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Source: Editor's Introduction to James Mill, Selected
Economic Writings, ed.
Donald Winch (Edinburgh: Oliver Boyd for the Scottish Economic Society, 1966).
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of the copyright holders, The Scottish Economic Society.
ECONOMIC WRITINGS: 1804-1808
James Mill is known among economists chiefly for his rôle as midwife in the birth of Ricardo's Principles of Political Economy (1817), and for his efforts as a Ricardian propagandist. But Mill did not meet Ricardo until 1808, by which time he had already written two pamphlets and a number of review articles on economic questions, while Ricardo had hardly begun his career as an economist. Apart from the two pamphlets and the extract from one of Mill's articles which are reprinted and introduced below, much of Mill's early economic journalism suffers from the fact that he relied exclusively on such work to support himself. Nevertheless, it is of considerable value to those interested in the development of economic thought in the neglected period between Adam Smith and Ricardo. Mill's original contact with the science of political economy probably came when he attended Dugald Stewart's lectures while a student at Edinburgh. Stewart had studied under Adam Smith, and lectured on political economy in a Smithian vein, though with some physiocratic deviations. James Mill, therefore, has some claim to be considered as a link, albeit indirect, between the founder of classical economics and Ricardo, its next great exponent.
Mill possessed in full measure what the philosophers of the eighteenth century referred to as l'ésprit de système; in all spheres of his considerable intellectual activity he appears as the disciple and determined partisan. Adam Smith was the dominant influence on Mill's work at this time, and all of his early economic writings take the form of defences of Smith's doctrinal and policy views. Although this is evident in the works reprinted here, in some respects their chief interest lies in the hints they provide of future developments, rather than in their Smithian basis. Mill spoke of Smith at this time as ‘that matchless political philosopher’, comparing him with Copernicus and Newton to the detriment of his Ptolemaic critics. This feature of Mill's early writings can be illustrated by the following comparison which he made between Smith and Sir James Steuart; it also provides insight into the characteristics which Mill prized in works of political economy.
Sir James surveyed the current systems with an eye more than ordinarily enlightened. It perceived that they were not sufficient. But it did not enable him to see through the subject, and to find out what was wanting to the establishment of satisfactory doctrines. He rather aimed at improvements than made any. His mind was not of that first order which lays hold of general relations, and by happy classifications is enabled to disentangle confusion, and ascend to simple and comprehensive axioms. To Sir James's eye the subject presented itself as a rude chaos; and he found himself unable to reduce it to light and order. He laboured zealously, but his labours came to nothing. He explained some old errors, and established some new truths. But his opinions have no general bearing. The mind is bewildered in following Sir James's speculations. The general principles of Political Economy seem to become more obscure in his hands than they were before. Dr Smith was accustomed to say that he understood Sir James Steuart's system better from his conversation than from his volumes; and at this we do not wonder. For, in truth, there is no combination of principles in his volumes which can be called a system at all. He adheres to the old commercial system; that is to say, the general strain of his reasonings and observations is more in conformity with this than with any other; yet he departs from it in many important doctrines, without perceiving whither these departures lead.
The labours of Dr Smith were of a different kind. He not only perceived that the preceding systems were deficient, but he perceived wherein they were deficient. He looked through the confusion of the subject; and after removing the unfounded theories of his predecessors, established with the evidence of demonstration a number of propositions, which truly deserve the name of principles. Sir James Steuart's book added very little to the knowledge of Political Economy. He had a confused perception of the insufficiency of what had been done before him; he discovered here and there an error, and added here and there an ingenious thought of his own. But Dr Smith reared the study to the dignity of a science. He explained the real sources of wealth, which till his time had been so grossly misunderstood; and conferred as great a benefit upon Political Economy, as was conferred on Astronomy by those philosophers who first confuted the perplexed doctrine of the cycles and epicycles, and established the simple principles of the Copernican system.
Each of the works reprinted here was undertaken as a contribution to contemporary discussions of issues raised or connected in one way or another with government policy during the early phase of the Napoleonic Wars. The first work deals with the problem of grain scarcity and the policy of the government towards domestic agriculture and the importation of foreign foodstuffs. The second concerns the gains from international trade and Britain's commercial policy in the light of Napoleon's economic blockade: in dealing with this, Mill was drawn into wider questions, such as the causes of economic growth and the effect of government expenditure. In the last work belonging to this period we see Mill's contribution to the debate on monetary questions initiated by the restriction on cash payments during the war.
1. An Essay on the Impolicy of a Bounty on the Exportation of Grain (1804)
This was Mill's first separate work and has been described by D. G. Barnes, the author of the standard history of the Corn Laws, as ‘probably the ablest pamphlet against the bounty which was produced during the entire controversy over the merits of that system’. It appeared originally in the Literary Journal, Oct. 1804, as a review of a pamphlet by James Anderson ; and was expanded and published anonymously in the same year.
The background to Mill's pamphlet, like the Corn Laws themselves, is rather complex. One sign of the structural changes in the British economy associated with the industrial revolution was that towards the end of the eighteenth century Britain became a net importer of corn in contrast to her net exporter position at the beginning of the century. Although domestic agriculture had expanded by means of enclosure, cultivation of waste land, and improvement of farming methods, the expansion was not sufficient to keep pace with the growth of population and of the manufacturing sector. Together with this secular change, and to some extent confused with it, were periodic crises brought on by poor harvests and exacerbated by the hindrance to foreign supplies during the Napoleonic Wars. In Dec. 1799 a crisis of this kind led to a panic rise in the price of wheat. Prices continued to rise throughout the following year after another bad harvest, reaching a peak of 156s. per quarter in Mar. 1801.
It was during this period of scarcity that James Anderson's pamphlet appeared. Anderson was a strong supporter of schemes to protect and encourage domestic agriculture, and held that a return to the export bounty system would solve the problems of recurrent scarcity and dependence on foreign supplies. He supported this opinion by reference to what he considered to be past experience. When the bounty system had been in full operation between 1689 and 1773, agriculture had flourished, prices had fallen, and Britain had been a net exporter of grain products. After the Corn Law of 1773, which was regarded by friends and opponents of agricultural protection alike as marking a change towards diminished protection, agriculture had suffered, exports had fallen, and prices had risen. The change in Britain's status from exporter to importer of corn was due entirely to legislation inspired by ‘speculative’ opinions; and here Anderson singled out Adam Smith for criticism, since Smith had attacked the bounty system and welcomed the law of 1773.
The acute scarcity abated later in 1801, and for the next three years prices continued to fall, reaching 50s. per quarter by the spring of 1804, just above the pre-war level. This naturally aroused concern among land-owners. A Select Committee was appointed in May 1804 to reconsider the Corn Law of 1791, which had given an increased measure of protection at the time, but was now thought not to guarantee a ‘fair and reasonable price’ to the farmer. As a result of the Committee's findings a Bill was passed later in the year which conceded higher protection and endorsed the bounty principle. The measure proved to be unnecessary. Between 1804 and 1813, poor crops, and after 1807, the operation of the Continental System, kept prices above the level specified. Its true significance has been explained by Barnes as follows:
In reality the Act of 1804 was merely a link between that of 1791, which marked the first decided use of political power by the landed interest to secure class legislation, and that of 1815, which marked the most extreme use of this power.
It was this Act and the reasoning of its supporters that Mill set out to attack. Mill upheld Smith's position with regard to the bounty system, but added a number of touches of his own. He believed that Britain had become a net importer of grain as a result of the growth of manufacturing and population relative to agriculture; and that the bounty had nothing to do with this. He went on to advance the proposition, based on the Malthusian principle that population and the demand for corn always rise to a level determined by subsistence, that a bounty is never required to ensure a ‘sufficient’ market for agricultural products. It is an elementary principle of society ‘that a sufficient market is always provided at home, for all the corn which the land with the utmost exertions of the farmer can ever be made to produce; that the demand will always be proportioned to the supply, however great that supply may be; and that a foreign market can never be wanted for any quantity of corn that can be regularly produced’. In his later pamphlet, Commerce Defended, a similar conclusion regarding foreign markets, derived from Say's Law, was applied to all goods.
The bounty was unnecessary and could have no effect on agricultural production because although it raises the home price of corn, it does not raise the farmers' profits, except perhaps temporarily. Competition among farmers and the ability of the landlord to raise his rent combine to bring profits down to the ‘lowest consistent with the nature of the business’. Adam Smith in his criticism of the bounty had said that with higher prices the farmer pays ‘his landlord a money rent proportionable to the rise in the money price of his produce’ ; but had stressed the fact that neither landlord nor farmer would be better off in real terms owing to the effect of a rise in the price of corn on the price of all other goods. Mill also makes the point that since ‘the money price of corn regulates the money price of everything else’, the effect of the bounty is to lower the value of money. But it is possible to detect the germ of the later Ricardian attack on the Corn Laws in Mill's view that by enabling land-owners to charge higher rents, the ‘sole effect’ of the bounty ‘is to put money into the pockets of the proprietors of land, by taking it out of the pockets of all other classes of the people’. Nevertheless, in the concluding chapters of his pamphlet, where he puts forward a case for free exportation and importation of corn, Mill is closer in spirit to the world of Adam Smith than to Ricardo and the debate on the Corn Laws as it was renewed in 1815. He concerns himself mainly with the benefits of free trade as a device for overcoming scarcity and minimising fluctuations in the price of corn, rather than with the effect of free trade on the division of the total product between rent, profits and wages.
2. Commerce Defended (1807)
Napoleon's campaign of economic warfare against Britain was initiated by the Berlin and Milan Decrees of 1806 and 1807 which prohibited all trade with Britain. In retaliation, Orders in Council were issued in 1807 confirming the blockade already maintained by the British navy on the Continental coast, and placing restrictions on all neutral ships trading with the Continent. Before writing Commerce Defended, the treatment of neutral ships had received Mill's attention in the Literary Journal. The question arose first in connection with the attempt to reconstitute the British colonial system by a series of Orders in Council after the American Revolution. This system was designed to protect British economic and naval interests by maintaining the monopoly of the colonial trade and its carriage. Under conditions of war the system proved difficult to operate without causing hardship to the West Indies, and ad hoc concessions were made which allowed American ships to share in the trade with British colonies. As the war on the economic front spread, a connected question arose as to the treatment that should be given to neutral ships trading with Britain and Europe. Mill consistently upheld the liberal view on this matter as put forward by Adam Smith; he attacked exponents of the old colonial system like Lord Sheffield, and defended the neutral trade against those who held that it was aiding the enemy.
The really important phase of the economic controversy aroused by the Napoleonic blockade opened in 1807 when William Spence published his Britain Independent of Commerce. Under the guise of dealing with the current crisis, Spence set out to show ‘that though Europe and America, Asia and Africa, were to resolve never more to use an article of British manufacture, still this favoured isle has the means within itself, not merely of retaining the high rank which she possesses, but of progressively going on in her career of prosperity and of power’. In the circumstances, it is hardly surprising that this position was eagerly taken up and widely discussed. Spence's pamphlet eventually ran to seven editions, and his views were given wider currency by William Cobbett who reprinted large extracts from the pamphlet in his Political Register. p Spence elicited two important rejoinders, one by Robert Torrens entitled The Economists Refuted and the other by James Mill which is reprinted here.
Spence's pamphlet was one of a number of works published at this time which set out to revive certain notions derived from the physiocrats in opposition to the ‘orthodox’ views of Adam Smith. This does not mean that Spence can be taken as a fair representative of physiocratic ideas since he does not hesitate to abandon them in favour of arguments derived from mercantilist writers, and even Smith himself, where convenient to his case. Spence was nothing if not an eclectic. Mill certainly recognised this. He was willing for polemical purposes to make good use of the inconsistencies in Spence's hotch-potch of doctrines, but he also saw the need to go beyond a simple refutation of physiocracy to answer Spence's case.
Spence begins, at least, as a physiocrat. Agriculture is the real source of a nation's wealth because only in agriculture does labour earn a return which exceeds that required to replace capital and support labour during the production period. This net surplus accrues to the land-owner in the form of rent. Labour employed in manufacturing yields a subsistence-wage together with a ‘normal’ profit for the employer. Any ‘abnormal’ profit must be earned at the expense of other members of society, and this means, ultimately, at the expense of the rent-receiving classes. Under no circumstances, therefore, do manufacturing profits add to the net surplus of the society. But manufactures should not be discouraged: on the contrary, the existence of a manufacturing sector is necessary as a stimulus to the raising of an agricultural surplus. Agriculture and manufacturing ‘are the two chief wheels in the machine which creates national wealth’ ; to set this machine in motion and keep it running smoothly the expenditure of the landowning classes is essential.
This leads Spence on to a criticism of Smith's view that parsimony and accumulation are the foundation of a nation's prosperity. Like Malthus, whose point of view he anticipates, he attacks savings not because they are hoarded, but because they entail a diversion of expenditure towards investment and away from immediate consumption. The fall in consumption expenditure brought about by an increase in investment leads to a decline in national prosperity. Since ‘expenditure not parsimony is the province of the class of land proprietors’, they perform their ‘duty’ best if their expenditure increases progressively. To this end, Spence extols the virtues of all forms of luxury spending. Even expenditure on frivolous luxuries helps to maintain prosperity, though he admitted that it would be more advantageous to a nation's wealth if expenditure were to be concentrated on such durable goods as ‘splendid palaces’.
Land-owners had not always carried out their spending duties to the full, but fortunately the growth of the National Debt had come to the rescue by converting ‘what was destined for capital into consumable revenue’, thus averting the problem of over-accumulation of capital. It is true that the National Debt brought with it a heavy tax burden, but ‘this very oppression is the means of bettering the condition…of the lowest ranks of society’. For these reasons he considered high levels of government expenditure, as during periods of war, to be favourable to prosperity, and agreed with Lauderdale in opposing the setting up of a sinking fund.
It is in this context that Spence's attitude to commerce as a source of wealth must be considered. Wealth is primarily the result of interaction between domestic agriculture and manufacturing; commerce has a minor and dispensable part to play. Commerce is simply an exchange of equivalents; a nation gains nothing apart from ‘conveniences’ from importing because an equivalent outpayment must be made. Profits may be earned by individual importers, but these are gained at the expense of domestic consumers. He does admit that where exports exceed imports, the profits on such excess, being earned at the expense of foreigners, make a positive, if much overrated, contribution to wealth. Here he makes use of an argument borrowed from the mercantilist writers, namely that durable commodities are more valuable than ‘fugitive and evanescent’ goods. Viewed in this light it is obvious that Britain loses by trade.
We supply them with commodities of absolute necessity to comfortable existence, and we receive in return from them such precious articles as tea–which debilitates us, without affording an atom of nourishment: as wine, rum, brandy, which do us the favour of shortening the days of a great proportion of our population. It is the countries we trade with, and not we, that get rich by our commerce.
He admitted though, that any sudden loss of foreign markets could bring temporary distress, and it is perfectly in keeping with Spence's views on government expenditure that he should advocate a programme of public works to deal with such disorders. In the long run, however, he appears to have felt that the best solution would be to divert spending from foreign to home-produced luxuries and necessities.
Mill's reply to Spence begins in earnest in Chapter IV with an attack on the fundamental physiocratic proposition that manufacturing profits, unlike rent, form no part of the net surplus of a society. He maintains that profit is a legitimate return on invested capital resulting from the enhanced productivity of labour when employed by capital, and not merely a transfer income earned at the expense of the consumer. He considered that Spence had fallen into a related fallacy when dealing with the gains derived from international trade. A nation gains from trade by the resultant increase in the ‘productive powers’ of its labour and land. These gains can be measured by the savings in real cost (expressed in physical terms of the wage-good corn) obtained by importing goods which, if produced at home, would cost more than the goods exported in exchange. This is not a statement of the comparative cost doctrine enunciated later by Ricardo; it does not make explicit the idea that importation would involve gain even if the cost of producing the good was higher abroad than at home. Mill's statement is one version of an eighteenth-century rule, of which the comparative cost doctrine was a refinement; but as Professor Viner has pointed out, the comparative cost doctrine ‘adds nothing to [the rule] as a guide for policy’.
Mill moves on to counter Spence's under-consumptionist interpretation of the relationship of capital accumulation, consumption and government expenditure. Commerce Defended supplies an important link in the continuity of ‘orthodox’ macro-economic views between Smith and Ricardo. Mill, making use of ammunition provided by Smith, fires the opening salvo in the battle between those who saw only benefit in the process of capital accumulation, and those who believed that it was possible for accumulation to be ‘excessive’ in some sense: between those who regarded the economy as being self-regulating, and those who considered that some form of intervention might be required to achieve the ‘correct’ level of consumption expenditure and to avoid economic breakdown. Mill versus Spence gives a foretaste of Ricardo versus Malthus.
Mill accepted the growth-oriented interpretation of the wealth of a nation made popular by Smith: that wealth consists of a nation's ‘powers of annual production’ rather than its total accumulated stock of capital. The only part of the total stock of accumulated capital which was important to the growth of annual produce was that destined to support or aid productive labour. Mill does not define the terms productive and unproductive labour; he reformulates Smith's idea in terms of the goods (but not services) consumed or used by the two types of labour. Under unproductive consumption he includes all luxuries (whether consumed by productive or unproductive labour) and the ‘necessaries of life’ consumed by unproductive labour. Productive consumption consists of the machinery, raw materials and wage-goods used by productive labour. The first form of consumption ‘means extinction, actual annihilation of property’ whereas the second ‘means, more property, renovation, and increase of property’. The distinction can be related to the point made earlier about profit: that part of the annual produce which is consumed unproductively is not available for use as capital; it does not add to the productive powers of labour and thereby earn a profit.
This line of reasoning leads on in Chapter VI to a full examination and rebuttal of Spence's case for encouraging unproductive consumption. In the interests of growth, Mill argues, it is essential to increase the volume of productive consumption at the expense of unproductive consumption. Spence's fears concerning excessive capital formation rest on a confusion which Mill sets to rights by invoking Smith's famous doctrine that ‘what is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people’. He takes this doctrine one stage further by asserting that general over-production is impossible. ‘The production of commodities creates, and is the one and universal cause which creates a market for the commodities produced.’ His elaboration of this principle is conducted on the assumption of a barter economy, and under these circumstances it is tautologous: though an excess supply of a particular commodity matched by an excess demand elsewhere can exist, aggregate supply must equal aggregate demand. He obviously intended to imply that the same conclusion applied to a money economy; but since he does not show how the result would be established in such an economy, it is impossible to say whether he held to what is now known as Say's Identity or to Say's Equality, i.e. whether equality between aggregate demand and supply is established regardless of money, assuming money to be simply a medium of exchange, or whether the value of money relative to goods provides the mechanism for equating aggregate demand and supply.
Mill's name is sometimes bracketed with that of J. B. Say as discoverer of this Law of Markets. In the discussions between Ricardo and Malthus on general over-production, the idea ‘that in reference to a nation, supply can never exceed demand’ was spoken of as ‘Mr Mill's’. But in the Preface to his Principles of Political Economy, Ricardo acknowledged Say as the originator of the doctrine. In view of the close friendship between Ricardo and Mill, and Mill's co-operation in producing the Principles, this might seem strange. Mill had in fact read the initial statement of the Law in Say's Traité before writing Commerce Defended, and went out of his way later to acknowledge Say's claims to priority. In a note to his article on ‘Economists’ for the Supplement to the Encyclopaedia Britannica he mentions Commerce Defended and says:
The only part of Mr Mill's pamphlet to which it is of any use at present particularly to refer, is where he proves that a balance necessarily exists between production and consumption; and that no amount of production can ever be without a market; a doctrine of cardinal importance, first illustrated by M. Say in his very able work, entitled Traité d' Economie Politique, but of which the evidence will perhaps be found more clearly deduced in this pamphlet than in any other treatise yet published.
Having shown that Spence's fears concerning the rate of capital accumulation are groundless, Mill attacks the welcome given by Spence to the growth of the National Debt and to Henry Petty's schemes for alienating the sinking fund. Mill's fervour on this issue is due partly to his acceptance of the Smithian view that government expenditure is ‘unproductive’, and partly to his political opinions regarding the burden on the people of current war expenditure.
Perhaps the most surprising fact about Mill's reply to Spence is that he concludes by agreeing with Spence's main conclusion, that the value of commerce to a nation's wealth is much overrated. Foreign trade leads to a better distribution of resources, but owing to the beneficent operation of the Law of Markets, trade is never necessary to guarantee full employment of those resources. He hints that ‘the national prosperity may in some cases even be consulted by abstaining from [foreign trade]’ so as to minimise economic instability. Mill thus moves away from Smith's ‘vent-for-surplus’ view of the gains from trade to take the position later upheld by the Ricardians on this issue.
3. ‘Thomas Smith on Money and Exchange’, Edinburgh Review, Oct. 1808
One of the most important questions discussed in the early 1800's was the state of the currency in the light of the restriction of gold payments introduced by the Bank of England in 1793, and renewed throughout the war. Mill reviewed some of the important contributions to the first stage of the debate between ‘bullionists’ and ‘antibullionists’ in the Literary Journal and the Eclectic Review. But the best statement of his views on monetary matters at this time was made in an article for the Edinburgh Review, part of which is reproduced below.
Mill took a poor view of most of the contemporary writers on the subject of money: so far as he was concerned ‘the doctrine of money…remains as it was left by the great Father of political economy’. Unfortunately, this was one subject on which Adam Smith gave very little guidance; his views could be cited on both sides of the currency debate. Mill's strict adherence to the line laid down by Smith left him sitting on the fence between the opposing parties; it required Ricardo's intervention later to end Mill's indecision. Mill was not in favour of continuing the restriction on gold payments because he felt that it would gradually undermine confidence in paper money. But unlike the bullionist writers he refused to believe that with or without the restriction it was possible for the banks to over-issue paper money in the normal course of their business. According to Adam Smith, a certain quantity of money was required to circulate the annual produce of a nation; any addition to this ‘channel of circulation’ in the form of an increase in paper money would merely lead to the export of the precious metals. Mill followed Smith in believing that the quantity of money in circulation was controlled by the ‘real’ needs of the community. He rejected Thornton's idea, based on the quantity theory of money, that an excess issue would ‘widen’ the channels of circulation by raising prices; the excess would overflow and would not depreciate the currency. Mill's earliest statement of his disagreement with Thornton is given in a review article written in 1804 on the Irish currency problem.
We advance a position which is directly the reverse of his [Thornton]; and we say that prices are very little affected, if they are affected at all, by an increase or diminution of the circulating medium. To see the truth of this position it is necessary to recollect what it is that purchases are in reality made by. Purchases are in fact the exchanges of commodities for one another;…Money is only the instrument by which the exchanges are performed. No man estimates the expenses which he shall be able to make, by the money he possesses; but by the valuable commodities he has to dispose of…It is very well established that it is the demand for commodities which determines their price. If the demand increases price rises; if it diminish prices fall. If then we would ascertain whether an increase in the circulating medium produce a rise of prices, we have only to examine what effect it is capable of producing upon the demand for commodities. The effect we think it will clearly appear, is very little.
On the basis of this simple argument, Mill concluded:
…that currency of a country can never be rendered excessive by the issues of banks; that currency can never sustain depreciation by the magnitude of these issues; and that the unfavourable state of exchange in Ireland, the high price of bullion, and the premium on guineas must be owing to something different from the paper issued by the bank of Ireland.
The ‘something different’ was, he conjectured, political and social disorder.
This was basically the position which Mill developed in his Edinburgh Review article. Malthus, a moderate bullionist, thought highly of Mill's article, but Francis Horner considered that Mill was guilty of ‘deplorable heresies’ and begged Jeffrey not to allow Mill to review the Report of the Bullion Committee. The work reviewed by Mill was Thomas Smith's Essay on the Theory of Money and Exchange (1807). Smith was an anti-bullionist, and as part of his attack on those whom he regarded as being unduly impressed by the virtues of the precious metals as standards of value, he advanced the idea of regulating the value of currency by recourse to an ‘abstract standard’ to be determined by convention. After a good deal of rather pretentious philosophical discourse on the nature of definitions and abstract terms, Mill accuses Smith of confusing the two functions of money: as a medium of exchange and as a unit of account. Accounting can be carried on in terms of abstract symbols but they are of no use in the market place; even symbols must represent real objects. Mill concludes that ‘nothing can measure value, but value itself’. Money is simply a commodity like any other, chosen for its convenience and relative stability in value.
Mill then proceeds to an examination of the nature and properties of paper money, and it is here that our extract begins. Paper money issued by the banks can only be depreciated by loss of confidence in the issuer. An issue of paper money in excess of that required for the normal ‘channels of circulation’ would merely lead to paper replacing the gold which would now be exported. But paper would not depreciate in terms of gold because the price of gold in world markets must remain on a level, and is unaffected by the loss of gold from one nation. By the same token Mill did not believe that it was possible for paper money to depreciate in terms of commodities. The banks cannot over-issue paper because ‘every man desires to have no more currency than what is absolutely necessary for his immediate payments, that he may continue to make a profit with the larger portion of his funds’. The money drawn by individuals from the banks is thereby automatically regulated because it is ‘never called upon but to answer the natural exigencies of business, and in this way cannot become superabundant’. Moreover, bills issued by the banks are constantly returning to be retired. It is with this version of the ‘real bills’ doctrine that Mill answered those who believed that paper money had been issued to excess since the restriction on cash payments. Although he felt that the dangers to the Bank of England of a drain on gold were exaggerated, he was aware of the difficulties inherent in a situation in which the central issuing bank was also called upon to make advances to the government. The solution was simple: divest the Bank of England of its functions as banker to the government.