The Online Library of Liberty

A project of Liberty Fund, Inc.

• Notice.
• Mr M C Culloch’s Publications.
• Treaties and Essays On Subjects Connected With Economical Policy; With Biographical Sketches of Quesnay, Adam Smith, and Ricardo
• A Treatise On Money. 1
• Sect. I.—: Circumstances Which Led to the Use of Money. Principal Properties Which Every Commodity Used As Such Ought to Possess. Not a Sign Or a Measure of Value, But a Real Equivalent.
• Sect. II.—: Circumstances Which Regulate the Exchangeable Value of Money.
• Sect. III.—: A Moderate Seignorage On Coined Money Advantageous. Principles Which Should Regulate Its Amount. 1
• Sect. IV.—: Expense of a Currency Consisting of the Precious Metals.
• Sect. V.—: Paper Money. Principle On Which Its Value Is Maintained.
• Sect. VI.—: Whether Gold Or Silver Should Be Adopted As the Standard of the Currency, Or Whether It Should Consist of Both.
• Sect. VII.—: Standard of Money. Degradation of the Standard In Rome, France, Great Britain, and Other Countries. Effects of This Degradation.
• Tables Relative to the Money of the United Kingdom.
• Treatise On the Circumstances Which Determine the Course of Exchange.
• Inland Exchange.
• Foreign Exchange.
• Sect. I.—: Nominal Exchange.
• Sect. II.—: Real Exchange.
• Sect. III.—: Computed Exchange.
• History and Influence of Bills of Exchange.
• Essay On Interest and Usury Laws.
• A Treatise On the Letting and Occupancy of Land.
• 1.: Money Rents.
• 2.: Proportional Rents.
• 3.: Produce Rents.
• 4.: Service Rents.
• An Essay Showing the Erroneousness of the Prevailing Opinions In Regard to Absenteeism.
• Sketch of the History of Commerce, to the Sixteenth Century.
• Sect. I.—: PhŒnician Commerce.
• Sect. II.—: Grecian Commerce.
• Sect. III.—: Roman Commerce.
• Sect. IV.—: Italian Commerce In the Middle Ages.
• Sect. V.—: Vasco De Gama and Columbus.
• An Essay On the Rise, Progress, and Decline of Commerce In Holland.
• An Essay On the Rise, Progress, and Decline of the Hanseatic League.
• Essay On the Origin of the Compass.
• Sketch of the Progress of Maritime Law.
• An Essay On the Colonial System of the Ancients.
• Sketch of the Life and Writings of Francis Quesnay.
• Sketch of the Life and Writings of Adam Smith, Ll.d.
• Sketch of the Life and Writings of David Ricardo, Esq., M.P.

FOREIGN EXCHANGE.

The price of foreign bills of exchange depends on two circumstances: first, On the value of the currency of the place where they are made payable, compared with the value of the currency of the place where they are drawn; and, secondly, On the relation which the supply of bills in the market bears to the demand.

If the value of the different coins and moneys which circulate in nations having dealings with each other were invariable, the exchange would be exclusively influenced by circumstances affecting the supply and demand for bills. But, in addition to variations in its cost in particular countries, the weight and fineness of the bullion contained in their coins are liable to all sorts of variations. And it is almost needless to say, that the price of bills, as of everything else, necessarily varies with these variations, increasing when the value of the money in which they are estimated falls, and falling when it increases. But these, it is plain, are merely nominal or numerical variations. They grow out of changes in the standard employed to measure values, and not in the values themselves. It is otherwise, however, with variations of price occasioned by changes in the supply of bills, or in the demand for them; that is, by changes in the payments a country has to make compared with those it has to receive. These are real, not nominal variations, for they affect the values in bills, and not the money in which these values are expressed. And hence the distinctions of nominal, real, and computed exchange. The first depends on alterations in the value of the currencies compared together; the second depends on the supply of bills in the market compared with the demand; and the third, or computed exchange, depends on the combined effects of the other two. For the sake of perspicuity we shall treat of these separately.1

Sect. I.—

Nominal Exchange.

Bullion being everywhere recognised as the standard currency of the commercial world, the comparative value of the currencies of particular countries depends,—1st, On the value of bullion in those countries; and, 2dly, On the quantity of bullion contained in their coins, or on the quantity of bullion for which their paper money, or other circulating media, will exchange.

I. The value of freely produced commodities being commonly proportioned to the cost of their production, including therein the cost of their conveyance from where they have been produced to where they are to be made use of, it follows, were the trade in the precious metals perfectly open, and the commodities produced in different countries about equally well fitted for exportation, that the value of bullion in one, compared with its value in another, would be chiefly determined by their respective distances from the mines. Thus, on the supposition that neither England nor Poland had any other article except corn to exchange with the Americans or Australians for bullion, it is evident that the precious metals would be more valuable in Poland than in England, because of the greater expense of sending so bulky a commodity as corn the more distant voyage, and also of the somewhat greater expense of conveying the gold to Poland. Had Poland succeeded in carrying her manufactures to a higher pitch of improvement than England, her merchants might be able, notwithstanding the disadvantage of distance, by exporting commodities possessed of great value in small bulk, the freight of which would be comparatively trifling, to buy bullion on cheaper terms than those of England. But when, as is actually the case, the advantages of skill and machinery are on the side of England, another reason is added to that derived from our less distance from the mines, why gold and silver should be less valuable here than in Poland, and why the money price of commodities should be higher.1

Hence, among nations which have attained to different degrees of excellence in manufacturing industry, the value of bullion does not wholly depend on their distance from the mines. But, whatever variations a different progress in the arts may occasion in its value in different countries, it is always less valuable in those into which it is imported, than in those in which it is produced. Like everything else, it is exported to find, not to destroy, its level. And unless its value in Europe exceeded its value in America and Australia by a sum sufficient to cover the expense of its importation, including ordinary profits to the importers, we should not, though the mines in these quarters were infinitely more productive, import from them a single ounce of bullion in the ordinary course of trade. It is obviously incorrect, therefore, to lay it down as a general proposition, “that the par of exchange between two countries is that sum of the currency of either of the two, which, in point of intrinsic worth, is precisely equal to a given sum of the other; that is, contains precisely an equal weight of gold and silver of the same fineness.”1 For a given quantity of gold and silver is not always, as is here assumed, of the same intrinsic value in different countries. It may differ but little among nations bordering upon or near each other, and which are all destitute of mines. But though, to use a familiar illustration, the value of sugar approaches nearly to a level in the great trading cities of Europe, it cannot surely be maintained that its value in the West Indies is as great as in Bordeaux or Liverpool, or that the exchange would be really at par, if a bill, which cost a hundred hogsheads of sugar in London, only brought a hundred in Jamaica. Now, in respect of principle, this is precisely the case with bullion. Though the value of gold and silver, compared with corn, labour, etc., may, and indeed must, vary very considerably among different nations, these variations are only the necessary result of their different progress in industry, and of the different quality of their cultivated lands, etc. Such differences of price are in the natural order of things; and bullion has not found its proper level till a quantity has been introduced into those countries which excel in manufactures, sufficient to raise the price of their corn and labour. These variations have, therefore, no influence over the exchange. Notwithstanding this difference of price, an ounce of bullion in one country, owing to the facility of intercourse, is very near equivalent to an ounce of bullion in another; and, supposing the trade in the precious metals to be perfectly free, the exchange will be at true par when bills are negotiated on this footing. But when we compare the values of these metals in distant countries, especially in those where they are produced, with those into which they are imported, there are very considerable differences. Gold and silver, like iron, coal, tin, etc., are necessarily cheaper in countries possessed of extraordinarily productive mines, than in those possessed only of mines of a secondary degree of fertility, or where they have to be entirely brought from abroad. And the exchange between such places is not at true par, unless adequate allowance be made for this difference of value. Thus if, because of the expense of carriage, the value of bullion in Great Britain be 5 per cent. greater than in San Francisco, 100 ounces of pure gold in the latter would not be worth 100 ounces of pure gold in London, but 5 per cent. less; and the exchange would be at true par when bills for 105 ounces standard bullion, payable in San Francisco, sold in London for 100 ounces.

The different values of the precious metals in different countries do not depend alone on their respective distances from the mines, or on their greater or less progress in the arts. The opinion formerly so very prevalent, that gold and silver were the only real wealth, led most nations to fetter and restrain their exportation, and to adopt a variety of measures intended to facilitate their importation. But these, even when most vigorously enforced, were singularly ineffectual. The great value and small bulk of the precious metals rendered it not only advantageous, but comparatively easy, clandestinely to export them, whenever their relative value declined.

“When,” says Dr Smith, “the quantity of gold and silver imported into any country exceeds the effectual demand, no vigilance of government can prevent their exportation. All the sanguinary laws of Spain and Portugal are not able to keep their gold and silver at home. The continual importations from Peru and Brazil, exceed the effectual demand of those countries, and sink the price of those metals there below that in the neighbouring countries. If, on the contrary, in any particular country their quantity fell short of the effectual demand, so as to raise their price above that of the neighbouring countries, the government would have no occasion to take any pains to import them. If it were even to take the pains to prevent their importation, it would not be able to effectuate it. Those metals, when the Spartans had got wherewithal to purchase them, broke through all the barriers which the laws of Lycurgus opposed to their entrance into Lacedæmon. All the sanguinary laws of the customs are not able to prevent the importation of the teas of the Dutch and Gottenburg East India Companies, because somewhat cheaper than those of the British Company. A pound of tea, however, is about a hundred times the bulk of one of the highest prices, 16s., that is commonly paid for it in silver, and more than two thousand times the bulk of the same price in gold, and consequently just so many times more difficult to smuggle.”1

But, though ineffectual to prevent their egress, the restrictions on the exportation of the precious metals have nevertheless contributed to occasion some slight variations in their value in different countries. The risk formerly incurred by the clandestine exporters of bullion from Spain, is supposed to have been equivalent to about two per cent.; or, which is the same thing, it is supposed that the restrictions maintained such an excess of gold and silver in that country as to sink them two per cent. below their value in countries having a free trade in bullion. In calculating the true par of exchange between different countries, circumstances of this kind must be taken into account. For, to whatever extent bullion in one country may be sunk below its value in those with which it maintains an intercourse, the nominal exchange will necessarily be unfavourable to that extent.2

It consequently results, that whatever occasions a rise or fall of the value of the precious metals in one country, proportionally affects its nominal exchange with other countries. If more coin, or convertible paper, circulated in Great Britain, compared with the business it has to perform, than in other countries, its relative value would be diminished. Foreign bills would sell for a premium, the amount of which would measure the excess of the value of the precious metals in the foreign market, caused by their redundancy in the home market. And, on the other hand, in the event of our currency becoming relatively deficient, its value would be proportionally increased; bills drawn on foreign countries would sell at a discount, the amount of which would equal the excess of the value of our currency over that of other countries.

II. In estimating the quantities of bullion contained in the coins of different countries, a particular coin of one, such as the British pound sterling, is selected for a standard by which to compare the others, and the proportion between it and them, supposing them to be all of their standard weight and fineness, is ascertained by experiment. A par of exchange is thus established, or rather it is ascertained, that a certain amount of the standard currency of one country contains as much gold or silver of the same fineness, as is contained in the coin or integer with which it has been compared. This relation, or par, as it is technically termed, is considered invariable; and allowance is made for subsequent variations in the coins of countries trading together, by rating the exchange at so much above or below par. In mercantile language, that country, by a comparison with one or other of whose coins the par of exchange has been established, is said to give the certain for the uncertain, and conversely. Thus, in the exchange between London and Paris, London and Hamburg, etc., London gives the certain, or the pound sterling, for an uncertain or variable number of francs, florins, etc. Hence, the higher the exchange between any two countries, the more is it in favour of that which gives the certain; and the lower, the more is it in favour of that which gives the uncertain.

On the supposition that 25 francs contain the same quantity of standard bullion as a pound sterling (25 fr. 57 cent. is about the exact par), and supposing also that the value of bullion is the same in both countries, the exchange between London and Paris will be at par, when a bill drawn in the one on the other sells at that rate; that is, when a bill of exchange for 2,500 or 25,000 francs, payable in Paris, sells in London for £100 or £1,000, and vice versa. It is but seldom, however, that the coins of any country correspond exactly with their mint standard. Unless when newly issued, they are either more or less worn; and whenever this defect becomes sensible, an allowance corresponding to the difference between their actual value and their mint value is made in estimating “the sum of the existing currency of either of two countries which contains precisely the same quantity of bullion as is contained in a given sum of the other.” Thus, if our pound sterling were so worn, clipped, or rubbed, as not to contain so much bullion as 25 fr., but ten per cent. less, the exchange between London and Paris would be at real par when it was nominally ten per cent. against London;1 and if, on the other hand, the pound sterling were equal to its mint standard, while the franc was ten per cent. less, it would be at par when it was nominally ten per cent. against Paris and in favour of London. If the currencies of both countries were equally reduced below the standard of their respective mints, there would obviously be no variation of the par. But whenever the currency of countries trading together is unequally depreciated, the exchange is nominally in favour of that country whose currency is least, and nominally against that whose currency is most, depreciated.

It is almost unnecessary to refer to examples to show the practical operation of this principle; and we shall content ourselves with selecting the following, from an infinite number of equally conclusive instances.

Previously to the great re-coinage in the reign of William III., silver being at the time legal tender, the exchange between England and Holland, calculated by the standard of their respective mints, was nominally twenty-five per cent. against England. Inasmuch, however, as English silver coins were then, owing to rubbing and clipping, depreciated more than twenty-five per cent. below their mint value, the real exchange was probably at the time in our favour. And the circumstance of the nominal exchange having become favourable to us as soon as the new coin was issued, tends to confirm this conjecture.1

The guinea was so much worn and degraded, previously to the gold recoinage in 1774, as to be from 2 to 3 per cent. under its standard weight. Inasmuch, however, as the coins then circulating in France were nearly of their standard weight and purity, the exchange between London and Paris was nominally from 2 to 3 per cent. against the former. We say nominally, for as soon as guineas of full weight were issued, the exchange rose to par.

The Turkish government, during the past century, has made successive reductions in the value of its coin. Before the first of these in 1770, the piastre contained nearly as much silver as the English half-crown; and, in exchange, the par was estimated at eight piastres to the pound sterling. But, in the interval, the degradation in the value of the piastre has been such that it is now worth only about 2¼d.; and the exchange is said to be at par when Constantinople gives about 109 piastres for £1 sterling. It is needless almost to say, that the nominal exchange, estimated by the old par of eight piastres to £1, became more and more unfavourable to Turkey with every successive enfeeblement of the coin, though it is doubtful whether the real exchange, or that depending on the balance of payments, was not all the while in her favour.

When one country uses gold as the standard of its currency, and another silver, the par of exchange between them is affected by variations in the relative values of these metals. When gold rises as compared with silver, the exchange becomes nominally favourable to the country which has the gold standard, and vice versa. And hence, in estimating the par of exchange between countries using different standards, it is always necessary to inquire into the comparative values of the metals selected for standards.

“For example,” to use the words of Mr Mushet, “if 34 schillings 11 grotes and ¼ of Hamburg currency be equal in value to a pound sterling, or of a guinea, when silver is at 5s. 2d. per oz., they can no longer be so when silver falls to 5s. 1d. or 5s. an oz., or when it rises to 5s. 3d. or 5s. 4d.; because a pound sterling in gold being then worth more or less silver, is also worth more or less Hamburg currency.

“To find the real par, therefore, we must ascertain what was the relative value of gold and silver when the par was fixed at 34s. 11¼g. Hamburg currency, and what is their relative value at the time we wish to calculate it.

“For example, if the price of standard gold was £3, 17s. 10½d. per oz., and silver 5s. 2d., an ounce of gold would then be worth 15·07 ounces of silver, and twenty of our standard shillings would then contain as much pure silver as 35s. 11 grotes and ¼ Hamburg currency. But if the ounce of gold were £3, 17s. 10½d., and silver 5s. (which it was on 2d January 1798), the ounce of gold would then be worth 15·57 ounces of silver. If £1 sterling at par, therefore, be worth 15·07 ounces of silver, then at 15·57 it would be at three per cent. premium; and three per cent. premium on 34s. 11¼d. is 1 schilling 1 grote and , so that the par, when gold is to silver as 15·57 to 1, will be 36 schillings 1 grote and . The above calculation will be more easily made by stating, as 15·07 : 34-12¼ :: 15·57 : 36-1.”1

As it is their intrinsic worth in bullion which determines the value of coins in exchange transactions, those of equal weight and purity are reckoned equivalent to each other, though some of them may have been coined at the expense of the state, and others charged with a duty or seignorage on their coinage. The latter may, if not issued in excess, pass current in the country in which they are coined for their value in bullion plus the duty;1 but they will not pass anywhere else, except at their bullion value.2

But the principal source of fluctuations in the nominal price of bills of exchange, is to be found in the varying value of the paper currency of commercial countries. The disorders which arose in remoter ages from diminishing the bullion contained in coins of the same denomination, are now reproduced in another form, and often to a still more ruinous extent, in the depreciation of paper currency.

The impossibility of retaining a comparatively large quantity of coin or bullion, or of paper convertible into coin, in a particular country, limited the issues of the Bank of England previously to the Restriction Act of 1797; and it has equally limited them since the resumption of specie payments in 1821, and sustained the value of our currency on a level with gold. When the Bank starves the circulation, or issues less paper than is necessary, bullion is imported, sent to the mint to be coined, and thrown upon the market. And when, on the other hand, the Bank issues too much paper, and thereby depresses its value relatively to gold, it becomes profitable to demand payment of its notes, and to export the specie thus obtained either as coin or as bullion. In this way the vacuum is filled up when bank-notes are deficient, the excess removed when they are redundant, and the value of the currency preserved nearly equal.

But, from 1797 down to 1821, this principle was suspended. During that period, the Bank was relieved from the obligation to pay her notes in gold; while, owing to their being made legal tender, their circulation was insured. Hence, their value exclusively depended (as shown in the previous treatise) on the extent to which they were issued compared with the demand.

There is no difference, in its influence over the exchange, between a degraded metallic and a depreciated paper currency. And when a country with either the one or the other has any dealings with another whose currency is of its full value, the exchange is nominally against her to the extent of the degradation or depreciation. The nominal exchange between any two or more places, is, in fact, always adjusted according to the values of their currencies, being most favourable to that whose currency approaches nearest to its standard, and most unfavourable to that whose currency is most degraded or depreciated.

The intercourse between Great Britain and Ireland, subsequently to the restriction on cash payments in 1797, furnishes some striking proofs of the effect which inordinate issues of paper have in depressing the exchange.

The nominal value of the Irish shilling being raised in 1689 from 12d. to 13d.,1 £108, 6s. 8d. Irish money became equal to only £100 of British money, so that the exchange between Great Britain and Ireland was said to be at par when it was nominally 8⅓ per cent. against the latter. In the eight years previous to 1797, when the paper currency of both countries was convertible into gold, the exchange between London and Dublin fluctuated from 7½ to 9 per cent., that is, from ⅚ per cent. in favour of Dublin to ⅔ per cent. against it. In September 1797 it was at 6 per cent., or 2⅓ per cent. in favour of Dublin. The amount of Bank of Ireland notes in circulation in January 1797 was only £621,917; whereas in April 1801 they had increased to £2,286,471, and the exchange was then at 14 per cent., or 5⅔ per cent. against Dublin. In 1803, the Bank of Ireland notes in circulation averaged £2,707,956, and in October that year the exchange was quoted at 17 per cent., that is, 8⅔ per cent. against Dublin!

The fact of the exchange between London and Dublin having fluctuated so little from par for the eight years previously to the restriction, shows that the circulating medium of Great Britain and Ireland had then been adjusted nearly according to the wants of the two countries. But, in these circumstances, it was evidently impracticable, supposing the value of British currency to remain nearly stationary, that the amount of Irish bank paper could be more than quadrupled in the short space of six years, without rendering the currency of Ireland redundant, and sinking its value below that of England. Had the Bank of England increased its notes in something like the same ratio as the Bank of Ireland, then, as the currency of both countries would have been equally depreciated, the exchange between London and Dublin would have continued at par. While, however, the notes of the Bank of Ireland were increased from £621,917 to £2,707,956, or in the proportion of 1 to 4·3, those of the Bank of England were only increased from £9,181,843 (their number on 7th January 1797), to £16,505,272, or in the proportion of 1 to 1·8. But for this addition to its issues by the Bank of England, the exchange, it is plain, would have been still more unfavourable to Dublin.

In the debates on the Bullion Report, it was contended that the increase of Bank of Ireland paper could not have been the cause of the unfavourable exchange upon Dublin, seeing that it had again become favourable after the issues of the Bank of Ireland had been still further increased. But to give this reasoning the least weight, it should have been shown that the currency of Great Britain retained its value in the interim, or that it had not been depreciated to the same extent as that of Ireland. For it is obvious that the depreciation of Irish bank paper might go on subsequently to 1804, and yet, if English bank paper were depreciated still more rapidly, the exchange would become more in favour of Dublin. This is merely supposing the circumstances which took place in the first six years of the restriction to be reversed in the second six. Let us inquire how the fact stands.

We have seen that, in 1803, when the exchange was nominally 10 per cent. against Dublin, the issues of the Bank of England amounted to £16,505,272, and those of the Bank of Ireland to £2,707,956. And by referring to the accounts of the issues of the latter from 1797 to 1819, published by authority, it is seen that, in 1805-1808, they were rather diminished; and that, in 1810, they amounted to only £3,251,750, being an increase of not more than £543,794 in the space of seven years, or at the rate of 2 per cent. per annum; but in the same period (from 1803 to 1810) the issues of the Bank of England were increased from £16,505,272 to £22,541,523, or at the rate of 5 per cent. per annum. And this is not all. According to Mr Wakefield1 there were fifty registered bankers in Ireland in 1804, and only thirty-three in 1810, of which fourteen were new houses, thirty-one of the old establishments having disappeared; and, “I believe,” says Mr Wakefield, “for the most part failed.” This extraordinary diminution of the country paper of Ireland, for the reduction of the issues was at least proportional to the reduction in the number of banks, could not fail greatly to raise its value, and to countervail a corresponding increase in the issues of the national bank. Now, the reverse of all this took place in Britain. In 1800 there were 386 country banks in this country; and in 1810, this number, instead of being diminished as in Ireland, had increased to 721, having at least three times the number of notes in circulation in the latter as in the former period!

It appears, therefore, that when, in the period between 1797 and 1804, the amount of paper in circulation in Ireland was increased, and its value depressed, faster than in England, the exchange between London and Dublin became proportionally unfavourable to the latter; and, on the other hand, it appears, that when, in the six years subsequent to 1804, the paper currency of England was increased more rapidly than that of Ireland, its relative value was diminished, and the nominal exchange became more favourable to Dublin.

This is sufficiently conclusive. But there is still better evidence to show that the unfavourable exchange of Dublin upon London, in 1802, 1803, 1804, etc., was entirely owing to the comparative redundancy or depreciation of Irish bank paper. The linen manufacturers and weavers, with the majority of the other inhabitants of a few counties in Ulster, being, at the period of the restriction, strongly disaffected towards government, very generally refused to receive banknotes in payment either of commodities or wages. The landlords having also stipulated for the payment of their rents in specie, a gold currency was maintained in the northern long after it had been banished from the southern parts of Ireland. If, therefore, the depression of the exchange between London and Dublin had been occasioned, as many contended, by an unfavourable balance of trade between Ireland and Great Britain, or by remittances from the former on account of absentees, it would have been equally depressed between London and the commercial towns in the northern counties. But so far was this from being the case, that in December 1803, when the exchange of Dublin on London was at 16¼ per cent., that of Belfast on London was at 5¼; or, in other words, at the very time that the exchange between Dublin, which had a paper currency, and London, was about 8 per cent. against Ireland, the exchange between Belfast, which had a gold currency, and London, was about 3 per cent. in its favour. And this is not all: For, while there was a difference of 11 per cent. in the rate of exchange between Dublin and London, and Belfast and London, the inland exchange between Dublin and Belfast was about 10 per cent. in favour of the latter; that is, bills drawn in Dublin, and payable in the gold currency of Belfast, brought a premium of 10 per cent., while bills drawn in Belfast, and payable in the paper currency of Dublin, sold at 10 per cent. discount!1

It is unnecessary to refer to the history of the French assignats, or of the paper currency of the continental powers generally, and of the United States, to corroborate what has been advanced. Such of our readers as wish for farther information upon these points may have recourse to the fourth volume of the “Cours d’Economie Politique” of M. Storch,2 where they will find an instructive account of the influence of inordinate issues of paper on the price of bullion and the exchange, in almost every country of Europe. They are, in every case, similar to those now stated.

It only remains to determine the influence of fluctuations in the nominal exchange over exports and imports.

When the exchange is at par, the operations of the merchant are regulated entirely by the difference between foreign prices and home prices. He imports such commodities as sell at home for so much more than they cost abroad as will indemnify him for freight, insurance, etc., and yield, besides, an adequate remuneration for his trouble, and for the capital employed in the business; and he exports those whose price abroad is sufficient to cover all expenses, and to afford a similar profit. But when the nominal exchange becomes unfavourable to a country, the premium which its merchants receive on foreign bills has been said to enable them to export with profit, in cases where the difference between the price of the exported commodities at home and abroad might not be such as to permit their exportation with the exchange at par. Thus, if the nominal exchange were 10 per cent. against this country, a merchant who had consigned goods to his agent abroad, would receive a premium of 10 per cent. on the sale of the bill; and if we suppose freight, insurance, mercantile profit, etc., to amount to 6 or 7 per cent., it would at first sight appear as if we might, in such circumstances, export commodities, although their price at home were 3 or 4 per cent. higher than in other countries. If, on the other hand, the nominal exchange were in our favour, or if bills on this country sold at a premium, it would appear as if foreigners would then be able to consign goods to our merchants, or the latter to order goods from abroad, when the difference of real prices would not of itself lead to an importation.

But a very little consideration will suffice to show that fluctuations in the nominal exchange have no such effects. That fall in the value of the currency which renders the exchange unfavourable, and causes foreign bills to sell at a premium, equally increases the price of commodities. And hence, however great, the premium which exporters gain by selling bills on their correspondents abroad, merely indemnifies them for the enhanced price of the goods exported. In such cases, mercantile operations are conducted precisely as they would be were the exchange really at par; that is, by a comparison of real prices at home and abroad, meaning by real prices, the prices at which commodities would be sold provided there were no depreciation of the currency. If these admit of exportation or importation with a profit, the circumstance of the nominal exchange being favourable or unfavourable will make no difference whatever on the transaction.

“Suppose,” says Mr Blake, who has very successfully illustrated this part of the theory of exchange, “the currencies of Hamburg and London being in their due proportions, and therefore the nominal exchange at par, that sugar, which, from its abundance in London, sold at £50 per hogshead, from its scarcity at Hamburg would sell at £100. The merchant in this case would immediately export. Upon the sale of his sugar, he would draw a bill upon his correspondent abroad for £100, which he could at once convert into cash by selling it in the bill market at home, deriving from this transaction a profit of £50, under deduction of the expenses of freight, insurance, commission, etc. Now, suppose no alteration in the scarcity or abundance of sugar in London and Hamburg, and that the same transaction were to take place after the currency in England had been so much increased that the prices were doubled, and, consequently, the nominal exchange 100 per cent. in favour of Hamburg, the hogshead of sugar would then cost £100, leaving apparently no profit whatever to the exporter. He would, however, as before, draw his bill on his correspondent for £100; and, as foreign bills would bear a premium of 100 per cent., he would sell this bill in the English market for £200, and thus derive a profit from the transaction of £100 depreciated, or £50, estimated in undepreciated currency,—deducting, as in the former instance, the expense of freight, insurance, commission, etc.

“The case would be precisely similar, mutatis mutandis, with the importing merchant. The unfavourable nominal exchange would appear to occasion a loss amounting to the premium on the foreign bill which he must give in order to pay his correspondent abroad. But if the difference of real prices in the home and foreign markets were such as to admit of a profit upon the importation of produce, the merchant would continue to import, notwithstanding the premium; for that would be repaid to him in the advanced nominal price at which the imported produce would be sold in the home market.

“Suppose, for instance, the currencies of Hamburg and London being in their due proportions, and therefore the nominal exchange at par, that linen, which can be bought at Hamburg for £50, will sell here at £100. The importer immediately orders his correspondent abroad to send the linen, for the payment of which he purchases at £50 a foreign bill in the English market; and, on the sale of the consignment for £100, he will derive a profit amounting to the difference between £50 and the expense attending the import.

“Now, suppose the same transaction to take place without any alteration in the scarcity or abundance of linen at Hamburg and London, but that the currency of England has been so augmented as to be depreciated to half its value, the nominal exchange will then be 100 per cent. against England, and the importer will not be able to purchase a £50 foreign bill for less than £100. But as the prices of commodities here will have risen in the same proportion as the money has been depreciated, he will sell his linen to the English consumer for £200, and will, as before, derive a profit amounting to the difference between £100 depreciated, or £50 estimated in undepreciated money, and the expenses attending the import.

“The same instances might be put in the case of a favourable exchange; and it would be seen, in the same manner, that nominal prices and the nominal exchange being alike dependent on the depreciation of currency, whatever apparent advantage might be derived from the former would be counterbalanced by a loss on the latter, and vice versa.”1

It appears, therefore, that fluctuations in the nominal exchange have no effect on trade. A fall in the exchange obliges the country to which it is unfavourable to expend a greater nominal sum in discharging a foreign debt than would otherwise be necessary; but it does not oblige it to expend a greater real value. The depression of the nominal exchange can neither exceed nor fall short of the comparative depreciation of the currency. If British currency were depreciated 10 or 15 per cent., the nominal exchange would be 10 or 15 per cent. against us; and we should be compelled, in all transactions with foreigners, to give them 22s. or 23s. for what might otherwise have been procured for 20s. But as neither 22s. nor 23s. of such depreciated paper is more valuable than 20s. of paper undepreciated, payment of a foreign debt would, it is evident, be as easily made in the one currency as in the other; and mercantile transactions would, in such circumstances, be conducted exactly as they would have been had there been no depreciation, and the nominal exchange at par.

Sect. II.—

Real Exchange.

Having thus endeavoured to trace the influence which variations in the value of currencies have over the exchange, we proceed to consider how far it is influenced by fluctuations in the supply and demand for bills. To facilitate this inquiry, we shall exclude all consideration of changes in the value of money; and suppose the currencies of the different countries having an intercourse together to be equal in weight and purity to their mint standards, and that each has its proper supply of bullion.

When two nations trade together, and each purchases of the other commodities of the same value, their debts and credits are equal, and the real exchange is, of course, at par. But it rarely happens that the debts reciprocally due by any two countries are equal. There is almost always a balance owing on one side or other, which affects the exchange. If, for example, the debts due by London to Paris exceed those due by the former to the latter, the demand in London for bills on Paris will be greater than the demand in Paris for bills on London; and the real exchange will, consequently, be in favour of Paris and against London.

The expense of transferring bullion from one country to another limits the range within which the rise and fall of the real exchange between them is confined. In this respect, as in most others, transactions between foreign countries depend on the same principles which govern those between different parts of the same country. We have already seen that the fluctuations in the real exchange between London and Glasgow cannot exceed the expense of transmitting money between those cities. And this principle holds universally. Whatever may be the expense of transmitting bullion, which is the money of the commercial world, between London and Paris, London and Hamburg, New York, etc., the real exchange of the one on the other cannot, for any considerable period, be depressed to a greater extent. No merchant will pay a higher premium for a bill to discharge a debt abroad, than will suffice to cover the expense of transmitting bullion to his creditor.

Hence it appears that whatever obstructs or fetters the intercourse among different countries, proportionally widens the limits within which fluctuations in the real exchange may extend. And hence the reason why it varies so much more in war than in peace. The amount of the bills drawn on a country engaged in hostilities is liable, from various causes, to be suddenly increased; though, whatever may be the amounts thus thrown upon the market, the depression of the exchange cannot, for any length of time, exceed the expense of conveying bullion from the debtor to the creditor country. But during war this expense, which consists of freight, insurance, etc., is necessarily much augmented. The evidence annexed to the “Report of the Bullion Committee,” shows that the cost of conveying gold from London to Hamburg, which, prior to the late war, amounted to 2 or 2½, had increased, in the latter part of 1809, to about 7, per cent.; so that the limits within which fluctuations in the real exchange might range in 1809 were about three times as great as those within which they were confined in 1793.

This principle also accounts for the greater steadiness of the real exchange between closely neighbouring countries. It costs considerably less to transmit bullion from London to Dublin or Paris, than to New York or Petersburg. And, as fluctuations in the real exchange are limited by this cost, they may evidently extend proportionally farther between distant places than between such as are contiguous.

We have next to investigate the circumstances which give rise to a favourable or an unfavourable balance of payments, and to appreciate their effects on the real exchange, and on trade in general.

A very great, if not the principal, source of the errors into which merchants, and the majority of writers on exchange, have been betrayed in regard to the balance of payments, appears to have originated in their confounding the sum which imported commodities fetch in the home market, with their cost abroad. It is obviously, however, by the amount of the latter only, that the balance of payments, and consequently the real exchange, is influenced. A cargo of corn, for example, which cost £3,000 free on board at Odessa, may be worth £4,500 when imported into England; but the foreign merchant would not, unless he imported the corn, be entitled to draw on London for more than its original cost, or £3,000. It is clear, therefore, on the slightest consideration, that the fact of the imports being more valuable than the exports, does not authorise the conclusion that the balance of payments is unfavourable. A favourable or an unfavourable balance depends entirely on the sum due to foreigners for imported commodities being less or more than the sum due by them for commodities purchased from us. It has nothing to do with the prices eventually obtained for the imported or exported commodities.

The mercantile system of commercial policy, which continues to preserve a powerful influence in most European countries, and in the United States, had for its grand object the creation of a favourable balance of payments, by facilitating exportation and restricting importation. It is foreign to our purpose to make any inquiry in regard to the principles of this system, except in so far as they are connected with exchanges. But we hope to be able to show, in opposition to the commonly received opinions, that, under ordinary circumstances, the value of the imports always exceeds the value of the exports; and that this excess or balance has not, speaking generally, any tendency to render the real exchange unfavourable.

It is the business of the merchant to carry the products of different countries from those places where their value is least, to those where it is greatest; or, which is the same thing, to distribute them according to the effective demand. There could, however, be no motive to export any article, unless that which was to be imported in its stead were of greater value. When an English merchant orders a quantity of Polish wheat, he supposes it will sell for so much more than its price in Poland as will suffice to pay the cost of freight, insurance, etc., and to yield, besides, the ordinary rate of profit on the capital employed in the business. If the wheat did not sell for this much, its importation would be productive of loss. Merchants never export, but in the view of importing more valuable products. Instead of an excess of exports over imports being any criterion of an advantageous commerce, it is quite the reverse. And the truth is, notwithstanding all that has been said and written to the contrary, that unless the value of the imports exceeded that of the exports, foreign trade could not be carried on. Were this not the case—were the value of the exports always greater than that of the imports, there would be a loss on every transaction with foreigners, and the trade with them would either not be undertaken, or, if begun, would be speedily relinquished.

In England, the rates at which exports and imports are officially valued were fixed so far back as 1696. The very great alteration which has since taken place in the value of money, and in the cost of the greater number of the commodities of this and other countries, has rendered this official valuation, though valuable as a means of determining their quantity, of no use whatever as a criterion of the true value of the imports and exports. To obviate this defect, accounts of the real or declared value of the exports, prepared from the declarations of the merchants, are annually laid before Parliament. There is, however, no such account of the imports; and it is, perhaps, impossible to frame one with anything like accuracy. It has also been alleged, and apparently with some foundation, that merchants have frequently exaggerated the value of articles entitled to drawbacks. But the extension and improvement of the warehousing system, and the decrease in the number of drawbacks, has materially lessened whatever fraud or inaccuracy may have arisen from that source. The declared value of the exports may now be considered as pretty near the truth, at least sufficiently so for all practical purposes.

If perfectly accurate accounts could be obtained of the values of the exports and imports, there can be no manner of doubt that in all ordinary years the latter would considerably exceed the former. The value of an exported commodity is estimated when it is shipped, before its value is increased by the expense incurred in transporting it to the place of its destination; whereas the value of the commodity imported in its stead is estimated after it has arrived at its destination, and been enhanced by the charges on account of freight, insurance, importer’s profits, etc.

It is of little importance, in so far at least as the interests of commerce are concerned, whether a nation carries its own imports and exports, or employs others. A carrying nation appears to derive a comparatively large profit from its commercial transactions. But this excess of profit is seldom more than a fair remuneration for the capital it employs, and the risk it incurs, in transporting commodities. Were the trade between this country and France wholly carried on in British bottoms, our merchants, in addition to the value of the exports, would also receive the cost of their carriage to France. This, however, would be no loss to the French. They must pay the freight of the commodities they import. And if the English sail ships on cheaper terms than their own countrymen, there is no good commercial reason, though there may be others of a different kind, why they should not employ them in preference.

In the United States the value of the imports, deduced from the custom-house returns, almost always exceeds the value of the exports.1 And though our practical politicians have been accustomed to consider the excess of exports over imports as the only sure criterion of an advantageous commerce, “it is nevertheless true, that the real gain of the United States has been nearly in proportion as their imports have exceeded their exports.”2 The great excess of imports into the Union is in part occasioned by the Americans generally exporting their own surplus produce, and receiving from foreigners not only an equivalent for the exports, but also for the cost of their conveyance to their markets. “In 1811,” says the author just quoted, “flour sold in America for 9 dol. 50 cents per barrel, and in Spain for 15 dol. The value of the cargo of a vessel carrying 5,000 barrels of flour would, therefore, be estimated, at the period of its exportation, at 47,500 dol.; but as this flour would, because of freight, insurance, exporter’s profits, etc., sell in Spain for 75,000 dol., the American merchant would be entitled to draw on his agent in Spain for 27,500 dol. more than the flour cost in America, or than the sum for which he could have drawn had the flour been exported on account of a Spanish merchant. But the transaction would not end here: the 75,000 dol. would be vested in some species of Spanish or other European goods fit for the American market; and the freight, insurance, etc., on account of the return cargo would perhaps increase its value to 100,000 dol.; so that, in all, the American merchant might have imported commodities worth 52,500 dol. more than the flour originally sent to Spain.” It is as impossible to doubt that this transaction is advantageous, as it is to doubt that its advantage consists in the value of the imports exceeding that of the exports. And it is clear that America might have the balance of payments in her favour, though such transactions as the above were multiplied to any conceivable extent.

Instead, therefore, of endeavouring to limit the trade with countries from which we should otherwise import more than we exported, we should give it every possible facility. Every man considers that market as the best in which he obtains the highest price for his goods. Why then exclude him from it? Why compel a merchant to sell a cargo of muslin, iron, etc., for £10,500, rather than £11,000 or £12,000? The wealth of a state is made up of the wealth of individuals. And we have yet to learn that any more effectual method of increasing individual wealth can be devised than to permit buying in the cheapest and selling in the dearest markets.

It would be difficult to estimate the mischief which absurd notions relative to the balance of trade have occasioned in most commercial countries. They have been particularly injurious to Great Britain. The restrictions imposed on the trade with France, originated in the prevalence of prejudices to which they gave rise. The great, and indeed the only, argument insisted on by those who prevailed on the legislature to declare the French trade a nuisance,1 was founded on the alleged fact, that the value of the imports from France considerably exceeded the value of the exports to her. The balance was termed a tribute paid by England; and it was sagaciously asked, what had we done that we should be obliged to pay so much money to our natural enemy? Those considerate and patriotic persons seem to have supposed that our merchants brought commodities from France, for no better reason than that they were French, or to oblige that ingenious people. But they were not quite so disinterested. They imported French wines, silks, and so forth, for the same reasons that they imported the sugar of the West Indies, the teas and spices of the East, and the timber of the Baltic, that is, because there was a demand for them, and because they were worth more in our markets than the native products exported in their stead. The reason assigned for prohibiting the trade affords a conclusive proof of its having been highly advantageous. And there cannot be a doubt, that an unlimited freedom of intercourse between the two countries would be of great service to both. Supposing it to be so arranged, does any one imagine that we should export or import any commodity to or from France, provided we could either sell or buy it on better terms anywhere else? If restrictions on the trade with any particular country be not injurious, that is, if it be either a losing or a less advantageous trade than that with other countries, we may be assured that the throwing it completely open would not make a single individual engage in it.

Everybody knows that these conclusions are not only theoretically true, but have been practically verified. The abolition of the discriminating duty on French wines, the reduction of the exorbitant duty on brandy, the repeal of the prohibition against importing silks, and the opening of our ports to French corn and flour, have all been advantageous. And though it be true that the prejudices of the French, and the high duties which they continue to impose on most articles of British produce, confine the trade within comparatively narrow limits, they have not made it unprofitable, and are more injurious to themselves than to us. It is a curious fact, that notwithstanding the great amount of our imports from France, and our expenditure in that country on account of absentees, the state of the exchange shows that the balance of payments is usually in our favour.

But the partisans of the exclusive or mercantile system may perhaps say, that they do not mean to contend that it is profitable to export more than is imported; but that, by exporting an excess of raw and manufactured produce, the balance of payments is rendered favourable, and that this balance (which they regard as representing the entire nett profit made by the country on its transactions with foreigners) is always paid in bullion.

It may, however, be easily shown that this statement is altogether erroneous; that a balance, whether on the one side or the other, is seldom or never cancelled by means of bullion; and that it is not a measure, and has, indeed, nothing to do with the profit or loss attending foreign commercial transactions.

If the premium on foreign bills, in a country with an unfavourable real exchange, be less than the cost of sending bullion abroad, it would be contradictory to suppose that it should be exported. And though the premium on such bills were to increase, till it become equal to, for it cannot exceed, the cost of exporting the precious metals, it does not follow that they will then be exported. That would depend on whether bullion were, at the time, the cheapest exportable commodity; or, in other words, whether a remittance of bullion was the most advantageous way in which a debt might be discharged. If a London merchant owe £1,000, or other sum, in Paris, he endeavours to find out the cheapest method of paying it. On the supposition that the real exchange is 2 per cent. below par, and that the expense of remitting bullion is also 2 per cent., it will be indifferent to him whether he pay £20 of premium for a bill of £1,000, payable in Paris, or incur an expense of £20 in remitting £1,000 worth of bullion direct to that city. If the prices of cloth in Paris and London be such, that it would require £1,030 to purchase and send as much cloth to Paris as would sell for £1,000, he would no doubt prefer buying a bill or exporting bullion. But if, by incurring an expense of £1,010, the debtor may send as much hardware or cotton to Paris as would sell for £1,000, he would as certainly prefer paying his debt by exporting the one or the other. It would save him 1 per cent. more than if he bought a foreign bill or remitted bullion, and 2 per cent. more than if he exported cloth. Had there been any other commodity which might have been exported with more advantage, he would have used it in preference.

It is obvious, therefore, that the trade in bullion is governed by the same principles which govern the trade in other things. It is exported when its exportation is advantageous; that is, when it is less valuable at home, and more valuable abroad, than anything else; and it cannot be otherwise exported. The balance of payments might be twenty or thirty millions against a country, without depriving it of a single ounce of bullion. No merchant would remit £1,000 worth of gold or silver from England to discharge a debt in Paris, if he could invest £970, £980, £990, or any sum under £1,000, in any other species of merchandise which, exclusive of expenses, would sell in France for that amount. Those who deal in the precious metals are as much alive to their interests, as those who deal in coffee, or sugar, or indigo. But who would attempt to discharge a foreign debt by exporting coffee which cost £100, if he could effect the same object by exporting indigo which cost only £95? No bullion will ever be exported unless its value be less in the exporting country than in that to which it is sent; and unless it be, at the same time, the most advantageous article of export.

2. It is in vain to contend that an unrestricted freedom of trade might render some unfortunate country indebted to another, so happily situated that it had no demand for any sort of ordinary merchandise, and would only accept of cash or bullion in exchange for its exports. A case of this sort never did, and never will, occur. It is not even possible. A nation which is in want of money must be in want of other things; for men desire money only because it is the readiest means of increasing their command over necessaries and enjoyments. The extreme variety, too, in the soils and climates—in the machinery, skill, and industry of the people of different countries—occasion extraordinary differences in their products and their prices. Some articles of the highest utility are peculiar to certain districts. And there will ever be a demand, not only for such articles, but also for those which, though they may be produced at home, may be imported of a better quality, or at a lower price. Nor, till the passion of accumulation be banished from the human breast, will there cease to be a desire to send commodities from places where their exchangeable value is least, to those where it is greatest.

3. In treating of the nominal exchange, we endeavoured to show that no single country can continue, for any length of time, to import or export a greater amount of bullion than may be necessary to preserve the precious metals in it in their proper relation to those of other countries; or, which is the same thing, to have the real exchange either permanently favourable or unfavourable. But though this principle be strictly true in reference to its aggregate exchanges, it may be incorrect if its exchange with one country only be considered. Great Britain, for example, may generally have the exchange in her favour with America, provided she have it generally, and to a nearly equal extent, against her with the East Indies, or some other country. “She may,” to use the words of Mr Ricardo, “be importing from the north the bullion which she is exporting to the south. She may be collecting it from countries where it is relatively abundant, for others where it is relatively scarce, or where, from some particular causes, it is in great demand. Spain, who is the great importer of bullion from America, can never have an unfavourable exchange with her colonies; and as she must distribute the bullion she receives among the different nations of the world, she can seldom have a favourable exchange with the countries with which she trades.”1

On this principle, Lord King successfully accounted for the favourable exchange between this country and Hamburg, from 1770 to 1799. He showed that the importation of bullion from Hamburg and other parts was not more than equivalent to the exports to the East Indies and the home consumption; that the demand corresponded to the supply; and that its value remained pretty stationary. The extraordinary influx of bullion into this country from the Continent at the æra of the Bank restriction in 1797, and the favourable state of the exchange, were undoubtedly owing to the reduction in the issues of bank paper, and to the diminution of the gold currency caused by the hoarding of guineas. In 1797 and 1798, above five millions of guineas were coined at the mint; and this extraordinary demand for gold is of itself abundantly sufficient to account for the very favourable exchange of that period, and for the length of time during which it continued. But, at the same time that the demand for gold bullion for the mint was thus increased, the demand for silver bullion, for export to India, was proportionally augmented.

From this period the exportation rapidly declined; and, in the years in which the exchange was most unfavourable, little or no silver was sent to India.

Instead, therefore, of the extraordinary importation of bullion from Hamburg in 1797 and 1798 affording, as Mr Bosanquet and others supposed, a practical proof of the fallacy of the opinion of those who contend that it is impossible, for any length of time, to subvert the natural equality in the value of bullion in different countries, it is a striking example of its truth. Without this influx, bullion in this country could not have maintained its proper comparative value. We imported it, because the reduction of the paper currency, and the increased exports of the East India Company, rendered its value higher here than on the Continent; and made it advantageous for the Continental merchants to send it to us, in the same manner as they would have sent corn, or anything else for which we had an unusual demand. For, however favourable the real exchange between Hamburg and London might have been to the latter, we should not have imported an ounce of bullion, had it not been, at the time, the article with which Hamburg could most advantageously discharge her debt to London.

4. In the absence of other arguments, it would be sufficient to state, that it is physically impossible that the excess of exports over imports, as indicated by the custom-house returns, should be paid in bullion. Every country, with the exception of the United States, has its apparently favourable balance; and, of course, if they really existed, they would have to be paid by an influx of bullion from the mines correspondent to their aggregate amount. It is certain, however, that, previously to the late discoveries in California and Australia, the entire produce of the mines, though it had been increased in a ten-fold proportion, would have been insufficient for this purpose! This fact is decisive of the degree of credit which ought to be attached to the commonly received opinions on this subject.

5. In the last place, the profit on transactions with foreigners does not consist in the quantity of bullion imported from abroad, but in “the excess of the value of the imports over the value of the exports.” If, in return for exported commodities worth ten or twenty millions, we import such as are worth fifteen or thirty, we shall gain 50 per cent. by the transaction, though the exports should consist entirely of bullion, and the imports of corn, sugar, coffee, etc. It is a ridiculous prejudice that would make bullion be imported rather than any other article. But whatever the partisans of the exclusive system may say about its being a preferable product, a marchandise par excellence, we may be assured that it will seldom appear in the list of exports or imports, while there is any other thing with which to carry on trade that will yield a larger profit.

Thus it appears that the excess of exports over imports, instead of being any proof of an advantageous commerce, is distinctly and completely the reverse; that the value of the imports into commercial countries may, and almost always does, exceed the value of their exports, without rendering them indebted to foreigners; and that when a balance of debt has been contracted, that is, when the sum payable to foreigners for imports is greater than the sum receivable from them for exports, bullion will not be sent from the debtor to the creditor country, unless it be at the time the most profitable article of export.

We have in the previous section shown that fluctuations in the nominal exchange have no influence over foreign trade. When the currency is depreciated, the premium which an exporter derives from the sale of bills on his correspondent abroad, is barely equivalent to the increase in the price of the exports, occasioned by the depreciation. But when the premium on foreign bills is not caused by a fall in the value of money, but by a deficient supply of bills, there is no rise of prices, and then the unfavourable exchange undoubtedly operates as a stimulus to exportation. As soon as the real exchange diverges from par, the mere inspection of price currents is no longer enough to guide the operations of the merchant. If it be unfavourable, the premium which the exporters receive on the sale of bills must be included in the estimate of the profit they are likely to derive from the transaction. The greater that premium, the less will be the difference of prices necessary to make them export. An unfavourable real exchange has, in truth, exactly the same effect on exportation as a bounty equal to the premium on foreign bills.

But for the same reason that an unfavourable real exchange increases exportation, it diminishes importation. When it is unfavourable, the prices of foreign products brought to our markets must be so much under their prices here, as not merely to afford, exclusive of expenses, the ordinary profit on their sale, but also to pay the premium which the importer must give for a foreign bill, if he remit one to his correspondent, or for the discount, added to the invoice price, if the latter draw upon him. A less quantity of foreign goods will therefore suit our markets when the exchange is really unfavourable; and fewer payments having to be made abroad, the competition for foreign bills is diminished, and the exchange rendered proportionally favourable. A favourable real exchange, consequently, operates as a duty on exportation and a bounty on importation.

Hence it is obvious that fluctuations in the real exchange have a necessary tendency to correct themselves. They can never, for any considerable period, exceed the expense of transmitting bullion from the debtor to the creditor country. And the exchange cannot continue permanently favourable or unfavourable even to this extent. When favourable, it corrects itself by restricting exportation and facilitating importation; and when unfavourable, it produces the same effect by stimulating exportation, and obstructing importation. The true par forms the centre of these oscillations. And though the thousand circumstances which daily and hourly affect the state of debt and credit, prevent the ordinary course of exchange from being almost ever precisely at par, its fluctuations, whether on the one side or the other, are confined within certain limits, and have a constant tendency to disappear.

The natural tendency which the exchange has to correct itself is powerfully assisted by the operations of the bill merchants.

England, for example, may owe an excess of debt to Amsterdam, yet, as the aggregate amount of the debts due by a commercial country, is generally balanced by the amount of those which it has to receive, the deficiency of bills on Amsterdam in London will most probably be countervailed by their redundancy in some other quarter. And, it is the business of the merchants who deal in bills, as of those who deal in bullion or any thing else, to buy them where they are cheap, that they may sell them where they are dear. They, therefore, buy up the bills drawn by other countries on Amsterdam, and dispose of them in London; and, by so doing, prevent any great fall in the price of bills on the former in the countries in which their supply exceeds the demand, and any great rise in Great Britain and the countries in which their supply happens to be deficient. In our trade with Italy, the bills drawn on England generally amount to a greater sum than those drawn on Italy. The bill merchants, however, by buying up the excess of Italian bills on London, and selling them in France, Holland, and other countries indebted to England, prevent the real exchange from being much depressed.

An unusual deficiency in the supply of corn, or of any article of prime necessity, by causing a sudden augmentation of imports, materially affects foreign debts and credits, and depresses the exchange. In time of war, the balance of payments is liable to be still further disturbed; the amount of the bills drawn on a country carrying on foreign hostilities, being increased by the whole expense of its armaments abroad, and of subsidies to foreign powers. But neither the conjoined nor separate influence of both or either of these causes has any permanent influence over the exchange. A sudden increase in the accustomed supply of bills must, in the first instance, by glutting the market, occasion their selling at a discount; but this effect will only be temporary. The unusual facilities which are then afforded for exportation, and the difficulties which are thrown in the way of importation, never fail speedily to bring the real exchange to par.

During a period of pence we may, in the too great ardour of speculative enterprise, export an excess of produce, overload the foreign market, and occasion such a decline in the prices of our goods abroad, as to make the imports less valuable than the exports with which they have been purchased. But such a state of things can only be of limited duration. The distress of which it is productive, assisted by the fall of the exchange, occasions a diminution of exports. The supply of our commodities in the foreign markets is rendered more nearly commensurate with the demand; till in no long time the value of the imports again exceeds, as it always ought to do, the value of the exports. But when a country has a large foreign expenditure to sustain, its exports are proportionally augmented. Whatever may have been the foreign expenditure of Great Britain during the late war, it is evident it could not be defrayed otherwise than by our annually exporting an equal amount of the produce of our land, capital, and labour, for which payment was not received, as in ordinary cases, by a corresponding importation of foreign commodities, but from the treasury at home. This is strictly true, even though the expenditure should have happened to be, in the first instance, discharged by remittances of bullion; for the increased supply of bullion which was thus required could be obtained only by an equally increased exportation of other products to the countries possessed of mines, or from which it was imported. Foreign expenditure, by increasing exports in proportion to its own amount, has no permanent influence over the exchange.

Thus it appears that an excess of exports, instead of being any criterion of increasing wealth at home, is only a certain indication of commercial losses, or of expenditure abroad. “When,” says Mr Wheatley, “the exports exceed the imports, as they must do when there is a large foreign expenditure, the equivalents for the excess are received abroad in as full and ample a manner as if the produce which they purchased were actually imported and entered in the custom-house books, and afterwards sent to the seat of war for consumption. But from the circumstance of its not being inserted in the custom-house entries as value received against the produce exported for its payment, the latter is deemed to constitute a favourable balance, when it is in reality exported to liquidate a balance against us.”1

But how conclusive soever this reasoning may appear, it has been said to be at variance with the fact; and the rise of the exchange at the end of the war, during the suspension of cash-payments, has been appealed to as showing that its previous low rate had not been occasioned by any depreciation of the paper currency, but by the excessive amount of the bills drawn upon this country to defray war expenditure. The statements made in the preceding treatise (p. 73), render it unnecessary to enter into any detailed examination of this opinion. The question is not whether the exchange recovered from its depression during the suspension of cash-payments, for the influence of that measure depended entirely on the use made of it, but whether its recovery took place without the amount of bank paper of all sorts, or of the currency, being diminished? And the statements referred to are decisive upon this point. They show that the currency was very greatly diminished in 1814, 1815, and 1816; and that this diminution occasioned the rise in its value, and in the nominal exchange.

Mr Francis Horner, the chairman of the Committee on the High Price of Bullion, and celebrated for the extent and accuracy of his information on such subjects, made the following statement in regard to this very question in his place in the House of Commons:—

“From inquiries he had made, and from the accounts on the table, he was convinced that a greater and more sudden reduction of the circulating medium had never taken place in any country than had taken place since the peace in this country, with the exception of those reductions that had taken place in France after the Mississippi scheme, and after the destruction of the assignats. The reduction of the currency had originated in the previous fall of the prices of agricultural produce. That fall had produced a destruction of country-bank paper, to an extent which would not have been thought possible, without more ruin than had actually ensued. The Bank of England had also restricted its issues. As appeared by the accounts recently presented, the average amount of its currency was not, during the last year, more than between £25,000,000 and £26,000,000; while two years ago it had been nearer £29,000,000, and at one time even amounted to £31,000,000. But, without looking to the diminution of Bank of England paper, the reduction of the country paper was enough to account for the rise which had taken place in the exchange.”

Hence it appears that the rise of the exchange in 1815 and 1816, had nothing, or but little,1 to do with the cessation of hostilities, and was entirely, or mainly, a consequence of the increased value of the currency, caused by the reduction of its quantity. Instead of being at variance with the principles we have been endeavouring to elucidate, this fact affords a strong confirmation of their correctness. And having been sanctioned by the fullest experience, they may be considered as beyond the reach of cavil and dispute.

An objection of a different sort has been made, to another part of the theory maintained in this section, which it may be proper to notice.

When the exchange becomes unfavourable, the premium, procured by the sale of the bill drawn on a foreign merchant to whom bullion has been consigned, is no greater than would be obtained by consigning to him an equivalent amount of coffee, tea, sugar, indigo, etc. An unfavourable real exchange permits a merchant to export commodities which could not be exported were it at par, or favourable. But the advantage still remains of exporting those commodities in preference, whose price in the country from which they are sent, compared with their price in that to which they are sent, is lowest. Suppose, for example, that the expense of transmitting bullion from this country to France is three per cent., that the real exchange is four per cent. against us, that the price of bullion is the same in both countries, and that coffee, exclusive of the expenses of carriage, is really worth four per cent. more in France than in England. In such a case, it is obvious that the exporters of bullion would realise a profit of only one per cent., while the exporters of coffee would realise, inclusive of the premium on the sale of the foreign bill, a profit of seven per cent. And hence the opinion maintained by Colonel Torrens,1 that when the exchange becomes unfavourable, those commodities which contain the greatest value in the smallest bulk, or on which the expense of carriage is least, are exported in preference, appears to have no good foundation. The prices of the commodities which nations trading together are in the habit of exporting and importing, are regulated not merely by the cost of their production, but also by the expense of their carriage from where they are produced to where they are consumed. If Great Britain were in the habit of supplying France with cottons and bullion, the average price of cottons in France, because of the expense required to convey them there, would probably be from 5 to 6 per cent. higher than in Britain; while, because of the comparative facility with which bullion may be transported from the one to the other, its value in Paris would not, perhaps, exceed its value here more than 1 per cent. Now, suppose that, when the prices of cottons and bullion in England and France are adjusted according to their natural proportions, the real exchange becomes unfavourable to us, it is clear that its fall gives no greater advantage to the exporters of bullion than to those of cottons. The rise in the price of foreign bills does not increase the expense of exporting the one or the other. It leaves the cost of their production and transportation exactly where it found it. During the depression of the exchange, the exporters of both articles get the premium on the bills drawn on their correspondents. But there is no inducement to export bullion in preference to cottons, unless the price of bullion increase more rapidly in France, or decline more rapidly in Great Britain, than that of cottons.

Whatever, therefore, may be the depression of the exchange, the merchant selects those commodities for exportation which, exclusive of the premium, yield the greatest profit on their sale. If bullion be one of these, it will of course be exported; if not, not. But of all commodities, bullion is that of which the value approaches nearest to an equality in different countries, so that it is the least likely to be exported during an unfavourable exchange. The demand for it is comparatively steady, and no great surplus quantity could be imported into one country without reducing, or exported from another without raising, its value, so as to unfit it either for exportation or importation. In most cases a small part only of an unfavourable balance is paid in bullion. The operations of the bullion merchants are chiefly confined to the distribution of the fresh supplies obtained from the mines, in proportion to the wants of different countries.

In corroboration of this argument, we may mention that it appears, according to the official statement, that the expenses incurred by this country on account of the armies acting in Portugal and Spain during the following years, were as under:—

Of which, according to the same official statement, only the following sums were remitted in coin or bullion:—

Of the sum of five millions voted to our allies in 1813 and 1814, not more than £300,000 was sent in bullion, the rest being made up by the exportation of manufactured goods and military stores.1 The high market price of gold and silver in 1809, 1810, etc., could not, therefore, be owing to the purchases made by Government, for they were not greater than the sums exported by the East India Company in 1798 and 1799, and in 1803, 1804, and 1805, when there was scarcely any perceptible rise in the price of bullion. The immense additions made to the paper currency in 1809, 1810, etc., sunk its value compared with bullion, and were the true cause of the unfavourable nominal exchange of that period.

Sect. III.—

Computed Exchange.

Having thus endeavoured to point out the manner in which variations in the values of the currencies of nations trading together, and in the supply and demand for bills, separately affect the exchange, it now only remains to ascertain their combined effect, or the computed or actual course of exchange.

From what has been already stated, it is obvious, that when the nominal and real exchange are both favourable or both unfavourable, the computed exchange will express their sum; and that when the one is favourable and the other unfavourable, it will express their difference.

When, for example, the currency of Great Britain is of the mint standard and purity, while that of France is 5 per cent. degraded, the nominal exchange will be 5 per cent. in our favour. But the real exchange may, at the same time, be either favourable or unfavourable. If it be, also, favourable to the extent of one, two, three, etc., per cent., the computed exchange will be six, seven, eight, etc., per cent. in our favour. And, on the other hand, if it be unfavourable to the extent of one, two, three, etc., per cent., the computed exchange will be only four, three, two, etc., per cent. in our favour. When the real exchange is in favour of one country, and the nominal exchange equally against it, the computed exchange is at par, and vice versa.

A comparison of the market with the mint price of bullion affords the best and readiest means by which to ascertain the state of the exchange. When there are no restrictions on the trade in the precious metals, the excess of the market over the mint price of bullion affords an accurate measure of the depreciation of the currency. If the market and mint price of bullion at Paris and London exactly corresponded, then, inasmuch as the real value of bullion must be very nearly the same in both countries, the nominal exchange would be at par; and whatever fluctuations the computed exchange might exhibit, must, in such case, be traced to fluctuations in the real exchange, or in the supply and demand for bills. If, when the market price of bullion in Paris is equal to its mint price, it exceeds it 2 per cent. in London, it is a proof that our currency is 2 per cent. depreciated, and consequently the nominal exchange between Paris and London must be 2 per cent. against the latter. Instead, however, of the computed or actual course of exchange being 2 per cent. against London, it may be against it to a greater or less extent, or in its favour. It will be more against it provided the real exchange be also unfavourable; it will be less against it provided the real exchange be in favour of London, though to a less extent than the adverse nominal exchange; and it will be in favour of London, should the favourable real exceed the unfavourable nominal exchange. Thus, if, while British currency is 5 per cent. depreciated, and French currency at par, the computed or actual course of exchange between Paris and London were 10 or 12 per cent. against the latter, it would show that the real exchange was also against this country to the extent of 5 or 7 per cent. And if, on the other hand, the computed exchange were only 2 or 3 per cent. against London, it would show that the real exchange was 3 or 4 per cent. in its favour, and so on.

It has been already shown, that, in so far at least as the question of exchange is involved, the differences in the value of bullion in different countries are limited by the expense of its transit from one to another. And hence, by ascertaining whether a particular country exports or imports bullion to or from other countries, we may determine its comparative value in these countries. Suppose, for example, that the expense of conveying bullion from this country to France, including the profits of the bullion dealer, is 1 per cent.; it is clear, inasmuch as bullion is exported only to find its level, that whenever our merchants begin to export it to France, its value there must be at least 1 per cent. greater than in England; and, on the contrary, when they import bullion from France, its value here must be, at least, 1 per cent. greater than in France. In judging of the exchange between any two countries, this circumstance should always be attended to. If no bullion be passing from the one to the other, we may conclude that its value is nearly the same in both; or, at all events, that the difference of its value is not more than the expense of transit. On the supposition that the entire expense, including profit, of conveying bullion from San Francisco to London is 5 per cent., and that London is importing bullion, it is clear, provided the real exchange be at par, and the currency of both cities at their mint standards, that the nominal, or, which in this case is the same thing, the computed exchange, will be 5 per cent. in favour of London. But if the currency of London be 5 per cent. depreciated, or, in other words, if the market price of bullion at London be 5 per cent. above its mint price, the computed exchange between it and San Francisco, supposing the real, exchange to continue at par, will obviously be at par. It may therefore be laid down as a general rule, that when bullion begins to pass from one country to another, the expense of transit, provided the mint and market price of bullion in the exporting country correspond, will indicate how much the value of bullion in it is below its value in the country into which it is imported, and will be identical with its unfavourable nominal exchange; and that, when the market exceeds the mint price of bullion in the exporting country, the expense of transit added to this excess will give the total comparative reduction of the value of the precious metals in that country. The converse of this takes place in the country importing bullion. When its currency is of the mint standard, the expense of transit is the measure of its favourable nominal exchange; but when its currency is relatively redundant or degraded, the difference between the expense of transit and the excess of the market above the mint price of bullion, will measure the extent of the favourable or unfavourable nominal exchange. It will be favourable when the depreciation is less than the expense of transit, and unfavourable when it is greater.

From 1809 to 1815 inclusive, Great Britain continued to export gold and silver to the Continent. During this period, therefore, we must add the expense of its export to the excess of the market over the mint price of bullion, to get at the true relative value of British currency, and the state of the real exchange. Mr Goldsmid stated to the bullion committee that, during the last five or six months of 1809, the expense of transporting gold to Holland and Hamburg, including freight, insurance, exporter’s profits, etc., varied from 4 to 7 per cent. But at the time that the relative value of bullion in Britain was at 5½ (medium of 4 and 7) per cent. below its value in Hamburg, the market price of gold bullion exceeded its mint price 16 or 20 per cent., or 18 per cent. at an average; so that the currency of this country, as compared with that of Hamburg, which differed very little from its mint standard, was depreciated to the extent of about 23½ per cent. Now, as the computed or actual course of exchange varied, during the same period, from 19 to 21 per cent. against London, it is plain that the real exchange could not be far from par. Had the computed exchange been less unfavourable, it would have shown that the real exchange was in favour of London; had it been more unfavourable, it would, on the contrary, have shown that the real exchange was against London.

Provided an accurate account could be obtained of the expense attending the transit of bullion from this country to the Continent during the subsequent years of the war, it would, most likely, be found, notwithstanding the extraordinary depression of the nominal, that the real exchange varied but little from par; and that the exportation of gold and silver was not a consequence of the balance of payments being against us, but of its being advantageous to export bullion, because of its being more valuable on the Continent. None will contend that, in 1809, 1810, etc., gold and silver were so redundant in this country as to sink their relative value. Any such supposition is out of the question. During the period referred to, they were sent abroad, because the depreciation of paper exceeded the cost of the transit of bullion; and it was every body’s interest to pay their debts in the depreciated currency, and to export that which was undepreciated to countries where it passed at its full value as coin, or in which bullion was in greater demand. Had our paper currency been sufficiently reduced, the supply of gold in the kingdom in 1809, 1810, etc., compared with the demand which must, under such circumstances, have been experienced, was so very small, that, instead of exporting, we should have imported the precious metals from all parts of the world.

The extraordinary exportation of British goods to the Continent during the latter years of the war, has been very generally supposed to have been in great measure owing to the depression of the exchange. But, in so far as this depression was occasioned by the redundancy or depreciation of the currency, it could have no such effect. It is impossible, indeed, to form any opinion as to the influence of fluctuations in the computed exchange on export and import trade, without previously ascertaining whether they are a consequence of fluctuations in the real or nominal exchange. It is only by an unfavourable real exchange that exportation is facilitated; and it may be favourable when the computed exchange is unfavourable. “Suppose,” to use an example given by Mr Blake, “the computed exchange between Hamburg and London to be 1 per cent. against this country, and that this arises from a real exchange which is favourable to the amount of 4 per cent., and a nominal exchange unfavourable to the extent of 5 per cent.; let the real price of bullion at Hamburg and London be precisely the same, and, consequently, the nominal prices different by the amount of the nominal exchange, or 5 per cent.; now, if the expenses of freight, insurance, etc., on the transit of bullion from Hamburg are 3 per cent., it is evident that a profit would be derived from the import of that article, notwithstanding the computed exchange was 1 per cent. against us. In this case the merchant must give a premium of 1 per cent. for the foreign bill, to pay for the bullion: £100 worth of bullion at Hamburg would therefore cost him £101, and the charges of importation would increase the sum to £104. Upon the subsequent sale, then, for £105 of depreciated currency in the home market, he would derive from the transaction a profit of £1. This sum is precisely the difference between the real exchange and the expenses of transit, that part of the computed exchange which depends on the nominal producing no effect; since whatever is lost by its unfavourable state is counterbalanced by a corresponding inequality of nominal prices.”1 In the same manner it may be shown that, though the computed be favourable, the real exchange may be unfavourable; and that, consequently, it may be really advantageous to export, when it is apparently advantageous to import. But it would be tedious to multiply instances, which, as the intelligent reader will readily conceive, may be infinitely varied, and which have been sufficiently explained in the foregoing sections.

The real cause of the extraordinary importation of British produce into the Continent, in 1809, 1810, 1811, etc., notwithstanding the anti-commercial system of Napoleon, is to be found in the annihilation of the neutral trade, and our monopoly of the commerce of the world. The entire produce of the East and West was at our disposal. The Continental nations could neither procure colonial products, nor raw cotton for the purposes of manufacturing, except from England. British merchandise was thus almost indispensable; and to this our immense exportation, in spite of all prohibitions to the contrary, is to be ascribed.

HISTORY AND INFLUENCE OF BILLS OF EXCHANGE.

It is not easy to discover the æra when bills of exchange were first employed to transfer and adjust the mutual claims and obligations of merchants. Their invention has been ascribed to the Arabians and Jews of the middle ages. But it seems certain that they were in use in remote antiquity. Isocrates states that a stranger who brought some cargoes of corn to Athens, furnished a merchant of the name of Stratocles with an order or bill of exchange on a town on the Euxine, where money was owing to him; and, because the person who had drawn the bill had no fixed domicile, Stratocles was to have recourse on a merchant in Athens, in the event of its being protested. The merchant, says Isocrates, who procured this order found it extremely advantageous, inasmuch as it enabled him to avoid risking his fortune on seas covered with pirates, and the hostile squadrons of the Lacedæmonians.1

There is also good evidence to show that the method of transferring and cancelling the debts of parties residing at a distance by means of letters of credit, which are in effect the same as bills of exchange, was not unknown to the Romans. Cicero, in one of his epistles to Atticus,1 inquires whether his son must carry cash to defray the expense of his studies with him to Athens, or whether he might not save this trouble and risk by obtaining an assignment for an equivalent sum from a creditor in Rome on his debtor in Athens. It is evident, from a subsequent epistle of Cicero, that the latter method had been preferred, and that the transference of the money had, in consequence, been rendered unnecessary.2

Macpherson states,3 that the first mention of bills of exchange in modern history occurs in 1255. The pope, having quarrelled with Manfred, king of Sicily, engaged, on Henry III. of England agreeing to indemnify him for the expense, to depose Manfred, and raise Henry’s second son, Edmund, to the Sicilian throne. The enterprise misgave. But the merchants of Sienna and Florence, who originally advanced the money to carry it into effect, or rather to gratify the pope’s rapacity, were paid by bills drawn on the prelates of England, who, although they protested that they knew nothing at all about the transaction, were nevertheless compelled, under pain of excommunication, to pay the bills and interest!4

Capmany, in his “Memoirs” respecting the Commerce, etc., of Barcelona, gives a copy of an ordonnance of the magistracy, dated in 1394, enacting that bills should be accepted within twenty-four hours after their presentation; a sufficient proof that they were in general use in the end of the fourteenth century.

But whatever be the æra of the introduction of bills of exchange, few inventions have redounded more to the public advantage. Without this simple and ingenious contrivance, commerce could have made no great progress. Had there been no means of adjusting the mutual claims of debtors and creditors otherwise than by the intervention of metallic money (for bank paper is only another species of bills of exchange), a very large portion of that capital which is setting productive labour in motion in every quarter of the globe, and ministering to the wants and enjoyments of mankind, must have been employed in effecting those exchanges which are much better effected by the agency of a few quires of paper. Instead of a perpetual importation and exportation of gold and silver, necessarily attended with an immensity of trouble and expense, bills, possessing little or no intrinsic worth, and which are transferred with the utmost facility, suffice to adjust the most extensive and complicated transactions. But the mere setting free of an immense productive power, engaged in a comparatively unprofitable employment, is only one of the many benefits we owe to the use of bills. By cheapening the instruments by which commerce is carried on, they have materially reduced the prices of most articles. And have, in consequence, increased the command of all classes over necessaries and luxuries, and accelerated the progress of civilisation, by occasioning a more extensive intercourse and intimate connection between different and independent countries, than would otherwise have taken place.

In a political point of view, their effects have been equally salutary. They enable individuals imperceptibly to transfer their fortune to other countries, and to preserve it safe alike from the rapacity of their own governments and the hostile attacks of others. The security of property has, in consequence, been vastly augmented. And though we should concede to the satirist, that paper credit has “lent corruption lighter wings to fly,”1 it has, at the same time, powerfully contributed to render subjects less dependent on the policy, and less liable to be injuriously affected by the injudicious measures of their rulers. In countries in a low stage of civilisation, the inhabitants endeavour, by burying all the gold and silver they can collect, to preserve a part of their property from the despots by whom they are alternately plundered and oppressed. This was universally the case in the middle ages. And in Turkey, India, Persia, and other eastern, and also in some European, countries, the practice is still carried on to a greater or less extent. Some economists have endeavoured to account for the long-continued importation and high value of the precious metals in India, by the loss which necessarily attends the practice of hoarding. And, undoubtedly, this locking up of capital, while it evinces an extreme degree of insecurity, is a main cause of the poverty of these countries. But the security afforded by bills of exchange is infinitely greater than any which can be derived from the barbarous expedient of trusting property to the bosom of the earth. “Pregnant with thousands flits the scrap unseen,” and in a moment places the largest fortune beyond the reach of danger. Mr Harris was, therefore, right in saying, “that the introduction of bills of exchange was the greatest security to merchants, both as to their persons and effects, and consequently the greatest encouragement to commerce, and the greatest blow to despotism, of anything that ever was invented.”1

Its extensive commerce, the wealth and punctuality of its merchants, and their intimate connection with all the other great trading cities of the world, made Amsterdam, previously to the peace of 1763, the chief place where the accounts of commercial countries were balanced and adjusted. But the loss of foreign trade, and the other vexations to which Holland was subjected during the ascendancy of the French, nearly divested Amsterdam of all share in this business; and it has not since recovered its former superiority. London is now the trading metropolis of Europe, and of the world, universi orbis terrarum emporium. The vast extent of its commercial dealings necessarily renders it the great mart for bills of exchange. Its bill merchants, a class of men remarkable for their shrewdness, and generally possessed of large capitals, assist in trimming and adjusting the balance of debt and credit between the most remote countries. They buy up bills where they are cheap, and sell them where they are dear. And, by the extent of their correspondence and the magnitude of their transactions, give a steadiness to the exchange, to which it could not otherwise attain.

ESSAY ON INTEREST AND USURY LAWS.

Interest is the annual sum, or rate per cent. which the borrower of a capital obliges himself to pay to the lender for its use.1

It was generally supposed, previously to the middle of last century, that, in the event of all legislative enactments regulating the rate of interest being repealed, its increase or diminution would depend wholly on the comparative scarcity or abundance of money; or, in other words, that it would rise as money became scarce, and fall as it became more plentiful. But this opinion has been successfully controverted.2 And it has been shown that the rate of interest, in advanced communities, is not determined by the abundance of the currency, but by the average rate of profit derived from the employment of capital. No doubt it most frequently happens that loans are made in currency. This, however, is of no consequence. There is obviously no substantial difference between one individual furnishing another with 100 bushels of corn, or 100 yards of cloth, to be repaid at the expiration of a specified period by the delivery of 104 or 105 bushels, or 104 or 105 yards, or with as much money, at 4 or 5 per cent., as would purchase the corn or cloth. And it is easy to perceive that, as crowds of passengers may be successively conveyed by the same carriage, so the same sum of money may serve to negotiate an infinity of loans. Suppose A lends to X £1,000, which the latter immediately pays away to B for an equivalent amount of commodities: that B, having no use for the money, lends it to Y, who pays it away for commodities to C, who again lends it to Z, and so on. It is plain that the borrowers X, Y, Z, have received loans of commodities, or capital, from the lenders A, B, C, worth three times (and they might have been worth thirty or three hundred times) as much as the money employed in settling the transactions. According as the supply of currency, compared with the business it has to perform, is greater or less, we give a greater or less number of guineas or livres, notes or assignats, for the articles we wish to obtain. It is, however, by the advantage or profit we expect to derive from the loan of these articles, and not from the circumstance of their costing a larger or smaller number of pieces of gold or silver or bits of engraved paper, that the rate of interest, or the compensation paid to the lender for their use, is determined. It may perhaps be supposed, that when the quantity of metallic money is increased, goldsmiths and jewellers obtain the raw material of their business with greater facility. But this is not always the case; and, though it were, it would not affect the rate of interest. No coins are ever sent to the melting pot, unless the currency be degraded or depreciated; that is, unless it be deficient in weight, or relatively redundant in quantity. And it is clear that the inducement to promise a high or low rate of interest for loans of money, which it was intended to work up into some species of goods, would not depend on the supply of such money, but on the profit to be derived from the operation, a circumstance totally unconnected with the scarcity or abundance of coin.

It, therefore, appears that the rate of interest at any given period, depends on the profit that may be made by employing capital in industrious undertakings, and not on the prices paid for the articles of which it consists. The latter are affected by every change in the value of money, but the former is little, if at all, affected by these changes, and is determined by the productiveness of industry. A low or a high rate of profit is uniformly accompanied by a low or a high rate of interest. Money, as every one knows, is cheaper in the United States and in Australia, than in England; but the ordinary rate of profit being higher there than here, interest, despite the lower value of money, is also higher. Extraordinary as it may seem, it is nevertheless true that, during the past year (1851-52), the current rate of interest in San Francisco, where bullion is so very abundant as to be almost a drug, varied from 2 to 3 per cent. a month, or from 24 to 36 per cent. per annum. And though we should allow that as much as a half of this rate is to be viewed as a premium of insurance on account of the insecurity prevalent in California, still the residue would amount to three, four, or five times the ordinary rate of interest in England. In farther corroboration of the above statements, we may mention that the low rate of interest in Holland during the greater part of the 17th, and the whole of the 18th, century, was not owing to any peculiar abundance or cheapness of money, but to the high rate of taxation and the difficulty of investing capital with a profit. And the latter has been, and is, the cause of the low rate of interest in this country towards the middle of last century and at the present time. It is not, in short, by the amount or value of the currency of a country, but by the means which it enjoys for the profitable employment of capital or stock, that profits and interest are governed.

That a rise or fall in the value of money can have no direct influence over interest, is plain from the fact of the interest being itself paid in the money that has risen or fallen. But, at the same time, a sudden increase in the supply of money, such as is now taking place, may undoubtedly have a temporary effect in depressing interest. Importers of bullion may not be able to lay it out advantageously in purchases, and may, in consequence, be disposed to have it coined and lent, though at a low rate. We incline, however, to think that the influence of considerations of this sort is but inconsiderable. Lenders will not take less for loans than the borrowers are willing to offer; and the offers of the latter must be determined not only by the amount of money seeking investments, but still more by the profit that may be made by its employment. When there is a rapid influx of money, loans for short periods are usually obtainable at low rates. This, however, is not generally the case with loans for lengthened periods. The lenders are willing to accept a reduced interest for a short term, till they can look about for some more profitable means of investment. But the interest on loans made on mortgage, or for lengthened periods, is always proportioned to the rate of profit at the time; and, supposing the security to be unexceptionable, is but little affected by anything else.1

The profits made in industrious undertakings are usually distributed into gross and nett profits. And if we deduct from the former the wages or remuneration due to capitalists for their skill and trouble in superintending businesses, with a compensation for the risks provided against by insurance, the residue is the nett profit or return growing out of the capital employed. It is on this latter portion that interest depends, or rather with which it is identical. Lenders having nothing to do with the employment of capital, are not entitled to any peculiar advantage that may arise from it. But they are entitled to all that can fairly be considered as the return to the capital they have lent, after the risks, salaries, and necessary emoluments of those who undertake its employment, are deducted; and this much, speaking generally, they will get, and no more. Whatever else may be realised by the employment of capital in industrial pursuits, belongs to the borrowers, and forms the fund out of which they are remunerated. In coming to this conclusion, we are supported by the authority of Mr Tooke. “The rate of interest,” says he, “is the measure of the nett profit on capital. All returns beyond this on the employment of capital, are resolvable into compensations, under distinct heads, for risk, trouble, or skill, or for advantages of situation or connection.”1

Whatever, therefore, may at any time occasion a sudden glut of money or capital, may lower the rate of nett profit and interest. But that very circumstance, by increasing the demand for capital, will eventually raise the rate to its proper level; and the glut having disappeared, profits and interest will depend on the productiveness of industry.

Besides, such variations as are proportioned to variations in the ordinary rate of profit, and which equally affect all loans, the rate of interest varies according to the security for the repayment of the principal, and the duration of the loan. Hence the powerful influence which the character of the borrower, and the purpose for which he borrows, or the nature of the business in which he is engaged, have over interest. Careful, skilful, and intelligent parties always borrow, cæteris paribus, on lower terms than those of an opposite description. The spendthrift, the idle, and the unskilful, can with difficulty obtain loans on any terms; and those who deal with them and stipulate for a high rate of interest to cover their risk, frequently find that their guarantee is inadequate, and that they would have better consulted their own advantage by lending to respectable parties on the usual terms. The nature of the employment in which borrowers are engaged has also, as now stated, a powerful effect in determining the rate of interest. Wherever there is risk, it must be compensated. A sum lent on mortgage over a valuable estate, is not exposed to any risk. But a sum lent to a manufacturer or merchant engaged in a hazardous business, is exposed to a high degree of risk; and the interest payable on the latter, inasmuch as it must include a premium to compensate this extra risk, may be twice or three times as much as that paid on the mortgage.

We should mistake, however, if we supposed that this circumstance places those who carry on peculiarly hazardous businesses in a comparatively disadvantageous situation. Competition will not permit, taking everything into account, a greater or a less amount of nett profit to be permanently realised in one branch of industry than in another. And those who invest their stock in employments of more than ordinary hazard, dispose of their produce at such prices as yield them the ordinary rate of profit, exclusive of a surplus sufficient to insure their stock against the extra risk to which it is exposed. Were this not the case, capitalists would not place their property in a state of comparative danger, and undertakings of a hazardous nature would not be entered into. But it very frequently happens, that the manager of a hazardous branch of industry, paying from 10 to 12 per cent. for loans, realises larger nett profits than the purchaser of an estate with money borrowed at 3 or 4 per cent.

Supposing the security to be equal, capital lent for a fixed and considerable period always fetches a higher rate of interest than that which is lent for short periods, or which may be demanded at the pleasure of the lender. There are but few modes of employing the latter, so that it is very frequently worth little or nothing. Hence the rate of interest is, in the majority of cases, in part at least, determined by the length of the loan; for, when that is considerable, it may be productively employed in a variety of businesses, in which it would not otherwise be safe to invest it, at the same time that the borrower has time to prepare for its repayment. But this principle has only a slight influence over loans for terms beyond three, or, at most five, years; for a loan for either of these terms, but especially the latter, may be employed in a great variety of ways, and would bring nearly as much interest as it would do were it for ten or twelve years. It is farther to be observed, that large classes of borrowers prefer the less interest which they get for advances at short dates, to the higher rate which they might get were they for longer terms. Most people wish to have the full command of their capital. Merchants and manufacturers who lent on mortgage, would in so far deprive themselves of the means of extending their business, and of speculating. And though sometimes, perhaps, this might be for their advantage, yet the flattering opinion which most people entertain of their own sagacity and good fortune, would but seldom permit them to doubt that it was a very serious disadvantage. Hence the low rates at which banking companies who pay the sums deposited with them on demand, and governments overwhelmed with debt, are able to borrow. A stockholder’s mortgage, or claim on the revenue of a country, may be immediately converted into cash at the current prices. And, however much the majority of the creditors of such a country as Austria, for instance, may be impressed with a conviction of its inability to discharge the various claims upon it, each individual, confident in his own good fortune and foresight, flatters himself that he, at least, will be able to predict the coming tempest, and that he will be able to sell out before a public bankruptcy.

It is evident, from these statements, that in addition to the security for loans and their duration, the rate of interest will, to a considerable extent, depend on the facilities afforded for enforcing or carrying out the stipulations in contracts. And hence a main cause of its reduction as society is more and more improved. Generally, it may be said that a speedy, cheap, and effectual process for securing the payment of debts, has a powerful tendency to lower—and a slow, costly, and ineffectual process, to raise—the rate of interest. In most countries, extraordinary means are taken to compel payment of bills; and this is a principal cause of the low rate at which they are commonly discounted. The easy enforcement of contracts constitutes, in truth, an important portion of the security for a debt. By a good security, is not meant a guarantee that a loan will ultimately be made good, but that it will be punctually paid when due; or, if the loan be of a kind that a little delay in its payment is usually given, that that delay will not be exceeded, and that it will be paid within the customary term. A security which should insure the final payment of a debt, but which should not insure its payment when due, or shortly thereafter, is not a good, but a bad security. It is indispensable to the transacting of business safely, cheaply, and expeditiously, that there should be as little doubt as possible either in regard to the payment of loans or the term when they are to be paid. If either of these points be doubtful, the lender will insist on an indemnity for the consequent risk, which the borrower will have to pay. And hence it is that the summary proceedings taken to enforce payment of bills, and such like debts, conduce more to the interest of the borrowers than of the lenders. They reduce the rate of interest; and the hardship, such as it is, which they occasionally inflict, does not occur in one case out of five hundred, while its salutary influence tells in every case.1

In Greece the rate of interest was not regulated by law; and it consequently varied with all the causes of variation above alluded to. Generally, however, it was what we should reckon very high, amounting, in most cases, to from 10 to 18 per cent., and upwards. This high rate of interest was not occasioned by a high rate of profit, but by the uncertainty of the laws, and the facilities which they afforded to fraudulent debtors to defeat the just claims of their creditors. The interest on money lent on bottomry, or on the security of the ship or cargo, or both, was rated at so much per voyage. It consequently depended on the place to which the ship was to sail, the season, the chance of meeting pirates or enemies’ ships, etc. Usually it was extremely great, varying from 30 to 50, or 60, per cent. The bankers and money lenders of Athens, though of low origin, being mostly freedmen or aliens, appear to have been considered as eminently trustworthy, and entitled to the public confidence. But they were, notwithstanding, quite as unpopular as the Jews and Lombards of the Middle Ages. We are surprised that so learned a writer as Boeckh should have endeavoured to perpetuate the vulgar prejudice against them, by stating that they had drawn upon themselves the “merited hatred of all classes.” He should have known that it was not the covetousness of the bankers, but that bad laws administered by interested judges, by making loans insecure, and driving parties of the highest respectability from the business, have been alone to blame for the exorbitant usury of ancient and modern times. Had contracts been properly enforced, the probability is that interest would have been as low in Greece as in England.1

Instead, however, of leaving the rate of interest to be adjusted by the free competition of the parties, on the principles thus briefly explained, or endeavouring to reduce it by facilitating the enforcement of contracts, most governments have interfered, either entirely to prohibit the taking of interest, or to fix certain rates which might be legally exacted, while any excess over them was declared to be usury, and prohibited under the severest penalties. In the ages in which these enactments had their origin, the precious metals were the only species of money, and were considered quite peculiar. Being used as standards by which to ascertain the values of different articles, and as the equivalents for which they were most frequently exchanged, they acquired a factitious importance in the estimation, not merely of the vulgar, but of persons of the greatest discernment. The fact, that to buy or to sell is merely to barter one commodity for another, to exchange a quantity of corn, or cloth, or beef, for a quantity of gold or silver, and vice versa, was entirely overlooked. The attention was gradually transferred from the money’s worth to the money itself. And the wealth of states and of individuals was not measured by the amount of their disposable produce, or by the quantity or value of the articles with which they could afford to purchase the precious metals, but by the quantity of these metals actually in their possession. For these and other reasons, money has been considered as a marchandisepar excellence. And we need not, therefore, be surprised at the measures to which the prevalence of such exaggerated opinions almost necessarily led; or that vigorous efforts should have been made to protect those who were unprovided with so powerful an instrument from becoming a prey to their more fortunate neighbours. Individuals might freely dispose of their corn, cattle, land, etc. But it was supposed that the demand for money might be so great, as to enable the lenders, unless restrained in their exactions, to ruin the borrowers, and engross the whole property of the country.

Another cause of the prejudice against stipulating for interest grew out of the dislike entertained to accumulation. It is a consequence of economy, or of a saving of income; which, in rude ages, is considered indicative, not only of a sordid disposition, but as being positively hurtful. Prodigals and spendthrifts were long, and perhaps still continue to be, the favourites of the public. Before the nature and functions of capital were properly understood, it was believed that it could not be increased without injury to individuals, and that any advantage it might give to the proprietor must be obtained at the public expense. It did not occur to our ancestors, that those who, by their economy, accumulate stock, add to their own wealth, without diminishing that of others; nor were they aware that, when expended, as is almost always the case, in the support of productive industry, this stock affords the means of producing an increased income. But reckoning, as they did, that the savings of individuals were so much withdrawn from income in which the public would otherwise have participated, it was natural enough that they should endeavour to limit the advantage derivable from their employment.

Much, also, of the prejudice against bargaining for interest, prevalent in the middle ages, may be traced to the authority of certain texts of Scripture, which were understood to prohibit its exaction. It is doubtful, however, whether they will really bear that interpretation. And supposing that they did, nothing could be more irrational than to regard the municipal regulations of a people placed in such peculiar circumstances as the Jews, as general and fixed principles, applicable in all ages and countries.1

But, whatever may have led to the efforts so generally made to limit or suppress the rate of interest, it is abundantly certain that, instead of succeeding in their object, they had an opposite effect. If a borrower consider it for his advantage to offer 6, 7, or 8 per cent. for a loan (and otherwise he would not make the offer), why should the legislature interfere, and prohibit the lender from receiving, and the borrower from paying, more than 3, 4, or 5 per cent.? An interference of this sort, besides being uncalled for and unnecessary, is in a high degree prejudicial. Restrictive laws, instead of reducing, uniformly raise the rate of interest. They cannot be so framed as to prevent borrowers from offering a higher rate of interest than is fixed by statute. And if the lenders had implicit confidence in the secresy and solvency of the borrowers, they might accommodate them with the sums wanted, without requiring any additional interest, because of the illegality of the transaction. But cases of this sort are extremely rare. Gratitude, and a sense of benefits received, are but slender securities for honourable conduct. Numberless unforeseen events occur to weaken and dissolve the best cemented friendships; and a transaction of this kind would afford an additional source of jealousies and divisions. In such matters, indeed, men are more than usually sharp-sighted, and are little disposed to trust to moral guarantees for the security of their property. But though neither the threatenings of the law, nor the inducements which it held out to dishonest debtors to recede from the stipulations into which they had entered, were able to prevent, or even greatly to lessen, what are termed usurious bargains, they rendered them more oppressive; for they obliged the lenders to demand, and the borrowers to undertake to pay, a higher rate of interest, to balance the risk of entering into what the law made an illegal transaction. This higher rate or premium being, of course, proportioned to the greater or less intensity of the risk to be provided against; that is, it increased or diminished according as the laws for the prevention of usury were enforced or relaxed.

Whenever, under the old system, the market rate of interest rose above the statutory rate, the free transfer of capital among the different classes was obstructed. Parties could no longer look merely to their own advantage. And loans which might have been obtained for 6, 7, or 8 per cent., had there been no hazard from anti-usurious statutes, were raised, on its account, to 8, 10, and 12 per cent. It is, therefore, plain that if the means taken to put down usury were not wholly responsible for its existence, they, at all events, added largely to its amount.

These conclusions do not rest on theory only, but are supported by a constant and uniform experience. In Rome, during the republic, the ordinary rate of interest was excessively high. The debtors, or plebeians, were every now and then threatening to deprive their creditors, who were generally of the patrician order, not only of the interest, but of the principal itself. Repeated instances occurred to show that these were not mere empty threats; and the patricians indemnified themselves, by a corresponding premium, for the dangers to which they were exposed. “Des continuels changements,” says Montesquieu, “soit par des loix, soit par des plebiscites, naturaliserent à Rome l’usure; car les créanciers, voyant le peuple leur débiteur, leur legislateur, et leur juge, n’eurent plus de confiance dans les contrats. Le peuple, comme un débiteur decrédité, ne tentoit à lui prêter que par des gros profits; d’autant plus que, si les loix ne venoient que de temps en temps, les plaintes du peuple êtoient continuelles, et intimidoient toujours les créanciers. Cela fit que tous les moyens honnêtes de prêter et d’emprunter furent abolis à Rome, et qu’une usure affreuse toujours foudroyée, et toujours renaissante, s’y établit. Le mal venoient de ce que les choses n’avoient pas été ménagés. Les loix extrêmes dans le bien font naître le mal extréme: il fallut payer pour le prêt de l’argent, et pour le danger des peines de la loi.”1

In Mohammedan countries, notwithstanding the prohibition in the Koran, the ordinary rate of interest is at least three or four times as great as its ordinary rate in Europe. “L’usure augmente dans les pays Mahometans à proportion de la sévérité de la defense: le prêteur s’indemnise du péril de la contravention.”2

During the middle ages, when interest was excessively high, the rate of profit was probably little, if at all, higher than at present. But it should be observed that a very great majority of the loans of these ages were but little influenced by its amount. They were not made to be invested, but to be spent. The great barons and other landed proprietors were the principal borrowers. And in nineteen out of every twenty instances, the sums which they borrowed were expended in the maintenance of crowds of idle retainers, in warfare, or in prodigalities of some sort or other. And while the borrowers belonged generally to what we should now call the spendthrift class, and there were no efficient means of compelling them to abide by their engagements, the lenders were but few in number, and mostly Jews and Italians, against whom the most unreasonable prejudices were entertained. Under such circumstances, it would be folly to suppose that the rate of interest should depend in any considerable degree on the rate of profit. The numbers, position, and character of the borrowers, compared with the fewness, position, and character of the lenders, and the risk to which the latter were exposed in entering into such transactions, occasioned the excessively high rate of interest. Of the 50 and even 100 per cent. which borrowers then frequently engaged to pay as interest, not more than 10 or 12 per cent. can properly be said to have been given for the productive services of loans. The rest must be considered as occasioned partly by the extreme scarcity of disposable capital and the carelessness of the borrowers, and partly, and principally, as a bonus to compensate the lenders for the imminent hazard of losing the principal.

In England, as in most other countries, Christians were, after the Conquest, absolutely prohibited, both by the civil and the ecclesiastical law, from bargaining for interest. But as Jews, according to the Mosaic law,1 were allowed to lend at interest to a stranger, its exaction by them was first connived at, and subsequently authorised by law. And the same privilege was afterwards extended to the Italian or Lombard merchants. In consequence of this exemption, many Jews early settled in England, and engrossed a large share of the trade of the kingdom. But despite their industry and general good conduct, the prejudices against them, and against the business in which they were mostly engaged, were so very strong that they and their families were regarded as slaves of the crown, by whom they were plundered, to an extent and under pretences which would now appear incredible. To such an extreme, indeed, were these oppressive practices carried, that a particular office, called the exchequer of the Jews, was established, for receiving the sums extorted from them in fines, customs, tallages, forfeitures, etc. They were, in consequence, obliged to charge an enormous rate of interest, or, as Madox expresses it, “to fleece the subjects of the realm as the king fleeced them.”1 And hence, while only from 7 to 10 and 12 per cent. interest was paid in countries where sounder principles prevailed, the rate charged in England was three, four, and even five times as great.2

But in the end the disorders occasioned by this ruinous system became so obvious, that, notwithstanding the deep-rooted prejudices to the contrary, a statute was passed in 1546 (37 Hen. VIII. cap. 7), legalising interest to the extent of 10 per cent. per annum; because, as is recited in the words of the act, the statutes “prohibiting interest altogether have so little force, that little or no punishment hath ensued to the offenders.” In the reign of Edward VI., the horror against interest seems to have revived in full force; for, in 1552, the taking of any was again prohibited, “as a vice most odious and detestable,” and “contrary to the word of God.” But, in spite of this denunciation, the rate of interest, instead of being reduced, immediately rose to 14 per cent., and continued at this rate until, in 1571, an act was passed (13 Eliz. cap. 8) repealing the act of Edward VI., and reviving the act of Henry VIII., allowing 10 per cent. interest. In the preamble to this act it is stated, “That the prohibiting act of King Edward VI. had not done so much good as was hoped for; but that rather the vice of usury hath much more exceedingly abounded, to the utter undoing of many gentlemen, merchants, occupiers, and others, and to the importable hurt of the commonwealth.” This salutary statute was opposed, even by those who should have known better, with all the violence of ignorant superstition. Dr John Wilson, a man famous in his day, and celebrated for the extent of his learning, informed the House of Commons, of which he was a member, that “it was not the amount of the interest taken that constituted the crime; but that all lending for any gain, be it ever so little, was wickedness before God and man, and a damnable deed in itself, and that there was no mean in this vice any more than in murder or theft.” To quiet the consciences of the bishops, a clause was inserted, declaring usury to be forbidden by the law of God, and to be in its nature sin, and detestable. This statute was limited to a period of five years; but, “forasmuch as it was, by proof and experience, found to be very necessary and profitable for the commonwealth of this realm,” it was, in the same reign, made perpetual. (39 Eliz. cap. 18.)

In the 21st of James I. the legal rate of interest was reduced to 8 per cent., by an act to continue for seven years only, but which was made perpetual in the succeeding reign. (3 Car. I. cap. 4.) During the commonwealth, the legal rate of interest was reduced to 6 per cent., a reduction which was afterwards confirmed by the 12 Car. II. And, finally, in the reign of Queen Anne, a statute (12 Anne, cap. 16) was framed, reducing the rate of interest to 5 per cent., at which it stood till 1839.

In the preamble to this statute, it is stated that, “whereas the reducing interest to 10, and from thence to 8, and thence to 6, in the hundred, hath from time to time, by experience, been found very beneficial to the advancement of trade and the improvement of lands, it is become absolutely necessary to reduce the high rate of interest of 6 per cent. to a nearer proportion to the interest allowed for money in foreign states.” It was for these reasons enacted, that all bargains or contracts stipulating for a higher rate of interest than 5 per cent. should be utterly void. And “that all persons who should after that time receive, by means of any corrupt bargain, loan, exchange, chevizance, or interest, of any wares, merchandise, or other thing whatever, or by any deceitful way or means, or by any covin, engine, or deceitful conveyance for the forbearing or giving day of payment, for one whole year, for their money or other thing, above the sum of £5 for £100 for a year, should forfeit, for every such offence, the treble value of the moneys or other things so lent, bargained,” etc.

In Scotland, previously to the Reformation, no interest could be legally charged. But that great event, by weakening the force of those religious prejudices, which had chiefly dictated the prohibition of interest, led to the adoption of more liberal opinions on the subject, and to the enactment of the statute of 1587 (11 Parlt. Jac. VI. cap. 52), which legalised interest to the extent of 10 per cent. In 1633 the legal rate was reduced to 8 per cent., and in 1661 to 6 per cent. The statute of Anne, reducing the rate of interest to 5 per cent., extended to both kingdoms.

The statutes prohibiting the taking of interest in Ireland were not repealed until 1635, when the statute 10 Car. I. cap. 22, gave liberty to stipulate for any rate not exceeding 10 per cent. In 1704 this rate was reduced to 8 per cent.; in 1722 it was reduced to 7 per cent.; and in 1732 it was further reduced to 6 per cent.

In France the rate of interest was fixed at 5 per cent. so early as 1665; and this, a few short intervals only excepted, continued to be the legal rate till the Revolution. Laverdy, in 1766, reduced it from 5 to 4 per cent. Instead, however, of the market rate being proportionally reduced, it was raised from 5 to 6 per cent. Previously to the promulgation of the edict, loans might have been obtained on good security at 5 per cent.; but an additional per cent. was afterwards required to cover the illegality. This caused the speedy abandonment of the measure.1

The same thing happened in Livonia in 1786, when the Empress Catherine reduced interest from 6 to 5 per cent. Hitherto, says Storch (in loco citato), those who had good security to offer were able to borrow at 6 per cent.; but henceforth they had to pay 7 per cent. or upwards. And such will be found to be invariably the case, when the legal is less than the market rate of interest.

It has been observed by Smith, that the statutory regulations, reducing interest in England, were made with great propriety. Instead of preceding, they followed the fall which was gradually taking place in the market rate of interest, and, therefore, did not contribute, as they would otherwise have done, to raise that which they were intended to reduce. Sir Josiah Child, whose Treatise, recommending a reduction of interest to 4 per cent., was originally published in 1668,1 states, that the goldsmiths of London, who then acted as bankers, could obtain as much money as they pleased, upon their servants’ notes only, at 4½ per cent. The supposed insecurity of the revolutionary establishment, and the novelty of the practice of funding, occasioned the payment of a high rate of interest for a large portion of the sums borrowed by the public in the reigns of William III. and Anne. But private persons, of undoubted credit, could then borrow at less than 5 per cent. During the reign of George II. the market rate of interest fluctuated from 3 to 4 and 4½ per cent.2

Smith mentions that the increased means of profitably investing capital acquired during the war, terminated by the peace of Paris in 1763, raised the market rate of interest to a level with the statutory rate, or perhaps higher. But it was not until the late war that any very material or general inconvenience was found to result from the limitation of interest to 5 per cent.

It is necessary, however, to observe, that this remark applies exclusively to the loans negotiated by individuals who could offer unexceptionable security; for, since the act of 1714, persons engaged in employments of more than ordinary hazard, or whose character for prudence and punctuality did not stand high, or who could only offer inferior security, were unable to borrow at 5 per cent.; and were consequently compelled to resort to a variety of schemes for defeating or evading the enactments in the statute. The most common device was the sale of an annuity. Thus, supposing an individual whose personal credit was indifferent, and who had only the liferent of an estate to give in security, wished to borrow, he sold an annuity to the lender sufficient to pay the interest stipulated for, which, because of the risks and odium attending such transactions, was always higher than the market rate, and also to pay the premium necessary to insure payment of the principal at the death of the borrower. It is curious to observe, that though the sale of an irredeemable life annuity, at a rate exceeding legal interest, was not reckoned fraudulent or usurious, yet, so late as 1743, Lord Hardwicke held that, in their less exceptionable form, or when they were redeemable, their sale could be looked upon in no other light than as an evasion of the statute of usury, and a loan of money.1 But the extreme inexpediency of this distinction soon became obvious, and the law was changed. The great extension of the traffic in annuities, and the advantage of giving as much publicity as possible to such transactions, led to various inquiries and regulations respecting them in the early part of the reign of George III. In consequence, the sale of irredeemable annuities became nearly unknown; and it was ruled, that the sale of a redeemable annuity could not be impeached, though it appeared on the face of the deeds that the lender had secured the principal by effecting an assurance of the borrower’s life.

During the greater part of the late war, the usury laws operated to the prejudice of all classes of borrowers. The great extent and high interest of the public loans, the facility of selling out of the funds, the regularity with which the dividends were paid, and the temptations to speculation arising from the fluctuations in the price of funded property, diverted so large a portion of the floating capital of the country into the coffers of the treasury, that it was next to impossible for private individuals to borrow at the legal rate of interest, except from the trustees of public companies, or through the influence of circumstances of a very peculiar nature. The proprietors of unencumbered freehold estates, of which they had the absolute disposal, were almost universally obliged to resort to those destructive expedients which had formerly been the resource only of spendthrifts and persons in desperate circumstances. Annuities were not unfrequently granted for several lives, at the rate of 12, 14, 15, and even 20 per cent., exclusive of the premium of insurance on the lives of the persons named in the grant of the annuities. Mr Onslow, in a speech on the usury laws, 23d May 1816, said that he knew a gentleman, possessed of a very large estate in fee-simple, who had been compelled to grant an annuity for four lives (and the survivor of them), named by the grantee, for eight years’ purchase.

The evidence annexed to the “Report of the Committee of the House of Commons, in 1818, on the Usury Laws,” sets their impolicy and pernicious influence in a clear light. Mr Sugden, now Lord St Leonards, stated, that when the market rate of interest was above the legal rate, the landed proprietor was compelled to resort to some shift to evade the usury laws. He had “known annuities granted for three lives, at 10 per cent., upon fee-simple estates, unencumbered, and of great annual value, in a register county. He had also known annuities granted for four lives; and more would have been added, but for the danger of equity setting aside the transaction on account of the inadequacy of the consideration. Latterly, many annuities were granted for a term of years certain, not depending upon lives.” On being asked whether, were there no laws limiting the rate of interest, better terms could or could not have been obtained, he answered, “I am decidedly of opinion that better terms could have been obtained; for there is a stigma which attaches to men who lend money upon annuities, that drives all respectable men out of the market. Some leading men did latterly embark in such transactions, but I never knew a man of reputation in my own profession lend money in such a manner, although we have the best means of ascertaining the safest securities, and of obtaining the best terms.”

“The laws against usury,” said Mr Holland, of the house of Messrs Baring Brothers and Company, “drive men in distress, or in want of money, to much more disastrous modes of raising it than they would adopt if no usury laws existed. The man in trade, in want of money for an unexpected demand, or disappointed in his returns, must fulfil his engagements, or forfeit his credit. He might have borrowed money at 6 per cent., but the law allows no one to lend it to him; and he must sell some of the commodity he holds, at a reduced price, in order to meet his engagements. For example, he holds sugar which is worth 80s.; but he is compelled to sell it immediately for 70s. to the man who will give him cash for it, and thus actually borrows money at 12½ per cent., which, had the law allowed him, he might have borrowed from a money dealer at 6 per cent. It is known to every merchant that cases of this kind are common occurrences in every commercial town, and more especially in the metropolis. A man in distress for money pays more interest, owing to the usury laws, than he would if no such laws existed; because now he is obliged to go to some of the disreputable money lenders to borrow, as he knows the respectable money lender will not break the laws of his country. The disreputable money lender knows that he has the ordinary risk of his debtor to incur in lending his money, and he has further to encounter the penalty of the law, for both of which risks the borrower must pay. If no usury laws existed, in common cases, and where a person is respectable, he might obtain a loan from the respectable money lender, who would then only have to calculate his ordinary risk, and the compensation for the use of his money.”

The committee admitted the force of this evidence by agreeing to the following resolutions:—“1st, That it is the opinion of this committee, that the laws regulating or restraining the rate of interest have been extensively evaded, and have failed of the effect of imposing a maximum on such rate; and that, of late years, from the constant excess of the market rate of interest above the rate limited by law, they have added to the expense incurred by borrowers on real security, and that such borrowers have been compelled to resort to the mode of granting annuities on lives; a mode which has been made a cover for obtaining a higher rate of interest than the rate limited by law, and has farther subjected the borrowers to enormous charges, or forced them to make very disadvantageous sales of their estates. 2d, That it is the opinion of this committee, that the construction of such laws, as applicable to the transactions of commerce as at present carried on, have been attended with much uncertainty as to the legality of many transactions of frequent occurrence, and consequently been productive of much embarrassment and litigation. 3d, That it is the opinion of this committee, that the present period, when the market rate of interest is below the legal rate, affords an opportunity peculiarly favourable for the repeal of the said laws.”

In spite, however, of the recommendation of the committee, and the cogent evidence on which it was founded, the popular prejudice continued so strong, that it was not till 1839 that a statute was passed, the 2d and 3d Vict., cap. 37, which exempted all bills of exchange and promissory notes, not having more than twelve months to run, and all contracts for sums above £10, from the operation of the usury laws.

It was supposed, or at all events argued, that the repeal of the usury laws would tempt such individuals as had money to lend, to indulge in those mean and discreditable practices which characterise the lowest class of money dealers. But it was more reasonably contended, that in the event of the rate of interest being left to be adjusted by the free compromise of the parties, there would be little employment for inferior dealers. Except when the market rate of interest was below the legal rate, the usury laws prevented all persons, whose credit was not extremely good, from obtaining loans from capitalists of the highest character, and forced them to have recourse to those who were less scrupulous. Supposing the market rate of interest to be 6 or 7 per cent., an individual in ordinarily good credit may, now that the usury laws are abolished, easily obtain a loan at that rate. But when the law declared that no more than 5 per cent. should be taken, and, consequently, affixed a species of stigma to those lenders who bargained for a higher rate, the rich and more respectable capitalists being excluded from the market, borrowers were obliged to resort to those of an inferior character, who, in addition to the premium for the risk of entering into an illegal transaction, received an indemnification for the odium which, in such cases, always attaches to the lender. It is idle to attempt to secure individuals against the risk of imposition in pecuniary, more than in any other species of transactions. And, although the object had been desirable, it could not be obtained by such inadequate means. The usury laws generated the very mischief they were intended to suppress. Instead of diminishing, they multiplied usurious transactions, and aggravated the evils they were designed to mitigate or remove.

Nothing can be more unreasonable than the clamour against money lenders, because of their exacting a comparatively high rate of interest from prodigals and spendthrifts. This is the most proper and efficient check that can be put upon extravagance. Supposing the security of a prodigal and of an industrious man to be nearly equal, and this is but seldom the case, the capitalist who lends to the latter, in preference to the former, confers a service on the community. He prevents those funds which ought to be employed in supporting useful labour, and in adding to the public wealth, from being wasted in frivolous or pernicious pursuits.

But, perhaps, it will be said, that this is mistaking the object of the usury laws; that they were not intended to force capitalists to lend to spendthrifts on the same terms as to industrious persons, but to protect the prodigal and unwary from the extortion of usurers, by declaring any stipulation between them for more than a given rate of interest to be null and void. But why all this solicitude about the least valuable class of society? Why fetter the circulation of capital amongst those who would turn it to the best account, lest any portion of it chance to fall into the hands of those who would squander it away? If the prevention of prodigality be of sufficient importance to justify the interference of the legislature, prodigals should be put under an interdict; for this is the only way in which it is possible to restrict them. It is not by borrowing money at high interest, but by contracting debts to dealers, on whose charge there is no check, that spendthrifts run through their fortunes. Bentham has justly observed, that so long as a man is looked upon as one who will pay, he can much more easily get the goods he wants than the money to buy them with, though he were content to give for it twice or three times the ordinary rate of interest. How contradictory, then, to permit prodigals to borrow (for it is really borrowing) the largest supplies of food, clothes, &c., at 20, 30, or even 100 per cent. interest, at the same time that we prohibit them, and every one else, from borrowing money at more than 5 per cent.? Instead of being of any service, this restriction was evidently injurious to the prodigal. It narrowed his choice, and drove him to a market where no disgrace is attached to the exaction of the most exorbitant interest, and where he could scarcely escape being ruined.

The outcry which is sometimes raised against capitalists for taking advantage of the necessities of industrious individuals, is seldom much better founded than that which is raised against them for taking advantage of the prodigal or simple. Parties borrow according to their character for sobriety and punctuality in meeting their engagements, and according to the presumed state of their affairs at the time. To say that a capitalist takes advantage of the necessities of individuals, is, in most cases, equivalent to saying that he refuses to lend to persons in suspicious or necessitous circumstances, on the same terms he would do were they in good credit, or were there no doubt of their solvency. And were he to act otherwise, he would be considered unfit to be entrusted with the management of his affairs.

But, as already seen, whatever may be the extortion of lenders, the usury laws did not check it. On the contrary, they compelled the borrowers to pay, over and above the common rate of interest, a premium to indemnify the lenders for the risks incurred in breaking them. They attempted to remedy what was not an evil, and what, consequently, should not be interfered with; and in doing this they necessarily created a real grievance. An act of parliament to compel the underwriters to insure a gunpowder magazine and a salt warehouse on the same terms would not be a very wise statute. Yet it would not be more absurd than to enact that the same rate of interest should be charged on capital lent on widely different securities. “It is in vain, therefore,” to use the words of Locke, “to go about effectually to reduce the price of interest by a law; and you may as rationally hope to set a fixed rate upon the hire of houses or ships, as of money. He that wants a vessel, rather than lose his market, will not stick to have it at the market rate, and find means to do it with security to the owner, though the rate were limited by law; and he that wants money, rather than lose his voyage or his trade, will pay the natural interest for it, and submit to such ways of conveyance, as shall keep the lender out of reach of the law.”1

The case of Holland furnishes a striking proof of the correctness of the theory we have been endeavouring to establish. The rate of interest has been, for a very long period, lower in Holland than in any other country of Europe; and yet it is the only country in which usury laws have been altogether unknown, where capitalists are allowed to demand, and borrowers to pay, any rate of interest.1 Notwithstanding all the violent changes of the government, and the extraordinary disturbance of her financial concerns since 1790, the rate of interest, in Holland, has continued comparatively steady. During the whole of that period, persons who could offer unexceptionable security have been able to borrow at from 2 to 5½ per cent.; nor has the average rate of interest charged on capital, advanced on the worst species of security, ever exceeded 6 or 7 per cent., except when the government was negotiating a forced loan. But, in this country, where the law declared that no more than 5 per cent. should be taken, the rate of interest for money advanced on the best landed security varied, in the same period, from 5 to 16 or 17 per cent., or above five times as much as in Holland.

In France the usury laws were abolished at the Revolution; and it is stated that their abolition was not attended by any rise of interest.2 According to the Code Napoleon, only 6 per cent. is allowed to be charged on commercial loans, and 5 per cent. on those made on the security of real property. There is, however, no difficulty in evading the law. This is usually done by giving a bonus before completing the transaction, or, which is the same thing, by framing the obligation for the debt for a larger sum than is really advanced by the lender. None of the parties particularly interested can be called to swear to the fact of such bonus being given; so that the transaction is unimpeachable, unless a third party, privy to the settlement of the affair, be produced as a witness.

In Hamburg, the rate of interest is quite unrestricted; or, if there be a written law restraining it, it has become obsolete. The rate, therefore, varies according to circumstances. Occasionally it has been at 7, 8, and even 10 per cent.; and, in 1799, a period of great mercantile embarrassment and insecurity, it was as high as 14 per cent. Generally, however, the rate of discount on good bills does not exceed 3 or 4 per cent.1

In Russia, the legal rate of interest is 6 per cent. But as Russia is a country capable of much improvement, and where there are very great facilities for the advantageous employment of capital, the market rate of interest is invariably higher than the statute rate, and the law is as constantly as it is easily evaded.2

In the United States, the legal rate of interest varies in the different States of the Union. In Alabama and Texas it is 8 per cent.; in New York, South Carolina, Georgia, Michigan, and Wisconsin, 7 per cent.; in Louisiania, 5 per cent.; and in all the other States, 6 per cent. The penalties for taking a higher rate than that allowed by law, vary in the different States, being much less in some than in others. We are not aware whether any legal rate of interest has been established in California; but, as already seen, the interest charged on bills in San Francisco has varied in the course of the present year (1852) from 2 to 3 per cent. per month.

The previous statements apply only to the cases of interest arising out of loans made by one party to another. But there are cases in which interest may become due without being stipulated for, by unnecessary or unjustifiable delays in the payment of debts, or by trustees, agents, or other parties coming into possession of property belonging to others, etc., and in these it is necessary, to obviate litigation, that the interest to be charged should be fixed by law. This legal rate had better be somewhat below the ordinary market rate, and may be adjusted from time to time as circumstances may require. But, except in cases of this sort, there is no more reason for interfering to regulate the rate of interest, than there is for interfering to regulate premiums of insurance, or the prices of commodities.

A TREATISE ON THE LETTING AND OCCUPANCY OF LAND.

Few things exercise so powerful an influence over the prosperity of agricultural countries as the nature of the contract entered into between the proprietors of estates and those to whom they let or assign them to be cultivated. Much of the superiority of English agriculture over that of France, and other Continental states, may be ascribed to the different customs which have been followed in this country with respect to the letting of land. And yet the tenure under which farms are held in a very large portion of the kingdom, might be materially improved. Nor do we well see how we can better fill up a few pages, than by briefly examining the conditions under which tenants may hold land, with the greatest advantage to themselves, the landlords, and the public.

When admitted to farms, tenants may hold at will, or from year to year, or under leases or other engagements, written or understood, for specified or indefinite terms. Of these methods, the superiority of the plan of letting lands, for specified rents, and a specified term of years, appears so very obvious, that it may be thought surprising it should ever have been disputed. Whatever their skill, or the amount of their means, agriculture will in great measure depend on the cogency of the motives which impel the cultivators to put forth their energies. And it is sufficiently evident that these will be greatly strengthened by securing tenants in the possession of their farms for reasonable periods; that is, for such periods as may enable them to adopt the processes, and to reap the profit of the outlays, required in good husbandry.

Where tenants have no such security, and may, as is at present the case in many parts of England, be turned out of their farms at any time, on receiving six months’ notice, without having any just ground for saying that they have been harshly or unjustly treated, it cannot be expected that they should undertake improvements. The hazard would be too great. They plough and sow according to the usual practice of the district; but they do nothing more. If they make any advances, they are such only as promise an almost immediate return. Those, how essential and advantageous soever, that require a few years before their cost is compensated, are never once thought of. It is almost needless to add, that agriculture, carried on by such tenants, makes no progress. They seldom have any idea of a better system; and, though they had, the tenure under which they hold would prevent its introduction.

No doubt, however, the term “tenants-at-will” is often most improperly applied. In a large portion of England, probably in two-thirds or three-fourths of the kingdom, the tenants are without leases. But it would be an abuse of the phrase to call the greater portion of them tenants-at-will. Owing to the customs in regard to occupancy in particular districts, to the practice followed on estates, and to the confidence placed in the character and promises of landlords, vast numbers of these tenants have no idea that they will be capriciously ejected, or that their rents will be improperly raised in the event of their undertaking any considerable improvements. This sort of tenure is extremely popular in England; and exists in various districts where agriculture is in a very advanced state, and where large sums have been expended by the tenants. But, notwithstanding its popularity, it is in many respects less advantageous than a tenure under leases of a reasonable length. There are, it is true, but few instances in which English gentlemen have degraded themselves by taking an unfair advantage of their tenants.1 But estates sometimes pass, by inheritance, from one line of proprietors to another with different views; and sometimes they are sold to those who may wish to subject them to an entirely new system. And, taking these and other contingencies into account, it cannot rationally be expected that the tenants will, speaking generally, be so liberal in their outlays upon improvements, as they would be if their possession were secured against all hazards for a certain number of years.

The interests of the public and of the landlords, as well as those of the tenants, are deeply involved in this question. It is needless, surely, to lay it down, that it is for the advantage of all parties that tenants should be industrious and enterprising. And no landlord who has a just sense of what he owes to himself and to society, will permit his estate to be occupied by slothful or inexpert tenants. But it is the vice of the system established in most parts of England, that it makes it very difficult for a landlord to get rid of such occupiers. He may be fully satisfied of their incompetency, but the rule of the estate has been to continue the old tenants; and were he to break through this rule, and to dismiss indifferent or bad tenants to introduce others of a superior class, he would be accused of acting harshly and unjustly; and would provoke a clamour and outcry, to which most gentlemen have the greatest dislike. And hence a main cause of the slovenly cultivation, and want of enterprise exhibited by the tenants of many estates and districts in England. But wherever leases are introduced, the connection between the landlords and tenants is limited to their endurance; and at their termination a landlord has it in his power, without provoking any remark or observation, to get rid of any incapable, troublesome, or unskilful tenant.

The difficulties which the prevalent English tenures throw in the way of those who may wish to get rid of questionable tenants, is not, however, their only disadvantage. It will be afterwards seen that the too low renting of land is, equally with its over-renting, an obstruction to improvement. And, despite the statements to the contrary, there is no doubt that, at this moment, a large portion of England is under-rented, the tenants being, in consequence, uninfluenced by one of the most powerful spurs to exertion. The same reasons which make so many landlords retain bad or indifferent tenants, hinder them from raising the rental of their estates to its proper level. They would be accused of treating their occupiers unjustly, of robbing them of the return due for outlays, and so forth. The plan of letting on leases for fixed periods gets rid of all these difficulties. The competition of the public raises rents to their fair value; and the occupiers must either exert themselves or go to the wall.

These results constitute a principal advantage of leases. In districts where they prevail, and where they are for proper terms, and embody the necessary conditions, there is universally a more efficient and improved system of husbandry than in districts where the tenants are rarely if ever changed.1 Such leases are eminently calculated to draw forth talent and enterprise; whereas under the favourite English tenure these are less in request, and those tenants who do not fall behind their neighbours are treated nearly as well as those who go forward.

The only plausible objection to the granting of leases for a specified number of years, takes for granted that the contract is really binding on the landlord only. When a farm is too low rented, the tenant, it is said, continues to enjoy this advantage during the lease; whereas, if it be too high rented, it is next to certain that the landlord will have to reduce the rent to what it is really worth. A transaction of this kind throws, it is contended, all the risk on the landlord, and gives all the advantage to the tenant; so that the only fair plan is to let from year to year, or at most for brief periods. But, though specious, this reasoning has no good foundation. The rents of farms held under leases, are, in the vast majority of cases, quite up to the mark, or beyond it, at their commencement. It may, however, happen that, after a few years of the lease have expired, a farm would let for more than the rent actually paid for it. If the rent be rated in money, it will of course be affected by changes in its value; and if it should decline, the rent will also decline. But when the rent consists of a fixed quantity of produce, convertible into money at the current prices of the day, it may reasonably be presumed, in the event of the farm becoming worth a higher rent, that this is a consequence of improvements effected by the tenant, which he would not have undertaken without the security afforded by the lease. And, unless this reasonable presumption be shown to be ill-founded, it follows, that in granting the lease the landlord made no sacrifice, but the contrary. He got all the rent which the farm was worth when let, while the security given by the lease, having stimulated the tenant to make improvements, the farm will bring a higher rent at its termination than it would otherwise realize.

It is, therefore, no more than equitable, that the extra profit derived from farms, held under leases of moderate duration, should belong to the tenants; for, if not in every case, it is certainly in the great majority of cases, the fruit of their industry, or skill, or capital. And though it be seldom practicable, or if practicable expedient, for landlords to compel tenants to pay the stipulated rent for farms, when it materially exceeds their real worth, there are no substantial reasons for impeaching the contract of lease, because of its being unfair. The inadequacy of a corn rent, convertible at the prices of the day, is in 99 out of every 100 cases, apparent only, it being occasioned by improvements effected by the tenant. Had there been no lease, or engagement equivalent thereto, these would not have been attempted, and the rent would not have appeared inadequate. All, therefore, that can justly be said in regard to the alleged want of reciprocity in leases, amounts to this, that if, through accident or simplicity, a landlord let a farm for less than it is worth at the time when the lease is effected, he will be unable to get the rent raised during its currency; while, if a tenant, from too great anxiety to get a farm, or exaggerated notions of its value, should promise more for it than it is really worth, it will, in general, be impracticable and unadvisable to hold him to his bargain. An inequality of this sort is really, however, entitled to but little attention. A tenant who has offered too high a rent for a farm, sustains, in most cases, a very serious injury before he gets it reduced, supposing, which is not always the case, that he succeeds in that object. But in the very rare case of a farm being let below its value, it is all but certain that the additional rent which might have been obtained for it is of trifling consequence to the landlord. The risks of parties so differently situated cannot be equalised. In truth, they are all, or mostly all, borne by the tenants; and it would hardly, in these circumstances, be equitable, even if it were otherwise desirable, for landlords to seek to compel them to abide by the letter of their engagements, and to go on paying greater rents than their farms are really worth. But it has been sufficiently shown, that while such conduct can hardly fail of being ruinous to the tenants, it is also highly injurious to the landlords. The latter had better borrow on the most usurious terms than attempt to eke out their incomes by sums abstracted from the capital of those engaged in the cultivation of their estates.

It is obvious, therefore, that leases for reasonable terms, and stipulating for fair rents, are beneficial alike to landlords and tenants. They give a sense of security to the latter, and inspire them with energy and enterprise. And while the improvements effected under their influence conduce, during their currency, to the advantage of the occupiers, they add to the permanent value of estates, and to their future rental. In almost every case, too, the granting of leases is immediately, as well as remotely, advantageous to the landlord. There is hardly an instance in which a farm will let for so much under an annual tenure as for a short lease, and under the latter the rent will be less than it would be were the lease extended to a reasonable term of years: Hence, in granting such lease, a landlord is not sacrificing present for the sake of prospective advantages; on the contrary, he is providing most effectually, not only for the future, but, in a still greater degree, for the instant increase of his income.

Length of Leases.—The expediency of granting leases being thus sufficiently established, their proper duration is the next point to be considered. This, however, is not a term which can be fixed by general rules. Pasture lands in good order may be advantageously let from year to year, or for short terms; and arable farms in a high state of cultivation and improvement, may be let for shorter periods than farms in an inferior condition. But, on the whole, it would seem to be the opinion of the most eminent authorities, that a term of nineteen or twenty-one years is, all things considered, the most proper for leases of arable farms in a medium condition. It is not, on the one hand, so extended as to tempt the tenant to delay commencing improvements, while, on the other, it is sufficiently lengthened to encourage him to make every fair exertion and outlay. And it has experience on its side, being the term most usually adopted in the best cultivated districts.

Supposing leases to be restricted to limited periods, such as seven or fourteen years, both of which are common terms in England, it is argued that it is possible, by the aid of proper conditions, not merely to hinder farms from being deteriorated, but to secure their improvement; and that such being the case, short leases must be advantageous to the landlords. But it is abundantly clear, that those who argue in this way, know little or nothing of the practical business of farming. It is, indeed, very generally allowed, that the shortness of the periods for which leases are usually granted in England, is one of the principal causes of their general unpopularity. It is needless to refer to those for seven years; for even fourteen years is too short a term to make it prudent for a tenant to make any very considerable outlays on unimproved or exhausted lands, or to subject them to proper rotations. Conditions may be inserted in the shortest leases to hinder farms from being over-cropped and otherwise mismanaged, and should never, indeed, be omitted. But it is visionary to suppose that any rules or regulations which it is possible to lay down, unless their observance be combined with the interest of the occupier, can be rendered an effective source of improvement. The most vexatious system of surveillance would not insure the faithful discharge of covenants unless the tenant supposed they contributed in some degree to his advantage. He might be taken bound to manure and fallow a certain portion of the farm, and to have another portion in green crop, etc., but if the lease were so short as not to allow him to reap the full benefit of these operations when properly executed, they would be performed slovenly and inefficiently, and with an eye only to appearances, or to the advantage to be derived from them during the existence of the lease. Everybody knows that the worst husbandry in England is found on farms held under short leases; and they are most frequently, also, at their expiration, out of heart, and in an impoverished condition.

It has sometimes been supposed that farming may be profitably carried on by subjecting land in a high state of improvement, to a severe course of cropping. But all competent authorities deny that such is the case; and contend that those farmers succeed best, who retain their lands in an improved state, and do not attempt to increase the returns of one year at the expense of those which are to follow. To insure this regular and only advantageous system of management, it is indispensable that leases should be of a reasonable length, and that the conditions preventing over-cropping and exhaustion, should be strictly enforced. But beyond this, all interference on the part of the landlord is mischievous. The industry and enterprise of the tenant will, under such circumstances, do all that can be done for the advancement of agriculture.

The endurance of a lease should not be made to depend on lives, or on any uncertain or contingent event, but should always be for a specified number of years. When otherwise, the security of the tenant is imperfect; and his operations are affected, in a greater or less degree, by apprehensions similar to those which influence tenants-at-will. Under a lease for a fixed term, the occupier knows what he is about. And by comparing the time which must elapse before any proposed outlay be compensated, with the length of the lease, he is able to estimate whether it would be for his interest to make it.

The expediency of granting leases for fixed and reasonable periods being thus established, we have next to inquire into the various methods of rating and estimating rents.

These may be classed under the following heads, viz., first, the rent may be paid in money; second, in a certain proportion of the produce; third, in a given quantity of produce—the amount in the last two cases being payable either in kind or in money at the current prices of the day; or fourth, on the corvée principle, by which the tenant engages to perform certain services for behoof of the landlord.

[1 ] Supposing every country to be in possession of its proper supply of bullion, the exchange may be said to be nominally affected by the amount of the difference between the market and mint price of bullion, and to be really affected by any deviation from par exceeding or falling short of that difference.

[1 ] Ricardo, “Principles of Political Economy,” etc., 1st ed. p. 175.

[1 ] Bullion Report, p. 22, 8vo. ed.

[1 ] Wealth of Nations, p. 190.

[2 ] All restraints on the exportation of the precious metals were abolished in Great Britain in 1819. Their effect for many years previously could not be estimated at above one-fourth per cent.

[1 ] It is necessary to observe, that it is here supposed that the clipped or degraded money exists in such a degree of abundance as only to pass current at its bullion value. If the quantity of clipped money were sufficiently limited, it might, notwithstanding the diminution of weight, pass current at its mint value; and then the par would have to be estimated, not by its relative weight to foreign money, but by the mint price of bullion. This principle must be constantly kept in view.

[1 ] Wealth of Nations, p. 210.

[1 ] An Inquiry into the Effects produced on the National Currency by the Bank Restriction Bill, etc., 2d edit., p. 94.

[1 ]Ante, p. 26.

[2 ] Previously to 1817, no seignorage had for a very long period been deducted from either the gold or silver coins of Great Britain; but in the great recoinage of that year, the value of silver was raised from 5s. 2d. to 5s. 6d. an ounce, or nearly in the proportion of 6½ per cent. The gold coins, however, are still coined free of expense, and no variation has been made in their standard. The proportion of silver to gold in the coins is now as 14 to 1; but their proportion to each other according to their mint valuation, is as 15 to 1.

[1 ] By a proclamation of James II. The arrangement was continued by the revolutionary government, and was confirmed by proclamation, 29th September 1737. But in 1825 the currencies of Great Britain and Ireland were assimilated.

[1 ] “Account of Ireland,” vol. ii. p. 171.

[1 ] Farther information on this subject may be obtained from the Report, 1804, of the Committee of the House of Commons upon the state of the circulating paper in Ireland, its specie, etc.; from Sir Henry Parnell’s pamphlet on the same subject; and from the pamphlets of Lord King, Huskisson, etc.

[2 ] Paris, 1823, 4 vols. 8vo.

[1 ] Observations, etc., p. 48.

[1 ] Such was always the case till the late extraordinary export of gold from California.

[2 ] Pitkin on the Commerce of the United States, 2d ed. p. 280.

[1 ] Prohibition Act, 1st William and Mary.

[1 ] See “Reply to Mr Bosanquet’s Observations on the Report of the Bullion Committee,” p. 17.

[1 ] Wheatley “On the Theory of Money,” p. 219.

[1 ] The real exchange might, probably, be affected to the extent of one or two per cent.

[1 ] Comparative Estimate, etc.

[1 ] Edinburgh Review, vol. xxvi. p. 154.

[1 ] Observations, etc., p. 91.

[1 ] De Pauw, “Recherches sur les Grècs,” i. 258.

[1 ] Epist. ad Atticum, xii. 24.

[2 ] Epist. ad Atticum, xii. 27. “De Cicerone, ut scribis, ita faciam: ipsi permittam de tempore: nummorum quantum opus erit ut permutetur tu videbis.” In his notes on a parallel passage, Grævius remarks, “Permutatio est quod nunc barbare cambium dicitur.”—Epist. ad Atticum, xi. 24.

[3 ] Annals of Commerce, i. 405.

[4 ] Hume’s England, cap. 12.

[1 ] Harris on Coins, part i. p. 108.

[1 ] Interêt; loyer d’un capital preté; ou bien, en termes plus exacts, achat des services productifs que peut rendre un capital.—(Say, tome ii. p. 480, ed. 4me.

[2 ] First by Mr Joseph Massie in a tract published in 1750, entitled “An Essay on the Governing Causes of the Rate of Interest;” and, second, and with better effect, in Hume’s “Essay on Interest,” in 1752.

[1 ] See the statement of Ricardo on this subject, ante, p. 40.

[1 ] Considerations on the State of the Currency, 2d edit. p. 12.

[1 ] It is not, of course, any part of our business to inquire into the methods most proper to be taken to enforce payment of debts. But, how paradoxical soever it may appear, we believe it would not be difficult to show that the putting of most descriptions of small debts, or of debts under £30 or £40, out of the pale of the law, would be advantageous. It would tend to prevent the abuse of credit by the lower classes, to whom it is extremely pernicious, and to make habits of economy and punctuality more valuable than at present.

[1 ] Bocckh’s “Public Economy of Athens,” i. pp. 164-191.

[1 ] Michaelis on the Laws of Moses, ii. 336. English translation. It is a remarkable fact that the famous reformer Calvin was one of the first to emancipate himself from the prejudices formerly so prevalent, especially among religious people, against taking interest. He comments as follows on the statement of Aristotle, that as money did not produce money, no return could be equitably claimed by the lender:—“Pecunia non parit pecuniam. Quid mare? quid domus, ex cujus locatione pensionem percipio? An ex tectis et parietibus argentum propriè nascitur? Sed et terra producit, et mari advehitur quod pecuniam deindè producat, et habitationis commoditas cum certâ pecuniâ parari commutarive solet. Quod si igitur plus ex negotiatione lucri percipi possit, quam ex fundi cujusvis proventu: an feretur qui fundem sterilem fortassè colono locaverit ex quo mercedem vel proventum recipiat sibi, qui ex pecuniâ fructum aliquem perceperit, non feretur? et qui pecunia fundum acquirit, annon pecunia illa generat alteram annuam pecuniam? Unde vero mercatores lucrum? Ex ipsius, inquies, diligentiâ atque industriâ. Quis dubitet pecuniam vacuam inutilem omnino esse? neque qui à me mutuam rogat, vacuam apud se habere à me acceptam cogitat. Non erga ex pecuniâ illâ lucrum accedit, sed ex proventu. Illæ igitur rationes subtiles quidem sunt, et speciem quandam habent, sed ubi propius expenduntur, seipsa concidunt. Nunc igitur concludo judicandum de usuris esse, non ex particulari aliquo Scripturæ Ioco, sed tantum ex æquitatis regulâ.”—Quoted by Dugald Stewart in his Notes to his Preliminary Dissertation to the Encyclopœdia Britannica.

[1 ] Esprit des Loix, liv. xxii. c. 21.

[2 ] Esprit des Loix, liv. xxi. c. 19.

[1 ] Deuteronomy, cap. xxiii. v. 20.

[1 ] Madox’s History of the Exchequer, i. pp. 221-261. 4to. 1769.

[2 ] At Verona, in 1228, the interest of money was fixed by law at 12½ per cent. Towards the end of the fourteenth century, the republic of Genoa paid only from 7 to 10 per cent. to her creditors; and the average discount on good bills at Barcelona, in 1435, is stated to have been about 10 per cent. But whilst interest in Italy and Catalonia, where a considerable degree of freedom was allowed to the parties bargaining for a loan, was thus comparatively moderate, it was, despite its total prohibition, incomparably higher in France and England. Matthew Paris mentions that, in the reign of Henry III., the debtor paid 10 per cent. every two months. And this, though impossible as a general practice, may not have been very far from the average interest charged on the few loans that were then contracted for.—Hallam’s “Middle Ages,” iii. 402.

[1 ] Storch, “Traité d’Economie Politique,” tome iii. p. 187.

[1 ] A second edition, very greatly enlarged, was published in 1690.

[2 ] On the 18th of December 1752, the three per cents. brought the highest price they have hitherto reached, namely, 106⅜ per cent. On the 20th of September 1797, the day on which the failure of Lord Malmesbury’s attempt to negotiate with the French republic transpired, consols fell to 47⅝, being the lowest price at which they have ever been sold.

[1 ] “Considerations on the Rate of Interest,” by E. B. Sugden, Esq.—Pamphleteer, vol. viii. p. 278.

[1 ] “Considerations of the Lowering of Interest and Raising the Value of Money, 1691.”—Works, ii. 7. 4to, 1777.

[1 ] Strictly speaking, this applies only to the state of Holland previously to the Revolution in 1795. The enactments of the Code Napoleon were subsequently introduced; but it appears, from the Report of the Parliamentary Committee on the Usury Laws, that they have not been acted upon.

[2 ] Storch, “Economie Politique,” tome iii. p. 187.

[1 ] Report on Usury Laws, p. 46.

[2 ] Ibid. and Storch, tome iii. p. 207.

[1 ] Such instances do, however, occasionally occur; and were they not sufficiently well known, some very gross and not very distant ones might be specified.

[1 ] See, for a striking illustration of the mischievous effects of this system, Mr Caird’s “Account of the Duke of Cleveland’s Estate in Durham.” It is, and always has been, very low rented. The tenants are very rarely displaced; and some of them have held their farms, in a regular series from father to son, since the reign of Elizabeth. And yet, as might have been anticipated, the agriculture of the estate has been neglected, the tenants have not made money, and its too beneficent proprietor is complained of because he does not reduce the present inadequate rental.—Caird’s “English Agriculture,” p. 349.