ricardo to tierney
[Answered by 30]
New Grove Mile end 11 th. Decr. 1811.
I am encouraged by my friend Mr. Sharp, to submit to your consideration some remarks on the means which might be advantageously adopted, first, to arrest the progress of the depreciation of our currency, and secondly to restore it to its standard value.
The first of these objects appears to me, in the circumstances in which we are placed, to be the most pressing and perhaps the most important. Depreciation cannot be effectually checked by any other means than by depriving the Bank of the power which they at present possess of adding indefinitely to the amount of their notes. This might be done in a direct manner, by limiting the amount beyond which their paper should not be issued; but it has been plausibly urged against such a measure that occasions may arise in which sound policy may require a temporary augmentation of bank paper, and to deprive the Bank of the power of increasing their notes at such periods might be the cause of considerable distress and difficulty to the mercantile classes.
This argument does not appear to me to have as much weight as those who advance it imagine. The objection however may be obviated by the measure which I beg leave to recommend; it is simply to oblige the Bank to sell gold bullion to any purchaser of not less than 50, 100, or 200 ounces at a fixed price somewhere about the present market price,—such regulation to continue for six months.
This would secure the public against any further depreciation of Bank notes, as the Bank would be obliged for their own safety to keep the amount of their circulation within the present limits whilst commerce and credit continued in its present state, to prevent such a rise in the price of bullion as would make it profitable to individuals to purchase it of them for exportation;—and if a greater circulation were required from the operation either of increased commerce, or of embarrassed credit, the bank might augment their issues without producing any effect whatever on the price of bullion, and consequently without exposing the Bank to any inconvenience, or depriving the merchants of that increased accomodation, which might be essential to their operations.
If no further measures were taken to approximate the currency to our ancient standard, the adoption of the one here recommended would alone give complete security as to the future:—the depreciation of our currency would be effectually checked, and the bank deprived of the alarming power which they at present possess, of diminishing, at their pleasure, the value of the monied property of every man in the kingdom. It would afford leisure too for the consideration of such further measures as might be necessary, without pledging Parliament to any particular course of proceeding. And if it should be thought expedient to make bank notes a legal tender, the knowledge which the public would have that though already depreciated more than 20 pct., the depreciation of Bank notes would go no further, and that their value would no longer depend on the caprice or false theory of Bank Directors, would deprive that measure of all the alarm which without such security it is so much calculated to produce.
To accomplish the second object, namely, to restore the currency gradually to its mint value, I should recommend that at the expiration of six months, the bank should be obliged to sell gold bullion at 6d. or 9d. pr. oz less than the price now to be fixed, this regulation to continue for one month only. At the end of that period they should again lower the price 6d. or 9d. pr. oz for the next month, and so on for every succeeding month till the price was reduced to £3. 17. 10½. This reduction would be as gradual as the most timid would think necessary, as if the price of bullion were to fall 6d. pr. month, nearly 4 years would elapse before the currency would be raised to its standard value; and if it were to fall 9d. pr. month it would not be effected in less than 3 years. When this desireable object should be attained it would be of little comparative importance to the public, whether the Bank were allowed to continue to supply the whole circulation, as they now do, with their notes, or whether they should be compelled to pay in specie. It is not money but money’s worth that the holders of notes require, and it can be of little consequence to any reasonable man whether he goes to market with 20 guineas or £21 in notes, provided he can purchase precisely as much with one as with the other. If the public were secured against depreciation by possessing the power of exchanging their notes for bullion at the mint value of gold, I should prefer a circulation, such as ours, consisting wholly of paper, to any other, even as a permanent measure, as being more economical and possessing other obvious advantages.
It need not be observed that the whole of the above plan proceeds on the supposition that the Bank have uncontrouled power of regulating the rise or fall in the price of gold bullion, a point which was most satisfactorily proved during the late discussion on the report of the Bullion Committee.
Before I conclude I think it right to mention that I took the liberty of recommending to the Chancellor of the Exchequer the measure which I have stated in the first part of this letter, as one which might be advantageously adopted to prevent alarm if Bank notes were to be made a legal tender. He politely declined to follow my suggestions. I have now only to apologize for having so long intruded on your attention and have the honour to be
Sir Your obedt and very humble Sert
Right Honble. George Tierney.
[The following is written on another sheet.]
In my letter to Mr. Tierney it was my intention to have added the following passage, but on consideration there appeared to be some objections to this part of the plan, the consideration of which would have led me to a longer discussion than was consistent with the object which I had in view.
There is yet a part of the plan to be mentioned, which though by no means essential to it, might possibly be adopted with advantage. It cannot be supposed that the Bank would willingly do any thing which might be hurtful either to public or to private credit. Whatever my opinion of their mistakes may be no one can be more persuaded than I am of the general integrity of their motives. If however from a mistaken view of the subject they should diminish the circulation too rapidly they might raise its value in a ratio which might involve individuals in much perplexity and distress. As well therefore as possessing a security against an undue increase of Bank notes for particular periods, it would be desirable that the Public should also be secured against a too rapid diminution of their amount. This object might be most fully attained by enacting that the Bank should be obliged to buy gold bullion (not less than a fixed quantity) during the whole period of the reduction of their notes, at a price not less than 2/pr. oz under the price at which they were then selling. When they sold gold bullion at £4. 17. pr. oz, they should be obliged to buy at £4.. 15. -. When they sold at £4. 15- they should buy at £4. 13. Thus would complete security be obtained for a reduction of the currency without any danger of the reduction being made but by means just as gradual as Parliament should think expedient.