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.

Remedy for the Sensitiveness of the Money Market.

The present state of things in England is not to be cured by any legislation. No government can save those from trouble who will make unlimited transactions in gold, without a sure prospect of finding the gold when wanted. It is absurd to suppose that any single establishment like the Bank of England, itself becoming hardly more important than some of the great city banks, can prop up the whole fabric of English commerce.

The only measure which can restore stability to the London market, or prevent it from becoming more and more sensitive, is to secure by some means the existence of more satisfactory cash reserves, either in actual coin, or in Bank of England notes, representing deposits of coin in the Bank vaults. It would be of comparatively little use, however, for some banks to become more prudent and self-denying, while others are allowed to stretch their resources to the utmost possible point, and outbid the more prudent banks in the rates of dividend they can pay. Combined action, therefore, seems requisite, somewhat in the manner suggested by Mr. Bagehot, as regards the city bankers.

As the Bank of England pays no interest upon the eight millions which it on the average of the last four years holds as the deposits of the London bankers, there seems to be no sufficient reason why the Bank should be allowed to make a profit out of so large a sum. If held by a committee of the depositing banks it would be equally safe, almost equally available, and might, moreover, by the investment of a portion in government stock, yield a profit to the depositors. It may be asked, Why not leave each bank to hold its own reserve in its own vaults? But there would then be no security against some banks running their reserves dangerously low, and trusting to extrinsic aid in times of difficulty. One objection which I should make to the scheme as put forth is, that government stock should not be allowed to form any part of the ultimate reserve. When loanable capital is very scarce, such stock can only be converted into actual bullion by forced sales which depreciate the funds, shock public confidence, and drain away money from those who would in some other channel have employed it in the money market. Unless government stocks be sent abroad, their sale cannot possibly increase the stock of gold in the country. A cash reserve ought to be composed of cash, and although it may be very convenient to bankers to use this word in a loose and ambiguous manner, it ought not to mean, in speaking of the ultimate reserves of the country, anything but gold coin or bullion, or warrants, actually issued against coin or bullion, on the deposit system previously considered.

It has been pointed out, moreover, in an able article in the Bankers' Magazine for February, 1875, that the proposed scheme would be very insufficient if carried out merely by a narrow circle of city bankers. The association should include, in one way or another, all the more important banks in the three kingdoms. The vast trade of the country cannot be placed upon a sound basis until the force of public opinion among bankers imposes upon each member the necessity of holding a cash reserve bearing a fair proportion to the liabilities incurred. It matters little who holds the reserve, provided it actually does exist in the form of metal, and is not evaporated away by being placed at call, or deposited with other banks which make free use of it. In the absence of some common action among bankers, it is certain that the sensitiveness of the money market will increase, and it is probable that commercial crises will from time to time recur, even exceeding in their violence and disastrous consequences those whose history we know too well.

Chapter XXV

A Tabular Standard of Value

At the outset it was observed that money, besides serving as a common denominator of value, and as a medium to facilitate exchange, was usually employed likewise as the standard of value, in terms of which contracts extending over long series of years are expressed. In letting land on long or perpetual leases, in lending money to governments, corporations, and railway companies, it is the general practice to make the interest and capital repayable in legal tender gold money. But there is abundance of evidence to prove that the value of gold has undergone extensive changes. Between 1789 and 1809, it fell in the ratio of 100 to 54, or by 46 per cent., as I have shown in a paper on the Variation of Prices since 1782, read to the London Statistical Society in June, 1865. From 1809 to 1849 it rose again in the extraordinary ratio of 100 to 245, or by 145 per cent., rendering government annuities and all fixed payments, extending over this period, almost two and a half times as valuable as they were in 1809. Since 1849 the value of gold has again fallen to the extent of at least 20 per cent.; and a careful study of the fluctuations of prices, as shown either in the Annual Reviews of Trade of the Economist newspaper, or in the paper referred to above, shows that fluctuations of from 10 to 25 per cent. occur in every credit cycle.