most liable to panic. Small notes were at this time subject to a stamp, and the government took the step of prohibiting any more stamps to be issued.

When Parliament met this step was blamed as unconstitutional, but the ministers declared that they had taken the step because, if any day had been fixed beyond which no stamps should be issued, or if the subject of small notes had come up for discussion, there would have been a rush for stamps. They proposed to allow the small notes already stamped to run until April 5, 1829, and then to allow no more notes under £5 in England. The debate on this proposition was long, and on the part of the opposition unclear and not to the point.

The proposition was advocated by Mr. Huskisson, who said that “a permanent state of cash payments and a circulation of one and two pound notes could not co-exist.” He urged that specie was the poor man's currency, and that, while there were no small notes, commercial crises might sweep over the mercantile community, but could not affect the laboring classes.

Mr. Grant said, that “in every wise system of currency it was a primary element that paper should be convertible at pleasure into a metallic currency, and that all small payments and the great bulk of the circulation should be in gold.”

Alderman Heygate said, that the country bankers would be forced to withdraw their small notes within three years, which would bring ruin. He said that the act of 1819 was intended to bring back the old standard, but that it had raised that standard. The proof was that the coins were exported on account of their “fineness and beauty.”

Mr, Attwood propounded a new law of the distribution of the precious metals: “The share of the precious metals which any country, rich or poor, could maintain, if there was any truth in experience, would be in the proportion of about half an ounce of gold against a quarter [8 bushels] of wheat, which gave 403. or 503. a quarter of this money, and no more.”

Thus the opposition ran over the whole history of the Restriction and the whole theory of money, but the question was, whether, having a convertible currency, they should have in it notes under £5.

Mr. Canning said: “If on the present occasion I am for withdrawing, within a limited time, the one-pound note from circulation, it is not from the mere love of theory, but because I have seen it practically proved in the experience of years which have elapsed since the Bullion Committee sat, that the circulation of the small notes cannot co-exist with a metallic currency.”

“It is vain to think of introducing gold amidst the overwhelming spread of small paper circulation. The small paper chokes up all the ordinary channels of circulation, so that the gold, though issued from the Bank, cannot flow into them, but is returned to the source from which it came.”

A test-vote, not directly on the question, showed two hundred and twenty-two in favor, and thirty-nine against. The small notes were withdrawn in 1829.

There have been fluctuations enough since then, and events which have illustrated and proved some weighty principles of currency, but they lie beyond the scope of the present under taking.

Specie payments could not be regarded as fixed on a solid basis until the small notes were withdrawn. In the year 1827, the Bank of England directors gave in their adhesion to the doctrines of the Bullion Report, and those doctrines, together with the exclusion of the small notes have been the foundation of the English convertible currency ever since.

The question how to regulate a convertible currency is still hotly disputed, and is far from a solution. It seems that art can help nature here as well as elsewhere, but we may be very sure that it can so help here only as it does elsewhere, —by following and assisting, not by supplanting and coercing.

A convertible currency is, like steel, not a natural product, but an artificial development, and in many respects superior, but it is as if we had not yet discovered the law by which to make the artificial product so that it should be neither too brittle nor too elastic, too hard nor too soft. One thing is very certain—that our blundering experiments have hitherto cost us far more than we have gained or saved.

So much, however, in regard to the laws which govern paper issues, as was laid down in the Bullion Report, is established beyond dispute. Its doctrines are the alphabet of modern finance.

The assertion has been many times made, in the United States, within the last year, that the period of the Restriction, in England, was a period of prosperity and financial success. A diligent reading of the appropriate documents, historical and legislative, has failed to bring to light any evidence at all to support this notion, or to lead to acquaintance with any English authority, contemporaneous or subsequent, who looks upon this period as anything else than a time of distress and humiliation.

EXPLANATION OF THE DIAGRAM.

In the following diagram, some of the movements of the period of the Bank Restriction are presented in a manner more distinct than any statistics can attain. The Bank of England circulation advanced steadily during the Restriction, under the rule adopted by the directors (p. 265). So soon as the crisis of 1818 brought a reduction, and Peel's act of 1819 enforced resumption, the Bank was forced to act upon the principles of the Bullion Report, though it still rejected them in theory, and retain its notes as they came back. So soon as the reduction of the issues began, everything conspired to assist it, and it went on until August, 1822, although specie payments were nominally resumed in May, 1821. The line at the top of the diagram, between 1810 and 1819, represents the total circulation of Bank of England and country-bank notes for the only period for which we have any estimate of them (see pp. 255 and 284). It shows the nett reduction in 1816, though the Bank of England kept up and increased its notes, and the increase in bullion (lowest line in the diagram) meets it exactly in accordance with the doctrine enunciated by the bullionists. When the total notes increased again in 1817, the bullion declined. When the Bank of England contracted, in 1819 and 1820, the country banks were forced to do the same, and the bullion increased. In 1824, under new inflation, it declined. The sudden increase and decrease of Bank of England notes in 1825, was in obedience to the doctrine of the Report in regard to the method of dealing with a panic (pp. 250, 304).

On the price line, see p. 255. The articles whose prices are summed up each six months are: I cwt. ashes; I cwt. bristles; 1 cwt. coffee; I lb. cochineal; I cwt. copper; 100 lbs. cotton; I ton flax; I ton hemp; I cwt. hops; 10½ cwt. lead; I lb. indigo; I ton iron; 252 gals, oil; I cwt. butter; 304 lbs. mess beef; I cwt. rice; I cwt. saltpetre; I lb. raw silk; I lb. cinnamon; 100 lbs. pepper; I gal. rum; I cwt. sugar; I cwt. tallow; I barrel tar; I lb. tea; I load timber; I cwt. tin; loo lbs. tobacco; I lb. wool; 8 bu. wheat. I have varied somewhat from the units of quantity in Tooke's tables in order that the fluctuations of each article might have an equal effect on the aggregate.

The price of gold is taken from the table in Tooke's “Prices,” VoL II,

[*]The eager demand for bullion in England is shown by an incident mentioned by Chevalier. The French Treasury, by transactions with its agents in 1806, came into possession of drafts of the Spanish Government on bullion in Mexico, but since the battle of Trafalgar England controlled the sea, and France could not bring over the metal. A Dutch bank negotiated a transaction between the belligerents by which the French Treasury realized its drafts, and an English frigate brought the treasure to England.

[*]On account of the interest attaching to this document and its historical and scientific importance, it is given in full in the Appendix. In the notes on the report the subordinate points in which it is regarded as erroneous or questionable are noticed.

[*]Harriet Martineau's Hist of Eng. I. 294.

[*]The reader who is curious to pursue this analogy is referred to Cobbett's Register, vols. 18 and 19. Cobbett's Paper vs. Gold goes over the whole subject of paper money in detail. The quotations from contemporaneous literature, the letters from persons who dissented from his views, and the allusions to current events, combine to form a picture of the times which is in striking analogy with all which we now see and experience.

[*]The English quote exchanges by the amount of the foreign currency which £1 will pay. This is not without exception, any more than our own custom of quoting dollars and cents required to pay a unit of the foreign currency, but it is the prevailing usage. High and low are therefore used in an inverted application in the two countries. Low exchange in this usage tends to an exportation of bullion.

[*]The appearance of the “middle-man” ought to be noticed.

[†]Martineau's History of England, I. 329.