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PAPER CURRENCY AND COMMERCIAL DISTRESS 1826 - John Stuart Mill, The Collected Works of John Stuart Mill, Volume IV - Essays on Economics and Society Part I 
The Collected Works of John Stuart Mill, Volume IV - Essays on Economics and Society Part I, ed. John M. Robson, Introduction by Lord Robbins (Toronto: University of Toronto Press, London: Routledge and Kegan Paul, 1967).
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PAPER CURRENCY AND COMMERCIAL DISTRESS
Parliamentary Review. Session of 1826. London: Longman, Rees, Orme, Brown, and Green, 1826, 630-62. Unsigned; not republished. Original heading: “Paper Currency;—Commercial Distress.” Running heads: “Finance and Trade.—Paper Currency./Finance and Trade.—Commercial Distress.” Identified in JSM’s bibliography as “An article on Paper Currency and Commercial Distress which appeared in the Parliamentary Review for the session of 1826.” In his account of the Parliamentary History and Review in his Autobiography (83), JSM describes the article as “an elaborate Essay on the commercial crisis of 1825 and the Currency Debates.”
The Parliamentary History and Review was designed by the Radicals to provide a comprehensive record of the debates in parliament and the parliamentary committees, with extensive critical comment on the proceedings and the issues. One volume of “History” and one of “Review” appeared in 1826, covering the session of 1825 (6 Geo. IV), and later in the same year another two volumes appeared, covering the session of 1826 (7 Geo. IV). The final issue was of one volume of “Review” in 1828, covering the session of 1826-27 (7 & 8 Geo. IV); the “History” was dropped because the debates had by that date become more readily available.
Paper Currency and Commercial Distress
the opening of Parliament in February, 1826, found the nation still in the crisis of one of those commercial revulsions, to which all commercial countries are liable, but which, partly from the unrivalled magnitude of our commercial transactions, partly from vicious legislation, are more frequent and more ruinous in our own country than in any other.
This great calamity engaged the immediate attention of Parliament, and led to the adoption of certain legislative measures, into the expediency of which we shall now inquire. Before, however, we can be competent to pronounce upon the efficacy of the supposed remedies we must be sure that we clearly understand the cause of the disease.
The proximate cause of the commercial crisis was speculation. It is not here intended to stigmatize all speculative transactions. Among the transactions so designated, are to be found many of the most useful operations of commerce. By speculations, we understand all mercantile transactions attended with more than ordinary risk: by rash speculations, those in which the risk is great, and the prospect of gain not a sufficient equivalent. The years 1824 and 1825 abounded in speculations of this latter description. Very rarely, at any former period, have mercantile miscalculations been carried to so great a length. A vast majority of these enterprises failed; but not until, for the purpose of carrying them on, many persons had come under engagements, which nothing but the success of the speculation could enable them to fulfil. The speculations proving unsuccessful, these persons became insolvent; and their ruin drew after it that of many others, who had not speculated, but who were dependent, for the means of fulfiling their engagements, upon the fulfilment of engagements towards themselves by persons who had.
Speculation, then, was the cause of the revulsion. But what was the cause of the speculation? This is evidently a most important question; and it is one which we shall find the means of answering without much difficulty. The cause of the late speculations, as of most former speculations, was anticipated deficiency in supply.
This solution will appear strange to those who imagine that the events of last year were something peculiar and unprecedented—something so entirely novel that they could not have arisen but from causes which had never been experienced before. This is an opinion, however, which can be entertained by no one who is even moderately conversant with our commercial history. Not to look back to the calamitous periods of 1784 and 1793; the present is the fourth commercial revulsion of the same kind, which has happened within the last sixteen years alone. The first took place in 1810 and 1811; the second in 1814 and 1815. Both were preceded by an immense increase of speculation. The same phenomena occurred, though to a less terrific extent in 1819.*
There was, it is true, the appearance of more speculation at the recent period, than at any of those above cited; because there were more projects: and the projects, or bubbles, as they were called, although they in reality bore a very small proportion to the totality of the speculations, were almost the only part of them which the more mercantile portion of the public saw, or dreamed of. But we ascribe little agency to these projects, comparatively speaking, in producing the distress. The speculations in shares extended only to a small portion of the mercantile community. Moreover, the projects which were really bubbles, that is, which were fraudulent, and were never intended to be prosecuted, mostly burst while the amount of the instalments which had been paid was as yet moderate; generally, we believe, not exceeding 1l. or 2l. per share. Of the bonâ fide projects, a great proportion still continue to be carried on; and may yet turn out, some of them undoubtedly will turn out, advantageous investments of capital. During the general infatuation, exorbitant premiums, it is true, were given for shares in the more promising of these undertakings; and to those who purchased when shares were at the highest, the profits of the enterprise will never yield any thing like an adequate remuneration. It could, however, be no secret to the most sanguine projector, that the returns, even to the most successful of these schemes, must be distant. With this knowledge, it is extremely improbable that the honest purchaser should have invested a larger sum in shares, than he could afford, at least, to wait a considerable time for the repayment of. And as for those who bought shares at a price which they knew that no rational calculation would warrant, in the hope of finding dupes, or knaves of their own stamp, to purchase them again at a further advance, we cannot say we greatly regret that their plans should have been thwarted, though it be at the expense of some loss and some inconvenience to themselves.
The speculations, by the failure of which so large a portion of the mercantile community has been brought to the brink of ruin, and so many actually ruined, were of a different kind. Their character was, not the investment of capital in new enterprises, but an enormous and improvident extension of dealings in many of the established lines of business. The proper name for these speculations is over-trading. The phenomena of over-trading are so little understood out of the mercantile circles, that a short exposition of them will be read with interest; and without it, we fear that much of our subsequent reasoning would scarcely be intelligible.
It is well known that there are dealers who are constantly upon the watch for every symptom either of an actual or a prospective increase of demand, or deficiency, in the supply of any article of general consumption. The moment any such symptom is perceived, these dealers come into the market and purchase, in order to profit by the rise of price which will take place when the deficiency, or the increase, of demand becomes known. Their purchases produce an immediate rise. The articles hence appear to be looking up: expectation is excited that they will rise still higher; and additional speculative purchases are made upon this prospect. In this manner, the prices of the articles which are the subjects of speculation, undergo a progressive rise; which will be greater or less, according to the strength of the impulse which has been given to the spirit of speculation. If the expected increase of demand, or deficiency of supply, be moderate, and not calculated to inspire great hopes of immense or rapid gains, the rise of price is probably not more than sufficient to call forth the required addition to the supply, and to produce, in the meantime, the necessary limitation of consumption. In this case, no loss is sustained, and the effects of the speculation are purely beneficial. But if the expected increase of demand, or deficiency of supply, be so considerable, as to produce anticipations of a great and rapid rise of price; and if these anticipations extend to several articles of general consumption at once; they give rise to what is frequently, though erroneously, called general over-trading. The few who watch prospectively the signs of future supply and demand, anticipating a great rise of price, make considerable purchases. These purchases produce a considerable immediate rise: and this in its turn tempts the many, who look no further than to the immediate turn of the market, to purchase in expectation of a still greater advance. These speculative purchases produce the very effect, in anticipation of which they were made. A progressive and rapid rise takes place; the holders of all the articles to which the speculation extends, appear to be making fortunes; and a general rush of capital takes place into those employments. Increased speculative purchases raise the price far beyond what the prospect of deficiency, or of increased demand, will justify. Immense orders are sent abroad, if the articles belong to the class of imported commodities; thus raising their price in the foreign market: if they be articles produced at home, equally extensive orders are given to our own manufacturers. Every one calculating upon being before-hand with all his competitors, provides himself with as large a stock as he thinks that the market will take off; not reflecting that others, equally with himself, are engaged in adding to the supply, nor calculating upon the fall of price which must take place as soon as this increased quantity is brought to market. The deficiency is soon changed into an excess. The first who come into the market realize at the high prices, and make, or appear to make, enormous gains. An additional stimulus is thus given to the frenzy, and prices at length rise to such a height, as to induce a considerable number of the holders to think of realizing. Then commences the fall of prices. This operates as a signal to all the other holders to hurry their stocks to market, in order to secure what they can before the price relapses to its original level. The recoil is hence almost instantaneous. Not only do prices fall to the level from which they rose, but, from the increased quantity which has been imported or produced, they fall lower; commonly much lower. Of those who have bought largely at the high prices, a great proportion are ruined. Those who have contracted to take large additional quantities from the manufacturers, are unable to perform their contract; and the stocks remain in the warehouses of the producers, many of whom become unable to fulfil their engagements, or obtain the means of fulfiling them by forced sales, at an enormous loss. The failure of a few great commercial houses occasions the ruin of many of their numerous creditors. A general alarm ensues, and an entire stop is put for the time to all dealings upon credit: many persons are thus deprived of their usual accommodation, and are unable to continue their business. It is unnecessary to multiply details.
Such is the rationale of a period of over-trading. Every merchant, who remembers the commercial revulsions of 1810-11, and 1815-16, will testify that such are the events which always follow the opening of new markets, the expectation of deficient supplies, every thing, in short, which excites a confident hope of rapid gains. The additional supplies necessary are enormously over-estimated, enormous over-production and over-trading take place, the market is glutted, the holders suffer immense losses, many of them become insolvent, and their ruin draws along with it the ruin of many among the many others, who have given them credit, confiding in the enormous wealth which they appeared to have the power of realizing during the continuance of those high prices of which their own purchases were in a great measure the cause.
The speculation and over-trading of the years 1824 and 1825, had their origin in a state of circumstances precisely similar. They are thus explained by Mr. Tooke, in his work intituled “Considerations on the State of the Currency:”
The close of each year is the period at which, by annual custom, the stocks of goods on hand, and the prospects of supply and consumption for the coming season, are stated and reasoned upon by merchants and brokers, in circular letters addressed to their correspondents and employers. By these circulars it appeared, that of some important articles the stock on hand fell short of that at the close of the preceding year. From this the conclusion was more or less plausibly deduced, that the rate of the annual consumption of these articles was outrunning the rate of the annual supply, and that an advance in price ought to take place; at the same time there were, as in the case of cotton and silk, confident reports of failure of crops, or other causes, which would inevitably diminish the forthcoming supply. Expectation of scarcity was thus combined with actual deficiency in exciting the spirit of speculation. . . . . The impulse to a rise having been given, and each succeeding purchaser having realized, or appearing to have the power of realizing, a profit, a fresh inducement appeared at every step of the advance, to bring forward new buyers. These were no longer such only as were conversant with the market; many persons were induced to go out of their own line, and to embark their funds or stretch their credit, with a view to engage in what was represented to them by the brokers as a certain means of realizing a great and immediate gain. Cotton exhibited the most extraordinary instance of speculation carried beyond all reasonable bounds. Silk, wool, and some other articles, in which some advance was justified by the relative state of the supply and demand, became the subject of a speculative anticipation, and advanced much beyond the occasion.*
It is evident, that what is lost to one person, in these fluctuations, is gained by another. In the view of national wealth, therefore, except to the extent of that portion of the gain which falls to the share of foreigners, together with the loss of interest on the capital which lies unemployed during the stagnation, the evil of such vicissitudes is small. In the view of national happiness, it is undoubtedly great; and the legislature, therefore, would be highly culpable in not applying a remedy, if a remedy were within the reach of legislation. But the cause of the evil is one which legislation cannot reach—the universal propensity of mankind to over-estimate the chances in their own favour. While this propensity subsists, every event which stimulates hopes, will give rise to extensive miscalculation; and every miscalculation upon a sufficiently extensive scale, will terminate in the ruin of multitudes. All that we are entitled to hope is, that as the world grows older it may grow wiser; that the time may come, when, in addition to reading, writing, and arithmetic, it may be thought not unnecessary for a young man who enters into a merchant’s counting-house, to possess some knowledge of the circumstances which regulate the prices of commodities; that when improved education shall have been followed by improved mental habits, and when the liberation of trade from the restraints under which it now labours, and which so greatly aggravate all fluctuations, shall have given sober calculation a solid ground to rest upon, sober calculation may gradually take the place of gambling; that traders may one day acquire sufficient prudence to abstain from risking their own property in rash speculations, and sufficient probity to abstain from risking in any speculations the property of others.
His Majesty’s Ministers saw the subject in another light. The root of the evil, in their opinion, lay much nearer the surface. According to them, the over-trading, and the revulsion which succeeded it, were either produced, or greatly heightened, by the system of our currency. Two laws were accordingly passed, by means of which, changes of considerable importance were made in the system of our currency. By the one, it was enacted, that no promissory notes, under the value of five pounds, should circulate beyond the 5th of April, 1829: By the other, the exclusive privileges of the Bank of England were so far curtailed, as to permit the establishment, at a distance not exceeding 65 miles from London, of banking associations with an unlimited number of partners.[*]
The observation which first suggests itself, on the subject of these specimens of legislation, is, that they were enacted in a hurry. Legislation, like most other kinds of business, when it is performed in a hurry, is not very likely to be performed well. When, indeed, an enactment does no more than carry into practice, principles, either obvious in themselves, or universally admitted by all well-informed persons who have directed their attention to the subject; provided, also, that the applicability or inapplicability of those principles to existing circumstances, depends upon facts, all of which are so obvious and familiar, as to be in no danger of being either mistaken or misinterpreted; it may then be safe to legislate, even in a hurry: And we do not deny that there may be dangers so imminent, as to justify the adoption even of an uncertain remedy, provided it be an immediate one. But no such danger existed in the present case. Nor was the purpose of this hasty legislation the mitigation of immediate suffering; which might have been some excuse for precipitation. It was never contended that the proposed measures had any tendency to alleviate the existing distress. It was even admitted, that the small-note measure was calculated to aggravate the distress, by discrediting an important part of the circulation; by which means the currency was further contracted, and additional force given to that recoil of prices, which was the immediate cause of the distress. As little could it be said that the suppression of the small notes was a measure borne out by received principles. Its proposers themselves never asserted, that the received principles were in its favour. They fully admitted that it was repugnant to received principles; but maintained that those principles, however plausible in theory, had been disproved by recent experience. With these representations before it, Parliament knew so little, or cared so little about received principles, that it was quite contented to set them aside on mere hearsay; being perfectly satisfied with the word experience, without giving itself any concern about the thing, or taking even so much trouble as would have been necessary to ascertain whether the supposed facts, on the ground of which it was thus called upon to renounce its strongest convictions, were really facts, or suppositions of the most unwarranted kind.
First appearances, indeed, had been sufficiently in favour of the ministerial theory, to enlist in support of it a large proportion of the public of all ranks, and of the public press. Long before the meeting of Parliament, a loud cry had been raised for the suppression of the small notes. Those who raised this cry, had seen, of the circumstances of the case, just so much as they could not help seeing, namely, the failure of banks, and the distress of many poor persons, who held the notes, especially the small notes, of those banks. To have seen thus much, required nothing but eyes; to see any thing further, required eyes, and a mind, capable of directing those eyes. All, therefore, who possessed the former, but were destitute of the latter, unanimously agreed, that the small notes ought to be suppressed. Uncultivated minds, minds unaccustomed to dwell upon any ideas beyond those of the immediate objects of sense, always jump at once from the good or evil which they see or feel, to the physical substance, the visible or tangible object, which sight or touch exhibits to them in the character of an instrument. In this point of view, there is no denying that the small notes were the cause of whatever losses were sustained by the holders of those notes; for certain it is, that, had there been no small notes, no person could have lost any thing by holding them. But we submit, that whatever was thus lost, was lost not by any pestilential quality in the piece of paper itself, but simply by the insolvency of the issuers. If, therefore, it be practicable to take perfect securities, that no person shall issue notes who does not possess property more than sufficient to meet their amount; it does appear, that the very possibility of loss to the holders of the notes would be completely obviated. That it is practicable to provide such securities, we have never yet found any person to deny; and something, though by no means enough, was done by one of the ministerial measures, towards providing them. Those members, who introduced into the discussion on the small notes, pathetic descriptions of the misery occasioned by the failure of a country bank, might have reflected that the debate on the Bank Charter Act[*] was the occasion on which such descriptions would have been in place.
We do not accuse ministers of having acted upon views so superficial as those which, we are persuaded, alone influenced the ignorant part of the public in the cry which it raised against the small notes. Ministers were well aware that the question turned upon far other considerations than these. But although they confessed that they were abandoning the established principles, they do not seem to have reflected, that to justify the abandonment of established principles, the most perfect knowledge that was attainable was not more than enough. After ascertaining the few facts which could be got at by merely ordering a parliamentary return, they took every other fact for granted, which the establishment of their theory required.
Take, for example, the supposed fact, to which so much importance was attached; that the currency had been increased for some time previous to the commencement of any efflux of gold. No fact ever admitted more easily of being proved or disproved before a committee; but ministers had reasoned themselves, or rather had been persuaded by others, into a belief that it must have been so; and, this settled, it was not considered needful, though it were only for the purpose of silencing adversaries, to ascertain whether or not, in point of fact, it had been so. Take next the assumption, that the small notes had operated greatly to facilitate the speculation and over-trading of 1824 and 1825. Against this supposition no less than five counter-suppositions might be suggested; not one of which was met, or could be met satisfactorily, without that inquiry into the facts, which it was not thought necessary to institute. The banks which issued small notes may not have facilitated speculation at all. Or they may have facilitated it by their large notes, and not by their small ones. Or they may have facilitated it by their small notes, but, if the small notes were suppressed, they might have it in their power to continue facilitating it by their large ones. Or they might have power to facilitate it by means of some substitute for notes, and without the assistance of notes, large or small. Or, lastly, they may have facilitated it by their small notes, and may not have power to facilitate it by any other means; but the utmost facility which they may be able to afford to it may not be so considerable, as to outweigh the counterbalancing advantages of a small note circulation.
Had Parliament exerted all the means which it possessed of ascertaining every fact material to the case, the discordance of the facts with the theory would probably have rendered any other mode of combating it superfluous. These means, however, were not exerted; and we must now proceed to examine into the validity of the theory, by a method more laborious in the process, though equally certain in the result; by reasoning from the nature and properties of currency and trade. We are persuaded, that even by this means, we shall be able to disprove the theory in every one of its essential parts, and by arguments so cogent, that the non-production of so many facts will only injure the simplicity, without detracting from the conclusiveness, of our reasoning.
We shall begin by exhibiting, in one view, the whole of the case which was attempted to be made out against the small notes. It will be seen that the principal arguments were, in substance, arguments, not against a small-note currency in particular, but against a paper currency of any description. The advantage which, it was stated, would result from the suppression of the small notes, was, that there would be less paper, and more gold: and all which was said against the small notes resolved itself into this, that paper money was bad, but that the worst sort of paper money was the small paper.
The following, then, were the objections to a paper currency.
1. That even in non-speculative periods, a paper currency, although convertible into specie, by law, at the option of the holder, is yet liable to over-issue.
2. That in speculative periods there is always an over-issue, which, by producing a general tendency of prices upwards, heightens and prolongs the spirit of speculation: That, when at length the revulsion arrives, the destruction of the extra paper which has been called into existence by the speculation, renders the recoil of prices more violent, and for this reason more destructive: And that these circumstances have actually taken place during the last three years.
3. That when the paper currency is suddenly increased, (at least if it be a paper currency issued, as ours is, chiefly through the medium of loans), a fall takes place in the rate of interest, which, by diminishing the incomes of the owners of small capitals, induces them to engage in hazardous speculations: and that this also actually happened during the last three years.
We shall now proceed to examine the evidence of these three propositions, one by one.
1.Over-Issue.—The first proposition is, That even in non-speculative periods, a paper currency, although convertible into specie at the option of the holder, is yet liable to over-issue.
The whole force of this argument lies in the word over-issue. Over-issue, however, is a thing oftener talked of than understood. What is meant by over-issue? Unless there be some standard by which it may be judged what is over-issue, and what is fit and proper issue, it cannot be determined whether a paper currency is liable to over-issue or not.
Over-issue, is any issue whatever, which depreciates the currency. We are aware that we are not using the word depreciation in its strict sense. We use it as a short expression for lowering the value of the currency; or, what is the same thing in other words, raising general prices. We assert, then, that however extensive the issues may be, unless the value of the currency is lowered, there is no over-issue. If this be doubted, which we can scarcely believe, let the reader merely revolve in his mind what possible harm can arise (while the issuers are solvent) from any issue of paper which does not raise prices, or lower the value of the currency.
This being assented to, we next ask, how the value of the currency can be lowered by any issue of paper which displaces an equal quantity of gold? If the answer be, as it must be, not at all; and if it be further admitted, as it universally is, that every issue of paper displaces an equal quantity of gold, so long as there is an equal quantity of gold in the circulation to displace; the inference must be, that while there is an ounce of coined gold in the country, there is proof positive of the non-existence of any over-issue.
Most assuredly the speakers in Parliament did not state the case to themselves in this way. In the minds of most of them there seemed to be a disposition to regard any issue of paper whatever as an over-issue. Loud and incessant were the complaints, that one-pound notes and sovereigns would not circulate together. The Bank of England and the country banks, were charged with a dereliction of duty, in not contracting their issues when the exchanges indicated that they were driving gold out of the country. Now, if it be a sufficient objection against paper that it displaces gold, there ought not to be any paper whatsoever. Every note of the thirty or forty millions of paper which are now circulating in this country, displaced, when it was first issued, an equal quantity of gold. This is so obvious, and now so perfectly familiar to the merest tyro in the theory of money, that it does not stand in need either of illustration or of proof.
Since the paper, which costs nothing, performs all the functions of currency as well, the large notes indeed much better, than gold; while every sovereign exported causes the importation of a sovereign’s worth of productive capital, or consumable produce; the country gains, by the substitution, the whole value of the gold. There is a gain to the currency in cheapness, while there is no loss in steadiness of value. The currency is altogether in a more perfect state than before. When an issue of paper ceases to displace a corresponding quantity of gold, then, and not till then, is the currency depreciated; then, and not till then, is there an over-issue. But this, by universal admission, cannot happen while the Bank continues to pay in specie on demand.
The above argument may be thus briefly recapitulated:
No issue of paper can be called an over-issue, which does not depreciate the currency:
It cannot depreciate the currency, if it displaces as much coin from the circulation as it adds paper:
By universal admission every issue of paper has this effect, so long as there remains a single sovereign in the country:
Therefore, so long as there remains a sovereign in the country, there has been no over-issue.
Thus far, the argument has nothing in it particularly complicated, or difficult of apprehension. We must here, however, observe, that to understand the rest of the discussion, the reader must keep constantly in view the principles already established; and, to be sure of keeping them in view, must dwell upon them before proceeding further, till they are quite familiar. Nothing less will be just to the writer, or entitle the reader to expect either profit or pleasure from the ensuing part of the argument.
With this remark we resume the thread of the argument.
An objection has been made to the above reasoning. Admitting that every million of notes issued causes the export of a million of coin, it is contended that this effect does not take place till after a considerable interval; during which interval the currency is actually increased to the extent of the extra million; its value, consequently, depreciated to that extent; and whatever bad consequences arise from a depreciation of the currency (of which speculation is asserted to be one) take place during that interval.
If the matter of fact involved in this objection were correct, the inference from it would be indisputable. If it be true that a considerable interval must elapse before the increase of the currency is carried off by the export of gold, all the evils arising from a depreciated currency must be experienced in the meantime. We maintain, however, that the interval is very inconsiderable. And upon this point we join issue with the opponents of a paper currency.
We shall proceed to state the reasons which have been assigned for the opinion that a considerable time must intervene between the issue of paper and the consequent export of gold. These reasons will be taken from the ablest publications on that side of the question. We should have preferred to take them from the speeches in Parliament, had the speeches in Parliament afforded them. But the only reason which was urged in Parliament was contained in one word—Experience: a reason, which, so long as we are not informed what experience, proves nothing whatever, except the ignorance of its propounder.
The reasoning of those, upon the authority of whose publications Parliament adopted this opinion, was as follows:
Until the exchanges have turned sufficiently against us, or, in other words, until foreign bills have risen to a sufficient premium, to yield a profit on the exportation of the precious metals, they will not be exported. But the exchanges turn against us, only when we have a balance to pay to foreign nations. The only process, therefore, by which the issue of paper can cause the exportation of coin, is the following. It first lowers the value of money, and raises prices. In so far as this rise of prices affects exported commodities, it reduces the profit upon their exportation. In so far as it affects imported commodities, it increases the profit upon their importation. Importation is thus encouraged, and exportation checked; the imports exceed the exports, a balance becomes due, the exchanges fall, and gold is sent abroad. Every step of this process, it is asserted, requires some time; and in particular, a considerable time must elapse between the sending out orders for additional imports, and the period when payment for them has to be made. During this interval, therefore, the currency will be depreciated.
Our answer to this objection is as follows.
That some time is required to effect the process by means of which a quantity of gold is carried off equal to the paper which has been issued, cannot possibly be denied. But it is evident that, for the purposes of the present inquiry, the only material question is, how much? If it requires only a few days, or even one or two weeks, to carry off the increase of the currency, any depreciation which can take place during that interval, is of small moment. But if the depreciation continues for many weeks, or months, its consequences may be very serious indeed. Let us therefore consider by what circumstances the length of the interval will be regulated.
The effect of the issue of paper, is to raise prices. We shall not here inquire what period of time, if any, would elapse, before the rise of prices took place. Suffice it to say, that until it has taken place, the currency is not depreciated, and therefore no evil is as yet produced by the issue. But as soon as there occurs a rise in the price of any of the great articles of import, immediate intelligence is sent off to Paris, or Hamburgh, and the merchants of those places immediately make their arrangements for profiting by the rise. The celerity with which the operations of commerce are performed when there is an adequate motive for so performing them, is matter of universal notoriety. Extensive shipments would probably be made within a week after the receipt of the intelligence. Nor is it correct to say that these shipments would not affect the exchange until the goods came to be paid for by the English purchaser. They would affect it immediately. There are few merchants who would be inclined to wait till the goods were sold, for a return to their capital. There are many who could not. These would immediately draw upon their correspondents, or agents, in London, to whom the goods had been consigned, and carry the bill to a bill broker in Paris or Hamburgh, to be cashed. This would bring bills on London to a discount; or what is the same thing, the exchange would rise. The next post would carry this intelligence to London, and without a day’s interval the London exchange would undergo a corresponding fall.
That the exchange cannot rise on one side of the channel without instantly falling on the other, it is quite unnecessary to prove to any mercantile man. But to those who are not familiar with the facts, we will explain in what manner the variation, which had taken place at Paris, in the exchange between the two countries, would communicate itself to London.
The speculators on the exchanges, hearing that bills on London were selling in Paris at a discount, or, in other words, that English money could be purchased at Paris for less than its worth, would immediately send orders to their Parisian correspondents to invest as much money as possible in bills upon London, at the favourable rate of exchange. In directing their agent to make these purchases, they, of course, must, at the same time, supply him with the means. For this purpose they would go to a London bill broker, and demand bills upon Paris. This demand would raise bills to a premium, in a word, lower the exchange.
Instead of a long interval, therefore, there is a very short interval between a depreciation of the currency and a fall of the exchange. Two days carry to Paris information of the rise of prices; eight or ten days, at the utmost, suffice for the shipment of goods; bills are immediately drawn upon London for the amount; the exchange rises at Paris, and no sooner is this known in London, than a corresponding fall in the exchange takes place there. As soon as the fall in the exchange, or in other words, the premium on bills, becomes sufficient to cover the expense of remitting gold, gold is exported for the sake of drawing against it and gaining the premium.
The expence of remitting gold to France does not amount to one per cent: a depreciation of the currency, therefore, to that extent, would be sufficient, after an interval of a few days, to cause the export of gold. The slightest excess above the expense of transit, is a sufficient motive to those who speculate on the exchanges; a class of men proverbially keen-sighted, and who are contented with very small gains, on account of the rapidity and certainty of the return. The exportation would in fact begin even before the exchange yielded such a premium as would be necessary to render the speculation a profitable one. There are transactions in anticipation of profit, as well as transactions for immediate profit, in this line of business as in others. To give an instance: Mr. Haldimand, in his Evidence before the Commons’ Committee on the resumption of cash payments in 1819, mentions that in the October preceding, when France had engaged for very large payments to foreign powers, “the Paris bankers, anticipating a great demand for bills upon all foreign countries, were remitting specie to meet the drafts which they intended to negociate to the agents of all those foreign powers, with a small advance upon their remittance.”[*]
Among the individuals who are constantly engaged in watching the minutest indications of possible profit in this line, it is sufficient to name Mr. Rothschild, in order to convince the reader that neither immediate nor prospective gains are in any danger of being overlooked.
Let us now recapitulate the substance of our argument against the first proposition.
The proposition was, that a paper currency admits of over-issue. We have seen, first, that there is no over-issue where there is no depreciation; secondly, that there is no depreciation, where the paper issued drives out of the country a corresponding quantity of gold; thirdly, that it always does this, while the Bank continues to pay in specie: and does it after an interval too short for the depreciation to be productive of any material inconvenience while it lasts.
Having thus, as we think, completely disproved in theory the proposition of our opponents, let us now revert to the phenomena of 1824-25: and though, for want of evidence, we cannot trace accurately the connexion of the events, we can prove at least, that what is known of them does not afford any ground for adhering to an opinion, the fallacy of which in theory has been so clearly shewn.
The great increase of the currency, which took place previously to the commercial crisis, has always been ascribed, and with justice, to the speculations of that year. It will be shewn presently, that the prevalence of speculation always leads to an increase of the currency: in the meantime, as this is an admitted fact, we shall consider it, and reason upon it, as proved. The tendency to speculation first manifested itself in a more than ordinary degree, in the spring of 1824. It increased gradually during the remainder of that year, and reached its greatest height during the first three months of 1825. Now it was also in the spring of 1824, that the efflux of gold commenced. The exchanges turned decidedly against us in July of that year: And we have the authority of Mr. Tooke,[*] (on whose part it may be regarded as an admission, since it makes against his theory), that a considerable amount of gold had found its way out of the country by other channels, some time previous to the turn of the exchanges. Here, then, is no proof that the exportation of gold does not take place till a considerable time after the increase of the currency. The evidence is not very conclusive; but such as it is, it makes against this opinion, not in its favour.
We may perhaps be told, that we do not make a fair statement of facts. It may be admitted, that the exchanges turned, by the time that the speculations had caused any increase of the currency. But the currency, it may be said, had been increasing in amount, for a considerable time previous to the speculations. The country banks had been extending their issues ever since the year 1822: and had increased them considerably before the spring of 1824. They are even in the habit of increasing their issues as corn rises in price: and yet, the increase never affects the exchanges, nor sends gold out of the country.
These facts are undeniable: and they lead to the consideration of a law of our currency, which has never been sufficiently attended to; this is, the dependence of its value upon the Corn Laws.
A rise in the price of agricultural produce invariably increases the issues of the country banks. The notes of the country banks are chiefly issued in discounts, or other advances, to farmers and corn dealers. When the articles in which these persons deal, appear to be rising in price, they apply to their bankers for greater advances, in order to obtain the means of holding back their stock till the price has reached its height. If the rise continues for some time, the farmers need greater advances, that they may be able to add to the supply; and all speculators in corn, at the higher prices, require a greater quantity of money to make their purchases. Add to this, that when corn is high, all persons whose property is corn can give better security, and can therefore more readily obtain whatever loans they require. In this manner the issues of the country banks are increased, and, we admit, without affecting the exchanges, or driving gold out of the country.
We maintain, however, that this is not the consequence of our paper currency, but of those laws which injure us in so many other respects as well as this—our Corn Laws. We affirm, that the country banks could not thus extend their issues if the trade in corn were free; and that a similar extension will take place, even under a metallic currency, while that trade continues under restraint.
These assertions we shall now endeavour to prove.
A circumstance which must by no means be forgotten, is, that when commodities rise in price, it really requires an increased quantity of money to circulate them. When corn and other agricultural produce rise in price, more money, by some means or other, must be had in the agricultural districts; and if it be not permitted to be produced upon the spot, it will be sent from London. This will cause a diminution of the circulating medium in London, and a fall of prices there. As in other cases, so in this, a fall of prices will produce an increase of exportation. Under a perfectly free trade in corn, the increased exports would be paid for, as they naturally and properly should be, by that additional importation of corn which the rise in its price would occasion: there would, therefore, be no increase in the amount of our currency; it would only be differently distributed between town and country. Under a restricted corn trade, the case is widely different. Corn cannot be imported. Other imports will not be increased, but diminished, from the fall of their price in our market. In what, then, can the increased exports be paid for, but in gold? And will not this gold be as real an addition to the currency, as the country paper? Gold will flow in, until the vacuum is filled, which was left in the London circulation by the country demands; since the balance between the exports and imports will not be restored until prices have again risen to their former level. The addition, therefore, to the currency, and the fall in its value, will be precisely the same in amount, whether under a paper currency, or under a metallic.
Lest this general explanation of the process by which depreciation would be produced, even under a metallic currency, when corn was dear, should not be deemed sufficiently intelligible, we will now enter more minutely into the detail.
If, when corn is dear, there be need of additional loans in the agricultural districts, (which is the fact assumed by both parties as the basis of their arguments), the need would not be less under a metallic currency than under a paper. The farmers and corn dealers would still apply for increased advances; and as the country bankers are the great money dealers, to them the application would still be made. The country bankers, like the London bankers, would not cease to lend money, even though it were money manufactured by other people; and if they could not increase their issues, that would be no reason why they should not, if the security were good, increase their loans. Suppose then that they were prohibited from making loans in their small notes, in their large notes, or even in bills on London, they would not give up the point so long as any other medium was to be had; they would write to desire their agents in London to remit to them a sufficient quantity of Bank of England notes, or to exchange these notes at the Bank for specie, and remit the specie.*
If the Bank re-issue these notes, which it may safely do, here is an increase of the currency, just as much as if the country banks had made the increase themselves. If it do not, prices fall, and gold flows in, by the process which we have already explained.
We have now, as it appears to us, completely disposed of that argument against a paper currency, which is founded upon the fluctuations to which it is supposed to be liable, in non-speculative periods. We have shewn, that there is only one case in which the amount of our currency, relatively to that of our commodities, can be increased, without turning the exchange against us, and causing the immediate abstraction of the superfluous part of the circulating medium:—that this one case is that of a rise in the price of corn:—and that, although in fact our currency rises and falls in amount, as the price of corn rises and falls, this is a fluctuation by no means peculiar to a paper currency, but common to every currency in a country where there are corn laws. It may consequently be added to the already long catalogue of the evils to which we are subjected by those pernicious enactments.
We are now prepared to pass to another head.
2.Speculation.—The second proposition is, That in speculative periods, if there be a paper currency, it is sure to be over-issued, and by producing a general tendency of prices upward, to heighten and prolong the spirit of speculation.
To this argument the same reply cannot be made as to the last. It would be in vain to say, that if the currency be increased in speculative periods, the exchanges will turn, and carry off the increase; for the increase of the currency which is produced by speculation, generally to a certain degree extends itself to those countries with which our principal commercial transactions take place;* and the exchanges, therefore, will turn against us, and drive out gold, not to the extent of the whole depreciation of our currency, but only to the extent of the difference between the foreign depreciation and our own. Conformably to this, it will be found, that the rise of prices during the speculative period of 1824-25 was so great, as to indicate an increase of the currency much above what would have been sufficient to drive out the excess, if the currencies of other countries had not been simultaneously increased; and although gold was at that very time flowing out at a most rapid rate, prices continued for many months at the same elevated range.
It cannot be denied, therefore, that our currency, as at present constituted, is liable, in speculative periods, to a fluctuation in value, of the nature of a depreciation.
What, however, may be maintained, and what we are prepared to shew, is, that to this depreciation a paper currency is not more subject than a metallic would be, if co-existent with so extended a system of commercial credit as exists in this country: that every country in which an extended system of credit exists, is liable to a depreciation of its currency in periods of speculation; and that the only effect of suppressing the country banks, would be, to cause the same depreciation to take place by means of credits of a far more objectionable description.
When it is supposed that paper-money is the cause of that depreciation of the currency which commonly takes place during periods of speculation, that property is overlooked, which speculation possesses, of creating the medium in which it is itself carried on.
It seems to be supposed by persons unacquainted with business, and who have paid no particular attention to the subject, that the whole of the currency of this country consists either of coin, or of bank notes of some description, issued either by the Bank of England, or by country banks; and that the currency can be depreciated only by an undue increase of one or other of these media. This, however, is a mistake.
A large portion of the circulating medium of a commercial country consists of mercantile bills of exchange. And the functions of currency are discharged, and the need of currency superseded, to a very great extent, by mere credit.
In what manner bills of exchange perform the functions of currency, is shewn in the following passage, from a work which has contributed more than almost any other to the diffusion of sound principles on the subject of currency:—
Let us imagine a farmer in the country to discharge a debt of 10l. to his neighbouring grocer, by giving to him a bill for that sum, drawn on his cornfactor in London for grain sold in the metropolis; and the grocer to transmit the bill, he having previously indorsed it, to a neighbouring sugar-baker, in discharge of a like debt; and the sugar-baker to send it, when again indorsed, to a West India merchant in an out-port, and the West India merchant to deliver it to his country banker, who also indorses it, and sends it into further circulation. The bill, in this case, will have effected five payments, exactly as if it were a 10l. note payable to bearer on demand. It will, however, have circulated in consequence chiefly of the confidence placed by each receiver of it in the last indorser, his own correspondent in trade; whereas, the circulation of a bank note is owing rather to the circumstance of the name of the issuer being so well known as to give to it an universal credit. A multitude of bills pass between trader and trader in the country in the manner which has been described; and they evidently form, in the strictest sense, a part of the circulating medium of the kingdom.*
It is evident that if our currency is capable of being depreciated by an increase of that portion of it which consists of bankers’ paper, it is no less capable of being depreciated by an increase of that portion which consists of mercantile paper.
Independently of the direct substitute for money presented by the employment of bills of exchange in making purchases,—an increased use of credit, whether given by means of bills or by mere entries in a book, also supersedes the use of money, though in a less direct mode, and consequently depreciates the currency. For the value of the circulating medium does not depend upon its quantity merely, but upon its quantity compared with the number and amount of the pecuniary transactions, in the settlement of which, it is employed. When, therefore, by an extended use of credit, the amount of transactions settled through the intervention of money is diminished, the same numerical quantity of money becomes relatively greater, and the value of the circulating medium is reduced.
It is well known that every increase of speculation is accompanied by an extended issue and circulation of mercantile paper, and with an extended use of credit. A period of speculation is invariably marked by great confidence. While prices are rising, every one seems to be growing rich, and on the strength of his supposed riches, every one finds his neighbour ready to give him credit. The speculator wishing, as the term implies, to extend his transactions, avails himself of this facility of obtaining credit, to the full extent which his speculations require. For most purposes, it is evidently more convenient to obtain a banker’s note, for the purpose of making purchases, than to make purchases with a bill. Notwithstanding, however, the superior convenience of notes, a large increase is constantly made, in periods of speculation, to the quantity of mercantile paper performing the functions of currency. And the same, or a still greater increase, takes place in the amount of transactions which are settled without the intervention either of bills or of money; by mere transfers in a banker’s or a merchant’s books. These additions to the currency have the same effect in lowering its value, which a similar increase in the issues of the country banks would have.
It is this unavoidable increase of the circulating medium, which renders the recoil of prices so destructive after a period of speculation. The speculation itself would only raise the prices of those articles which were the original objects of speculation. But suppose an article to be sold and resold ten times, (no uncommon event in speculative periods,) and suppose a bill to be drawn by each successive seller upon the purchaser, and all these bills to be added to the general mass of the circulating medium employed in making purchases: the effect which this must have in depreciating the currency, is most evident. By this depreciation, prices in general are raised, and commodities in general become objects of speculation.* The fresh speculations produce a fresh addition to the circulating medium, and a fresh rise of prices; and so long as this lasts, every person in business appears to be rapidly making his fortune; until at last the articles which rose first and highest begin to fall, from the increased supply which the high prices have called forth, or perhaps from the mere desire of the holders to realize their gains. This causes the ruin of a large proportion of the holders of those articles: their paper becomes worthless, and ceases to circulate: the circulating medium being thus diminished, the prices of all other articles begin to fall at an accelerated pace, scattering ruin as the fall proceeds, and not only annihilating the paper of all the firms which successively become insolvent, but spreading a general distrust, which renders every one unwilling to take even the customary amount of private paper. The circulating medium is thus reduced, and prices consequently fall to a much lower level than that from which they previously rose.
All that fluctuation, therefore, in the value of the currency, which takes place in periods of speculation, may thus take place without the intervention of bankers’ notes, by mercantile paper and credit alone.
In case it should be objected, that, if bankers’ notes were abolished, at least that portion of the increase in the circulating medium would be prevented, which takes place by the increased issues of the country banks;—we will now shew, first, that if all bankers’ notes were this day abolished, their place would be filled by an equal amount of mercantile paper; and, secondly, that, in periods of speculation, the same addition to the currency, which is now made by bankers’ paper, mercantile paper, and mere credit, taken together, would be made by the two latter media alone.
To the first of these propositions we have the evidence of reasoning, and the evidence of fact; both of them of the most conclusive kind.
Country notes are issued in loans made by the country bankers to their customers. Loans would still be wanted by their customers if country notes were no more: and the country bankers would still be the persons applied to, in order to furnish them. If they furnished these loans in specie, they would be obliged not only to go to the expense of bringing specie from London, but to go to the expense of procuring the specie itself. They would, therefore, prefer to make the required advances by granting bills upon their agents in London, which bills being sent to London when due, would be exchanged without the intervention of money, by the operations of the clearing-house.
Accordingly, in Lancashire, where there are no local banks of circulation, bills on London, drawn by the bankers of that country on their correspondents, constitute the great mass of the circulating medium; as is proved by the following extracts from the evidence taken before the Lords’ Committee on Scotch and Irish currency in the last session:—
John Gladstone, Esq. M.P.—‘We sell our goods, not for payments in cash, such as are usual in other places, but generally at credits from ten days to three months, to be then paid for in bills on London at two or three months’ date: these bills we pay to our bankers, and receive from them bills or cash, when we have occasion for either to make our payments.’ (P. 216.)[*]
Again: ‘We have a considerable portion of large Bank of England notes in circulation: these are generally used for the payment of duties, and also for the purposes of remittance; but the great mass of our circulation is in bills of exchange; sovereigns and smaller bank notes are only required for such objects as charges of merchandize, with duties, freights, and other items. I believe the circulation in bills of exchange is of great magnitude; the circulation of bank notes limited.’ (P. 219 [p. 513].)
Lewis Loyd, Esq. says, that before the notes of certain banks in neighbouring counties found their way into Lancashire, the currency consisted of ‘nine partsbills of exchange, and the tenth part gold and Bank of England notes. I am inclined to think the bills of exchange bore a still greater proportion.
The money [he was asked] which you suppose the manufacturer draws for wages, you are in the habit of paying in gold or Bank of England notes?—Yes, we are wholly.
If he draws upon his deposit account, and it is supposed not to be for wages, how do you make payment upon that account?—It is generally made in bills of exchange drawn on London, but we accommodate his wishes as much as we can.
Some of these bills of exchange are drawn from one part of Lancashire on another, are they not?—The bills of exchange called for by a manufacturer in such a case as that put, are mostly drawn in Manchester in his favour, and he uses them as he likes.
Supposing a manufacturer in Manchester were to have a deposit account with you, and to make repeated demands for gold beyond what you thought necessary for the payment of wages, what would be your conduct?—We should say that we could not supply him. There is an understanding between the manufacturer and the banker: the manufacturer is to be supplied with what his wages require; but the ordinary demands of business beyond wages are usually paid in bills of exchange; and if he did not conform to that practice, we should complain, and object to his manner of conducting his account.
Do those bills of exchange circulate from hand to hand in Manchester? Yes; when a bill is drawn in favour of a manufacturer, he endorses it usually to the person to whom he pays it, and the person to whom he pays it pays it again to another, and it goes on often till it is covered with endorsements.
So that in fact it forms a part of the circulating medium?—the principal part.
Have you not seen bills of exchange of that nature, for the value of 10l. with fifty or sixty names upon them?—Yes; with twice that number. I have seen slips of paper attached to a bill as long as a sheet of paper could go, and when that was filled, another attached to that.’
Again: ‘Do you know any system adopted in Lancashire, from which there arises a check upon the quantity of those bills of exchange that may be issued?—The check upon them is their convertibility into Bank of England notes; that is, the facility with which they are discounted in the London market.
That is the only check, is it not?—Yes it is.’ (P. 299.)[*]
Mr. Henry Burgess, a manufacturer at Leeds.—‘What is the general circulating medium of Lancashire, independent of those promissory notes,’ (of the Blackburn and Macclesfield banks?)—‘the great mass of the circulating medium of lancashire, as in all the manufacturing districts in the North, is bills of exchange; a part of the circulation is in gold and silver, and Bank of England notes.
Are not many of those bills of exchange for sums from 10l. to 30l.?—A great portion certainly from 10l. to 30l.
Are there many below 10l.?—No.
What proportion do you suppose those bills of exchange bear in value to the Bank of England notes and gold which circulate in Lancashire?—I should say that on the first of December last those bills of the value of 10l. and not exceeding 30l.amounted to four-fifths.
If you do not confine your answer to bills of exchange under 30l. what proportion does the gold and Bank of England notes bear to the bills of exchange in Lancashire?—I should say that the bills of exchange were more than twenty to one. I have this day received a letter from a bank in Lancashire, who states the amount at much higher than that.
Have you any objection to state the name of that banker?—Mr. Roby, of Rochdale, of the firm of Fentons and Roby.
At what does he state them?—He says they are as fifty to one.*
Do you know of any system by which an effectual check can be given to the amount to which these bills of exchange may be circulated?—Inasmuch as these bills of exchange all, or in great measure come to London, and are exchanged at the clearing-house without the intervention of bank notes, except in the proportion of about one-twentieth part, the check is a very inefficient one.’ (P. 294 [ibid., p. 559].)
It would, no doubt, be easy for the legislature to abolish this kind of paper currency also, if it were so minded. Parliament might not only prevent credit from being given through the medium of the fittest persons, the bankers, in the most convenient form, that of notes; it might even prevent it from being given through the medium of those fittest persons in any form whatever. But could it put a stop to credit altogether? If not, is it not highly expedient that credit should be given in a mode which admits of publicity, and in which all loss to the lenders from the insolvency of the borrowers may be completely obviated? You would prevent a company of opulent merchants, with a large capital, from issuing notes which bear no interest, when you cannot prevent John-a-Nokes, without any capital at all, from issuing notes which bear interest, to any extent to which he can find persons to take them. You would prevent a merchant from receiving bills or notes from his banker, whose power to discharge them you may render certain, if you please; when you cannot prevent two merchants, on the brink of insolvency, from agreeing to draw bills to any amount upon one another, and with these defrauding any number of dealers of their goods, under pretence of a purchase.
After such testimony as the above, our first position, that if local notes were abolished, their place would be supplied by bills of exchange, can no longer be withstood. Our second, that in periods of speculation the same depreciation would take place by means of bills and credit, which now takes place by means of bills, credit, and country notes together, will appear upon a little consideration equally obvious.
The banks increase their issues in periods of speculation in the following manner. The speculator draws a bill, which he carries to be discounted in the banker’s notes. This he does, because the notes are more convenient to him than the bill; but if he can find a banker to discount a bill for him, we may rely upon it that he could find a dealer to take the same bill in payment for goods. He who has credit enough to obtain a loan from a banker, has credit enough to obtain goods from a dealer. Whenever there is a disposition to give credit too easily, which there always is in periods of great speculation, we may be quite certain that this disposition is stronger among the other classes of the community, than among the bankers. Other persons have other business to attend to. The business of a banker consists hardly in any thing else, except in learning all that is to be learned concerning the stability of those with whom he has dealings. And though much has been said on the subject of the anxiety of a banker to get out his notes, we should be surprized if it were greater than the anxiety of a dealer to get out his goods.
Supposing even that it were found impossible to pay wages and perform the smaller retail purchases with bills, (though why small bills should not answer as well as small notes, we are unable to divine); it is not usually in paying wages, or in performing small purchases, that the speculator lays out the money which he borrows to carry on his speculations. And if one of the remote consequences of the speculation be the employment of additional men by the manufacturers, the absence of small notes would oppose no material obstacle to this, since the necessary quantity of gold might easily be spared from the retail transactions, by an extended use of bills in the latter; a change which, in a period of confidence, would be unattended with difficulty.
Thus, then, it appears, that in periods of speculation, the addition to the circulating medium and the depreciation of its value, are no greater with a local bank paper than without it.*
Metallic money, therefore, has no advantage over paper in periods of speculation. But paper money has an immense advantage over metallic in the revulsion which follows.
During a commercial crisis, credit almost entirely ceases. None but the very best bills, and of the shortest dates, will pass current in the market; and for all other payments, ready-money must be provided. Those who have it, are unwilling to let it out of their hands; knowing that nobody who has demands upon them, will receive payment in any other medium. They therefore postpone all ready-money purchases. Thus, at the very moment when money and nothing else will be received in purchases, scarcely any money is offered; its purchasing power consequently is prodigiously increased, prices fall ruinously low, and insolvencies are multiplied a hundred-fold beyond what the mere destruction of the paper of the original insolvents could have produced. Now then, if a supply of paper, of undoubted security, can be poured into the market, sufficient to compensate the undue contraction of the currency, all this unnecessary evil is obviated. But if not, it must wait the tardy process of importing bullion from abroad: which, after all, may perhaps be hoarded as fast as it comes in.
If the distress of last winter was what it was, notwithstanding the issue of several additional millions of Bank of England notes; what might it not have been if the enormous contraction, natural at such a crisis, had been suffered to continue?
We have now, we hope, fully answered the second great proposition of our antagonists.
3.Rate of Interest.—The third proposition is, That when the paper currency is suddenly increased, a fall takes place in the rate of interest, which, by diminishing the incomes of the owners of small capitals, drives them to engage in hazardous speculations; and that this actually happened during the last three years.
The first position which we think it necessary to lay down, is one which, we presume, will be called theoretical; not because it is a theory, for that is a character common to all general principles, but because it differs from the theory of those who arrogate to themselves the exclusive appellation of practical men. The practical men generally imagine, that the rate of interest depends upon the quantity of the circulating medium. Our proposition is, that it depends upon no such thing; but purely upon the competition between the lenders and the borrowers; and can be affected by no circumstance which does not influence either the amount applied for by borrowers, or the amount offered by lenders.
This surely is almost as obvious of itself, as any illustration can make it. If, in one night, every piece of money in the country, of whatever denomination, were doubled, whereby all prices would be doubled, and the purchasing power of money reduced one-half; can any person suppose that the rate of interest would be lowered? True it is, that all who lent money would have twice as much to lend; but as it would now require twice as much to perform any purchase, all who borrowed money would now find it necessary to borrow twice as much. The lenders and the borrowers would bear the same proportion to each other, and the rate of interest would remain unchanged.
This error, which consists in supposing, that the quantity of the currency regulates the rate of interest, and which is one of the most common of the many errors constantly committed by mere men of business, when they meddle with general reasoning, arises from that frequent source of incorrect inference, ambiguous language. The word money is used in two significations. In its common signification, money means money; currency; the circulating medium: the quantity of money means the quantity of currency; the value of money means its purchasing power. In the language of commerce, on the contrary, money means money lent, or rather money offered to be lent. The market for loans is called the money-market; by the value of money, is meant the rate of interest: great facility in obtaining loans is called plenty of money; great difficulty in obtaining them, is called scarcity of money.
This equivoque would, it might be thought, be too obvious a one, to impose even upon the most ignorant; nor do we believe that it would impose upon any body except the practical men; who, because they know better than other people a sort of facts which are not to the purpose, think themselves entitled to remain in perfect ignorance of all those which are. No other class of persons could have imagined, because currency and loans happened to be called by the same name, that an abundance of the one imported an abundance of the other. The practical men, however, imagine that it does.
But there is another and a more intelligent class of reasoners, who, allowing that it is an increase of loans, and not an increase of the currency, which operates to depress the rate of interest, affirm, however, that from the manner in which our paper currency is issued, exclusively through the medium of loans, an increase of the paper currency almost necessarily imports an increase of loans. It is upon this ground, that they ascribe to the paper currency, the speculations of the last three years. Before the speculations began, there had been, they contend, a greatly increased issue of paper, the whole of it in the way of discounts or other advances, by the country banks. This lowered the rate of interest, and by reducing the incomes of those who lived by the interest of their capital, drove them into all sorts of hazardous speculations. An increase of issues by the Bank of England afterwards took place, and still farther heightened the evil.
This opinion, though less absurd in principle than the foregoing, imports a misapprehension of the actual facts.
Allowing that an increase of lenders tends to lower the rate of interest, it will not certainly be contended that every increase of lenders has this effect. It is only when an increase of lenders takes place, unaccompanied by a corresponding increase of borrowers, that it produces a fall in the rate of interest. If an addition be made to the loans, coincidently with an equal addition to the demand for them,—much more, if the former addition is called forth by, and is the consequence of, the latter,—we might more reasonably expect that this variation in the state of the money-market, should be attended by a rise in the rate of interest, than that it should be productive of a fall. And such, as we shall prove by documentary evidence, was the character of that increase of loans, which took place during the last three years. It therefore was not, we may infallibly conclude, the cause of any depression of the rate of interest.
The increased issues were made, partly by the country banks, and partly by the Bank of England.
It is allowed on all hands, by what circumstance the increased issues of the country banks were occasioned. They were occasioned by the rise which had been gradually taking place since 1822, in the prices of all descriptions of agricultural produce. Now, the only manner in which this could cause an increase of issues, was by causing an increase of applications for them. In what manner it does this has been explained in a former part of this essay. The increase of lending, therefore, was called forth by a previous increase of the desire to borrow. After the speculations began, a further increase of issues was produced, by a further increase of applications. The additional loans, therefore, did not come into competition with any part of the capital previously lent: and the increased issues of the country banks may be dismissed, as having had no tendency, direct or indirect, to depress the rate of interest.
The increased issues of the Bank of England stand upon somewhat a different ground. In the case of this establishment, the extension of its loans was its own spontaneous act, for the purpose of carrying off the superfluous quantity of specie in its coffers. And had its additional loans been made in the ordinary mode, (the discount of mercantile bills,) its tendency to lower, for a short time, the rate of interest, would have been out of dispute. The new loans were, however, made to a new borrower—the Government. They were made, in the purchase of the Dead Weight, as it is called; that is, the military and naval pension annuities.
Mr. Vansittart, when Chancellor of the Exchequer, finding that the military and naval pensions pressed heavier upon our finances than appeared to him to be pleasant or convenient, bethought himself of a plan for taking a part of the load off the shoulders of the present generation, and laying it upon posterity. This was to be effected by prevailing upon somebody to take upon himself the great, but constantly decreasing burthen of these pensions, upon condition of receiving, in return, from the public, a fixed annuity for 45 years. This was obviously equivalent to raising an annual loan to defray so much of the annual expense of the pensions as exceeded the fixed annuity; the loan to be repaid gradually, when, by the decease of a part of the pensioners, the annuity should in its turn come to exceed the pensions. To raise a loan, keeping up at the same time the mockery of a sinking fund, was exactly of a piece with that system of trickery and juggle which was the grand characteristic of Mr. Vansittart’s financial career. But with this, or any other of the absurdities, with which this extraordinary measure was chargeable, we have at present nothing to do. The point essential to our argument is, that the Bank undertook the payment of a certain portion of the pensions, on condition of receiving from the public a fixed annuity of 558,740l. From the value of the transaction, its advances, in the first years, of course, greatly exceeded this annuity, and could not be made without either diminishing its accommodation to individuals, or increasing the amount of its issues. Its accommodation to individuals had already been greatly reduced, by its refusal to discount, except at a rate of interest exceeding the market rate. But still the reduction had not been sufficient to admit of its making the new advances to Government, without an increase of its issues; which accordingly took place.
So much for the facts. Now for the application. The Bank extended its loans. But to the same extent to which it extended its loans, a new borrower appeared, in the person of Government. The new loans displaced no capital which was already invested, nor deprived any of its expected, or customary, investment. If the advances had been made by private capitalists, from funds which they had, previously, been in the habit of lending to individuals, who does not perceive that there would have been a considerable rise in the rate of interest? The effect of the extension of the Bank issues, was to prevent this rise. It produced no fall. From the nature of the case, it could not produce any.
The Bank does not make returns of the amount of its discounts, and other loans to individuals; and parliament was in too great a hurry to legislate on the subject, to think of calling for much information regarding it. They called, however, for returns of the amount of notes in circulation for some years back, on the fifteenth days of February, May, August, and November, in each year: periods chosen as being the remotest possible from the payment of the quarterly dividends, which always occasions a great temporary fluctuation in the amount of the currency; and therefore indicating, more nearly than any other periods which could be chosen, the average issues for the quarter. The annexed Table exhibits these quarterly returns for the three years, 1823, 1824, and 1825, compared with the average amount in circulation in 1822, computed from the same returns; and contrasted with the advances which the Bank had made, up to the same periods, on the dead weight. It will thence appear, that, with one exception, at every one of the twelve quarterly periods the advances on the dead weight exceeded, often greatly exceeded, the increase of the Bank issues.
At all these periods, except one, the reader will perceive, that the Bank had increased its loans to Government, more than it had increased the totality of its issues; its loans to individuals, therefore, by which alone the rate of interest (as we have shewn) could possibly have been affected, were diminished; and the effect, therefore, which the operations of the Bank were producing upon the money market at all these periods, must have been to keep up the rate of interest, instead of depressing it. The one period, which we mentioned as an exception, was that of November, 1823; at which the increase of issues did exceed the advances to Government by rather more than 400,000l. How far so trifling a variation as this, which is not greater than is happening, as the monthly returns shew, almost every month, and which was almost immediately withdrawn, is entitled to be considered as the cause of the fall in the rate of interest which took place, we leave the reader to judge.*
But what, then, it will be asked, was the cause of the great fall, which took place in the rate of interest, in 1823 and 1824?
We protest against the supposition, that we are under any sort of obligation, because we negative an alleged cause, to assign the real one. We will, however, make the attempt; premising that we do not pretend to do more than conjecture; nor are we by any means certain that in a case of this sort, any thing more than a conjecture can be made.
The rate of interest, like the prices of commodities, though it is subject to casual variations, has nevertheless a point to which it converges; and this point is regulated by the rate of profit upon mercantile capital. The rate of interest, on the average of a considerable number of years, always bears some proportion to the rate of profit.† If therefore, we had the means of ascertaining what rate of interest the ordinary rate of profit would warrant, we should have the means of discriminating between these fluctuations in the rate of interest which are casual and temporary, and those which are permanent.
Now, to a criterion of this sort, though we cannot obtain it exactly, we may distantly approximate. During the ten years of peace which followed the American war, and during which the rate of interest seems to have been tolerably steady, the average price of three per cent consols was about 76;* and the rate of interest on the best security, measured by this test, would appear to be somewhat under four per cent. This, therefore, may be considered, with some plausibility, as the rate of interest which was at that time warranted by the average rate of profit upon capital. After this period ensued a war of 30 years. During war the rate of interest is always higher, relatively to the rate of profit, than during peace: because the immense loans which are then called for, with a view to unproductive expenditure, and not to profitable employment, render it necessary that a greater proportion of the holders of capital should be induced to lend it, in preference to engaging it in business: which inducement can only be held out by means of a rise in the rate of interest. In the meantime, the great increase of our population, combined with the Corn Laws, which have only come into operation since 1815, has raised the price of the necessaries of life greatly above the average of the years preceding the war. This has raised nominal wages, and by increasing that part of the cost of production of all commodities which consists of the subsistence of the labourer, has lowered the general profits of stock. Adverting, therefore, to the greatly increased prices of necessaries in the last ten years, as compared with the ten years preceding 1793, we shall not perhaps be far from the truth in conjecturing, that if 4 per cent. was a rate of interest justified by the rate of profit in 1788, 3½ per cent. is as much as is justified now.
This would show 85 or 86 as the natural and reasonable price of three per cent consols at the present time, and probably for some years to come. To this price, accordingly, the three per cents have always gravitated. From the close of the war the funds gradually rose, until their rise was checked by the commercial distress of 1819. Commercial distress, by producing a great immediate demand for ready-money, always lowers greatly the price of, in other words, increases the interest on, all securities which are immediately convertible. The three per cents fell in 1819 to 60¼. But they soon resumed their tendency upward, and on the first of November, 1822, they stood at 82⅜. For a few months afterwards, they were slightly depressed, by anticipations that this country might possibly become involved in the war which was then commencing between France and Spain. When these anticipations ceased, the rise of the funds recommenced, and on the second of December, 1823, they were at 84⅛, not far from their present price (in December, 1826).
Thus far the fall of the rate of interest is easily and naturally accounted for, by supposing it to be a reasonable and proper fall, with reference to the rate of profit at the time. The subsequent rise of the funds from 84⅛ to 96⅝ in about five months, cannot be thus accounted for. It would be absurd to suppose that in so short a time a fall took place in the rate of profit sufficient to warrant so great a fall in the rate of interest. But the truth is that no fall took place in the general rate of interest, corresponding to this rise of the funds. We are assured by persons possessed of the most authentic information, that the rate of discount on the best bills never fell lower, during the last four years, than 3½ per cent. To this level it had already fallen in July, 1823, long before that sudden rise in the public securities, of which we spoke. We have little doubt that this rise was merely the effect of speculations on the Stock Exchange. It occurred at a period when speculations were rife, and when, the funds having risen gradually with little interruption for three years, the speculators were very likely to calculate upon a further rise. At all events, from whatever cause the rise may have begun, it was sure, when it did begin, to set the speculators in motion, and to produce that ulterior rise from speculative purchases, to which the funds are liable in common with all other articles which are bought and sold.
We have now disposed of the three great arguments against a paper currency in general: viz. first, that it is liable to over-issue; secondly, that it affords facilities to speculation, when excited by other causes; lastly, that the fluctuations in its amount, produce fluctuations in the rate of interest, and that, when a fall of interest is produced by this cause, speculation is the consequence.
If the foregoing deductions are as conclusive as they appear to us, it has been established that these three objections either are not applicable to a paper currency at all, or not in a greater degree than to a metallic currency.
The expediency, therefore, of the suppression of the small notes, in so far as it depended upon any of these reasons for its support, may be pronounced to have been disproved.
Of objections applicable to the small notes, but not applicable to a paper currency at large, two only have been alleged. The first is, that the holders of small notes are the persons who suffer most from the insolvency of the issuers: The second is, that the small notes are the great cause of panics.
The first of these objections would be obviated, if the insolvency of banks of circulation were rendered, as it might be rendered, virtually impossible. The second appears to us to be unfounded.
Under a system of banking so wretchedly constituted as ours, where that general apprehension, which is called a panic, is often no more than a very justifiable alarm—it may be that the alarm (although it does not arise earliest) continues longest, and is most difficult to remove, among the holders of the small notes. And under such a system it may be said, with some plausibility, that the small notes are a cause of panics. Under a secure banking system, on the contrary, it is not the small notes, but the absence of small notes, which is apt to be a cause of panics.
In Scotland, where there is no reason for a panic, (only two banks of circulation, we believe, having there become insolvent in the last hundred years), it is in evidence before the committees that the people prefer notes to gold, because they feel themselves incapable of discriminating between real and counterfeit coin. This will always be the case, where the currency, with the exception of the subsidiary coins, is wholly paper, and where no insolvencies occur to shake the public confidence in the latter. If gold circulated in Scotland along with notes, the probability of a panic, under a banking system so perfectly secure, would even then not be considerable; but it is difficult to believe that it would not be greater than at present.
While ministers and parliament were wholly taken up by the vain attempt to remove the causes of mercantile revulsions, they neglected to apply many of those palliatives, which legislative wisdom would have suggested, to mitigate the destructiveness of those revulsions, when they occur.
Against one of the most distressing features in the late crisis, the failure of the country banks, they did indeed provide a partial remedy, by permitting the establishment of banks with an unlimited number of partners, in any part of the kingdom, beyond a circle of 65 miles round London. The Bank of England would not consent to any greater sacrifice of its exclusive privileges, except upon condition of a further prolongation of its charter: to which condition, much to their credit, ministers refused to accede; and England must, therefore, wait till the year 1833, when the Bank charter will expire, for the establishment of banks with more than six partners in and near London, or of banks with limitation of the responsibility of any of the partners, in any part of the kingdom. For what has been done, however, by ministers, to render banking partnerships more secure, we are willing to give them the due praise; and, in our opinion, much more has been done than many of the speakers in parliament were disposed to allow.
It was argued, by Mr. Baring and others, that unless the measure extended to the establishment of banks with limited responsibility, either upon the principle of a commandite or of a joint stock company, it would be nugatory; since very few banks had hitherto availed themselves even of the full number of partners allowed by law; and if even six persons had so rarely been willing to risk their whole fortunes by embarking in a bank without limitation of responsibility, it was, they argued, extremely improbable, that a still greater number of persons should do so.
The readers of our former volume[*] are aware that we entertain an opinion highly favourable to such an alteration in the law as shall permit commandite partnerships, not only for banking purposes, but for all others.
Yet, we are far from going along with Mr. Baring in the opinion, that because this has not been done, nothing has been done. The difference, either in stability or in credit, between a bank with five and a bank with six partners, is a trifle: and the sixth place, being the last, will generally be kept open until some person, with capital and credit sufficient to be of material service, may offer himself to fill it. But the difference both in stability and in credit between a partnership of six and a partnership of sixty, is cæteris paribus very great; a bank, therefore, which has no motive to increase itself to six, might have abundant motive to increase itself to sixty partners, which it could the more readily do, as the risk to each of the sixty would only be one-tenth of what it now is to each of the six. The truth is, that associations of from six to twenty partners are by many degrees more unsafe than any other kind of partnerships. The majority of the partners, though their whole fortune is at stake, cannot personally superintend the management, and they are not sufficiently numerous to appoint a committee for the express purpose of watching over their interests. When the shareholders are more numerous, they appoint a Board of Directors to superintend and control the managing partners or officers; and that superintendence, which cannot be exercised by the partners individually, is regularly exercised by those of their number in whom they most confide.
It is difficult to conceive how Mr. Baring could assert, that persons would not be found to enter as sleeping partners into banking companies without limitation of responsibility; when he could not be ignorant of the great number of mining and other associations which exist in London without any such limitation; and when, (to say nothing of the newly-established provincial banks in Ireland,) it is proved by the returns made to parliament, that six of the Scotch banks,* without any limitation of responsibility, consist of 112, 147, 202, 446, 521, and 1238 partners respectively; and that there are five other Scotch unchartered banks, in each of which the number of partners exceeds sixty—while, of the twenty-nine unchartered banks, there are only five in which the partners amount to any number intermediate between eight and sixty-one; a fact strongly corroborative of our remark, that such partnerships hold out less advantages than any others.
Nor is there more weight in another argument which has been urged by some, to prove the unimportance of the late alteration in the law; namely, that a considerable number of the Scotch banks consist only of a small number of partners. It has never been asserted that the existence even of chartered banking companies, was incompatible with the existence of common banking partnerships. But it is incompatible with the existence of banking partnerships whose credit is not equal to that of a banking company; and this is surely as perfect a security as is necessary. Accordingly, the banks with few partners have in Scotland been found practically as secure as those with many.
The measure of ministers, therefore, was not only unobjectionable in principle, but will prove, we doubt not, useful in practice. Still, it was not the only security, which it would have been practicable and useful to take against the insolvency of bankers. And, such as it is, it will not, probably, come into full operation for some time. There is another and a still more effectual check, which might have been brought into operation immediately. It might have been rendered imperative upon the country banks to make returns, at stated periods, of the whole amount of their notes actually in circulation, together with the property which, after satisfying all other demands, the concern possessed, as the means of meeting those notes. These returns should, like the returns for the purpose of the income tax, be liable to be verified on oath, if required; and should include all the assets of the concern, exclusively of the private fortunes of the partners. No banker, to whose credit the publication of these statements would be favourable, could feel any disinclination to furnish them; and while they would render it absolutely impossible for a bank to issue more notes than it possessed the means of paying, they would not be liable to the same objections as the regulation which has been suggested, requiring all banks of circulation to make deposits of stock, a plan which, to say nothing of several other possible inconveniences, would probably cramp exceedingly the power of the banks to afford accommodation to the public. The same regulation would meet the objection which we have sometimes heard against a currency consisting of small notes, that the influence of the country bankers is such as to render them virtually inconvertible. Under the present banking system this argument may have some weight. We can readily conceive that it may be in the power of a country banker to pass his notes among the poorer classes, although his credit is not sufficient to give them general circulation. But the plan which we have suggested would put an end for ever to the circulation of country notes of inferior quality. The quantity can never be unduly increased by the mere influence of the country bankers. For there is always somebody in every district who is beyond the sphere of that influence; and as soon as the amount of the circulation has been increased beyond the due extent, it is the interest of this somebody to buy up the notes and present them to the issuers for payment.
The Bank of England likewise should be required to make periodical and frequent returns of its issues; distinguishing according as the notes were issued in discounts, in purchases of exchequer bills, advances to Government, purchases of bullion, and so forth: not to obviate any danger of the insolvency of that establishment, but in order that any alteration in the amount either of its issues or of its loans, which could affect either the money market, or the value of the currency, might be known at the very earliest period possible. Such returns would not only remedy all the real defects of our currency, but, even if the defects were real, which we have shown to be imaginary, even to these they would provide an effectual remedy.
Another measure, which parliament did not think proper to adopt, but which, had it been adopted, would have done more to relieve the present, and mitigate future distress, than any other measure that can be named, is the repeal of the Usury Laws.
One of the chief peculiarities of a period of commercial distress is, that every body wishes to borrow, while nobody is willing to lend. From a fall of prices, or the failure of some one who is indebted to him, a merchant is disappointed of a sum which he expected to receive, and which was his only immediate means of meeting an engagement falling due the same day. Failure to pay a bill when it becomes due, is an act of insolvency; and a merchant will raise money at any sacrifice to avoid it. When many persons are placed simultaneously in this situation, it may be supposed for what an extraordinary amount, beyond the usual quantity of loans, a demand is produced. But the same cause which produces this desire to borrow, produces at the same time a disinclination to lend: not only by reason of the little confidence which at such a period is likely to be felt in the solvency of the borrower; but because the fall in the public securities, and in the prices of goods, occasioned by the same attempts to raise money immediately, enables him who has funds at his command, to invest them at a profit greatly exceeding the legal rate of interest. Who would lend to a merchant at five per cent, at the risk of losing all by his insolvency, when by buying into the three per cents at 75, he can obtain immediately four per cent upon his money; and by selling out a year afterwards, when they have risen to 83, realize a profit of about ten per cent more, independently of the dividends accruing in the intermediate period, amounting in all to a gain of fourteen per cent in one year? The same persons might perhaps be willing, if they were permitted, for the sake of the immediate gain, to discount at short dates, at the rate of seven or eight per cent. Thus, by not being permitted to borrow money for a few weeks, at two or three per cent above the legal rate, many merchants have no doubt been ruined; while a far greater number have possessed themselves of the means of continuing their payments by the most enormous sacrifices in other ways. For here the absurdity of the usury laws shines out in the most glaring colours. The laws which prevent money from being raised by borrowing, cannot prevent it from being raised by forced sales of stock, or forced sales of goods. The same stagnation which renders it so difficult to borrow money, renders it still more difficult to dispose of goods, except at ruinously low prices. Mr. Tooke,* in his pamphlet on the currency, states, that to his knowledge, during the late crisis, extensive sales were made of stock, at a loss of twenty or thirty per cent; and of goods for immediate money, at a still greater sacrifice. Mr. John Smith† “knew an instance in which, for a very large sum, no less than from 74 to 76 per cent had been paid. This, of course, had been done by a bargain in selling out stock for money.” And Sir Henry Parnell‡ stated, that “a banker had told him that instances had come to his knowledge, in which,” by forced sales of goods, “a loss of 90 per cent had been incurred.”
The opportunity was lost of ridding the country of the nuisance of these laws, which, nugatory in periods of prosperity, exist exclusively to the effect of aggravating the pressure of commercial distress.
The list of palliatives which might have been adopted, is far too long for enumeration. We must, however, add one more, which we hold to be of considerable importance. The notes of the country banks ought to have been made payable in Bank of England notes only, and not in gold. It is evident that so long as the Bank of England is solvent, the security of its notes is equal to that of gold. By rendering them a legal tender in exchange for country notes, not only would the nation be spared the expence of keeping a reserve of gold in every country bank, but the evils of a panic would be greatly mitigated. It is well known that the great cause of the failure of so many London bankers in December 1826, was the immense drain upon them for specie to meet the demands of their country correspondents. The same demands produced that drain upon the bank, which so very nearly produced a second suspension of its payments.
To the above catalogue of remedies omitted, may be further added the repeal of the Corn Laws; which, as we have shown in a former place, are the cause of the chief fluctuations to which our currency is liable, and which, moreover, by lowering the rate of ordinary mercantile profit, really produce that tendency to hazardous speculations which is so erroneously, though so commonly, imputed to the system of our currency.
If the views which have been promulgated in the preceding pages be correct, it must appear that parliament, in its attempts to legislate for the currency, and for the commercial crisis, has erred most widely, both in what it has done, and in what it has omitted to do.
These errors did not take place without a cause; and the cause, which led to such effects, must needs be one, which it is of no small moment to us to investigate.
Interest, in this case, is chargeable with no part of the blame. Neither Parliament, nor those who make the Parliament, had any interest in the question, other than the general interest of the nation: and the speakers from all sides of the two Houses demonstrated generally a laudable freedom from party feelings and prejudices. Yet, though every person obviously applied his mind to the subject with the most sincere desire of being right, it not only happened, in our opinion, that the great majority came to a conclusion which is wrong, but all who are even moderately conversant with the subject must allow, that but a small share of ability was displayed by either side, even in the statement of its case. Nobody seemed to have made the subject a matter of study. Nobody seemed to have made even an attempt at examining it in all its bearings. They had come to the consideration of the facts of a very complicated case, unprepared by a previous acquaintance with those general principles, which would have taught them what were the facts, among so great a number, which it was necessary to attend to. They remained almost universally in ignorance of the material facts, for want of knowing what facts were material; and attending only to the obvious appearances, jumped from one seeming coincidence, to a crude generalization. Even the most acute, for want of a clue to guide them, could do no more than can be done by mere sagacity, unassisted by knowledge; which is, to form a strong conception of some one or two of the material circumstances, and to draw, from these one or two circumstances, what would have been a just inference if there had been no other circumstances to be taken into the account, but in which all the other circumstances were overlooked. The crudeness of their conceptions was strikingly demonstrated by the inability of any of them to give any thing like a connected statement even of his own case. With the exception of the Marquis of Lansdowne* on the one side, and Major Maberly on the other, not a man could state the grounds of his opinion in a manner which would be deemed creditable by any well-instructed person who agreed with him. And even the Marquis of Lansdowne only professed to state the argument as he found it in Mr. Tooke’s pamphlet. It is true that he could not have taken it from a better source: it is true, moreover, that he seems to have understood the pamphlet, and therefore, although in our opinion misled, he was misled by arguments by which it is no discredit to a man of sense to have been led astray. There were few of the speakers on this question, Whigs or Tories, in whose favour so much as this can be said.
This universal incapacity is not accidental, nor is it confined to this question. It may be observed on all questions requiring any depth of thought, or accuracy of knowledge; and it is only more conspicuous on a subject like the present, because it is not quite so easy to make words pass for ideas on such a topic, as on a question of government, judicature, or law. Nor will this incapacity appear wonderful, when we reflect, that the same cause which disables most of our public men from coming to the right conclusion on one subject, disables them equally on all—they have no general principles to guide them.
As there are quack physicians, and scientific physicians, so there are quack politicians, and scientific politicians. The characteristics of the quack are very seldom accurately conceived; and the word generally expresses little more than a vague and unanalyzed feeling of contempt. But the distinction between the man of science and the quack, is broad and obvious. The man of science is he who knows and applies the general principles, the theory, of his art. The quack, or empiric, is he who, ignorant of principles, generalizes upon the few particular instances which his own narrow experience has presented to him. Now, the general principles of the physician are the general laws, according to which it has been observed, or inferred, that the phenomena of the human body regulate themselves. The general principles of the statesman are, in like manner, the general laws, according to which it is observed, or inferred, that the phenomena of human society regulate themselves. By the diligent study of these laws, the philosophic stateman or physician has learned, what causes, in the field of his inquiries, are followed by what effects. By this knowledge, he is taught to look for the effect, only when he has perceived the cause: while the empiric, on the contrary, who is ignorant of the cause, expects the effect, whenever he has observed that, once or twice, in circumstances not obviously dissimilar, the same event, or something like it, has occurred.
The world has produced many scientific physicians, but few, very few scientific statesmen: nor is there much in the education or pursuits of our practical politicians, which warrants the expectation that many such will arise in their ranks for a long time to come.
In the first place, every scientific statesman must, in the present state of the world, be self-taught. In any established system of education he will meet with few helps, and many obstructions. He to whose skill the care of the human body is confided, finds every where some provision made for teaching him, in the best manner which the state of science in the age and country will allow, the causes which determine the good or ill condition of the human body. But he who is destined to direct the government of a nation, finds nowhere any adequate provision for teaching him the causes which determine the good or ill condition of the political body. In few countries do the laws of human thought, and human action, the principles of legislation, government, and political economy, form any part of the established course of education. In the great public seminaries for the education of the higher ranks of our countrymen in particular, not only are these branches of knowledge not taught, but every thing that is practicable is done to keep the mind of the student from turning towards them; partly by direct discouragement, partly by holding out rewards and honours exclusively to pursuits of a character diametrically opposite, and the more trifling and unprofitable the better; thus drawing off, by the appearance of intellectual exercise, those active minds, which are ambitious of higher distinctions than that of being victor in a rowing match, or in a horse race.
If the education of our statesmen and legislators does so little to fit them for their business, their subsequent occupations do still less.
A part, after they leave the school or the university, enter into the subordinate departments of the public offices, and serve their apprenticeship to the highest functions of government by discharging the lowest. If these have not acquired a taste for the study of the general principles of political philosophy, before they enter upon this career, they are little likely to acquire it amid the official drudgery in which they are from that time immersed. It is not in the midst of such occupations as these, that the mind learns to contemplate, on an extended scale, the operation of the causes of national prosperity and decline. Facts, of a certain description, they may have opportunities of observing; statistical facts, which it is necessary that the stateman should know, as it is necessary that the physician should know the constitution of his patient, but which he can learn as well, or better, from the testimony of others, as from personal observation. But it would be as reasonable to expect that a bricklayer’s labourer, by piling up bricks, should learn the principles of architecture, as that a clerk in an office should learn, in the exercise of his calling, the principles of good government. He who learns nothing but official details, knows nothing but official details: and if he would know any thing else, he must seek his knowledge elsewhere.
The next class from whom our legislators are drawn, is the mercantile and manufacturing class. After a life spent in the inspection of balance sheets, and prices current, they retire from ’Change, and frequent St. Stephen’s, imagining themselves capable of managing the state, because they have succeeded in managing the counting-house. The circumstance which is most characteristic of this class, is the persuasion which they have universally imbibed, that on all subjects which concern the wealth or commerce of a nation, it belongs to them to decide, and to the rest of the world to obey. These pretensions they uphold by styling themselves practical men, and warning off the ground, with no very mild denunciations, all persons who, under any other title, venture to encroach upon it. The idea which, we presume, they wish to convey when they call themselves practical men, is, that as men of business they possess a practical knowledge of many facts, not equally well known to others, which bear upon the particular question under discussion. Even if this were true, it would not entitle their opinion to any particular weight; because the knowledge of facts does not necessarily impart any peculiar qualifications for drawing the right inferences from these facts; and besides, if they know facts not known to other people, let them state those facts; but let them not complain because their inferences from facts are not taken for facts, and received upon their authority. The assertion, however, that what are called practical men, possess any peculiar acquaintance even with the facts, on which the decision of great public questions usually turns, is devoid of truth. A merchant, as such, is not necessarily acquainted with any facts, except those which determine him to buy and sell: nor even here is his knowledge necessarily very profound. Those who have been behind the scenes know well, what an affair of mere routine mercantile business usually is. To produce, purchase, or import, every year, about the same quantity which was produced, purchased, or imported, the year before, increasing or diminishing the quantity a little, as the market appears to be looking up or down,—constitutes, pretty nearly, the sum total of the art of commerce, as it is commonly practised. What the chancellor Oxenstiern said of the government of the world, may be said with almost equal correctness, of its trade, Quam parvâ sapientiâ regitur! The moment these men of practice quit the beaten track, strike out a path for themselves, and launch into the field of commercial speculation, all becomes mere guess work: the sort of experience which they have acquired is not of a nature to make them acquainted with the remote causes of the events which they hear and see; and their ignorance of these renders them mere gamblers; incapable of foresight, incapable of calculation; staking their fortunes upon the chances of the market, precisely as men of another description stake theirs upon the chances of the card-table.
It is not to be denied that a merchant has peculiar opportunities, if he knows how to employ them, of knowing some of the facts which bear upon many great public questions. But these very opportunities of knowing some of the facts, are apt to divert his attention from the remainder; and by knowing half the facts, being ignorant of the other half, he is still more likely to come to the wrong conclusion, than he who is ignorant of the whole. He may, in general, be trusted to, for judging, with tolerable correctness, of the effect which any measure will have upon his own immediate interest. That ignorance of remote causes, of which we spoke, disables him, in the majority of cases, from judging correctly of the effect of the measure, upon even his own ultimate interest: and of its effect upon the public interest, he is usually a worse judge than other people, because his attention is wholly fixed upon a different part of the subject. We might illustrate this observation by numerous specimens of the part which has been taken by the practical men on almost every great commercial question for the last twenty years. As might be expected from the extremely narrow range of their experience, they are in the habit of giving utterance to more absurd theories than any other class of human beings, and are notoriously the last persons who can be taught how to use their own eyes, or to comprehend the most obvious signs of the most familiar phenomena. At the time of the Bullion Report, they to a man maintained, that a currency could never be depreciated, so long as it was issued only in discounts at 5 per cent, upon bills of short date, and undoubted security; and averred, that since, at that time, guineas were not at a premium, it was a conclusive proof that the currency was not depreciated. To the above opinions, a portion of them continue to adhere.* The majority, having at length been shamed out of these extravagances, by men who had never crossed the threshold of a counting-house, and who were probably ignorant of the difference between a day-book and a ledger, now stride at once to the opposite extremity of the scale; imagine that this over-issue, which they had deemed impossible, is the one and only source of every evil that befals the country; and after giving the whole weight of their support to a currency which was liable to excess, now join in raising the cry of excess against a currency which is not.
There is yet another class, from which a large portion of our legislators are taken—the country gentlemen; and these, having over the two former the advantage of leisure, and of not having their minds narrowed by exclusive devotion to one particular pursuit, would be, beyond question, the fittest class for the functions of legislation, were their education so directed as to give them either the qualifications of a legislator, or a taste for the acquisition of those qualifications. But—so exquisitely is our system of education adapted to its end—to nine-tenths of them it teaches nothing; to the remaining tenth, nothing but what they do not want: and we consequently find that this class, in qualifications for business, is only distinguished from the other two, by possessing in a greatly inferior degree that diligence and attention, which, from early habit, commonly adhere to those who have been trained in the routine of the counting-house or of the office.
That a legislature thus composed should scarcely ever be able, even when it is willing, to legislate for a great nation as the wants of a great nation require, is a result which ought to excite neither disappointment nor surprise. By what rule can he, who has no scientific knowledge of the connexion between effects and causes in public affairs, distinguish causation from mere casual coincidence? And what is the quack, but he who confounds the latter with the former? And, accordingly, from time immemorial, it has happened to this country as to others, that its laws have been made by quack legislators, and its affairs administered by quack statesmen; while it is only now and then, at immense intervals, that a man has arisen, who made even an approach to the character of a scientific statesman or legislator. But though this be the deplorable picture which history exhibits to us, it holds out one great and encouraging lesson: That the man of general principles, even though imperfect, has ever thrown the men of tricks and expedients into the shade: That in every age, he who has approached the nearest to the character of a scientific politician, has been confessedly the first man among his contemporaries, and the only one whose reputation as a statesman has long survived him. What was it which made Edmund Burke, with all his errors, (and few men have committed more grievous ones,) soar so immeasurably above the vulgar orators, and still more vulgar statesmen of his day? What, except that he was a man of general principles? Imperfect, indeed, and in many important points erroneous, those principles were; but they will cause his name to be remembered, when the waters of oblivion shall have closed over the greatest and most admired of his contemporaries, and when the very existence of such men as Pitt and Fox, shall be remembered only by the places which they held.
From his time to our own, in so far only as Mr. Horner is an exception, the only man of general principles who has made his appearance in public life, was Mr. Ricardo. And the ascendancy, which, in the few short years of his parliamentary career, this great man acquired, over the minds even of those by whom he and his principles were abhorred, but who could not avoid feeling the infinity of their littleness when beside him, is an inspiring lesson to all who shall hereafter start in the same career of excellence, and a salutary antidote to the benumbing counsels of those preachers of indifference, who assiduously chaunt the parrot strain that true greatness is never appreciated, and who, by way of apology for their own firm determination to make no attempt at benefiting mankind, strive with all their might to persuade others that mankind are far too foolish and wicked, to render the idea of benefiting them any thing but the dream of a madman.
Of the present ministers, a part have adopted the conclusions which Mr. Ricardo had deduced by logical ratiocination from the most extensive and best established laws of human action; and are so far superior to the mere statesmen of routine. But men born when they were born, educated as they were educated, and occupied as they have been occupied since they entered into life, could scarcely be expected to have attained so clear a conception of those general laws, or so much skill in following them out to conclusions applicable with unerring certainty to the particular circumstances of each particular case, as to be able to tread unassisted in his path. They are so imperfectly acquainted with the principles from which the opinions they have adopted are a deduction, that they are continually liable to make mistakes in the application. So conscious are they of this, that they always seem to be afraid of their ground, and distrustful of their own opinions: ready to follow implicitly the guidance of any plausible person, the general tenor of whose opinions coincides with their own; but their confidence in others as easily shaken as their confidence in themselves; vacillating; unsteady; and quickly frightened (not by fear for themselves, but by an anxious desire to do their duty, coupled with distrust in their own judgment) into the abandonment even of the opinions of the truth of which they have professed, and with sincerity, to be the most firmly convinced. Thus, on the very subject in discussion,—the subject of a paper currency,—they were at first so eager to put a stop to the circulation of the small notes, that they could not wait for the form of parliamentary sanction, but prohibited, on their own responsibility, the stamping of such notes. Then they grew alarmed at the stories which they heard concerning the discredit into which the small notes had fallen through their over-anxiety to get rid of them in a hurry; and they permitted the issue of the small notes of the Bank of England—beyond all question the worst sort of small notes—for a further period. But now with one accord the Scotch bankers, and all who were connected with Scotch bankers, raised an uproar; in which they were cordially joined by every Scotch jobber, who, hating ministers for the good they had done, stretched a point to oppose them even when they were doing mischief. The great novelist himself took the field, and put forth an entertaining story-book on the currency,[*] in which, between an anecdote and a joke, he wedged in an insinuation, that Scotchmen had not yet forgotten the use of the claymore. Completely bawled down, ministers at length did for the Scotch and Irish currencies, what they ought from the first to have done for the English; they granted a Committee of Inquiry. The result was, that the proposed change was abandoned so far as respected Scotland, and postponed as regarded Ireland: and if ministers have one-half the discernment for which we give them credit, they have long since deeply regretted that they ever hazarded a measure, which has materially lowered them in the estimation of the public, and done no good.
The debates in Parliament were rather marked by general weakness, and ignorance of the subject, than by the peculiar absurdity of any one among the opinions which were broached. There was something deserving of attention, however, in the treatment which was sustained by the unfortunate science of political economy. On most questions affecting the public wealth, the party in the right is pretty much accustomed to be taunted, by the party in the wrong, with being misled by political economy. But in the present instance, each party was taunted, by the other with having been led into its present errors by that delusive study. Those who were for a gold currency, said, they had never concurred in the theories of the political economists on the advantages of a paper currency. Among these was Mr. Tierney,* who said that on this point he was more obstinate than on any other, although (he added) he knew that good, wise, and well-informed men differed from him, and although, he, for his part, affected to know no more, and see no farther, than his neighbours. Those who were for a paper currency said, that “excepting only the members of the Political Economy Club, there were no persons to be found who approved of the conduct of ministers.”† Another speaker on the same side, Mr. Hudson Gurney,‡ “could not help attributing the source of all the evil to the Bullion Committee. Mr. Horner had come up to it from Scotland to confuse the question with Scotch metaphysics.” From all which it may be inferred, that there were at least some persons on both sides, who, although they differed in their opinions, agreed in their contempt for persons who were wiser than themselves.
Proportioned to the invectives of both parties against “political economy” and “metaphysics,” was the eagerness of each to shew that it had the practical men on its side; and vehement was the contest before they could settle, on which side the practical men really were. Mr. Baring, who agreed with ministers that the small notes were a nuisance, but who pertinaciously opposed their suppression, on the ground (if we comprehend him rightly) that a period of distress was the wrong time for such a measure, made a series of speeches, in one of which, amid bitter complaints of the sacrifices made to theory, and the disregard shewn to practical men, he exhorted the House to recollect, that, in spite of all eloquent speeches, it “stood in this situation—the men of business in it, from one end to the other, told the right hon. gentlemen to beware. He did not think there was one banker or merchant in the House, on whatever side he might be accustomed to vote, who ventured to say he thought this measure could be carried without injury to the country. . . . . If any practical man would get up and say that this measure could be carried into effect without great suffering, he would give up the point.”* His call was answered by Mr. Grenfell, who took a widely different view of the state of opinion among practical men. “As a practical man, his opinion was, that not only might this measure be carried with safety, but that there could be no permanent safety for the country without it. There was not a single practical man who would attempt to deny that the one pound note system was a nuisance which ought to be abated; that the evils which now afflicted the country originated in those notes, and that one of the remedies for those evils was to do away with that circulation.”†
The word experience was of course bandied from one side of the house to the other, and the average number of appeals were made to it from theory, by that numerous class, who are accustomed to judge of the wisdom of a measure exclusively by the event. Among these Mr. Brougham’s appearance will excite surprise. He candidly owned that he had once been of opinion that a paper payable in gold by law, on demand, could never exist in excess, and that “experience alone had shaken his firm belief in this theory.”‡ We think that it would have been more to the credit of Mr. Brougham’s wisdom, had he remained silent on a subject which it is evident that he had not studied. It is not by merely glancing at the surface of the subject, and making himself acquainted with one or two of the more obvious facts, that a man becomes entitled to say what is or is not experience.
Among the speeches, the most deserving of attention, in many points of view, were those of Mr. Baring; and to these alone we shall further advert. We have not room for an examination of the numerous theories which that honourable gentleman let fall while vituperating theory. But there is one of his theories—his darling theory—the theory so dear to him, that he could scarcely open his lips without pronouncing it, which must be noticed; the theory of a double standard.
At present, gold alone is by law a legal tender to any amount exceeding forty shillings, and is therefore the sole regulator of the value of our currency. Mr. Baring’s theory was, that it would be a great improvement to make silver a legal tender also. Now, the reasons against this are cogent and obvious. If both metals were made a legal tender, they must be made so in a fixed ratio; say twenty shillings, to pay a debt of one sovereign. But the relative value of the two metals in the market is liable to variation; and, in point of fact, does vary not unfrequently. As soon as this happened, it would become the interest of all debtors to pay their debts in the metal which had relatively fallen. Not only, therefore, would the currency vary in its value with the fluctuations of two metals, instead of those only of one; but whenever one of the two metals became the standard, the whole of the other metal in circulation would be immediately melted.
Though we commonly object to the introduction of figures into a question of political economy, as in general raising more difficulties than it solves, in this instance we think that figures will render our meaning more intelligible. Let us suppose that a sovereign, and twenty shillings, are both of them made legal tender for a debt of one pound; and that this proportion accurately corresponds with the present value of both metals in the bullion market: the quantity of gold in the sovereign, and of silver in the twenty shillings, being severally worth in that market one pound. Let us now suppose that from a falling off in the supply of gold, or an increase in the supply of silver, from the mines, the quantity of gold in a sovereign becomes worth 21s. in silver, or the quantity of silver in twenty shillings becomes worth only 19s. in gold. In the first case, a speculator procures a sovereign with 20s., melts it, and sells it for 21s. In the other, with his 19s. in gold he buys silver bullion, has it coined into 20s. at the mint; and by this addition to the currency, raises, among other prices, the price of gold bullion to 21s. when he procures a sovereign for 20s. melts it, and sells it for 21s.
Two evils are thus produced by a double standard: in the first place, double fluctuations; and secondly,—whenever, by a change in the relative values of the metals, one of them becomes the standard instead of the other,—the loss to the nation of the expence of coinage on half the coins in circulation.
Not only did Mr. Baring overlook these arguments, fully and repeatedly as they have been stated in almost all the writings on the subject, but he found, with one exception, nobody to remind him of them.* What is more, he found several members, and among others Mr. Huskisson,† to express something more than a half assent to the proposition. Mr. Peel also gave a modified assent to it, but with the following sensible reservation:—“It would be necessary to accompany it with a measure to guard against fluctuations in the price of silver, so that if there should be an increase in the quantity of silver, the man who had contracted obligations in gold should not be allowed to discharge them in silver.”* —No doubt the measure would be harmless with this condition, for it would be nugatory. Where would be the advantage to the debtor of being allowed to pay in silver, if he were obliged to pay it at the same rate, at which he might purchase gold with it, and pay in gold?
It is curious, that every one of Mr. Baring’s arguments for two standards, were arguments only for making silver the standard in preference to gold. Such were, the greater facility of obtaining it in the requisite quantities; its being the standard of other countries, which rendered it impossible, unless it were ours also, to have a perfectly accurate par of exchange; the less liability of its value than of the value of gold, to be raised or lowered by the operations of speculators, &c.&c. All these circumstances may deserve ample consideration, regarded as reasons for making silver the standard, instead of gold; but they certainly are no reasons for having more standards than one.
A discussion of some interest took place in parliament, upon a proposition for authorizing the issue of several millions of exchequer bills to relieve the immediate distress. Ministers refused their assent to this proposition, but, in lieu of it prevailed upon the Bank to make advances to the extent of three millions upon the security of goods.
The propriety of this course appears unquestionable: yet, strange to say, scarcely any part of their conduct excited so much reproach. The practical men not only gave them no thanks for what they did, but would not cease urging them to do what they had refused to do: and ministers were bitterly inveighed against, for unfeelingly suffering such a depth of distress to continue unassuaged, merely because they would not deviate from a general principle, which was not applicable to such extreme cases. Of those from whom this lachrymation proceeded, there was not one who seemed capable of seeing that an advance by the Bank afforded all the relief which an issue of Exchequer bills could afford; probably much more than it would.
Two evils were expected to be remedied by this measure: first, the depression of prices, owing to the contraction of the currency by the immense destruction of mercantile and country paper; and, secondly, the difficulty, or rather the utter impossibility, of obtaining loans, except at extravagant interest. Both these evils were materially mitigated by the advances of the Bank. By these advances, three millions were added to the currency, and three millions were added to the loans. By the issue of exchequer bills, very little would have been added to either. Exchequer bills do not, except to a very limited extent, circulate as currency; and for this reason, neither could they have been of any use as a loan, to the merchant who received them, unless they were first cashed. If cashed by the Bank, they would have operated in the same manner precisely, as the Bank advances upon goods under Government guarantee. If cashed elsewhere, they would not have added to the aggregate of loans, but would merely have enabled the holder to borrow money, which otherwise would probably have been lent to some one else. If the measure, therefore, had averted bankruptcy from one individual, it would only be by bringing it upon another. To a certain extent, indeed, it might have drawn out funds, which would not have been lent upon any inferior security; and so far, but no farther, it would have afforded relief. But the advances of the Bank, by immediately superadding the whole of their own amount, to the funds which were already seeking an investment in the money-market, did at once, and to the full extent, what, to a certain extent, the other measure might possibly have done.
Yet this measure the practical men pronounced to be nugatory, while their hearts were exclusively set upon the other. One reason they had for this preference; and a curious specimen it was, of the empiricism of the mere practical men, in every thing which they say and do in public matters, and which they call, following experience. The issue of exchequer bills had been tried in 1793, and had succeeded! while the Bank advances had never been tried before! There are few quacks, in tolerable practice, who cannot produce hundreds of instances in which their nostrum has been taken, and in which, afterwards, the patient has recovered. The practical men could produce only one such instance: and even to that, there were objections, to which newspaper cases in general are not liable: for patients, we know, do not always recover, even when the doctor is dismissed; but a commercial crisis must abate, some time or other: and if it begins to do so just after the exchequer bills have been administered, people are sure to suppose that had it not been for the drug, it would have continued till doomsday.
Hear how a practical man can rail against theory while in the act of theorizing, and theorizing, too, upon a single instance.
Mr. Bright: “What did Mr. Pitt do on that occasion? He issued exchequer bills, and the distress of the country was cured, not only without loss, but with benefit to the state. Why should we now adopt new expedients? Why not profit by the experience and the wisdom of our ancestors? He was no speculatist, no theorist, and disliked the fashionable philosophy of the day, and he asked the country to adopt the wise course of Mr. Pitt.”*
Mr. Tierney made a speech, which, as usual, was full of wit, and pleasantry, and point, but somewhat barren of ideas. The only thing particularly remarkable in it, was the principle of morality by which he professed to be guided in his public conduct: “He approved of the issue of Exchequer bills in 1793. On that occasion he was not in Parliament; but had he been, he would in all probability, like a good soldier, have fought under the banners of his party, and he believed they opposed it: but the measure was sound and good.”*
We commend Mr. Tierney for his frankness; and shall know, hereafter, for what degree of sincerity to give him credit, when he declares to the House, on party questions, that the salvation of the country depends upon its following his advice. We are greatly edified by the notion which he entertains of the duty of a public man. It consists, he says, in being “a good soldier.” Permit us to ask, whose soldier? Not that of the people; for their interest is indissolubly linked with every thing that is open, and honest, and sincere. Of whom, then, is he the soldier? We need not go very far for an answer.
The Usury Laws also produced something of a debate. Our sentiments on this subject, having been fully declared in our preceding volume, need not be repeated here. The baneful operation of these laws during the panic having done much to strengthen and spread the opinion of their badness, it was to be expected that the country gentlemen would, in defending them this session, exhibit marks of peculiar irritation. Such marks they accordingly did exhibit; and poured out the vials of their wrath to the very dregs, upon the unfortunate proposer, and upon all who were of his opinion.
Mr. Davenport “called upon Government to take a part in stopping the eagerness for introducing such bills.”[*] Mr. Bright, who richly deserves to have been born a country gentleman, “was glad that the bill was thus early opposed. It was essential that the country gentlemen should not be year after year agitated in their minds, and more particularly at a time when they ought to be kept at ease. He condemned in the strongest manner the re-introduction of such a bill as that now submitted for their consideration; it could be productive of no good, and would disturb existing arrangements.”[†] On second thought, it occurs to us, that the above observations are ironical. The principal sentence is evidently a sly hit at the extreme sensitiveness of the country gentlemen in money matters, which he artfully represents as having risen to a disease in their minds, and complains that they are not treated with the tenderness due to valetudinarians. Mr. R. Gordon could not contain his indignation against Mr. Sykes, for merely expressing his surprise that the country gentlemen should think the Usury Laws injurious to them. “The landed interest did not stand in need of the suggestions of the honourable member. He condemned the honourable gentleman’s avidity to assist the landed gentlemen with new theories; it would be better to allow the country gentlemen to take care of themselves; for surely they ought to be the judge of what suited their own affairs.”[*] Had Mr. Bright been in his merry mood when these observations were made, he would have remarked, in continuation of his former view of the subject, that the country gentlemen already began to demonstrate that instinctive aversion to their keepers, which persons in their unfortunate situation so generally display.*
The only argument which was even named, against the repeal of the Usury Laws, was, that it would shake the security of mortgages; by which is meant that, if higher interest than 5 per cent were permitted to be taken, all mortgages would be called in, and 2 or 3 per cent additional interest immediately laid on. There is something so incredibly silly, as well as something so much worse than silly, in this language, that it deserves most particular notice. In the first place, it is scarcely credible that men should be found in the present day, to stand up and affirm what is here implied, that the lender is the person who fixes the rate of interest; and that too, with full experience before their eyes, that the lender cannot even keep the rate of interest from falling below the legal limit, to say nothing of rising above it. Nor do we believe that even the landlords would have committed so gross and so obvious a mistake, were it not for their inveterate habit of taking their opinions on all money matters from their attornies; to whom the Usury Laws, and the evasion of the Usury Laws, are the source of profit without end, and who, therefore, unanimously agree that those laws, and their evasion, are equally indispensable to the security of the social order. In the next place, suppose it true that these laws do keep down the rate of interest on mortgages below its natural rate: is there any set of men, save those who, like the country gentlemen, have so long been accustomed to make the interest of all other classes yield to theirs, that it appears to them almost a miracle to meet with resistance from any other class in the attempt,—is there any other set of men, who would have the assurance to say—We are dealers in corn, and we will therefore compel you to buy it of us at our own price; we are borrowers of money, and we will therefore compel you to lend it to us at our own rate; and all this, not on account of any service which we have done or intend to do you in return, but because we and our pockets are of such vast importance to the nation, and their being well filled so absolutely essential to the maintenance of the constitution and to the prosperity of the state, that no Englishman will grudge to contribute his share, in this or in any other way, towards filling them!
[* ]The reader who desires to possess fuller information concerning the events of these remarkable periods, will find many valuable details in Part I of Mr. Tooke’s able and important work on High and Low Prices.
[* ][2nd ed. London: Murray, 1826.] Pp. 44-7.
[[*] ]7 George IV, cc. 6 and 46.
[[*] ]7 George IV, c. 46.
[[*] ]Parliamentary Papers, 1819, III, p. 56.
[[*] ]Tooke, Considerations, pp. 68-9.
[* ]It may perhaps be objected, that the country banks would be more sparing in their advances to their customers, if they had to provide gold for the purpose. Under circumstances favouring the spirit of speculation, and thus tending to increase the general demand for loans, this would be perfectly true. But under the circumstances now supposed, it would not be true. If the country bankers would not make further advances to their customers when corn was rising, the London money dealers might and would. Except when there is a general spirit of speculation afloat, (or what is equivalent to it, an increased disposition to give credit), increased applications for loans from one quarter are always accompanied by diminished applications from another. It is the articles that appear to be rising, which excite speculation, and produce a demand for loans among the dealers in these particular articles. But unless there be an increase of the currency, either previous or simultaneous, one article cannot rise unless another falls. While agricultural produce, therefore, is rising, other articles will fall, and while the farmers and corn dealers are calling for increased loans, there will be a cessation even of the usual demands from other quarters. A number of the London money lenders will thus have a portion of their capital set free, which they will be ready to lend to the farmers, either directly, or, as would probably be more convenient, through the medium of the country bankers.
[* ]The increased orders which our merchants send abroad in a period of over-trading, reduce the stocks on hand in the warehouses of the foreign dealers, and give rise to anticipations of deficiency in the supply. Anticipated deficiency is the most frequent of all causes of speculation: and the speculative spirit thus spreads to foreign countries. There, as here, it leads to an increase of the circulating medium, by an extended use of private paper and credit; and of course sinks the value of the currency, though rarely to so low a level as ours, because the derivative speculation rarely equals the original one in extent.
[* ]Thornton on the Paper Credit of Great Britain, p. 40. [Thornton, Henry. An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. London: Hatchard, 1802.]
[* ]This was strikingly the case during the speculative mania which preceded the late revulsion. “The speculative anticipation of an advance was no longer confined to articles which presented a plausible ground for some rise, however small. It extended itself to articles which were not only not deficient in quantity, but which were actually in excess. Thus, coffee, of which the stock was increased, compared with the average of former years, advanced from 70 to 80 per cent. Spices rose, in some instances, from 100 to 200 per cent. without any reason whatever, and with a total ignorance on the part of operators of every thing connected with the relation of the supply to the consumption. In short, there was hardly an article of merchandise which did not participate in the rise. For it had become the business of the speculators or the brokers, who were interested in raising and keeping up prices, to look minutely through the General Price Currents, with a view to discover any article which had not advanced, in order to make it the subject of anticipated demand. If a person, not under the influence of the prevailing delusion, ventured to inquire for what reason any particular article had risen, the common answer was, ‘Every thing else has risen, and therefore this ought to rise.’ ”—Tooke on the Currency, pp. 47-8 [2nd. ed., pp. 48-9].
[[*] ]Parliamentary Papers, 1826-27, VI, p. 511.
[[*] ]Parliamentary Papers, 1826-27, VI, pp. 561-2.
[* ]Mr. Burgess has since published a pamphlet, in which he informs us, that Mr. Roby made his statement upon an accurate examination of the receipts in his own bank for years past. He also states, that circulating bills compose the greatest part of the currency, not only in Lancashire, but throughout the north of England. He considers Bank of England notes and country bankers’ notes to form, conjointly, not more than a tenth of the whole paper circulation of the kingdom. As a practical man, his testimony is valuable to the important fact that bills increase in a much greater proportion than notes, during periods of speculation. [Burgess, Henry. A Letter to the Right Hon. George Canning. London: Harvey and Darton, 1826, pp. 83n, 79.]
[* ]It may possibly be contended, that an addition to the number of bank notes depreciates the currency somewhat more than an addition of equal amount to that part of the circulating medium which consists of bills; because paper which bears interest, does not in general pass so rapidly from hand to hand, as paper which is wholly unproductive in the hands of the owner. This is in some measure true. When a bill of exchange comes into the hands of a person not in business, or whose business at that time happens to be slack, he generally keeps it till it becomes due, having no particular motive to make purchases with it, and being well satisfied that so much of his capital should be yielding interest without trouble to himself. But the bills drawn for the purposes of speculation are drawn in order to make purchases; and pass into the hands of the dealers in those articles which are the objects of speculation. With them, of course, business is very brisk, and they are very active in extending it. Far from keeping a bill in their hands for the sake of the interest at such a period, they are more likely, besides paying away the bills they receive, to draw additional bills of their own, for the purpose of increasing their available capital.
[* ]Much has been said on the subject of the peculiar evils which are supposed to have arisen from the loans (to the extent of 1,400,000l.) which the Bank came to the resolution of making upon mortgage. That such loans were utterly inconsistent with all sound principles of banking, on account of the virtual inconvertibility of the security, we admit: but these loans could not affect the money market in a different manner from any other loans. The table in the text has shewn, that when the Bank made these advances on mortgage, its loans to individuals were less, discounts and mortgage taken together, than they were when it made its loans solely by way of discount: notwithstanding the mortgages, therefore, its operation upon the rate of interest, must have been, not to produce the fall, but to check it. In point of fact, the Bank resorted to the measure of lending on mortgage, only because it could get no bills to discount, its rate of discount being higher than the market-rate.
[† ]This dependence of the rate of interest upon the rate of profit, gives the measure of the extent to which an increase of loans, even when uncalled for by any increase of borrowers, can depress the rate of interest. Of the class of lenders there are always some, who at the existing rate of interest would rather lend their capital than embark in business themselves, but who, on the slightest reduction, would cease to lend, and withdraw their funds to another investment. Capital is thus withdrawn from the money-market, to an amount equal to that of the additional loans, and then things are as they were before. This answers the general argument against our paper currency, founded on its supposed tendency to cause fluctuations in the rate of interest. In the text we have contented ourselves with analyzing the particular case on which the supporters of that argument rely.
[* ]We exclude the year 1793, which, if taken into the account, would render the average of the whole period far more favourable to our conjecture than it now appears. But we are aware that the very high price of the public securities in that year, was owing to peculiar causes not connected with the general rate of profits on capital.
[[*] ]Parliamentary Review for 1825. London: Longman, Rees, Orme, Brown, and Green, 1826.
[* ]The Arbroath Banking Company, the Perth Banking Company, the Dundee Commercial Bank, the Aberdeen Town and Country Bank, the Commercial Banking Company of Scotland, and the National Bank of Scotland.
[* ][Considerations,] p. 62n.
[† ]Ante [Parliamentary History for 1826. London: Longman, Rees, Orme, Brown, and Green, 1826], p. 320.
[‡ ]Ante [ibid.], p. 236.
[* ]Ante [Parliamentary History for 1826], p. 175.
[* ]See Mr. Hudson Gurney’s invective against the Bullion Committee (ante [Parliamentary History for 1826], p. 218). See also the speech of Mr. Thomas Wilson (ante [ibid.], p. 275). “As to the doctrine,” says this gentleman, “of limiting discounts, in order to force up the exchanges, he regarded it as one of the absurdities of the day.” It is a fact, pregnant with meaning, that a representative of this stamp should have sat in two parliaments for the city of London.
[[*] ]Scott, Walter. Thoughts on the Proposed Change of Currency. Edinburgh: Blackwood, 1826.
[* ]Ante [Parliamentary History for 1826], pp. 313-14.
[† ]Mr. Ald. Heygate, ante [ibid.], p. 236.
[‡ ]Ante [ibid.], p. 218.
[* ]Ante [Parliamentary History for 1826], pp. 225-6.
[† ][Ibid.], p. 227.
[‡ ][Ibid.], p. 228.
[* ]Sir Henry Parnell was this exception. He said a few words ([ibid.] p. 236) which were characterized, like most of that gentleman’s observations, by good sense; but he did not enter at any length into the subject. He said enough, however, to prove that he understood it. On questions of this kind he is generally better informed than almost any other person in the house.
[† ]Ante [ibid.], p. 202.
[* ][Parliamentary History for 1826], p. 214.
[* ]Ante [ibid.], p. 256.
[* ]Ante [Parliamentary History for 1826], p. 259.
[[*] ]Ibid., p. 320.
[* ]Ante [ibid.], pp. 319-21