Of Principles illustrated in this and the preceding Volume.
In proportion as the processes of exchange become extensive and complicated, all practicable economy of time, trouble and expense, in the use of a circulating medium, becomes desirable.
Such economy is accomplished by making acknowledgments of debt circulate in the place of the actual payment: that is, substituting credit, as represented by bank-paper, for gold money.
The adoption of paper money saves time by making the largest sums as easily payable as the smallest.
It saves trouble by being more easily transferable than metal money.
It saves expense by its production being less costly than that of metal money, and by its setting free a quantity of gold to be used in other articles of production.
A further advantage of paper money is, that its destruction causes no diminution of real wealth, like the destruction of gold and silver coin; the one being only a representative of value,—the other also a commodity.
The remaining requisites of a medium of exchange, viz.—that it should be what all sellers are willing to receive, and little liable to fluctuations of value,—are not inherent in paper as they are in metallic money.
But they may be obtained by rendering paper money convertible into metallic money, by limiting in other ways the quantity issued, and by guarding against forgery.
Great evils, in the midst of many advantages, have arisen out of the use of paper money, from the neglect of measures of security, or from the adoption of such as have proved false. Issues of inconvertible paper money have been allowed to a large extent, unguarded by any restriction as to the quantity issued.
As the issuing of paper money is a profitable business, the issue naturally became excessive when the check ot convertibility was removed, while banking credit was not backed by sufficient security.
The immediate consequences of a superabundance of money, are a rise of prices, an alteration in the conditions of contracts, and a consequent injury to commercial credit.
Its ulterior consequences are, a still stronger shock to commercial credit, the extensive ruin of individuals, and: an excessive contraction of the currency, yet more injurious than its excessive expansion.
These evils arise from buyers and sellers bearing an unequal relation to the quantity of money in the market.
If all sold as much as they bought, and no more, and if the prices of all commodities rose and fell in exact proportion, all exchangers would be affected alike by the increase or diminution of the supply of Money. But this is an impossible case; and therefore any action on the currency involves injury to some, while it affords advantage to others.
A sudden or excessive contraction of the currency produces some effects exactly the reverse of the effect of a sudden or excessive expansion. It lowers prices, and vitiates contracts, to the loss of the opposite contracting party.
But the infliction of reverse evils does not compensate for the former infliction. A second action on the currency, though unavoidably following the first, is not a reparation, but a new misfortune.
Because, the parties who are now enriched are seldom the same that were impoverished by a former change; and vice versâ: while all suffer from the injury to commercial credit which follows upon every arbitrary change.
All the evils which have arisen from acting arbitrarily upon the currency, prove that no such arbitrary action can repair past injuries, while it must inevitably produce further mischief.
They do not prove that liability to fluctuation is an inherent quality of paper money, and that a metallic currency is therefore the best circulating medium.
They do prove that commercial prosperity depends on the natural laws of demand and supply being allowed to work freely in relation to the circulating medium.
The means of securing their full operation remain to be decided upon and tried.