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• Note
• Introduction
• Bibliographical Notes
• Introduction
• An Enquiry Into the Nature and Effects of the Paper Credit of Great Britain (1802)
• Chap. I
• Chap. Ii
• Chap. Iii
• Chap. Iv
• Chap. V.
• Chap. Vi
• Chap. Vii
• Chap. Viii
• Chap. Ix
• Chap. X
• Chapter Xi
• Appendix I: The Evidence Given By Henry Thornton Before the Committees of Secrecy of the Two Houses of Parliament On the Bank of England March and April 1797
• Appendix II: Manuscript Notes By Henry Thornton to Lord King’s Thoughts On the Effects of the Bank Restriction ( April 1804)
• Appendix III: Two Speeches of Henry Thornton, Esq. On the Bullion Report May, 1811

CHAP. VIII

A third objection commonly made to country banks, is, the influence which their notes are supposed to have in raising the price of articles.

By the principles which shall be laid down in this Chapter, I propose to prove, that, though a general encrease of paper has this tendency, the objection, when applied to the paper of country banks, is particularly ill founded.

It will be necessary, in the discussion which is now about to take place, to join the consideration of two subjects, that of the influence which an enlarged emission of paper has in lifting up the price of commodities, and that of its influence, also, in producing an excess of the market price above the mint price of gold, and in thus exposing the bank to failure, and the country to considerable inconvenience. It is through the medium of the enhanced price of commodities that I conceive the ill effect on the mint price of gold to be brought about.

The discussion of these topics will best be introduced by a statement of the principle which regulates the value of all the articles of life.

The price of commodities in the market is formed by means of a certain struggle which takes place between the buyers and the sellers. It is commonly said, that the price of a thing is regulated by the proportion between the supply and the demand. This is, undoubtedly, true; and for the following reason. If the supply of an article or the demand for it is great, it is also known to be great; and if small, it is understood to be small. When, therefore, the supply, for example, is known to be less than the demand, the sellers judge that the buyers are in some degree at their mercy, and they insist on as favourable a price as their power over the buyers is likely to enable them to obtain. The price paid is not at all governed by the equity of the case, but entirely by the degree of command which the one party has over the other. When the demand is less than the supply, the buyers, in their turn, in some degree, command the market, giving not that sum which is calculated to indemnify the seller against loss, but so much only as they think that the seller will accept rather than not sell his article. The question of price is, therefore, in all cases, a question of power, and of power only. It is obvious, that a rise in the price of a scarce commodity will be more or less considerable in proportion as the article is felt to be one of more or less strict necessity.

The principle which has been laid down as governing the price of goods, must be considered as also regulating that of the paper for which they are sold; for it may as properly be said, on the occasion of a sale of goods, that paper is sold for goods, as that goods are sold for paper: thus the sale of a single commodity, as it is called, is a twofold transaction, though not commonly understood to be so: I mean, that the price at which the exchange (or sale) takes place depends on two facts; on the proportion between the supply of the particular commodity and the demand for it, which is one question; and on the proportion, also, between the state of the general supply of the circulating medium and that of the demand for it, which is another.

Paper, moreover (of which I shall here speak as if it were the only circulating medium, it being the only one used in the larger payments), is, to some persons, somewhat in the same manner as bread is to all, an article of necessity. It is necessary to traders, partly because they have come under engagements to make payments which are only to be effected by means of their own previous receipts: and partly because they hold goods which must, within no long time, be sold for money, that is to say, for paper, since a continually growing loss accrues from the detention of them. Paper, therefore, must be bought by the trader: and if there is a difficulty in obtaining it, the buyer of it is brought under the power of the seller, and, in that case, more goods must be given for it.

Let us, now, trace carefully the steps by which an encrease of paper serves to lift up the price of articles. Let us suppose, for example, an encreased number of Bank of England notes to be issued. In such case the traders in the metropolis discover that there is a more than usual facility of obtaining notes at the bank by giving bills for them, and that they may, therefore, rely on finding easy means of performing any pecuniary engagements into which they may enter. Every trader is encouraged by the knowledge of this facility of borrowing, a little to enlarge his speculations; he is rendered, by the plenty of money, somewhat more ready to buy, and rather less eager to sell; he either trusts that there will be a particular profit on the article which is the object of his speculation, or else he judges, that, by extending his general purchases, he shall at least have his share of the ordinary profit of commercial business, a profit which he considers to be proportioned to the quantity of it. The opinion of an encreased facility of effecting payments causes other traders to become greater buyers for the same reason, and at the same time. Thus an inclination to buy is created in all quarters, and an indisposition to sell. Now, since the cost of articles depends on the issue of that general conflict between the buyers and sellers, which was spoken of, it follows, that any circumstance which serves to communicate a greater degree of eagerness to the mind of the one party than to that of the other, will have an influence on price. It is not necessary to suppose either a monopoly, or a combination, or the least unfairness, to exist, or even large and improper speculations. The encrease in the eagerness of each buyer may be trifling. The zeal to buy, being generally diffused, may, nevertheless, have a sensible operation on price.

That, on the other hand, a reduction of the quantity of paper causes a fall in the price of goods, is scarcely necessary to be proved. It may be useful, however, in some degree, to illustrate this point by facts. I understand, that at the time of the great failure of paper credit in 1795, the price of corn fell, in a few places, no less than twenty or thirty per cent. The fall arose from the necessity of selling corn under which some farmers were placed, in order to carry on their payments. Much of the circulating medium being withdrawn, the demand for it was in those places far greater than the supply; and the few persons, therefore, who were in possession of cash, or of what would pass as cash, having command of the market, obliged the farmers to sell at a price thus greatly reduced. It was a new and sudden scarcity of cash, not any new plenty of corn, which caused the price of corn to drop.

It has been already observed, that some few days antecedently to the suspension of the cash payments of the bank, exchequer bills, as well as stocks, when sold for ready money, that is to say, for bank notes, fell in price. Not many days afterwards, although no material event had occurred except that of the stoppage of the bank, they rose. This fall and rise in the price of government securities evidently did not result from any corresponding fluctuation in the national confidence in them; for the fall took place when the national credit would naturally be the highest, namely, when the bank was as yet paying in cash, and the approaching stoppage was not known; and the rise happened when the national credit would be the lowest, namely, within a few days after that discouraging event. The reason of each of the fluctuations unquestionably was the fluctuation in the quantity of the Bank of England notes, which, as it has since appeared, were, during the day or two which preceded the suspension, about a million less than they were either a short time before or a short time afterwards. The notes being fewer during those few days, the price of them was, at the same time, higher. It was, in fact, therefore, the price of notes which rose, rather than that of stocks which fell, on the days immediately preceding the suspension; and it was the price of notes which a few days afterwards fell, rather than that of stocks which rose* .

I shall, for the present, consider the doctrine which has been laid down, as being sufficiently established, namely, that paper fluctuates in price on the same principles as any other article, its value rising as its quantity sinks, and vice versâ; or, in other words, that an augmentation of it has a general tendency to raise, and a diminished issue to lower, the nominal cost of commodities, although, partly for reasons which have been already touched upon, and partly for some which shall be hereafter given, an exact correspondence between the quantity of paper and the price of commodities can by no means be expected always to subsist.

The reader possibly may think that, in treating of this subject, I have been mistaking the effect for the cause, an encreased issue of paper being, in his estimation, merely a consequence which follows a rise in the price of goods, and not the circumstance which produces it. That an enlarged emission of paper may often fairly be considered as only, or chiefly, an effect of high prices, is not meant to be denied. It is, however, intended to insist, that, unquestionably, in some cases at least, the greater quantity of paper is, more properly speaking, the cause. A fuller explanation of this apparently difficult and disputable position will be given in the further progress of this Work.

I proceed, in the next place, to shew in what manner a general rise in the cost of commodities, whether proceeding from an extravagant issue of paper, or from any other circumstance, contributes to produce an excess of the market price above the mint price of gold.

It is obvious, that, in proportion as goods are rendered dear in Great Britain, the foreigner becomes unwilling to buy them, the commodities of other countries which come into competition with our’s obtaining a preference in the foreign market; and, therefore, that in consequence of a diminution of orders from abroad, our exports will be diminished; unless we assume, as we shall find it necessary to do, that some compensation in the exchange is given to the foreigner for the disadvantage attending the purchase of our articles. But not only will our exports lessen in the case supposed; our imports also will encrease: for the high British price of goods will tempt foreign commodities to come in nearly in the same degree in which it will discourage British articles from going out. I mean only, that these two effects (that of a diminished export, and that of an encreased import) will follow, provided that we suppose, what is not supposable, namely, that, at the time when the price of goods is greatly raised in Great Britain, the course of exchange suffers no alteration. For the following reason, I have said that this is not supposable. Under the circumstances which have been described of a diminished export, and an encreased import, the balance of trade must unavoidably turn against us; the consequence of which must be, that the drawers of bills on Great Britain in foreign countries will become more in number than the persons having occasion to remit bills. This disparity between the number of individuals wanting to draw, and of those wanting to remit, as was remarked in a former Chapter, must produce a fall in the price at which the over-abundant bills on England sell in the foreign market. The fall in the selling price abroad of bills payable here, will operate as an advantage to the foreign buyer of our commodities in the computation of the exchangeable value of that circulating medium of his own country with which he discharges the debt in Britain contracted by his purchase. It will thus obviate the dearness of our articles: it will serve as a compensation to the foreigner for the loss which he would otherwise sustain by buying in our market. The fall of our exchange will, therefore, promote exportation and encourage importation. It will, in a great degree, prevent the high price of goods in Great Britain from producing that unfavourable balance of trade, which, for the sake of illustrating the subject was supposed to exist.

The compensation thus made to the foreigner for the high British price of all articles is necessary as an inducement to him to take them, somewhat in the same manner as a drawback or bounty on exportation is the necessary inducement to take those particular goods which have been rendered too dear for the foreign market by taxes laid on them in this country. In each case the British consumer pays the high price, and the foreigner is spared, because otherwise he will not accept out commodities.

The fall in our exchange was just now defined to be an advantage gained in the computation of the exchangeable value of that foreign circulating medium with which the foreigner discharges his debt in Great Britain, a debt paid in the circulating medium of this country. It implies, therefore, a high valuation of his circulating medium, and a low valuation of our’s; a low valuation, that is to say, both of our paper and of the coin which is interchanged with it.

Now, when coin is thus rendered cheap, it by no means follows that bullion is rendered cheap also. Coin is rendered cheap through its constituting a part of our circulating medium; but bullion does not constitute a part of it. Bullion is a commodity, and nothing but a commodity; and it rises and falls in value on the same principle as all other commodities. It becomes, like them, dear in proportion as the circulating medium for which it is exchanged is rendered cheap, and cheap in proportion as the circulating medium is rendered dear.

In the case, therefore, which has now been supposed, we are to consider coin as sinking below its proper and intrinsic worth, while bullion maintains its natural and accustomed price. Hence there arises that temptation, which was formerly noticed, either to convert back into bullion and then to export; or, which is the same thing, to export and then convert back into bullion; or, which is also the same thing, to convert back into bullion, and then sell to the bank, at the price which would be gained by exportation, that gold which the bank has purchased, and has converted from bullion into coin.

In this manner an encrease of paper, supposing it to be such as to raise the price of commodities in Britain above the price at which, unless there is some allowance afforded in the course of exchange, they will be received in foreign countries, contributes to produce an excess of the market price above the mint price of gold, and to prevent, therefore, the introduction of a proper supply of it into the Bank of England, as well as to draw out of its coffers that coin which the directors of the bank would wish to keep in them.

Dr. Smith appears to me to have treated the important subject of the tendency of an excessive paper circulation to send gold out of a country, and thus to embarrass its banking establishments, in a manner which is particularly defective and unsatisfactory. It is true, that he blames the Bank of England for having contributed to bring on itself, during several successive years, a great expence in buying gold through a too great circulation of its paper; and that he also charges the Scotch banks with having had, through their excessive issues, a share in producing this evil. Thus, therefore, he seems to give to his reader some intimation of the tendency of an excessive issue of paper to create an excess of the market price above the mint price of gold* .

It appears, however, in some degree, from the passage in question, though much more clearly from other parts of his work, that he considers every permanent excess, whether of the market price above the mint price, or of the mint price above the market price of gold, as entirely referable to “something in the state of the coin† .”

In one place he remarks, that a high price of bullion arises from the difference between the weight of our more light and that of our more heavy guineas; the value of the gold in the heavier guineas, as he represents the case, determining the general current value of both the lighter and the heavier pieces of coin; and the superior quantity of gold in the heavier guineas constituting, therefore, so much profit on the melting of those heavier pieces‡ : a supposition manifestly erroneous, and contradicted by experience; for it implies that the excess of the market price above the mint price of gold both never is and never can be greater than the excess of the weight of the heavier above the lighter guineas; and, also, that the price of bullion cannot fluctuate while the state of our coinage remains in all respects the same. We have lately experienced fluctuations in our exchange, and correspondent variations in the market price, compared with the mint price of gold, amounting to no less than eight or ten per cent., the state of our coinage continuing, in all respects, the same.

Dr. Smith recommends a seignorage, as tending to raise the value both of the lighter and heavier coin; and thus, also, to diminish, if not destroy, the excess of the market price above the mint price of gold* .

It is remarkable, that this Writer does not, in any degree, advert either to that more immediate cause (a fall of our exchanges), from which I have, in this as well as in a former Chapter, described the excess in question, as, in all cases, arising; or to that more remote one on which I have lately dwelt, namely, a too high price of goods, which produces a fall of our exchanges.

Dr. Smith does not, in any of his observations on this subject, proceed sufficiently, as I conceive, on the practical principle of shewing how it is through the medium of prices (of the prices of goods in general, and of bullion in particular, compared with the price of the current circulating medium), that the operations of importing and exporting gold are brought about. He considers our coin as going abroad simply in consequence of our circulation at home being over full. Payment in coin, according to his doctrine, is demanded of every bank for as much of its paper as is excessive, because the excessive paper can neither be sent abroad nor turned to any use at home; whereas, when it is changed into coin, the coin may be transmitted to a foreign part, and may there be advantageously employed* .

The reader will perceive, that, according to the principle which I have endeavoured to establish, coin does not merely leave the country because, the circulation being full, no use can be found at home for additional circulating medium; but that every encrease of paper has been represented as enhancing the price of goods, which advanced price of goods affords employment to a larger quantity of circulating medium, so that the circulation can never be said to be over full. This advanced price of goods is the same thing as a reduced price of coin; the coin, therefore, in consequence of its reduced price, is carried out of the country for the sake of obtaining for it a better market. The heavier pieces, undoubtedly, will be preferred, if there is a facility of obtaining and transporting them; but the lighter guineas will also be exported, when the state of the exchange shall be sufficiently low to afford a profit on such a transaction. One of the consequences of Dr. Smith’s mode of treating the subject, is, that the reader is led into the error of thinking, that when, through an excessive issue of paper, gold has been made to flow away from us, the expence of restoring it consists merely in the charge of collecting it and transporting it from the place to which it is gone. It follows, on the contrary, from the principles which I have laid down, that, in order to bring back gold, the expence not only of importing it may be to be incurred, but that also of purchasing it at a loss, and at a loss which may be either more or less considerable: a circumstance of great importance in the question. If this loss should ever become extremely great, the difficulties of restoring the value of our paper might not easily be surmounted, and a current discount or difference between the coin and paper of the country would scarcely be avoidable.

Dr. Smith, indeed, represents the expence of bringing back gold as considerable; but he seems to impute the greatness of it to the circumstance of its recurring again and again: and he describes it as continuing to recur in the case of each individual bank, whether in town or country, which persists in the false policy of issuing more paper than is sufficient to fill the circulation of the neighbouring district. I shall here take occasion to notice some great inaccuracies in one part of his reasoning upon this point.

He says—“A banking company which issues more paper than can be employed in the circulation of the country, and of which the excess is continually returning upon them for payment, ought to encrease the quantity of gold and silver which they keep at all times in their coffers, not only in proportion to this excess, but to a much greater proportion. Suppose, for instance, all the paper of a particular bank, which the circulation of the country can easily absorb, amounts to forty thousand pounds, and the bank keeps usually ten thousand pounds in gold and silver for its occasional demands. If this bank should attempt to circulate forty-four thousand pounds, the excess of four thousand pounds will return as fast as it is issued. Fourteen thousand pounds must then be kept instead of ten thousand pounds, and the bank will gain nothing by the excessive circulation. On the contrary, it will lose the whole expence of continually collecting four thousand pounds in gold and silver, which will be continually going out of its coffers as fast as they are brought in.”

He then adds—“Had every particular bank always understood and attended to its own interest, the circulation would never have been overstocked with paper money.”

There is, no doubt, some sort of ground for saying that an excess of paper will come back upon the banks which issue it, and that, in coming back, it will involve the issuing banks in expence. Much exception, however might be taken against Dr. Smith’s mode of estimating the expence which the quantity which would come back would bring upon the issuing banks. But the objection which I shall in the first place, urge against the remark of Dr. Smith, is, that, even granting it to be just, it can be just only in a case which can scarcely ever occur among the country banks of this kingdom. I mean, that it can apply solely to the case of a single bank of which the paper circulates exclusively through a surrounding district: it obviously cannot hold in the case of many banks, the paper of all of which circulates in the same district.

In order to explain this clearly, let us make the following supposition. Let us imagine the circulation of country bank paper which a certain district will bear to be one hundred thousand pounds, and ten banks to be in that district, each usually circulating and able to keep in circulation ten thousand pounds. Let us also suppose an excessive issue of four thousand pounds, and let us allow the effect of this on the ten banks to be that which Dr. Smith describes, a point which might certainly be disputed, namely, that a necessity will arise for always keeping (for this is what Dr. Smith’s language implies) an additional stock of gold amounting to exactly four thousand pounds, and also that a reiterated expence will be incurred (Dr. Smith does not say how frequently reiterated) in collecting and transporting these four thousand pounds of gold. Still it must be observed, that we may suppose the issue of the four thousand pounds excessive paper to be made by some one only of the ten banks, while the charge incurred by such issue may be divided among them all. It may, therefore, on Dr. Smith’s own principles, answer to one of several banks emitting paper which circulates in the same place, to issue the paper which is considered by him as excessive; and the practice of doing so may be owing to the country banker’s too well knowing his own interest, and not, as Dr. Smith supposes, to his too ill understanding it.

But the case which I have supposed has been put merely by way of illustration. When many banks issue notes circulating over the same district, it is impossible to say whose paper constitutes the excess. Whatever temptation to excess exists, must be a general one. It is, however, counteracted not only by the charge of transporting gold, on which alone Dr. Smith dwells, but likewise by all the other charges, as well as by all the risks to which country bank notes subject the issuers; not to mention the difficulty of finding a channel through which a quantity of paper much larger than common can be sent by the country bank into circulation.

Dr. Smith supposes, in the passage which has just been quoted, that, when there is an excessive circulation of country bank paper, the excess returns upon the banks to be exchanged for gold and silver. The fact is, that it returns to be exchanged not for gold and silver only, but either for gold and silver, or for bills on London. A bill on London is an order to receive in London, after a certain interval, either gold or Bank of England notes. This order imposes on the country banker the task of providing a fund in London sufficient to answer his draft: it serves, however, to spare that expence of transporting gold, as well as to lessen that necessity of maintaining a stock of guineas, which Dr. Smith assumes to be the consequence of every excessive emission of notes, and to be the certain means, if bankers do but understand their interest, of limiting their issue.

The remark which has just been made derives particular importance from the circumstances of the period through which we have passed. For, if the usual means of preventing an excess of country bank notes were nothing else than the liability of the issuers to be called upon for a money payment of them, it might fairly be assumed, that, at a time when the money payment of them has been suspended, we must necessarily have been exposed to the greatest inundation of country paper, and to a proportionate depreciation of it. The unbounded issue of country bank notes has been restrained by the obligation under which country bankers have considered themselves to be of granting bills on London; that is to say, orders to receive in London Bank of England paper in exchange for their notes, if required to do so: and it is certain that they would be required to do so whenever the quantity of their notes should be much greater in proportion to the occasion for them, than the quantity of the notes of the Bank of England in proportion to the occasion for those notes.

For the sake of explaining this, let it be admitted, for a moment, that a country bank has issued a very extraordinary quantity of notes. We must assume these to be employed by the holders of them in making purchases in the place in which alone the country bank paper passes, namely, in the surrounding district. The effect of such purchases, according to the principles established in this Chapter, must be a great local rise in the price of articles. But to suppose a great and merely local rise, is to suppose that which can never happen or which, at least, cannot long continue to exist; for every purchaser will discover that he can buy commodities elsewhere at a cheaper rate; and he will not fail to procure them in the quarter in which they are cheap, and to transport them to the spot in which they are dear, for the sake of the profit on the transaction. In order that he may be enabled to do this, he will demand to have the notes which pass current in the place in which we have supposed goods to have been rendered dear by the extraordinary emission of paper, converted into the circulating medium of the place in which goods are cheap: he will, therefore, require to have his country bank note turned into a Bank of England note, or into a bill on London, which is nearly the same thing, provided Bank of England notes are fewer in proportion to the occasion for them than the country bank notes; that is to say, provided Bank of England notes have less lifted up the price of goods in London than country bank notes have lifted up the price of goods in the country.

This point may be still more fully illustrated in the following manner. Let us imagine a mercantile house to consist of two branches, the one placed in the metropolis, the other in the country, and each branch to be accustomed to make certain payments in the spot in which it is situated, each, however, to be in the habit of borrowing as largely as it is able, the one of a neighbouring country bank, the other of the Bank of England, and of applying these loans to the joint use of the trading concern. Let us next suppose an extraordinary facility of borrowing at the country bank to arise, while the opportunities of obtaining loans at the Bank of England remain the same* . In such case the mercantile house, provided its London payments continue to bear the same proportion as before to its country payments, which will hardly fail to be the case, will exchange some part of its encreased loans in the country, consisting in country bank notes, for bills on London, or, in other words, for Bank of England notes. It will thus adjust, with the greatest nicety, the quantity of London and of country paper to the amount of the pecuniary demands upon it in each quarter; and, in doing so, it will contribute to prevent the supply of notes in either place from becoming greater in proportion to the demand than in the other. What has been supposed of one house, may be supposed of many similar ones; and not only of houses of the particular description which has been spoken of, but also of the several independent establishments in the two distant places which have pecuniary transactions together, and have an interest in accommodating each other. Their general operations, of a pecuniary kind, must be such as always to check a local rise in the price of commodities in either place, while it is as yet so small as to be scarcely perceptible. In this manner, therefore, the exchangeableness of country paper for London paper will never fail very nearly to equalize the value of them both. It is, moreover, important clearly to point out that their value will be equalized, or nearly equalized, not by a tendency in the London paper to partake in a low value which the country paper has acquired in consequence of its not being limited by any voluntary act of the issuers; nor by a tendency in each to approximate in value to the other; but by a tendency in the country paper to take exactly the high value which the London paper bears in consequence of its being restricted by the issuers. That this must be the case is plain, from the remark which has just been made; for it has been shewn, that the country paper, however it may fail to be limited in quantity by any moderation or prudence of the issuers, becomes no less effectually limited through the circumstance of their being compelled by the holders to exchange as much of it as is excessive for the London paper which is limited; which is limited, I mean, in consequence of a principle of limitation which the directors of the Bank of England have prescribed to themselves.

The country paper, let it then be observed, does not add any thing to the quantity of the London paper; for the effectual limitation of the London paper is the great point, which it must be borne in mind, that we have assumed. The country paper, therefore, does not in any degree diminish the price of the London paper; for its price must remain fixed so long as its quantity continues fixed, supposing, as we do in our present argument, that the demand for it is the same. It has been proved, however, that the country paper is rendered, by its exchangeableness with the London paper, almost exactly equal to it in value. It is, then, rendered almost exactly equal in value to a paper of which the value is completely sustained. Thus, therefore, the limitation of the supply of the single article of London paper, of which, however, we are taking for granted that the demand continues the same, is the means both of sustaining the value of London paper, and also of sustaining the value as well as limiting the quantity of the whole paper of the country.

It is, however, necessary here to point out to the reader, that, in the immediately preceding observations, we have assumed certain facts to exist, for the sake of stating clearly a general principle. It will be the object of a succeeding Chapter to shew in what respects the case which has been supposed differs from the actual one.

[* ]In the event of any great public alarm, such, for instance, as that which might be occasioned by the landing in this country of any considerable body of enemies, it is likely that the price of Bank of England notes, compared with that of stocks, or other articles for which there is a ready money market, would in like manner rise, even though the quantity of paper should continue the same: this would happen in consequence of that encreased demand for bank notes, to which it has been repeatedly observed that a state of consternation always gives occasion. Many bankers, at such a time, would feel a doubt whether they might not be drawn upon more largely than usual by some of their more timid customers; and whether, also, they might not be subjected to more than common difficulty in selling government securities, an article which, in ordinary times, they are used to turn into cash on the shortest notice, and which, while a prompt sale of them is to be depended on, they prefer to bank notes, because an interest is gained by holding the one, and not by detaining the other.

During the short crisis of an invasion, the advantage of accruing interest would be little regarded, and each banker, therefore, would make an effort to exchange his exchequer bills, or, perhaps, his stocks, for Bank of England notes, an effort which must prove generally ineffectual, supposing the quantity issued to be the same; but which, however, would have the effect of bringing down the comparative price of the article so eagerly offered in exchange for notes. Thus the price of government securities would appear to fall, when, in part at least, it would rather be the price of bank notes which should be said to rise. Some encrease of the bank issues seems very justifiable at such a time; such an encrease, I mean, as should be sufficient only to prevent what may be termed an unnatural rise in the value of bank notes. This issue would be the means of preventing a misconception among the public respecting the degree of distrust in government securities entertained by the dealers in them, a circumstance which might be of some political importance in a moment of general consternation.

[* ]“By issuing too great a quantity of paper, of which the excess was continually returning in order to be exchanged for gold and silver, the Bank of England was, for many years together, obliged to coin gold to the extent of between eight hundred thousand pounds and a million a year. For this great coinage the bank (in consequence of the worn and degraded state into which the gold coin had fallen a few years ago) was frequently obliged to purchase gold bullion at the high price of 4l. an ounce, which it soon after issued in coin at 3l. 17s. 10½d. an ounce, losing, in this manner, between two and a half and three per cent. Though the bank, therefore, paid no seignorage, though the government was properly at the expence of the coinage, this liberality of government did not prevent altogether the expence of the bank.”—Enquiry into the Nature and Causes of the Wealth of Nations, by Dr. A. Smith, Vol. I. page 451, 4th edit. Oct.

[† ]“When the market price either of gold or silver bullion continues for several years together steadily and constantly eithermore or less above, or more or less below, the mint price, we may be assured that this steady and constant either superiority or inferiority of price is the effect of something in the state of the coin, which, at that time, renders a certain quantity of coin either of more value or of less value than the precise quantity of bullion which it ought to contain.”—Smith on the Wealth of Nations, Vol. I. page 69, 4th edit. Oct.

[‡ ]“In every country the greater part of the current coin is almost always more or less worn or otherwise degenerated from its standard. In Great Britain, it was, before the late reformation, a good deal so, the gold being more than two per cent. and the silver more than eight per cent. below its standard weight. But if forty-four guineas and a half containing their full standard weight, a pound weight of gold, could purchase very little more than a pound weight of uncoined gold, forty-four guineas and a half wanting a part of their weight, could not purchase a pound weight, and something was to be added, in order to make up the deficiency. The current price of gold bullion at market, therefore, instead of being the same with the mint price, or 46l. 14s. 6d. was then about 47l. 14s. and sometimes about 48l. When the greater part of the coin, however, was in this degenerate condition, forty-four guineas and a half, fresh from the mint, would purchase no more goods in the market than any other ordinary guineas; because, when they come into the coffers of the merchant, being confounded with other money, they could not afterwards be distinguished, without more trouble than the difference was worth. Like other guineas, they were worth no more than 46l. 14s. 6d. If thrown into the melting pot, however, they produced, without any sensible loss, a pound weight of standard gold, which could be sold at any time for between 47l. 14s. and 48l. either in gold or silver. There was an evident profit, therefore, in melting down new coined money; and it was done so instantaneously, that no precaution of government could prevent it. The operations of the mint were, upon this account, somewhat like the web of Penelope; the work that was done in the day was undone in the night. The mint was employed not so much in making daily additions to the coin, as in replacing the very best part of it which was daily melted down.”

[* ]“Were the private people who carry their gold and silver to the mint to pay themselves for the coinage, it would add to the value of those metals in the same manner as the fashion does to that of plate. Coined gold and silver would be more valuable than uncoined. The seignorage, if it was not exorbitant, would add to the bullion the whole value of the duty, because the government having every where the exclusive privilege of coining, no coin can come to market cheaper than they think proper to afford it.

“A seignorage will, in many cases, take away altogether, and will in all cases diminish, the profit of melting down the new coin. This profit always arises from the difference between the quantity of bullion which the common currency ought to contain, and that which it actually does contain. If this difference is less than the seignorage, there will be loss instead of profit. If it is equal to the seignorage, there will neither be profit nor loss. If it is greater than the seignorage, there will, indeed, be some profit; but less than if there were no seignorage.”—Smith’s Wealth of Nations, Vol. II. Book IV. Chap. VI. pages 333, 334, and 335.

These observations of Dr. Smith, on the subject of a seignorage, seem erroneous in the following respects. Plate, when bought, is purchased in order not to be sold again, but to be retained by the possessor, and the price paid by the original buyer may, therefore, be not unfairly considered, as it is by Dr. Smith, to be the current price of the article. Gold, on the contrary, is no sooner bought and coined, than it is sent into circulation, it is sold, that is to say (or exchanged for commodities), again and again. What we mean, therefore, by the current price of gold coin, is that price at which it passes, not in the original bargain for bullion between the seller of it and the bank, but in the general course of this subsequent circulation. Guineas, moreover, not only circulate at home, but are liable to be sent abroad in the event of any unfavourable balance of trade. They are worth, in that case, just as much as the foreign country will give for them; and the foreign country, in estimating their value, since it means to melt them, does not at all take into its calculation the expence of the coinage of the piece of metal. It acts like a buyer not of new but of old plate, who destines it to the melting pot, and, therefore, refuses to allow any thing for “the fashion.”

This foreign price of our coin principally determines the current value of the price of coin in England. It appears to me to do this in the following manner.

When the price which our coin will fetch in foreign countries is such as to tempt it out of the kingdom, the directors of the bank naturally diminish, in some degree, the quantity of their paper, through an anxiety for the safety of their establishment. By diminishing their paper, they raise its value; and in raising its value, they raise also the value in England of the current coin which is exchanged for it. Thus the value of our gold coin conforms itself to the value of the current paper, and the current paper is rendered by the bank directors of that value which it is necessary that it should bear in order to prevent large exportations; a value sometimes rising a little above, and sometimes falling a little below, the price which our coin bears abroad; a price, in the formation of which no regard is had to the fashion.

A seignorage, nevertheless, might add to the current value of the coin of the kingdom for the following reason. It might incline the directors of the bank to improve the value of their paper by a stricter limitation of it, for the sake of more effectually exempting themselves from an occasional burthen, which is now borne for them by the government. The point below which they would wish to prevent their paper from falling would still be the same as it is now, namely, the selling price of our coin when melted and carried to foreign countries: the care, however, which they would take to prevent its falling below that price would, perhaps, be greater, and would be such as to raise its average price, if, in the event of each depression, they should be subject not only, as they are now, to loss in the purchase of gold, but to a further loss in coining it. There seems no reason, however, to suppose, that the degree of fluctuation which is now apt to subsist between the market price and mint price of gold could, by any efforts of the bank, be materially lessened. It results from the fluctuations in the exchange; and those fluctuations, in general, proceed from variations in the markets of Europe, which affect the balance of trade, and cannot, by any management of bank paper, be exactly counteracted.

[* ]“The coffers of a banking company which issues more paper than can be employed in the circulation of the country, and of which the excess is continually returning upon them for payment, though they ought to be filled much fuller, yet must empty themselves much faster than if their business was confined within more reasonable bounds, and must require not only a more violent but a more constant and uninterrupted exertion of expence in order to replenish them. The coin, too, which is thus continually drawn in such large quantities from their coffers cannot be employed in the circulation of the country. It comes in place of a paper which is over and above what can be employed in that circulation, and is, therefore, over and above what can be employed in it too. But as that coin will not be allowed to lie idle, it must, in one shape or another, be sent abroad, in order to find that profitable employment which it cannot find at home; and this continual exportation of gold and silver, by enhancing the difficulty, must necessarily enhance still further the expence of the bank in finding more gold and silver in order to replenish those coffers which empty themselves so very rapidly.”—Vol. I. page 450.

[* ]The case here put is assumed to exist only by way of argument. The point intended to be shown, is, that the case cannot happen; or, at least, that such cannot be the case, at the same time, of all the country banks in the kingdom. A single individual, it is true, may find his means of borrowing at a particular country bank to encrease in the manner which is here supposed; for he may obtain a preference over other borrowers. A single bank, also, may find its means of lending to encrease; for its notes may usurp the place of those of other banks. There can, however, be no material enlargement on the whole of the paper of the country, while the facility of borrowing in London remains the same.