The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface.
• Conversation I.: Introduction.
• Conversation II.: Introduction — Continued.
• Conversation III.: On Property.
• Conversation IV.: On Property— Continued.
• Conversation V.: On the Division of Labour.
• Conversation VI.: On Capital.
• Conversation VII.: On Capital — Continued.
• Conversation VIII.: On Wages and Population.
• Conversation IX.: On Wages and Population. Continued.
• Conversation X.: On the Condition of the Poor.
• Conversation XI.: On Revenue.
• Conversation XII.: On Revenue Derived From Property In Land.
• Conversation XIII.: On Revenue Derived From the Cultivation of Land.
• Conversation XIV.: On the Revenue of Those Who Do Not Employ Their Capital Themselves.
• Conversation XV.: On Value and Price.
• Conversation XVI.: On Money.
• Conversation XVII.: Subject of Money Continued.
• Conversation XVIII.: On Commerce.
• Conversation XIX.: On Foreign Trade.
• Conversation XX.: Continuation of Foreign Trade.
• Conversation XXI.: Subject of Foreign Trade Continued.
• Conversation XXII.: On Expenditure.

CONVERSATION XVII.

Subject of MONEY continued.

caroline.

I have been reflecting much upon the subject of our last conversation, Mrs. B.; and it has occurred to me, that though there may be no permanent excess and depreciation of specie in any particular country, yet it must gradually decrease in value throughout the world: for money is very little liable to wear; a great quantity of the precious metals is annually extracted from the mines, and though a considerable portion of it may be converted into plate and jewellery, yet the greater part, I suppose, goes to the mint to be coined, and this additional quantity must produce a depreciation of value?

mrs. b.

An increase of supply will not occasion depreciation of value, if there should at the same time be a proportional increase of demand, and we must recollect that the consumable produce of the earth increases as well as that of the mines — the commodities to be circulated as well as the medium of circulation; and it is not the actual quantity of money, but the proportion which it bears to the quantity of commodities for which it is to serve as a medium of exchange, that regulates the price of those commodities.

Let us suppose the price of a loaf of bread to be one shilling; and say, if 1000 more loaves of bread be produced every year by agriculture, and such an additional number of shillings be obtained from the mines as will be necessary to circulate them, the price of a loaf will then remain the same, and the value of money will not, by this additional quantity of specie, be depreciated.

caroline.

But, Mrs. B., you do not consider that when the thousand additional loaves are eaten, the additional shillings will remain.

mrs. b.

The greater part of these loaves will be eaten by those who will not only reproduce them, but probably increase the number the following year.

caroline.

In that case it would be very possible that the progress of agriculture and manufactures should not only keep pace with, but even precede that of the mines.

mrs. b.

If the quantity of the precious metals annually extracted from the mines be exactly what is required for the arts, and for the additional specie necessary to circulate the increasing produce of the land, there will be no change in the value of money, and commodities will continue to be bought and sold at their former prices. If less gold and silver be extracted than is requisite for these purposes, goods will fall in price; and if, on the contrary, a greater quantity be produced, goods will rise in price, the fluctuations in the price of commodities gradually and constantly conforming to the variations of the scale by which their value is measured.

Dr. Adam Smith was of opinion that for many years past the supply of gold and silver did not exceed the demand; but several later writers conceive that he was mistaken on this point. I am very far from being a competent judge of such a question, but I confess that I feel inclined to favour the opinion of a general depreciation.

Previous to the discovery of America the exchangeable value of money was certainly much greater than it has been since that period. Some notion may be formed of the difference of the value of money in ancient and in modern times from the amount of the revenue which Xerxes, King of Persia, derived from his wealthy and extensive empire, and which enabled him to maintain his mighty fleets and armies; it is said in history to have amounted to only three millions sterling.

caroline.

The prodigality and extravagance of the Romans was then, in fact, still greater than it appears, since the immense sums they expended upon luxuries were then more valuable than they would be at the present times.

mrs. b.

As the wealth of the Romans arose in a great measure from the spoliation of the countries they conquered, gold and silver formed an essential part of their plunder; specie, therefore, might possibly be of less value there than in other parts of the world at the same period.

Independently, however, of the increase of quantity which produces a depreciation in the value of the precious metals themselves, there are causes quite foreign to this, which have considerable effect on the value of the money into which they have been coined. One of these is the adulteration of the coin. A pound sterling, or twenty shillings, originally weighed a pound of silver; hence its denomination. But sovereigns, in making new coinages, frequently found it convenient to adulterate the metal by mixing it with alloy. It was a means of increasing the value of their treasures, by paying their debts with a much less quantity of the precious metals, and thus defrauding their creditor-subjects, who in the first instance were not aware of the change.

In the year 1351, Edward the Third, distressed by the debts he had incurred in his chimerical attempts to conquer France, adopted this mode of paying his creditors with less money than he borrowed of them. He ordered a pound of silver to be coined into 266, instead of 240 pennies. Having experienced the beneficial effects of this expedient, he soon after coined 270 pennies out of the same pound. By this imposition, not only the creditors of the crown, but all other creditors were defrauded of about a tenth of their property; being compelled to receive in payment money of less value than that they had lent. Considerable inconvenience was also experienced from the alteration in the standard of value; as soon as it was discovered, it produced a general rise in the price of commodities, and the poor were greatly distressed by the enhancement of prices of the necessaries of life.

caroline.

But did not wages rise in the same proportion?

mrs. b.

Eventually they did, no doubt; but after such a revolution in prices as an event of this nature produces, a length of time is required to restore the due level; and the rich always resist the rise of wages as long as it is in their power. In the instance I have mentioned it does not appear that the labouring class made any effort to obtain a compensation by a rise of wages, until a dreadful pestilence, which originated in the east, extended its ravages to England, and carried off the greater part of the lower classes. The survivors then took advantage of the scarcity of hands to raise their terms; but the king, instead of allowing the remedy to pursue its natural course, considered this attempt of the labourers to raise their wages as an unwarrantable exaction; and in order to prevent it, enacted the statute of labourers. This statute ordained that labourers should receive no more than the wages which were paid previous to the adulteration of the coin.

It would be difficult to conceive a law more calculated to repress the efforts of industry. But Edward, urged by the weight of his accumulated debts, continued to depreciate the value of the coin; endeavouring to conceal the fraud by the introduction of a new silver coin called a groat, but in value only 3¼d.: and in 1358 he made 75 groats, or 300 pennies, out of a pound of silver.

caroline.

What a prodigious depreciation in the course of so short a period of time! and have similar expedients been resorted to by successive sovereigns?

mrs. b.

Yes; so repeatedly that 20 shillings, or a pound sterling, instead of containing, as formerly, a pound of silver, now weighs rather less than four ounces of that metal.

caroline.

But this is a partial depreciation, which affects only the coin of Great Britain. Have other countries adopted so unjust and pernicious a measure?

mrs. b.

It is so tempting an expedient for sovereigns, that it has been resorted to in almost all countries where money is used. In the time of Charlemagne the French livre weighed a pound, of 12 ounces. Philip the First adulterated it with one-third of alloy. Philip of Valois practised the same fraud on gold coin, and it has been repeated by successive sovereigns till the depreciation of the French livre is even greater than that of our pound sterling, it being now worth not more than ten-pence.

As far back as the time of the Romans this surreptitious mode of obtaining wealth had been discovered, and was practised. The Roman as, which originally contained a pound of brass, was in the course of time diminished to half an ounce.

caroline.

But now that the world must be fully aware of the imposition, I should think that governments would not venture to have recourse to such expedients.

mrs. b.

This country has increased so much in wealth, that in the present times less difficulty is experienced in raising taxes; and the facility of making loans has induced government to give the preference to that mode of obtaining money during a time of war, or whenever any extraordinary expenses are incurred.

Of late years a new mode of augmenting the currency of the country has been invented; by substituting for the precious metals a more convenient and more economical medium of exchange, under the form of paper-money.

caroline.

Paper-money! There can be no real value in money made of paper?

mrs. b.

None whatever intrinsically, yet it has been found to answer most of the purposes of specie. — You remember that money was first invented to avoid the inconvenience of barter. When a commodity is sold for money, it is under a confidence, on the part of the seller, that he will be able with the money to purchase any other commodity of equal value that he may want. It is of no consequence to him of what material the money be made, provided it have this quality.

caroline.

True; but paper can never have that quality; who would part with any thing of value for a bit of paper?

mrs. b.

Suppose I were to give you a paper containing my promise to pay you 100l. in money whenever you demanded it; would you not consider the promise so formally given, nearly of the same value as the money itself?

caroline.

Yes; because I have perfect confidence in you: but a stranger would not.

mrs. b.

Suppose that instead of my promise to pay you 100l., I should give you a piece of paper containing a promise to the same effect of some of the wealthiest and best known merchants in London?

caroline.

My confidence in the value of such paper would be in proportion to the reliance I could place on the promise of such merchants.

mrs. b.

Exactly so. Such confidence is the foundation of all banking establishments, which are in general a partnership of wealthy and respectable merchants, in whom the public repose so great a confidence that they are willing to take their promissory note, commonly called a bank-note, instead of money.

caroline.

A bank-note then is a written engagement, or promise to pay the sum, whatever it be, that is specified in the note?

mrs. b.

It is; and these notes become current as a medium of exchange; having no intrinsic value, they are merely the sign or representative of wealth; but are received by the public under the persuasion that they will be paid in money by the bank which issues them, whenever it may be required.

caroline.

This is indeed an excellent invention; what a saving of expense! The establishment of a bank of paper-money appears to me very similar to the discovery of a mine of gold in the country: or indeed the bank has even some advantages over the mine, for it is certain of being productive, and yet it is attended with much less expense.

mrs. b.

The saving of capital to a country by the substitution of paper to a metallic currency, is perhaps still greater than you imagine. If, for example, the currency of Great Britain be estimated at twenty millions of sovereigns, and the ordinary rate of profit at 8 per cent., it is evident that this currency costs the country above a million and a half a-year; for had not the twenty millions been employed as coin, they would have been invested in different branches of industry, and yielded above a million and a half profit. Besides, the loss of coin occasioned by fires, shipwrecks, and other accidents, is very considerable, and requires an annual addition to be made to the stock of currency in order to fill up the void. Thus, you see that it is an expensive luxury for a country to maintain twenty millions of gold in circulation.

caroline.

I am only surprised that facts like these should not have given rise to paper-money long before the present period. Pray, is the invention of paper-money quite of modern date?

mrs. b.

There is, I believe, no vestige of any thing of the kind in ancient history; unless we should consider as such a species of stamped leather used as money by the Carthaginians; and as they had also coined money, it is possible that their stamped leather might be considered merely as a sign or representative of real value, analogous to our paper-money.

caroline.

The leather was probably a species of parchment, the substance commonly used for writing on, before the invention of paper, and the impression stamped on it might signify the sum of money which the piece of leather was to represent, or pass for.

mrs. b.

These are points upon which, in the imperfect state of our knowledge of Carthaginian currency, it would be difficult to determine; it is fortunate, therefore, that they are questions more of curiosity than of utility.

The first bank we are distinctly acquainted with was established at Amsterdam in the year 1609* ; but this institution was of a different kind from what I have been describing. It issued no paper, but received the deposit of coined money, an account of which was taken in the books of the bank; and through the medium of these books, transfers of property were made from one individual to another, as occasion required, without the money being once removed from the strong chests in which it was originally deposited.

caroline.

There does not seem to be any economy in this species of bank; whilst those which issue bank-notes, by the substitution of a cheap circulating medium, render that of gold and silver superfluous, and enable it to be sent abroad to purchase foreign commodities.

mrs. b.

And, should foreign countries adopt the same economical expedient, and send us their superfluous specie . . . . . ?

caroline.

True, I did not consider that. If paper-money were generally adopted, every country would be overstocked with specie; for though the establishment of a bank in any one country may force the superfluous money into others, this cannot happen if banks are set up in every country. They are far, therefore, from being attended with the advantages I at first imagined.

mrs. b.

By issuing paper-money, so much is, in fact, added to the circulation throughout the civilised world; and inasmuch as it supersedes the use of the precious metals, and therefore lessens the demand, it must to a certain degree lessen their value. The immediate effect of opening a new bank is certainly to drive some portion of the specie out of the country in which the bank is established. It does not, however, force out the whole quantity which the paper represents; for, independently of the general excess to which we have alluded, a bank must keep a certain quantity of specie in reserve, to be enabled to fulfil the promise of paying its notes on demand.

caroline.

You do not mean to say that a bank will keep a fund of specie, like that of Amsterdam, equal to the value of its notes, for that purpose; for if so, no saving would result from the use of paper-money?

mrs. b.

Certainly not. The profits of the bank arise from the employment of the capital thus saved, which consists of the difference between the amount of notes issued and the specie reserved in the bank. It is so improbable that every person possessed of notes should apply at once for payment, that there is no necessity for providing a fund equal to the amount of the notes in circulation in order to fulfil the engagement. Banks discover from experience what is the proportion of specie requisite to enable them to answer the average demand made upon them; and they regulate the quantity of notes they issue accordingly: for if they failed in their engagement to pay them in cash on demand, they would become bankrupt.

caroline.

Yet I understand that a few years since the Bank of England did not pay its notes in specie?

mrs. b.

That is true; but it was in consequence of an act of parliament having been passed purposely to grant this privilege to the Bank of England for a specified time.

caroline.

And when a Bank of England note could no longer be exchanged at pleasure for specie, in what did its value consist?

mrs. b.

In the expectation that it would one day be paid in specie: this opinion rendered bank-notes still current: had such confidence been destroyed, their value would have been reduced to that of the paper of which they are made.

caroline.

But when the Bank of England was not obliged to pay its notes in cash, it was at liberty to issue any quantity however great. In short, it seems to have discovered the philosopher’s stone; for, though it may not have found the means of making gold, it possessed a substitute which answered the purpose equally well.

mrs. b.

Excepting, that, having no intrinsic value, it cannot be exported in case of excess; and you may recollect our observing, that no use could be made of any superfluous quantity of money but to exchange it for foreign goods. An excess of currency produced by an over-issue of bank-notes must therefore remain in the country, and cause a depreciation in the value of money, which would be discovered by a general rise in the prices of commodities, and would be attended with all the evils enumerated in our last conversation.

caroline.

And is there not great danger of a bank issuing an excess of notes when it is not restricted by the obligation of paying them in specie?

mrs. b.

A very considerable risk is certainly incurred by such an exemption.

When a bank issues more notes than are required for the purpose of circulation, its effect in depreciating the value of the currency, and raising the price of commodities, is at first very trifling, because as soon as that effect is perceived, the coined money begins to disappear. Notwithstanding the prohibition of law, it never fails to make its escape out of the country. It is either clandestinely sent abroad, or privately melted, and exported in bullion. As long, therefore, as an over-issue of notes serves to replace the coin which it forces out of the country, there is but little augmentation of the circulating medium; but if, after the specie has disappeared, the bank still continue to force an additional quantity of notes into circulation, the excess will be absorbed in it, the value of the currency will be proportionally depreciated, and a corresponding rise will take place in the price of commodities.

caroline.

But is it known whether the Bank of England materially increased its issue of notes when it was exonerated from the obligation of paying them in cash?

mrs. b.

Of that there is no doubt; but it is the opinion of some people, that the supply of notes did not exceed the demand; — that the paper-mine (as you call it) increased its produce only in proportion to the increase of the produce of the country, and the peculiar exigencies of the times, political circumstances having deranged the natural order of things, and rendered, during the late revolutions of Europe, a more than usual quantity of currency necessary.

caroline.

But was it not during the late war that all our gold coin disappeared, and was supposed to be melted down or exported? And was there not a general rise in the price of provisions and commodities at the same period?

mrs. b.

That is true; and the question has been very much disputed whether these circumstances were owing to the war, and the taxes it entailed upon us, or to an over-issue of bank-notes. England was under the necessity of paying her troops on the Continent, and of subsidising foreign sovereigns; and the opinion was maintained by many people, that this was a sufficient reason to account for the disappearance of our specie, and to render an additional issue of bank-notes necessary.

But the strongest argument in favour of a depreciation of the currency is, that guineas no longer passed for the same value as gold bullion, which is the natural standard of the value of coined money.

caroline.

Has the gold then been adulterated, and an ounce of gold coined into more than 3l. 17s. 10½d.?

mrs. b.

No; but gold bullion partook of the general rise of commodities, and, instead of selling for 3l. 17s. 10½d., it sold for above 4l., and even once was as high as 5l. an ounce.

caroline.

But why did not guineas rise in the same proportion? I cannot conceive how they can be less valuable than a similar weight of the gold of which they are made.

mrs. b.

The coined and the uncoined gold, it is true, remained in reality of the same value, but as it is not lawful to pass a guinea for more than a poundnote and a shilling, the guineas were compelled to share the fate of the paper-currency; and if that was depreciated, all the coined money of the country, whether gold or silver, must have been so likewise.

caroline.

Then, if it had not been illegal, every one would have melted his depreciated guineas and shillings, and converted them into gold and silver bullion?

mrs. b.

Certainly. It is this which caused our specie to disappear, and transported it to foreign countries, where it was freed from the shackles of a depreciated paper-currency, and enabled to fetch its real value in exchange for goods; it is this also which, as we before observed, brought foreign goods to be sold at our market, because it was dear; and sent our money to purchase goods at foreign markets, because they were cheap.

caroline.

But if an ounce of gold rises in price from 3l. 17s. 10½d. to 5l., is it not rather the value of the bullion that has risen than the currency that has fallen?

mrs. b.

Gold bullion, like every other commodity, rises in price only, not in value; and that rise is owing to the depreciation of the currency in which its price is estimated: were there no depreciation, bullion and guineas would both be worth 3l. 17s. 10½d. an ounce.

caroline.

This, then, seems to decide the point of depreciation.

mrs. b.

I think it does; but it is yet a disputed question, though the principle becomes every day more generally acknowledged; but you must recollect, that when I undertook to assist you in acquiring a knowledge of the principles of political economy, we agreed to confine our enquiries to such points as were well established. We will, therefore, refrain from deciding a question upon which there still exists a difference of opinion.

It is very easy to acquire some knowledge of the principles of a science, but extremely difficult to know how to apply them. I would particularly caution you against hasty conclusions or inferences: the errors arising from the misapplication of sound principles are scarcely less dangerous than those which proceed from ignorance.

Let us now conclude our observations on currency, which we may henceforth consider as consisting not merely of specie, but of coined and of paper-money.

caroline.

It is not, I suppose, necessary that the value of the currency of a country should be equal to the value of the commodities to be circulated by it?

mrs. b.

By no means. The same guinea or bank-note will serve the purpose of transferring from one individual to another several hundred pounds’ worth of goods in the course of a short time. There are besides many expedients for economising money, the most remarkable of which is an arrangement made amongst bankers. Their clerks meet every day after the hours of business to exchange the draughts made on each other for the preceding day. If, for instance, the banking-house A. has draughts to the amount of 20,000l. on the banking-house B., the latter has also, in all probability, draughts upon the former, though they may not be to the same amount; the two houses exchange these draughts as far as they will balance each other, and the necessity of providing money for the payment of the whole is thus obviated. By this economical expedient, which is carried on amongst all the bankers in London east of St. Paul’s, I understand that about 200,000l. performs the function of four or five millions.

caroline.

And what do you suppose to be the proportion of the money to the value of the commodities to be circulated by it?

mrs. b.

That, I believe, it would be impossible to ascertain. Mr. Sismondi, in his valuable Treatise on Commercial Wealth, compares these respective quantities to mechanical powers, which, though of different weights, balance each other from the equality of their momentum; and, to follow up the comparison, he observes, that though commodities are by far the most considerable in quantity, yet that the velocity with which currency circulates compensates for its deficiency.

caroline.

This is an extremely ingenious comparison, and I should suppose the analogy to be perfectly correct; for the less money there is in circulation, the more frequently it will be transferred from one to another in exchange for goods.

mrs. b.

Perfectly correct is rather too strong a term. The analogy will only bear to a certain extent, otherwise, whatever were the proportions of currency and of commodities, they would always balance each other, and the price of commodities would never be affected by the increase or diminution of the quantity of currency.

[* ]It is said, however, that a bank was established at Venice at least two centuries before.