Front Page Titles (by Subject) ARTICLE I.—THE CURRENCY MONOPOLY. ( From The Prospective Review, 1848. First essay published by Walter Bagehot. ) - The Works and Life of Walter Bagehot, vol. 8 (Physics and Politics, Currency Monopoly, and Essays)
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ARTICLE I.—THE CURRENCY MONOPOLY. ( From “ The Prospective Review, ” 1848. First essay published by Walter Bagehot. ) - Walter Bagehot, The Works and Life of Walter Bagehot, vol. 8 (Physics and Politics, Currency Monopoly, and Essays) 
The Works and Life of Walter Bagehot, ed. Mrs. Russell Barrington. The Works in Nine Volumes. The Life in One Volume. (London: Longmans, Green, and Co., 1915). Vol. 8.
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ARTICLE I.—THE CURRENCY MONOPOLY.
Not only do the circumstances of the recent mercantile crisis naturally create an interest in the subject of currency, but there is also a deeper and a more permanent reason why it should occupy the minds of those who live in the present age. It cannot be denied that the success of the Free Trade agitation in England has now familiarised the majority of educated Englishmen with a scheme of political doctrine which at any previous time would have been deemed, to say the least, eccentric and paradoxical. Almost all in any other generation would have regarded even the characteristic truths of the laissez-faire system as utterly strange and incredible; and even the most far-seeing would have thought its characteristic errors too futile to need a detailed refutation. In our time, however, it has been clearly and convincingly argued, that when no blinding passion prevents individuals from discerning what is their greatest pecuniary interest; when their pecuniary interest coincides with that of the nation at large; and when also the pecuniary interest of the nation is coincident with its highest interests and highest duties,—the welfare of the nation will be better promoted by leaving every man to the exercise of his own unfettered discretion, than by laying down a general legislative rule for the observance of all. We do not think that when the boundaries of the argument are thus guarded and defined, the proof of the laissez-faire system can rightfully be gainsaid. To us it appears evident that a Government cannot exercise that minute inspection of details, and will not devote to them that continuous attention, which are essential to the success of trading speculations: nor even if the whole detail of cases were laid before them, have the habits of rulers in general trained them for coming to a decision so correct as that of mercantile men: nor, what is more to the point than all, can any law drawn up in vague and general language supply a universally beneficial rule for the multifarious and ever-varying operations of commerce. From an habitual contemplation of these truths, a sentiment of dislike to the interference of Government has grown up in the minds of money-making men: those of them especially who have most accurately studied the machinery by which capital and labour are transmitted to their most profitable employment are prone to speak contemptuously of Government interference as though it were proposed that those who were wholly ignorant of the construction of a nicely adjusted machine should have the discretionary privilege of placing a clog upon its working. This sentiment is useful and healthy when confined to its legitimate function, viz. when watching that Government does not assume to know what will bring a trader in money better than he knows it himself; but it is a sentiment very susceptible of hurtful exaggeration: in the minds of many at this day it stands opposed to the enforcement of a moral law throughout the whole sphere of human acts susceptible of attestation: to the legislative promotion of those industrial habits which conduce to the attainment of national morality or national happiness at a sacrifice of national wealth: to efforts at a national education, or a compulsory sanatory reform: to all national aid from England towards the starving peasantry of Ireland: to every measure for improving the condition of that peasantry which would not be the spontaneous choice of the profit-hunting capitalist. Whoever speaks against these extreme opinions is sure to be sneered at as a “benevolent sentimentalist”: and economists are perpetually assuming that the notion of Government interference is agreeable only to those whose hearts are more developed than their brains: who are too fond of poetic dreams to endure the stern realities of science. Under these circumstances, the opponents of the laissez-faire system will be interested to inquire whether there be no exception to it within the limits of Political Economy itself; whether instances cannot be found where the pecuniary interest of individuals, though not guiding them to actions morally wrong, does nevertheless come into collision both with the pecuniary and with the real interest of the nation; where the sedulous attention of a Government is needed to guard the elaborate machinery of national industry against the disturbing agency of individual selfishness. Such a subject, according to an immense preponderance of authority, according to the almost universal belief of the greatest nations, is the subject of currency. The vast majority of nations have vested in the hands of Government the monopoly of what in the hands of individuals would be a lucrative branch of industry, viz. the trade of coining metallic money. The progress of opinion in this country has during the last few years sensibly tended towards following the example of several continental nations, and giving to Government, of course with due respect to vested interests, the monopoly also of the issue of paper money. In the following essay it is proposed, after a brief preliminary notice of the books before us, to indicate the grounds upon which we believe that there is a great wisdom in acknowledging this exception to the principles of Free Trade: to defend the practice of confining to Government both the coining of the precious metals, and, as far as possible, the utterance of money destitute of intrinsic value: and also to notice some interesting points of currency theory which incidentally arise in the progress of the discussion, and which are treated of at length in the works under review.
These works have all arisen out of the terrible monetary crisis of 1847, and for their main and characteristic object to decide whether it were alleviated, caused, or aggravated by the Bank Bill passed at the instance of Sir R. Peel in 1844. This measure had a fourfold purpose: it was designed to limit to 14,000,000 sterling the amount of paper money issuable by the Bank of England on securities; to divide the Bank of England into two Departments, in one of which, called the Issue Department, there should be bullion for all bank notes over and above the before-mentioned 14,000,000, either in the till of the other or Banking Department, or in the hands of the trading public of England; thirdly, to preclude the existing country banks of issue from going beyond the issue of a certain maximum of notes founded on a particular average of the previous circulation of each; fourthly, to provide against the establishment of any new banks of issue, and for the substitution of Bank of England paper in the room of the circulation of any existing banks who may consent to it. This Act is clearly an approach to the principle of a Government monopoly of paper money: most obviously by its last provision, but not less by the constitution of a separate Issue Department, which as a mere piece of mechanism to keep bullion in reserve to represent notes in circulation, and to give bullion in exchange for them on demand, is beyond the control of Bank Directors, and might as well be in the hands of National Commissioners appointed by the Crown. Under this law the monetary affairs of the country were transacted, until October 25, 1847, when a letter from Lord John Russell and the Chancellor of the Exchequer empowered the Bank of England “to enlarge the amount of their discounts and advances upon approved security,” at the rate of 8 per cent., at the risk of an extraordinary issue of bank notes unrepresented by bullion; thus abolishing pro tempore that portion of Sir R. Peel’s Bill which limited the amount of notes not represented by bullion in the Issue Department. On this measure, and on the deviation from it, there is every kind of difference of opinion; but those most entitled to respect are adequately represented by the three works at the head of this Article. Mr. Wilson, the editor of the Economist, has here embodied in a permanent form several very able and instructive articles, first published in that newspaper during last year. He is a decided opponent of the Bill of 1844, and in his own words “has never been able to discover any good ground for the objections which appear to exist in the minds of a portion of even the most uncompromising free traders against the application of the same principles to banking, and especially to notes payable on demand”. He enumerates five assumptions which, he thinks, are contained in the Act of 1844; and professes to refute them at great length. These are, first, that bank notes, though payable in coin at the option of the holder, are still liable to be issued in excess, and are consequently subject to depreciation. Secondly, that convertibility of notes into coin at the pleasure of the holder alone is not a sufficient guarantee that a mixed currency of bank notes and coin shall conform in its variations to the same laws which regulate a purely metallic currency. Thirdly, that issuers of notes have power to increase or decrease the circulation at pleasure. Fourthly, that by an expansion or contraction of the issue of bank notes at pleasure, the prices of commodities can be increased and diminished. Fifthly, that by such an increase or diminution of prices, the foreign exchanges can be corrected, and an undue efflux or influx of bullion, as the case may be, corrected.1 Beside this elaborate attempt at the refutation of the principles of Sir R. Peel, Mr. Wilson has given us a dissertation on the distinction which he draws between capital and circulation, on the difference between floating and circulating capital, on railways, and on the principles of banking; so that the work forms altogether a very complete discussion of the causes which are asserted to have produced the crisis of 1847. On each of the five propositions which Mr. Wilson has enumerated, we shall be obliged to say something hereafter: they are evidently most material in deciding on the rule by which the issuer or issuers, whoever they may be, are to be guided in the management of the circulating medium. We do not imagine that his objections invalidate the essential argumentative supports of the Act of 1844; but we are quite ready to concede that he has effectually demolished certain outworks which had been reared by the excessive zeal of incautious defenders. We may be excused for remarking that we much wish that the book had been submitted to an attentive revision. There are, we think, many inaccurate expressions which would pass in a newspaper without occasioning either remark or mistake, but which occasion perplexity and even error when submitted in a permanent work to the eyes of attentive students and acute opponents. Mr. Wilson concludes with a plan of his own for a secure and economical currency; the principal feature of which is a “substitution” of one pound notes for sovereigns, with the view of obtaining a convenient purchase-money for the foreign corn imported last year.
Colonel Torrens’ pamphlet (if 177 pages do not make a book of too great magnitude for a name so trivial) shows in the strongest light the peculiar talents of its author. Although long, in consequence of the number of the subjects which it discusses, it is by no means prolix or diffuse; for the style is marked by that distinctness and precision which characterise a writer who has a clear and scientific acquaintance with the subject which he handles. No English economist with whose works we are acquainted has at all equalled Colonel Torrens in the literary skilfulness which results in the emphatic statement of abstract truths.1 His well-known controversial ability has never been more strikingly displayed than in his present production. He has been thoroughly roused by the objections to the principles of the Act of 1844, of which he is the greatest theoretical expounder; and he has the advantage of contending against adversaries more eminent for diligence, good sense, and acquaintance with the actual course of business, than for the faculty of scientific abstraction. Colonel Torrens is not, however, so great a worshipper of the Act of 1844 as to disapprove of the interposition of Ministers in October last. On the other hand, he regards this Act of the Government as a masterpiece of political sagacity, conceived with great speculative ability, and executed with first-rate practical dexterity, neither begun too early nor deferred too late.
Mr. Tooke’s book cannot be looked on as a masterpiece of literary skill. It is swollen with quotations which those who are interested in the subject will most probably have read in the works from which they are selected, and which will not always be intelligible to those who meet them here for the first time. The style is prolix and diffuse; very different from what the author of the London petition of 1820 and the previous volumes of the History of Prices has at times shown himself capable of. But Mr. Tooke claims respectful attention on grounds which allow him to sacrifice the attractions of verbal elegance. He began his career as an economical author, many years ago, by writing in defence of the currency doctrines maintained by Ricardo and the Bullionists of 1810; but by a more detailed attention to the condition of England from 1793 to 1839 he was led first to modify, and afterwards to discard, this celebrated scheme of economical theory. At the present time this circumstance is particularly important, because the principles of the Bill of 1844 are, according both to friends and opponents, logically correct deductions from the tenets of Ricardo. Mr. Tooke’s own substitute for these views has been embodied for some years in the History of Prices, of which the work before us is the concluding volume.
It will be more convenient to describe these new speculations in connection with those parts of the subject to which they particularly refer. We are not prepared, with Colonel Torrens, to designate the History of Prices as “the most illogical work which has ever been contributed to the world on a scientific subject”: but we are still less ready to hail Mr. Tooke as the discoverer of principles that will supersede everything yet advanced upon the subject of currency. He appears to us simply an able and industrious collector of facts, who has done a great service to Political Economy by a narrative of the rise and fall of English prices during the present century. He does not appear to us to understand what are the necessary supports of the theory on which the Act of 1844 is grounded. He continually alleges facts as “obvious disproofs” of that theory which, in reality, are perfectly consistent with it, and seem to us sometimes confirmatory of it. Mr. Tooke is a much more violent opponent of the principles of Sir R. Peel’s Bill than Mr. Wilson. It will go down to posterity in this volume of the History of Prices that the interference of Ministers with the working of that Act in October last was a manifest indication of utter falsity of principle, and that the Act itself has been “a total, unmitigated, uncompensated, and, in its consequences, a lamentable failure”. The greatest cause of the diversity of opinion prevailing on the subject of currency, and conspicuous even in the books which we have just described, is an indistinct conception of the circumstances affecting exchangeable value. Money is, for commercial purposes, the standard of value, and no one ought to wonder that mistakes as to value itself may cause that which measures it to be misapplied. A few words, therefore, on elementary principles will not be thrown away if they clear from the minds of any, misconceptions as to the fundamental truths on which almost all political economy is grounded. In doing this, we shall follow the rule of science and common sense, by considering first the most simple cases, and then advancing to those more complicated; first computing the effects due to the principal and constant causes, and then going on to the consideration of secondary and disturbing agencies. We may state that in our judgment, there is a consensus of economists for what we shall advance: particular writers, as Mr. Tooke and Mr. Wilson, take exception to particular tenets; but the prevailing course of teaching, as exhibited in the writings of the most accomplished economists, tends to a united belief in the proposition we are about to maintain. As the simplest possible mode of conducting mercantile business is by barter, we are met at the threshold of Political Economy by the question much discussed some thirty years ago—viz. what, under this simple system, regulates exchangeable value. The doctrine generally received at present, and, as we think, the true one, is as follows: the price universally is regulated by the quantity brought to market, and the demand for it; by the scarcity of the article, and its utility: that is, by its scarcity, and by that power of satisfying human wants of which the market-demand is the sole attainable evidence. Hence it is assumed as an axiomatic truth that articles equally in demand, exchange one against another inversely as their supply: and articles of which the supply is the same, exchange one against another in direct proportion to the demand. But it is obvious that these causes, viz. demand and supply, cannot, in the case of articles capable of being produced in indefinite quantity by human labour, be an ultimate regulator of exchangeable value. The supply of such articles is not a simple casualty: men have some motive for producing when they do produce, and for ceasing when they cease; and this motive it is the business of Political Economists who have in view the discovery of the mental laws affecting the Production as well as the Consumption of wealth, to exhibit with clearness and fulness. Nor in all ordinary cases is that motive hard to seek: since those articles exchange one against another which are equally in supply and equally in demand, it is obviously the interest of every man to supply that one among equally desired articles which he can supply with the greatest ease. Hence, cases of monopoly excepted, articles which it is easy to produce will be supplied in inverse proportion to their cost of production; because producers will flock to those branches of trade which are attended by an extra facility of production: and will keep clear of those where there is an extra difficulty. And therefore it appears as a final result, that in all pursuits open to unlimited competition, articles for which the demand is the same will have an exchangeable value directly proportioned to their cost of production: that is, to the labour and capital expended upon bringing them to market. It is important to call attention to the fact that this result is brought about by alterations in the quantity of articles offered for sale, so that diminution of the cost of production would cause a fall in exchangeable value; until producers shall have suited themselves to the new state of circumstances, and until a general increase in the quantity of the commodity throughout all its uses and all its products shall have so glutted the market as to render it too abundant to bear its old value.
A speculative thinker would expect to find that the main course of trade would not be much altered after the improvement superinduced upon the system of barter by the introduction of a general instrument of interchange under the name of money. When men find out an instrument to facilitate the performance of any work, they will generally take care not to overlook the end in a superfluous anxiety about the means. Mankind are a race of beings wiser in action than in speech: the mass of energetic intelligence which is concentrated on the industrious occupations of practical life, though unrepresented in books and often undervalued by literary men, will generally keep mere instruments in due subservience to their ultimate ends. So it is obviously with metallic money. Gold does not cease to have its value determined as before because everything is purchased with it, and all debts are paid in it. Though a convenient it is a misleading expression to speak of the state of barter as having ceased; in point of fact, gold is bartered for everything and everything is bartered for gold. Just as in the state of things before the introduction of money to expedite the transfer of commodities, a diminution in the cost of production is followed by an increase in the quantity of it that is brought to market, and consequently by a reduction of value. Everybody, in plain English, could have it more easily: the supply of it would increase: the quantity of it made into plate would be greater, and the value of plate less: the quantity made into sovereigns would be increased, and the purchasing power of sovereigns would be diminished. And here it is important to remark that it is an increase in the amount of the circulating medium that raises the prices which are estimated in that medium: that the quantity of money in circulation is the cause of that rise, and not the consequence of it: that a facility in obtaining the medium of interchange raises the price when measured in that medium. Nor will the case be altered when bullion is imported from foreign countries: an influx of bullion will cause an additional quantity to be made both of plate and sovereigns: by causing that increase of quantity it will also cause a diminution in their purchasing power. Nor is the case altered by the foundation of banks of deposit. The necessity of these arises thus: every man has to keep a certain amount of coin ready to meet demands upon him: “Money,” says Aristotle, “is barren”: no man gets a profit on what is in his till; and a natural desire arises in consequence to reduce its amount to the minimum consistent with safety and solvency. This desire is partially satisfied by an offer from a person whose respectable character and pecuniary means afford the public what they think an adequate guarantee for his not becoming insolvent, to receive the superfluous cash of individuals, and to pay it back either upon demand or upon the receipt of a certain notice. A part of this money he lends out again, at a profit to himself; a part he holds as a reserve to meet demands upon him.
Now under the influence of a cheapening of bullion it appears that both the money in the hands of the public and in the bankers’ reserve will increase. Sovereigns and plate, as we so often say, will be multiplied, and wherever either is used there will be an increased supply of them. It is a very secondary question whether, with Colonel Torrens, we shall say that money in bankers’ reserve is in circulation, or, with Mr. Wilson, confine that appellation to money in the hands of persons not bankers. Mr. Wilson’s distinction seems to us very arbitrary:1 the reserve of money is an equivalent for a larger amount, which if there had been no banks of deposit would have been in the hands of the public; if the keeping one-fifth of the currency of a country in a bankers’ reserve enables it to dispense with the employment of two-fifths, it seems confusing to apply the name circulation to the three-fifths in previous use, and not to apply it to the one-fifth which is substituted for them. What renders the difference of opinion important is the doctrine of the exchanges. When there is an influx of bullion, the exchange is, in conformity with certain old mercantile superstitions, called favourable, and also unfavourable when there is an export of bullion. Now the theory of Sir R. Peel’s bill assumes that with the influx of bullion there would be an increase in the quantity of a purely metallic circulation, because as a rule that influx would be attended with a cheapening of bullion, and mutatis mutandis a similar proposition is thought to hold if an efflux. Also it is stated as a fact of experience, that drains of bullion, for the purpose of supplying an adverse exchange, act first on the reserves of bankers; and Mr. Wilson reasons that these reserves are not circulation, and that, as the drain acts on them, the circulation is not reduced by it; and he believes himself to have thus overthrown a material support to the Act of 1844. Even, however, if it were admitted that the drain acted only on the reserves, we should answer that they were as much in circulation in the till of the banker as in the till of a merchant: but we altogether doubt if a drain could act on them only. A reserve in general ought to bear a fixed proportion, say a third, to the deposits which it is kept to meet: if a half of the reserve were drawn out, the deposits would evidently be reduced only a sixth, and the reserve would only be one-fifth of the deposits. A prudent banker would, in such a case, increase his money reserve by the sale of securities and an abstraction of the proceeds from the money in the hands of the general public. On the whole we cannot but regret that Mr. Wilson should have suffered a point of detail like this to obscure his perception of the principle that an influx of bullion will be attended by a cheapening of bullion: and that the latter will, when the number of monetary transactions has undergone no diminution, be accompanied by an increase of circulation. We quite concede to Mr. Wilson that it may happen that the transactions of the country may be simultaneously diminished with an import of bullion and increased simultaneously with an export. The amount of transactions depends of course on the amount of commodities in the country and on the wish to interchange them. Circumstances could no doubt be imagined, which might, by affecting these, reduce the mercantile business of the country, just when bullion was fast flowing into the country; but this admission obviously does not affect the principle which we have here advanced. It is also proper to remark, that we have been all along speaking of a purely metallic currency, where all barter was extinct, and all bargains were effected by the passage of so much coin from hand to hand. We are quite willing to concede to Mr. Wilson, that if any remains of a system of barter should have lingered long after the rest of it was abandoned, and if this last remnant of the primitive state of things were swept away during an adverse exchange and an efflux of bullion, an increase in the circulation of a purely metallic currency will be coincident with a foreign drain of bullion. As Mr. Wilson himself remarks in a recent number of the Economist, the downfall of the conacre system, and the introduction of money wages into many parts of Ireland, may have last year rendered necessary an increase of Irish silver currency, although there was simultaneously a drain of bullion from the whole United Kingdom to pay for foreign corn.
It is obvious that the introduction of a metallic currency induces the practices of estimating the prices of articles in money, or, as it is phrased, makes money the standard of value.
On this account it very early became necessary to know what amount of gold is being paid and received at any given time: so that when the price purports to be a certain quantity of gold, no more and no less should be paid and received. For this purpose, either Governments or individuals of sufficiently respectable character must place a stamp or other mark on the bullion to intimate what it consists of: and this is the prerogative or privilege of coining. It has been extensively believed that Governments were the only persons who were competent to give a credible assurance that metallic money contained a certain amount of bullion. Nevertheless, at Rome, the patricians had, for a long period, the right of coining money, and it is evidently an infraction of the principles of Free Trade and unlimited competition to vest in Governments the monopoly of stamping metallic money. It is evident that trade would go on if Baron Rothschild’s head were on our coin instead of Queen Victoria’s; and Mr. S. J. Loyd’s assurance that £3 17s. 10½d. of his currency contained an ounce of gold and no more, would be as good as a similar assurance from the Master of the Mint. Such a system might be worked under a severe law against instances of fraud, and under legislative provisions, enumerating what coins should be allowed by law to be a legal tender, and what amount of gold and silver they should respectively contain. These provisions would be necessary in order to free us from the confusion of different systems of coinage, with different names, and with the same names and different weights, whose complexities would rival those of the Swiss batzen. So long as the pieces of coin really contained that amount of bullion which they were certified to contain, no effect would be produced except that the expense of coining, now defrayed by the State, would be borne by the public in the shape of a permanent difference of value between the manufactured article—sovereign, and the raw material—bullion, and that the coiners would get the ordinary rate of profit on the capital employed in their business. But if debasement were once introduced, if sovereigns did not contain that amount of bullion which they were certified to contain, but only a less amount, sovereigns would be supplied, by the fraudulent producer, with less cost and in greater quantity than by others, would be issued by him upon loan, and in purchase, resale, or consumption, to an undue extent. New purchasers would be brought into the market, who would not have come there if the currency were undebased. The price of goods would rise; the rise in the price of goods would act as a stimulus to production; the stocks of goods for sale would be largely increased; at last the debasement would be discovered; the debased coin would be at a discount; prices would return to their original metallic standard, and would, in consequence, undergo a considerable nominal fall; and that fall would probably go beyond its true limits, because few like to make purchases in a falling market, and most hang back in expectation of an impending additional fall of prices.
Here there is obviously considerable derangement of industry, and considerable evil arising out of the custom of coinage by individuals. Besides this it must be remarked that the chief utility of unlimited competition is its quality of reducing the cost of production to the minimum which Nature admits of. In all mechanical processes, for example, unlimited competition produces continually new inventions and additional economy in the working of old ones; and in general, this has the advantage of supplying human wants at the least possible sacrifice of labour and capital. But improvements in the process of coining brought about by the competition of individual coiners would have a different and less beneficial effect. What is wanted in money is fixity1 of value.
The discovery of a new mine is a very questionable advantage, if it should throw others out of employment, and reduce the cost of production of bullion, and thereby diminish its exchangeable value. All money prices would rise 10 per cent. in consequence of such an alteration in the cost of money to the extent of 10 per cent.; the cause would not at first be recognised as prices rise: the rate of production will be accelerated and the stock of goods on hand augmented: the course of events in fact would exactly resemble that rise of price and extension of supply which we have shown to be a consequence of a debasement of the coinage by individual competing coiners. It has been contended that this is no evil: that the quantities of all goods in the market are equally augmented: and that therefore, as in a state of barter, each would soon find out what he wanted to exchange his own commodities for, so, in the present more artificial state of things, every one would sell at the reduced rate, and would buy what he wanted and no more. The value of commodities in relation to one another, it is contended, has not been affected, and the rise in their money prices, it is therefore legitimately deduced, would only be nominal and immaterial. This argument is so far correct, that the rise of the prices of all commodities to the extent of 10 per cent. in consequence of a corresponding fall in the value of money, being common to all articles, does not affect their relative value. But the increased rate of production which we have shown to be consequent on that rise has a very different effect: an addition of 10 per cent. to all the commodities in a market very materially alters their relative exchangeability. The effect of a very small supply of some articles is enormously to lower their value, while a much larger supply of others hardly diminishes the value at all. For instance, of those articles of which only a limited amount is wanted, a small increase above that amount will cause a great reduction of price. There is a certain amount of plain food, for example, which will thoroughly feed a population: the demand for it, as Adam Smith long ago observed, is limited by the narrow capacity of the human stomach. A series of very plentiful harvests which should produce a quantity of corn exceeding, in however small an amount, this fixed maximum of demand, would bring down the price of corn enormously. On the other hand, articles of more luxury are often indefinitely desired. A fall in the price of jewellery of ¼ per cent. might bring it within the reach of a new class, and might be a consequence of an increase of 1 per cent. or more in quantity. Therefore it is plain that an increase in the quantity of all commodities would not equally affect the value of them all, but would change their relations to each other very considerably. We must also bear in mind that all articles are not produced in the same time. A rise in the price of one will insure an immediate change in the quantity of it which is produced and brought to market: but it takes years to affect the quantity of an article which it takes years to manufacture. So that not only would an equal increase in the quantity of produce cause a difference of value, but also an equal increase in the rate of increase of all commodities does not immediately ensure an equal augmentation in their supply: and both these it appears are the consequence of a diminution in the value of the currency. Hence it appears that fixity of value is the only essential in the standard of value: that the improvements which competition would introduce into its manufacture would not compensate for the derangement of industry with which they would be inevitably accompanied: that what is wanted is not the cheapest money, but the money whose value is most stable: that what we wish is not to diminish the cost of production of coin, but to render it a constant quantity. Moreover, by giving Government the monopoly of coining we can not only give coin a fixity of value by the difference between the progressive improvements of individual competitors and the conservative habits of an uninventive monopolist; but we can do away altogether with the whole source of alteration in the value of money arising from its having to go through the mechanical process of being coined. Government coins gratis. The nation defrays the expense out of the taxation. Coin is the only manufactured article of no greater value than the raw material out of which it is made.1
Hence beside debasement by individual coiners we find another great source of destruction—derangement in the machinery of industry, which is entirely closed up by giving to Government the monopoly of coining metallic money. On these grounds Governments have deemed it necessary to keep the issue of metallic money in their own hands. To us they appear amply sufficient: but we regard with wonder that no thorough-going disciple of the anti-corn-law league has yet advanced the proposition that there ought to be Free Trade in Sovereigns. The derangement which debasement introduces into the pursuits of industry is in our view a sufficient reason for keeping it out of hands in which there is a risk of possible fraud. But there is such capital ad captandum case by appealing to what our pound was originally, by pointing out how much our Government has in past times debased it, by insisting on the expense and mismanagement of the national Mint, and the want of new openings for national capital, that we really wonder exceedingly at not hearing any one claim for individual industry the lucrative employment of coining the precious metals. We especially wonder that those who with Mr. Hume are so strenuous for unlimited free trade in paper money should not take bolder ground, and assert that Government is overstepping its proper limits in meddling with money at all. We shall proceed now to give reasons for believing that all the grounds for entrusting the Government with a monopoly of coining money hold with increased force for giving them a monopoly of the issue of paper money.
We have seen that the introduction of banks of deposit enables a smaller amount of coin to do the work of a larger. The first effect of this, if the introduction were sudden, would undeniably be to throw coin on the market in increased quantity as compared with the transactions of the country, and therefore to depreciate it. Whatever economises the amount of coin in use must inevitably cause a temporary superabundance of it: on this will come a reduction of value, and on this again, if it goes far enough, a melting of coin: the depreciation of bullion itself, in consequence of the additional supply, and consequently an exportation to foreign countries not affected by this local diminution of exchangeable value. Now exactly this very same course of events appears to take place in consequence of the introduction of paper money, which has also the effect of economising the use of coin. In its origin paper money is a promise to pay specie. It is used by a banker in purchases for consumption, in loans and in discounts. Of course it is his interest to pay in promises when he would otherwise have paid in coin, because he thus obtains the use of the coin where his promises would have been useless. Also there is a likelihood that he will lend it when he would not have lent coin, because he will get interest on a loan without having to find intrinsic value to the amount lent. Now the effect of both these courses of action is to bring new purchasers into the market; and thereby to raise prices. We before explained that a facility of obtaining bullion as the medium of interchange had a tendency to raise the price when measured in that medium. The case is not altered when media is written for medium.1 The increased facility of obtaining bargain-making instruments would cause more persons to attempt to make bargains; new buyers would come into the market when they could obtain more easily the means of buying. The coming of new buyers into the market while the quantity of commodities remains the same will raise the price of those commodities. The ensuing effects are exactly those which we have shown to arise from a debasement of species by fraudulent competing coiners: viz. a great derangement of industry, an increased rate of production, a rise in the value of articles not quickly supplied in additional quantities as compared with those which are of speedy growth and quickly made; a fall in the value of articles much affected by small increase of supply, as compared with others comparatively insensible to this source of fluctuation. These effects are, we admit, only temporary. The debasement of the coin is found out, and so is the depreciation by means of the issue of paper. The rise in the price of commodities affects the price of bullion as a commodity; the good coin is melted down; bullion itself is depreciated; and if the extent of the depreciation be sufficient to cover the cost of carriage, becomes an article of export to other countries. One way of obtaining coin for export or melting is by returning notes on the issuers for coin; and it is evident that the return of one-half the notes issued, and the withdrawal of the coin thus obtained from circulation, would bring the currency back to its former quantity, and prices to their former level. The injurious effects of depreciation by convertible paper and of debasement by individual coiners are exactly the same: both productive of extensive mischief while they last. One great difference is, that debasement is a matter that can be tested by the senses: whereas depreciation by paper may continue for a long period of time, without any sign that will certainly convince all inquirers, and controversies concerning it may be multiplied indefinitely by the confusion of philosophers and the mistake of self-interested traders. Another great difference however is, that when the final result has been the substitution of paper for coin, a good effect is produced, which is not produced by the discovery of a debasement: a machine produced with very little labour has been made to do work before only to be accomplished by one of very considerable cost; human exertion is economised, and the empire of man over the powers of external nature is extended and confirmed by an increase in the efficacy of his industry.
The debasement of the coin by a monopolist like Government has a somewhat different effect. It is in general known from the first, though its effects in detail have rarely been correctly interpreted: there is seldom any law compelling a return to the original standard, as we have supposed to be the case with competing coiners: and in the great majority of cases there is no return to the state of things in existence previous to the depreciation. If issued, as it always is, where good coin was not obtainable by the Government, it gives an extra facility of obtaining the media of interchange to the extent of the difference between the cost of production of the debased and the undebased coin. Its effect on industry is therefore similar to that before explained: prices rise and money is depreciated. There is an exactly similar case with a particular kind of paper money issued by the Government, or a monopolist bank, or set of banks. This kind is generally in form a promissory note, but it is not so in reality: it is not payable in anything: it is in intentional language inconvertible. Of this kind were the French Assignats, and such are the notes of the Bank of France at the present moment. As its cost of production is nothing compared with the cost of producing gold, an issue of inconvertible paper may be considered as a debasement without limit. Obviously, therefore, the monopolist can issue as much as he pleases: he will find people always to take the money: the only limiting causes to depreciation are the habits of issue to which he conforms voluntarily. If by an infallible instinct he found out what quantity of purely metallic money would have sufficed for the wants of the community, and used only that amount, there would be no depreciation. We know that there is no such instinct, and we do not believe that there is any means of calculating the demand for a purely metallic currency, except by the use of it, or of something not more easily attainable than it. Again, if this inconvertible currency were issued by persons who used to issue a convertible currency, and if, trade happening to be pretty steady, they issued only that amount of currency which they had been accustomed to issue when obliged to give gold in exchange for their notes, no effect would be produced by the law empowering them to issue inconvertible paper. But this state is clearly one of unstable equilibrium: if trade altered, this fixed amount of currency would become redundant or insufficient: in no way has it any tendency to right itself after receiving the slightest derangement. There is indeed a certain theory known by the name of the “Law of Reflux,” by which Mr. Wilson contends that the quantity of an inconvertible currency suits itself immediately to that of a convertible currency to the quantity of a purely metallic circulation. In substance it is this: that when issued upon loans, they are returned to the issuer if not wanted for the general transactions of the country: thus Mr. Fullarton says very perspicuously: “Bank notes are never issued but on loans, and an equal amount of notes must be returned to the Bank whenever the loan becomes due. Bank notes, therefore, can never clog the market by their redundance. The Bank has only to take care that they are lent on sufficient security, and the reflux and the issue will in the long run balance each other. Perfect convertibility is no doubt one essential condition of every sound and perfect system of currency. It is the only effectual protection against internal discredit, and the best preventive against any violent aberrations of the exchange with other countries. But it is not so much by convertibility into gold, as by the regularity of the reflux that in the ordinary course of things any redundancy in the bank-note issuer is rendered impossible.” And both Mr. Tooke and Mr. Fullarton have elsewhere written copiously to the same effect. But it is hardly true as a fact that all bank notes are issued as loans. They are, we believe, not unfrequently issued by country bankers in purchases for consumption. Also on the general question Colonel Torrens well writes: “Mr. Fullarton reiterates this argument through several pages, innocently unconscious of the fact that, in order to give it any weight and validity, it is necessary that the loans should be repaid on the instant they are granted. Allow any interval to elapse between the loan and the repayment, and no regularity of reflux can prevent redundancy from being increased to any conceivable extent.” It is certainly very strange to find a distinguished practical man of business like Mr. Wilson, laying down the old doctrine of the Bank directors that inconvertible bank notes could not be depreciated, no matter at how low a rate of interest they are issued. Why those who hold this doctrine do not go further, and maintain that everybody should be allowed to issue debased coin adlibitum, is more than we can understand. Every argument here alleged is at least equally valid for coin of less intrinsic value than it purports to be, as it is for paper which is almost destitute of intrinsic value: and Mr. Hume is ever ready to give ample evidence of the management of the National Mint. Mr. Tooke, who is more moderate though perhaps less strictly logical, contends for the law of reflux only when the notes are lent at the existing rate of interest. But to select one objection out of many, is it to be supposed that the competition of issuers, or the self-interest of the monopolist Bank, will not delay the rise of the rate of interest by continuing to offer loans and discounts at the market rate, and then at least quantities of money, which Mr. Tooke admits to be excessive, will be issued upon the market, and will have the effect so often insisted on in raising prices and depreciating money? Moreover, it is quite unproved that the facility for lending afforded by the privilege of issuing money destitute of intrinsic value will not cause quantities of it to be issued which would not have been issued under less favourable circumstances: the obvious presumption is, that they will be issued. The market rate of interest is affected by very many different circumstances, many of them quite unconnected with money and is therefore an unsatisfactory guide for regulating issue of it—especially since the quantity issued has a reflux effect on the rate of interest. Mr. Wilson, we doubt not, would reply that more money would not be kept out than the transactions of the country require: we venture to oppose to his great authority the still greater authority of Mr. Ricardo: “The plea that no more is issued than the wants of commerce require is of no weight; because the sum required for such a purpose cannot be defined. Commerce is insatiable in its demands, and the same portion of it may employ ten millions or one hundred millions of circulating medium; the quantity wholly depends on its value. If the mines had been ten times more productive, ten times more money would the same commerce employ.” “Money,” says Mr. Senior, “is abstract wealth:” anyone who wants anything, wants that which will buy everything. Once lessen the difficulty of obtaining money, and there will be no want of claimants for the use of it.
Mr. Tooke has another theory which is, we believe, peculiarly his own, so far as writers of any name and authority are concerned. It is sometimes stated in the form that “changes in the amount of circulation do not affect prices at all”. Upon this point we can only refer our readers to what we have said before: we have nothing new to say, and we must not repeat arguments already wearisomely insisted on. Circulation is bartered for commodities, and commodities are bartered for circulation. Mr. Tooke strenuously maintains everywhere in his History of Prices, that the quantity of commodities brought to market affects their price as measured in circulation; and why the commodity circulation should not be depreciated by super-abundance and appreciated by scarcity, is to us inscrutable. Another of Mr. Tooke’s dicta is, that an increase of circulation is a consequence, not a cause, of a rise of prices. We believe that sometimes it is a cause and sometimes an effect. We have pointed out various instances, as the debasement of the coin, in which our increase of circulation is a cause and not a consequence of a rise of prices. But we fully concede to Mr. Tooke, that if money circulates at an unaltered rate,1 the same amount of commodities might require a greater amount of money to circulate them at some times than at other, because there would be periods of speculation in which there was a great wish to interchange commodities, and times of depression in which the desire to interchange is comparatively weak. There are also, no doubt, cases in which a slight diminution in the supply of articles of primary necessity causes a great increase in their price, not immediately counterbalanced by a corresponding fall in other articles; and this might cause a general rise of prices, and require more money to circulate them. All this, and several other cases of a similar character, may be admitted by the staunchest advocate for the Bill of 1844; although Mr. Tooke not unfrequently argues that any increase of prices not caused by an increase of circulation is fatal to it. No one denies that if a case can be found of a general rise of prices not originating in such a scarcity as would counterbalance the rise of price by the diminution of quantity, either an increase in the quantity of circulation or an enhancement of its value will necessarily take place. But it is proposed, also, to lay down that a general fall of prices will ensue on an increased difficulty of obtaining money. Few will allege that alterations in the value of money are more than disturbing causes; few will deny that the alterations in the supply and demand of commodities are the main constant causes of their exchangeable values.
Nevertheless, though we cannot concur in the extravagant eulogiums which some writers have recently lavished upon the opinion of Mr. Tooke, we are not disposed with Colonel Torrens to put them aside as worthless, or treat them as a “psychological study”. The evidence of a distinguished practical man of business against any law, the working of which he has minutely studied, will rarely be found entirely destitute of instruction. On one point we think he is decidedly victorious over Colonel Torrens. Mr. Tooke contends that though no new purchasers can, under the present law, be brought into the market by an undue issue of bank notes, nevertheless other media of interchange can be found, such as bills of exchange and book credits, that will do the work, if not so conveniently yet not with intolerable inconvenience. Mr. John Mill has well said that “Bank notes are to credit what coin is to bullion”: they are, that is, the most convenient and efficacious mode of employing it. But Mr. Mill urges that a banker can find other means of giving his customers credit when he pleases: there are other ways of bringing new purchasers into the market who would not have come there if the banker had been obliged to procure coin to make the necessary advances. On this point Mr. Tooke writes:—
“When the Bank of England or a country banker makes an advance, or discounts a bill, the borrower or discounter is asked how he wishes to have the amount. In the case of the Bank of England the borrower, when the discount or loan is agreed on, has the option of receiving gold or notes or a book credit. In by far the larger proportion of instances I believe the book credit is preferred; a cheque on the Bank is passed, and placed by the borrower to his account with his banker, who as between himself and the Bank of England sets off the amount against acceptances to bills or cheques upon him held by the Bank, or simply places it to the credit of his deposit account with the Bank. In this case not a single note is created or issued, against several millions of securities upon which advances are made either to individuals or to governments.”
Evidently so long as transactions take place between customers of the Bank of England the transfer of certain figures from one man’s account to another is enough to transfer a very large amount of wealth through any number of consecutive hands. Again, it is a well-known fact that bills of exchange were media of interchange competing against bank notes in Lancashire, and were for a time in great measure successful. Now these substitutes, we admit, take away considerably from the advantage of giving to the Government a monopoly of the issue of bank notes and coin; their existence is a very serious set-off against the utility of Sir R. Peel’s measure. But we cannot make, with Mr. Tooke and Mr. Mill, the next step, and deduce that they entirely destroy that utility. Bank notes are by very much the most efficacious and customary substitute for coin; for one transaction performed by means of bills of exchange or book credit, perhaps a large number are performed by means of notes payable on demand.1 Few facts can show this more clearly than the fact that able men very familiar with the course of events have been accustomed to ignore these substitutes altogether, to treat notes and specie as the only media of interchange requiring the attention of speculators and legislators. Bank notes and coin circulate from hand to hand without endorsement, and therefore finally close transactions at once, while bills of exchange do not close them until finally paid. Coin and notes are capable of being used by those who do not keep their accounts with the same bankers, and in this are far more efficient than book credits. Although therefore we admit that these substitutes for the use of coin and notes exist, and that they must of necessity be left in the hands of individuals; although we also concede that a habit of giving excessive credits of long duration will derange industry in the same manner as a depreciation of paper or a debasement of the coin, we still feel disinclined to give the issue of either coin or bank notes (for the argument tells, it will be observed, equally against both) to the haphazard of unrestricted competition; we must not allow more potent instruments of derangement to work unimpeded, because less potent ones are working side by side with them; it is the duty of a wise State to secure the mass of the nation against evils produced by the selfishness of individuals so far as it is possible: to bring within Government control even the most limited causes of commercial convulsion.
A verbal puzzle also is raised and prolixly argued by Mr. Tooke as to what constitutes money: he confines the word to coin and inconvertible paper, and maintains that convertible paper and bills are only forms of circulating credit. The terminology is not, in our view, very interesting; yet we may observe, that in our eyes it is a superfluous subtlety to say that metallic money does not circulate on the credit of the coiners: the Government stamp is an assertion concerning the amount of bullion contained in the coin, and the user of it uses it on the faith that this assertion is true, and it is hard to draw the line between this and credit. Again, inconvertible paper for the most part circulates, because it is believed that no issue of it in quantities sufficient to cause depreciation will immediately take place: no trader who could help selling would take assignats in exchange for his goods if he knew that the Government were going to issue immediately an enormous amount of them. We think it inexpedient to draw this fine distinction between trust and credit in the definition of a word so often to be used. Colonel Torrens, as we think, says truly, that in ordinary speech a payment in bank notes is a ready-money payment: and that
“The terms money and currency have hitherto been employed to denote those instruments of exchange which possess intrinsic or derivative value, and by which, from law or custom, debts are discharged and transactions finally closed”.
We should somewhat differ from Colonel Torrens as to what this definition would include; but as we would not weary our readers with mere questions of nomenclature, we shall only add that, even if Colonel Torrens could make out that bills of exchange and book credits are not currency in the technical sense of the word, this would not justify his inference that their operation upon the transfer of commodities is so different from that of bank notes as not to interfere with the consequences of leaving the issue of the latter in the hands of Government alone.
In answer to Mr. Tooke and Mr. Wilson’s objections to Sir R. Peel’s measure, we may use an argumentum ad hominem of some plausibility. Both these writers admit that the “convertibility” of bank notes into coin is an essential condition of their safest and most beneficial employment. It is also clear that the failure of individual issuing bankers reduces to a nullity the legal obligation to give coin in exchange for notes. While the issue of notes is a matter left to unrestricted competition, and when, as Mr. Wilson’s principles of Free Trade in Banking and Currency imperatively demand, no more care is taken to secure the convertibility of notes than to secure the payment of deposits, a very serious fraction of the “circulation credit” of the realm is mischievous credit, founded on no real basis, but resting on a belief in the riches of insolvent bankers. Even with the restricted number of individual issuers, admitted by the present law, there have been four failures of issuing banks in the counties west of London, and some of these appear in the papers as having “almost no assets”. If new banks of issue had been allowed to spring up during the railway mania, who can doubt that a large number of insolvent concerns would have come into existence, and have gone down at the first appearance of depression, leaving the holders of their notes with papers not only inconvertible, but valueless? Even were it admitted that issues of convertible paper can never depreciate coin, we should still contend that there would be a case for the interference of Government to secure the convertibility of the coin; and as an argumentum ad hominem against Mr. Wilson, we hold it to be perfect.
These reasons appear to us to answer the objections of Mr. Tooke and Mr. Wilson to the Bill of 1844, which relate to the internal transactions of the country. With respect to our foreign relations we shall speak presently, and also with respect to the interference of Government in October last. But first we shall sum up what we have already advanced in the assertion, that the issue of money is a fit case for a Government monopoly, because the object aimed at is not to reduce the cost-price, but to render it fixed: because fluctuations in value are attended with a great derangement of internal commerce; because the interests of individual coiners and issuers is at variance with the interest of the community, and because as a result of the whole, the principle of individual self-interest cannot here be trusted to as a security for the welfare of the community.
We hope we have made good our assertion, that the arguments which are held to be sufficient in relation to a Government monopoly of coining are equally good for a Government monopoly of paper money. And this is the more worthy of remark, because we have not as yet availed ourselves of one of the most powerful arguments against those who purpose to superadd to our present system of metallic money a “free trade” in paper currency. At present the whole expense of procuring money from the mine is borne by the community at large, and the expense of coining is defrayed by the State. Surely it appears but fair that those who bear the expense of providing this costly instrument should derive the advantage accruing from the use of an equally efficient but more economical substitute. Nevertheless, under the system of “Free Trade in Banking” the profit derived from the substitution of paper for gold goes to the banker and not to the community: it resembles the profit of debasement by individual coiners of which we have spoken so often: it is as if one partner were to derive the whole advantage from an economy of the paid-up capital belonging to the whole mercantile concern.
The arguments which we have here used are based entirely on the internal circumstances of the country, and we think they afford ground for saying that unless serious dangers arise out of its external relations, the principles we recommend are worthy of adoption. That no such dangers exist is presumable from the fact, that the advocates of the measures of 1844 are prone to select these external relations as the stronghold of their argument. The object of our propositions, our readers will remember, has been to preserve fixity of value in the currency, and it remains to be seen whether the effects upon foreign trade of those depreciations and appreciations of which we have been speaking are injurious or beneficial: if they are injurious, they will be confirmatory of our case; if beneficial, a set-off against it. The state of this part of the case we believe to be as follows: If all the world used the same coins, and regarded the same precious metal as the standard of value, the trade between two nations would not, so far as currency is concerned, differ from that of the same nation; the trade between London and Paris would be like that between London and Glasgow, except that, as in the territories of the German Zollverein, the same coin would in every different place bear the stamp of its own special Government. Nor is the case materially altered when the currencies of two countries are not the same but different, but when the same metal is the standard of both: an equation is then settled by estimating the amount of the standard metal (the Government stamp counting of course for nothing beyond its own territories), and this equation is called in mercantile language the par of exchange. When two different metals are used as the standard, the par consists of the quantities of the two which exchange one for another in the market; and here the par is not as in the first case an invariable physical fact ascertainable by the senses, but something which depends on the fluctuations of the market, and can only be known by noting down the results of each day’s bargaining. Now it is plain that in either of these cases the depreciation of what in one country is the standard of value will tend to cause its exportation; and similarly its appreciation will act as a premium on its importation. If English bullion goes abroad to a country having no previous debt due from England, something must return in order to pay for it; and in this case depreciation of the currency, by providing a profitable article of export, will act as a premium upon import. If bullion is exported to a country having a credit on England, there is no occasion why any commodity should return in order to pay for the bullion, because the latter is really transmitted to pay off a debt. There is no special inconvenience in these events in themselves; but one particular case exists in which they certainly aggravate very serious evils. If from any cause, as a deficient harvest, bullion and coin are being drained out of this country, there is a certain point at which they would be so elevated in value as to render it no longer profitable to export them. But if by an issue of paper simultaneously with the continuance of the drain we provide an efficient substitute, the supply will seem not to be diminished, the value will not rise, coin will be exported instead of commodities; the drain of bullion will not cease where it would have ceased under a purely metallic circulation; it will be for a longer period the most profitable article of export. Such a management of the paper circulation is at variance with the first principle of a metallic currency, which we have shown to be that, cæteris paribus, the circulation should increase with the cheapening and diminish with the appreciation of bullion. Also, if the paper circulation were augmented by the increase of the notes of issuing bankers competing with one another, another serious inconvenience will of necessity arise. It appears to be an attested fact of experience, that the deposit reserve of banks is the first place from which bullion is obtained for exportation: a continuance of a foreign drain is therefore accompanied with a steady drain on the deposits, and this we are now to suppose accompanied by a steady increase of the note circulation. We believe that no one will deny the great danger of such a course to the solvency of the bank. If the circulation were to get out of credit, the danger would be most serious: all the most available resources are expended in meeting the drain on the deposits; all that can be most advantageously, or at least disadvantageously, sold has been sold to meet this drain: and if a new drain were added in the shape of a run caused by discredit of the circulation, the solvency of the banks, and the convertibility of the notes in the hands of the public would be instantly threatened by a danger from which it would be difficult to escape. These two serious difficulties arising out of the foreign relations of the country appear to us to strengthen the argument against the system of competing issuers which was derived from those internal circumstances which are affected by the depreciation of the currency. But because we are prepared to defend the measure of Sir R. Peel on this ground, it is the more incumbent on us to state that we are quite at issue with certain persons who, as Mr. Wilson has concisely stated, loudly proclaim to the world “that the great and leading principle of the Act of 1844 is that, in the event of adverse exchange against their country, our system has a self-acting principle of contraction by which the prices of commodities shall be reduced so that they may be exported in preference to gold”.
We believe it to be a demonstrated truth of science, that rises and falls of price caused simply by a contraction and enlargement of the circulation do not of themselves affect foreign trade at all. The depreciation of bullion provides a more profitable article of export; but if it were profitable to export commodities before, we believe it will be profitable still: the appreciation of bullion provides a more profitable article of comfort, but if before it were profitable to import commodities, no diminution of profit will ensue on the change of price due to a contraction of the currency. A mode of conducting business important to be noticed in this connection is thus described by Mr. Blake: “The merchant is regulated in the conduct of his business by a comparison of the prices which commodities bear in the home and in the foreign market; his attention is directed to the prices current, accounts of which are constantly published, and immediately communicated to his correspondents abroad. If he finds that the price of the same commodity abroad is so much higher than in the home market, that its sale abroad will pay the expense of freight and insurance, and at the same time leave him an adequate profit for his trouble, he will immediately purchase and export the commodity in question. As soon as the bill of lading is received by his correspondent to whom the goods are consigned, he will draw his bill upon him for the amount; and if the exchange be at par, will have no difficulty in procuring money equal to the value specified in the bill by negotiating it in the market at home. But if the exchange be not at par, it is evident that his calculations upon the profit he is likely to derive from the export must include the premium or discount which he will receive or pay in the disposal of his bill.”1
Now it appears clear that any cause which raises or lowers the prices of all commodities will also raise or lower the price of bills of which the value is regulated by the same causes as the value of all other kinds of merchandise. For example, an increased facility of obtaining money will bring new purchasers into the bill market just as into all other markets, and the price of bills will rise in consequence. Hence although a merchant wishing to export would receive a discouragement from the rise of prices 10 per cent. in consequence of a depreciated currency, nevertheless by the mode of conducting business above described he would obtain a premium of 10 per cent. on his bill. Similarly an increased difficulty of obtaining money will not only lower the premium on bills, but perhaps change it into discount. So that a depreciation of the currency does not lessen the profit on the exportation of commodities, nor when the merchant looks to deriving a part of his profit from the sale of his bill does the appreciation of the currency increase that profit in the least. Again, in the foreign bill market the depreciation of English currency will lower the price of bills in England. All persons who wish for English coin to purchase goods in England for exportation or immediate consumption will be less willing to bid for the money-order when the purchasing power of that money is diminished. Hence it is clear that the depreciation of English currency reduces the price of bills on England in the foreign market; so that a foreigner might be no less ready to export commodities from England after than before the rise in the price of goods owing to a depreciation of the currency, and obtain by the less price he pays for a bill a profit corresponding to the loss occasioned by the additional price which he has to pay for his commodities. It may therefore be laid down that the price of bills of exchange on foreign countries in the home market rises and falls with the prices of commodities when these are affected by alterations in the value of the currency: that is, the price of such bills varies directly with the price of commodities: while the price of bills on England in the foreign markets varies inversely with the price of articles, here increasing when they diminish, and diminishing when they increase. Therefore an exporting merchant who sells his bill at home will sell it for more when the price of commodities rises; and if he buys his bill on England in the foreign market he will pay less for it; and an importing merchant who sells his bill abroad will have to pay less for it, and will be able to get less for the bill on foreign countries which he might sell in the English market. Therefore it is evident that when the business is managed by means of bills, alterations in the value of the currency do not of themselves act as premiums on the export or import of commodities: they neither increase nor diminish the profit of the merchant. When therefore the currency cannot be itself exported, its effect on foreign trade is nothing at all. The depreciation of French assignats was not of itself calculated either to increase or to diminish the French imports. When the currency consists of articles of intrinsic value like bullion, which are capable of export, its depreciation of course, as previously stated, will be a bounty on its export, and therefore often on the import of commodities returning to pay for it: and similar propositions mutatis mutandis are true of appreciation. Foreign trade then is barter like other trades; and the depreciation of one article has an effect not only on the profitableness of its export, but leaves unaffected the profit on the export of these. Money is but a single commodity, and changes in its local value only cause its export, but have no tendency to diminish the profit or the export of other commodities. Men have not allowed themselves to be mastered by their own instrument; what trade was before money existed, it is still in the main and essentially. One article has attained an additional useful property, and the demand for it is subjected to another cause of fluctuation; but this has not power enough to alter the general course of international commerce.
It is evident that the exportability of coin is oftentimes a source of variations in its value: so much may be exported to pay for a deficient harvest, that what remains may be dearer. It has therefore often enough been proposed to provide a currency independent of the exchange, and not susceptible of this species of appreciation and depreciation. We have never seen any plan which appeared to us successful to meet this object, and we doubt whether there is any one both theoretically unobjectionable and practically feasible. Those plans which propose a currency with intrinsic value have failed, because the material which they have proposed was possessed of other useful properties besides serving as currency, and could therefore be exported like bullion. Those plans which adopt a currency without intrinsic value seem as yet defective in laying down any thoroughly satisfactory rule for regulating its amount. One method of arriving at the end desired is, by finding some commodity which only has utility, in consequence of the convention of a particular state to use it as money, but of which nevertheless the supply is determined by the cost of production. This could not be exported, because its value would be limited by the frontiers of the country which agreed to use it as currency; and yet its amount would be determinable just as gold and silver now are. No such commodity, however, appears to exist, and the conception of it is only a theoretic dream as to what would constitute the best currency for the internal traffic of a nation.
Mr. Tooke has a violent philippic against Ricardo for having dared to assert that coin was never exported except from a redundancy in the currency; and objects that the facts of 1847 are of themselves enough to prove that coin is exported to pay for a deficient harvest. But we would ask, what is Ricardo’s test of a redundant currency? We believe that he would have called any currency redundant when coin became the most profitable article of export: so that this controverted proposition reduces itself to the simple truth, that coin is not as a rule exported when there is any other more profitable article of export. To this we do not think Mr. Tooke has offered any valid objection. It is quite indisputable that the tendency of trade sets most strongly toward those transactions which yield the greatest pecuniary return. The reason is, that there is an immense amount of capital not used by its owners, but lent to those who will bid highest for it;—of course those whose trade yields them the greatest return will bid most for the capital which aids them in carrying it on. We are bound, however, to concede to Mr. Tooke that Ricardo has not expressed with sufficient clearness the proposition that the risk of sudden falls of price is one element in the determination of the profit requisite to ensure the entrance on a mercantile speculation. In the case of a deficient harvest, we are obliged to ransack countries for our subsistence which are unused to employ our manufacturers to any great extent. It is therefore certain that a small increase in their quantity will produce a glut of them and a great fall in their value, and therefore a great loss to the merchant. But bullion, as Mr. Blake has well observed, is the article of the steadiest possible value: a very slight lowering of its price very greatly increases the quantity of it employed, and therefore the risk of exporting coin is less than the risk of bullion. Hence is it that bullion leaves the country before the price current alone would seem to render it advisable; therefore is it that bullion merchants seem to trade on smaller profits than other mercantile men. As a result, then, of what has been said, it appears that so far from the foreign relations of the State affording any objection to fixity in the standard of value, at least one serious danger arises out of one case of depreciation, viz. an undue prolongation of a foreign drain of bullion; an export, that is, of bullion, when commodities would have been otherwise exported: as a consequence of this, an increase in the home stocks of commodities, an alteration of their prices, and, as has been shown, a considerable derangement of domestic industry. Here then we find an additional reason to approve of the Government monopoly of the currency, and of the Act of 1844, as an approximation to that system.
In deference to the censures of Mr. Tooke we pass to a consideration of the interference of Ministers in October last, which he considers a convincing proof of the failure of Sir R. Peel’s Act. The measure of Sir C. Wood and Lord J. Russell may be defended on two distinct grounds: one resting on consideration of currency; the other on considerations derived from banking. The currency argument is this—It is a great defect of a purely metallic circulation that the quantity of it cannot be readily suited to any sudden demand; it takes time to get new supplies of gold and silver, and, in the meantime, a temporary rise in the value of bullion takes place. Now as paper money can be supplied in unlimited quantities, however sudden the demand may be, it does not appear to us that there is any objection on principle to sudden issues of paper money to meet sudden and large extensions of demand. It gives to a purely metallic circulation that greater constancy of purchasing power possessed by articles whose quantity can be quickly suited to the demand. It will be evident from what we have said before, that this power of issuing notes is one excessively liable to abuse, because, as before shown, it may depreciate the currency; and on that account such a power ought only to be lodged in the hands of Government, and not of a body of traders deriving profit from the increase of their note circulation. It should only be used also in rare and exceptional cases. But when the fact of an extensive sudden demand is proved, we see no objection, but decided advantage, in introducing this new element into a metallic circulation. We see here only one other case of Government intervention to ensure steadiness in the standard of value. Now something like this happens in periods of extensive discredit, especially under the present system of provincial banks of issue. Every banker is obliged to keep a new reserve to meet the augmented danger of a run for his paper. This requires a large increase of circulation, and it is difficult to obtain gold to satisfy so unexpected a demand. Also no merchant knows whom to trust: he is not disposed to give his banker so much credit as heretofore, but to keep in his till money which he would otherwise have put into the bank, and this materially restricts the economy which banks of deposit introduce into the circulation; and when the currency has suited itself to the business of the country under a system of economy, it becomes difficult to make it do the same work under a system comparatively costly. We here see an additional reason for giving Government the sole issue of paper money, because the discredit of individual bankers so much aggravates other species of discredit as to require the issue of additional Bank of England notes. This principle, we would say in answer to Mr. Tooke, is recognised in the Act of 1844. It provides that Bank of England notes may be issued in a extra amount in the place of country paper, which, from an apprehension of its falling into discredit, its issuers may be desirous to relinquish altogether. The intervention of Ministers, therefore, so far from being a proof of failure in the Act, is but a further extension of a principle which it recognises: an application to one case of apprehended distrust of the very remedy which the Act itself prescribes for another.
A further and still more urgent reason arose from the condition of the Banking Department. “On the 30th of October their reserve was reduced,” says Colonel Torrens, “below £2,000,000 against liabilities amounting to £14,200,000, and it was believed that at a later period the coin and notes in the till of the Banking Department fell short of £1,600,000.” Such a state of things was obviously a near approximation to failure. Moreover, the failure of the Bank of England would be equivalent to a temporary stoppage of the mercantile business of the country. Colonel Torrens again writes: “The stoppage of the Bank of England would be tantamount to a general stoppage of the London private banks and discount houses. This great establishment, from the vast amount of capital at its disposal, from its being the depository of the public revenue and of the banking reserve of the subordinate banking establishments of the metropolis, wields a tremendous power, the misdirection of which might lead not only to its own insolvency, but to a general insolvency of all subordinate concerns, and to a national bankruptcy.” No Government would be justified in allowing this to come about while there remained a chance of preventing it by the use of any means whatever. That the Bank directors were excessively to blame, we have no doubt at all. They run a risk of failure which might have injured the proprietors of Bank stock, whose agents they are; under similar management, any smaller banking establishment would have been utterly ruined.
No doubt this interference of Government to support the Banking Department is very different from the currency regulations of which we have spoken before. It goes far beyond the intervention of Government to give fixity to the standard of value; it amounts to the admission that Government may settle when money of fixed value shall be lent to one man and borrowed from another. A person well instructed in the principles of free trade will be apt to wonder at this. He will ask, “Why is the whole mechanism of industry liable to be set wrong by the misconduct of one body of men?” In no other trade but banking are we dependent on the conduct of one firm. Either what I have been taught is a mistake, and trade will not manage itself without external superintendence, or there has been some previous derangement by former laws; either the intervention of Government to keep trade in a right course is always and essentially necessary, or we are now suffering from the evil consequences of former mistaken interventions. History supplies the answer in a sentence. Government for a long period gave the Bank of England almost a monopoly of Banking in London. They gave privileges to a single corporation which enabled it to put all competitors at defiance. The experience of Scotland would in itself be a strong argument that this interference was the cause of the excessive preponderance of the Bank of England over the other establishments. In Scotland there has been no monopoly, but all other circumstances are pretty similar, and there we are not dependent on the good management of a single overgrown establishment, but on the prudential skill of a moderate number of tried, trustworthy, and experienced corporations. The deductions of the theory come to confirm the inductions of experience. In the competition of capital against capital, each has, up to a certain point, an advantage proportioned to its comparative magnitude. Thus Mr. Babbage writes, in his Economy of Manufactures: “When, from the peculiar nature of the produce of each manufacture, the number of processes into which it is most advantageous to divide it is ascertained, as well as the number of individuals to be employed; then all other manufactories which do not employ a direct multiple of this number will produce the article at a greater cost”. The same is true of the extra risk which small capitals run in comparison with large ones. When the insurance premium is 10 per cent. a man with twenty ships, of equal value, and running equal distinct risks, can obviously insure himself: it is the same thing to him whether he loses one ship or pays the insurance; and the same with any multiple of twenty. Similarly, if taking the whole of any business its risks are as 10 to 100 on a perpetual average, that is, if ten of its transactions fail in every hundred, a man who, under any run of luck, can always go through one hundred transactions would gain an advantage over those with less; and no one would have an advantage over him. The tendency of things is toward capitals arranged on a certain scale, with a fixed minimum and multiples of it. So that we may lay down that the natural government of all trades, including banking, is an oligarchy according to the strict Aristotelic conception of it, where a few govern because of their wealth; but the Bank of England is obviously a τύραννος, who has obtained aid from without to overthrow the constitution and establish his own rule.
These considerations weigh strongly with us against the system of Mr. Tooke. He wishes it to be a law, or almost a law, that there should always be a reserve of £10,000,000 in both departments. This, it seems to us, is perpetuating that system of Government interference with banking from which so many evils have arisen. We quite admit that it may be necessary to interfere again because we have interfered before; but a permanent system should, in our judgment, be founded on permanently right principles: the effects of past misconduct will wear out in the course of time; but Mr. Tooke proposes to found a lasting system on the rotten basis of antiquated errors, to transmit unimpared to posterity the evils which we have, to our misfortune, inherited from our fathers.
In conclusion we cannot refrain from remarking that the adoption of the measure of 1844 so nearly contemporaneously with the commencement of the Free Trade Legislation in this country, is another very remarkable instance of the practical sagacity of the English people, and of that soundness of understanding which comprehends the widest principles and yet discerns their true limits, which is able to stand the most searching test of the thorough comprehension of a principle, viz. the knowing what are its exceptions and what are not. The English are far excelled by the French in logical accuracy and in the taste for symmetry of construction. But we never heard a Frenchman’s jokes against the bizarreries of the English constitution without bearing in mind that the distaste for sweeping generalisation and the habit of deciding on each case in and for itself, which have produced such a mass of unsystematised legislation, are nearly allied to a deep conviction of the necessary incompleteness of all system, and of the necessity for constant watchfulness to avoid the application of a formula to cases not comprehended in its proof.
P.S.—Since this essay left the hands of the writer, the first report of the Committee of the House of Commons appointed to investigate the causes of the last crisis has been laid on the table of the House. It states that, after a careful review of the evidence, the committee are of opinion “that it is not expedient to make any alteration in the Bank Act of 1844. They approve, however, of a recent change in the constitution of the Bank of England, by which a permanent governor is appointed in place of the old system of annual election. The committee decidedly approve of the intervention of Government in October last; and decline to suggest any machinery which might obviate for the future the necessity of a recourse to the Deus ex machinâ.” This is disappointing to us, as we had hoped that some unexceptionable “expansive clause” might have been framed to save future Chancellors of the Exchequer from the anxiety which Sir Charles Wood has so feelingly described. This problem, it appears, is considered beyond our present means of solution, and must be left to future times.
We also desire to say, that when insisting so strongly on the necessity of fixity of value in the circulating medium, we have omitted to make use of the most obvious argument in favour of it, viz. that changes in the standard of value introduce frauds into all fixed contracts. Thus the depreciation of coin is an advantage to debtors who have to pay fixed sums, and a disadvantage to creditors who have to receive them. This is too obvious to need statement in detail, but its practical importance requires at least that it should be mentioned.
 These five assumptions ought to be only four; because Mr. Wilson admits that, if the third is granted, the fourth follows. Mr. Fullarton also thinks the inference legitimate.
 Mr. Loyd, the great practical expounder of the principles of Sir R. Peel, has explained the less theoretical parts of the subject with greater clearness than Colonel Torrens, and has dilated on some parts of the subject with an eloquence unexampled in currency pamphlets, and admirably adapted to the subject.
 Mr. Wilson appears to have been misled by not observing the difference between reserves held against circulation and reserves held to pay back deposits when called for. The former do not lessen the amount of circulation in the hands of the public, which is the essential characteristic of the latter. To reckon the former as circulation is reckoning the same sum twice over, and make out that the use of a representative medium increases permanently the amount of money in use throughout a country.
 The phrase “fixity of value” has been objected to by some on the ground that when the value of one thing alters, the value of all others is consequently changed; thus it is said, if cotton goods fall in price, the value of gold is affected, because it will exchange for less cotton than before. Mr. Senior has perspicuously expressed what appears to us to be the best definition of the words “fixed” and “steady” in the following extract from the Encyclopædia Metropolitana: “The fluctuations in value to which a commodity is subject by alterations in what we have called the extrinsic causes of its value, or, in other words, by alterations in the demand or supply of other commodities, have a tendency, like all other extensive combinations of chances, to neutralise one another. While it retains the same utility, and is limited in supply by the same causes, a given quantity of it, though it may exchange for a greater or less quantity of different specific commodities, will in general command the same average quantity as before of the general mass of commodities; what it gains or loses in one direction being made up in another. It may be said without impropriety, therefore, to remain steady in value. But the rise and fall which a commodity experiences in consequence of an alteration in its utility, or in the obstacles to its supply, is, in fact, entirely uncompensated. A commodity therefore which is strikingly subject to such variations is properly said to be unsteady in value.” When then the intrinsic causes of the value of a commodity have undergone no alteration, we shall hereafter say that its value is “fixed” or steady.
 Out of this arises the incidental advantage that circulation in England passes here at its value and in other countries also. Queen Victoria’s stamp is worth nothing in France; and by charging nothing for it here we do away with a permanent difference of value between the value of a sovereign in France and a sovereign in England. It should be remarked, however, that no interest is paid by the Government to those who have deposited bullion at the Mint, and this loss of interest during the time occupied by the process of coining amounts to a very small seignorage.
 This step in our reasoning is vehemently denied by Mr. Tooke. We shall say presently what seems to us sufficient in reply to him.
 The rate of circulation at diifferent times deserves, perhaps, a more accurate treatment than it has received. Since in times of speculation men are more eager to purchase, and money will circulate more rapidly, and if an undue issue of notes cause an increase of speculation, it appears that they will not only act on price by increasing the quantity of money, but also by increasing the efficiency of what were originally in circulation.
 Mr. Fullarton appears to think bank notes “insignificant” as compared with bills. We are glad to be able to oppose to him the authority of Mr. J. S. Mill, who states that as bills are more powerful forms of credit than book credit, so bank notes are more powerful than bills. This statement is given in his recently published Principles of Political Economy, after an elaborate examination of the subject, and is of the greater authority from the resemblance between the views of Mr. Mill and Mr. Fullarton on many parts of the subject. We regret that Mr. Mill’s book did not reach us before this article was written.
Blake on the Exchange. The word Real has been omitted before Exchange as foreign to our present purpose.