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NOTES ON THE BULLION REPORT AND EVIDENCE 1810 - David Ricardo, The Works and Correspondence of David Ricardo, Vol. 3 Pamphlets and Papers 1809-1811 [1809]

Edition used:

The Works and Correspondence of David Ricardo, ed. Piero Sraffa with the Collaboration of M.H. Dobb (Indianapolis: Liberty Fund, 2005). Vol. 3 Pamphlets and Papers 1809-1811.

Part of: The Works and Correspondence of David Ricardo, 11 vols (Sraffa ed.)

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Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


NOTES ON THE BULLION REPORT AND EVIDENCE
1810

NOTE ON ‘NOTES ON THE BULLION REPORT’

The Notes on The Bullion Report and Evidence printed below were written by Ricardo in September 1810 or shortly after.

The MS consists of three parts:

(A) The Notes on the Report, which cover three octavo pages (these Notes begin on the last page of the MS denoted as (C));

(B) The rough Notes on the evidence of Goldsmid, Binns and Merle, which cover two quarto pages;

(C) The systematic Notes on the Minutes of Evidence, which cover twenty-five octavo pages.

While (A) and (C) were certainly written at the same period,(B) may have been written somewhat earlier. Of the three MSS, (A) and (B) are merely jottings, but (C) forms a systematic commentary.

Ricardo, in the Notes (C), gives the page reference only for the first of his comments on each witness; subsequent comments, even if referring to later pages, have only a serial number which corresponds with the number pencilled on his copy of the Report.

The plan here adopted in printing the Notes (C) is the same as that used for the Notes on Malthus in Vol. II and for the Notes on Bentham in this volume. The relevant extracts from the Minutes of Evidence are printed in small type at the top of the page (with marginal numbers as marked by Ricardo in the Gatcombe copy) and the corresponding comments in larger type in the lower part. A number of exclamation marks written by Ricardo on the Gatcombe copy of the Report are also printed where he placed them.

To the Notes (A) quotations from the relevant passages of the Bullion Report have been prefixed.

(A)

[NOTES ON THE REPORT OF THE BULLION COMMITTEE]

[p. 9.] The Report points out that there have been considerable importations of gold into England from South-America.

Page 9.

The committee seem anxious to prove that there have been considerable importations as well as exportations of gold, but this fact is not in the least material to the principle which they are attempting to support.

[p. 21.] The Report quotes from the evidence of the Continental Merchant: ‘The Exchange against England fluctuating from 15 to 20 per cent. how much of that loss may be ascribed to the effect of the measures taken by the enemy in the North of Germany, and the interruption of intercourse which has been the result, and how much to the effect of the Bank of England paper not being convertible into cash, to which you have ascribed a part of that depreciation?—I ascribe the whole of the depreciation to have taken place originally in consequence of the measures of the enemy; and its not having recovered, to the circumstance of the paper of England not being exchangeable for cash.’

21 It is difficult to believe that the cause here assigned were adequate to produce such an unfavorable exchange as from 15 to 20 pct.: much of it must in the first instance be attributed to the circumstance of Bank of England paper being excessive and not convertible into cash.

[pp. 55–56.] The Report exposes the fallacy of ‘not distinguishing between an advance of capital to Merchants, and an additional supply of currency to the general mass of circulating medium’, under a system of paper currency: ‘In the first instance, when the advance is made by notes paid in discount of a bill, it is undoubtedly so much capital, so much power of making purchases, placed in the hands of the Merchant who receives the notes; and if those hands are safe, the operation is so far, and in this its first step, useful and productive to the public. But as soon as the portion of circulating medium, in which the advance was thus made, performs in the hands of him to whom it was advanced this its first operation as capital, as soon as the notes are exchanged by him for some other article which is capital, they fall into the channel of circulation as so much circulating medium, and form an addition to the mass of currency.’

55 The advance is not useful even in the first instance if the amount of currency have already attained its natural limit. It can only be useful to one merchant in the same degree as it becomes hurtful to another. It enables one to make purchases, but, by the increase of prices, it deprives others of the ability of carrying on the same extent of trade.

[pp. 57–58.] The Report reads: ‘The suspension of Cash payments has had the effect of committing into the hands of the Directors of the Bank of England, to be exercised by their sole discretion, the important charge of supplying the Country with that quantity of circulating medium which is exactly proportioned to the wants and occasions of the Public. In the judgment of the Committee, that is a trust, which it is unreasonable to expect that the Directors of the Bank of England should ever be able to discharge. The most detailed knowledge of the actual trade of the Country, combined with the profound science in all the principles of Money and Circulation, would not enable any man or set of men to adjust, and keep always adjusted, the right proportions of circulating medium in a country to the wants of trade. When the currency consists entirely of the precious metals, or of paper convertible at will into the precious metals, the natural process of commerce, by establishing Exchanges among all the different countries of the world, adjusts, in every particular country, the proportion of circulating medium to its actual occasions, according to that supply of the precious metals which the mines furnish to the general market of the world. The proportion, which is thus adjusted and maintained by the natural operation of commerce, cannot be adjusted by any human wisdom or skill. If the natural system of currency and circulation be abandoned, and a discretionary issue of paper money substituted in its stead, it is vain to think that any rules can be devised for the exact exercise of such a discretion; though some cautions may be pointed out to check and control its consequences, such as are indicated by the effect of an excessive issue upon Exchanges and the price of Gold.’

58. The proportion of currency which can conveniently be maintained in a country where a paper currency not convertible into specie exists can be adjusted by human wisdom and skill, as the Comm̃ee themselves assert in several parts of the report. It is precisely at its proper limit whilst gold does not rise above or fall below the mint price.

[p. 65.] The Report refers to the crisis of 1793: ‘In this crisis, Parliament applied a remedy, very similar, in its effect, to an enlargement of the advances and issues of the Bank; a loan of Exchequer Bills was authorized to be made to as many mercantile persons, giving good security, as should apply for them; and the confidence which this measure diffused, as well as the increased means which it afforded of obtaining Bank Notes through the sale of the Exchequer Bills, speedily relieved the distress both of London and of the country.’

Perhaps after all that confidence was on the point of being restored at the very moment that recourse was had to this boasted measure.

(B)

[ROUGH NOTES ON THE FIRST PART OF THE MINUTES OF EVIDENCE]

The chief imports of gold from the West Indies; principally from Jamaica. Spanish and Portugal coin have an extrinsic value as coin,—but French gold coin has not.

(C)

[NOTES ON THE MINUTES OF EVIDENCE] MINUTES OF EVIDENCE

Taken before the Select Committee appointed to enquire into the Cause of 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.

Jovis, 8° die Martii, 1810.

Mr.—, a Continental Merchant, again called in, and Examined.

[pp. 102–103.] In what way do you think the present issue of bank notes and country bankers paper would operate to reduce the rate of exchange, supposing the balance of trade to be in favour of this Country?—The greater the issue, the more the exchange would be lowered; and supposing that a scarcity of the circulating medium of this Country existed, the higher the exchange would be. Independent of this direct effect, a reduction of the circulating medium would also have that of lowering the1 prices of every article, and thus increase the facility and extent of their export.

That in consequence of an increase of bank notes in circulation, and articles of merchandize being raised in price, that the2 exports are less than they otherwise would be, and in that way the operation on the exchanges is to our disadvantage?—Yes, in as far as there is any competition in trade between this and other countries.

Admitting that by an increase or decrease of the quantity of paper in circulation the prices of merchandize are increased and decreased, and the exportation greater or less, and that the exchange is of consequence indirectly affected; will you explain more particularly the direct operation of an excess of paper currency on the exchange?—An increase of the circulating medium enables persons to make greater advances to foreigners, and more3 bills are thus brought into the foreign market; this must have the effect of lowering the exchange. Should, on the contrary, a scarcity of money exist here, it would become desirable to realize and accelerate the payment of debts due to this Country; advances now readily made to them would from necessity be curtailed, and the foreigner, who required a bill on this country, would be obliged to pay a higher price for that which was scarce than if it were abundant. The importations, from the same causes, would be curtailed; and the desire to raise money by sending a greater quantity of goods abroad, would be increased. However great the inconvenience to individuals, I conceive that a very material reduction of the circulating medium in this Country (by which I do not mean to make any distinction between coin and paper) would have the immediate effect of raising the exchange so far above par as to enable foreigners to send Bullion to this Country for the liquidation of their debt, provided this principle were carried to such an extremity.

[p. 103.] Supposing a diminution of the paper of Great Britain to take place, or an expectation of such diminution generally to prevail, would not the following effect follow; would not those English merchants who now trade on borrowed capital, and order goods from abroad on their own account, with a view to importation hither, or invite consignments from abroad by4 offering to make large advances on the credit of them, curtail their orders and limit the extent of their advances, in consequence of their anticipating increasing difficulty in providing the means of payment; would not this conduct on their part lessen the quantity of drafts drawn upon them, and thus affect the balance of payments, and would not this alteration in the balance of payments tend to improve the British exchange?—I perfectly agree in the effect of the positions placed in the foregoing question, as I tried to explain in my preceding answer.

[p. 104.] In the case supposed [the circulating medium consisting almost exclusively of paper], will not the same general advance of prices in England, which you state an augmentation of5 paper to produce, operate as a discouragement to the exportation of English articles so long as the exchange shall remain the same, which shall be assumed to be at par?—Yes, certainly; but it is an assumption which, in my opinion, could never take place in fact.

[p. 105.] Then if the exchange was affected solely by the balance, the payments of exchanges with the North of Europe at this moment ought, according to the information on which you6 have formed your judgment, to have been in favour of England? —If that were the only cause that influenced the exchange, it is my opinion, that the exchange would have been in favour of England for some time past.

[p. 107.] You have stated, that the exchange has been greatly in our favour since the restriction on the Bank, and that the balance of payments then due to England was in consequence liquidated by great importations of Bullion into this Country; you have also stated, that in your opinion, the balance of payments is now in our favour; explain to the Committee to what cause you ascribe the difference in the exchange between those two periods, in each of which you conceive the balance of payments to be in our favour?—At the period of the suspension, the situation of the trade of this Country was very favourable to it: the stock of goods on hand, and which were required by the Continent, was very great; public opinion here in favour of the measure empowering the Bank to withhold cash payments was such, that for some time no traffic at home was carried on between this paper and coin: while the balance of trade therefore continued in favour of this country, the foreigner could only liquidate his debt by sending Bullion. Had the re-exportation8 been allowed, a very small proportion of such exportation would have been sufficient to keep the exchange at near par; or even the public opinion would have fixed it at that rate, if it were ascertained that such operations could take place when required. This not being the case, and some extraordinary causes (as explained) having taken place, that depressed the exchange, and coin being withheld both from internal circulation and from its operation with foreign countries, I conceive this to be the cause of an unfavourable rate of exchange during a period of a favourable balance of trade. In fact, the foundation by which what is called a par of exchange is fixed, no longer exists as matter of fact.

Page 102

1.

If the reduction of the circulating medium would raise the exchange, how could it cause the exportation of commodities seeing that any advantage from the reduction in their price will be precisely counteracted by the disadvantage from the rise in the exchange.

2

Is not the rise in the price of commodities, in consequence of an increase of bank notes, merely nominal to the foreigner, as whatever advance may take place in the price of goods, will, as just observed, be counteracted by the fall in the exchange, proceeding from the same cause.

3

The effects here stated could only take place when the currency was undepreciated. In raising the value of a depreciated currency to par, the effects on foreign trade would be purely nominal. If the value of the currency were raised above par by further curtailments of Bank notes, the effects, as stated in the latter part of this answer would follow.

4.

There would be no diminution of imports. Those trading on borrowed capitals would cease to invite consignments from abroad, but as the value of the circulating medium would be increased, those trading with their own capitals would be enabled to import an increased quantity of commodities: The increase on one hand would be precisely equal to the diminution on the other. The value of the currency would not only be raised at home, but abroad also: the improvement of the exchange would enable the same sum of english money to purchase a larger quantity of foreign commodities.

5

Here the answer appears to recognize the principle which I have stated above, and is at variance with the former answer.

6.

The exchange may be, and possibly is, really in our favor, though nominally against us.

7

The effect of a diminution of the currency would be precisely the same as the exportation of coin to the same amount. If there be any difference it must be so small that it can scarcely be estimated. The sum exported would be divided amongst all nations and could not be permanently retained in the importing country.

8

The cause here mentioned could not have produced the effect ascribed to it1 if the circulating medium were not permanently excessive. The exchange may be completely controlled by those who have now the power of issuing paper. Whilst confidence is reposed in the Bank, the restriction might continue and yet the exchange never deviate far from par.

Veneris, 9° die Martii, 1810.

John Whitmore, Esq. the Governor of the Bank of England, John Pearse, Esq. Deputy Governor of the Bank of England, called in together; and Examined.

[p. 112.] Let me suppose a case in which no demands were made upon the Bank by Government for unusual accommodations, but an unusual demand was made by merchants for increased facilities of discount; would the Bank in such a case consider itself as bound, in order to support public credit, to grant that increase of discounts, although there was a run upon it for Gold, occasioned by the high price of Bullion and the unfavourable state of the exchange?—I desire time to consider that question.

Supposing the Bank to be now paying in cash, and to experience a drain of Gold, as just mentioned; and supposing them also to afford precisely the same sum in the way of loan as before; would not a diminution of their paper take place, which would be proportionate to that diminution of their stock of guineas which the drain would occasion, inasmuch as every person coming to demand guineas would give in exchange for them an equal quantity of bank notes, which would be cancelled?—I would wish for time to consider that question.

Is there not reason to suspect that the present unfavourable state of the exchange may be in part owing to the want of that limitation of paper which used to take place before the suspension of the cash payments of the Bank, on the occasion of the exchanges becoming unfavourable?—My opinion is, I do not know whether it is that of the Bank, that the amount of our paper circulation has no reference at all to the state of the exchange.

Has that question ever been brought to a regular discussion and decision in the Court of Directors?—In the opinion of the Bank Directors, it had not sufficient bearing upon our concerns to make it more than a matter of conversation; it never was singly and separately a subject of discussion, though constantly in view with other circumstances.

Mr. Pearse.—The varying prices of the Hamburgh exchange compared with the varying amount of Bank notes at different periods, seem to prove that the amount of Bank notes in circulation has not1 had an influence on the exchange.

[p. 114.] Whether, since the suspension of the payments in cash down to the present time, there has been any material extension2 of commercial discounts?—I wish to have time to consider that question.

1.

If, during the Period that the exchange has improved whilst the amount of Bank notes has increased, commerce and payments had not also increased, no such effects could have followed. An additional circulating medium, whilst it preserves the same value, will be required by an increased commerce and revenue, an augmentation of paper circulation may therefore take place at such time3 without causing either the depreciation of paper, or of the foreign exchanges. Mr. Pearse does not prove,1 even if the fact be as he stated, that the principle, “of the exchanges being affected by an excess of currency” is erroneous.

Page 114

2.

Is it not surprising that the Governor of the Bank should require time to consider this question,—when it is (I am credibly informed) ascertained, that the discounts have increased in no less a proportion than.2

Lunae, 12° die Martii, 1810. Abraham Goldsmid, Esq. called in, and Examined.

[p. 120.] Does not the present low rate of exchange create1 the demand and the high price of Bullion?—The present high price of Bullion is on account of the low rate of exchange.

[p. 121.] Is it your opinion that the circulating medium, as entirely confined to paper in this country, produces any effect upon foreign exchanges?—I do not profess myself competent to2 give my opinion upon that.

Page 120

1.

Mr. Randall Jackson said, in his speech at the Bank, that many respectable evidence had given it as their opinion to the committee that the high price of bullion had nothing to do with the fall of the exchange.3 Mr. Goldsmid whom he often mentioned with great respect, is in this answer at variance with him. Indeed I can find no such opinion given by any evidence whatever

2.

Mr. Goldsmid acknowledges that he is not competent to give an opinion upon the main point in dispute. It cannot, therefore, be on his authority that either Sir J. Sinclair4 or Mr. Jackson so confidently rely, for the conclusions which they have formed “on the opinions5 of the great practical authorities,”6 examined by the committee.

Martis, 13° die Martii, 1810.

John Whitmore, Esq. the Governor, and John Pearse, Esq. the Deputy Governor of the Bank of England, called in together; and Examined.

[p. 124.] Supposing the currency of any country to consist altogether of specie, would that specie be affected in its value by its abundance or by its diminution, the same as copper, brass, cloth, or any other article of merchandize?—I have already said1 that I decline answering questions as to opinion; I am very ready to answer any questions as to matters of fact; I have not opinions formed upon the points stated in this and the preceding question sufficiently matured to offer them to the Committee.

[p. 125.] You stated in a former examination, “Supposing the excess of the market price of Gold in Bank notes above the mint price to be 5 per cent. and that in consequence a drain of guineas takes place from the Bank, and the Bank, by diminishing the amount of its outstanding demands, raises the value of its paper 5 per cent.,” in the manner described in a former answer of yours, would not the result be to bring the market and the mint price of Gold to a par, and consequently to put a stop to the demand for guineas?

Mr. Whitmore.—I believe my former answer did not go to the Bank raising the price of their notes, for in fact, if the Bank was to2 raise the value of them, and give them for discounts, estimating them at such increased value, it would incur the penalty of usury. I therefore conceive this statement to suppose a case that cannot occur.

In taking into consideration the amount of your notes out in circulation, and in limiting the extent of your discounts to merchants, do you advert to the difference, when such exists, between the market and the mint price of Gold?—We do advert to that, inasmuch as we do not discount, at any time, for those persons who we know or have good reason to suppose export the Gold.

Page 124

1.

After this answer can the comm̃ee be blamed for not giving implicit assent to Mr. Whitmore’s opinions? If he had answered this question, in the only way in which it could be answered, in the affirmative; he would have been obliged to admit that the issues of the Bank could be made to raise or fall the price of gold

2.

He confounds price and value. How could the bank incur the penalty of usury whatever value a pound sterling might rise to. If £100—of our present currency, were so raised in value, by adding to the quantity of gold in a guinea, as to command double the quantity of commodities, which they can now purchase, and the Bank were to lend such £100—at 5 pct. how could the increased value of the notes subject them to the penalties of usury?

Mercurii, 14° die Martii, 1810. John Louis Greffulhe, Esq. was Examined.

[p. 130.] Is it not your opinion that, if no forced paper circulation existed in the Country, it would not be possible for the exchanges to fall materially below their par, or for the price of Bullion to rise materially above its standard price?—I conceive1 that that would not prevent the exchange from falling very considerably under par, if the amount of Bullion in the Country were not sufficient to pay the balances.

1.

Mr. Grefulhe seems to consider it as a possible case, that the balance of payments might be so much, and so permanently against a country that if there existed in that country a metallic circulation only, she might be exhausted of all her bullion and coin. He does not reflect that the want of a circulating medium is so urgent that we should cease to import commodities, after a considerable portion of our money had left us, if it can be supposed2 foreign nations could be3 so blind to their interest as to refuse to accept any thing else in exchange for them. Those who argue thus are always obliged to suppose that the balance of payments is accidentally and uncontrollably against us; they should go a little further in their examination of cause and effect, and they would discover that a balance of payments can never be4 against any particular country, for any length of time, but from a relative excess in the currency of that country.—It buys with money because money is too abundant:— diminish the quantity and it will cease buying altogether, unless it can buy with goods.

William Cecil Chambers, Esq. called in, and Examined.

1 [pp. 136–137.] What do you say as to an excessive currency, though not forced?—I do not conceive the thing possible.

What do you mean by a forced paper currency?—A paper which I am obliged to take against my will for more than its value; it is not forced so long as people take it willingly, which they will naturally do whilst undepreciated.

136

1.

This seems to be the source of all the errors of these practical men. A paper currency cannot be excessive, according to them, if no one is obliged to take it against his will. They must be of opinion that a given quantity of currency can be employed by a given quantity of commerce and payments, and no more,—not reflecting that by depreciating its value the same commerce will employ an additional quantity. Did not the discovery of the American mines depreciate the value of money, and has not the consequences been an increased use of it. By constantly depreciating its value there is no quantity of money which the same state of commerce may not absorb; and it is of little importance whether the state forces a paper circulation, or whether it be issued by a company only when demanded by the public, in discounting good bills, the effects of an excessive issue will be the same.—

Suppose the paper in circulation not convertible into specie to be 20 millions, and I have credit sufficient with the bank to get a bill discounted at the Bank for £1000—wishing to extend my business to that amount. Suppose too that all the other trades possess equal facilities and that by these various bills being discounted a million is added to the circulation. Now the possessors of this additional million have not borrowed it to let it remain idle but for the purpose of extending their different trades. The distiller goes to the corn market with his portion; the cotton manufacturer, the sugar baker &c. with theirs; the quantity of corn, sugar, and cotton in the country remaining precisely the same as before. Will not the effect of this additional million be to raise the prices of all commodities or 5 pct. that being the proportion in which the currency is increased. These borrowers of the Bank will succeed in their object of increasing their trade, but by rendering the 20 millions which was before in circulation less efficient there will be a corresponding loss in the trade of those who were before possessed of this sum. As no addition had been made to the quantity of the corn, the sugar or the cotton but only to the prices of those commodities there would be no increased trade but a different division of it. If another million were added to the circulation by new demands for discounts, the same effects would again follow. There can be no limits to the depreciation of money from1 such repeated additions. The observations of Mr. Harman that the Bank never discount bills but for bona fide transactions2 cannot limit the quantity,3 —the same sum of money performs successively a great number of payments,— but a bill might be given for each of these payments for bona fide transactions and if the bank discounted them all we might have four or ten times the amounts of paper that is now actually in circulation.

Mr. Chambers like those who have given their evidence before him ascribes the unfavorable exchange to the balance of payments being against us,—allows that a forced paper circulation would depress the exchange, but contends that the Bank of England cannot force a circulation; he does not conceive Gold to be a fairer standard for Bank of England notes than Indigo or broad cloth!!!

Page 152

Page 176

Veneris, 16° die Martii, 1810.

John Whitmore, Esq. the Governor, and John Pearse, Esq. the Deputy Governor of the Bank of England, called in together; and Examined.

[pp. 152–153.] Suppose a case in which no demands were made upon the Bank by Government for unusual accommodations, but an unusual demand was made by merchants for increased facilities of discount, would the Bank in such a case consider itself as bound, in order to support public credit, to grant that increase of discounts, although there was a run upon it for Gold occasioned by the high price of Bullion and the unfavourable state of the exchange?—I now consider my answer as my own opinion, not having the opportunity of consulting the Bank upon the question; in my opinion the Bank would not increase1 their discounts, nor on the other hand would it, I think, after the experience of the years 1796 and 1797, do well materially to diminish them.

Veneris, 23° die Martii, 1810.

John Whitmore, Esq. the Governor, and John Pearse, Esq. the Deputy Governor of the Bank of England, called in together; and Examined.

[p. 176.] Taking the daily average amount [of payments made by all the London bankers put together] so low as five millions, does it not follow that in the course of the year the notes of the Bank of England in circulation are employed in making payments of above 1,500,000,000 sterling, on the counters of the London bankers alone?—According to the opinion that I entertain, it will amount to that.

Taking into consideration the quantity of Bank of England paper necessary for country bankers, and the various other uses and applications for which it is demanded, does it not follow that there is only a certain limited proportion of the total amount of Bank of England paper in circulation, available for effecting the payment of this 1,500 million?—It is only part of the circulation that is available for such purpose.

Veneris, 30° die Martii, 1810.

John Whitmore, Esq. the Governor, and John Pearse, Esq. the Deputy Governor of the Bank of England, called in together; and Examined.

[pp. 184–185.] Does not the unfavourable course of exchange with foreign countries tend, even under the present restriction, in some degree to render its continuance and prolongation necessary, in so far as that necessity may depend on the proportion of specie in the coffers of the Bank to the amount of its notes in circulation?

Mr. Whitmore.—In my opinion the high price of Gold bullion abroad, does make it necessary to continue the restriction; but I have already observed, that the low state of exchange has not operated before the restriction to drain us of our guineas to any1 material extent.

Mr. Pearse.—Undoubtedly it does, as far as regards the supply of the public wants with a circulating medium, as it would not be possible for the Bank to continue that supply if the Restriction Bill were removed, whilst the foreign exchanges remain so unfavourable as at present; a profit of from ten to fifteen, to twenty per-cent. upon converting Guineas into bullion, would be too great a temptation to allow any to remain in the Bank, as long as a bank note remained in circulation. The Bank would therefore inevitably be driven to the necessity of calling in its notes, or in2 other words of reducing its advances on bills, &c. which would produce that distress which the Restriction Bill was passed to prevent.

[p. 186.] Suppose the measure to be determined upon by Parliament, of the opening of the Bank at a distant period, should you think that in the event of the exchanges continuing the same or nearly the same, some restriction of the Bank issues ought to take place with a view to prepare for the opening?...

Mr. Pearse.—In the contemplation of the removal of the Restriction Bill at any definite period, it would become necessary for the Bank to regulate the amount of its issues, with a reference to the course of exchange with foreign countries; but while that 3 exchange continues unfavourable (an event as arising out of the balance of payments not within the control or influence of the Bank) I cannot see that any regulation within the means of the Bank, would in the event of an opening, effectually preclude the risk of a demand for specie being then made for the purpose of profit in exporting it to the Continent.

[pp. 187–188.] Do you conceive that a very considerable reduction of the amount of the circulating medium, would not tend in any degree to increase its relative value compared with commodities, and that a considerable increase of it would have no tendency whatever to augment the price of commodities in exchange4 for such circulating medium?—It is a subject on which such a variety of opinions are entertained, I do not feel myself competent to give a decided answer.

In your examination of the 21st inst. you state, that an excess of country bank paper can only obtain when issued otherwise than as representing securities arising out of real transactions, and payable at fixed and not distant periods; and yet, in your examination of the 23d, you state, that this paper must always circulate at par, or it would return upon the parties that issue it; can there then be any permanent excess of country bank paper while it is so exchangeable?—In my answer of the 21st of March, I adverted to the causes which might be productive of an excess in the issues of country bank paper: in my answer of the 23d, I meant to allude to the consequences which must inevitably, in my opinion, result from the existence of such an excess. It is certainly possible, were it important in amount, that the country banks, by not regulating their issues on the principle of the Bank of England, might send forth a superabundance of their notes; but this excess, in my opinion, would no sooner exist in any material degree, than it would be corrected by its own operation, for the holders of such paper would immediately return it to the issuers, when they found that in consequence of the over issue its value was reduced or likely to be reduced below par: thus,5 though the balance might be slightly and transiently disturbed, no considerable or permanent over issue could possibly take place, as from the nature of things the amount of Bank notes in circulation must always find its level in the public wants.

[pp. 188–189.] If, however, he [the foreigner] receives £.100 in Bank notes, and is under the necessity of going to market for Bullion, will he the foreigner not rate his goods twenty per cent. higher, the difference in the price between them; and will he not invoice his goods twenty per cent. higher to his correspondent6 accordingly? [Mr. Whitmore]—I cannot contemplate a trade where the invoices are made out with reference to the price of Bullion.

If this were the case, what prospect should we have of a rise in the price of the exchange?—Never having weighed the subject7 with any reference to the price of Bullion, I am not prepared with an opinion how a merchant would act in such a case.

1

Before the restriction the exchange was never for any considerable time against this country. If such a state of the exchange had permanently existed,7 whilst the Bank paid in specie, the Bank might have been drained of every guinea.—

2

Mr. Pearse is no doubt correct in his answer as far as regards the necessity which the Bank would be under of reducing its advances on bills &ca, but he is wrong in supposing that any distress similar to that in 1797 would ensue from the repeal of the restriction bill.

3

The limitation of the Bank issues would certainly raise1 the foreign exchange

4.

Is not the affirmative to this question self evident?

188

5.

Mr. Pearse must give up his accusation against the country banks of causing an excess of circulation, as he here admits that it is an evil which would correct itself.

189

6.

Is it not self evident that the value of the money for which the foreigner must sell his goods in this country must enter into his calculation?

7.

Is not this a confession that he has not considered a most important question in political economy particularly necessary to be well understood by a Bank director.

Lunae, 2° die Aprilis, 1810. William Coningham, Esq. called in and Examined.

[p. 190.] It appears from your evidence before the Irish Exchange Committee in the year 1804, that you were of opinion that the paper currency of Ireland was then depreciated, and that this depreciation was the cause of the unfavourable state of the exchange between England and Ireland; are you of opinion that that paper is still depreciated, and if so, to what circumstance do you8 ascribe the improvement in the exchange between the two Countries?—I think it is still depreciated, but in a very inconsiderable degree compared with what it was in the year 1804: and I am inclined to think, that the cause of the depreciation being so much less now than it was at the period alluded to is, that there is greater confidence in the paper than there was at that time; and therefore the people take it with more freedom, and of course consider it of more value.

8

He does not consider it so much depreciated as formerly because on a comparison with Bank of England paper it is now nearly at par. which it was not then. To me it is evident that the value of Bank of Ireland paper has not been raised to the value which Bank of England paper then bore, but that the value of Bank of England paper has been sunk to that of Bank of Ireland paper, and that therefore they are now both depreciated.

Mercurii, 4° die Aprilis, 1810. Sir Francis Baring, Bart. called in, and Examined.

[p. 195.] Would not the removal of the restrictions upon1 trade diminish the price of bullion?—The removal of the restrictions upon trade would produce an exportation of merchandize, and facilitate the means of importing bullion.

[p. 196.] Are you not aware that the issuing of notes under five pounds has increased materially the whole amount of notes issued; and do you not believe that the amount of small notes should be left out of the account in comparing the present amount of notes in circulation with that existing at the period you have alluded to [previous to 1797]?—The small notes are equally paper, and they add to the mass of Bank notes before in circulation; they issue in the same manner in exchange for public or2 private securities: Instead of being left out in a comparative view, I fear they rather tend to increase the difficulty more than their due proportion, because they cannot be withdrawn without an issue of specie to an equal amount, and therefore stand in the front of the battle.

[pp. 198–199.] Do you conceive that the Bank of England will effectually guard against the possibility of any excess in the circulation of the country (as well their own as the paper of country banks) if they regulate their issues by the demand for discounts of good bills founded on real mercantile transactions, as the occasions of the Public may appear to require?—It has been ascertained by long experience, that wherever paper has circulated under the power and influence of Government on the Continent, it has failed. The paper of the Bank of England has stood firm for above a century, and flourishes at this moment with unabated confidence. The power reposed in the Bank is great; their paper is the basis on which the best interests of the Country rest; it is the seed which serves to produce the whole of its commerce, finance, agricultural improvements, &c. &c. Such a power may remain with safety, so long as the Bank is liable to discharge their notes in specie, because that circumstance constitutes a complete counteraction to any disposition (if it should be entertained) to increase the circulation beyond a reasonable and safe limit, and, under that circumstance, things (foreign exchanges,3 &c.) will find their proper level.... I consider the opinionentertained by some persons, that the Bank ought to regulate their issues by the public demand, as dangerous in the extreme, because I know by experience, that the demand for speculation can only be limited by a want of means; and I think the Bank would not be disposed to extend their issues beyond three-fourth parts of its present amount, if the restriction was removed....

195

1.

The removal of the restrictions on trade might undoubtedly facilitate the means of importing bullion, if circumstances were favorable to such an operation; but the exportation or importation of bullion must be regulated by the relative value of bullion in the two countries, or which is the same by the rate of the real exchange between two countries.

2.

This question is not fairly answered. It is certain that the small notes cannot be withdrawn without an issue of specie to an equal amount, as they are wanted for small payments and are therefore indispensible; but the question is whether in judging of an excessive issue by a comparison of the present amount of notes, and the amount in 1797, the amount of small notes should be taken into consideration.1 If the small notes substituted have not exceeded the amount of guineas withdrawn, it is clear they should not be taken into the account.

3.

Sir F. Baring is decidedly opposed to the opinion entertained by the Bank Directors, that they cannot produce an excess of circulation whilst they discount bills for real bona fide transactions.

217.

Mr. Tritton’s evidence generally is very cautious,—he appears not to have paid much attention to the subject of currency, and the effects produced on it by London and country Banks.

Page 218, 219

In his answer to a subsequent question he allows that an augmentation of the quantity of Bank of England notes tends to raise the prices of commodities.

Lunae, 9° die Aprilis, 1810.

[pp. 213–18.] John Henton Tritton, Esq. a Partner in the Banking-House of Barclay & Co., called in, and Examined.

[p. 218.] Jeremiah Harman, Esq. Director of the Bank of England and General Merchant, called in, and Examined.

[p. 219.] Do you conceive that the diminution of the paper of the Bank would, either immediately or remotely, tend to an2 improvement of the exchange?—None whatever.

Was it not the practice of the Bank, antecedently to the restriction of the cash payments, to lessen in some degree the amount of its issues, when a material demand for guineas was made upon3 it?—It has been occasionally, and at one period in particular, according to my view of the subject, it accelerated very much the mischief which ensued.

[pp. 219–220.] Supposing the Parliament to enact that the Bank of England should again pay in Gold at a distant period, say one, two or three years, would it be your opinion that the Bank ought to resort to the measure of restraining its issues, as a means of preparing itself to meet that event, supposing the exchanges and the price of Bullion to continue as they now are?—I conceive4 that they must necessarily, if the exchanges were to continue as they now are, which, however, I deem barely within possibility.

[p. 220.] Do you not apprehend that there is a disposition in persons keeping accounts at the Bank, to apply for a larger extent of discount than it is on the whole expedient for the Bank to grant?—Very many do, and we treat them accordingly.

Do you not think that the sum total applied for, even though the accommodation afforded should be on the security of good bills to safe persons, might be such as to produce some excess in the quantity of the Bank issues if fully complied with?—I think if we discount only for solid persons, and such paper as is for real bonâ fide transactions, we cannot materially err.

Supposing you were to afford your accommodation at four per cent. instead of five per cent. interest, the current interest being five per cent., would there not be danger of excess?— Perhaps so.5

Does it not then follow, that, provided money is now worth something more than five per cent., and being in general difficult to be procured at that rate, you may fall into some excess by granting it at five per cent. on the principle which you have stated?—I think not, because we should discover the superabundance6 very soon.

What should you consider the test of that superabundance?— Money being more plentiful in the market.7

[p. 221.] Supposing the exchange to continue long and greatly unfavourable, should you not be disposed to refer this circumstance in some measure to an excess of paper currency, or should you assume that the balance of trade had continued during8 that long period unfavourable?—I must very materially alter my opinions, before I can suppose that the exchanges will be influenced by any modifications of our paper currency.

Have you ever known the exchange to fall to twelve or fifteen per cent. in any part of Europe, in which it was computed in coin9 containing a fixed quantity of gold or silver, or in paper or bank money exchanged at a fixed agio, either for such gold or silver coin, or for gold or silver bullion of a definite amount?—I really cannot from recollection answer that question.

2.

This question is not fairly answered. It is certain that the small notes cannot be withdrawn without an issue of specie to an equal amount, as they are wanted for small payments and are therefore indispensible; but the question is whether in judging of an excessive issue by a comparison of the present amount of notes, and the amount in 1797, the amount of small notes should be taken into consideration.1 If the small notes substituted have not exceeded the amount of guineas withdrawn, it is clear they should not be taken into the account.

3.

But at the period here alluded to the exchange was considerably in our favor and therefore the present case and that case are totally dissimilar

4.

That the exchanges should remain as they now are Mr. Harman thinks barely within possibility. Any material improvement of the exchange with the present amount of paper money I deem barely within possibility. Nothing can improve the exchange but some alteration in the relative state of the currency of this and the currencies of other countries

5 and 6.

Are not the answers to 5 and 6 contradictory?

7.

This opinion is built upon the idea that the interest of money rises or falls according to the abundance of money.— If the Bank Directors could be convinced that this is an erroneous principle we might expect to see them adopt a very different system. The interest which a man agrees to pay for the use of a sum of money is in reality a portion of the profits which he expects to derive from the employment of a capital which that sum of money will enable him to obtain. In the interest which he is willing to pay he is guided solely by the probable1 extent of those profits. His profits are necessarily totally independent of the abundance or scarcity of the money which circulates commodities2 in the country. If America had had no mines3 but we had obtained by the discovery of that large portion of the world the same commerce which we now enjoy, the value of gold and silver would not have been depreciated, and no country would have had more than a third of the money which they now possess4 , but its greater value would have made it equally effectual for the commerce and payments of each. Profits would have been precisely the same as they now are though they would be expressed by a different amount of Pounds sterling. A man possessed of £500 year would then have been as rich as one possessed now of £1500. And a monied man with £5000—lent at 5 pct. would1 have had as abundant an income, as one under the present circumstances with £15000 lent at the same rate of interest. If gold were to become as abundant as lead it would make no permanent alteration in the rate of interest for money; the depreciation which money experiences renders the same nominal sum less effective in the precise degree of its depreciation. If then an abundance of paper circulation as allowed by Mr. Harman raises the prices of commodities or in other words depreciates the value of money, will not that circumstance alone be a cause for an increased demand for it? Will not the supply again depreciate it and the demand increase? And may not this continue ad infinitum. And as the larger quantity of depreciated money will be no more effective than the smaller quantity of undepreciated money was before who will be conscious of an excess?—who will find that the particular sum which he possesses is superfluous and endeavour to return it to the Bank in payment of a discounted bill. The bank during the suspension of Cash payments, with its present excessive issues produces the same effect as the discovery of a new mine of gold which should materially depreciate the value of money. In the case of the mine, as the currency of all countries would be equally depreciated its effects would be visible only in the rise of prices of all commodities for which money is exchanged, and the exchange which2 expresses the relative value of the currencies of different countries would continue at par;—but in the case of the augmentation of Bank notes not convertible into specie at the will of the holder, the rise of the prices of commodities is confined to the country where the notes are issued and consequently the depreciation of money is local and not general; and is made evident by the effect produced on the exchange with foreign countries, which deviates from par nearly in the same proportion as the money is depreciated.

8

How unfit for a Bank Director, whilst the restriction bill is in force, is that man who without qualification declares “that he must very materially alter his opinions, before he can suppose that the exchanges will be influenced by any modifications of our paper currency.[”]

9.

This is the true test by which to try the soundness of their principle. I defy them to answer it in the affirmative.

229

Martis, 22° die Maji, 1810.

[pp. 228–31.]Thomas Richardson, Esq. again called in, and Examined.

[1]Replaces ‘produced any effect’.

[3]First written ‘An increased commerce and revenue requires an additional circulating medium, whilst it preserves the same value, it will therefore bear an increase of paper circulation’, then altered as above. Ricardo omitted however to strike out ‘requires an’ and ‘increase’.

[1]‘therefore’ was ins. and then del. here.

[2]Left blank in MS. The proportion was as 241 to 688, according to the ‘Scale of Discounts’ presented by the Bank to the Bullion Committee with the request that it should not be made public. It was however published in the Morning Chronicle of 15 Oct. 1810; see below, Appendix to Vol. IV.

[3]See The Speech of Randle Jackson, Esq. delivered at the General Court of the Bank of England, held on the 20th of September, 1810, respecting the Report of the Bullion Committee...London, Butterworth, pp. 23–4; cp. above, p. 152.

[4]Observations on the Report of the Bullion Committee. By the Right Honourable Sir John Sinclair, Bart., M.P., London, Cadell and Davies, 1810.

[5]‘opinions’ is written above ‘evidence’, which however is not del.

[6]Sinclair’s words are ‘Sanctioned by the authority of persons of practical detail’ (Observations,p. 28)

[2]‘it can be supposed’ is ins.

[3]‘could be’ is written above ‘were’, which, however, is not del.

[4]Replaces ‘is never’.

[1]‘excessive’ is del. here.

[2] See below, p. 375.

[3]‘because if all such bills were discounted we might have four times the amount of paper that is now actually in circulation’ is del. here.

[7]‘had permanently existed’ replaces ‘were possible’; and, in the next line, ‘might have been’ replaces ‘might be’.

[1]Replaces ‘lower’.

[1]‘As the guineas have been withdrawn and the small notes only substituted’ is del. here.

[1]‘As the guineas have been withdrawn and the small notes only substituted’ is del. here.

[1]‘probable’ is ins.

[2] ‘which circulates commodities’ is ins.

[3]Replaces ‘If the mines of America had never been discovered’.

[4]Replaces ‘she now possesses’.

[1]‘not envy’ is del. here.

[2]‘only’ is del. here.