The Online Library of Liberty

A project of Liberty Fund, Inc.

• Advertisement By the Editor.
• Plan of Lectures On Political Economy, For Winter 1800-1801.
• Outlines of Moral Philosophy. Part Third. [political Science.]
• Part III. *: of Man Considered As the Member of a Political Body. †
• Chapter I.: Of the History of Political Society.
• Chapter II.: Of the General Principles of Legislation and Government.
• Lectures On Political Economy.
• Errata.
• Introduction. of the Objects and Province of Political Economy. *
• [chapter I.]: [of the Title and Comprehension of the Science, In Its Most Extensive Meaning.]
• Chapter II. *: [of the Contents and Distribution of Political Economy Proper,—or of Part First.]
• [ Population. ]
• [ National Wealth. ]
• [ the Poor:—their Maintenance. ]
• [ Education.—prevention, Reformation, Correction of Crime. ]
• [chapter III.]: [preliminary Distinction of Positive Laws Into Two Classes; and the Relation of These to Political Economy Proper,—or to Part First.]
• Part First.—: of Political Economy Proper.
• [book First.]: [of Population.]
• [chapter I.]: Of Population Considered As an Article of the Natural History of Man.
• [chapter II.]: [of Population Considered As an Article of Political Economy.]
• [sect. I.—: Of Population As Affected By the Political Institutions Which Regulate the Sexual Connexion.]
• [sect. II.—: Of Population As Affected By the State of Manners Relative to the Connexion Between the Sexes.]
• [sect. III.—: Dependence of Population On the Means of Subsistence Enjoyed By the People.]
• [ Appendix. —: of the Means Which Have Been Employed to Ascertain the State of Population In Particular Instances. ]
• [book Second.]: [of National Wealth.]
• [chapter I. * ]: [of Productive and Unproductive Labour.]
• [sect. I.—: On the Circumstances Which Render Labour More Effective.]
• Chapter II.: [of Money, the Circulating Medium.]
• [sect. I.—: Of the Origin and Use of Money.]
• [sect. II.—: Of Real and Nominal Prices.]
• [sect. III.—: On the Effects of Plenty Or Scarcity of the Precious Metals Upon Prices.]
• Sect. IV.—: Of Money As the Standard of Value.
• [sect. V.—: Of Interest.]
• Appendices to Books First and Second.
• Appendix I.—: To B. I. Ch. II. § 3.
• Quotation On Population From Pinto.
• Appendix II.—: To B. II. Ch. II.
• Notes On the [ Parliamentary ] Bullion Report. ( Sent By Mr. Stewart to Lord Lauderdale, In February, March, and April, 1811.)

Notes on the [Parliamentary] Bullion Report.

(Sent by Mr. Stewart to Lord Lauderdale, in February, March, and April, 1811.)

Note I.

(Feb. 26,) Bullion Report, p. 7.—“The same rise of the market price of gold above its mint price will take place, if the local currency of this particular country, being no longer convertible into gold, should at any time be issued to excess. That excess cannot be exported to other countries, and not being convertible into specie, it is not necessarily returned upon those who issued it; it remains in the channel of circulation, and is gradually absorbed by increasing the prices of all commodities. An increase in the quantity of the local currency of a particular country, will raise prices in that country, exactly in the same manner as an increase in the general supply of precious metals raises prices all over the world.”

This reasoning is qualified and restricted in another part of the Report, by some just observations upon the effects of a quick or slow circulation, in augmenting or diminishing the powers of money as a medium of exchange, (see page 26;) but very little use is made, in the general argument, of these important and indeed essential limitations; and they seem to have been still less attended to in some of the best pamphlets which have lately appeared on the same subject. “If the currency of a country,” says Mr. Blake, “is increased, while the commodities to be circulated by it remain the same, the currency will be diminished in value with respect to the commodities, and it will require a larger proportion of the former to purchase a given quantity of the latter; or, in other words, prices will rise. If we were in the habit of considering money as purchased by commodities, instead of commodities being purchased by money, the diminution in the value of money from its abundance would be immediately apparent.”—“Mr. Thornton admits, in the most explicit manner, that if the quantity of circulating medium is permanently augmented, without a corresponding augmentation of internal trade, a rise will invariably take place in the price of exchangeable articles. Indeed, this is a principle upon which all the writers on Commerce, both practical and speculative, are agreed; they have thought it so undeniable as to require no particular illustration, and have rather assumed it as an obvious truth than as a proposition that depended on inference. Upon this idea is founded Mr. Hume’s well-known argument against Banks, and it is equally implied in Dr. Smith’s confutation of that objection; it forms the foundation of those presumptions from which Mr. Boyd has lately inferred an improper increase of Bank of England paper; and it is implicitly admitted likewise by Mr. Thornton, one great object of whose book is to persuade the public that there has been no such increase.”1 —“Without entering, therefore,” continues Mr. Blake, “into an unnecessary argument, I shall, for the present, assume as admitted, that the increase of currency, while the commodities to be circulated remain the same, will be attended with an increase of nominal prices, and a correspondent depreciation in the value of money.”2

That there is a great deal of truth in this doctrine, when properly explained and modified, I do not deny; but it is surely not entitled to be assumed as a political axiom; nor is it even correctly true in the form in which it is here stated. It is, in fact, the very same doctrine with respect to prices, which was advanced by Locke, Montesquieu, and Hume; and which Sir James Steuart has, I think, refuted by very satisfactory (though very ill expressed) arguments, in his Political Œconomy. (Book II. chap. xxviii.) The only difference is, that whereas Locke and Montesquieu assert that the prices of commodities are always proportioned to the plenty of money in a country, the authors referred to in the foregoing extract, (with the exception of Mr. Hume,) content themselves with saying, that “the increase of currency, while the commodities to be circulated remain the same, will be attended with an increase of nominal prices.”

That the principle, even when thus corrected, does not appear altogether self-evident, is shewn sufficiently from what was already hinted concerning the effects which may be produced by a change in the rate of circulation. Bishop Berkeley long ago proposed it as a Query,—“Whether less money swiftly circulating be not, in effect, equivalent to more money slowly circulating; and whether, if the circulation be reciprocally as the quantity of coin, the nation can be a loser?”* It is, at least, a possible case then, in theory, that, on the one hand, an increase in the quantity of money may be so counterbalanced by a decrease in the rate of circulation, as to leave the relation between money and commodities the same as before; and that, on the other hand, the quantity of money may remain unaltered, (nay, may suffer a great diminution,) while in consequence of an accelerated circulation, its influence upon prices, and upon everything else, may be increased in any given ratio. In general, before we draw any inferences from the mere increase of currency, it is as necessary to ascertain the fact, whether its circulation be likely to be, on the whole, accelerated or retarded, as it is, in computing the momentum of a moving body, to combine the velocity of its motion with the quantity of its matter.

An examination of the circumstances by which the circulation of money is liable to be affected, appears to me to be still a desideratum in the theory of commerce. Mr. Thornton has touched slightly on the subject in his book on Paper Credit; but his reasoning is not at all convincing to my mind. “The causes,” he observes, “which lead to a variation in the rapidity of the circulation of bank-notes may be several. In general, it may be observed, that a high state of confidence serves to quicken their circulation; and this happens upon a principle which shall be fully explained. It must be premised that, by the phrase, a more or less quick circulation of notes, will be meant a more or less quick circulation of the whole of them on an average. Whatever increases that reserve, for instance, of Bank of England notes which remains in the drawer of the London banker, as his provision against contingencies, contributes to what will here be termed the less quick circulation of the whole. Now a high state of confidence contributes to make men provide less amply against contingencies. At such a time, they trust, that if a demand upon them for a payment, which is now doubtful and contingent, should actually be made, they will be able to provide for it at the moment; and they are loath to be at the expense of selling an article, or of getting a bill discounted, in order to make the provision much before the period at which it shall be wanted. When, on the contrary, a season of distrust arises, prudence suggests that the loss of interest arising from a detention of notes for a few additional days should not be regarded.”1

Agreeably to the same view of the subject, it is observed in the Bullion Report, as a proof, that “the effective currency of the country depends upon the quickness of circulation, as well as upon its numerical amount,” that “a much smaller amount is required in a high state of public credit, than when alarms make individuals call in their advances, and provide against accidents by hoarding; and in a period of commercial security and private confidence, than when mutual distrust discourages pecuniary arrangements for any distant time.”—(P. 26.)

In both of these passages, there appears to me to be an indistinctness of thought as well as of expression. In the first place, I have great doubts of the correctness of the assertion, “that a high state of confidence seems to quicken the circulation of bank notes.” A rapid circulation of money, it must be observed, is by no means implied in that briskness and activity of commerce which is measured by the number of commercial exchanges, and which is sometimes, but very inaccurately, called the circulation of commodities. The manufacturer may supply the merchant, the merchant the shopkeeper, and the shopkeeper his customers, without the intervention of any money, till it come out of the pockets of the consumers; the place of money being supplied, during the previous process, by the mutual credit of the parties: and it is evident, that in proportion to the quickness of the process, and to the high state of confidence at the time, the employment of money will be the less necessary. If the rapidity of circulation be, at such a period, increased on the whole, it is not because the money passes more rapidly than before through the same number of hands, but because the multiplication of hands which have now acquired by their industry the means of partaking in the national opulence, has enlarged the circle in which its movements are performed.

But, secondly, admitting Mr. Thornton’s general assertion to be true, I do not see that the reasoning either in his Book or the Report, affords any explanation of the fact. The notes which, during a period of alarm, are kept in the drawers of bankers and others, as a provision against contingencies, cannot surely be said with propriety to have their circulation retarded. They are abstracted from circulation altogether; and if the same demand for a circulating medium continues as formerly, the notes which remain to supply this demand cannot fail, in proportion to the reduction in their amount, to pass with an accelerated rapidity from one hand to another. The truth is, if I do not deceive myself, that in both the passages last quoted, two very different things are confounded together:—1. The effect of credit and confidence in superseding the necessity of ready money payments, by a settlement of accounts at distant periods of time; and, 2. The effect of a quick circulation in rendering a given quantity of currency equivalent to a larger one with a slow circulation. Both of them have a tendency to economize the numerical amount of currency; but they depend on very different causes, and are by no means necessarily combined in their operation.

It is justly remarked in a passage which you have quoted from Quesnai in your pamphlet on the Irish Bank, that “the money of a poor nation must be proportionally more considerable than that of a rich one; for no more can remain with either, than the sum of which they have need for their sales and for their purchases. Now, among poor nations the intervention of money becomes indispensably necessary in the operations of commerce. Everything must there be paid for in ready cash; because no one can there rely on the good faith of another.” The same observation is applicable to a rich commercial country, in times of distrust and alarm; and explains sufficiently the increased demand which arises for a circulating medium at such a crisis. A circulation of money or paper then takes place, in numberless cases, where its intervention was before superseded by general confidence and credit. As to the rapidity of circulation, I cannot help thinking, that a general want of confidence must tend powerfully to increase it, by adding to the number of ready money payments; and, in so far as this takes place, it must necessarily (by the virtual multiplication of the currency) counteract the pressure of the existing evil. From the Statement of the Committee, they seem to consider the increased demand for notes in a time of distrust, as a consequence of the circulation being slower than usual.

The aim of the reasoning quoted above from Mr. Thornton’s book, was probably to suggest, as an indirect apology for the increased issue of notes from the Bank, that the effect of this increased issue is partly to correct the inconveniences of that retarded circulation which he supposed to exist. If the foregoing remarks have any foundation, the effect of this increased issue upon prices, must, in fact, exceed that of its numerical amount, in the same proportion in which the rate of circulation has been quickened by the peculiar circumstances of the times.

It is to be observed, besides, that the most considerable part of the increase of Bank of England notes since 1798, has been in the article of small notes, (Report, p. 25;) and there cannot be a doubt that the case has been the same in a far greater degree with the issues of country banks, although no estimate is given by the Committee of the increased circulation of their notes, not exceeding two pounds two shillings. (P. 29; see also p. 149.) Now, it is chiefly in the case of small notes that circulation operates in producing a virtual multiplication of paper currency; for the same reason that “a shilling,” according to an observation of Mr. Smith, “changes masters more frequently than a guinea, and a halfpenny more frequently than a shilling.”* In reply to a question addressed by the Committee to Mr. Francis Baring—(“Do you not believe that the amount of small notes should be left out of the account in comparing the present amount of notes in circulation with that existing before the restriction?”) I find the following answer stated in the Report:—“Instead of being left out in a comparative view, I fear the small notes rather tend to increase the difficulty beyond their due proportion; because they cannot be withdrawn, without an issue of specie to an equal amount, and stand therefore in the front of the battle.” I am inclined to think he might also have added, that they tend to increase the difficulty beyond their due proportion, inasmuch as their commercial momentum (if I may be allowed the expression) is increased in an incomparably greater degree than that of the larger notes, by the rapidity of circulation.

In farther illustration of the proposition, “that the mere numerical return of the amount of bank-notes out in circulation, cannot be considered as at all deciding the question, whether such paper is or is not excessive,”—it is stated in the Report, as a circumstance which above all deserves attention, that “the same amount of currency will be more or less adequate, in proportion to the skill which the great money-dealers possess in managing and economizing the use of the circulating medium. Your Committee (it is added) are of opinion, that the improvements which have taken place of late years in this country, and particularly in the district of London, with regard to the use and economy of money among bankers, and in the mode of adjusting commercial payments, must have had a much greater effect than is commonly ascribed to them, in rendering the same sum adequate to a much greater amount of trade and payments than formerly.”—(P. 26; see also p. 147.)

Upon the supposition that the issues of the bank had been diminished precisely to the extent of this economy, it seems evident, that the circulation of the country, so far as it can be supposed to have any influence upon prices, could not have been at all affected by these late improvements. The bank-notes formerly employed in conducting this business, were found, it would appear, to be a clumsy and expensive instrument for accomplishing an end that could be attained as effectually without its assistance; and this being the case, the new arrangements were unquestionably improvements in point of economy to the London bankers. With respect to the general circulation of the country, the effect in both cases must have been exactly the same.

On the other hand, as, in point of fact, the issues of the bank have increased immensely since these economical arrangements have taken place, the amount of the notes thus economized must either be added to the mass of circulating medium which is employed in carrying on the exchanges of the London district, or must serve to enlarge the basis on which the circulation of the country banks is to be reared. The effect must be similar to those other improvements which (according to the Report) “have taken place in this country, with regard to the use and economy of money among bankers, and in the mode of adjusting commercial payments.” It is also worthy of observation, that this economy is confined to the larger notes, and that, in the same proportion, the means are acquired of increasing the issues of the small ones.

In what I have hitherto said, I have proceeded on the general principle assumed in the Report, “That every change in the effective currency of the country, (including under this phrase the quickness of its circulation, as well as its numerical amount,) must occasion a corresponding change in the price of commodities;” and the result of the whole is, that the operation of the cause must, upon this supposition, have been incomparably greater than the mere numerical amount would lead us to apprehend. I must, however, confess, that I can see no evidence whatever for the truth of this doctrine; and if you think it worth your while to read my observations on the subject, I shall state in another letter the grounds of my doubts. In the meantime, I shall only add, that I am perfectly satisfied with the conclusion of the Committee, that the increased issues of bank-notes have occasioned a depreciation of our currency, or, in other words, a general rise of prices. I differ from them only in the manner in which I conceive this depreciation to have been brought about. According to their view of the subject, the effect is represented as resulting from the cause, no less immediately and obviously than a fall in the exchangeable value of wheat after an abundant harvest; or, if any explanation is hinted at, it is by means of some metaphorical phrase, which only serves to throw the difficulty a little more into the shade. “The issues of the bank,” we are told, “cannot be exported to other countries, and not being convertible into specie, it is not necessarily returned upon those who issued it; it remains in the channel of circulation, and is gradually absorbed by increasing the prices of all commodities.”1 To me it appears, that without attending particularly to the various modes in which the additional currency enters into circulation, (whether issued by the Bank of England in advances to Government, and in discounts to merchants, or by country banks in discounts to traders, to farmers, and to other classes of the community,) and following it out through the various steps of its progress, till it finds its way into the pockets of those who are to employ it in consumption, it is neither possible to form a precise idea of the nature of the disorder, nor to speculate safely concerning the means by which it may be alleviated.

The omission of this preliminary discussion strikes me as the most important defect in the Report. Something approaching to it is attempted by Mr. Blake in his pamphlet, and the outline which he has sketched is very distinct and satisfactory, as far as it goes.2 It is only surprising that a writer, to whom this view of the subject had presented itself, did not assume, as the foundation of his general argument, this explanation of the process by which the over-issues of the bank tend to augment the prices of commodities, instead of having recourse to the very vague and incorrect principle, “that it is impossible such an increase should have taken place in the quantity of any commodity that is given in exchange for others, whose quantity is not augmented in the same proportion without affecting their comparative value.”3 This misapplication of the word commodity to bank-notes, is not peculiar to Mr. Blake,4 and it is extremely apt to mislead a careless reader. It is not even, in my opinion, accurately applied to gold and silver while in the shape of coins, were it for no other reason than this, (and I apprehend there are several others no less conclusive,) that commodities cannot, like coins, be virtually multiplied by circulation. The essential difference between such coins and paper currency is, that the former are at all times convertible into a commodity, by being put into a crucible, serving, in their new form of bullion, to liquidate the accounts of different nations, and to furnish a link for connecting together the commercial transactions of mankind in every quarter of the globe.

Note II.

[March.]—In my former paper, I took notice of the general principle which seems to me to be assumed in the Bullion Report, “That every change, &c.—(Supra, p. 436.) I intended to have stated, at some length, my doubts about the correctness of this proposition, but shall confine myself at present to one or two of the most obvious objections to which it is liable.

1. It may, I think, be now assumed as a first principle, that the mere increase of gold and silver in a country does not necessarily raise prices. The reasonings of Sir James Steuart on this head appear quite decisive, and could not have failed to have made a greater impression on the public mind, if they had been expressed with the clearness and precision of Mr. Hume or Mr. Smith. Now, if this principle be once granted, it necessarily follows, that prices are not regulated solely by the amount of currency, even when combined with the rate of its circulation. In proof of this, it is sufficient to observe, that an accelerated circulation operates entirely by the virtual multiplication of the currency; and therefore, whatever effect may result from this acceleration, might have been produced by a real multiplication of the currency, the rate of circulation remaining the same as before.

In speculating concerning prices, the quickness of circulation deserves our attention, only in so far as it may be supposed to afford a proof of the general diffusion of the currency through the great mass of consumers. But of this last fact, a quick circulation, considered singly, by no means furnishes unequivocal evidence, as the money may, in consequence of various causes, pass more rapidly from hand to hand, while it still moves in the same circle as before; and even where the two circumstances, of an accelerated and of an extended circulation, happen to coincide, the effects on price are evidently to be ascribed, not to the quick circulation, but to the multiplication and competition of purchasers. The quick circulation is itself, in this case, only a collateral effect of that general diffusion of wealth upon which, much more than on the quantity of currency in the country, the prices of commodities will be found to depend. Indeed, neither the one nor the other (nor any other cause whatsoever,) can possibly raise the price of any article, but by first increasing the competition of purchasers in a greater proportion than the quantity of goods which the market supplies.

2. Another proof that “the momentum of the circulating medium does not of itself regulate prices,” may be collected from the effects of Credit in supplying to those individuals who possess it, for all essential purposes, the place of ready money. A man whose credit is good, or, in other words, who is known to possess valuable property at his own disposal, may command, at all times, what commodities he pleases, though he should happen, at the moment, to have neither a guinea nor a bank-note in his pocket. The only inconvenience he will suffer from his want of ready money is, that he will be obliged to pay a proportionally higher price for what he purchases; and, consequently, where there is a competition of such purchasers, a scarcity of circulating medium, instead of lowering prices, will infallibly tend to increase them.

From these principles it follows, that no fixed proportion can exist between the quantity of currency in a country and the amount of commercial exchanges to which it is subservient, inasmuch as this proportion must vary, not only with the rate of circulation, but with the degree of credit and confidence generally prevalent, and with the skill of bankers and merchants in economizing the use of money in their mutual dealings. Nor would the problem be of much use if it could be solved; for none of these circumstances has any direct connexion with the high or low prices of commodities. Indeed, credit, under whatever form it may appear, must always tend to raise prices, at least as high, as the money would have done, whose place it supplies.1

In illustration of this, I shall avail myself of a passage in Pinto’s Traité de la Circulation et du Credit, which I shall transcribe at length, as you are not likely to have the book at hand:—“La circulation réelle de la monnoie est prodigieuse dans la dépense journalière et domestique qu’on appelle négoce; le même écu peut cascader en 24 heures, par cinquante mains différentes, et aura représenté cinquante choses par la circulation qu’il a essuyée; si donc ces cinquante personnes s’assembloient la nuit, elles trouveroient avoir dépensé et payé 50 ecus, et il n’y en a en cependant qu’un d’effectif, qui par la circulation en représente cinquante. On n’a qu’à observer, qu’il n’y a pas dans tout l’univers la moitié de l’argent à quoi se monte la dépense qu’on fait en un an dans la scule ville de Paris, si l’on comptoit tout l’état de dépense qu’on fait, et qui se paie en argent, depuis le 1 Janvier jusqu’au dernier Décembre, dans tous les ordres de l’état, depuis la maison du roi, jusqu’aux mendians qui consomment un sol de pain par jour.

“Cette circulation est immense par la multiplicité des operations simultanées et répétées partout et à chaque moment; mais il y a une autre circulation en gros, qu’on fait à la faveur du crédit, et du papier, qui représente l’argent, comme l’argent représente les choses. L’exemple de l’écu fait voir qu’un négociant particulier, qui a du crédit, peut, indépendamment des termes qu’on lui accorde pour les paiemens de ses achats, faire circuler son papier et se prévaloir de celui des autres, et multiplier par-là les ressorts de son commerce, en facilitant la circulation. Une lettre de change a souvent dix endossemens, et représente souvent la même valeur à dix personnes différentes. Voilà des choses importantes; quoiqu’assez connues, elles ne méritent pas le nom de triviales.”*

In a note to this passage, the following anecdote is mentioned by the author:—“Pendant le Siège de Tournay en 1745,” &c.†

This fact, which is adduced by Pinto merely to shew that a small sum with a quick circulation may be virtually equivalent to a large sum with a slow circulation, leads to some other consequences no less important, by placing in a strong light the effects of credit in facilitating the operations of commerce, where there is an apparent deficiency in the circulating medium. The paymaster, by borrowing 7000 florins seven times over from the sutlers, borrowed, during the course of the siege, to the amount of 49,000 florins. Supposing that there had been no specie to be had in the garrison, it is evident that the same transactions might have been carried on by means of paper money issued by the paymaster, and accepted in payment by the sutlers; and therefore the only use of these weekly loans was to keep the garrison in good humour, by the regular handling of their pay in that currency to which they were accustomed. Or, supposing the sutlers to have given credit to every soldier to the extent of his pay, and that accurate accounts had been kept of all their mutual dealings, might not the whole business have been managed (without any inconvenience whatever but the trouble arising from the petty details of book-keeping) without any circulating medium at all? In such a peculiar combination of circumstances as this, the only essential advantage derived from a circulating medium (whether we suppose it to consist of specie or of paper) would seem to resolve into its effect in superseding the task of recording the mutual bargains of individuals; or (as Anacharsis concluded somewhat too precipitately with respect to the use of gold and silver among the Greeks) a circulating medium would seem to answer no purpose whatever, but that “of assisting the memory in numeration and arithmetic.” Mr. Hume, when he wrote his Essay on Money, seems to have thought that the case would be the same with a nation cut off from all commercial connexion with foreigners; overlooking a variety of important considerations, which I shall pass over here, as they have no immediate connexion with the present argument. Whatever opinion we may form on this point, one thing seems indisputable, that in the example of the garrison as described by Pinto, the amount of circulating medium could have no effect whatever on prices; that there would have been exactly the same with a circulation of 7000 florins as with one of 49,000—and that (supposing credit to be completely established among all parties) they would not have fallen, although no circulating medium had been employed as an instrument of commerce.

I have thus arrived at the same conclusion which you state in your last letter, when you express your doubts whether “a mere excess of circulating medium, if it confined itself to those duties which a circulating medium properly performs, could produce a rise of prices.” For my own part, I am disposed to go a step farther, and to entertain some doubts, whether a general rise of prices would be necessarily produced by this superabundant currency, even on the supposition that it consisted wholly of gold and silver, so as to form (according to Mr. Smith) a real addition to the national capital. Mr. Hume, in his Essay upon Interest, states an imaginary case, that “by miracle, every man in Great Britain should have five pounds slipt into his pocket in one night, in which case,” he adds, “the whole money that is at present in the kingdom would be much more than doubled:” and he observes very justly, that in these circumstances “there would not next day, nor for some time, be any more lenders, nor any variation in the interest.” The next sentence is not so unexceptionable. “Were there nothing but landlords and peasants in the state, this money, however abundant, could never gather into sums; and would only serve to increase the prices of everything, without any farther consequence.” In what proportion it would serve to increase prices; Mr. Hume has not said explicitly; but it is evident, that upon the principle which he has assumed in his Essay on Money, (and which is unfolded still more fully by Locke and Montesquieu,) it ought to do much more than double the prices of all the commodities in the kingdom. The palpable absurdity of the conclusion, in this instance, affords a sufficient refutation of the premises from which it is deduced. The real fact would manifestly amount to this, and to nothing more, that every man would be enabled to add five pounds to his capital or to his expenditure. What possible effect could this have on the prices of any commodities, but those which are in request among the lowest order of the people? Nor is it easy to conceive, that even on these prices, the permanent effect would be very considerable. How different would be the influence of the same addition to the capital (either real or fictitious) of the country, if it were all to issue from the shops of bankers in the form of advances to Government, or of discounts to merchants, manufacturers, farmers, and landed proprietors!

It would appear, therefore, that it is not the quantity of money added, at any time, to the capital of a country, which can, of itself, produce a general rise of prices; unless this accession of capital is determined by political or commercial arrangements, to flow in those channels which may alter the former relation between the demand and supply of the market. According to Montesquieu’s doctrine, the prices of all commodities should not only rise, but all of them should rise in the very same proportion; in contradiction to the evidence of our daily experience, that while the prices of certain articles are rising, those of others are falling, in consequence of causes which have no connexion whatever either with the quantity of money, or with the quantity of commodities.

What you afterwards remark on the indirect connexion between high prices and an increased circulating medium, is precisely the proposition I had in my mind when I said formerly, that the extraordinary issues of paper currency since the stoppage of cash payments, had affected prices chiefly by the manner in which these notes have entered into circulation. Nothing, in my opinion, can be more satisfactory on this head than the simple statement you have given of the fact. “By the same act with which a bank increases the circulating medium of a country, it issues into the community a mass of fictitious capital, which serves not only as circulating medium, but creates an additional quantity of capital to be employed in every mode in which capital can be employed.” The explanation you have given of the process by which this affects the prices of commodities, coincides so exactly with all my own ideas, that it would be quite superfluous for me to follow out the speculation any farther.

The radical evil, in short, seems to be, not the mere over issue of notes, considered as an addition to our currency, but the anomalous and unchecked extension of credit, and its inevitable effect in producing a sudden augmentation of prices by a sudden augmentation of demand. The enlarged issues deserve attention, chiefly as affording a scale for measuring how far this extension has been carried. The same degree of credit, if it could have been given without the intervention of paper currency, would have operated exactly in the same way upon prices, and upon everything else.

Mr. Thornton’s opinion is plainly in direct opposition to this conclusion, and can, I think, be accounted for only by the credit which he has unconsciously lent, on various occasions, to the specious but fallacious theory of Montesquieu and Hume. “It is by the amount,” he observes, “not of the loans of the Bank of England, but of its paper; or, if of its loans, of these merely as indicating the quantity of its paper, that we are to estimate the influence on the cost of commodities. The same remark,” he adds, “may be applied to the subject of the loans and paper of country banks.”1 The converse of these propositions would, in my apprehension, be much nearer to the truth.

An idea similar to that which Mr. Thornton has here expressed, seems plainly to be implied in the explanation given by the Bullion Committee, of the difference between “the effects of an advance of capital to merchants, and an additional supply of currency to the general mass of circulating medium. “If the advance of capital only be considered, as made to those who are ready to employ it in judicious and productive undertakings, it is evident there need be no other limit to the total amount of advances than what the means of the lender, and his prudence in the selection of borrowers, may impose. But, in the present situation of the bank, intrusted as it is with the function of supplying the public with that paper currency which forms the basis of our circulation, and at the same time not subjected to the liability of converting the paper into specie, every advance which it makes of capital to the merchants in the shape of discount, becomes an addition also to the mass of circulating medium. In the first instance, when the advance is made by notes paid in discount by a bill, it is undoubtedly so much capital, so much power of making purchases, placed in the hands of the merchant who receives the notes; and if those hands are safe, the operation is so far, and in this its first step, useful and productive to the public. But as soon as the portion of circulating medium in which the advance was thus made, performs in the hands of him to whom it was advanced this its first operation as capital, as soon as the notes are exchanged by him for some other article which is capital, they fall into the channel of circulation as so much circulating medium, and form an addition to the mass of currency. The necessary effect of every such addition to the mass is to diminish the relative value of any given portion of that mass in exchange for commodities.”*

The very same doctrine occurs in a different form in the following passage of Mr. Huskisson’s pamphlet:—“The state of our currency, in regard to its diminished value, is no other than it would be if our present circulation, being retained to the same amount, were, by some sudden spell, all changed to gold, and, by another spell, not less surprising, such part of that gold, as by its excess created a proportionate diminution in its value here, with reference to its value in other countries, would not by exportation, or otherwise, find its way out of our separate circulation.”1 The simile is quite correct, so far as it goes; but in order to render the parallel complete, Mr. Huskisson should have added, as a third spell, not less indispensably necessary than the two others: That all the issues of gold should be confined to the shops of our bankers, to be put in circulation by them in the shape of advances to Government, or of mercantile discounts; and that our bankers should have the same profits in issuing gold, as they have at present in the issues of their own paper. If the gold were all to emanate from the same sources as the paper, and to flow afterwards in the same channels, the results in both cases could not fail to be precisely the same.

Note III.

The general result of the reasonings which I have hitherto stated is, that the increased issues of paper currency since the year 1797, have operated on the prices of commodities chiefly by means of that sudden extension of credit which they necessarily suppose; and of the communication of this credit to those classes of individuals whose capitals have the greatest influence on the state of the market. Had the increased issues been divided into equal shares, according to the population of Great Britain, and had every inhabitant of the island received his trifling quota at one and the same instant, how comparatively insignificant would the effects have been!

This conclusion agrees, I think, perfectly in substance with that which you have formed, when you observe, in your last letter, that “by the same act with which a bank increases the circulating medium of a country, it issues into the community a mass of fictitious capital, which serves not only as circulating medium, but creates an additional quantity of capital to be employed in every mode in which capital can be employed.” My own statement, however, appears to me to have this advantage, that it comprehends not only those mercantile discounts which have a remote effect on the market by being employed as capital, but those discounts which affect the market immediately, by furnishing the means of an enlarged expenditure. It is worthy of attention too, that even mercantile discounts operate on the market in the latter way as well as in the former; it being presumable, that every merchant (and more particularly, every speculative merchant) will raise his style of living in proportion to the magnitude of his commercial transactions. The same luxury and vanity extend themselves downwards through all the inferior orders of traders and men of business; the peculiar circumstances of the times having been so long unfavourable to habits of sober economy, and having so strong a tendency to encourage a general spirit of extravagance and improvidence, by facilitating the means of its indulgence. Hence, to those persons who live on fixed incomes, an additional sort of depreciation in the value of money, (a depreciation quite distinct from the effects either of taxation or of high prices;) I mean that which arises from new ideas of competency, and of the scale of expenditure necessary to support the condition of a gentleman.

I have dwelt the longer on this particular view of the subject, considered in contrast with that adopted by Mr. Thornton, (and apparently sanctioned in the last passage quoted from the Bullion Report.) because the two opinions lead obviously to two very different conclusions concerning the nature of the remedy suited to the disorder. The one opinion suggests the propriety of limiting credit through the medium of a restricted currency; the other of limiting the currency through the medium of a well-regulated and discriminating credit. If the radical evil were merely an excess of circulating medium, operating as such without the combination of any other cause, it would follow, that a reduction of this quantity, by whatsoever means it were to be brought about, and however violent the effects which it might threaten, would be the only measure competent to the attainment of the end. But if, on the other hand, this excess be only symptomatic of another malady, with which, from particular circumstances, it happens to be co-existent, (of an extension of credit, to wit, calculated to derange the pre-existing relations of demand and supply;) in that case, the restriction and regulation of this credit ought to be regarded as the primary object, and the reduction of our circulating medium attended to solely as an indication that the cure is progressive.

Of the most expedient means to be employed for this purpose, I am not qualified to form a judgment. But I cannot help observing, that if a repeal or a relaxation of the anti-usurious laws were a thing not quite impracticable, it would go to the root of the mischief by a process more effectual, and at the same time more gentle and manageable in its operation, than any other that I can imagine. It is observed in the Bullion Report, that “the law which in this country limits the rate of interest, and of course the rate at which the bank can legally discount, exposes the bank to still more extensive demands for commercial discounts. While the rate of commercial profit is very considerably higher than five per cent., as it has lately been in many branches of our foreign trade, there is in fact no limit to the demands which merchants of perfectly good capital, and of the most prudent spirit of enterprise, may be tempted to make upon the bank for accommodation and facilities by discount.”*

To the same purpose, Mr. Thornton long ago remarked, that “in order to ascertain how far the desire of obtaining loans at the bank may be expected at any time to be carried, we must inquire into the subject of the quantum of profit likely to be derived from borrowing there under the existing circumstances. This is to be judged of by considering two points: the amount, first, of interest to be paid on the sum borrowed; and, secondly, of the mercantile or other gain to be obtained by the employment of the borrowed capital. The gain which can be acquired by the means of commerce, is commonly the highest which can be had; and it also regulates in a great measure, the rate in all other cases. We may, therefore, consider this question as turning principally on a comparison of the rate of interest taken at the bank with the current rate of mercantile profit.

“The bank is prohibited, by the state of the law, from demanding, even in time of war, an interest of more than five per cent., which is the same rate at which it discounts in a period of profound peace. It might, undoubtedly, at all seasons, sufficiently limit its paper by means of the price at which it lends, if the legislature did not interpose an obstacle to the constant adoption of this principle of restriction.

“Any supposition that it would be safe to permit the bank paper to limit itself, because this would be to take the more natural course, is, therefore, altogether erroneous. It implies that there is no occasion to advert to the rate of interest in consideration of which the bank paper is furnished, or to change that rate according to the varying circumstances of the country.

“At some seasons an interest, perhaps, of six per cent. per annum, at others of five, or even of four per cent., may afford that degree of advantage to borrowers which shall be about sufficient to limit, in the due measure, the demand upon the bank for discounts. Experience in some measure proves the justice of this observation; for, in time of peace, the bank has found it easy to confine its paper, by demanding five per cent. for interest; whereas, in war, the directors have been subject, as I apprehend, to very earnest solicitations for discount, their notes, nevertheless, not being particularly diminished. It is, therefore, unreasonable to presume that there will always be a disposition in the borrowers at the bank to prescribe to themselves exactly those bounds which a regard to the safety of the bank would suggest. The interest of the two parties is not the same in this respect. The borrowers, in consequence of that artificial state of things which is produced by the law against usury, obtain their loans too cheap. That which they obtain too cheap, they demand in too great quantity.”*

I had written thus far, when the Edinburgh Review for February was put into my hands. It contains a pretty long article on the Depreciation of Paper Currency, including remarks on the chief pamphlets which have lately appeared on the subject. I have only had time, as yet, to read four or five of the first paragraphs, in one of which there is a passage which surprised me a good deal by the looseness of the statement, both in point of thought and of expression. “Mr. Ricardo is in our opinion particularly entitled to praise for the manner in which he has laid down two most important doctrines,—long known, indeed, and acknowledged by those who have maturely considered these subjects, but not unfrequently overlooked by others.

“The first is the grand doctrine, which may be said to be the main hinge on which the principles of circulation, whether consisting of a paper currency, or of the precious metals, must necessarily turn;—the doctrine, that every kind of circulating medium, as well as every other kind of commodity, is necessarily depreciated by excess, and raised in value by deficiency, compared with the demand, without reference either to confidence or intrinsic use. This doctrine follows immediately from the general principles of supply and demand, which are unquestionably the foundation on which the whole superstructure of political economy is built.”1

In justice to some propositions which I have already hazarded, I cannot pass over these magisterial remarks without examining the legitimacy of the inference mentioned in the last sentence. This will give me an opportunity of adding a few illustrations which escaped me formerly in the hurry of writing. But I find I must delay proceeding farther till another post.

Note IV.

I was afraid, that in the foregoing papers, I had dwelt much longer than was necessary on the refutation of acknowledged prejudices; but some remarks in the last Edinburgh Review convince me, that either my own ideas are completely unfounded, or that something is still wanting to place the question at issue in the proper point of view. The following is the passage which appears to me to be more particularly exceptionable. “Mr. Ricardo . . . . . is built.” (Same as quoted in last page.)

I before objected to the application of the word commodity to paper currency, or even to the precious metals while in the shape of coin; for this obvious reason, that there is nothing in the commercial transferences of commodities which bears the most distant analogy to the virtual multiplication of a bank-note, or of a guinea, by means of a quick process of circulation. If there were any such analogy, the sutlers mentioned in the anecdote quoted above from Pinto, might, without the aid of a miracle, have multiplied at pleasure the number of loaves and fishes in their canteens, according to the wants of the garrison.

It is not unusual, indeed, among writers on Political Economy, to speak of the circulation of commodities or of goods, as well as of the circulation of money; but the expression is extremely vague and inaccurate, inasmuch as the word circulation must, in these two cases, be used in very different acceptations. In the following instance, Mr. Thornton appears to have departed very widely from his customary precision of language. “Montesquieu alludes, in a manner so imperfect, as to be scarcely intelligible, to those effects of the different degrees of rapidity, in the circulation both of money and of goods, which it has been one object of this work to explain. It is on the degree of rapidity of the circulation of each, combined with the consideration of quantity, and not on the quantity alone, that the value of the circulating medium of any country depends.”1 To this last sentence, I must own, I cannot annex any clear idea. Mr. Thornton has, indeed, explained more distinctly than any other English author I know, the effects of a quick circulation of money; but as to a quick circulation of goods, (if the word circulation be, in both instances, used in the same sense,) I am unable to form any conjecture concerning the meaning which he annexes to the phrase.

Nothing, I think, but this common misapplication of the word commodity to a circulating medium could have suggested the observation which occurs in the next sentence of the Edinburgh Review. “This doctrine follows immediately from the general principles of supply and demand, which are unquestionably the foundation on which the whole superstructure of Political Economy is built.” Upon this sentence, accordingly, I must take the liberty of offering a few remarks; for, surely, if these principles have so weighty a fabric to support, we cannot be at too much pains to ascertain correctly, in what sense we ought to understand them.

And here I must observe, in the first place, that there are few, if any, political maxims, which admit, like the axioms in mathematics, of a literal and unqualified application in all imaginable combinations of circumstances. They are, in general, abbreviated, and consequently loose statements of important conclusions, adopted by their conciseness to serve as aids to the memory; but requiring, when they are assumed as principles of reasoning, the exercise of our own common sense, in supplying those indispensable conditions and exceptions, which are to be collected from their spirit rather than from their letter. That this observation applies forcibly to the maxim now before us, a few very slight hints will be sufficient to show.

Prior to the present discussions about paper currency, the Corn Trade had been, for a good many years, the favourite subject of speculation to Political Economists; and in this particular speculation, the general principles of supply and demand may, with great truth, be said to be the foundation on which all our reasonings must be built. The demand is here constant, universal, and imperious; and the supply, at the same time, such as must necessarily be brought to the market, within a period of no great extent, from the perishable nature of the commodity and the expense which it involves in the keeping. It is not, therefore, surprising, that the habitual use of the words demand and supply, in speaking of the Corn Trade, should have facilitated to hasty reasoners the extension of a similar conclusion to other branches of trade of a very different nature; and to which that conclusion cannot be fairly applied, without many modifications and restrictions. An obvious example of this occurs in the article of wine, which being kept at no expense, while it increases in value with its age, may, notwithstanding a moderate demand and an abundant supply, keep up its price for years, in defiance of the general maxim. Upon the whole, however, due allowance being made for obvious exceptions of this sort, the truth of the maxim may be safely admitted; provided always the demand, and the quantity destined for supplying it, be of such a nature as to be confined in their variations within that range which experience teaches us to allow for the possible fluctuations of the market. If the supply be inexhaustible, (as in the instance of water in this country,) the principle becomes altogether unmeaning; the commodity possessing, on that supposition, no exchangeable value whatever. Nor does it become less nugatory, if we suppose, on the other hand, the demand to be unlimited, as I apprehend, happens very remarkably with respect to money, considered as a subject of property. The demand for it (or, at least, for something convertible into it) is unbounded, and frequently increases in proportion to the abundance in which it is possessed. Political arithmeticians have employed themselves in attempting to ascertain the quantity of bread and of butcher’s meat that individuals may be supposed to consume at an average; but who has ever thought of fixing a limit to the auri sacra fames? In this respect, at least, if we choose still to call money a commodity, we must allow it to be a commodity sui generis; and, therefore, not to be rashly subjected to those sweeping maxims which regulate the prices of wheat or of broad cloth.

• “Crescit amor nummi, quantum ipsa pecunia crescit:
• Et minus hanc optat, qui non habet.”

• —[Juvenalis, V. xiv. 140.]

Another circumstance, which has given rise to this mistaken view of the subject, is a want of attention to the distinction between the use of money and the property of money. No man certainly would choose to borrow money beyond what he really wants, or what he can turn to profit; and, in proportion to the urgency of the demand, or the prospect of greater profit by the employment of it, he will be willing to give a higher interest. The natural and equitable rate of interest will be determined by the demand there is for borrowing, and the plenty there is to supply that demand; and hence it is, that in a country situated as Great Britain now is, (a country where a maximum for the rate of interest is fixed by law, and where the prospect of commercial profit is tempting to adventurers,) it is altogether absurd to suppose, as some respectable persons have done, that “the bank ought to regulate their issues by the public demand;”—“a principle,” says Sir F. Baring, “which I consider as dangerous in the extreme, because I know by experience that the demand for speculation can only be limited by the want of means.”—(Report, p. 133.) The inevitable consequence of this is, a general rise of prices, (or what amounts to the same thing,) a depreciation in the value of our circulating medium;—a depreciation, however, I must again repeat, which is not (like the fall in the price of wheat after a plentiful crop) the immediate or necessary consequence of mere superabundance, otherwise the same effect might have been produced (which it manifestly could not) by slipping a twenty shilling note into the pocket of every inhabitant of the kingdom. The primary cause of the depreciation is the artificial cheapness in the rate at which, in consequence of the laws against usury, the use of money may be obtained, combined with the security which the Bank enjoys, in yielding to the public demand, in consequence of the stoppage of cash payments. But these considerations do not belong to this part of my argument.

The authority of Mr. Smith’s name (although he has expressed himself on this topic in very general terms) has probably contributed not a little to induce many persons to adopt, without a due examination, the doctrine which I have been endeavouring to refute. “The quantity,” he observes, “of the precious metals may increase in any country from two different causes; either, first, from the increased abundance of the mines which supply it; or, secondly, from the increased wealth of the people, from the increased produce of their annual labour. The first of these causes is, no doubt, necessarily connected with the diminution of the value of the precious metals; but the second is not.”*

On both these points, I must acknowledge, I am disposed to differ very considerably from Mr. Smith, (at least in the unqualified form in which he has here expressed his opinion,) but I shall confine myself at present to the first clause of his proposition. I shall send you afterwards, if you desire me to do so, the grounds of my doubts with respect to the second.

“It is a question with me,” says Sir James Steuart, “whether the mines of Potosi and Brazil have produced more riches to Spain and Portugal within these two hundred years, than the treasures heaped up in Asia, Greece, and Egypt, after the death of Alexander, furnished to the Romans during the two hundred years which followed the defeat of Perseus and the conquest of Macedonia? From the treasures mentioned by all the historians who have written of the conquest of these kingdoms by the Romans, I do not think I am far from truth when I compare the treasures of the frugal Greeks to the mines of the New World.”†

Mr. Hume himself has said, that “money, after the conquest of Egypt, seems to have been nearly in as great plenty at Rome, as it is at present in the richest European kingdoms.”*

It is, however, a fact, equally striking and indisputable, that while, in consequence of the later Romans, the prices of superfluities rose to an excessive height, those of necessaries kept astonishingly low. Of this, the most satisfactory evidence may be found in Arbuthnot’s Tables of Ancient Coins, and in Wallace’s Dissertation on the Numbers of Mankind.†

It will be said, that no inference whatever can be justly founded on any parallel between the statistical details of ancient and of modern times; and that the low prices of the necessaries of life in Rome, notwithstanding the plenty of money, may be explained in the most satisfactory manner from the cultivation of the land by slaves, and from a variety of other causes which have no existence among us. Now, this is the very point for which I am contending; that the plenty of the precious metals does not necessarily raise prices, and that these are influenced by many other circumstances of a perfectly different nature. The effects of wealth obtained by war and rapine, I consider as perfectly analogous to those of gold and silver obtained by the discovery of a new mine; and, therefore, I take for granted, that had the money in Rome been drawn immediately from the bowels of the earth, the prices of necessaries would not have been affected in a greater degree,—the political condition of the people and the state of manners remaining the same.

The trifling wages of labour in India afford another illustration of the same thing.

Mr. Smith afterwards remarks, that the discovery of the abundant mines of America seems to have been the sole cause of this diminution in the value of silver in proportion to that of corn. It is accounted for accordingly in the same manner by everybody; and there never has been any dispute either about the fact, or about the cause of it.”‡ But surely, during this period, a variety of other causes of the most powerful efficacy were operating on the condition of mankind in this part of the world; and without the co-operation of some of these, the discovery of the American mines would no more have raised the price of corn in modern Europe, than the sudden influx of wealth from the conquered provinces did in ancient Rome. On the other hand, I have no doubt that those causes would have raised prices, (I do not say to the same degree,) although the mines had not been discovered. Nay, it is far from being improbable, that this discovery retarded, instead of accelerating the progress of mercantile ingenuity in introducing the later improvements of banks and of paper currency, by means of which (while they continued to be regulated by principles founded on good sense and good faith) such a source of real wealth and prosperity was opened to this country.

Note V.

If I had looked over the whole of the article in the Edinburgh Review which I referred to in my last, I would not have troubled you with so large a packet. After reading more than twenty pages farther, I was agreeably surprised with the following passage:—

“Whenever, in the actual state of things, a fresh issue of notes comes into the hands of those who mean to employ them in the prosecution and extension of a profitable business, a difference in the distribution of the circulating medium takes place, similar in kind to that which has been last supposed; and produces similar, though of course comparatively inconsiderable effects, in altering the proportion between capital and revenue, in favour of the former. The new notes go into the market as so much additional capital, to purchase what is necessary for the conduct of the concern. But before the produce of the country has been increased, it is impossible for one person to have more of it, without diminishing the shares of some others. This diminution is effected by the rise of prices, occasioned by the competition of the new notes, which puts it out of the power of those who are only buyers, and not sellers, to purchase as much of the annual produce as before. While all the industrious classes,—all those that sell as well as buy, are, during the progressive rise of prices, making unusual profits, and, even when this progression stops, are left with the command of a greater portion of the annual produce than they possessed previous to the new issues.

“It must always be recollected, that it is not the quantity of the circulating medium which produces the effect here described, but the different distribution of it. If a thousand millions of notes were added to the circulation, and distributed to the various classes of society exactly in the same proportions as before, neither the capital of the country, nor the facility of borrowing, would be in the slightest degree increased. But, on every fresh issue of notes, not only is the quantity of the circulating medium increased, but the distribution of the whole mass is altered. A larger proportion falls into the hands of those who consume and produce, and a smaller proportion into the hands of those who only consume.”1

Now, the substance of all this seems to me to be perfectly sound and satisfactory, (although I think it might have been more unexceptionably expressed;) but I confess I am at a loss how to reconcile it with the “grand doctrine, that every kind of circulating medium, as well as every other kind of commodity, is necessarily depreciated by excess, and raised in value by deficiency, compared with the demand.” Or, supposing for a moment that the two passages may be so explained as to be not inconsistent with each other, it must still be acknowledged that the conclusion in which the foregoing reasoning terminates, does not “follow immediately from the general principles of supply and demand,” as applied to the circulating medium.

Note VI.

[April 12.]—Your solution of the difficulty with respect to the rapid rise of silver since the increased issues of the Bank, by means of purchases of Exchequer Bills, appears to me to be sound and satisfactory. Whether the additional notes be, in the first instance, issued to Government or to the merchants, the ultimate effect will, I conceive, be exactly the same. In both cases, they must pass very soon into the hands of the bankers, who will employ them again in discounts; and who, in proportion to the increased amount of the notes, will have the means of their accommodation enlarged. Indeed, I cannot imagine how it is possible, by any creation of circulating medium on the part of the bank, to raise the prices of commodities, unless it either adds to the capital of merchants so as to increase the demand, while the supply in the market continues the same; or augments, by an increased facility of borrowing, the funds of those classes who fall under the description of consumers.

The more I reflect on the figurative language commonly employed on this subject, I am the more at a loss how to comprehend its meaning. When it is said, for example, in the Bullion Report, “that the excess of the present currency of this country not being exportable to other countries, nor convertible into specie, remains in the channel of circulation, and is gradually absorbed by increasing the prices of all commodities,” I find it utterly impossible for me to annex any precise idea to the proposition. By what sort of gradual process are the superabundant issues absorbed in the prices of commodities; and to what sort of elective attraction is it owing that this gradual absorption is so much greater in the case of some commodities than of others? This metaphorical view of the subject is the more to be regretted, that, by placing on a wrong foundation the very important conclusion with respect to the depreciation of our present currency which it is employed to support, it has furnished to different writers the means of involving the conclusion itself in some degree of obscurity. Mr. Coutts Trotter, for instance, in a pamphlet which has just reached me, (and which, however erroneous and superficial in its views, may be regarded as a fair specimen of the prevailing misconceptions among men of business,) proceeds all along on the supposition, that, in order to shew there has been no excess in the bank issues, it is sufficient to remark, that no man carries about with him in his pocket, or locks up in his drawer, a greater number of bank-notes than he finds necessary for his immediate expenditure. Hence he seems disposed to infer, that as the additional issues do not stagnate in the channel of circulation so as to overflow its banks, any more than the limited issues did prior to the restriction, there exists no superfluity of currency to be absorbed in the prices of commodities. The truth is, that it is not a superfluity of currency in the hands of consumers that is the cause of the advanced prices; but, on the contrary, it is the advanced prices which render an amount of currency, that would otherwise have been superfluous, absolutely necessary for the daily expenditure of the consumer.1 In other words, it is the rise of prices produced by the extension of credit and the creation of fictitious capital implied in the enlarged issues, that gives full employment to the same issues considered in their capacity of circulating medium. Indeed, it might be easily shewn, that the rise of prices must occasion a scarcity rather than a superfluity of circulating medium: for a great deal of what Davenant and others have stated with respect to the disproportion between the cause and the effect, in the rise of price produced by a deficient supply of corn or of other necessary commodities, will be found to hold equally with respect to the rise of price produced by an increased demand operating on a limited supply. The amount of increased issues, therefore, considered in their capacity of circulating medium, cannot possibly keep exact pace with the advanced prices which they have previously occasioned by increasing demand, in their double capacity of mercantile capital and of funds for expenditure.

Having mentioned Mr. Trotter’s pamphlet, I cannot help taking notice here of some remarks which he has made in reply to that account of the rise of prices which seems to me the only satisfactory one, and on which I think the whole argument on that point ought to be rested. “It is maintained,” he says, “that the facility with which bank-notes are procured from the bank, by the mode of discount peculiar to commercial men, calls into existence an increase of purchasers in our markets, whose competition heightens the price of every article.” On this sentence, (which Mr. Trotter seems to consider as a first-rate absurdity from the two points of admiration which he has placed at the end of it,) he proceeds to remark as follows:—“This will not be urged by any person acquainted with the subject of production; an increase of capital (which this is to the small degree in which it exists) never raises the price of commodities, but has exactly the opposite effect; an increase of consumers, in any given state of supply, will raise the price of every article which is the object of their wants, and the enhanced price will continue until the stimulus of the increased demand has created a proportionably increased production;—but a competition of consumers is regulated by principles quite distinct from a competition of merchants, who buy to sell again: these must always have in view the price which the article they are in treaty for will obtain at its ultimate market; and, whether there be ten such competitors or a hundred, whether each has carried to the place of competition one hundred pounds of bank-notes, or one thousand, he must still be limited, in the offer he can afford to make, by the price which he expects to obtain in selling again. So far, indeed, from this increased capital being the occasion of high prices, it is one of the principal means of keeping them down;—a competition of capitalists, like a competition of manufacturers, restricts their respective profits.”1 In answer to this reasoning it may be observed:—1. That merchants and consumers are here stated in contrast to each other, as if they were two classes of persons completely distinct, whereas, in fact, every merchant is also to be considered as a consumer; and, (in a commercial country like Great Britain,) a very great proportion of the consumers may, without any improper latitude in the use of the word, be considered as merchants. The enlarged accommodation, therefore, that a merchant receives, in the form of commercial discounts, while it enables him to increase his speculations as a trader, enables him also to defray the enlarged expenditure which he incurs as a consumer, and even encourages him to add to the scale of his consumption. 2. The immediate or proximate effect of a competition of capitals, is here confounded with its ultimate tendency. That prices are always reduced in the long run by an increase of demand, where it is possible by human industry to increase the supply in proportion, is a maxim admitted by all writers on Political Economy; but that the first effect of the increased demand is to raise prices, is another maxim no less indisputable than the former. It is under this first or proximate effect that we are now suffering, and under this effect we must (while things continue on their present footing) every day suffer more and more, unless by some miracle the supply of commodities should be rendered as easy and as instantaneous as the extension of credit and the creation of capital. That “a competition of capitalists, like a competition of manufacturers, restricts their respective profits,” is indeed true; and it is reasonable and fortunate that it should be so, where all their capitals are equally the fruits of regular and useful industry. The melancholy fact in this country at present is, that the profits of men of real capital are restricted by the competition of those who have none, and that the prudent and steady trader feels himself jostled out of his way by the bolder adventurer. It is no less hard, that the expenditure of the former, in his capacity of consumer, should, at the same time, be augmented by the competition of the latter.

I forgot to take notice, in my last letter, of your remarks on the inconveniences that might be expected to result, under the present state of our paper currency, from the repeal of the Anti-Usurious Laws. With these remarks I perfectly agree, but I always proceeded on the supposition, that the Bank was to be obliged, within a limited time, to resume its cash payments; a supposition, which, I think may be assumed as an indisputable postulatum, whatever other subsidiary measures may be thought useful for accomplishing the proposed end. It still appears to me, that, while the Bank is previously preparing for this resumption by narrowing its discounts, a relaxation of these laws would contribute more than anything else to smooth the way towards this great object, by furnishing the means of such a prudent solution in the distribution of credit, as might moderate the violence of the shock, which both the commercial and agricultural interests of the country must inevitably sustain before things are brought round again to their ancient and natural course.

I must now relieve you, for the present, from this voluminous correspondence, but I have still floating in my head a variety of crude ideas about some other parts of the Report, which I shall put in writing during the summer, and submit to your consideration, when I shall have the pleasure of seeing you at Dunbar. I have little doubt that my objections to some of these arise from my want of sufficient information.

If I have stumbled upon anything that you think worth shewing to Horner, I can have no objection to your communicating my papers, either in whole or in part, to one in whom I have so entire a confidence, provided only you mention to him my anxiety that nobody whatever shall hear of such a communication. I meant to have written to himself on the subject, but as the Report was already before the public, and as the most popular objections to it have been confined to those points which seemed to me the least vulnerable, I thought it better to delay proposing my doubts till both of us should have a little more leisure. I have sometimes wished that I had seen the Report before it was printed, as nothing would have given me greater pleasure than to have contributed anything, however trifling, towards its improvement. But this I regret the less, as I take for granted, that nothing of any consequence is to be expected at the present moment, and that there will still be ample time for discussion before the business can be brought forward with any prospect of success.

[1 ]Edinburgh Review, Vol. I. p. 178.

[2 ] Blake’s Observations, &c., p. 44.—To the same purpose it is observed by Mr. Huskisson, that “although a general increase of prices in all the ordinary commodities of any country is not, in itself, an indication of the depreciation of its currency, (it being always possible that such an effect may arise from other causes;) yet this general increase of prices could not fail to be produced by an increase of the precious metals.”—[Question on the Currency, &c.,] pp. 24, 25.

“If the circulation of any country were performed exclusively by gold, and the supply of that metal were, from any imaginable cause doubled, whilst the quantity of gold and the demand for it should continue the same in all ordinary parts of the world, the price of gold in such a country would be diminished. This diminution of the price of gold would appear in the proportionate rise of all commodities.”—[Ibid.] pp. 26, 27.

[* ] [Querist, No. 22.—Vide supra, pp. 378, 379.]

[1 ]Inquiry into the Nature and Effects of the Paper Credit of Great Britain, Chap. iii. p. 47, seq.

[* ] [Wealth of Nations, Book II. chap. ii.; Vol. I. p. 486, tenth edition.]

[1 ]Report, p. 7.

[2 ] [Observations, &c.] pp. 78-83.

[3 ] Ibid. p. 44.

[4 ] “It is generally admitted, that the value of a commodity depends greatly on its scarcity or plenty. Now, there has been, within these twelve years, a remarkable increase in our amount of bank-notes,” &c.—Mushet, Inquiry into the Effects on Currency, &c.] p. 20.

[1 ] The effect of credit in supplying the place of a circulating medium, and that of mercantile skill in economizing the use of it, (which last is, at bottom, nothing more than a more ingenious and refined extension of the same substitute,) have been remarked by Thornton, and various other late writers; but none of them appear to me to have been aware, that whatever effects are produced by a circulating medium on prices, must be equally produced by every possible expedient which can be devised to keep accounts between debtor and creditor, without its intervention.

[* ] [Partie I. p. 33, seq., orig. edit.]

[† ] [Quoted above, p. 378.]

[1 ] The illustration which Mr. Thornton has given of this remark, affords a most satisfactory refutation of the opinion which it is employed to establish. (Pp. 313, 314.)

It is difficult to reconcile the above passage with the very judicious observations which Mr. T. has made in pp. 258-260 of the same book.

[* ] [Report, p. 23.]

[1 ]The Question Concerning the Depreciation of our Currency Stated and Examined, p. 107, note.

[* ] P. 23.

[* ]Inquiry into the Nature and Effects of the Paper Credit of Great Britain, Chap. x. pp. 287, 288.

[1 ] No. XXXIV. p. 341.

[1 ]Inquiry into the Nature and Effects of the Paper Credit of Great Britain, Chap. xi. p. 307.

[* ] [Wealth of Nations, Book I. chap. xi.; Vol. I. p. 294, tenth edition.]

[† ] [Political Œconomy, Book II. chap. xxx.; Works, Vol. II. p. 135, seq.]

[* ] [Essays, Vol. I. Note P.]

[† ] [See above, p. 381, seq.]

[‡ ] [Wealth of Nations, Book I. chap. xi.; Vol. I. p. 300, tenth edition.]

[1 ] No. XXXIV. p. 364.

[1 ] I speak here of the economical consumer, or as to those who enlarge their scale of living in proportion to the facility of obtaining credit, their increased consumption operates on the market in the same way as the increased demand occasioned by mercantile discounts.

[1 ]Principles of Currency and Exchanges applied to the Report of the Bullion Committee, p. 37.