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Subject Area: Economics
Topic: Free Trade

ESSAY No. XXXII. - Condy Raguet, The Principles of Free Trade [1835]

Edition used:

The Principles of Free Trade illustrated in a series of short and familiar Essays originally published in the Banner of the Constitution, 2nd ed. (Philadelphia, 1840).

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Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


ESSAY No. XXXII.

april 24, 1830.

General Smith’s Report on the Currency, in the Senate of the United States. Influence of the banking system under cash payments. Causes which check the excessive issue of bank notes. Doctrine of the true par of exchange on England.

WE publish to-day the Report of General Smith, chairman of the Committee on Finance, in the Senate of the United States, upon the subject of a national currency. It is a sound, sensible and orthodox production, which does great credit to the committee, and displays a full acquaintance with the important subject to which it relates. There is indeed no safety in any system of currency, but one which has for its basis the precious metals; nor can there be safety in any banking institutions administered by government, or their agents. The expansive power of a mixed currency can only be securely trusted to individual interest, and even here there is a necessity for much caution in the framing of charters of incorporation, so as to render the obligation of a punctual payment of their notes, on the part of banks, too imperative to be trifled with.

We agree with the chairman of the committee, that a more uniform currency throughout an extended country, cannot exist, than the one which now prevails throughout all those parts of the United States where the local banks do really pay their notes when called upon, in coin; for, if an individual in any one of the states holds the note of a bank, he can convert it at pleasure into an equal amount of coin; and no more certain equivalency can exist, than that which exists between a silver dollar in the pocket of a man at New Orleans, and a silver dollar in the pocket of a man at Passamaquoddy. Where there is in fact a real bona fide cash payment by the banks, without the exercise on their part of any disposition to influence the holders of their notes, through fear, favour or affection—and where there is on the part of the public, no fear of offending bank-directors, or of exciting their vengeance in the form of withholding discounts—the currency must needs every where be sound, and consequently equivalent, for a hard dollar is a hard dollar all the world over. Occasions may indeed occur, in which a convertible currency shall, for a time, be depreciated, but it cannot long continue so. If, for example, one of the banks in Philadelphia should issue to-day an undue proportion of notes, the excess would return for payment to-morrow, through the other banks, with the unerring certainty of fate. And if all the banks of Philadelphia should do the same thing, and issue an excessive quantity of paper, so as to depreciate the currency of that city below the level of the currencies of the other cities, the evil could last but a short time. The effect would be, that all prices would rise in Philadelphia. Bills of exchange upon foreign countries, and public stocks, would rise first, and the consequence would be, that the brokers of New York and Baltimore, whose business it is to watch currencies as well as market prices, would soon send on for sale, from their cheap markets, a sufficient amount of those articles to throw the Philadelphia banks into debt to the New York and Baltimore banks, which debts they would be obliged to liquidate in coin. This is the machinery which is in constant operation to prevent excessive issues. Each individual bank in a city imposes a check upon all the rest. The aggregate number of banks of one city, impose a check upon the banks of another city; and the whole mass of banks of one entire country have a check imposed upon them by the general level of currencies throughout the trading world; which must needs regulate the course of exchange, and say, in effect, “Thus far shalt thou go and no farther.”

As to the idea entertained by some people, because a man in Missouri, who has a horse-load of Spanish dollars, cannot find any body who will carry them all the way to Philadelphia for him, and there give him the same quantity of Spanish dollars, without charging him any thing for his trouble and expenses, that therefore the currency is not equivalent, is too absurd to merit an argument. Between two places, at which the currency is equally sound, there will needs be at times a rate of exchange for or against, and bank notes when they travel beyond the mere precincts of the institution by which they are issued, perform the functions of small bills of exchange. When they cannot therefore at a distance from home, be converted into coin at par, it proves nothing as affects the currency, but merely shews that, in that particular place, there are at the time more buyers than sellers of small bills of exchange.

In General Smith’s Report, we are particularly pleased with the satisfactory manner in which he proves the soundness of the currency, by the rate of exchange on England. His elucidation is clear, philosophical, and indisputable, and should be read by all who wish to free themselves from the delusive idea, that the balance of trade is shewn to be against the country, by the nominal high rate of exchange. General Smith shews, and shews truly, that although bills on London are quoted at 8 to 9 per cent. advance, they are in reality below par; and so far as exchange proves any thing on the subject, it proves that the balance of trade is and has been for a long time in favour of the country. This is a matter of great importance to be understood, and as it is a very simple one, it is within the scope of the comprehension of the most simple mind.

If two men should be talking of the temperature of the weather, as proved by a thermometer, every body would admit, that it would be necessary for them to agree upon a particular degree of heat or cold as the starting point of their argument. We will now suppose, that one of them asserts that the cold is ten degrees above zero, and that the other insists upon it that the cold is little more than ten degrees below zero. It would be impossible for them to settle the dispute in any other way than by agreeing that they would be governed by the same standard. Upon reference to Fahrenheit, who takes his zero at 32 degress below freezing point, it is found that the former is right. Upon reference to Reaumur, who takes his zero at freezing point and makes a different scale of degrees, it is found that the latter is right. No difference between them could afterwards exist, for they would find it necessary in all future discussions to understand, before-hand, a common point to start from.

The question of exchange stands precisely upon the same footing. A certain class of reasoners say, that exchange is above par. General Smith says, it is below par. Where is the starting point? It is the value of a silver dollar in British gold currency, in which our debts are contracted and made payable. The class of reasoners referred to, say, a dollar is 4s. 6d. sterling. General Smith says it is not, and General Smith is right, and in support of his position brings forward the London prices current to shew, that silver dollars are there only worth 4s. 1½d. each. The fact is, that Spanish dollars are not a legal tender in England at any fixed value, and they are consequently worth no more than they will sell for in the market, and consequently all calculations which take 4s. 6d. as the basis of their value, is starting at a wrong zero. But does not our act of Congress say, that $4.44 are equivalent to a British pound sterling? And suppose an act of Congress were to say, that the moon was made of green cheese, would that alter the fact, whatever it might be? It is enough for us to know, that no British law says any such thing, and as the British manufacturers who sell us their merchandise, have a good deal more to say in the matter than we have, we must not lose sight of the principle that it takes two to make a bargain. Our Congress has a right to say, that in estimating the imposts upon British invoices which pay ad valorem duties, the pound sterling shall be reduced into currency as the equivalent of $4.44. This it has done, and nothing more; but such local legislation cannot affect the question of equivalency in England. There, the pound sterling is the equivalent of $4.85 within a small fraction, as is proved from the fact that a dollar is worth but 49½ pence, and, consequently, one pound sterling would purchase 4 dollars and 85 hundredth parts of a dollar. No sophistry can stand up against these facts, and it is therefore too clear to admit of a doubt, that, estimating exchange at the true par, the rate will be found to be in our favour. This can be proved thus:—

A bill of exchange on London, for £100, can be procured at$ 44444
With the addition of 8 per cent. premium, which add,3333
Making47777
Which said bill will procure in London, according to the above quotation of dollars, at 49½ pence each48485
Leaving a balance of708

equal to a profit of very near one and a half per cent.

This is the true view of the subject, and the nation is under obligations to General Smith for bringing this important illustration of a matter, so little understood even by merchants, into the view of the public, in a document, which, from its official character, will have a circulation equal to one hundred times that of any private essay or treatise that could be written on the subject.