The Online Library of Liberty

A project of Liberty Fund, Inc.

• Advertisement.
• Life and Writings of Mr Ricardo
• Principles of Political Economy and Taxation.
• Advertisment to the Third Edition
• Preface
• Chapter I.: On Value
• Chapter II.: On Rent.
• Chapter III.: On the Rent of Mines.
• Chapter IV.: On Natural and Market Price.
• Chapter V.: On Wages.
• Chapter VI.: On Profits.
• Chapter VII.: On Foreign Trade.
• Chapter VIII.: On Taxes.
• Chapter IX.: Taxes On Raw Produce.
• Chapter X.: Taxes On Rent.
• Chapter XI.: Tithes.
• Chapter XII.: Land-tax.
• Chapter XIII.: Taxes On Gold.
• Chapter XIV.: Taxes On Houses.
• Chapter XV.: Taxes On Profits.
• Chapter XVI.: Taxes On Wages.
• Chapter XVII.: Taxes On Other Commodities Than Raw Produce.
• Chapter XVIII.: Poor Rates.
• Chapter XIX.: On Sudden Changes In the Channels of Trade.
• Chapter XX.: Value and Riches, Their Distinctive Properties.
• Chapter XXI.: Effects of Accumulation On Profits and Interest.
• Chapter XXII.: Bounties On Exportation, and Prohibitions of Importation.
• Chapter XXIII.: On Bounties On Productions.
• Chapter XXIV.: Doctrine of Adam Smith Concerning the Rent of Land.
• Chapter XXV.: On Colonial Trade.
• Chapter XXVI.: On Gross and Net Revenue
• Chapter XXVII.: On Currency and Banks
• Chapter XXVIII.: On the Comparative Value of Gold, Corn, and Labour In Rich and Poor Countries.
• Chapter XXIX.: Taxes Paid By the Producer.
• Chapter XXX.: On the Influence of Demand and Supply On Prices.
• Chapter XXXI.: On Machinery
• Chapter XXXII.: Mr Malthus's Opinions On Rent.
• The High Price of Bullion a Proof of the Depreciation of Bank Notes.
• High Price of Bullion.
• Appendix.
• Reply to Mr Bosanquet's Practical Observations On the Report of the Bullion Committee.
• Chapter I.: Preliminary Observations—mr Bosanquet's Objections to the Conclusions of the Bullion Committee Briefly Stated.
• Chapter II.: Mr Bosanquet's Alleged Facts, Drawn From the History of the State of Exchange, Considered.
• Chapter III.
• Chapter V.
• Chapter VI.
• Chapter VII.
• Chapter VIII.
• Chapter IX.
• Appendix.
• An Essay On the Influence of a Low Price of Corn On the Profits of Stock
• Proposals For an Economical and Secure Currency; With Observations On the Profits of the Bank of England As They Regard the Public and the Proprietors of Bank Stock.
• On Protection to Agriculture.
• Plan For the Establishment of a National Bank.
• Essay On the Funding System,
• Essay On the Funding System,
• Observations On Parliamentary Reform.
• Speech On the Plan of Voting By Ballot

APPENDIX.

observations on some passages in an article in the edinburgh review, on the depreciation of paper currency; also suggestions for securing to the public a currency as invariable as gold, with a very moderate supply of that metal.

The public having called for a new edition of this pamphlet, I avail myself of the occasion to consider the observations which the Edinburgh Reviewers, in the last number of their publication, have done me the honour to make on some of the passages contained in it. I am induced to do this from the conviction that discussion on every point connected with this important subject will hasten the remedy against the existing abuse, and will tend to secure us against the risk of its recurrence in future.

In the article on the depreciation of money, the Reviewers observe, “The great fault of Mr Ricardo's performance is the partial view which he takes of the causes which operate upon the course of exchange. He attributes,” they say, “a favourable or an unfavourable exchange exclusively to a redundant or deficient currency, and overlooks the varying desires and wants of different societies as an original cause of a temporary excess of imports above exports, or exports above imports.” They then comment on the passage in which I have maintained that a bad harvest will not occasion the export of money, unless money is relatively cheap in the exporting country, and conclude their observations by giving it as their decided opinion, that the exportation of money in the supposed case of a bad harvest, “is not occasioned by it-cheapness. It is not, as Mr Ricardo endeavours to persuade us, the cause of the unfavourable balance instead of the effect. It is not merely a salutary remedy for a redundant currency: but it is owing precisely to the cause mentioned by Mr Thornton—the unwillingness of the creditor nation to receive a great additional quantity of goods not wanted for immediate consumption without being bribed to it by excessive cheapness; and its willingness to receive bullion—the currency of the commercial world—without any such bribe. It is unquestionably true, as stated by Mr Ricardo, that no nation will pay a debt in the precious metals if it can do it cheaper by commodities; but the prices of commodities are liable to great depressions from a glut in the market; whereas the precious metals, on account of their having been constituted by the universal consent of society the general medium of exchange and instrument of commerce, will pay a debt of the largest amount at its nominal estimation, according to the quantity of bullion contained in the respective currencies of the countries in question, and, whatever variations between the quantity of currency and commodities may be stated to take place subsequent to the commencement of these transactions, it cannot be for a moment doubted that the cause of them is to be found in the wants and desires of one of the two nations, and not in any original redundancy or deficiency of currency in either of them.”

They agree with me, “that no nation will pay a debt in the precious metals, if it can do it cheaper by commodities, but the prices of commodities, they say, “are liable to great depressions from a glut-in the market; “of course they must mean in the foreign market, and then the words express the opinion which they are endeavouring to controvert, viz. that when goods cannot be sent out so advantageously as money, money will be exported,—which is another way of saying that money will never be exported, unless it is relatively redundant with commodities, as compared with other countries Yet, immediately after, they contend, that the exportation of the “precious metals is the effect of a balance of trade,∗ originating in causes which may exist without any relation whatever to redundancy or deficiency of currency.” These opinions appear to me directly contradictory. If, however, the precious metals can be exported from a country in exchange for commodities, although they should be as dear in the exporting as in the importing country, what are the effects which will follow from such improvident exportation?

“A comparative deficiency in one country, and redundancy in the other,” say the Reviewers, p. 343, “and this state of things could not fail to have a speedy effect in changing the direction of the balance of payments, and in restoring that equilibrium of the precious metals, which had been for a time disturbed by the naturally unequal wants and necessities of the countries which trade with each other.” Now it would have been well if the Reviewers had told us at what point this re-action would commence,—as at the first view it appears that the same law which will permit money to be exported from a country, when it is no cheaper than in the importing country, may also allow it to be exported when it is actually dearer. It is self-interest which regulates all the speculations of trade, and where that can be clearly and satisfactorily ascertained, we should not know where to stop if we admitted any other rule of action. They should have explained to us therefore, why, if the demand for the commodity imported should continue, the country importing might not be entirely exhausted of its coin and bullion. What is under such circumstances to check the exportation of the currency? The Reviewers say, because “a country with a diminished quantity of bullion would evidently soon be limited in its powers of paying with the precious metals.” Why soon? Is it not admitted “that excess and deficiency of currency are only relative terms; that the circulation of a country can never be superabundant,” (and therefore can never be deficient), “except in relation to other countries.” Does it not follow from these admissions, that if the balance of trade may become unfavourable to a country, though its currency be not relatively superabundant, that there is no check against the exportation of its coin, whilst any amount of money remains in circulation; as the diminished sum (by acquiring a new value), will as readily and as effectually make the required payments as the larger sum did before? A succession of bad harvests might, on this principle, drain a country of its money, whatever might be its amount, although it consisted exclusively of the precious metals. The observation that its diminished value in the importing country, and its increasing value in the exporting country, would make it revert again to the old channel, does not answer the objection. When will this happen? and in exchange for what will it be returned? The answer is obvious—for commodities. The ultimate result then of all this exportation and importation of money, is that one country will have imported one commodity in exchange for another, and the coin and bullion will in both countries have regained their natural level. Is it to be contended that these results would not be foreseen, and the expense and trouble attending these needless operations effectually prevented, in a country where capital is abundant, where every possible economy in trade is practised, and where competition is pushed to its utmost limits? Is it conceivable that money should be sent abroad for the purpose merely of rendering it dear in this country and cheap in another, and by such means to insure its return to us?

It is particularly worthy of observation that so deep-rooted is the prejudice which considers coin and bullion as things essentially differing in all their operations from other commodities, that writers greatly enlightened upon the general truth of political economy seldom fail, after having requested their readers to consider money and bullion merely as commodities subject to “the same general principle of supply and demand which are unquestionably the foundation on which the whole superstructure of political economy is built;” to forget this recommendation themselves, and to argue upon the subject of money, and the laws which regulate its export and import, as quite distinct and different from those which regulate the export and import of other commodities. Thus the Reviewers, if they had been speaking of coffee or of sugar would have denied the possibility of those articles being exported from England to the Continent, unless they were dearer there than here. It would have been in vain to have urged to them, that our harvest had been bad, and that we were in want of corn; they would confidently and undeniably have proved that to whatever degree the scarcity of corn might have existed, it would not have been possible for England to send, or for France (for example) to be willing to receive, coffee or sugar in return for corn, whilst coffee or sugar cost more money in England than in France. What! they would have said, do you believe it possible for us to send a parcel of coffee to France to sell there for 100l. when that coffee cost here 105l. —when by sending 100l. of the 105l. we should equally discharge the debt contracted for the imported corn? And, I say, do you believe it possible that we shall agree to send, or France agree to receive (if the transaction is on her account) 100l. in money, when 95l. invested in coffee and exported will be equally valuable as the 100l. when it arrives in France? But coffee is not wanted in France, there is a glut of it;—allowed, but money is wanted still less, and the proof is, that a hundred pounds' worth of coffee will sell for more than a hundred pounds' worth of money. The only proof which we can possess of the relative cheapness of money in two places, is by comparing it with commodities. Commodities measure the value of money in the same manner as money measures the value of commodities. If, then, commodities will purchase more money in England than in France, we may justly say that money is cheaper in England, and that it is exported to find its level, not to destroy it. After comparing the relative value of coffee, sugar, ivory, indigo, and all other exportable commodities in the two markets, if I persist in sending money, what further proof can be required of money being actually the cheapest of all these commodities in the English market, in relation to the foreign markets, and therefore the most profitable to be exported? What further evidence is necessary of the relative redundance and cheapness of money between France and England, than that in France it will purchase more corn, more indigo, more coffee, more sugar, more of every exportable commodity than in England?

I may, indeed, be told that the Reviewer's supposition is not that coffee, sugar, indigo, ivory, &c. &c., are cheaper than money, but that these commodities and money are equally cheap in both countries, that is to say, that one hundred pounds sent in money, or invested in coffee, sugar, indigo, ivory, &c., &c., will be of equal value in France. If the value of all these commodities were so nicely poised, what would determine an exporter to send the one in preference to the other in exchange for corn, in relation to which they are all cheaper in England? If he sends money, and thereby destroys the natural level, we are told by the Reviewers that money would, on account of its increasing quantity in France and its decreasing quantity in England, become cheaper in France than in England, and would be re-imported in exchange for goods, till the level were restored. But, would not the same effects take place if coffee or any of the other commodities were exported, whilst they were equally valuable in relation to money in both countries? Would not the equilibrium between supply and demand be destroyed, and would not the diminished value of coffee, &c., in consequence of their increased quantity in France and their increased value in England, from their diminished quantity, produce their re-importation into England? Any of these commodities might be exported without producing much inconvenience from their enhanced price; whereas money, which circulates all other commodities, and the increase or diminution of which, even in a moderate proportion, raises or falls prices in an extravagant degree, could not be exported without the most serious consequences. Here, then, we see the defective principle of the Reviewers. On my system, however, there would be no difficulty in determining the mode in which, in a case so extremely improbable as that of an equal value in both countries for all commodities, money included, and corn alone excepted, the returns would be made so as to preserve the relative amount and the relative value of their respective currencies.

If the circulating medium of England consisted wholly of the precious metals, and were a fiftieth part of the value of the commodities which it circulated, the whole amount of money which would, under the circumstances supposed, be exported in exchange for corn, would be a fiftieth part of the value of such corn: for the rest we should export commodities, and thus would the proportion between money and commodities be equally preserved in both countries. England, in consequence of a bad harvest, would come under the case mentioned at page 263—of a country having been deprived of a part of its commodities, and therefore requiring a diminished amount of circulating medium. The currency, which was before equal to her payments, would now become superabundant, and relatively cheap, in the proportion of one fiftieth part of her diminished production; the exportation of this sum, therefore, would restore the value of her currency to the value of the currencies of other countries. Thus, it appears to be satisfactorily proved, that a bad harvest operates on the exchange in no other way than by causing the currency, which was before at its just level, to become redundant, and thus is the principle that an unfavourable exchange may always be traced to a relatively redundant currency most fully exemplified.

If we can suppose that, after an unfavourable harvest, when England has occasion for an unusual importation of corn, another nation is possessed of a superabundance of that article, “but has no wants for any commodity whatever, “it would unquestionably follow that such nation would not export its corn in exchange for commodities; but neither would it export corn for money, as that is a commodity which no nation ever wants absolutely, but relatively, as is expressly by the Reviewers. The case is, however, impossible, because a nation possessed of every commodity necessary for the consumption and enjoyment of all its inhabitants who have wherewithal to purchase them, will not let the corn which it has over and above what it can consume, rot in its granaries. Whilst the desire of accumulation is not extinguished in the breast of man, he will be desirous to realise the excess of his productions, above his own consumption, into the form of capital. This he can only do by employing, himself, or by loans to others enabling them to employ an additional number of labourers, as it is by labour only that revenue is realised into capital. If his revenue be corn, he will be disposed to exchange it for fuel, meat, butter, cheese, and other commodities in which the wages of labour are usually expended, or, which is the same thing, he will sell his corn for money, pay the wages of his labourers in money, and thereby create a demand for those commodities which may be obtained from other countries in exchange for the superfluous corn. Thus will be reproduced to him articles more valuable, which he may again employ in the same manner, adding to his own riches, and augmenting the which and resources of his country.

No mistake can be greater than to suppose that a nation can ever be without wants for commodities of some sort. It may possess too much of one or more commodities for which it may not find a market at home. It may have more sugar, coffee, tallow, than it can either consume or dispose of, but no country ever possessed a general glut of all commodities. It is evidently impossible. If a country possesses every thing necessary for the maintenance and comfort of man, and these articles be divided in the proportions in which they are usually consumed, they are sure, however abundant, to find a market to take them off. It follows, therefore, that, whilst a country is in possession of a commodity for which there is no demand at home, it will be desirous of exchanging it for other commodities in the proportion in which they are consumed.

No nation grows corn, or any other commodity, with a view to realise its value in money (the case supposed, or involved in the case supposed, by the Reviewers), as this would be the most unporfitable object to which the labour of man could be devoted. Money is precisely that article which, till it is re-exchanged, never adds to the wealth of a country; accordingly we find, that to increase its amount is never the voluntary act of any country any more than it is that of any individual. Money is forced upon them only in consequence of the relatively less value which it possesses in those countries with which they have intercourse.

Whilst a country employs the precious metals for money, and has no mines of its own, it is a conceivable case that it may greatly augment the amount of the productions of its land and labour without adding to its wealth, because at the same time those countries which are in possession of the mines may possibly have obtained so enormous a supply of the precious metals as to have forced an increase of currency on the industrious country, equal in value to the whole of its increased productions. But by so doing the augmented currency, added to that which was before employed, will be of no more real value than the original amount of currency. Thus then will this industrious nation become tributary to those nations which are in possession of the mines, and will carry on a trade in which in gains nothing and loses every thing.

That the exchange is in a constant state of fluctuation with all countries I am not disposed to deny, but it does not generally vary to those limits at which remittances can be more advantageously made by means of bullion than by the purchase of bills. Whilst this is the case, it cannot be disputed that imports are balanced by exports. The varying demands of all countries may be supplied, and the exchanges of all deviate in some degree from par, if the currency of any one of them is either redundant or deficient, as compared with the rest. Suppose England to send goods to Holland, and not to find there any commodities which suit the English market; or, which is the same thing, suppose that we can purchase those commodities cheaper in France. In this case we confine our operation to the sale of goods in Holland, and the purchase of other goods in France. The currency of England is not disturbed by either transaction, as we shall pay France by a bill on Holland, and there will neither be an excess of imports nor of exports. The exchange may, however, be favourable to us with Holland, and unfavourable with France; and will be so, if the account be not balanced by the importation into France of goods from Holland, or from some country indebted to Holland. If there be no such importation, it can arise only from a relative redundancy of the circulation of Holland, as compared with that of France, and in payment of the bill it will suit both those countries that bullion should be transmitted. If the balance be settled by the transmission of goods, the exchange between all the three countries will be at par. If, by bullion, the exchange between Holland and England will be as much above par as that between France and England will be below the par, and the difference will be equal to the expenses attending the passage of bullion from Holland to France. It will make no difference in the result, if every nation of the world were concerned in the transaction. England having bought goods from France and sold goods to Holland, France might have purchased to the same amount from Italy; Italy may have done the same from Russia, Russia from Germany, and Germany within 100,000l. of the same amount from Holland; Germany might require this amount of bullion either to supply a deficient currency, or for the fabrication of plate. All these various transactions would be settled by bills of exchange, with the exception of the 100,000l., which would be either transmitted from an existing redundancy of coin or bullion in Holland, or it would be collected by Holland from the different currencies of Europe. It is not contended, as the Reviewers, infer, “that a bad harvest, or the necessity of paying a subsidy in one country should be immediately and invariably accompanied by an unusual demand for muslins, hardware, and colonial produce,” as the same effects would be produced if the country paying the subsidy, or suffering from a bad harvest, were to import less of other commodities than it had before been accustomed to do.

The Reviewers observe, page 345, “The same kind of error which we have here noticed pervades other parts of Mr Ricardo's pamphlet, particularly the opening of his subject. He seems to think that when once the precious metals have been divided among the different countries of the earth, according to their relative wealth and commerce, that each having, an equal necessity for the quantity actually in use, no temptation would be offered for their importation or exportation, till either a new mine or a new bank was opened: or till some marked change had taken place in their relative prosperity.” And afterwards, at page 361, “We have already adverted to the error (confined, however, principally to Mr Ricardo, and from which the Report is entirely free) of denying the existence of a balance of trade or of payments not connected with some original redundancy or deficiency of currency.” “But there is another point in, which almost all the writers on this side of the question concur, where, notwithstanding, we cannot agree with them, and feel more inclined to the mercantile view of the subject. Though they acknowledge that bullion occasionally passes from one country to another, from causes connected with the exchange, yet they represent these transactions as quite inconsiderable in degree. Mr Huskisson observes, ‘that the operations in the trade of bullion originate almost entirely in the fresh supplies which are yearly poured in from the mines of the New World, and are chiefly confined to the distribution of those supplies through the different parts of Europe. If this supply were to cease altogether, the dealings in gold and silver, as objects of foreign trade, would be very few, and those of short duration.”

“Mr Ricardo, in his reply to Mr Bosanquet, refers to this passage with particular approbation.” Now, I am at a loss to discover in what this opinion of Mr Huskisson differs from that which I had before given, and on which the Reviewers had been commenting.

The passages are in substance precisely the same, and must stand or fall together. If “we acknowledge that bullion occasionally passes from one country to another from causes connected with the exchange,” we do not acknowledge that it would so pass till the exchange has fallen to such limits as would make the exportation of bullion profitable; and I am of opinion that if it should so fall, it is in consequence of the cheapness and redundance of currency, which “would originate almost entirely in the fresh supplies which are yearly poured in from the mines of the New World.” This, then, is not another point in which the Reviewers differ with me, but the same.

If “it is well known that most States, in their usual relations of commercial intercourse, have an almost constantly favourable exchange with some countries, and an almost constantly unfavourable one with the others,” to what cause can it be ascribed but to that mentioned by Mr Huskisson? “The fresh supplies of bullion which are yearly poured in (and in nearly the same direction) from the mines of the New World. Dr A. Smith does not seem to have been sufficiently aware of the powerful and uniform effects which this stream of bullion had on the foreign exchanges, and he was inclined much to overrate the uses of bullion in carrying on the various roundabout foreign trades which a country find it necessary to engage in. In the early and rude transactions of commerce between nations, as in the early and rude transactions between individuals, there is little economy in the use of money and bullion; it is only in consequence of civilisation and refinement that paper is made to perform the same office between the commonwealth of nations, as it so advantageously performs between individuals of the same country. The Reviewers do not appear to me to be sufficiently aware of the extent to which the principle of economy in the use of the precious metals is extended between nations, indeed, they do not seem to acknowledge its force even when confined to a single nation, as from a passage in page 346, their readers would be induced to suppose their opinion to be, that there are frequent transfers of currency between the distant provinces of the same country; for they tell us that “there have been, and even will be, a quantity of the precious metals in use destined to perform the same part with regard to the different nations connected with each other by commerce, which the currency of a particular country performs with regard to its distant provinces.” Now, what part does the currency of a country perform with regard to the distant provinces?

I am well persuaded, that, in all the multiplicity of commercial transactions which take place between the distant provinces of this kingdom, the currency performs a very inferior part, imports being almost always balanced by exports,∗ and the proof is, that the local currency of the provinces (and they have no other) is seldom circulated at any considerable distance from the place where it is issued.

It appears to me that the Reviewers were induced to admit the erroneous doctrine of the merchants, that money might be exported in exchange for commodities, although money were no cheaper in the exporting country, because they could in no other way account for the rise of the exchange having, on some occasions, accompanied the increased amount of bank notes, as stated by Mr Pearse, the late deputy governor, and now governor of the Bank, in a paper delivered by him to the bullion committee. They say, “according to this view of the subject, it certainly is not easy to explain an improving exchange under an obviously increasing issue of notes: an event that not unfrequently happens, and was much insisted upon by the deputy governor of the Bank as a proof that our foreign exchanges had no connexion with the state of our currency.”

These are circumstances, however, which are not absolutely irreconcileable. Mr Pearse, as well as the Edinburgh Reviewer, appears to have wholly mistaken the principle advanced by those who are desirous of the repeal of the restriction bill. They do not contend, as they are understood to do, that the increase of bank notes will permanently lower the exchange, but that such an effect will proceed from a redundant currency. It remains, therefore, to be considered whether an increase of bank notes is necessarily at all times accompanied with a permanently increased currency, as, if I can make it appear that it is not, there will be no difficulty in accounting for a rise in the exchange with an increased amount of bank notes.

It will be readily admitted, that, whilst there is any great portion of coin in circulation, every increase of bank notes, though it will for a short time lower the value of the whole currency, paper as well as gold, yet that such depression will not be permanent, because the redundant and cheap currency will lower the exchange, and will occasion the exportation of a portion of the coin, which will cease as soon as the remainder of the currency shall have regained its value and restored the exchange to par. The increase of small notes, then, will ultimately be a substitution of one currency for another, of a paper for a metallic currency, and will not operate in the same way as an actual and permanent increase of circulation.† We are not, however, without a criterion by which we may determine the relative amount of currency at different periods, as distinguished from bank notes, on which, though we cannot infallibly rely, it will probably be a sufficiently accurate test to determine the question which we are now discussing. This criterion is the amount of notes of 5l. and upwards in circulation, which, we may reasonably calculate, always bear some tolerably regular proportion to the whole circulation. Thus, if since 1797 the bank notes of this description have increased from 12 to 16 millions, we may infer that the whole circulation has increased one-third, if the districts in which bank notes circulate have neither been enlarged nor contracted. The notes under 5l. will be issued in proportion as the metallic currency is withdrawn from circulation, and will be further augmented if there be also an augmentation of notes of a higher denomination.

If I am correct in this view of the subject, that the increase in the amount of our currency is to be inferred from the increased amount of bank notes of 5l. and upwards, and can by no means be proved by an increase of 1l. and 2l. notes which have been substituted in the place of the exported or hoarded guineas, I must wholly reject the calculations of Mr Pearse, because they are made on the supposition that every increase of this description of notes is an increase of currency to that amount. When it is considered, that in 1797 there were no notes of 1l. and 2l. in circulation, but that their place was wholly filled with guineas; and that, since that period, there have been no less than 7 millions issued, partly to supply the place of our exported and hoarded guineas, and partly to keep up the proportion between the circulation for the larger and for the smaller payments, we shall observe to what errors such reasoning may lead. I can consider the paper in question of no authority whatever as opposed to the opinion which I have ventured to give, namely, that an unfavourable balance of trade, and a consequently low exchange, may in all cases be traced to a relatively redundant and cheap currency. ∗ But if the reasoning of Mr Pearse were not incorrect as his facts are, he is no way warranted in the conclusions which he has drawn from them.

Mr Pearse states the increase of bank notes from January 1808 to Christmas 1809, to have been from 17½ to 18 millions, or 500,000l., the exchange with Hamburgh during the same period having fallen from 34s. 9g. to 28s. 6g. an increase in the amount of notes of less than 3 per cent., and a fall in the exchange of more than 18 per cent.

But from whence did Mr Pearse obtain this information, of 18 millions of bank notes only being in circulation at Christmas in 1809? After looking at every return with which I have been able to meet, of the amount of bank notes in circulation at the end of 1809, I cannot but conclude that Mr Pearse's statement is incorrect. Mr. Mushet in his tables gives four returns of bank notes in the year. In the last, for the year 1809, he has stated the amount of bank notes in circulation at 19,742,998

For many months previously to December it was not lower. When I first discovered this inaccuracy I though Mr Pearse might have omitted the bank post bills in both estimates, although they did not in December 1809, exceed 880,880l.; but on looking at the return of bank notes in circulation, including bank post bills in January 1808, I find Mr Pearse has stated it larger than I can any where find it: indeed his estimate exceeds the return made by the Bank for the 1st of January 1808, by nearly 900,000l., so that from the 1st of January 1808 to the 12th of December 1809, the increase was from 16,619,240 to 19,727,520, a difference of more than 3 millions, instead of 500,000, as stated by Mr Pearse, and of 2 millions if Mr Pearse's statement for any time in January 1808, be correct.

Mr Pearse's statement, too, that from January 1803 to the end of 1807, the amount of bank notes had increased from 16½ to 18 millions, an increase of a million and a half, appears to me to exceed the fact by half a million. The increase of notes of 5l. and upwards, including bank post bills, did not, during that period, exceed 150,000l. It is material that these errors should be pointed out, that those who may, in spite of what I have urged, agree in principle with Mr Pearse, may see that the facts of the case do not warrant the conclusions which that gentleman has drawn from them, and, indeed, that all calculations founded on the particular amount of bank notes for a day, or for a week, when the general average has been for some time before, or some time after, greater or less, will be of little avail in overturning a theory which has every other proof of its truth. Such I consider the theory which asserts that the unlimited multiplication of a currency which is referable to no fixed standard may and must produce a permanent depression of the exchange, estimated with a country whose currency is founded on such standard.

Having considered the weight which ought to be attached to Mr Pearse's paper, I beg the reader's attention to the table which I have drawn out from the statements in the Bullion Report, and from the papers which have since been presented to the House of Commons. I request him to compare the amount of the circulation of the larger notes with the variations in the exchange, and I trust he will find no difficulty in reconciling the principle maintained by me with the actual facts of the case, particularly if he considers that the operations of an increased currency are not instantaneous, but require some interval of time to produce their full effect,—that a rise or fall in the price of silver, as compared with gold, alters the relative value of the currencies of England and Hamburgh, and therefore makes the currency of one or other relatively redundant and cheap;—that the same effect is produced, as I have already stated, by an abundant or deficient harvest, either in this country or in those countries with which we trade, or by any other addition or diminution to their real wealth, which by altering the relative proportion between commodities and money alters the value of the circulating medium. With these corrections, I have no fear but that it will be found that Mr Pearse's objections may be refuted without having recourse to the abandonment of a principle, which, if yielded, will establish the mercantilc theory of exchange, and may be made to account for a drain of circulating medium, so great, that it can only be counteracted by locking up our money in the bank, and absolving the directors from the obligation of paying their notes in specie.

Mr Pearse's statement as presented to the Bullion Committee:∗

The rate of the Hambro' Exchange is taken from Lloyd's list.

The average amount of bank notes from the year 1797 to 1809 inclusive, in the following table, is copied from the Report of the Bullion Committee. The rates of exchange are extracted from a list presented by the Mint to parliament. There have been three returns made to parliament by the Bank of the amount of their notes in circulation in the year 1810;—the first for the 7th and 12th of each month; the second, a weekly return from the 19th January 1810 to 28th December; and the third also a weekly account from the 3d March to 29th December 1810. The average amount of notes above 5l., including bank post bills, according to the first account, is

In the years marked thus^∗ the value of silver as compared with gold exceeded the Mint valuation; this was the case particularly in the year 1801, when less than 14 oz. of silver could purchase an ounce of gold;—the Mint valuation is as 1 to 15.07; the present market value is as 1 to 16 nearly.

Average amount of Bank of England Notes in circulation in each of the following years:

“If,” say the Reviewers, “considerable portions of the currency were taken from the idle, and those who live upon fixed incomes, and transferred to farmers, manufacturers, and merchants, the proportion between capital and revenue would be greatly altered to the advantage of capital: and in a short time the produce of the country would be greatly augmented.” It is no doubt true “that it is not the quantity of circulating medium which adds to the national wealth, “but the different distribution of it.” If, therefore, we could be fully assured that the effects of the abundance, and the consequent depreciation of the currency, would diminish the powers of consumption in the idle and unproductive class, whilst it increased the number of the industrious and productive class, the effect would undoubtedly be to augment the national wealth, as it would realize into capital that which was before expended as revenue. But the question is, will it so operate? Will not a thousand pounds saved by the stockholder from his income and lent to the farmer, be equally productive as if it had been saved by the farmer himself? The Reviewers observe, “on every fresh issue of notes, not only is the quantity of the circulating medium increased, but the distribution of the whole mass is altered. A large proportion falls into the hands of those who consume and produce, and a smaller proportion into the hands of those who only consume.” But is this necessarily so? They appear to take if for granted, that those who live on fixed incomes must consume the whole of their income, and that no part of it can be saved and annually added to capital. But this is very far from being the true state of the case; and I would ask, do not the stockholders give as great a stimulus to the growth of the national wealth by saving half their incomes and investing it in the stocks, thereby liberating a capital which will ultimately be employed by those who consume and produce, as would be done if their incomes were depreciated 50 per cent. by the issues of bank notes, and the power of saving were in consequence entirely taken from them, although the Bank should lend to an industrious man an amount of notes equal in value to the diminished income of the stockholder? The difference, and the only difference appears to me to be this, that in the one case the interest on the money lent would be paid to the real owner of the property; in the other, it would ultimately be paid in the shape of increased dividends or bonuses to the Bank proprietors who had been enabled unjustly to possess themselves of it. If the creditor of the Bank employed his loan in less profitable speculations than the employer of the savings of the stockholders would have done, there would result a real loss to the country; so that a depreciation of currency may, as far as it is considered as a stimulus to production, be beneficial or otherwise.

I see no reason why it should diminish the idle and to the productive class of society. At any rate the evil is certain. It must be accompanied with a degree of injustice to individuals which requires only to be understood to excite the censure and indignation of all those who are not wholly insensible to every honourable feeling.

With the sentiments of the remainder of the article I most cordially agree, and trust the efforts of the Reviewers will powerfully contribute to overturn the mass of error and prejudice which pervades the public mind on this most important subject.

It is often objected to the recommendation of the bullion committee, namely, that the Bank should be required to pay their notes in specie in two years, that, if adopted, the Bank would be exposed to considerable difficulty in providing themselves with the requisite amount of bullion for such purpose; and it cannot be denied, that, before the restriction bill can be repealed, the Bank would be in prudence bound to make ample provision for every demand which might by possibility be made on them. It is observed by the bullion committee, that the average amount of bank notes in circulation, including bank post bills, in the year 1809, was 19 millions. During the same period the average price of gold was 4l. 10s.,—exceeding its Mint price by nearly 17 per cent., and proving a depreciation of the currency of nearly 15 per cent. A diminution, therefore, of 15 per cent. in the amount of the Bank circulation in 1809, should, on the principles of the committee, raise it to par, and reduce the market price of gold to 3l. 17s. 10½d.; and till such reduction take place, there would be imminent danger to the Bank as well as to the public that the restriction bill should cease to operate. Now, admitting (which we are far from doing) the truth of your principles, say the advocates for the Bank; admitting that after such a reduction in the amount of bank notes, the value of the remainder would be so raised, that it would not be the interest of any person to demand specie at the Bank in exchange for notes, because no profit could be made by the exportation of bullion; what security would the Bank have that caprice or ill-will might not render the practice general of discontinuing the use of small notes altogether, and demanding guineas of the Bank in lieu of them? Not only, then, must the Bank reduce their circulation 15 per cent. on their issues of 19 millions.—not only must they provide bullion for 4 millions of 1l. and 2l. notes which would remain in circulation, but they must also furnish themselves with the means of meeting the demands which may be made on them to pay the small notes of all the country banks in the kingdom,—and all this within the short period of two years. It must be confessed, that, whether these apprehensions are likely or not likely to be realized, the Bank could not but make some provision for the worst that might happen; and though it is a situation in which their own indiscretion has involved them, it would be desirable, if possible, to protect them against the consequences of it.

If the same benefits to the public,—the same security against the depreciation of the currency, can be obtained by more gentle means, it is to be hoped that all parties who agree in principle will concur in the expediency of adopting them. Let the Bank of England be required by Parliament to pay (if demanded) all notes above 20l., and no other, at their option, either in specie, in gold standard bars, or in foreign coin (allowance being made for the difference in its purity) at the English Mint value of gold bullion, viz. 3l. 17s. 10½d. per ounce, such payments to commence at the period recommended by the committee.

This privilege of paying their notes as above described might be extended to the Bank for three or four years after such payments commenced, and, if found advantageous, might be continued as a permanent measure. Under such a system the currency could never be depreciated below its standard price, as an ounce of gold and 3l. 17s. 10½d. would be uniformly of the same value. By such regulations we should effectually prevent the amount of small notes necessary for the smaller payments from being withdrawn from circulation, as no one who did not possess to the amount of 20l. at least of such small notes could exchange them at the Bank, and even then bullion, and not specie, could be obtained for them. Guineas might indeed be procured at the Mint for such bullion, but not till after the delay of some weeks or months, the loss of interest for which time would be considered as an actual expense, an expense which on one would incur whilst the small notes could purchase as much of every commodity as the guineas which they represented. Another advantage attending the establishment of this plan, would be to prevent the useless labour which, under our system previously to 1797, was so unprofitably expended on the coinage of guineas, which, on every occasion of an unfavourable exchange (we will not inquire by what caused), were consigned to the melting pot, and, in spite of all prohibitions, exported as billion. It is agreed by all parties that such prohibitions were ineffectual, and that whatever obstacles were opposed to the exportation of the coin, they were with facility evaded.

An unfavourable exchange can ultimately be corrected only by an exportation of goods,—by the transmission of bullion,—or by a reduction in the amount of the paper circulation. The facility, therefore, with which bullion would be obtained at the Bank cannot be urged as an objection to this plan, because an equal degree of facility actually existed before 1797, and must exist under any system of Bank payments. Neither ought it to be urged, because it is now no longer questioned by all those who have given the subject of currency much of their consideration, that not only is the law against the exportation of bullion, whether in coin or in any other form, ineffectual, but that it is also impolitic and unjust; injurious to ourselves only, and advantageous to the rest of the world.

The plan here proposed appears to me to unite all the advantages of every system of banking which has been hitherto adopted in Europe. It is in some of its features similar to the banks of deposit of Amsterdam and Hamburgh. In those establishments bullion is always to be purchased from the Bank at a fixed invariable price. The same thing is proposed for the Bank of England; but in the foreign banks of deposit, they have actually in their coffers, as much bullion as there are credits for bank money in their books; accordingly, there is an inactive capital as great as the whole amount of the commercial circulation. In our Bank, however, there would be an amount of bank money, under the name of bank notes, as great as the demands of commerce could require, at the same time there would not be more inactive capital in the Bank coffers than that fund which the Bank should think it necessary to keep in bullion, to answer those demands which might occasionally be made on them. It should always be remembered, too, that the Bank would be enabled, by contracting their issues of paper, to diminish such demands at pleasure In imitation of the Bank of Hamburgh, who purchase silver at a fixed price, it would be necessary for the Bank to fix a price very little below the Mint price, at which they would at all times purchase, with their notes, such gold bullion as might be offered to them.

The perfection of banking is to enable a country, by means of a paper currency, (always retaining its standard value,) to carry on its circulation with the least possible quantity of coin or bullion. This is what this plan would effect. And with a silver coinage, on just principles, we should possess the most economical and the most invariable currency in the world. The variations in the price of bullion, whatever demand there might be for it on the Continent, or whatever supply might to poured in from the mines in America, would be confined within the prices at which the Bank bought bullion, and the Mint price at which they sold it. The amount of the circulation would be adjusted to the wants of commerce with the greatest precision; and if the Bank were for a moment so indiscreet as to overcharge the circulation, the check which the public would possess would speedily admonish them of their error. As for the country Banks, they must, as now, pay their notes, when demanded, in Bank of England notes. This would be a sufficient security against the possibility of their being able too much to augment the paper circulation. There would be no temptation to melt the coin, and consequently the labour which has been so uselessly bestowed by one party in recoining what another party found it their interest to melt into bullion, would be effectually saved. The currency could neither be clipped nor deteriorated, and would possess a value as invariable as gold itself, the great object which the Dutch had in view, and which they most successfully accomplished by a system very like that which is here recommended.

REPLY TO MR BOSANQUET'S PRACTICAL OBSERVATIONS ON THE REPORT OF THE BULLION COMMITTEE.

• LONDON

1811.

REPLY TO MR BOSANQUET.

CHAPTER I.

PRELIMINARY OBSERVATIONS—MR BOSANQUET'S OBJECTIONS TO THE CONCLUSIONS OF THE BULLION COMMITTEE BRIEFLY STATED.

The question concerning the depreciation of our currency has lately assumed peculiar interest, and has excited a degree of attention in the public mind, which promises the most happy results. To the Bullion Committee we are already most particularly indebted for a more just exposition of the true principles which should regulate the currency of nations, than has before appeared in any authoritative shape, in this or any other country. It could not, however, be expected that a reform, so important as that which the Committee recommend, could be effected without calling forth the warmest opposition, dictated by the erroneous principles of some, and by the interested views of others. Hitherto this opposition has been attended with the best effects; it has tended to prove more fully the correctness of the principles laid down by the Committee; it has called forth new champions in the field of argument; and discussion has daily produced new converts to the cause of truth. Of all the attacks on the report of the Committee, however, that of Mr Bosanquet has appeared to me the most formidable. He has not, as his predecessors have done, confined himself to declamation alone; and though he disclaims all reasoning and argument, he has brought forward, what he thought were irrefragable proofs of the discordance of the theory with former practice. It is these proofs which I propose to examine, and I am confident that it will be from a deficiency of ability in me, and not from any fault in the principles themselves, if I do not show that they are wholly unfounded. Mr Bosanquet commences, by availing himself of the vulgar charge, which has lately been so often countenanced, and in places too high, against theorists. He cautions the public against listening to their speculations before they have submitted them to the test of fact; and he kindly undertakes to be their guide in the examination. If this country had hitherto carried on trade by barter, and it were, for the first time, going to establish a system by which the intervention of money should facilitate the operations of trade, there might be some foundation for calling the principles which might be offered to public attention wholly theoretical; because, however clearly dictated by the experience of the past, their practical effects would not have been witnessed. But, when the principles of a currency, long established, are well understood; when the laws which regulate the variations of the rate of exchange between countries have been known and observed for centuries, can that system be called wholly theoretical which appeals to those principles, and is willing to submit to the test of those laws?

To such an examination the report of the Committee is now submitted, and the public is called upon to believe that a theory which its adversary allows to be unassailable by reasoning and argument, is to be battered down by an appeal to facts. We are told, “that boldly as the principle is asserted, and strongly as reason appears to sanction it, that it is not generally true, and is at variance with fact.” This is the test to which I have long wished to see this important question brought. I have long wished that those who refused their assent to principles which experience has appeared to sanction, would either state their own theory as to the cause of the present appearances in the state of our currency, or that they would point out those facts which they considered at variance with that which, from the firmest conviction, I have espoused.

To Mr Bosanquet, then, I feel considerably obliged. If, as I trust, I shall be able to obviate his objections; to prove them wholly untenable; to convince him that his statements are at variance with fact; that for his supposed proofs he is indebted to the wrong application of a principle, and not to any deficiency in the principle itself:—I shall confidently expect that he will abjure his errors, and become the foremost of our defenders.

Mr Bosanquet has thus stated the principal positions of the Committee, to which he is induced to object:

1st, “That the variations of the exchange with foreign countries can never, for any considerable time, exceed the expense of transporting and insuring the precious metals from one country to the other.

2d, That the price of gold bullion can never exceed the Mint price, unless the currency in which it is paid is depreciated below the value of gold.

3d, That, so far as any inference is to be drawn from Custom-house returns of exports and imports, the state of the exchanges ought to be peculiarly favourable.

4th, That the Bank, during the restriction, possesses exclusively the power of limiting the circulation of bank notes.

5th, That the circulation of country bank notes depends upon, and is proportionate to, the issues from the Bank.

Lastly, That the paper currency is now excessive, and depreciated in comparison with gold, and that the high price of bullion and low rates of exchange are the consequences as well as the sign of such depreciation.”

These principles being in all essential points the same as those which I have avowed, and on which Mr Bosanquet has attacked me, to avoid the necessity of speaking at one time of the opinion of the Bullion Committee, and at another of my own, I shall, in the future pages of this work, consider them as the principles of the Bullion Committee only, and shall take occasion to mention any shade of difference that may occur between theirs and mine.

CHAPTER II.

MR BOSANQUET'S ALLEGED FACTS, DRAWN FROM THE HISTORY OF THE STATE OF EXCHANGE, CONSIDERED.

SECTION I.

Exchange with Hamburgh.

The first position controverted is, “That the variations of the exchange with foreign countries can never, for any length of time, exceed the expense of transmitting and insuring the precious metals from one country to the other.”

Can this be called a theoretical opinion, now brought forward for the first time? Has it not been sanctioned by the writings of Hume and Smith? and has it not been undisputed even by practical men?

Mr——, in his evidence before the Bullion Committee, observes, “that the extent to which the exchange can fall is the charge of transporting bullion, together with an adequate profit to the risk the transporting such specie is liable to.”

Mr A. Goldsmid “never recollected the exchange to have differed more from par than 5 per cent. before the suspension of cash payments.”

Mr Grefulhe stated, “that since he had been in business he recollected no period prior to the suspension of the cash payments by the Bank, when the exchange was considerably below par.”

The same opinions were given by many practical men before the Lords' Committee in 1797.

But in opposition to all these opinions, Mr Bosanquet has facts which he boldly thinks will prove the unsoundness of the doctrine. “In the years 1764 to 1768,” he observes, “prior to the recoinage, when the imperfect state of the coins occasioned gold to be 2 to 3 per cent. above the Mint price, the exchange with Paris was 8 to 9 per cent. against London,—at the same time the exchange with Hamburgh was, during the whole period, 2 to 6 per cent. in favour of London; here appears, then, a profit of 12 to 14 per cent. for the expense, in time of peace, of paying the debt to Paris with gold from Hamburgh, which must have exceeded the fact by at least 8 or 10 per cent.; and it is worthy of remark, that the average exchange with Hamburgh, for the years 1766 and 1767, of 5 per cent. in favour of London, added to the 2 per cent., the price of gold above the Mint price, constituted a premium of 7 per cent. on the importation of gold into England, or, deducting 1½ per cent for expenses in time of peace, a net profit of 5 per cent., yet the exchange was not rectified thereby. Again, in 1775, 1776, and 1777, after the recoinage, we find the exchange on Paris 5, 6, 7, and 8 per cent. against London in time of peace, when half the amount would have conveyed gold to Paris, and one-fourth have paid the debts of Paris at Amsterdam.

In the years 1781, 1782, and 1783, being years of war, the exchange was constantly from 7 to 9 per cent. in favour of Paris; and, during this period, gold was the common circulation of this country; and the Bank was compelled to provide it for the public at the Mint price. It has been already shown how little effect the precious metals produced towards equalising the exchange with Hamburgh during the years 1797 and 1798; and another instance may be adduced in the years 1804 and 1805, when the Paris exchange varied from 7 to 9 per cent. in favour of London.

In every case here cited, the fluctuations of the exchanges greatly exceeded the expense of conveying gold from one country to the other, and to a much greater degree in most of them than in the present instance; the circumstances of the times were, it will readily be admitted, more favourable to intercourse on those occasions than they now are, and the state of metallic circulation afforded facilities not now experienced here. Yet, under all these disadvantages, the principle assumed by the Committee was not operative, and cannot therefore be admitted as a solid foundation for the superstructure of excess and depreciation attempted to be raised upon it.”

If the facts had been as here stated by Mr Bosanquet, I should have found it difficult to reconcile them with my theory. That theory takes for granted, that whenever enormous profits can be made in any particular trade, a sufficient number of capitalists will be induced to engage in it, who will, by their competition, reduce the profits to the general rate of mercantile gains. It assumes that in the trade of exchange does this principle more especially operate, it not being confined to English merchants alone; but being perfectly understood, and profitably followed, by the exchange and bullion merchants of Holland, France, and Hamburgh; and competition in this trade being well known to be carried to its greatest height. Does Mr Bosanquet suppose that a theory which rests on so firm a basis of experience as this can be shaken by one or two solitary facts not perfectly known to us? Even should no explanation of them be attempted, they might safely be left to produce their natural effects on the public mind.

But before the reasoning of the Committee can be proved defective by Mr Bosanquet's facts, we must examine the source from whence those supposed facts are derived.

“Mr Bosanquet tells us that there is annexed to Mr Mushet's pamphlet a table, showing, 1st, The rate of exchange with Hamburgh and Paris for 50 years past, and how much it has been, in each instance, above or below par.

2d, The price of gold in London, and a comparison of this price with the English standard or Mint price.

3d, The amount of bank notes in circulation, and the rate of their assumed depreciation, by a comparison with the price of gold.”

Now, the accuracy of these tables must be admitted or proved before the conclusions, which result from the inspection of them, can command assent; but so far from this being the case, their accuracy is disowned by Mr Mushet himself, who, in the second edition of his pamphlet, acknowledged the false principle upon which his first tables were calculated, and has given us a new and amended set.

The following notice accompanied the second edition of Mr Mushet's pamphlet:—“In the first edition of this work I stated the par of exchange with Hamburgh at 33 schillings and 8 grotes, and at that considered it as a fixed par; from the best information which I have been able to obtain upon ‘Change since, 34.11¼ are considered as the par, and in the present edition I have stated it as such. I have also corrected the mistake of considering the par to be fixed; because gold being the standard of the money of England, and silver in Hamburgh, there can be no fixed par between those two countries; it will be subject to all the variations which take place in the relative value of gold and silver. For example, if 34 schillings 11 grotes and ¼ of Hamburgh currency be equal in value to a pound sterling, or 20/21 of a guinea, when silver is 5s. 2d. per oz., they can no longer be so when silver falls to 5s. 1d. or 5s. per oz., because a pound sterling in gold being then worth more silver, is also worth more Hamburgh currency.

“To find the real par, therefore, we must ascertain what was the relative value of gold and silver when the par was fixed at 34.11¼, and what is the relative value at the time we wish to calculate it.

For example, if the price of standard gold was 3l. 17s. 10½d. per oz., and silver 5s. 2d., an ounce of gold would then be worth 15.07 ounces of silver, being the Mint proportions; 20 of our standard shillings would then contain as much pure silver as 34 schillings 11 grotes and ¼; but if the ounce of gold was 3l. 17s. 10½d., and silver 5s. (which it was on the 2d January 1798) the ounce of gold would then be worth 15.57 ounces of silver. If 1l. sterling at par, therefore, be worth 15.07 ounces of silver, then at 15.57 it would be at 3 per cent. premium; and 3 per cent. premium on 34.11¼ is 1 schilling 1 grote and , so that the par, when gold is to silver as 15.57 to 1, will be 36 schillings 1 grote and .

The above calculation will be more easily made by stating as follows:—

As 15.07: 34.11¼:: 15.57: 36 .”

As it is universally admitted that gold is the standard measure of value in this country, and that silver performs the same office at Hamburgh, it is evident that no tables can be correct which assume a fixed invariable par. The true par must vary with every variation in the relative value of the two metals.

There are some objections, however, which I have yet to offer against the perfect accuracy of Mr Mushet's present tables.

In the first place, he has taken the par of silver against silver too low; he has calculated on the information which he had received, that 20 standard shillings in silver contained as much of that pure metal as thirty-four schillings and 11¼ grotes; but it appears by Dr Kelly's table (Bullion Rep. page 207,) that by actual assay, as well as by computation, 20 shillings are of equal value with 35 schillings and 1 grote. This difference amounts to little more than 3/8 per cent.; and I have only noticed it because I think it highly desirable that we should be able, at all times, to ascertain the true par.

Secondly, Mr Mushet has calculated the degree in which the exchange was above or below par by a reference to the prices which he has quoted from Lloyd's list. Now, invariably have those prices been for bills at 2½ usances, and as the par of exchange is computed from a comparison of the actual value of the coins of the two countries, payable at the same time in both, and not in one of them at the end of 2½ months, an allowance for interest must be made for this period, which will amount to about 1 per cent.∗

A deduction of 1 3/8 per cent. must therefore be made from the column for the favourable exchange to England in Mr Mushet's tables.

There are also, in all calculations on the true par of exchange, other sources of error, some of which will be presently noticed; so that it is not possible to ascertain with perfect accuracy, unless all those facts were before us, the actual difference which at any time existed between a remittance by bullion, and by the purchase of a bill.

To Mr Mushet's amended tables, thus corrected, I am willing to submit the truth of the principle now disputed. It will then appear, that at no period since 1760 has the exchange with Hamburgh been more in favour of England than 7 per cent., with one exception only; and the reader will not be surprised that there should have been such an exception, when he learns that it was in the memorable year of 1797, just after the suspension of cash payments at the Bank. At this period the currency of this country was reduced particularly low; the amount of bank notes in circulation being less than it had been for ten years preceding. That, under such circumstances, the exchange should have become favourable to England, and, consequently, that there should have been large importations of bullion, is entirely conformable with the principle of the Bullion Committee, and confirms the efficacy of the remedy which they have proposed. A great circulation of paper and a too abundant currency, are stated by them to be the causes of the present nominally low exchange, and they confidently predict, that a reduction of its quantity will, as in the year 1797, raise the exchange, and by that means render the importation of bullion profitable. That this favourable exchange did, in the year 1797, produce an immense importation of gold can, by indirect evidence, be amply proved. The amount of foreign gold coined in his Majesty's Mint was,

But, it will be asked, how do those who contend that the exchanges of a country cannot, for any length of time, be either highly favourable, or highly unfavourable, account for the exchange with Hamburgh being permanently in favour of England for two or three years?

This was the case, Mr Bosanquet observes, during the years 1797 and 1798, and he affirms that the precious metals produced little effect in equalising the exchange. It appears by Mr Mushet's amended tables (always corrected by the 1 3/8 per cent.) that, during those years, the exchange was favourable to England, and fluctuated from 5.6 to 4.3 per cent. But the principle I understand to be this, that no country can, for any length of time, have the exchange highly favourable or highly unfavourable, because it supposes either such an increase on the one hand in her stock of money and bullion, or on the other such a diminution in that stock, as would destroy that equilibrium in the value of the currencies of countries which they naturally have a tendency to find.

The assertion is true when applied to the exchanges, in general, of any country, but is false if the rate of her exchange with one country only be considered. It is possible that her exchange with one particular country may be permanently unfavourable, in consequence of a continued demand for bullion; but this by no means proves that her stock of coin and bullion is decreasing, unless her exchange should be also unfavourable with other countries. She may be importing from the north the bullion which she is exporting to the south,—she may be collecting it from countries where it is relatively abundant, for countries where it is relatively scarce, or where, from some particular causes, it is in particular demand; but it by no means follows, as an undeniable consequence, that her own stock of money shall be reduced below its natural level. Spain, for example, who is the great importer of bullion from America, can never have an unfavourable exchange with her colonies; and as she must distribute the bullion she receives amongst the different nations of the world, she can seldom have a favourable exchange with the countries with which she trades.∗

Applying, then, these principles to the state of our exchange with Hamburgh in 1797 and 1798, we shall observe, that it was not in consequence of what is usually termed a balance of trade that the exchange was permanently favourable to England; it was not because Hamburgh had contracted a debt to us for the balance of commodities which she had imported, that she was necessitated to pay us in gold and silver bullion, but because she could advantageously export bullion in the same way as any other commodity, in consequence of an unusual demand for that article in England. This demand proceeded from two causes: First, from the unusually low amount of our currency; secondly, from the exportation of silver to Asia by the East India Company.

In consequence of the first of these causes, and of the immense amount of guineas which at that period had been withdrawn from circulation for the purpose of hoarding, by timid people, we have already seen that the foreign gold coined into guineas during those years, amounted to no less a sum than 5,200,000l. Here, then, was a demand for gold unprecedented in the history of the Mint, and of itself abundantly sufficient to account both for the high exchange, and the length of time which it continued. It is a practical illustration of the truth of a most satisfactory theory.

To this, however, must be added, the demand for silver bullion in consequence of the exportation of the East India Company. It appears, by the account delivered to the Bullion Committee (No. 9), that the whole amount of foreign silver coin, exported by the Company on their own account, as well as on account of private persons, amounted

From this time the exportation of silver to the East Indies was considerably reduced, and has now almost wholly ceased. Thus, then, it appears that a high exchange was followed by an unusually great importation of bullion, and that, when that demand ceased, the exchange regained its natural level. On a further inspection of the table, it will appear, that in proportion as the amount of bank notes increased, the exchange became depressed, and was in 1801 more than 11 per cent. against England; and at the same time the price of gold bullion rose to 4l. 6s.—more than 10 per cent. above the Mint price.∗

It must be confessed, that from September 1766 to September 1767, the exchange continued permanently in favour of England from 7.4 to 6.8 per cent.; and from that period to September 1768, it continued generally favourable above 3 per cent.; but what circumstances in the situation of Europe might then have made it profitable for England to become the agent in collecting bullion from Hamburgh for some other country, it is not now material to inquire. Of this I am fully assured, that, if all the circumstances were fairly before us, it might be satisfactorily explained.

But whether explained or not explained, it proves nothing in favour of Mr Bosanquet's theory (for theory Mr Bosanquet has just as much as the Committee): it only proves that the precious metals might continue to be imported from one quarter while they were exported to another; which the theory of the Committee not only allows, but requires. To prove anything in favour of Mr Bosanquet's theory, it must be proved that the precious metals came in permanently in greater proportion than they went out; not from one place only, but from all places taken together.

The following considerations go a certain way in accounting for the phenomena which have misled Mr Bosanquet: the tables of Mr Mushet are calculated on a comparison of the relative value of silver with bar gold. Now, bar gold is generally 2s. or 3s. per ounce worse in price than gold in coin; and, therefore, if the gold imported be intended for re-exportation, the true par will differ from 2 to 3 per cent., according as the calculation is made by reference to coined or to bar gold.†

When money is wanted for our own circulation, I do not object to the calculation of the true par of exchange being made, on a comparison of the relative value of the silver of the foreign country with the value of standard gold bars in this; but in that case there must be added to the amount of expenses attending the transportation of the silver, the interest which the purchaser of gold will lose, during the detention of the gold in the Mint whilst coining into money. The natural destination of a great part of all the bar gold is to some of the Mints of Europe, as it is in the state of coin only that gold can be made productive of interest to the owner. In comparing, therefore, the value of the currency of one country with the value of bullion in another, we must not leave out of our consideration the trifling superior value which coin bears above bullion in the importing country. Thus, if a merchant in Hamburgh were indebted 1l. sterling to a merchant in England, and should export to England as much silver as would purchase the quantity of gold contained in 1l., he would not be able to discharge his debt till the gold were manufactured into coin. In addition, then, to his other expenses, the interest which he would have to pay to his creditor till the coin was returned to him, would enter into his calculation at the time that he was making a comparison of the advantages which would attend either the purchase of a bill, or the remittance of bullion.

This loss of interest the Bullion Committee have estimated at 1 per cent.

If these principles are correct, there must be deducted from the favourable Hamburgh exchanges of Mr Mushet's tables 1 per cent. more than we have already stated, when the bullion is wanted for our own coin, and from 2 to 3 per cent. when it is required for re-exportation. It is also necessary to observe, that the relative value of gold to silver is constantly varying in all countries, though always tending in all to an equality of value; and that the test of our currency being depreciated, is more certainly proved by the high market price of bullion than by the low exchanges.∗

SECTION II.

Exchange with Paris.

Having thus examined the objections made by Mr Bosanquet to the conclusions of the Committee, as far as the exchanges with Hamburgh are concerned, I shall now proceed to consider the circumstances which appear to him to be at variance with the principle I am defending, in the account of the exchanges between this country and Paris.

In the consideration of the par of exchange with Hamburgh, the principle on which it is calculated is easy and simple; not so that with Paris. The difficulty proceeds from this: that France as well as England has two metals, gold and silver, in circulation, both of which are legal tender in all payments.

In my former publication I endeavoured to explain the principles which appeared to me to fix the standard measure of value in a country where silver and gold are both in circulation, and both a legal tender.

Lord Liverpool supposed, that when gold became the standard measure of value in this country, it arose from some capricious preference of the people to gold; but it can, I think, be clearly proved that it was caused entirely from the circumstance of the market value of silver relatively to gold having become greater than the Mint proportions. This principle is not only most fully admitted, but also most ably illustrated by his lordship.

The Mint will coin an ounce of gold into 3l. 17s. 10½d. of gold money, and they will also coin 15.07 ounces of silver into the same amount of silver money. What is it, then, that determines the Bank or any individual to carry an ounce of gold in preference to 15.07 ounces of silver to the Mint to be coined, as they are both by law equally useful to discharge a debt to the amount of 3l. 17s. 10½d.? No other consideration but their interest. If 15.07 ounces of silver can be purchased for less than an ounce of gold, silver will be coined; and if an ounce of gold can be procured for less than 15.07 ounces of silver, gold will be taken to the Mint for that purpose.

In the first case silver will become the measure of value; in the second, gold.

Now, as the relative market value of these metals is subject to constant variation, gold or silver may alternately become the standard measure of value. Since the recoinage of silver, in the reign of King William, gold has almost uniformly been of less value than 15.07 ounces of silver, and consequently gold has, since that period, been the standard of value in this country. In the year 1798, the coinage of silver was altogether prohibited by law. Whilst that law remains in force gold must necessarily be the standard measure, whatever may be the variations in the relative value of the two metals.∗

Whichever metal is the standard measure of value, it will also regulate the par of exchange with foreign countries, because it will be in that metal, or in paper currency representing that metal, that bills will be paid.

In France there are also two metals in circulation, and both legal tender to any amount. The relative value of gold to silver in the coins of France, previously to the Revolution, was as 15 to 1 (Bullion Report, No. 59), and is now 15½ to 1; but we are informed by a letter of Mr Grefulhe to the Bullion Committee (No. 56), that in 1785, an alteration had been made in the number of louis which were coined from a marc of gold, that number having been increased from 30 to 32. Previously to 1785, therefore, gold must have been valued in the French Mint somewhere about 14 to 1. For the same reasons that the standard of value was subject to change from gold to silver, and from silver to gold, in England, it would also be subject to do so in France. When the relative value of gold to silver was under 14 to 1, gold would have become the standard measure of value in France, and, consequently, the rate of exchange with England would have been estimated by a comparison of the gold coins of the two countries. When above 14, and under 15.07 to 1, gold would have been the standard in England, and silver in France, and the exchange rated accordingly. The par would then have been fixed by a comparison of the gold of England with the silver of France. And when the relative value was above 15.07 to 1, silver would have been the standard in both countries. The exchange would then have been rated in silver. But after 1785, when the Mint valuation of the metals was altered in France, and became nearly the same as that of England, the par of exchange would have been reckoned either in gold or in silver in both countries.

I have already observed that, to compare the amount of deviation of the exchange from par with the expenses of transmitting the precious metals from one country to the other, is not sufficient to prove that such trade would be profitable, we must also consider what the price of bullion is in the country to which it is transmitted, or the amount of expense which would be incurred in procuring the bullion to be coined into money. In this country no seignorage is charged. If an ounce of gold or silver is carried to the Mint, an ounce of coined money is returned. The only inconvenience, therefore, that an importer of bullion can experience in receiving bullion from abroad, instead of the money of England, is the delay during its detention at the Mint, and which the Bullion Committee have valued at 1 per cent. One per cent. appears, therefore, to be the natural value of English coin above bullion, provided the coin be not debased, and the currency be not excessive. But in France the seignorage, according to Dr Smith, amounted to no less than 8 per cent., besides the loss of interest during its detention at the Mint. And we have his authority, too, that no sensible inconvenience resulted from it.∗ An ounce of gold or silver coin was in France, therefore, of more value by 8 per cent. than an ounce of gold or silver bullion. It results from these facts that no bullion could have been imported into France, unless there was not only a profit equal to the expenses attending its importation, but a further profit of 8 per cent., the par of exchange being calculated not on the value which the coin actually passed for in currency, but on its intrinsic value as bullion.†

To make this appear more evident, let us suppose that the exchange with London was, as Mr Bosanquet informs us, 8 per cent. in favour of France, in the year 1767, and that at the same time it was 6 per cent. in favour of London with Hamburgh, and that the expenses of sending gold from Hamburgh to Paris were no more than 1½ per cent. Will it not be cheaper, he asks, by 12½ per cent. to pay the debt at Paris, by sending the gold from Hamburgh,‡ than by remitting a bill? I answer, No; because, when the gold arrives at Paris, it must either be coined into money, or sold as bullion. If it be coined into money, 8 per cent. must be paid to the Mint; if it be sold as bullion, it will sell at 8 per cent. under the Mint price.§ . The profit, then, if all the other calculations be correct, will be reduced from 12½ to 4½ per cent. But they are not correct, being subject to further deductions from the causes already stated.

Keeping these principles in view, it will, I believe, appear, that the exchange with Paris was in favour of England during a great portion of the four years, from 1764 to 1768, and at all the other periods mentioned by Mr Bosanquet.

I cannot help here observing, that it must excite astonishment, that a British merchant should seriously believe it possible, that, in time of peace, a net profit, after paying all expenses, of from 10½ to 12½ per cent. should have been made by the exportation of gold from Hamburgh to Paris during four years:—a profit, which, from the quick returns, would have enabled any person engaging in such undertakings to have cleared more than 100 per cent. per annum on the capital employed; and that too in a trade, the slightest fluctuations of which are watched by a class of men proverbial for their shrewdness, and in which competition is carried to the greatest extent. For any man to compare the account of the Hamburgh exchange, and of the Parisian, and not to see that the accounts were incorrect, that the facts could not be as so stated, is very like a man who is all for fact and nothing for theory. Such men can hardly ever sift their facts. They are credulous, and necessarily so, because they have no standard of reference. Those two sets of supposed facts, those in the Hamburgh exchange on the one hand, and those in the Parisian on the other, are absolutely inconsistent, and disprove one another. That facts such as these should be brought forward to invalidate a theory, the reasonableness of which is allowed, is a melancholy proof of the power of prejudice over very enlightened minds.

SECTION III.

Supposed Fact of a Premium on English Currency in America—Favourable Exchange with Sweden.

The next point on which I wish to make a few observations, is that first mentioned by Mr Grefulhe, and now brought forward by Mr Bosanquet. I allude to the premium which it is asserted was given in America, in hard dollars, for the depreciated currency of England. I have examined this fact with the greatest attention, and to me it appears evident; first, that the price which was called a premium of 9 per cent. given for a bill upon England, was really a discount of 3¼ per cent.; and, secondly, that at that price it was a cheaper remittance than if the dollars with which the bill was bought had been exported.

The par of exchange with America is reckoned in dollars; the par is called 4s. 6d. sterling for a dollar, consequently 444.4 dollars ought to contain as much pure silver as 100l. sterling. But this is not the fact. An American dollar, according to the Mint regulation of America, ought to weigh 17 dwt. 8 grains, and is 8½ grains worse than English standard silver; consequently, the value of an American dollar in our standard silver is 4s. 3¾d. According to this value, 463.7 dollars is the true par for 100l. of our English silver currency; but we are comparing the dollars of America with the pound sterling of England, which is gold; therefore, the true par for 100l. sterling at the relative value of dollars and gold in May 1809, the period alluded to, was 500 dollars. Now, for a bill of 100l. on London, bought with dollars in America at the highest exchange that year, viz. 109, no more was paid than 484 dollars; it was therefore purchased at 3¼ per cent. under the real par.∗

It should be recollected that the embargo laws were at that time most strictly enforced; that captains of packets were obliged, before they were permitted to proceed on their voyage, to swear that they had no specie on board; and, on one occasion, one of these captains was obliged to re-land the specie which he had smuggled on board his vessel. At the same time, the rate of insurance was immoderately high, and a premium of 8 per cent. was paid on a few ships which broke the embargo, the underwriters being guaranteed, too, from the loss which would have attended their seizure by the American Government. Now, 8 per cent. insurance, besides commission, freight, and other expenses, together with 3¼ per cent., the actual discount of the bill bought, would, perhaps, not be much under the discount which then existed on our paper currency; so that our depreciated paper was not bought at a premium for hard dollars, but was bought at a discount, and at its actual value.

But we are told the exchange with Sweden is favourable to England, and that the currency of Sweden is regulated in a manner precisely similar to ours, the Bank not issuing specie whenever the exchange becomes unfavourable. There is no doubt a perfect agreement in the two cases, and for that reason they are followed by similar effects, and the depreciation of both currencies requires the same remedy. This remedy is a diminution in the amount of the circulating medium, either by the exportation of the coins, or by a reduction of bank paper. If the exchange with Sweden is, as stated, 24 per cent. in favour of London, it proves only that the excess of paper currency not convertible into specie is, in Sweden, proportionably greater than in England.∗

SECTION IV.

A Statement concerning the Par of Exchange, by the Bullion Committee, examined.

Having now considered every fact, or supposed fact, advanced by Mr Bosanquet, on the subject of the exchange, with a view to prove that the principle which the Committee have avowed,—namely, that the variations in the exchange with foreign countries can never exceed for any length of time the expense of transporting and insuring the precious metals; having proved the conclusion to which the writer would lead us to be unsupported by his facts, of which not one is, as I think, at variance with the principle of the Committee, I must beg leave to point out an error in the Report itself, an error on which Mr Bosanquet founds his opinion, that all remedy may safely be delayed.

“Thus, then,” says Mr Bosanquet, “it appears that, on a full admission of all the principles adopted by the Committee, and of their application to the present case, the foreign exchanges were, at the time when the Report was presented, and for three months prior thereto, about 2 per cent. below the natural limit of depression.”

“It will probably be thought that the question, as a practical question of national importance, is altogether at rest;—that there is no necessity, at least, for the adoption of hasty remedies, even though the correctness of the general reasoning of the Committee should, on full inquiry, be conceded.”

When the exchange is admitted to be exceedingly depressed, we are told that to oblige the Bank to pay in specie would be attended with the most dangerous consequences; that we must wait till the exchange becomes more favourable; and when it is supposed to have risen within 2 per cent. of its natural limit, then we are again desired to pause, because it is no longer a question of national importance. By this mode of reasoning, a motive may be found for refusing ad infinitum to renew the payments of the Bank. I confidently hope that no such fallacious reasoning will be listened to; that we shall at last open our eyes to the dangers that beset us; that we shall examine coolly, and decide manfully.

The principle upon which Mr Mushet's amended tables are constructed, has been most fully admitted, and most correctly and concisely stated in the Report (page 10.)

“If one country uses gold for its principal measure of value, and another uses silver, the par between those countries cannot be estimated for any particular period, without taking into account the relative value of gold and silver at that particular period.”

The Committee have, moreover, in their endeavours to find out the real par between this country and Hamburgh, kept this principle constantly in view, as will appear from the questions put to Mr——(Report, page 73). Mr——also fully admitted the principle; and yet, when he was requested to “state in what manner he applied those general ideas to the statement of the par of exchange, as between England and Hamburgh,” he answered, “taking gold at the coinage price of 3l. 17s. 10½d., and taking it at Hamburgh at what we call its par, which is 96 stivers banco for a ducat, and further reducing 55 ounces of standard gold as being equal to 459 ducats, it produces a par of exchange of 34s. 3½g. Flemish for a pound sterling: a ducat contains at the rate of 23½ carats fine.”

Now, here is not one word said about the relative value of gold to silver in the market; and the only information which is obtained from this answer is, that 34s. 3½g. Flemish, in gold coin, is equal to a pound sterling of gold; and this calculation agrees within ½ grote with that of Dr Kelly (Rep. No. 59). If the purchaser of a bill in London for 34s. 3g. could obtain at Hamburgh 34s. 3g. in gold currency, that might truly be called the par, but he can only obtain 34s. 3g. in silver, which is not worth, by 8 per cent., as much as 34s. 3g. in gold coin. The question proposed by the Committee was, in effect, What amount of Hamburgh currency contains the same quantity of pure silver as can be purchased by a pound sterling in gold?

At the period when the Report was made, the answer would have been 37s. 3g. Flemish; 37s. 3g. therefore was then the true par of exchange. If the Committee had calculated according to this par, instead of 34s, 3g., they would not have reported that the exchange with Hamburgh was not more unfavourable to England than 9 per cent., but nearly 17 per cent.; and Mr Bosanquet would not have had an opportunity for observing, that, admitting the reasoning of the Committee, the evil was not of sufficient magnitude to make any immediate interference necessary.

CHAPTER III.

MR BOSANQUET'S ALLEGED FACTS, IN SUPPOSED REFUTATION OF THE CONCLUSION THAT A RISE IN THE MARKET PRICE OF BULLION ABOVE THE MINT PRICE PROVES A DEPRECIATION OF THE CURRENCY, CONSIDERED.

SECTION I.

That the Negation of the above Conclusion implies the Impossibility of melting or exporting English Coin—an Impossibility contended for by nobody.

The next proposition of the Committee, the justness of which Mr Bosanquet disputes, he has thus stated:—“That the price of gold bullion can never exceed the Mint price, unless the currency in which it is paid is depreciated below the value of gold.” But this is not exactly the principle of the Committee. Their principle, when fairly stated, is, not that gold as a commodity may not rise above its value as coin, but that it cannot continue so, because the convertibility of coin into bullion would soon equalize their value. The words of the Committee are these,—“Your Committee are of opinion that, in the sound and natural state of the British currency, the foundation of which is gold, no increased demand for gold from other parts of the world, however great, or from whatever causes arising, can have the effect of producing here, for a considerable period of time, a material rise in the market price of gold.” Nothing appears to me to be wanting to make this a self-evident proposition but the admission, that the