The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface
• Chapter I: Barter
• Want of Coincidence In Barter.
• Want of a Measure of Value.
• Want of Means of Subdivision.
• Chapter II: Exchange
• Utility and Value Are Not Intrinsic.
• Value Expresses Patio of Exchange.
• Chapter III: The Functions of Money
• A Standard of Value.
• A Store of Value.
• Separation of Functions.
• Chapter IV: Early History of Money
• Currency In the Hunting State.
• Currency In the Pastoral State.
• Articles of Ornament As Currency.
• Currency In the Agricultural State.
• Manufactured and Miscellaneous Articles As Currency.
• Chapter V: Qualities of the Material of Money
• 1. Utility and Value.
• 2. Portability.
• 3. Indestructibility.
• 4. Homogeneity.
• 5. Divisibility.
• 6. Stability of Value.
• 7. Cognizability.
• Chapter VI: The Metals As Money
• Iron.
• Lead.
• Tin.
• Copper.
• Silver.
• Gold.
• Platinum.
• Nickel.
• Other Metals.
• Alloys of Metals.
• Chapter VII: Coins
• The Invention of Coining.
• What Is a Coin?
• Various Forms of Coins.
• The Best Form For Coins.
• Coins As Works of Art.
• Historical Coins.
• The Royal Attribute of Coining.
• Chapter VIII: The Principles of Circulation
• The Standard Unit of Value.
• Coin, Money of Account, and Unit of Value.
• Standard and Token Money.
• Metallic and Nominal Values of Coins.
• Legal Tender.
• The Force of Habit In the Circulation of Money.
• Gresham's Law.
• Extension of Gresham's Law.
• Chapter IX: Systems of Metallic Money
• Currency By Weight.
• Unrestricted Currency By Tale.
• Single Legal Tender System.
• Multiple Legal Tender System.
• Composite Legal Tender.
• Chapter X: The English System of Metallic Currency
• English Gold Coin.
• English Silver Coin.
• English Bronze Coinage.
• Deficiency of Weight of the English Gold Coin.
• Withdrawal of Light Gold Coin.
• Supply of Gold Coin.
• Supply of Silver Coin.
• The Royal Mint.
• Chapter XI: Fractional Currency
• Billon Coin.
• Composite Coin.
• Bronze Coin.
• English Bronze Coin.
• Weight of the Currency.
• Nickel, Manganese, Aluminium, and Other Metals and Alloys.
• Chapter XII: The Battle of the Standards
• The Double Standard.
• Compensatory Action.
• The Demonetization of Silver.
• Disadvantages of the Double Standard.
• The Monetary Systems of the World.
• Chapter XIII: Technical Matters Relating to Coinage
• The Alloys In Coin.
• The Size of Coins.
• The Wear of Coin.
• Methods of Counting Coins.
• Cost of the Metallic Currency.
• Chapter XIV: International Money
• Advantages of International Money.
• Disadvantages of International Money.
• Conflict of Monetary Systems.
• International Monetary Negotiations.
• Decimalization of English Money.
• The Future American Dollar.
• German Monetary Reform.
• Systems of Fractional Money.
• Final Selection of the Unit of International Money.
• Chapter XV: The Mechanism of Exchange
• Progressive Development of the Methods of Exchange.
• Representative Money.
• Cheque and Clearing System.
• Chapter XVI: Representative Money
• Early History of Representative Money.
• Reasons For the Use of Representative Money.
• Inconvenience of Metallic Money.
• The Weight of Currency.
• Saving of Interest.
• Chapter XVII: The Nature and Varieties of Promissory Notes
• Specific Deposit Warrant.
• General Deposit Warrant.
• Difference Between a Special and a General Promise.
• Pecuniary Promissory Notes.
• Principles of the Circulation of Representative Money.
• Chapter XVIII: Methods of Regulating a Paper Currency
• 1. Simple Deposit.
• 2. Partial Deposit.
• 3. Minimum Reserve.
• 4. Proportional Reserve.
• 5. Maximum Issue.
• 6. Elastic Limit.
• 7. Documentary Reserve.
• 8. Real Property Reserve.
• 9. Regulation By the Foreign Exchanges.
• 10. Free Issue System.
• 11. The Gold Par Method.
• 12. Convertibility By Revenue Payments.
• 13. Deferred Convertibility.
• 14. Inconvertible Paper Money.
• Over Issue of Paper Money.
• Want of Elasticity of Paper Money.
• Chapter XIX: Credit Documents
• Measurement of Credit.
• Bank-notes.
• Cheques.
• Bills of Exchange.
• Interest-bearing Documents.
• Definition of Money.
• Chapter XX: Book Credit and the Banking System
• Single Bank System.
• System of Two Banks.
• Complex Bank System.
• Branch Bank System.
• Bank Agency System.
• London Agency System.
• Country Clearing System.
• Chapter XXI: The Clearing-house System
• Transaction of Business At the London Clearing House.
• Manchester Clearing House.
• New York Clearing House.
• Extension of the Clearing System.
• Advantages of the Cheque and Clearing System.
• Proportion of Cash Payments.
• Cases to Which the Clearing System Is Inapplicable.
• Chapter XXII: The Cheque Bank
• Relation of the Cheque Bank to Other Banks.
• The Cheque Bank As a Monetary Agent.
• Payment of Wages By Cheques.
• The Cheque Bank As a Savings Bank.
• Results of the Cheque Bank System.
• Chapter XXIII: Foreign Bills of Exchange
• Origin and Nature of Bills of Exchange.
• Trade In Foreign Bills.
• The World's Clearing House.
• Centralization of Financial Transactions In London.
• Representation of Foreign Bankers In London.
• Chapter XXIV: The Bank of England and the Money Market
• Expansion of Trade.
• Competition of Bankers.
• The Bank Charter Act of 1844.
• The Free-banking School.
• Possibility of Over-issue.
• The Right of Coining Bank Notes.
• Scotch and English Banking.
• Cash Reserves of Bankers.
• Remedy For the Sensitiveness of the Money Market.
• Chapter XXV: A Tabular Standard of Value
• Corn Rents.
• A Multiple Legal Tender.
• Lowe's Proposed Table of Reference.
• Poulett Scrope's Tabular Standard of Value.
• Difficulties of the Scheme.
• Chapter XXVI: The Quantity of Money Needed By a Nation
• Quantity of Work to Be Done By Money.
• Efficiency of the Currency.
• Effects of the Cheque and Clearing System.
• Conclusion.

Principles of the Circulation of Representative Money.

In the last two sections of Chapter VIII. (pp. 80-85), we found that by analysing the motives of individuals in receiving, holding, or paying away metallic money, we could arrive at certain laws of circulation, which were amply confirmed by experience. It was also pointed out that the same laws might be extended mutatis mutandis, to the mixed circulation of metallic and paper money. Habit is almost as powerful in supporting the use of representative money as of real metallic coins. Persons who have long been accustomed to pay away certain pieces of paper without loss, will continue to regard them as good currency until some rude shock is given to their confidence. This may go so far that a dirty bit of paper, containing a promise to pay a sovereign, will be actually preferred to the beautiful gold coils which it promises. The currency of Scotland is a standing proof of this assertion; and the same may be said of Norway, where, until 1874, no gold at all was in circulation, and notes for one, five, or ten dollars formed the principal part of the currency.

There is one all-important point in which representative differs from metallic money; it will not circulate beyond the boundaries of the district or country where it is legally current or habitually employed. No doubt Bank of England notes are frequently carried abroad by travellers, and are in most places readily exchanged for the money of the locality; but they never circulate, and are treated as bills upon London, forming a convenient mode of remittance. They do not satisfy a debt from this to another country, but rather create it, an English bank-note, in the hands of a Paris banker, representing a claim which he has upon the Bank of England. The only money which can really be exported in payment of debts due to foreign merchants is standard metallic money. Hence paper money has exactly the same capacity for driving out standard money that light or depreciated coins possess.

In the case of inconvertible notes this has always been most obvious. As the quantity of such notes issued progressively increases, as almost always happens, coin must be exported, otherwise the currency would become excessive. But when most of the coin is gone, need of it begins to be felt for making foreign payments, and then the value of the paper falls below that of the coin which it is supposed to correspond to. Many persons begin to hoard the coins for the sake of anticipated profit, and nothing but paper is soon to be found in circulation. This effect of paper in driving coin out of use has been manifested over and over again, as in the time of the assignats of the French Revolution, the suspension of specie payments at the Bank of England between 1797 and 1819, and the late American war. One of the most recent and striking instances is to be found in Italy, where large quantities of beautiful gold and silver coins had been struck in the years 1862 to 1865, but all disappeared very rapidly from circulation as soon as the cours forcé of paper money was proclaimed.

Chapter XVIII

Methods of Regulating a Paper Currency

We may now proceed with advantage to consider the various methods on which the issue of paper money may be conducted. This question is perhaps the most vexed and debatable one in the whole sphere of political economy; but, by carefully adhering to the analysis of facts, we may perhaps get a view of the subject free from the great perplexities in which it is commonly involved. The elementary principles of the subject are not of a complex character; and if we hold tenaciously to those principles, we may perhaps be saved from that dangerous kind of intellectual vertigo which often attacks writers on the currency.

The state may either take the issue of representative money into its own hands, as it takes the coining of money, or it may allow private individuals, or semi-public companies and corporations, to undertake the work under more or less strict legislative control. We will afterwards briefly consider the relative advantages of government and private issues, but in either case we may lay down the following series of methods according to which the amount of issue may be regulated, and the performance of the promises guaranteed.

1. The Simple Deposit Method. The issuer of promissory notes may be obliged to keep a stock of coin and bullion constantly on hand, equal in amount to the aggregate of the uncancelled notes, each of which, being instantly paid on presentation, will induce a corresponding decrease of the reserve.

2. The Partial Deposit Method. Instead of being obliged to keep the whole of the precious metals deposited in his vaults, the issuer may be able to invest a fixed amount in government funds, or other safe profitable securities.

3. The Minimum Reserve Method. The issuer may be bound to have on hand under all circumstances a fixed minimum amount of coin and bullion.

4. The Proportional Reserve Method. 2 The reserve may be made to vary with the amount of standing notes, being, say, at least one-third or one-fourth of the total.

5. The Maximum Issue Method. Permission may be given to issue notes not exceeding in the aggregate a fixed amount, prohibitory penalties imposed upon any breach of this restriction.

6. The Elastic Limit Method. A limit may be assigned to the aggregate amount of notes, as in the last method, but the penalties on the excessive issue may be intentionally made so light, that the issuer will under some circumstances prefer to pay the penalty rather than restrict his issues.

7. The Documentary Reserve Method. The reserve of property which the issuer is required to keep may consist not of gold or silver coin or bullion, but of government funds, bonds, shares, or other documentary securities.

8. The Real Property Reserve Method. Instead of merely documentary property, the issuer may be allowed to treat various property, such as land, houses, ships, railway shares, etc., as his reserve of wealth to meet engagements.

9. The Foreign Exchanges Method. Some important bank may be allowed to issue convertible notes on the understanding that it will not increase the amount in circulation so long as the foreign exchanges are against the country, and render the export of specie profitable.

10. The Free Issue Method. The business of issuing promissory notes may be left open to the free competition of all individuals, free from any restrictions or conditions, except such laws as apply to all commercial contracts and promises.

11. The Gold Par Method. Paper money may be issued, bearing the appearance of promissory notes, but inconvertible into coin. The issue being restricted as long as any premium on gold is apparent, the paper money may be thus maintained equal in value to the coin which it nominally represents.

12. The Revenue Payments Method. Inconvertible paper money may be freely issued, but an attempt may be made to keep up its value by receiving it in place of coin in the payment of taxes.

13. The Deferred Convertibility Method. Notes may be issued promising to pay metallic money at some future day, either definitely fixed or dependent upon political or other contingent events.

14. The Paper Money Method. Lastly, those who coin apparent promissory notes may be entirely absolved from the performance of their promises, so that the notes circulate by force of habit, by the command of the sovereign, or in consequence of the absence of any other medium of exchange.

Although I have, in the above statement, enumerated no less than fourteen distinct methods of managing the issue of paper currency, it is by no means certain that other methods have not been employed from time to time. There may be, in fact, an almost unlimited number of devices for securing the performance of promises, or for rendering the performance unnecessary. Moreover, these methods may be combined together in almost unlimited variety. The reserve may be required to be partially in the form of specie, and partially in documentary securities, or real property. A banker may be allowed to issue a certain fixed amount of notes without any condition as to reserves, and to issue further notes on the Deposit Method.

It would obviously require a very large volume to enter at all in an adequate manner upon a description of these methods, their relative advantages or defects, and the ways in which they have been combined and carried into effect at different times and places. I must therefore confine myself in this small book to a very concise discussion of this most extensive subject.