Front Page Titles (by Subject) APPENDIX B.: Paper Money—Causes why not circulated by Government without interest, as well as by Individuals. - The Works of Jeremy Bentham, vol. 3
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APPENDIX B.: Paper Money—Causes why not circulated by Government without interest, as well as by Individuals. - 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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Paper Money—Causes why not circulated by Government without interest, as well as by Individuals.
The contrast between the terms on which bank paper is received, and those on which government paper is received, has been already brought to view. The inferiority of the latter cannot, however, be owing to any inferiority in point of credit. The credit of the Bank of England can never be greater than that of the government of Great Britain;* yet a man who would trust government with his whole fortune, to the amount of hundreds of thousands of pounds, will not give a premium of more than a few shillings per £100 for an exchequer bill bearing interest, though he will give £100 for a bank note to that amount, for which he will receive no interest. The same man, too, will not only take a promissory note from the great company, of whose opulence the opinion is so universal and so high, for its nominal value, but perhaps even the note of some country banker, of whom, except from such his note, he has no knowledge. The cause of this inferiority can never, therefore, consist in any inferiority in point of credit. It must be looked for, therefore, in some other circumstance.
There are several circumstances which cooperate towards giving to the bank paper the aptitude it possesses with respect to circulation. The want of any of these properties, or the possession of it in an inferior degree, will account pro tanto for the inferiority of the terms upon which the government paper obtains the degree of circulation it has obtained.
These properties are—1. The being payable to the bearer on demand; 2. The being transferable, like coin, from hand to hand, without indorsement or any other formality; 3. The being issued for such small sums as £20, £10, and £5; 4. The being impressed on paper which, in point of size, is neither so large as to take up much room, nor so small as to be liable by its minuteness to escape observation, and be lost; and in point of texture is thin enough to bear folding without cracking, and yet not so thin but that it will bear to be written upon, by which means any proprietor may put his mark upon it, to enable him to vindicate his right to it in case of loss; 5. The having been so long in possession of the national confidence, and that to such a degree as to be the only paper which individuals all over the kingdom are universally in the habit of accepting upon the same terms as the current coin.*
An exchequer bill bears a daily interest, and is made payable to bearer. Upon hearing this, one should suppose that it should bear a premium to the amount of the interest;—since a bank note for that sum, payable to bearer and carrying no interest, bears no discount, but is received at par. An exchequer bill does indeed bear a premium, but that premium is very far short of being equal to the interest.
The difference, we have seen, does not arise from difference in point of security and credit, but may perhaps be traced to the combined influence of several causes; viz.—1. The want of bills for small sums of a size adapted to the general run of the demand; 2. The not being made payable to the bearer at any time, but only after the interval of about half a year after its issue; 3. The want of that simplicity, in respect of the terms and mode of payment, which is observable in the paper of the Bank of England;—to which may perhaps be added, something (of which presently) in the sensible properties of the instrument itself by which the engagement is conveyed.
That the want of sufficient division has a very considerable share in the production of the effect, can scarcely be a matter of doubt. Exchequer bills are not for a less amount than £100; they are never issued for a less sum. Bank notes are for various amounts less than £100, viz. £50, £40, £30, £20, £15, £10, and £5. In the instance of exchequer bills, the magnitude of the sum is itself sufficient to render this species of paper unfit for the ordinary course of circulation—it is of itself sufficient to throw it out of the ordinary current of private dealings. It is a commodity for which comparatively so few are qualified to bid, that those few cannot but enjoy considerable advantage in their biddings. It is the money of so few men, that that circumstance is of itself sufficient to prevent it from being generally known. Accordingly, the circulation of exchequer bills is confined in great measure, for aught I know, to the metropolis:—it is confined to the neighbourhood of the Alley—to bankers, stock-brokers, and the other classes of money dealers. A man may have enjoyed a large income—a man may have had very extensive dealings in the way of trade, and yet go out of the world without having ever set eyes on an exchequer bill.
The bank, it may be said, issues notes for sums as large as £100—indeed, for sums to a prodigious degree larger; and yet there is no more discount upon these large notes or the bank, than upon the very smallest ones. True: but then, along with these larger notes, the bank issues, and that in great plenty, the smaller notes above mentioned—and that in such plenty, as to be in readiness for change of the larger notes, wherever and by whomsoever such change is wanted: nor are such larger notes ever issued to any one who chooses rather to have the smaller notes.
The small notes of the bank, it may be observed in reply, afford no facility to the circulation of the large notes of the same company, that the exchequer bills of government do not equally possess: for, admitting that the value of an exchequer bill of £100 would not be quite so great, setting aside the article of interest, as that of a bank note to the same nominal amount, still the exchequer bill has a known value in the market, as experience shows, not much less than that of the bank note. It ought, therefore, to be as easy, were this all, to find change for a £100 exchequer bill in bank notes, as for a £100 bank note.
To this it may be rejoined, that the facility in the two cases is not in truth alike. Everybody being equally acquainted with bank notes, anybody who has £100 to keep for a little while before he will have to change it, will as readily take it in a single bank note for £100, as in ten notes for £10; for though he may never have seen such a thing as a bank note for £100 before in his life, yet the perfect resemblance it bears in every respect but the quantity of paper, engraving, and writing, to the ten £10 notes, makes it, so long as he does not want to change it, exactly the same thing to him:—the security is the same,—the conditions and time of payment are the same,—and what is no small matter, the appearance of the instrument is exactly the same, the variation in respect of the sum excepted—a sort of variation which he is already accustomed to by the smaller notes. A man who has a £100 bank note, need not fear, therefore, the getting smaller bank notes to the same amount from any one who has them, and is in no immediate want of such lesser notes in the way of change:—whereas a man who has only a £100 exchequer bill, may see good grounds for doubting whether he shall be able with equal facility to get such change for such exchequer bill; since, among twenty people to whom he may offer it, every one may perhaps be altogether unacquainted with it, and if not absolutely decided in regarding it as a species of paper of less value, may still be unwilling to give himself the trouble of satisfying himself whether it be of equal value or not.
The want of efficient assurance of putting off this species of paper with as much facility as a bank note to the same amount, gives this species of paper a disadvantage, or at least it may be reckoned among the causes which contribute to give this paper a disadvantage in point of prompt circulation, in comparison with bank notes. But since, accordingly, the exchequer bill is not, like the bank note, everybody’s money, the consequence is, that in order to find out a person whose money it is, it must be sent to the great market for money in different shapes,—the Alley: it must go into the hands of a broker; and the expense, but much more the time (for the expense is but per cent.) places it thus on a ground of considerable disadvantage in comparison with a bank note.
So far as this disadvantage goes, instead of operating as current cash, it has the effect only of so much capital in the funds, operating in the shape of principal money, as carrying interest, and serving as a source of income. In this quality, the price it bears will approach to that of stock—to that of a government annuity given in exchange for so much money rather than to the price of so much money receivable at any time. It will, however, have the advantage, in point of price, of such an annuity, and that on several accounts: it is transferable with so much less trouble and expense—the value of it rises by keeping, according to a visible and certain law, in a visible and certain proportion, day by day;—whereas the price of so much stock, though it may rise in much the same degree upon the whole as the period of payment approaches, yet as it can rise by no interval less than ⅛ per cent., amounting in three per cents. to 1/24 [Editor:?] of the whole, it can rise by no shorter steps than one step of at least fifteen days; and even then, the rise is so liable to be disturbed by fluctuations, as to be, in the character of a rise proportioned to lapse of time and the consequent accrual of interest, in a manner imperceptible.
It might be thought, that though the £100 exchequer bill is, for the reasons above pointed out, not everybody’s money—not the money of so many people as the £100 bank note, still it might be worth so many people’s money, as to bear the same price, or nearly the same price. It would, for example, be the money of bankers and money-dealers in general. It certainly is the money of bankers to a degree: yet still not in the same degree as the bank note. It is their money upon a footing more nearly approaching to that in which so much stock is their money, than that in which the bank note is their money. A banker may lay out his money in this way for the purpose of making it produce an interest; and thence he may lay out in this way such part of his receipts as be allows himself to lay out for his own benefit: but he cannot lay out in this way, as he may in bank notes, any part, or at least any considerable part, of the money which he deems it necessary to keep by him in readiness to answer drafts; because, as has already been observed, he cannot be equally sure of the exchequer notes being accepted of by a person who comes with a draft, as he can of the bank notes being so accepted of. He can keep it, therefore, upon no other footing than that of an evidence of his being entitled to a principal sum bearing interest,—in a word, as a source of interest. But in the capacity of a source of interest, it must bear the interest it purports to give, or at least a very considerable part of it: if it did not, it would not answer the purpose; it therefore cannot bear, in this quality, a premium eating out that interest, or any considerable part of it. It may indeed be worth his while to take somewhat less interest upon such a security than he could make of the same money in the funds; because it will cost him rather less time, and at at any rate less money, to convert it into cash at any time, than to convert into cash so much stock. And this accordingly is the case:—a man makes almost one per cent. less in this way than by buying into the funds.
As to the circumstance of the exchequer bill not being payable on demand, till half a year after the time of its being issued, this circumstance is not sufficient of itself to account for the depreciation. Taken by itself, it seems in fact to have but little or no influence. If this were the sole cause of depreciation, this cause being removed, the effect would cease: before the time when principal and interest became payable, or at least at the time of issuing, an exchequer bill would indeed bear no premium; but no sooner were that period arrived, than it would bear a premium, and that equal to the interest. This, however, is so far from being true, that, as far as I can learn, the arrival of this period makes in this respect no perceptible change. At the time of issuing, the exchequer bill bears a small premium, thereby reducing the rate of interest that can be made of it; at the arrival of the time of payment, it continues to bear that premium, but does not bear any more. The truth is, that the inconvenience of its not being payable for half a year is foreseen, and so far as it is reckoned for anything, allowed for from the first; and the exchequer bill takes its station among the commodities of the Alley, as a paper better adapted for a source of income than for general circulation; and this station the change in its nature, operated by the arrival of the time for payment, is not able to raise it from.
The comparative want of simplicity in respect of the terms and mode of payment, in comparison with a bank note, cannot but have some share in the comparative depreciation of an exchequer bill. To be adapted to general circulation, an engagement of this sort, as to the contents of it, ought to be so simple, that, if possible, everybody of a condition high enough to have property to such an amount pass through his hands, may be able without effort to apprehend them. The engagement taken by the bank—a promise on the part of an individual to pay the sum in question on demand, and that to the bearer by whom the instrument of engagement shall be produced—possesses this property in the highest degree of perfection that can be conceived. In the instance of the exchequer bill, several circumstances concur in keeping down the terms of the engagement considerably below this point of perfection. It is to be paid indeed to the bearer—that is, if it be paid at all. But will it be paid at all? This appears to depend upon a variety of contingencies;—viz. l. If aids happen to be granted for the service of the next year, then out of the first of such aids. But will any such aids be granted? This is expressly stated to be a matter of uncertainty:—it is stated, that perhaps no such aids may be granted before a certain date in the next year,—and provision is made accordingly for that contingency, that if no such aids be granted, that the money is to be paid out of the consolidated fund. But if paid out of this consolidated fund, when is it to be paid?—and by whom? These are questions it leaves in utter darkness. Is it, too, in other respects, a good bill? Grounds of suspicion, and those of the strongest kind, present themselves upon the face of it. A period is expressed, during which it will not be accepted of as such by the very government that issues it. It is not to be current, or pass in any of the public revenues, aids, taxes, or supplies whatsoever, or at the receipt of the exchequer, before a certain day in the next year,—that is, for half a year and upwards. Before that period, then, it will not be treated as a good bill;—this it expressly says. Will it afterwards? and when? Of this nothing is said; it is left entirely to conjecture.
Nor is this all:—another ground of uncertainty and suspicion. It does not state how soon it is to be paid; but it does state that it is not to be paid till another sum, amounting perhaps to several millions, has been paid. “Registered and payable after 1,754,400,” says a bill, No. 17545, I have before me. When is it, then, that this £1,754,400 will be paid? This again is all in darkness.
To a person acquainted with the mechanism of government, all these points are in a state of perfect clearness: he knows, that with all these apparent difficulties and uncertainties, the bill that presents them is at least as good as a bank note. But among persons who are not unaccustomed to the simple language of a bank note, not one out of a hundred, or perhaps a thousand, has any such acquaintance with the mechanism of government.
Even the introductory words, inserted with the view of indicating the authority on which the bill is issued, are of a nature more likely to excite doubt and difficulty in an unlearned mind, that is, in the mind of the bulk of readers, than to command confidence. “By an act of Parliament, Tricesimo quarto Geo. III. Regis. For raising a certain sum of money by loans or Exchequer Bills for the service of the year 1794.” In this formidable mixture of English and Latin, interlarded with terms of art and the language of finance, a man is sent to an act of parliament, to know whether the bill will be paid or no, and if paid, when and how and by whom—the rather as in the bill itself no answer to any of these questions is to be found:—and upon his putting a right construction upon a revenue act of parliament—he who perhaps never read an act of parliament in his life, and almost certainly (if not a lawyer) is not in the habit of trusting himself to find out the sense of an act of parliament—depends his knowing whether the bill will or will not be paid, and so forth. It is a case for him to consult his lawyer upon, as he would think it necessary to do upon other acts of parliament, where property to much less amount than £100 (the amount of an exchequer bill) was at stake. But the occasion does not allow time for consulting a lawyer;—and if it did, the expense of consulting him would eat a good way into the profit to be made by the interest of which the bill holds out the prospect, in addition to the principal that would be promised by a bank note to the same amount.
The fourth and last of the causes that have been mentioned as appearing to concur in the production of the depreciation in question, is the character of the instrument in respect of its sensible qualities—the size and texture of the paper. A bank note is perhaps, in respect of these properties, as convenient for circulation as can be imagined. In point of size and thickness neither so large as to take up an inconvenient quantity of room in the pocket or pocket-book, not even when a considerable number are taken together;—nor yet, on the other hand, so small as to be liable to escape notice and be lost: while, by reason of its extraordinary thinness (besides being so much the better guarded against fraudulent alteration, which is the principal object,) it is better adapted to bear folding to reduce it to a size fit for the pocket and pocket-book, without cracking at the edges, and so coming to pieces.
In these particulars, the difference between the bank note and the exchequer bill is not great—though, as far as it goes, it is rather to the disadvantage of the exchequer bill. In point of size, the exchequer bill is much upon a par with the bank-note—not quite so long—a little broader: these differences are not at all material. But the paper is a great deal thicker—rather of a thick and brittle sort than otherwise—so much so as to be in appearance more exposed to crack than any of the papers commonly used as writing papers.
In the bank note, too, there is something in the meatness of the engraving, and the conspicuous and emphatic display of the sum, that cannot but be particularly attractive and fascinating to an ordinary eye. In the exchequer bill, there is no such display of the sum; and the style of the impression of the long-winded explanation of the conditions of payment has nothing particular to recommend it.
Upon these combined causes, then, it appears most probable that the depreciation of government paper depends; and not till they are removed, can it be expected that this comparative depreciation will disappear.
GENERAL VIEW OF A COMPLETE CODE OF LAWS.
GENERAL VIEW, &c.
[* ]The greatest part of the capital of the Bank of England has been laid out in the purchase of government annuities; the directors of the bank therefore can never distribute these annuities in the shape of dividends amongst its stockholders, unless they receive them from government.
[* ]A bank-note has other properties calculated to guard it against forgery;—but these do not belong to the present matter.