Front Page Titles (by Subject) CHAPTER VII.: ADVANTAGE BY ADDITION TO COMMERCIAL SECURITY. - The Works of Jeremy Bentham, vol. 3
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CHAPTER VII.: ADVANTAGE BY ADDITION TO COMMERCIAL SECURITY. - Jeremy Bentham, The Works of Jeremy Bentham, vol. 3 
The Works of Jeremy Bentham, published under the Superintendence of his Executor, John Bowring (Edinburgh: William Tait, 1838-1843). 11 vols. Vol. 3.
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ADVANTAGE BY ADDITION TO COMMERCIAL SECURITY.
Another advantage expected from the proposed paper, is—the addition it promises to make to commercial security—the support it holds out to commercial solvency. It presents itself, not only as being itself exempt from those shocks to which the ordinary species of paper money are essentially exposed, but as affording to the community a remedy, and that of the preventive kind, against the disorders to which it stands at present exposed by the constitutional weaknesses of those papers.
For a property thus valuable, it is indebted to two features belonging to it. One is—the making no addition by its quantity to the quantity of cash engaged for. It is by this, that it is itself preserved from that brittleness which is of the essence of those other papers. The other is—the faculty of being employed in either of two capacities at pleasure:—1. As a permanent source of income—like so much stock—so long as it is kept in the same hand; 2. As a circulating medium—a species of money, as often as it is passed on from one hand to another. It is by this latter feature that it is enabled to fill up whatever gaps may come to be made in the quantity of money in circulation, by a deficiency in the quantity of those other papers.
That in point of security, commercial wealth is liable to suffer from an excess in the comparative quantity of paper money, is a truth but too often felt, and sufficiently understood. That in point of quantity it is liable to suffer a kind of negative loss from a deficiency in the quantity of paper money, is a truth rather understood than felt, but equally out of doubt; because, inasmuch as every fresh £100 worth of paper money is so much added to the mass of circulating capital, to the amount of the value at which it passes, the national capital is of course so much the less for every accession of this kind which it might have received consistently with commercial security, and fails to receive. That by a deficiency in the quantity of paper money, commercial wealth is liable to suffer—not in point of quantity only, but even in point of security, is a sort of discovery in political economy, seemingly of very recent date.† Till the pressure upon the Bank of England in 1797, it seems to have been generally understood, that in the article of paper money, deficiency was the safe side:—but on that occasion it became apparent, that in regard to paper money of the kind in view, there is no safe side.
While there is stock to sell, and in such abundance, how (it may be asked) can commercial wealth be liable to suffer in point of security by a defalcation (which can never be a very large one) from the quantity of paper money? When by selling stock, a man who has either stock enough, or credit to borrow stock, may at any time raise as much money as he pleases: he will be a loser, it is true, by the interest of the stock sold out, from the time when sold to the time when replaced, and so far wealth suffers in point of quantity: but there ends the damage: security remains entire. Yes, doubtless;—so a man may:—but on what terms? On the terms of taking the precise amount from some one else: the deficiency is shifted only, not lessened.
Stock may be sold for money, and in that figurative sense it may be converted into money:—but in the literal sense, it cannot be converted into money: and it is in the literal sense that an article must be capable of being converted into money, to answer the purpose in question here. Stock convertible into money? Yes, in the same figurative sense in which lands and houses and goods are convertible into money—and no other. Annuity-note paper is convertible into money, paper-money, in the literal sense.
Stock is one thing—paper money (the sort at present in use) is another:—annuity-note paper, and that alone, is both in one. It has two natures, and is at all times either the one thing or the other, whichever is most wanted.*
The defalcation made from commercial security by the defalcation of a given mass of money (cash or paper, makes to this purpose no difference,) would upon examination be found greater than might have been supposed. The annual receipts of the country, on the score of income and capital taken together, may (without any error capable of affecting the argument) be stated as not much over or under three times the amount of the money of the country, cash and paper taken together.† Call, then, the quantity of Bank of England paper habitually issued and kept in circulation, £10,000,000: and of that habitual 10 millions, suppose, at a particular time, one million cancelled or kept back,—for instance, by a defalcation to that amount from the usual discounts. Here, then, is produced already, by the defalcation of this single million from the quantity of money in circulation, a defalcation to the amount of three millions from the mass of money that should have been received in the course of the year:—and this without any allowance made for the proportion of the money of both sorts (cash and paper) that will always be hoarded and kept out of the circulation in the shape of capital waiting for employment, or the cash that must always be kept up in the same way as a fund of reserve for answering the engagements contracted by that part of the currency which is in paper.
Call the amount of money kept up on both these accounts in the shape of capital, one-fourth part of the whole;—then will a defalcation, as above, from the mass of money by a defalcation to that amount from the quantity of bank paper issued and kept out, produce, instead of the above supposed defalcation of three millions, a defalcation of four millions from the mass of money receipts.
Suppose, again, that by reason of the alarm excited by this defalcation from bank paper, whatever was the cause of such defalcation, another million (cash and paper together) is hoarded up and kept out of circulation, out of the portion which otherwise would have continued in the circulation:—on this supposition, the defalcation from the mass of the year’s money receipts swells, from the four millions above spoken of, to eight millions.
But it is on the quantity of money ready to be transferred to those to whom it is due, or by whom it is otherwise expected, whether out of the portion which is kept in general circulation in small masses, and which serves as a vehicle for income, or out of the portion kept up in large masses, in the shape of capital, that the body of commercial men, in their capacity of debtors, depend for their ability to fulfil the aggregate mass of their engagements. If, then, the influx of money in the course of the year into commercial hands be thus diminished by the amount of eight millions on the score of income and capital taken together, eight millions, or some such large sum, will be the amount of engagements broken in the course of that year, by reason of the defalcation of a single million’s worth of bank paper (unless in as far as the deficiency may have been made up from other sources;)—and to this amount will the commercial wealth of the country have suffered, not only in point of quantity, but in point of security.
I speak of security, in contradistinction to quantity; i. e. to actual wealth to a liquidated amount; for if to the above liquidated loss be added the loss by failure following failure in consequence of the shock given to security, the ultimate loss may rise above the supposed eight millions, to an indefinite amount.
The want of a circulating medium as such, that deficiency, of which so much was said in 1797, may recur at any time. By the united wisdom of all parties interested, it received a cure at that time from a number of concurrent measures, all of them well adapted to the production of the effect. From true wisdom it received, for the time, a perfect cure:* but, by any other means than the sort of remedy here proposed, to prevent the evil from recurring again and again at any time, is not within the reach of the most perfect wisdom:† and prevention is still better than the most perfect cure. To be liable at any time to become the instrument of mischief, and that in either of the two opposite ways, by being in too great quantity, or in too little, is of the essence of all such promissory paper: for its not being in too small a quantity, it depends upon the wisdom and even humour of a few individuals; for its not being in too great quantity, it depends not only upon the wisdom and humour of individuals, but upon contingencies of the day, and the humours and prejudices of the uninformed and ill-informed, and hasty and impetuous multitude: upon the former, as to their not exceeding in their issues the amount warranted by the rules of prudence—upon the latter, as to their not frustrating and setting at default all the rules of prudence, by crowding in to demand for their paper without need, such a quantity of cash as is not in existence.
The sort of promise given by bank and bankers’ paper, is that sort of promise, the fulfilment of which, taken in the aggregate, is physically and constantly impossible: the promise given by the proposed annuity-note paper, is that sort of promise, the fulfilment of which, whether taken in the aggregate or in parcels, has never yet been found to fail—which possesses all the certainty that is to be found anywhere in human affairs; and which becomes less and less liable to fail, the greater the quantity of money of which it conveys the promise.
Were the proposed paper the only paper money, national wealth would not be liable to suffer either in point of quantity or in point of security—either from excess or from deficiency in the quantity of paper money in any degree; since, even without the exercise of human reason on the part of anybody (except on the part of each note-holder, in so far as his own particular interest, and that the interest of the moment, were concerned:) it would adjust itself, as it were of itself, as to what concerns the demand for circulating money, to the exact quantum of the demand: it would be stock one moment, and cash the next, whichsoever were most wanted.
In the other case, were it but one ingredient amongst others in the composition of the currency of the country, it would, as far as it went, and to the extent of the quantity kept in hand, principally with a view to income,* act as an occasional supplement to other paper money, and as a remedy of the preventive kind to whatever inconveniences might otherwise have arisen from a deficiency of that article.
Against an excess in the quantity of other paper money, its operation would not be quite so efficient or so manifest. But by presenting to every eye a species of paper money unsusceptible either of excess or depreciation, it would at once and at all times take the pretence of necessity from the rashness that might otherwise be disposed to hazard an excessive issue; and it would render the public in general the less disposed to accept, in an excessive quantity, a paper essentially hazardous, seeing that a paper essentially exempt from hazard was at their command, to any amount, at any time.
[† ]The source to which I am indebted for it, is the evidence of Mr. Henry Thornton, as printed in the several unpublished Reports of the Committees of Lords and Commons on the affairs of the Bank in March and April 1797, and reprinted in Mr. Allardyce’s published Address to the Bank proprietors in the same year. In the form of a note, the substance of that evidence would form a valuable addition to the future editions of Adam Smith’s Wealth of Nations.
[* ]It is a fact no less curious than true, that by a mere collateral circumstance, such as the mode of transfer appointed, and the nature of the evidence required in proof of title, the nature of a species of property, in itself the same in both cases, should undergo so material a change. Without a degree of expense, destructive of a part, or the whole, or even more than the whole of the value, stock, as we have seen, cannot be broken down into masses corresponding to those small and diversified portions into which money is and must be divided:—nor can it at any expense be either bought or sold on any occasion without loss of time, and the obligation of personal attendance at one certain place, the same for the whole island, wheresoever the residence of the parties may happen to be in each instance. It cannot be carried by a man in his pocket, and so like so much cash distributed among any number of hands, at the very instant the occasion for each disbursement arises. Annuity-note paper, like cash and Bank of England paper, but still more divisible, is already broken down into a multitude of portions still more various, and commensurate to all purposes—and, like cash, is to be had at all times and in all places.
[* ]1. On the part of the bank, the extension given to the quantity of their paper—not in notes of the then usual magnitude, but in notes of the reduced magnitudes—the £1 and £2 notes;—whereby the market was enlarged to such an extent as, if given to it at an earlier period, would, it seems probable, have prevented the exigency.
[† ]To a theoretical glance it might be apt to appear that the lesser quantity of money might serve to convey the same quantity of annual receipts as the greater, if in proportion to the deficiency in the quantity of matter, the velocity of the circulation were to be increased. But upon examination, I do not imagine it would be found by what means the velocity would be capable of receiving any adequate increase. The natural effect of those pressures, to which such increased velocity would be a relief, is—not to accelerate the circulation, but to relaod [Editor:?] it.
[* ]It therefore would not begin to act in this capacity till after Period I.; but from thenceforward the quantity would be more than adequate to the purpose here in question in a prodigious degree.