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600062463Q
ELEMENTS
OF
POLITICAL ECONOMY.
THE
ELEMENTS
OF
POLITICAL ECONOMY.
BY
HENRY DUNNING MACLEOD.
No sons tanaginons pw quo la vrai soit Tlctorieiix dte qull ie montn ; 11 Teit A 1a fin, nuUs Q
Inl fiftut da temps poor soumettre les Mprtts.
FoimirKLLB. Vit de ComeUle.
LONDON:
LONGMAN, BROWN, GREEN, LONGMANS, AND ROBERTS.
MDCCCLVin.
THB AUTHOR RESERVES THE R10HT OF TRANSLATION.
J'J^^ dL.. (J-Z.
LOMDOKt
KING & CO., Pim^Qfl. QUEKN STREET, dTT.
PREFACE.
The purpose of the following work is to strengthen
and establish the new conceptions and principles in
Political Economy propounded in my Theory and
Practice of Banking. In order to treat that subject
properly, I found it necessary to lay altogether new
foundations of the science. JBut I was subject to a
certain disadvantage. For .t6 establish a new set of
opinions, an unusual amount of discussion and con-
troversy is necessary. But to do this in a thoroughly
efiEicient manner, would have led to an inordinate increase
of a work, whose plan already extended over a wide
range of subjects. I was, therefore, in a certain measure
cramped to a more confined discussion than the nature
of the case really demanded, to have j ustice done to it.
The object, therefore, of the present work is to widen and
strengthen the foundations of the science, as treated in
that work. It has, therefore, a very considerable portion
in common with it ; and those parts of the former work,
which are of general application, are incorporated with
this one.
The view that I take of the proper limits of the pure
science of Political Economy, entirely differs from that
YI. PREFACE.
of any of the larger and well-known Treatises on it. In
my view the true object of the pure science of Political
Economy is to discover the laws that regulate the
Exchangeable Relations of Quantities. This coincides, I
think, pretty closely, with the ideas of at least one
eminent writer — Archbishop Whately. I however think
it right to say, that I formed this opinion of the subject
quite independently, and, indeed, before I was acquainted
with his lectures. The same conception seems also to
have occurred to other writers, but no one has hitherto
executed a comprehensive work, founded upon this con-
ception. The views held by preceding writers, and the
reasons which have led me to endeavour to found a
system on this conception, are shortly stated in the
preliminary observations.
Political Economy, like geology, is preeminently a
practical science. There is no more grievous error, than
to suppose that it can be constructed solely in the closet,
like some abstract sciences. On the contrary, it requires
a familiar practical knowledge of a considerable variety
of subjects. Nature is far more subtle than the acutest
intellect of man, says Bacon, and in practice there occur
a great variety of circumstances of the first importance
in Political Economy, but which would only occur to a
person practically familiar with the subject. Moreover
it is indispensably necessary that these facts, and their
relations, should be expressed in language governed by
the most rigorous scientific precision.
The forces which produce the phenomena of Political
Economy are equally certain, precise, and unerring, as
those in Mechanics, and they must be expressed in lan-
guage subject to the same scientific control. Political
Economy will never be brought to a satisfactory state,
until the meaning of every single term is as rigidly set-
FBEFACE. VU.
tied, and every sentence and idea is tested with the same
rigorous precision as those in mechanics. And success in
one depends exactly on the same faculty as in the other,
namely the power of the separation of ideas, of resolving
complex ideas into their elements. " Nella maggior parte
degli uomini manca il vigore per rimontare ai principii
grandi e universalis e discomporre con analisi le mal com-
binate idee, unico mezzo per discoprire le vere relazione
delle cose."*
It is a glorious and a hopeful sign to see the writings
of Bacon daily becoming more popular. This, of course,
is not the place to go into any general account of his
transcendant merits. But one of them bears peculiarly
on our present subject. He diligently inculcated the
doctrine of the unity of science. His name has been
far too much exclusively connected with physical Science,
whereas he over and over again inculcates that
natural philosophy is the proper preparation and dis-
cipline for the successful study of moral and political
science. He calls it the "admirable mother of the
sciences," and again and again declares, that the same
general principles of reasoning lie at the foundation
of all science, and warns us on no account whatever to
break the continuity of the Sciences. "Atque hoc
pro reguMl ponatur generali; quod omnes scientiarum
partitiones ita intelligantur et adhibeantur, ut scientias
potius signent aut distinguant, quam secent et divellant ;
ut perpetuo evitetur solutio continuitatis in scientiis.
Hujus etenim contrarium particulares scientias steriles
reddidit, inanes et erroneas; dum a fonte et fomite
communi non aluntur, sustentantur et rectificantur."f
• Beccaria. Del DiEordine delle Monete nello Stato di Milano. 1762.
f De Augm ; Sci : l iv. Cap. 1 .
VUI. FBXVACB.
That the same great principles of reasoning are
common to all sciences, is a truth which is now so
generally acknowledged, as to require nothing to be
said. If^ therefore, it can be shewn^ that the arguments
of writers on Political Economy are palpable violations
of all the acknowledged standards of reasoning in
Natural Philosophy, that is enough at once to con-
demn them. Now, this is exactly what is the case
with the principal works on Political Economy, which
have exercised the greatest influence over opinion iu
recent times.
Ricardo was a person of great natural powers of rea-
soning, but unfortunately, as is well known, he never
received that indispensable training in natural science,
without which, it is absolutely hopeless that any one
wliatever, however great his natural abilities may
be, can construct a work on scientific principles.
^^ Neither the naked hand, nor the undisciplined in-
tellect, can avail much," says Bacon, "each of them
requires instruments and training.'' Though his work,
therefore, shews his great aptitude for abstract reasoning,
it is not possible for any one who understands the great
general principles of natural philosophy, not to see im-
mediately, that it is diametrically opposed to them. It
is a complete rupture of that continuity of science, which
is universally acknowledged to be indispensable. To
believe in Ricardo at the present day is a most grievous
anachronism. No work whatever from its great, but
undisciplined power, has inflicted such incalculable
mischief on the Science of Political Economy.
Bacon declares that all science consists in forminof true
conceptions of things, and discovering the laws of their
relations, or general principles, the notiones and the
axiomata. He maintains that the discovery of these
FRBFACB. IX.
depends upon the same general methods, and the same
tests must be applied for proving their accuracy. One
of the chief methods is that of rejections and exclusions.
Having stated this, however, his attention has been
chiefly directed to the method of ascertaining correct
axioms, or general principles, and he has said very little
about the conceptions, or definitions. And most persons
who have cultivated natural philosophy, have bestowed
much more attention to the principles, than the concep-
tions. But we shall find that Political Economy afifords
many instances of striking beauty, in which the great
truths chiefly brought to bear by him on principles, are
here brought to bear on conceptions.
By that mysterious correlation which holds between
reasoning and reality, it is invariably found that if con-
ceptions of things are framed which are true to nature,
and results are calculated according to reasoning which
is also true to nature, they will be found to correspond
to reality. That is, if true conceptions are formed, and
truly reasoned about, results may be predicted. But if
restdts are calculated^ and it is found that they do not
correspond to nature, but are palpably and notoriously
erroneous, then we are inunediately certain, either that
the reasoning, or the conception, must be erroneous.
And if it be shewn that the reasoning is unimpeachable,
it necessarily follows that the conception micst be
untrue.
We shall find a most beautiful exemplification of this,
in the common notions about the paper currency and
money. The common notion is that the paper currency
merely represents bullion, as an article of value, not
because there is any speciality about bullion in itself, but
merely as a convenient commodity. Now, adopting this
notion, there is a very prevalent idea, which is the
X. PBEFACB.
peculiarity of John Law's theory of money, that a paper
currency may represent any other article of value, equally
well as bullion, and that if there is a scarcity of bullion,
the only thing necessary to insure an ample supply of
money, is to base a paper currency upon any other com-
modity of value. Now, the reasoning is unanswerable
if a paper currency is the representative of value^ Law's
theory of money cannot be refuted. What he says is
that if a paper currency only represents an article of
value it cannot be depreciated. Now, there is no flaw
whatever in his reasoning. And his plan appearing to be
so specious, has been repeatedly tried, and as uniformly
failed, inducing some of the most terrible convulsions the
world ever saw. It, therefore, mtist be erroneous, and as
we have said the reasoning is unimpeachable, the error
MUST lie in the conception.
We must proceed by Bacon's method of rejections and
exclusions. If a paper currency succeeds, which is based
solely upon bullion, and fails when based upon bullion
and commodities, which are both articles of value, it
necessarily follows that we must search for some con-
ception, which shall include bullion and exclude commo-
dities. And that is precisely what we have done. We
have found that a paper currency is based upon bullion
as the specific representative of debt^ and not as an in-
different article of value. Bullion is the representative
of debt, and commodities are not. Paper currency is the
representative of debt. Paper currency and bullion are
homogeneous quantities, paper currency and commodities
are not homogeneous. Directly we adopt the conception
of currency as the representative of debt, the fallacy of
Law's theory of money is palpable, and apparent. It is
immediately seen that to base a paper currency on com-
modities, is an express violation of this fundamental con-
PREFACE. XI.
ception. It is immediately seen that it involves this
contradiction in terms, that we can buy a thing and have
the price of it as well. It is also seen that by adopting
our conception of the nature of money, all the direful
consequences which we know have occurred, can be
infisdUbly predicted, it can be shewn that they must
necessarily happen. There can then be no possible doubt
that we have at last obtained the true conception of the
nature of a currency. Currency is the representative of
DEBT and not ofYALjm.
Now, this result is not doubtful, or a matter of opinion,
but it is a certainty. It is attained by exactly the same
process of reasoning that all results which are acknow-
ledged to be certain are attained. It is just as certainly
wrong to say that paper currency is the representative
ofvalue^ as it is certainly wrong to say that the sun goes
round the earth. The certainty of the one result depends
upon exactly the same principle as the other, namely, the
capability of shewing that results obtained by reasoning
founded upon such conceptions, necessarily correspond
with actual phenomena.
There is no science so apt to seduce and deceive an
unwary person as Political Economy. In most other
sciences the terms are uncouth, novel, and strange. They
immediately arrest the learner's attention, and he desires
to ascertain their exact meaning. Having learnt this, he
always associates certain definite ideas with certain words.
In Political Economy, however, the words being in com-
mon use are so familiar that people use the language
carelessly, and never dream of stopping to think whether
they have any definite idea of the meaning of the words
they employ.
The consequence is, that the language of Political Eco-
nomy is utterly corrupt. The first thing to be done, is to
Zn, PBSFACE.
effect a thorough and entire reform of the nomenclature
of the subject ; to fix and define the true conception of
all its teclmical terms on exactly the same principles as
they are done in other sciences.
'^ In the right definition of names lies the first use of
speech, which is the acquisition of science. And in wrong,
or no definitions, lies the first abuse, from which proceed
all fidse and senseless tenets." So says Hobbes,'** nor did
any man ever say anything more true. And a writer,
who it would have been well if he had followed his senti-
ments more closely, says : " But to penetrate to the more
hidden agreement on which these obvious and superficial
agreements depend, is often one of the most difficult of
scientific problems. As it is among the most difficult, so
it seldom fails to be among the most important* And
since upon the result of this inquiry respecting the causes
of the properties of a class of things, there incidentally
depends the question. What shall be the meaning of a
word, some of the most profound and valuable investiga-
tions, which philosophy presents to us, have been intro-
duced by, and have offered themselves under the guise
of inquiries into the definition of a name."f
And this is as applicable to Political Economy as to
any other science, though it has been less attended to.
The question whether the circulating medium is the
medium which circulates itself, or the medium which cir-
culates commodities, is of fundamental importance. No
progress can be made until the question, whether Bills of
Exchange are, or are not, circulating medium, is conclu-
flively setded on scientific principles.
Nothing can shew better than Political Economy, the
• Leyiathan. Pt i. chap. iv.
f J. S. Mill. System of Logic. Vol l p. 175.
oorrect, or incfxr^'Si .jn^ristr^ iin?
If thought does zrx. zul^vi* ]a
master thought. 4z^^:-^n uiriiji.
wickedness, ctth^^^ i-.Zrc. tiji
expression the "^iis^-^ ::
made some of the mrfiz s^^Zt'.-L
Science, hefore thev iilvi-rT^i ilt: sLr-Tlc
commerce both sides musi gtaln '
If, then, it is of s-j great icporraaoe Vj senlr ibe
nomenclature of the Science, the nrst i^eyjid^te is riaiiiesT-
Ij to endeavour to settle the true conception of iLe
Science itself. Accordinirlv. in the Preliminaet C^es-
TATI09S| I have very briefly stated the circumstances
out of which it originated, the views of its nature and
extent which the chief writers in it have held^ and the
reasons which have led me to adopt the conception of it
as the Sdence which treats of the laws that regulate tUo
Exchangeable relations of quantities.
The First Chapter, then^ contains an nttcuipt to seltio
the true fundamental conceptions of the vnriouH Um*ii]s
and objects in it, fortifying and illustrating these; vi(*ws
by analogous instances drawn from other HciisiiccK.
The Second Chapter then attempts to sottlc thc! f^i'iuj-
nJ laws, which regulate the exchangeable rolatioriM of
these quantities, on exactly similar principlcjH iih aru
acknowledged to be conclusive in jiliyHiail Hcicnce.
Though I would willingly have avoided controvopny,
I thought it incumbent on me, to shew that th« principh-H
of other writers which 1 dissent from, arcs cU^arly and
manifestly opposed to the principles of K^^ncrul science.
The question, therefore, does not lie botweon nic and tlicm]
but is to decide which of our opinions is correct, according
to a universally recognized standard of reference. Having
XIV. PREFACE.
attained such a general principle, its application is shewn
in two Sections. The first treats of its application to
cases of absolute sale, the second to those of the tempo-
rary purchase for any time of the use of anything. In
this latter Section I have endeavoured to shew that
Ricardo's fundamental conception of Rent is not the true
one, and also that the general principle he arrives at is
palpably erroneous.
The Third Chapter treats of Credit. No subject has
been so grievously maltreated by Political Economists as
Credit. Turgot is the great misleader of opinion on this
point, and all his error, and that of succeeding writers,
proceeds from a conception of the nature of Credit, which
is palpably absurd. Credit is divided into two grand
divisions, Mercantile Credit, and Banking Credit. In
two sections I have endeavoured to exhibit as correctly as
possible, the actual details of business ; a thing which has
never yet been done, by any writer on Political Economy
Mercantile Credit occupies the first Section.
The second Section is of peculiar importance at the
present time, when Banking occupies the public attention
so prominently ; and all the more so, in consequence of
the erroneous notions which are prevalent upon it. I
have carefully read every word that ever was said in
Parliament upon it; everything contained in the various
blue books ; innumerable pamphlets ; quantities of articles
in newspapers, and I can only say this, that not a single
speaker in Parliament, not a single witness before a
Parliamentary committee, tuot a single pamphleteer, not
a single writer of a newspaper article shewed, that he
had the most distant conception of the ordinary routine
business of banking! The actual details are here for
the first time exhibited, and it is only necessary to under-
PREFACE. XV.
stand them to see that they contain a complete over-
throw of common opinion on the subject.
The third Section I have devoted to the examination of
the established doctrines on the subject of Credit, from
Tui^ot to Mr, Mill, and shewn the entirely false concep-
tion of the nature of Credit, they are based upon.
The Fourth Chapter • contains less novelty than any
other. The fact is, that the subject has been so tho-
roughly and satisfactorily settled by former writers,
that I had little to do but to gather and select the
classical problems in the subject, and endeavour to
demonstrate them, in my own way. The subject of the
Exchanges is that which has been by far the best treated
of any in Political Economy, and which is the best under-
stood, from the great and thorough disscussions raised
in the great currency debates during the war. The fact
is, the question was so thoroughly settled then, that there
is little probability of the question ever being seriously
raised again. Nevertheless, it seemed better to collect' the
great principles then established, because the time may
come again, when they may be useful. The only novel
principle that I have added, but it is one of the greatest
importance at the present day, is, that a difference in the
rate of discount between any two places^ more than mffiderU
to pay the cost of sending bullion from one to the other ^
necessarily causes a transmission of bullion from one to
the other J which necessarily shews that the true method of
controlling the paper currency^ is by a sedulous aMention
to the rate of discount^ a principle which was first proved
in my Theory and Practice of Banking, and which it is
said that the Bank of England have at last learnt and
adopted.
The Fifth Chapter contains a full examination of
several theories of Currency of great practical importance,
XVI. PBBFACE.
and it is a wonderful confirmation of the truth of our
fundamental conception of the nature of money. It is
there shewn that John Law's theory of money is a direct
violation of that conception, that it involves a contradic-
tion in terms. Several examples of its adoption and failure
are then given. And as we are writing these sheets a
terrible confirmation of its trut|i has just taken place.
For American banking is based upon John Law's theory
of money. And it is to the erroneous nature of American
banking, that the present crisis is owing.
The theory of tie Bank of England in 1810, of basing
a paper currency upon the discount of mercantile bills, is
then investigated, and its necessary consequences de-
monstrated, corresponding with the actual phenomena.
Thus, we see that all parts of the system mutually sustain
one another. We then shew the beautiful action of the
true regulating power of the currency, namely the rate
of discount; how, by its own natural operation, it main-
taiifs the equilibrium between production and consump-
tion, always adapting one to the other, and curbing and
promoting them in strict accordance with the requirement
of nature, so as to prevent violent convulsions.
An historical sketch of the Currency of England is
indispensably necessary, and is given in the Sdcth chapter,
in which several questions respecting the exchanges are
incidentally illustrated.
The Seventh chapter treats of the Regxilation of a
Paper Currency, which is, in fact, the summing up of
Political Economy. It exhibits the action of the Bank of
England in all the great monetary crises since 1783 up to
the present month of November, 1857, and a statement is
given of the different opinions that have prevailed. And
an accoimt is given of Sir Robert Peel's three states of
opinion on the currency question. It is clearly shewn
PREFACE. XVII.
tW his opinions in 1844 were entirely dilBFerent from
those he held, and repeatedly expressed from 1819 to
1833. The Bank Act of 1844 is then explained in detail.
Such an extraordinary exposure scarcely ever took place.
It is proved to be founded upon contradictory principles,
and seeks to attain an object which has been repeatedly
condemned by all the great authorities of former times,
and by all experience. What its fate will be remains to be
seen. Thus, it appears that all the great questions in
Political Economy flow directly from the doctrine of
Exchange.
This work restores the great line of orthodox opinion,
so rudely broken of recent years. It is the lineal repre-
sentative of the ideas of Burke, of King, of Thornton, of
Horner, of Huskisson, of the Bullion Report, of the
Framers of the Act of 1819. The Currency Question
is the most important subject of the day. But it is now
in the Arian phase of its existence, like the throes of
Enceladus, it will periodically convulse the world, until it
is settled on true scientific principles. That this work is
subversive of the dominant opinions of the day is true ; but
yy&jjiai vXioy Kparovtriv fj trOivoc \tpiiv
Ideas are no respecters of persons. They will sap the
power of rank, of wealth, of number, and of authority.
Firmly relying on the invincible power of truth, from
however humble an origin it may spring, to win its way
to universal empire, I submit these pages to the candour
and the intelligence of the world.
H. D. MACLEOD.
Kensington,
November 25, 1857.
CONTENTS.
PRELIMINARY OBSERVATIONS.
ON THE NATURE AND UMIT8 OF THE SCIENCE
OP POLITICAL ECONOMY.
Sscnoir. Pagb.
1. Difference of opinion as to the nature and limits of Political
Economy. 1
2. Origin of the true science to be dated from the period of the
overthrow of the doctrine of the Balance of Trade. , . 1
3. Which is due to Quesnay and his school 2
4. Era of the foundation of the science by Quesnay. . . 3
5. Extent of it, as conceived by him. 3
6. Three of his maxims were the overthrow of the previously
existing system of Political Economy. .... 4
7. Quesnay is the Copernicus of Political Economy. . . 5
8. Adam Smith's conception of the nature of Political Economy. 5
9. J. B. Say's conception of the nature of Political Economy. 6
10. This conception has been extensively received. ... 6
11. Ricardo's Principles of Political Economy and Taxation. . 7
12. Mr. Senior's conception of the nature of Political Economy. . 8
13. Mr. J. S. Mill's opinion. ....... 8
14. Many continental treatises have gone back to the original
conception of the Science. ...... 8
15. Necess«ary to explain the conception of the science as adopted
in this work. ......... 8
16. The science of Political Economy is founded upon the natural.
wants of the members of Society. ..... 8
1 7. Two methods of distributing products to members of Society.
First method, a distribution regulated by public authority. , 9
b 2
XX. CONTENTS.
Sacnoir. Paok.
18. Second method, that of free exchange, and unlimited com-
petition. 9
19. The first method is called Socialism 10
20. The second method of free exchange and unlimited compe-
tition is exclusively adopted in this Work 10
21. The true object of Political Economy is to discover the laws
which regulate the values of quantities, and all quantities
which have value, or exchangeable relations, are included in it. 1 1
22. Political Economy includes the Present Value of deferred
Payments. 11
23. Political Economy treats of all things that may be bought and
sold, whether actually or potentially existing. . . .12
24. Archbishop Whately has proposed the name of Catallactics. 12
25. We adhere to the name of Political Economy. . . .12
26. If there were no exchanges there could be no science of
Political Economy. Inadequacy of J. B. Say's definition 13
27. Wealth may be produced, distributed, and consumed, without
any exchanges, and then there could be no idea of value . 13
28. This, however, requires a peculiar state of Society . . .13
29. It has always failed where the members of Society were on an
equality with each other ....... 14
30. The Socialists have endeavoured to abolish Political Economy 14
31. Having adopted this fundamental conception of the nature of
Political Economy, what things are excluded from it . .14
32. Such discussions are excluded from this Treatise . • .15
33. Advantages of this mode of treating the subject . . .16
34. Great importance of the science of Political Economy to
mankind . 16
CHAPTER I.
DEFINITIONS AND ILLUSTBATIONS OF THE TERMS USED IN 1»0LITICAL
ECONOMY.
1. Meaning of EXCHANGEABLE VALUE 21
2. Meaning of diminution in value 22
3. Exchangeable value influenced by intrinsic qualities . . 22
4. Exchangeable value not indicated by labor . . . .23
5. Tendency towards an equilibrium of advantages . . .23
6. It is not labor that confers value, but value that attracts labor 23
7. Meaning of debt 24
8. Evidence of this debt 24
9. Which becomes a currency . . , . . .24
10. What currency is 25
11. Though it receives its name from passing from hand to hand,
it is only current because it circulates something else . . 25
12. Use of a currency ..;.•... 25
CONTENTS. XXI.
tlCnOW. PAOB.
13. Definition of currency ; 25
14. Where there is no debt there can be no currency. The use of
a currency is not to facilitate but to abolish exchanges . 26
15. Plato and Aristotle's definition of money as the medium or
instrument of exchange 26
16. Reasons for rejecting this conception 27
17. Analogous cases 28
18. Adam Smith accidentally expressed the true conception • • 29
19. Meaning of Depreciation 29
20. Distinction between Diminution in Value and Depreciation . 29
21. Quantity of the Currency should be proportioned to the debt . 30
22. Progress of improvement in Currency 31
23. Best material for a Currency 31
24. Gold and Silver the best materials for a Currency . . .31
25. Further advantages of a Metallic Currency . . , .32
26. It performs the same functions as a Paper Currency . . 33
27. Disadvantages of a Metallic Currency 33
28. Paper Currency is made to represent Metallic Currency . . 34
29. Postage Stamps a rude form of Currency . . . .34
30. Idea of Currency distinct from that of Money ^ and may exist
without it 34
81. Progressive steps in generality of Currency . . . .35
32. A Currency was used before its true nature was understood . 36
33. Paper Currency is termed Security for Money, — ^Two divisions
of it — Promises to pay money, and Orders to pay money . 36
34. Meaning of Circulation 37
35. Dlustration of Currency and Circulation . . . .38
36. Gold and Silver derive their chief value from their fitness to
form a Currency 38
37. Difierence between Salb and Exchange 39
38. Question debated by the Koman Lawyers . . . .39
39. Currency is a complex term — Meaning of Circulating Medium 40
40. Circulating Medium is the medium which circulates commodities 41
41. Enumeration of the diflferent species of Currency . . .41
42. Decision in Chancery 42
43. Amount of Currency 42
44. Objections to these views answered 43
45. Proposal of Sir Josiah Child 43
46. Opinion of Mr. Thornton .44
47. The expressions Currency and Circulating medium are identical 44
48. Quotation from Dr. Whewell 45
49. The essence of Currency is personal liability . . . .46
50. Distinction between Bills of Exchange and Bills of Lading and
Dock Warrants ........ 46
61. Dangerous consequences of confounding them . . .47
52. Conversation of Linnaeus illustrating the distinction between
the things which are and which are not Currency . . 47
ZXU. COMTENTS.
Bktiov. Pao«
53. Application of this Conversation * 48
54. Criterion to decide what is and what is not Currency . . 48
55. Distinction between Bills of Exchange and Stock. . . 49
56. Distinction between Securities for Money and Convertible
Securities. 50
57. Illustration of the distinction between depreciation and
diminution in value. 50
58. Most perfect form of a Currency. 51
59. The term Value in Political Economy is to be restricted to the
Exchangeable relations of quantities. . . . .51
60. The distinction between Value in use and Value in Exchange
erroneous. 52
61. Illustration of the meaning of Value 53
62. Labor and Value have no necessary connection. . . » 53
63. All value is local. 54
64. Positive Values and Negative Values 54
65« Examples of positive and negative values 55
66. The same continued 55
67. Professions founded upon negative values 55
68. Profit cannot begin until negative value is got rid of. . . 56
69. All employments based either upon positive or negative values. 56
70. Besources of a country. 56
71. The circulation of the Currency is analogous to the duty of an
Engfne 57
72. Or to the momentum of a body 57
73. The quantity of Currency in different countries is no evidence
of their comparative wealth. 68
74. The quantity of money in any country hears no necessary
relation whatever to the qimntity of other goods ^c. in it, or to
. their price. ......... 59
75. The quantities of Currency in different countries vary very
much according to the different methods of transacting
business GO
76. Different effects that may be produced by introducing more
money into a country. GO
77. Different effects produced by changing the mode of doing
business 61
78. Meaning of Capital and Credit. 62
79. First conception of Capital and Interest. . . . .62
80. Historical origin of Interest. . . . , . ,63
81. Rude form of Capital very obstructive to the growth of \realth . 63
82. First rudimentary form of Credit. 64
83. Quotation from Mr. Laing illustrating Capital, Credit, and
Interest. 64
84. Certain dogmas derived from these views 65
85. Revolution caused by the introduction of Money. . . 65
86. Investigation of the meaning of Capital. . . . .65
OONTENTfl. XXm.
Sicnov. Paoi*
87. Pnndamental conception of Capital 66
88. There is no abstract measure of Value, as of length and weight 67
89. Further elucidation of the operation of Capital. . • .68
90. Capital is the circulating power of Commerce. . . .68
91. Meaning of the mercantile phrase to turn-over Capital. . 69
92. Extension of the meaning of Capital — Intellectual Capital. . 69
93. Most general meaning of Capital 70
94. Meaning of Credit. Maney^ Labor, and Credit, represent
industry past, present, and future 71
95. Examination of the operation of Credit 71
96. Capital and Credit constitute the Circulating Medium, . . 72
97. The system of Credit further investigated in a future chapter. 72
98. Further examples of immaterial Capital 72
99. The word Capital is rather to be applied to the method of
employing any quality, than to any particular thing. . 73
100. Political Economy includes the Present Values of all future
payments 74
101. Bills of Exchange are independent values . . . .74
102. Illustration of the nature of Bills of Exchange. • • 75
103. A Bill of Exchange is a separate and independent Value. . 75
104. Destruction of Credit is destruction of Capital. . . .76
105. Meaning of Profit, and its rate. .... 76
106. Meaning of Fixed and Floating Capital. . . .76
107. Further examination of fixed and floating capital. . . 77
108. An article receives eitlier of these names according to the
intentions of the owner of it, and not according to its own
nature 77
109. Further illustration of these words 77
110. The same continued. 78
111. The same continued. 79
112. Evil effects of too rapid a conversion of floating into fixed
Capital. *......... 80
113. The hire of an article is not proportional to its value. . .81
114. The value in money of an article is termed its Price. . .81
115. Different names of the purchase of services of a temporary
nature .82
116. The Value of Money varies inversely as Price, and directly as
Discount 83
117. Meaning of Pboduction 84
118. Meaning of Supply 85
119. Meaning of Consumption. ....... 85
120. People are divided into producers and consumers of each
article. .......... 86
121. The series of persons who deal in any article of commerce are
alternately producers and consumers of that article. ... 86
122. Distinction between Wealth and Resources. . . .86
123. Which species of industry conduces most to national opulence. 88
3UUV. CONTEXTS.
SaonoK. Pacb.
124 Mistaken ideas of the Spaniards regarding the precious metals. 89
125 Their fatal consequences to them. .... 90
126 Evils of an excess of Currency. 90
127. How this is obviated in England. 91
CHAPTER II.
THEORY OP PBICES. — PRELIMINARY CONSIDERATIONS.
1. Object of the present chapter is to discover a general expression
for the Law of Price in all cases 95
2. Different species of Price 96
3. MeABiug of Market Value, A. more general name required . 96
4. Difficulty of ascertaining market value . . . . .97
5. Price may be called Instantaneous Value . . , .97
6. Meaning of Intense .*.•.•.. 98
7. Services may be of different degrees of intensity . . .98
8. Illustration of this 99
9. Different causes that influence price 100
10. General formula for price 100
11. Application of this law of Price will bo considered in two
sections 101
SECTION I.
ON THE APPUCATION OP THE LAW OP PRICE, TO CASES OF ABSOLUTS
BALE.
1. The general formula obtained is applicable to all cases . 102
2. Adam Smith's law of value 103
3. This law is erroneous 103
4* Adam Smith adopts two measures of value, for which Ricardo
censures him 104
5. Bicardo adopts Adam Smith's first measure of value • .105
6. He rejects the idea of estimating value by the exchangeable
relations of quantities 105
7. Ricardo's law is that cost of production regulates value • . 106
8. He admits that this law is not applicable in all cases • .106
9. His ideas contrary to the requirements of modem science . 107
10. Mr. Mill's conclusion is also unscientific .... 107
11. Ricardo's law of value is amenable to the same censure which
he visited upon Adam Smith's law 108
12. Error of Adam Smith's doctrine of natural price . . .109
13. Adam Smith and Ricardo's systems are equally erroneous . 110
14. The relation between supply and demand is the sole
REGULATOR OF VALUE Ill
1 5. Pjice is in all cases a struggle between buyer and seller . Ill
16. No change in cost of production influences price, unless accom-
panied by a change in the relation of supply and demand . 112
CONrCNTS. XXV.
SiCTfoir. Pags*
17. Example to prove this . . ... 112
18. The rde exemplified in the case of com . . . .114
19. Ricardo's assertion erroneous 114
20. It is the market price of com which indicates the most unfavor-
able circumstances under which production can take place 115
21. This farther exemplified 116
22. The same rule holds good with regard to mines. Case of coal
mines shews the fallacy of the Bicardian law of value • 116
23. Further fallacies of Ricardo 117
24. Ricardo's doctrine as fallacious as if we were to say that the
height of the mercury in the thermometer regulated the heat
of the atmosphere 118
25. Further illustration of Ricardo's fallacy . . . .119
26. Analogous instance of this fallacy in physical science • .119
27. Further illustrations 120
28. Effects of a diminution of the cost of production of an article
under different circumstances 121
29. Further examples 122
30. General principles drawn from the preceeding examples . 122
31. Change in price not necessarily directly proportional to a
change in the ratio of supply and demand .... 123
32. Tendency towards an equality of profits . . . .123
33. General principles regarding price 124
34. These considerations conclusive as to the fallacy of the Ricar-
dian system of Political Economy 124
35. General law in experimental science . . . . .125
36. Analogous law in rolitical Economy 125
37. Total failure of the law that cost of production regulates value 125
38. Every general formula must bear on the (ace of it all the ele-
ments which influence its action 126
39. The only way to constmct a true formula for price . . 126
40. The formula obtained in this chapter is universally applicable 126
41. Speculation is the mother of production, but demand is the
origin of value 126
42. Aristotle saw the trae source of value 127
43. The Result only has value independently of the cost
of production 128
44. Further examples of erroneous reasoning , . . .128
45. Universal law in Political Economy 129
46. Erroneous expression of J. B. Say 129
47. Case of diamonds and paarls 130
48. It is the result only which has value 131
49. Ricardo's account of the value of gold erroneous , . . 132
50. Case of the value of buildings 133
51. Case of the value of pictures, statues, &c. . . . .134
52. Error of some railway companies. 134
53. The value of an article may diminish f s its cost of production
increases ....*••.. 134
XXVI. OOMTIMTB,
SBcnoir. PAom.
54. The value of an article often regulates its coet of production. 135
55. Further error of the doctrine that cost of production
regulates value 135
56. The hope of profit is the cause of production • . .136
57. Explanation of a difficulty raised by J. B. Say • . .137
58. Traders must live by their trade 139
59. Error of some gentlemen in this respect . . • .140
60. Example of this quoted from Mr. Laing . • . .140
61. Further examples from various countries . . • • 141
62. Separation of employments • .143
63. True axiom of trade — Small profits and quick returns • .143
64. Different fares of London and provincial cabs . • • 144
65. Profits must always be reduced to the same standard as
interest 144
66. Error of confounding the actual profit with the rate of profit. 145
67. Error of Mr. Mill on this subject 146
68. Variation in the price of bread 146
69. Case of wool 147
70. Com is an example of the error that cost of production
regulates value 148
71. Changes of price of different articles are effected in different
proportions ......... 149
72. Application of the law of price to forced sales . . .149
73. An article may be depreciated and yet increased in value . 150
74. Error of Bentham, that production is limited by capital . 151
75. Meaning of Over-production 151
76. Natural advantage of fluctuation of prices . • . .152
77. The true way to curb production is to annihilate profits . 154
78. Variation in the value of the Currency . . . .154
79. The measure of value liable to undergo a change . .155
80. Inconveniences of this change 155
81. Especially in the case of public debts 156
82. Important to inquire what circumstances will produce a
change in the value of money 158
83. Lord Lauderdale's statement of the eight causes which
produce a change in value 158
84. Ricardo's law a breach of the law of Continuity . . .159
85. Similar fallacy quoted by Dr. Whewell . . . .160
86. Important remarks of Dr. Whewell regarding the law of
Continuity 160
87. Causes of the variation in the value of money . . .161
88. Gold and silver the measures, but not the standard of value. 163
89. Other standards of value proposed by writers . . .163
90. Wheat an erroneous standard of value 164
91. Legal interference with the price of wheat . . . .164
92. Wages of labor also an erroneous measure .... 165
93. J. B. Say calls the attempt to discover a standard of value the
the quadrature of the circle of Political Economy . .165
0OI(TSKT8. XXVII.
Sacnov. Paos.
94. It is beyond the power of Law to fix yalues .... 165
95. The exchangeable relations of gold and silver do not coincide
with their relative quantities * 166
96. Inconvenience of an unlimited quantity of two species of
metallic currency 167
97. The same law applicable to any other substanoe used
a currency 167
98. ^s for instance, an inconvertible paper currency . . .168
99. Effects of improving the communications in a country . .169
100. Difference of price of an article in two markets can never
exceed for any length of time the cost of conveying it from
one to the other . . . ' . . . .170
101. Gold bullion is the measure of the value of the Currency . 171
102. This test a certain one 171
103. Changes in value as indicated by nominal prices sometimes
only apparent and not real 172
104. Inconvenience of a double standard 172
105. Prices should be left to the arrangement of the parties. . 178
106. Industry is the fundamental idea of property . . . 174
107. Examination of the system of protection . . . .174
108. Error of the system of Protection 176
109. What it is . . , 176
110. Opposite error . 176
111. Law of the Maximum in France in 1793 .... 177
112. Each system erroaeoiis 177
113. Both systems are forms of Socialism 178
114. Fundamental error of the Protective System , • .178
115. Case of Value apparently anomalous 179
116. Services rendered are of different natures . . • . 180
117. Progress of ideas in rights of property .... 180
118. Property in ideas 181
119. Peculiarity in law regarding property in ideas . • .181
120. Injustice in present law 182
121. No just ground for the distinction 182
122. Error of Mr. McCulloch 188
123. Anecdote of a French Revolutionary Tribunal . . . 184
124. Progress of public opinion respecting Copyright . . .184
125. Present Value of future payments 185
126. All certain future payments have an independent value . 186
127. Creation of Promises to Pay by merchants .... 186
SECTION II.
ON THE APPLICATION OF THE LAW OF PUICE TO CASES OF THE PURCUASB
FOB A LIMITED PERIOD OF THE USE OF ANYTHING.
1. Different names which the price paid for the use of anything
for a limited period receives 188
XXVin. CONTENTS.
oonoir. PAat.
2. Meaning of Bobot, Mbtatebs, and Bent .... 189
3. Farther explanation of Bent 189
4. Meaning of a Farheb 190
5. Bent is usually a fixed sum 190
6. Pajment of rent in kind 191
7. Meaning of Corn-rents 191
8. Doubtfiil if corn-rents are the most advantageous . .191
9. Bent is a part of price, but does not influence it . . . 192
10. Bent may be increased even though price does not increase . 192
1 1. The supply and demand regulates market price, and market
price regulates rent 193
12. Point at which cultivation for profit must cease . . .193
13. Exaggerated importance given to the Bicardo Theory of Bent 1 94
14. Bicardo's definition of rent absurd 194
15. Bicardo's censure of Adam Smith unfounded . . .195
16. Bicardo's views a mere play upon words . . . .196
17. Bicardo's account of Bent 197
18. Fallacious doctrine of Bicardo 197
19. Inconsistencies of Bicardo 198
20. Bent an example of the law of price 1 98
21. How rent arises 200
22. Further consideration of Bent 200
23. The same continued 201
24. More advantageous to have moderate sized farms on .a pro-
perty than very large ones . . . . . . 202
25. OnHii-e 202
26. On personal services 202
27. Wages do not depend upon the price of food . . . 203
28. A rise in food will generally depress wages . . . 204
29. Wages are determined purely by demand and supply . . 205
30. Strikes caused by erroneous opinions on this point . . 206
31. Causes that influence wages 207
32. Historical illustration of these remarks .... 207
33. Error of Bicardo's regarding natural prices of labor • . 208
84. Springs from his fundamental error regarding value . .210
35. The only way to enhance wages is to diminish competition . 211
36. Examination of Adam Smith's chapter on Wages and Profits 212
37. The same continued 212
38. The same continued 213
39. The same continued 213
40. His misanalogy regarding a lottery 214
41. Incongruity of his ideas 215
42. An expensive professional education is incurred because the
rewards are high, and not the reverse . ^ . .215
43. Upon Interest 216
44. Explanation of its nature 216
45. Gmat errors of opinion on this subject . . .217
CONTENTS. XXIX.
nonov. TAQu.
46. Considerations which goyem its rate 218
47. Interest analogous to Bent 219
48. Abnormal instances 219
49. Practical example 220
50. The same continued 220
51. The same continued 220
52. Length of time it took to abolish the Usury Laws . .221
53. Further considerations of the nature of Interest . . . 222
54. Bent and Interest proceed in opposite directions in progress
of society 223
55. Market rates for different species of securities differ. . . 224
56. Interest contains two elements. ..... 224
57. Another way of considering the question 225
58. Difficulty of discriminating the separate causes. . . 226
59. Examples of different rates of interest. .... 226
60. Sometimes arises from the change in the yalue of money. . 227
6 1 . Security sometimes worst when interest lowest. . . . 2^8
62. Bate of interest much depends upon the state of confidence. . 228
63. Considerations arising from the double meaning of the expres-
sion Value of Money. 229
64. Quotations from Adam Smith 229
65. Under what circumstances an increase in the quantity of
money produces a diminution on its value with respect to
debts and commodities 231
66. The same continued. 232
67. As long as an increase of the qxtanHty of Capital affects the
value of money with respect to debts, it has no effect on its
value with respect to commodities, arid as soon as it begins
to affect its value with respect to commodities it ceases to
affect its value with respect to debts 233
68. Effect different in former times to the present. . . . 233
69. Errors of two different parties 234
70. As soon as money undergoes a diminution of value with
respect to debts or commodities in any country, it causes an
exportation of bullion, and an importation of debts and
commodities. 234
71. Example of a very low rate of interest in France in 1812. . 235
72. Opposite causes may produce the same phenomena in Political
Economy. ......... 235
73. Apparent paradox of high rate of interest paid for money. . 236
74. Explanation of the paradox 237
75. A still more startling example. . . . . . 237
CHAPTEB III.
THE THEORY OP CREDIT.
Preliminary Bemaiks 241
XXX. CONTENTS.
SECTION I.
ON MLBCANTILE CREDIT.
Smtiom. Paos.
1. Meaning of Mercantile Credit. 243
2. Bests upon coufidence 244
3. Two forms of instrnments of credit 244
4. Usual form of a Bill of Exchange 245
5. Law of the acceptance of Bills. ..... 245
6. Usual form of a promissory note. 245
7. Essentials of Bills and Notes 246
8. Negotiability of Bills 246
9. Mercantile usage adopts.Bills rather than notes. . . 247
10. Meaning of indorse. 247
11. Discounting a Bill is not lending money 248
12. Meaning of Indorsement in blank, &c, .... 249
13. Bills of Exchange are saleable commodities. . . 249
14. Mode of generation of Bills 250
15. Use of a Bank 251
16. Function of a Bank. 551
17. Advantage of discounting. 251
18. Function of a Bank of discount. . . . . .251
19. Progress of goods in business 252
20. Transfer of goods usually generates two Bills. . . . 252
21. Number of liabilities of each party 252
22. Error regarding commercial Bills 253
23. Error of expression that Bills r^prc^en^ property. . . . 253
24. Bank may advance to several persons engaged in some
operation. ......... 254
25. Mr. Thornton points out error regarding Bills. . . . 254
26. Every indorsement of a Bill is a fresh drawing. . . 255
27. Liabilities of the parties. 255
28. Bisks of discounting. 256
29. Overtrading 256
30. The same continued. 257
31. Consequence of over supply 257
32. Meaningof Bankers "contracting their issues." . . . 258
33. Impossible to ascertain the effect of a contraction of issues
on prices. 259
34. Opinion of Mr. Turner 259
85. Failure of Credit causes a demand for money. . . .261
86. It is generally the failure of Credit, and not the scarcity of
money that causes a pressure on the Money Market . . 261
37. All great commercial crises in this country have been pre-
ceded by a failure of Credit 263
38. Phenomena of the momey market explained by the foregoing
principles. 263
39. The effect of a legitimate use of Credit is to equalize prices. 264
CONTENTS. XXXI.
Saonoir. Paop.
40. Credit caipable of being applied to the formation of products . 265
41. Example of this 266
42. Examination of this example 266'
43. Error of epithet fictitious Capital 267
44. Advantages and risks of this method . .... 268'
45. Different proportion of credit and money in England . . 269
46. Discounting a bill with a bank is not borrowing money, but
selling a debt 269
47. Meaning of an accommodation bill 270
48. Nature of the transaction 271
49. False distinction between real and accommodation bills . 271
50. Essential distinction between real and accommodation bills is,
that one represents a past and the other a future transaction 272
51. Cash credit system of Scotland is upon the principle of ac-
commodation paper 273
53. Limit to the number of real bills ..... 273 '
54. Most commercial catastrophes caused by accommodation
paper 274
55. All commercial transactions on credit are sales not loans 274
56. MERCANTILE CREDIT IS JfERCANTILB CAPITAL . . .275
57. Credit ranks with gunpowder, printing, and steam among the
marvels of human ingenuity 276
SECTION II.
THEORY OF BANKING.
1. This section only contains the Theory of Banking . . 277
2. The business of a merchant is to deal in commodities, the busi-
ness of a banker is to deal in currency .... 277
3. Necessary to settle the meaning of a Bank and to Bank . 277
4. Instances from early English writers to shew that the word
Bank is more probably the equivalent of the Italian word
Monte than oi Banco 278
5. Description of the first banks 278
6. The notes of the Bank of Venice were exactly equal to the
coin they displaced 280
7 The Bank of Blamburg, and of Sweden .... 280
8, These banks examples of the meaning of the word here
supposed . . . . 280
9. First bankers in England 280
10. Their mode of doing business 281
11. They issued notes exceeding the amount of cash they held . 282
12. Foundation of the Bank of Scotland 282
13. The Bank of England the first monetary institution in Eng-
land to which ihe name bank was applied .... 283
14. Mode of its formation 283
XXXIL CONTENTS.
Sacnow. Pi
15. Tbc if«iic8 limited at first, then anllmitcd, then limited again
by the Bank Act of 1844 288
16. The essential feature of a bank at this period was to issue
promissory notes payable to bearer on demand . . • 283
17. The bank at first received no monopoly in its favor . . 284
18. Clause in the Act of 1709 prohibiting banking partnerships of
more than six persons 284
19. It does so not by naming " banking " but by describing it . 285
20. Clause in the Act of 1742 strengthening this prohibition . 285
21. Description of this privilege of exclusive banking . . . 286
22. Change in the mode of doing banking business in 1772 . 287
23. Custom of bankers regarding cheques 287
24. Cheques are a substitute for bank notes . . • . 288
25. Change in the mode of expression to meet the change in the
mode of doing business 288
26. Practical differences between cheques and bank notes . . 288
27. Both subject to the general law affecting instruments of credit 289
28. Modem system of Banking by means of cheques the same in
principle as by means of bank notes. Different forms of
making up the accounts 289
29. Examination of these forms 290
30. Examination of the second form . . . . . .291
31. Erroneous inferences which may be drawn from the publica-
tion of balance sheets 291
32. Erroneous expression regarding bankers, that they are agents
between persons who want to lend and those who want to
borrow 292
33. Common notion of banking erroneous 292
34. Further proof of the fallacy that discounting bills is lending
money 293
35. Deceptive inferences drawn fix)m banking accounts . . 294
36. Distinction between a banker and a bill broker • . . 294
37. Cheques are merely another form of bank notes . . . 294
38. A merchant deals with credit, a banker deals in credit . • 295
39. CREDIT IS CAPITAL 295
40. Error of those who think that banking does not add to capital 295
41. It is in the multiplying power of capital that the chief danger
of too rapid an extension of banking consists . . . 296
42. A bank mania to be carefully guarded against . . . 297
43. Limit to a banker's power of buying debts with promises
to pay 297
44. It may happen that the mutual claims of bankers may all be
settled without any coin 298
45. One refutation of the error that Bills of Exchange are
not currency 299
46. The Clearing House 299
47. Mode of transacting business tbere 800
CONTENTS. XXXIII,
BtonoK. Paok.
48. The same continued 800
49. The same continued . . • . . . . . 301
50. The same continued 302
51. Banks which are not in the clearing house .... S02
52% Beflections suggested by the clearing house. . . . 302
53. Refutation of common errors regarding payment of Bills
of Exchange. . 303
54. The obligations interchanged at the Cleariug House form an
integral part of the circulating medium .... 304
55. Impossible to estimate the amount of paper currency in
this country 305
56. The important portion of the paper currency which consists of
cheques has not been sufficiently appreciated . . . 305
57. Practice of manufacturing sham debts 306
58. Dangerous for a bank to countenance accommodation paper . 307
59. Explanation of the true danger of accommodation paper . 307
60. Beal danger is that the position of principal and surety
is reversed 308
61. Great extent of this system 308
62. Duty of a banker to contract his liabilities in times of danger. 309
63. "Whenever the rate of discount in two markets differs by
more than the sum necessary to transmit bullion, an
immediate flow of bullion takes place to that market
where debts are to be bought cheapest .... 310
SECTION ni.
EXAMINATION OP THE OPINIONS OP MODERN POLITICAL ECONOMISTS
ON THE SUBJECT OF CREDIT.
1. The preceding sections contain the complete overthrow of the
established opinions upon credit . . . . .311
2. The modem doctrines of credit take their rise from a writing
of Turgors 311
3. Further fallacy of J. B. Say 312
4. J. B. Say's error not excusable in persons who admit of
immaterial capital 313
5. Extract from Mr. Thornton 313
6. The same continued 314
7. Error in this extract 314
8. Further extract from Mr. Thornton 315
9. Error of this extract 315
10. Bills of Exchange and Banker's notes are separate values . 316
11. Discounting Bills of Exchange with Bank notes is not the
cancelment of debts, but an exchange of values . .317
12. Money is only a more general species of Bill of Exchange . 3 16
xxxiv.
COKTKKTS.
Skctioh.
13.
U.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
The same flillacy which was prevalent in the last century
regarding money, is now prevalent regarding Bdla of
Exchange 818
Great error of Montesquieu regarding the nature of money • 819
Money is a merchandize in itself, and not a sign of value . 319
The same arguments which prove that money is a separate
value, prove that credit is a separate value . . . 319
The fundamental error of the subject is that credit is a loan. 320
A bank note has value, not because it costs a few pence to
produce it, but because it can be exchanged for money ot
commodities 320
Bank notes which pass as freely as sovereigns have the same
value as sovereigns . . . . . , .321
Extract from Adam Smith 821
Extract from Mr. Mill 322
Extract from Mr. McCulloch 823
Self contradiction of Mr. Mill 324
The present value of a debt payable at a future time is a
separate and independent value ..... 325
Katiire of the question at issue. Is the property in this
country in different forms of credit, to the amount of
£600,000,000, a real value or only a myth ? . . . 325
Error of prevalent ideas on the continent regarding credit . 326
Necessary to trace the origin and meaning of the expression
Circulating Medium ....... 826
Extracts from Adam Smith ...... 327
The expression not in common use in 1 793 .... 328
Philosophical meaning of " medium " leaves no doubt as to
the true sense of circulating medium .... 328
First beginning of the controversy regarding it . . . 329
Change of opinion regarding its meaning . . . . 33 1
Examination of these opinions . . . . . . 33 1
Mr. Wood's opinion 332
Mr. Norman's opinion ....... 332
Mr. Lloyd's (Lord Overstone) opinion .... 332
Reply to Mr. Cobden's opinion 333
Reply to Mr. Smith, and Mr. Ward's opinion . . . 333
Reply to Mr. Lloyd's opinion ...... 334
The same continued ........ 336
The same continued 336
Extract from Colonel Torrens 336
Great error of his opinion ....... 337
Opinion of M. Michel Chevalier in accordance with the
principles of this work 337
Analogous case from tlie trial of Gerrald .... 338
Lord 0 verstone's opinion is a violation of the Law of Continuity 339
His criterion adopted and proved to confirm the doctrines of
this work . . . , , . . . , . 339
CONTENT?. XXXV.
CHAPTER IV.
THEORY OP THE EXOUANQES.
SscnoK. Vaqm
1. Necessity for money changers 343
2. Difference between Banking and Money Changing . . 34 1
3. Necessary to understand the Theory of the Exchanges . 345
4. Value reckoned by weight and by tale .... 345
5. Almost all errors in monetary science arise from confounding
the name with the value ...... 345
6. Deterioration of coinage caused by wear and tear . • 346
7. The Par op Exchange 347
8. A deterioration of the coinage causes a fall of the Foreign
Exchanges 848
9. Which will be cured by a reform of the coinage . . . 348
10. A debasement of the coinage produces the same effects . 348
1 1 . There can be no true par of exchange between two countries
which do not use the same metal as a standard currency . 349
12. Enquiry by House of Lords in 1797 349
13. Consequences of issuing a new coinage during a depreciated
state of the cttrrency 350
14. Difference in prices according to the state of the coinage . 350
1 5. Depreciation of the currency drives bullion out of the country 35 i
1 6. ExempliBcation of this 35 1
17. Proper measures to pursue 352
18. Error respecting the expression "Mint price" . . . 352
19. Meaning of the expression Mint price . . . .352
20. First coinage of gold 353
21. Weight of coins fixed by Law 354
22. Mint price of gold is £3 17s. 10|d. per ounce . . . 354
23. The same quantity of metal is of the same value whether in
coin or bullion 355
24. When the market price exceeds the Mint price it is a sign
that the coinage is depreciated 355
25. Further explanation of this 356
26. Abundance or scarcity of gold can make no difference in
market or Mint price 357
27. To alter the Mint price would be a fraud . . . .358
28. Example of this 358
29. But would only extend to existing contracts . . . 359
80. The Mint price of gold regulates the foreign exchanges . 359
31. Further illustration 360
32. An alteration in the Mint price of gold means an alteration
in the weight of the coin 360
83. While market price of gold exceeds Mint price no bullion
wiH be coined . 361
34. Gold coin cannot be more valuable than bullion . . .361
XXXVI. CONTENTS.
Sbctioh. Paoiu
35. If tbe market price were to rise above the Mint price it would
be fatal to the Bank of England 863
36. Symptoms of a Depreciated Currency in 1844 . . . 362
37. Difference of Nominal Exc'hange and Real Exchange . 363
38. Consideration of causes that affect the real exchange . . 364
39. Trade in bullion of two descriptions 364
40. With bullion-producing countries 364
41. With countries that do not produce bullion. The Seven causes
which influence the movements of bullion. . . . 365
42. The Foreign Exchanges. 366
43. The balance of trade. • 366
44. Adam Smith on the mercantile system 367
45. The reverse of the mercantile system is true. . . . 367
46. Description of the Balance of Trade. .... 368
47. Which is a delusion. 369
48. Dealing between nations made up of the aggregate of deal-
ings between individuals. 369
49. Favourable exchange with bullion-producing countries is no
proof of prosperity 370
50. Fallacy of opinion that exports should exceed imports. . 370
51. Exemplification of this 370
52. The same continued. 371
53. The same continued. 372
54. The same continued. 372
55. The same continued. 372
56. Extension of this example. 372
57. The same continued 373
58. Fallacy of old ideas of balance of trade 878
59. Advantage of a variety of products 374
60. Another example 874
61. Prohibitive duties cause an influx of bullion. . . . 375
62. Causes that produce movements of bullion. . . . 376
63. Overtrading causes an outflow of bullion 377
64. Exchanges with Bussia and Ireland. • . . • 37d
66. Further description of commercial operations. . . . 379
66. Conclusions to be deduced from the movements of bullion. . 379
67. Any amount of foreign trade may be carried on without
remittances in specie 3S0
68. In commerce both parties ought to shew a favourable
balance. . . .... • . . 380
69. Errors on this subject 381
70. The same continued. 381
71. Example of trading with the Soutih Sea Islanders. , • 382
72. Observation of Mr. Craik. 383
73. Desirable to discontinue the phrase ** Balance of Trade." . 383
74. Causes which influence foreign exchanges. . • . 383
75. Example of exchange at par 384
CONTENTS. "XXXVII.
Sacnoir. Pam
76. Increase from par , « • . • • . . 384
77. Decrease from par 385
78. State of Exchanges an example of the formula for price. . 385
79. The Exchanges between London and Paris. • . . 386
80. Circumstances which cause a transmission of bullion. . . 386
81. State of the Exchange shews the tendency of bullion. . 387
82. If prices of goods are too high bullion must be sent . . 387
83. An unfavourable exchange has a tendency to correct itself. . 388
84. The same continued. 388
85. Disturbances of the Exchange unprofitable. . . . 389
86. Alleged isncouragement to exportation by an unfriyourable
Exchange. ..•..«..••. 389
87. The two causes which indicate the rate of Exchange may
operate in the same or opposite directions — Axiom connect-
ing the Currency and the Foreign Exchanges. . , 390
88. Only applies to countries which maintain their legal standard. 391
89. The bisb of the market price above the mint price
of gold betond a small quantity, and a fall of
the foreign exchanges betond the limits of the
real exchange are the proof and the measure of
the depreciation of the currency 391
90. This may be called Lord King's law. .... 392
91. This law expressed in .another form. .... 392
92. Beal exchange may be favourable while nominal exchange
adverse. 393
93. Foreign Exchange will be generally favourable or generally
adverse. 393
94. Arbitration of the Exchanges , . 394
95. Bills of Exchange used to transmit loans • • • . 395
96. Another instance of the same. • . • • • . 396
97. A DIFFERENCE IN THE RATE OF DISCOUNT AT ANY TWO
. PLACES MORE THAN SUFFICIENT TO PAT THE COST OF
SENDING BULLION FROM ONE TO THE OTHER, CAUSES A
. FLOW OF BULUON FROM ONE TO THE OTHER. . . 897
98. A political or commercial convulsion in any country, causes
a flow of bullion to that country, unless it is prevented by
an inconvertible paper Gnrrency. • , • • . 398
99. Simplest way of stating the subject of the Exchanges. . 399
100. Second meaning of the expression Par of Exchange. • . 400
101. Present usance or par of exchange excessive. . • . 401
102. Advantage of a variety of productions 401
103. The warehousing system. 402
104. JLt attracts and retains bullion. • , • • • 402
105. Axiom of the French merchants. . . . • > 403
106. Eflfect of an inconvertible paper Currency on the Foreign
. Exchanges and the market price of bullion. . . . 403
107. Inconvertible paper currency a new standard . . . 404
XXX^in. CONTENTS.
gBcnoy. Paov.
108. Diminution in value of coin does not cause any difference
between the market and Mint price of bullion . . . 405
109. Depreciation of thn Paper Currency ..... 405
110. Only, way of preventing a depreciation of Paper Currency is
by limiting its amount 406
111. Its amount must be diminished until the market or paper
price coincides with the Mint price .... 406
112. Excessive quantity of Paper Currency drives out gold . . 406
1 1 3. The market price of gold bullion is the test of the depreciation
of the Paper Currency 407
1 14. Which can only be remedied by diminishing its quantity . 408
115. Erroneous doctrine on this subject . • • . . 408
CHAPTEE V.
ON SOME THEORIES OF CURRENCY.
1. It is necessary not only to ascertain the true principles of
monetary science, but to point out the fallacy of false
theories 413
2. One of these may be called Lawism . . . r .414
3. Statement of the question .414
4. Peculiarity of Law's system 415
5. It is a violation of the fundamental conception of a Currency
established in this work 415
6. Precursors of Law 416
7. Borne account of .Law's Theory of Money . . . .416
8. The same continued 41B
9. The same continued 41B
10. The same continued 418
n. The same continued 419
1 2. The same continued 420
13. The same continued 420
14. The same continued 421
15. The same continued 421
16. The essence of Lawism is that money represents commodities,
and that paper currency may be based upon commodities.
Money does not represent Commoditixs, but only
Capital, or the accumulation of labor which has
NOT yet been given FOR COMMODITIES . . • 423
17. The theory of basing a paper currency upon commodities
involves the palpable contradiction in terms that a perscm
may buy commodities and keep his money as well . • 423
18. Law's idea 424
19. Law was no advocate of an unlimited in(X>nvertible paper
currency 424
20. The most celebrated examples of Lawism « .. . . 425
jQOBTBirTf. XZXIX.
8acTtDW« FAom
21. Aeooontof the French' Aadgnats . . . . . 427
22. .The same continued 428
28. Jhe same Qontinued 429
24. The same continued 429
25. The same continued 480
28. The same continued 431
27. Extracts from Sir Archibald Alison's History regarding the
assignats 481
28. His extraordinary inconsistency f 483
29. The same continued ..••.... 434
80. Practical results of Law's theory 485
81. Fourth example of Lawism — The Bank of Norway • . 436
82. Fifth example — The American banking convulsions of 1887-9 487
88. The principle of badng a paper currency on the public funds
is identical with, and is as vicious ]is basing it on land • 440
84. Fundamental vice of the constitution of the Bank of England. 441
85. The consequences of this vicious principle are prevented by
its being limited to that single instance . . • • 441
86. On the theory of basing a paper currency on the discount of
mercantile bills 441
87. Refutation of this theory by the Bullion Committee • . 442
38. This refutation incomplete 444
89. Demonstration of the fallacy of this theory on the principles
of this work 445
40. The same continued 446
41. Specific meaning of over-issue ..•••• 448
42. Fallacy of the expression ** good bills " . . . , 449
43. Adam Smith the parent of both these currency fallacies . 449
44. Bullion as the representative of debt is the only proper basis
upon which to found a paper currency .... 450
45. Bullion is the only regulator of its amount • • • .451
46. Capital and credit form the only true circulating medium . 451
47. Capital and credit must always increase and decrease
together 451
48. Problem to discover the true mode of acting upon the paper
currency 452
49. The rate c^ discount is the true mode of acting upon the
paper currency 452
50. Arguments applicable to the case of wheat also apply to debt 458
51. Efifecte of the action of this principle 453
52. In all commercial crises production should be curbed . . 455
63. Consequences of violating this principle .... 455
54. The same continued 456
56. Perverse opposition to this law of nature .... 456
66. Error of a prevalent theory 466
67. Historical proof of the fallacy of this theory. . . . 457
58. Mistaken views of Sir Archibald Alison • • • . 457
Jl^
tow— C«
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i A" • •
- -^- -• b •
458
499
459
4O0
400
461
463
46S
463
463
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
10.
17.
18.
19.
20.
21.
2-2.
23.
24.
25.
20.
CILVriE?. VI.
BEXTCH OF TR£ HXSTOBT OF THE CrBKE5CT OF }EX6LA3n>.
Imp -nance of a kniw'.-lire tf :i^ L:i:.:rv of ihe currency
Tli»- jN.'Uii.l we:;rrii • f >ilvor was :::'.- nicasurv of value
Atlielslane al-ulislKS ihe rii:"::t -f i-rivaic coinage .
Great debasement of iht- curivnoY in iLe lime of Uenir
The same und^-r Stt-jLen .....
John declares light coin 10 l»e illegal .
First arrival of the Cahorsini in lA>ndon
Great re -coinage by £«lward I. .
Debasement of the currvincy under Efiward II. .
Keform of the currency by Edward III.
Debate in Parliament on the currency question .
First coinage of shillinprs antl sovereigns by Henry VII.
Debasement of the standard by Henry VI 1 1.
Projected reform of the currency by £4lward VL
ThiH reform arrested by the death of the king
Great reform by Queen Elizabeth — Grcsham's law of the
currency .......
Curious perversion of judgment in the case of the
currency .......
('o in age of guineas by Charles II
(ireat degra<lation of the coinage in 1G94 .
Diftails of tliis .......
Quotalinns from contem[>orary writers.
Debate in Parliament on the currency question .
Tho same continue^l ......
T\w. same; rontinued ......
The Hiime continued ......
Irish
467
46S
468
469
469
460
469
470
470
471
471
471
472
473
474
475
475
477
478
478
479
480
481
482
484
484
OONTEITTS. XLI.
Beotjov. Paoi.
27. Iiitroduction of bank notes into the English currency . . 485
28. Suspension of cash payments by the Bank of England —
Bestoration of the exchanges by the refonn of the coinage 486
29. Derangement of the currency in 1717 487
80. Report of Sir Isaac Newton thereon 488
81. Guineas fixed at 21s 489
82. Mint price of gold fixed at £3 l7s. lO^d. . . . 489
33. Bad state of the coinage in 1760 490
34. Act of 1773 respecting the money . . . . . 491
35. Kesolution of the House of Commons in 1776 . . .491
36. Act of 1774 492
37. The exchanges restored by the re-coinage .... 492
38. Stoppage of the Bank of England in 1797 . . . .498
39. Adverse exchanges in 1801 493
40. In 1696 bank notes were held to be at a discount • . 493
41. Fundamental truths well ascertained 494
42. Introduction of an inconvertible paper currency . • . 494
48. Sudden rise of the market price of gold in 1801 • • . 495
44. Principle then discovered that this was owing to the depre-
ciation of bank notes 495
45. Mr. Boyd, Lord King, and Mr Thornton, first discovered this 496
46. Adverse exchange in 1802 496
47. True principle seen by Mr. Fox 497
48. Lord King's law of the paper currency .... 498
49. Difierence of the Irish from the English currency. . . 500
50. The Bank of Ireland ordered to suspend payments in cash . 500
51. Derangement of the Irish exchange ..... 500
52. Committee in Parliament appointed to inquire . . .501
53. First discussion in Parliament on a paper currency . . 501
54. Description of the state of the Irish currency . . .501
55. The same continued 503
56. State of the Irish exchanges 505
57. Error of the opinions of the Irish Bank Directors. . . 506
58. Opinions of the Committee 506
59. Opinions of the witnessess 506
60. Mr. Marshall's opinion 508
61. The sauie continued 509
62. Opinions of the Bank Directors 509
63. Report of the Committee 510
64. The same continued ........ 512
65. The same continued ........ 512
66. The same continued 512
67. The same continued 513
68. Mr. Fox declares it to be a fantastical opinion that paper was
not depreciated but gold risen 513
69. First declaration by a Parliamentary Committee . . .615
70. Great mercantile speculations in 1809 . • • .515
d
TrTT- C0KTENT8.
Smvxov. Vaqm.
71. Great rise in the price of gold and fall in the exchanges 516
72. Appointment of uie Bullion Committee . . . .516
73* Declaration by that Committee that the Bank should regnlate
its issues by the Foreign Exchanges . . . .516
74. State of facts agreed upon 517
75. The issues maintained by one party 517
76. Issues maintained by the other 518
77. Some of the doctrines maintained by the Committee . .519
78. The same continued 519
79* Distinction between a drain ci gold for domestic purpoees and
a foreign drain 519
80. lir. Homer's resolutions 520
8 1 • The Government maintains that the coinage of England never
did contain any definite weight of bullion . . . 520
82. Absurdity of this opinion 522
88. Evidence of the depreciation of the currency . , , 522
84. The House of Commons votes that 21 was equal to 27 . 528
85. Consequences of this vote. Further depreciation of the note 524
86. Great mercantile disasters in 1815-16-17 .... 525
87. Great destruction of paper currency, and restoration of the
remainder to par 525
88. Triumph of the principles of the Bullion Report . . . 526
89. Great drain of bullion in 1818 526
90. Third suspension of cash payments by the Bank of England. 527
91. Appointment of committees by both Houses of Parliament . 528
92. Adoption of Locke's principle of a single standard of value . 528
93. The British pound means 5dwt8. 8-274gms. of gold, 22
carats fine and 2 carats alloy . . . . . . 529
Table shewing the different values for which the pound
weight of silver and gold were ordered to pass current by
various mint indentures from 1344 to 1817 . . . 58t
Table showing the chief variations in the market price of
gold bullion from 1790 to 1819, and the true value of the
Bank of England £1 note during the restriction . . 582
CHAPTER Vn.
ON THE REGULATION OF A PAFBR CURRENCY.
1. Great importance of the question 536
2. The whole end of Political Economy is to regulate the
currency 536
3. Statement of the principles which have guided the Bank of
England during various monetary crises, and the principle
which the Bank Act of 1844 is intended to eofiirce . 586
4. First crisis of 1783 586
CX)NTENT8. XLIII.
SBCTKMr. Paos.
5. Principle of the Bank to contract the issues while the drain
is going on and enlarge them when it ceases and turns • 537
6. Great increase of country bankers. Crisis of 1793 . . 538
7. Severe policy of the Bank of England .... 538
8. Sir Francis Baring's opinion 539
9. His account of the causes of drains 539
10. Sir John Sinclair's plan, and its success .... 540
11. Keport of Committee of House of (jommons . . 540
12. Becommendation of the Committee 541
13. Immense success of the plan 541
14. It produces no loss, but a small profit . . .541
15. Description of its success by contemporary writers . . 542
16. Approval of it in the Bullion Beport 542
17. Conduct of Mr. Fitt towards the Bank .... 543
18. Drain upon the Bank m 1 796 543
19. Severe policy of the Bank, and stoppage of payment . . 543
20. Immediately enlarges its issues and produces great relief . 544
2 i . The governor of the Bank in 1 8 1 0 condemns its policy in 1 797 544
22. Deterioration of opinion caused by the restriction Act . . 545
23. Mismanagement of the Bank in 1818 545
24. Act to suspend payments 546
25. Adoption by the mercantile world of the principles of the
Bullion Report 546
26. Speech of Mr. Peel on introducing the Act of 1819 . . 547
27. Second state of Sir Bobert Peel's opinions . . . . 550
28. The Bank of England rejects the principles of the Bullion
Report, but adopts them in 1827 550
29. Approach of the crisis of 1825 551
30. Action of the Bank during the crisis 552
31. Sudden change of policy and profuse issue of notes . . 552
32. Great triumph of the principles of the Bullion Report in
this crisis 553
33. Sir Robert Peel's opinion in 1 833 554
34. Rise of the Currency principle 554
35. Lord Overstone's dogma a violation of Bacon's principle . 656
36. All Theories of Paper Currency may be reduced to three
varieties 556
37. The advocates of the first variety are divided into two sects . 556
38. Bank of Venice the first example of the Currency principle . 557
39. Bank of Scotland an example of the second variety . . 557
40. Bank of England constructed on a different principle . . 557
4 1 . All restrictions removed from the issues of the Bank . . 558
42. Mr. Thornton's opinion that such a maxim as the Currency
principle would lead to universal failure . . . 5.58
43. The authors of the Act of 1819, totally repudiated the Cur-
rency principle 559
44. In 1833 Sir Robert Peel again repudiates the Currency
principle 560
M"
> • Z"-T-_i :-- - -TV rrn MT £ j:.j jriii" :ufs lai r
5<. T:.-r iLz:* '•-:ir--r-f . 5M
-. Tr.-ui:- : ii^ rr.i--.r* ;: -^r B:: • c B«fc.:r: . . 06^
:/j. L^ai:. :: Bzl.z. ± l-^oo. iii ••:« :•- Itki :£ -^« Bwik . 567
^M Ti:^L : :^— :. :1. B^k A:: 567
►;l. Tl^ Bizik Ai: : ht.;^: :::^ iz.v^— ..^ el-sieiia . . 568
^y^. Grea: :->L^--ir7 lAiLic :f y;Trz.:^r. i'^ST . . . 568
f/i. S^:oni ri.^T-^r.r: 0- :€ t'l^ A:: 569
*;i. D•T:Vt^-! =:rr::= sL?<rr:':ei :■: ihr A:: L. IflT . . .569
•Jo. Fa-il drf^v: 0: t-.e BarJs A:i. a::i -.mr me:!:.--] cf regnkdng
the Paf^r CT:rrer.cj 570
r>;. Ar>?^;rl.t7 '.: the C^rr-rLry prlccir'.e 572
»i7. 0^ricl'jv>.7i , ' . .* 572
PRELIMINAET OBSERVATIONS.
ON THE NATUBE AND LIHIT8 OF THE SdENGE OF POLITICAL
ECONOMY.
XUV. CONTENTS.
flacnov. Paos.
45. The Currency principle at last gains the ascendency in 1840 660
46. The Bank Act of 1844 an attempt to cany out the Currency
principle 560
47. Sir Bobert PeeVs statements erroneous .... 562
48. He acknowledges the inconsistency of his present with his
former opinions 562
49. Plan of the Act 563
50. Distinction between banking principles and currency principles 563
51. Violation of the Currency principle by the Act . . 564
52. Second violation of the Currency principle .... 564
53. The Bank Act of 1 844 is framed on this principle, that twice
14 millions is equal to 14 millions, and an indefinite
number of millions is equal to nothing .... 564
54. First trial of the Act 565
55. The same continued 565
56. The same continued 566
57. Panic in October, 1847. Suspension of the Act 566
58. Triumph of the principles of the Bullion Beport . . 567
59. Drain of Bullion in 1855, and wise conduct of the Bank . 567
60. This not owing to the Bank Act 567
61. The Bank Act composed of two incongruous elements . . 568
62. Great monetary panic of November, 1 857 .... 568
63. Second suspension of the Act 569
64. Doubtful merits ascribed to the Act in 1 847 . . 569
65. Fatal defect of the Bank Act, and true method of regulating
the Paper Currency 570
66. Absurdity of the Currency principle 572
67. Conclusion 572
PRELIMINAET OBSERVATIONS.
ON THE NATURE AND LIMITS OP THE SCIENCE OP POUTICAl
ECONOMY.
ELEMENTS
OF
POLITICAL ECONOMY.
ON THE NATURE AND LIMITS OF THE SCIENCE
OF POLITICAL ECONOMY.
1. The first thing to be done in the study of any
science, is to endeavour to form a proper conception of
its nature and limite; then to examine it in its whole
extent up to those limits, and to refrain rigidly from all
discussions and enquiries which transgress them. In
many sciences this is no easy task, but in none is it
so difficult as Political Economy. In no science have
eminent writers taken so different and various views of
its nature and extent ; have differed so much as to what
should be included in it, or have so varied in their treat-
ment of it. There is nothing in the name of the science
which would appear to mark out its precise limits.
Seeing, then, that almost every writer differs upon the
subject, we think that the best way will be to give a very
short sketch of its origin, the views taken of its proper
scope by some of the chief writers, and the reasons which
have led us to adopt the limits we have done in the
following work.
2. The origin of the true science of Political Economy
is to be dated from the period of the overthrow of the
doctrine of the Balance of Trade, which is due to Qubsnat
and his school. What astrology is to astronomy, what
alchemy is to chemistr}-, that was the system of absurdity
2 ELEl^IENTS OF rOLITICAL ECOKOICT.
and folly wliich was the established opinion of mankind,
and of the most eminent statesmen before the days
of Quesnay, to Political Economy. Its establishment
was chiefly due to Charles V. and Sully, and for upwards
of two hundred years it enthralled the most eminent
men. This doctrine was that money was the only wealth,
that what one nation gained all the others must necessarily
lose, and that every effort should be made by legislation
and war to obtain money, and nothing but money. This
horrible doctrine, that every nation was interested in, and
benefited by, the destruction of its neighbours, was the
prevailing belief for upwards of two centuries, and was the
fruitful parent of innumerable bloody wans, and incal-
culable misery and ruin. The ludicrous and palpable
fallacy which deceived for so long a period the most con-
summate statesmen of their day, may well strike us with
amazement and humiliation at the feebleness of human
wisdom. In pursuance of this imaginary phantom, the
earth has been deluged with blood, and nations have every-
where been brought down from prosperity to ruin. It
would be well if the recording angel could blot out
from the pages of history, such a sickening monument
of crime and folly.
3. It is true that during tliis period a few sagacious
men perceived the gross fallacy of the whole system, but
they were solitary lights shining in darkness, and the
darkness comprehended them not. Their isolated efforts
were unheeded and forgotten, and it was not until a
powerful sect arose that any permanent effect was pro-
duced upon the opinions of mankind. And that honor is
unquestionably due to Quesnay and his followers. These
men first proclaimed the doctrine that every nation is
interested in the prosperity of its neighbours, and not in
their destruction, with a power and an authority, which
has gone on increasing from their day to this, and having
been developed by a long series of illustrious writers, has
produced an entire revolution in the opinions of mankind,
and in the policy of the most enlightened nations.
NATURE AND LIMITS OF THE SCIENCE. O
4. Although, as we have said, there were several
very good works on particular points in the science which
is now called Political Economy, it took its rise as a
science in the middle of the last century in France. That
country had been brought to the lowest state of depression
and misery by the ruinous wars of Louis XIV. the nnancial
catastrophe of the Mississippi scheme, the destructive
effects of the prevailing mercantile system, the oppression
of the nobility, and the weight of the taxes. The terrible
picture of social tyranny, cruelty, and oppression which
the French people groaned under during the first half of
the 18th century, may be seen in contemporary writers.
It was in brooding over the intolerable misery under
which their country groaned, that a few generous and
righteous philosophers struck out the idea that there
must be some natural science, some principles of eternal
truth with regard to the social relations of mankind, the
violations of which were the causes of that hideous misery
they saw in their native land. Quesnay, the great father of
this science, gave it the name of Natural Mighty and his
object was to discover and lay down an abstract science
of the natural rights of men in all their social relations.
And this science comprehended their relations towards the
government, towards each other, and towards property.
The term politique in French might have in a certain way
expressed this science, but that word is so exclusively
appropriated to the art of government, that Quesnay
adopted the term Political Economy for tliis new science.
One of his followers, Dupont de Nemours, proposed the
name of Physiocratie, or the government of the nature
of things, but the word having been appropriated to
certain doctrines of the sect, which are now shewn to be
erroneous, has fallen into disuse, and the term Political
Economy has survived.
5. The Science, then, of Political Economy, as conceived
by its founders, embraced the whole field of the social
relations of mankind, in all their departments, physical
and moral. *' Right is misunderstood,'' says Quesnay,
a 2
4 ELEl^fENTS OF POLITICAL ECONOlffT.
'^chiefly because no one, statesman, priest, or philosopher,
has placed it in a proper liglit." His aim and object, then,
was to supply this deficiency in philosophy, and to discover
the laws of Order, and these related to liberty, property,
and aiithorily, the three essential elements in all social
organiziUion. His first publication, Le Droit Naturelj
contains a general incpiiry into the nature of these natural
rights, and he afterwards, in another called ^^Mcunmes
g&nh'nles dn Govvernement econoinique d^un lioyaume
agricole^'' endeavours to lay down, in a series of thir^
maxims, or fundamental gfeneral principles, the whole basis
of the Economy of Society. The 23rd of these declares
that a nation suffers no loss by trading with foreigners.
The 24th declares the fallacy of the doctrine of the
balance of trade. The SJSth is this; ^^Qu^on maintienne
Venti^re liberie de commerce; car la police du com-
merce INTERIEUR ET EXTERIEUR LA PLUS SURE, LA PLUS
EXACTE, LA PLUS PROFITABLE A LA NATION ET A L'ETAT,
CONSISTE PANS LA PLEINE LIBERTE DE LA CONCUBRKNCB.
6. Jn these three maxims were contained the entire
overthrow of the existini>; system of Political Economy,
which Quesnay and his followers developed, and notwith-
standing all their errors and shortcomings, are unques-
tionably entitled to be considered as the true founders of
the Science of T^olitical Economy. From the publication
of these doctines in 1756, a continuous series of eminent
men directly emanating from the school of Quesnay,
among whom our countryman, Adam Smith, stands one of
the most conspicuous, have been engaged in diffusing
them. At last, having gradually won their way ana
convinced nearly all the most eminent men of all countries,
and having been subjected to a series of minor experi-
ments, attended with the happiest results, after a lapse of
ninety years, they obtained their crowning triumph by
the repeal of the corn laws in England in 1846. This
event struck the system of Protection with a mortal blow
all over the world. No doubt it will die hard, from the
strength of the private interests involved in maintaining
NATURE AKD LIMITS OF THE^ 8CIBNCS. 5
it. But its doom is sealed, and another century will
probably see it exterminated from Europe.
7. Now, Quesnay is entitled to be considered as the
patriarch of modem political economy, because the illus-
trious line of writers who have achieved this result con-
tinued in an unbroken line from that day to this, and
acknowledge him as their common instructor. His fun-
damental dogma was not only a complete revolution in
speculative opinion, but it drew wit'i it a complete rever-
sal of national policy tlirougliout the world. And though^
no doubt, some of his leading* doctrines are erroneous,
men are to be judged by what they succeed in, and not
by what they fail in. Quesnny is, therefore, entitled to
be considered as the Copernicus of Political Kconomy.
8. The immediate followers of Quesnay in France
adopted very much the ideas of their leader as to the
extent of the science, and were chiefly occupied in de-
veloping and enforcing his \^ews But a friend and pupil
of Quesnay introduced the study of the new science into
this country, and gave it a popularit}^ which the abstract
and dry discussions of its originators could never have
secured tor it. Adam Smith does not even call his work
one on Political Economy. — he calls it *' An Enquiry into
the Nature and Causes of the Wealth of Nations." His
own conception of the nature of Political Economy he
gives in the introduction to his fourth Book, as follows :
** Political Economy considered as a branch of the science
of a statesman or legislator, proposes two distinct objects,
tirst to provide a plentiful revenue, or subsistence for the
people; or more properly to enable them to provide such
a revenue or subsistence for themselves ; and secondly to
supply the state or commonwealth with a revenue suffi-
cient for the pul»lic services. It proposes to enrich both
the people and the sovereign." And this is almost the
only passage in which the expression occurs. Our pur-
pose here is not to criticise that work, but to endeavour
to ascertain the limits which Adam Smith gave to the
subject. His work, then^ treats entirely of the origin,
6 ZLEMESrrS OF POLITICAL KCOKOafT.
growth, and accumulation of material wealth. It treats
of the division of lalx)r : the use of money ; the wages of
labor ; the accumulation and employment of capital ; of
the diflerent pro«rress of opulence in different nations;
an explanation of the mercantile system, and an admirable
exposure of its foUv: of the agricultural system; of
colonies ; of the public revenues* and their mode of ex-
penditure; of public works and taxes. It is scarcely
necessary to say that he was the ardent and enlightened
advocate of free trade, and probably did more to advance
the cause than all other writers put together.
9. But without entering into any account of how he
has treated the subject, we may say that he has confined
his inquiries solely and entirely to the accumulation of
material wealth. All persons who employ their labour
in any way which does not tix and realize itself in some
permanent subject, a vendible commodity, which endures
after that labour is past, he classes as unproductive
labourers, and considei's them as quite beyond the limits
of liis subject, and passes them over. It is evident, how-
ever, that this is a very inadequate view to take of the
subject. The next most conspicuous work which we
have to mention is J. B. Sav's Traite de VEconomie Polu
tiqucy published in 1808. He first excluded all questions
of Government from Political Economy. He says "On
a lonof temps coufondu la Politique proprement dite, la
science de Torganisation dcs societes, avec TEconomie
Politique qui enseigne comment se forment, se distribuent
et se consomment les richesses qui satisfout aux besoins
des societes. Cependant les richesses sont essentiellement
independantes de I'organization politique. Sous toutes
les formes de gouvemement, un ^tat peut prosperer s'il est
bien administr^. On a vu des nations s'enrichir sous les
monarques absolus ; on en a vu se miner sous les conseils
populaires." He then remarks what confusion the eco-
nomists and others had been betrayed into, by mixing
together the subjects of Politics and Political Economy.
10. The definition he here gives has been very
NATUBS AND LIMITS OV THE SCIENCE. 7
generally received since his time ; and Political Economy
is said to be the science which treats of the production^
distribution, and consumption of wealth. He most properly
separates Political Economy from all questions of Govern-
ment^ as the growth of wealth is altogether independent
of political organization, and states might flourish find
decay in wealth, under every form of government. This
was a great step in advance, but he made further and
more important advances. He saw that it was quite
impossible to restrain the name of wealth and capital to
material, vendible, and enduring commodities only. He
saw, for instance, that the education of professional persons
such as lawyers, physicians, &c., was veritable capital,
which we may call intellectual or mental capital. In this
he was undoubtedly correct, and since his day, intellectual
capital of all kinds has been properly held to be within
the limits of Political Economy. In accordance with the
definition he gave of the nature of the science, his work is
divided into three parts. The first is on the production
of wealth ; the second on its distribution ; and the third
on its consumption. To the latter word, however, he
gives an interpretation to which we cannot accede, and
under it he enters into dissertations on public expenses,
debts, &c. In a larger treatise on the same subject, named
the Cours completed EconomiePolitique^he adheres to the
same general arrangement, but he introduces many more
discussions, which appear to us to be somewhat beyond
the limits which he has himself prescribed for the subject.
11. The next work which requires to be noticed, is
Ricardo's Principles of Political Economy and Taxation^
which returns to the narrow views of Adam Smith ; being
wholly occupied with the discussion of the prices and
values of commodities and labor, and the efffect of tax-
ation upon them. This work is one of extremely limited
compass, indeed, it is rather an attempt to arrive at a few
abstract principles, than anything else ; but from the
name of it, Ricardo evidently considered that taxation is
beyond the limits of pure Political Economy.
S ELEMENTS OT POLITICAL BCONOMT.
12. Mr Senior considers Political Ek^nomj to be the
science which treats of the nature, production, and dis-
tribution of wealth ; and accordingly, while he follows
J. B. Say, and includes all intellectual capital in it, he
excludes all questions of taxation, government, colonies,
&c.
13. It would appear that Mr. John Stuart Mill also
agrees, that these questions are beyond the limits of the
pure science, as he entitles his work the Principles of
Political Economy, with some of their Applications to Social
Philosophy. He seems to adopt very much the views of
J. B. Say, w'th regard to its proper limits, and his work
is professedly much more extensive than if he had
confined himself to pure Political Economy.
14. Many of the recent treatises published on the
Continent have come back to the original ideas of the
subject in all its extensiveness, and aim at being complete
dissertations upon all the social relations of men, physical
and moral.
16. Seeing, then, the utter confusion of opinion, and
inconsistency of conception of the very nature of the
subject which prevails among writers, it may be advan«
tageous to give the views of the nature, objects, and
limits of the Science, which will be developed in the
following work.
OF THE NATURE AND LIMITS OF THE SCIENCE OF POLmCAL
ECONOMY AS TREATED IN THIS VOLUME.
16. Of all the denizens of the earth, man seems to be
the only one whose individual efibrts are unable to supply
himself with all the requisites of life and enjoyment. In
the earliest stages, and in the rudest forms of society of
which we have any knowledge, men seem to have in variably
coveted things beyond what they could obtain by their
own exertions. Such objects, however, they could not
obtain gratuitously from the labor of others, but they
NATUBE AND LIMITS OF THB SCIENCE. 9
were obliged to give something in return for what they
wanted themselves. Moreover, as man advances in civili-
zation, his wants and desires multiply and increase in
variety, the wider is the range of objects he desires to
procure. The more objects, however, he desires to
acquire, the more must he exert himself to produce some-
thing, which the producers of those articles which he
wants, may accept in return. Consequently, in order to
obtain what he himself wants, he must study and observe
what others want, and, reciprocally, if others want what he
can produce, they must study what he wants, to offer in
exchange for it. By these means, society is bound together
by all its members being required to study the wants and
desires of each other.
17. The wants of society are, therefore, the stimulus
to production. Now, when objects have been produced,
there are two distinct and opposing fundamental prin-
ciples regarding the distribution, or appropriation to each
member of society of the things he wants, which have
been advocated by writers, and adopted in practice. The
first of them is where each individual laborer is allowed
to have no exclusive right of property in what he has
produced, or in the fruits of his own industry, but each
of them is supposed to labour for the general benefit of
society, and all the produce is thrown into a common
stock, and then is divided among all the members accord-
ing to some compulsory rule, so that all the laborers
receive reciprocally some portion of the fruits of each
others industry.
18. The second principle is when each laborer is
allowed to retain the exclusive right of property in the
fruits of his own industry. The labor of each member
is prompted solely by his own individual desire to attain
something, and he is permitted, in each case in which he
wants anything else, to deal separately with the person to
whom it belongs, and the respective quantities of each
others produce which is given in exchange, is left solely
to the private arrangement of the parties.
10 ELEMENTS OF POLITICAL ECONOMT.
19. The first of these principles has, with different
modifications of detail, found a crowd of admirers. It
has been advocated by dreaming philosophers, visionary
enthusiasts, selfish rogues, and innocent saints. Repeat-
ed endeavours have been made to carry out some scheme
of this nature under a great variety of diflfering^ condi-
tions. But they have universally been found to fail;
having been frequently started with the fairest auspices,
they have always ended in misery and disaster. This
would seem to prove that there is somethinof i-adically
wrong in principle in them. There are, no doubt, several
minute differences of detail among the various schemes,
but they all agree in this, that men should be constrained
to work in union with others, and that the rewards
meeted out to the members of society should be awarded
by pubhc authority. All these different schemes which
have this principle in common, however they may differ
in other respects, may be known by the generic name of
Socialism.
20. This work is entirely founded upon the second of
these principles. It totally rejects the first as nothing
but a dangerous and delusive fallacy, which is incapable
of succeeding — an impracticable folly, which always has,
and always will fail. We utterly abhor and repudiate
all forms and schemes of Socialism, however mild they
may be. The principles of this work are exclusively
founded upon the sacred right of private property, upon
the indefeasible right of every man to retain the fruits of
his own industry, and to exchange them with those of
any one else he pleases, in any proportion they may agree
upon among themselves. And it is to these exchanges,
and to the different proportions in which different things
will exchange with one another, that, in our view, the
science of Political Economy is properly limited. And,
in our opinion, the object of the pure science of Political
Economy is to discover the laws which regulate the
exchangeable relations of quantities. Now, the ex-
changeable relations of any quantity with respect to
NATUBB Ain> LIMITS OF THS SCIENCE. 11
any other quantity, is termed its "Value with respect to
that quantity. And thus, in our view, the true object of
the science of Political Economy is to discover the laws
which regulate the values of quantities.
21. Having thus determined the nature and limits of
the science, we have next to determine what are the objects
included in it. Having determined that its duty is to dis-
cover the laws which regulate the values of quantities, it
follows that all quantities, or objects, that have value, or
exchangeable relations, are included in it. In our view,
whatever may be bought and sold comes within the
dominion of Political Economy. The earliest cultivators
of the science began only with material property, which
has exchangeable relations. The next advance was made
by including all intellectual or mental property, which
has value in it, or which may be made the subject of sale.
But here the most advanced political economists appear
to have stopped. That is to say, they only consider pro-
perty which has an actual existence at the present time.
22. But if we include in the science of Political Eco-
nomy all quantities which have exchangeable relations,
or have value, that is, all quantities that may be bought
and sold, this limitation of the subject to property which
actually exists is palpably defective. Because, in all
civilized societies there is property of an enormous value,
which is bought and sold, which has no present existence,
which has only a future existence, and which is yet the
subject of exchange. And this comprehends the whole
theory of the Present Value of Deferred Payments. Under
this compreliensive title is included the theory of the
value of landed property, of annuities, of the public funds,
and the whole doctrine of Credit, which is the great
stumbling block of political economists. Under this single
title is included property of immensely greater value
than all other property whatever, and yet it is wholly
neglected by politiod economists. A future payment
may be bought and sold, it has a present value quite
distinct from the money it will ultimately be paid in, it is
12 iXEMEHTS OF POUTICAL SCOSOMT.
an article of commerce, just exactly like a quarter of
com. The present value of the deferred payments, which
are articles of commerce in England, is probably at least
eight fold the actual money in the country, and they are
separate and independent values from it, just like any
other commodities. The present value of all the bills of
exchange and promissory notes in Great Britain at this
time is not less than £500,000,000, and yet this is treated
as nothing by political economists. The actual specie
in the countiy is not supposed to exceed £70,000,000.
And such is the proportion which the present value of
the deferred payments bears to the actual money.
23. The science of Political Economy, therefore, in
our view, treats of and includes all things, of whatever
nature they may be, whether actually, or potentially exist-
ing, that may be bought and sold. These are, in our
view, its proper limits, and its object is to discover and
ascertain the laws which regulate their values.
24. The subject of Exchanges is, therefore, in our
view, the limit of the pure science of Political Economy.
And this seems to be the opinion of several eminent
writers, and some have proposed to change the name of
it, as not sufficiently indicative of its nature, and have pro-
posed others in substitution. Thus, Archbishop Whately,
who it must always be a matter of deep regret did not
handle the entire subject, and who it is quite easy to see
would have achieved a greater reputation in it than any
other writer who has touched it, has proposed to call it
('atallactics.
25. We shall, however, adhere to the name of Political
Economy. There is no great advantage to be gained by
changing the name of a science which has once acquired
a linn hold in popular usage, even though that name
would not perhaps have been the best that might have
\mm selected, if the science were a new creation. There
are few sciences which have not received a great extension
or alteration of application of what the meaning of
their uauies would suggest. Plato long ago laughed at
NATURB AND LIMITS OF THE SCIBKCfi. 13
the idea of calling the science which treated of the motion
of the heavenly bodies geometry, yet geometry has re-
tained its name from that day to this. And so of the
names of many other sciences. But while it is to be
remarked that the names of most other sciences received
a very much more extensive application than their original
meaning, that of Political Economy has been greatly re-
stricted and contracted. The better way, then, appears
to us to be, not to attempt to alter a generally received
name where no adequate advantage is to he gained,
but rather to fix and define clearly what is to be included
in it.
26. In our view, then, if there were no Exchanges,
there could be no science of Political Economy. It is
plain there could be no such thing as value. Such a
division, therefore, of Political Economy into the produc-
tion, distribution, and consumption of wealth, evidently
does not convey an accurate idea of the science. Because
wealth maybe produced, distributed, and consumed without
any Exchanges, and therefoi'e, without the principles of
Political Economy coming into oi^ration at all.
27. Thus, we may suppose that a certain quantity
of land may be the possession oi* a certain number of
individuals in common, and each should be entitled to
a certain share of the entire produce, without any speci-
fic appropriation. It is probable that in the olden times,
in the Highlands of Scotland, many families might have
lived without ever buying or selling a single article in
the whole course of their lives. All their food, clothing,
arms, &c., were made of the produce of the estate. The
house was made of the native fir trees, all the labour
was performed by their own dependents. Now, such a
state of society may attain a certain degree of wealth,
but it would not be a proper subject for Political Economy,
for no such idea as value could enter their minds.
2S. It has been proved by experience, however, that
it is necessary to have a certain peculiar state of moral
sentiments in a society, to have any such plan as this
16 ELEMENTS OF POLITICAL BGONOBCY.
by introducing extraneous discussions. On all the sub-
jects of this work it is possible to ariive at absolute
truth. But in such questions as Taxation, Poor Laws,
the Transmission of Property, Kmigration, &c., there is
no such possibility. They are in all respects uncertain^
variable sciences, very greatly dependent on particular
circumstances. It is impossible to arrive at absolute,
universal, demonstrative truth in them.
34. From the preceding remarks, it may appear that
the science we are about to treat of is insignificant.
It has nothing to boast so striking to the imagination as
the triumphs of the astronomer or the chemist. But it
is not too much to say, that it is more intimately con-
nected with human happiness and well-being than all
tlie other sciences put together. The astronomer's field
of fame lies in the cold regions of space. We may be
amazed, almost awe-struck with the powers of the human
intellect, which, by a few mysterious symbols upon paper,
detected the existence and fixed the position of an undis-
covered planet. These, truly, are marvellous triumphs.
But though the astronomer may dazzle the intellect, in
his lone icy grandeur he is far beyond the reach of
human sympathy. But the illustrious man who dis-
covered the palpable truth, that in commerce both sides
must gnin^ operated a revolution in public opinion and
in national policy, which directly affects the happiness of
every human being, and has conferred more solid benefits
upon mankind than the discoveries of all other sciences
put together. Political Economy is essentially of human
interest; it performs among sciences what the Roman
Eoet, in those world-famous lines, asserted to be the pecu-
ar function of his countrymen among nations: —
Excadent alii spirantia mollius asra,
Credo equidem ; vivos ducent de mannore voltus ;
Orabunt causas melius, coelique meatus
Describent radio, et surgentia sidera dicent;
Tu regere imperio populos, Romane, memento ;
Hae tibi orunt artes; pacisque imponere morem,
Parccre subjectis, et (lebellare superbos.
AND LIMITS OF THE 8CISVCE. 17
If war is the greatest curse of mankind, Political
Economy is the most poweriiil antagonist of war. If
tyrannical monopolies m trade are among the greatest
social curses, Political Economy is their most effectual
destroyer. When its consequences are clearly apprehend-
ed, and its doctrines have won their way to universal
acceptance, they will go far to convert the world from a
slaughterhouse and a shambles, into a garden of plenty
and abundance. What a humiliation for the pride of the
human intellect to discover, that for six generations men
had converted themselves into bands of legal murderers,
that the hand of every nation was armed against every
other, the most powerful states have been brought to ruin,
and misery and desolation visited upon every fireside in
Europe, on account of a phrase, on account of an expres-
sion which is now irrefragably proved to be the veriest
delusion that ever deceived the senses of mankind ! But
amidst this universal insanity and desolation, the Genius
of Political Economy rose with healing ou its wings, to
minister the only remedy which could restore prosperity
and happiness to the world. One unhappy phrase was
the pregnant source of all this woe, the magic of another
sentence is alone capable of assuaging it. No doubt the
progress of sound ideas is slow, centuries perhaps may
elapse before they produce their full effect. But they
are irrevocably fixed in the opinions of mankind. The
laws of Political Economy are now demonstratively settled.
It is not mere uncertain caprice that has made England
adopt the principles of Free Trade, but scientific truth.
The progress may be slow, but it is irreversible. No one
dreams that England will ever go back again to her
former errors. Practical success and scientific reasoning
equally combine to insure the ultimate triumph of these
principles. There is no agent so powerful to subdue
barbarism, and to humanize mankind, as a sound system of
Political Economy. More than all other causes put
together it will help to accelerate the period when the
roar of the cannon shall be heard no more^ and the sabre
18 MLDOJm OF FOLRICAL ■OGBQHT.
shall rost in its scabbard. When it is clear! j seen that
the interests of all mankind are bound ap in peace, and
that every nation is interested in the prosperity of its
neighbours, and that the misfortunes of one nation btb
injurious to the interests of every other, then we may
hope that war clouds wiU cease to lower on the horizon : —
Flacatumque nitet diffbdo lamine coelun.
CHAPTER I.
DEFINITIONS AND ILLUSTRiTIONS OF THE TEBM8
USED IN POLITICAL EOONOinr.
b3
** *Eietiv(K th\6ytK «f ^€* TO rt loriv. 2»Xkoyi(€a6ai yap Ulp^i, &p>x^ M
rtty mthXoyiaiMV to ri ivriVm
'' He (Socrates) wished to reason s78teiDatically» and therefore he tried
to establish Definitions, for Definitions are the basis of systematic
reasoning."
AazsTOT. MitBtpk, xiL 4.
^ Every man, who aspires to true knowledge, shoald examine the defini-
tions of former authors, and either correct them, or make them anew/'
"Definitiones enimi et partitiones, et horom laminibns utens fwatio,
tom simiUtodines, dissiniilitadinesqiiei et earom temus et acuta distinctioi
fidentimn est hominmDi ilia vera et firma et certa ene qnsB totentur/'
**For definitions and divisions, and a discourse which emjdoys these
ornaments, and also similarities and dissimilarities, and the subtle and
fine-drawn distinctions between them, belong to men who are confident
that those arguments which they are upholding, are true and firni| and
certain."
CxosBO^ Aeadmie QwutkmM^ libu n. li.
^ The mixture of those things by speech, which are by nature divided,
is the mother of all error."
DEFINCnOKS AND ILLU8TRATIOK8 OF TBBliS. 31
CHAPTER I.
DEFINITIONS AND ILLUSTRATIONS OF THE TERMS
USED IN POLITICAL ECONOMY.
OF EXCHANGEABLE VALUE— DIMIKimOir IN VALUE-DEBT— CIRCUIISTANCES OUT OP
WHICH THE NECESSITY FOR A CURRENCT ARISES— DEnNTTION OF CURRENCY^
PLATO AND ARISTOTLE'S DEFINITION OF MONEY REJECTED AS INADEQUATE-
DEPRECtATION—DlSTINCTION BETWEEN DIMINUTION IN VALUE AND DEPRECIATION
—SECURITIES FOR MONEY-CIRCULATION— EXCHANQE AND SALE-CIRCULATINO
MEDIUM— DIFFERENT SPECIES OF CURRENCY— CONVERTIBLE SECURITIES— BILLS
OF LADINO— DOCK WARRANT»~P08rnVE VALUES— NEGATIVE VALUES-RESOURCES
—CAPITAL- FIXED CAPITAL— FLOATING CAPITAL— INTEREST— CREDIT— MONEY—
MEASURE OF VALUE— PROFIT— DISCOUNT— WAGES— RENT— HIRE— PRODUCTION AND
CONSUMPTION— SUPPLY AND DEMAND— PRESENT VALUE OF DEFERRED PAYMENTS
—CERTAIN PRELIMINARY PROPOSITIONS.
1. As soon as men began to render each other ser-
vices, they must have estimated how much of one kind
of service should be given as an equivalent for another.
The most natural measure which would suggest itself to
their minds, would be the quantity of labor which each
had bestowed upon the service he was able to render.
The hunter would consider what was the average produce
of a day's cliase, and he would soon learn what amount
of his produce ought to be considered as a fair equivalent
for a certain amount of the produce of the herdsman, or •
the tiller of the ground. Different productions would by
this means acquire certain fixed proportions in which
tliey would exchange for each other, and this would con-
stitute their Exchangeable Value, and would remain
pretty uniform as long as the same amount of labor con-
tinued to produce equal quantities of each of them.
^S SLBMBNTB OF POLITICAL SCOHOMV.
2. If animals of the chase became unusually abundant,
so that the hunter could obtain an increased quantity of
his produce with no greater labor than before, while the
fruits of the field and the fold remained the same, the shep-
herd and the farmer would be no longer content to receive
the same amount of the hunter's produce in exchange for
the same quantity of their own. In proportion as it was
obtained with greater facility, they would demand more
of it ; and the exchangeable values of these productions,
or the respective quantities of each of them which were
considered as equivalents, would undergo an alteration.
The produce of the hunter would be said to be Diminished
IN Value, because any quantity of it would exchange
for a less quantity of any other production than for-
merly.
3. In order to make the preceding suppositions correct,
it is evidently assumed that all the productions of these
several persons were equally desirable or necessary, equally
useful or agreeable. But, if any one of these productions
had any intrinsic qualities of a peculiar nature, which ren-
dered it more agreeable, or more useful than the others, it
would be sought after with more eagerness, and persons
would be wiUing to give a greater proportionate amount
of their productions than would be due to the simple consi-
deration of the labour of obtaining them, on the ground of
preference of one production over another. Thus, if
venison were more savory than mutton, there would be a
greater demand for it than for mutton, and just in pro*
portion as it was more sought after, the hunter would
demand a greater amount oiother production in exchange
tor it. Thus, its exchangeable value would rise. On the
other hand, if nobody cared for mutton, the shepherd
would not be able to induce any one to exchange his
E reductions, and it would have no exchangeable value,
owever much labor he had bestowed in rearing it. The
same thing would be manifestly true of all other produc-
tions. Thus, if the skin of one animal was more beau-
tiful or more useful than tiie skin of another^ their
DBFINinONS AND ILLUSTRATIONS OB TBIMS. 23
exchangeable value would be greatly influenced by such
a pecimar quality^ and would thus by no means be
determined by the quantity of labor bestowed in producing
them.
4. Each laborer would, therefore, very soon discover
that the value of his production, or the quantity of other
productions which were considered as equivalent for it,
would by no means be indicated bv the labor he had
bestowed upon it, but would chiefly depend upon the
necessities or tastes of his neighbours.
5. Now, every laborer naturally tries to obtain the
greatest quantity of other productions that he possibly
can in exchange for his own. When, therefore, he saw
that the production upon which he bestowed his labour
fell in exchangeable value, he would change the direction
of his labour. He would give up producing what was held
in low esteem for what was in hi^h esteem. He would en-
deavour to produce what would bring him the greatest
amount of advantage in return. But the greater number of
people laboring to produce the more desirable article, and
the greater quantity thereby produced, would inevitably
tend to lower its exchangeable value, and the diminished
quantity of the less desirable article produced would in-
evitably tend to raise its exchangeable value. And this
would go on until an equilibrium of advantages was pro-
duced among the various labourers, so that there would
remain no preponderating reason why any of them should
change their pursuits.
6. From these considerations we immediately deduce
a principle which is of fundamental importance in Political
Economy. We see that it wa^ not ihe labor which con-
Jerred the value^ but the value which attracted the labor.
Each man was obliged to think of something his neigh-
bours wanted, and he devoted his labor to produce such
an article. But whether his production had value or not
purely depended upon his success in judging what they
wanted. He could not compel them to give him any-
thing for his produce against their will. They did not
24 XLEMENT8 OF POLITICAL ECONOMY.
^ve any quantity of their own productions for his, because
he had bestowed labor upon producing it, but he bestow-
ed labor upon producing something, because he thought
others would give something for it.
7. Services in general would, therefore, gradually ac-
quire a recognized exchangeable value, which would not
undergo any alteration so long as their relative conditions
remained the same. Now, if it could happen that when-
ever one man required the services of another, that other
at the same time had need of an equivalent amount of his
services in return, such transactions could take place with
great facility, and the amount of services rendered on each
side being equal, the parties would be in the same relative
situation as before. But it would often happen that when
one man required the services of his neighbour, that
neighbour would not require an equivalent amount of
service in return at the same time. If, then^ a trans-
action took place between them with such an unequal
result, and the one amount of service was balanced agamst
the other, there would remain over a certain difference^
or amount of service due from the first to the second,
and this would constitute a Debt.
8. The second would, however, require at some future
time to hu ve this balance of service due to him performed,
and the debt discharged. Moreover, for his own security,
he would like to have some evidence, or memorial, to prove
the debt, and accordingly he might require the debtor to
give him some sign, or token, of the fact. If writing had
been known in those times, a statement in writing ac-
knowledging the debt, and promising to render the
service due, whenever called upon to do so, would be a
natural form of such evidence.
9. We may now suppose that the second person has
dealings with a third, and requires his services, but that
the third has no immedirte use for the services of the
second, but requires those of the first; now, if these parties
were so circumstanced, what could be more natural than
for the second to transfer to the third, the debt due ta
DEFINinOKB AND ILLUSTRATI0K8 OF TSRMS. 25
him from the first? A similar operation might be repeat-
ed by several different parties an indefinite number of
times, and so this written obligation, or this evidence of
a debt, enabling the possessor of it to demand some ser-
vice to be rendered by the debtor, would pass from hand
to hand, or be current, and from this use of it, the thing
itself would be what is called a Cubeenct.
10. This currency is nothing more than the evidence
of services having been rendered, for which an equivalent
has not been received, but can at any time be demanded.
It is obvious that as soon as it has been demanded^ and
rendered, the evidence of its being due must be given up
to the debtor to be destroyed, and will be no longer
current. Now, if any man can render services to his
neighbours, he must, in return, receive either services or
the evidence of their bein^ due, and if he renders more
than he immediately requires in return, he will accumu-
late a store of this evidence for his future wants.
11. It is evident that such a. written obligation as has
been described, derives its whole transferable or current
value from the fsLCt^ that the person who acknowledges him-
self bound to perform such services, can render them at
any moment that he may be called upon, and is generally
believed to be able to do so. Thus, though it receives
its name of currency from its being passed from hand to
hand, it only is current because it has the power of trans-
ferring or circulating something else.
12. These simpk considerations at once shew the
nature of a currency. It is the evidence of a debt due to
the possessor of it, proving that he has rendered services
for which he has received no equivalent, but which he
can demand at any time. And when he does demand it^
he must give up or extinguish the evidence of the debt.
Hence, the use of the currency is to facilitate the transfer
of debts from one person to another, and whatever means
be adopted for this purpose^ whether it be gold, silver, or
paper, is a currency.
13. We may, therefore, lay down as our fundamental
26 ELEMBKT8 OF FOLITICAL BCOKOlCr.
conception, that cubrsnct and transfbrablb dbbt abb
CONVERTIBLE TERMS ; wbatevcr represents transferable
debt of any description is currency; and whatever
material the currency mav consist of, it represents
TRANSFBRABLE DEBT and nothing else.
14. The preceding considerations suggest to us a prin-
ciple which will be found to be of fundamental importance
in Political Economy, and it will be seen that it is
essentially requisite to bear it in mind in all questions
relating to monetary science. It is this, Wheeb thebb
IS NO DEBT, THERE CAN BE NO CDBRENCY. We have
seen that where the exchanges were equal, there is no
debt, and there can be no currency. The debt repre-
sented the precise inequality of the exchange, and where
there is no exchange, the debt must equal in value the
service rendered. Hence, it is perfectly clear that the
use of currency is to supply the defect of the exchange,
or rather in most cases to do away with the necessity u>r
an exchange. Its real use is manifestly to enable com-
modities to circulate, or move from the possession of one
person to another, or to enable one person to render
another services, without the necessity of an exchange.
Hence the use of a currency is not to facilitate
EXCHANGES, BUT TO ABOLISH EXCHANGES.
15. It is hardly necessarv to say, that this is not the
conception of the nature of money hitherto established
among writers on Political Economy. The idea originated
by Plato and Aristotle, and hitherto universally adopted
by all writers, both on the continent and in England, is,
that money is the ^^ instrument of exchange/' or is the
^^ medium of exchange," and this is the name most usually
given to it in modern discussions upon the subject. The
principal writers on Political Economy consider money as
an intermediate merchandize used for the purpose of CTOct-
ing indirect exchanges. We cannot do better than give
the views commonly entertained, to exhibit the con-
trast with the one we have proposed. Thus, M. Gamier*
* £leinent8 d'Economie Politique. 3rd edit, 1S56. p. 14.
DEFINITIOm AND ILLUSTBATIOKB . OF TERMS. 27
observes that direct barter ceases as soon as nations
emerge from the infancy of civilization. In civilized
countries such cases are very rare^ {md in most, impos*
sible. Thus, a bookseller who has nothing but books, can
but rarely pay his baker, or his shoemaker, with books.
A certain peculiar species of merchandize has, therefore,
been devised, called money, which the buyers of books
give to the bookseller, and which he can give again to
those who sell to him. Thus, he says, the barter is com-
plicated by an intermediate exchange. This money, men
have agreed to make of silver, and of gold ; and in civilized
countries, the shoemaker exchanges his shoes for their
equivalent in money, for the purpose of again exchanging
this money for a hat, it may be. The operations of the
hatter are similar, and they may be represented thus :
The shoemaker
first exchanges his shoes for money^
then exchanges the money for a hat,
which is equivalent to exchanging
the shoes for a hat.
The hatter
first exchanges a hat for money ^
then the money for shoes,
which reduces the operation to an exchange
of a hat for shoes.
16. Such is the view of the matter hitherto universally
adopted, and it may, perhaps, seem somewhat captious to
reject a conception sanctioned by so great a concurrence
of authority. Moreover, allowing that either conception
is correct, it may seem to many indifferent which ought
to be adopted. We think, however, that a careful con-
sideration of the two proposed conceptions will show that
the one we have adopted is manifestly the more rigidly
accurate of the two. But the true reason why we reject
a conception so long established, is one which has prevailed
in many other sciences, and has conclusively shewn which
is the true fundamental conception of the science. It is
28 ELEMBNTB OF FOLHICAL BCOKOMT.
this, that although the sunple phenomena of monetary
science may be explained equally well by adopting; either
conception, yet, when we come to the higher aim more
compucated phenomena, they are wholly inexplicable, if
we adopt the conception of money as the medium of ex-
change. If there never had been anjrthing but a metallic
currency, the older conception would have been sufficient.
And such was the case when the conception originated.
In modem times^ however, an engine of a much more
complicated nature has been devised, namely. Credit or
Paper Currency. Now, our reason for rejecting the con-
ception of money which is in general use is, that it is
whoUy incapable of solving the more intricate and im-
portant problems in the paper currency. On the contrary,
the whole theory of credit and paper currency can be
constructed, and all the phenomena of them explained, by
adopting the fundamental conception we have proposed.
A very good proof of the correctness of these remarks is,
that no writer who has adopted the older conception has
ever even attempted to solve the more intricate problems
in the theory of paper currency, or even seems to oe aware
of their existence. The most stupendous calamities have
been brought about by founding a paper currency in
contradiction to our fundamental conception. And it will
be shewn that this conception will give a satisfieictory
solution of them all.
17. The force of this reasoning will be apparent to
any one who considers several analogous cases in other
sciences. Thus, the definition of an angle adopted by
Euclid serves well enough for the purposes of geometry,
but is quite inadequate to those of trigonometry, which
is founded on a totally different conception of an angle
to the one adopted in geometry. So the fundamental
conception of the central position of the earth was capable
of explaining many of the simpler phenomena of astro-
nomy, but being inadequate to explain the more compli-
cated ones, it was rejected in favor of the heliocentric
one. So also the corpuscular theory of light was super**
DEFIKITI0N8 AKD ILLUSTRATIONS OF TSBMS. 29
seded by the undulatory theory for the very same reason.
Exactly a similar course of reasoning compels us to reject
the conception of money as being the medium of exchange^
and to adopt that of its being the representative of debt.
18. Adam Smith, who adheres to the older conception^
has, on one occasion, accidentally stumbled upon the truth.
Thus, he says,* ^^ a jguinea may be considered as a bill for
a certain quantity of necessaries and conveniences, upon
all the tradesmen in the neighbourhood." Instead of
sa^ng that it is a bill upon all the tradesmen in the
neighbourhood^ he should have said that it is a bill upon
all the trading portion of the civilized world. He would
then have obtained exactly the true conception. But
unfortunately, like a rustic who has found a aiamond, he
did not perceive the value of the truth he had accidentally
expressed, and let it escape from his grasp.
19. It is evident that such a currency would only be
of any value as long as people agreed to receive it, and
believed that the debtor could perform his promise. But
if he granted a great many obUgations to render services,
people would begin to doubt whether he could perform
the whole of them. They would probably think how
much he could perform of what he had promised, and as
this would be tne measure of the real i^ue of the pro-
mise^ it would not be received as current for more wan
that. In this state, this currency would be said to be
Defbeciated in value If this went on for any length
of time, they mi^ht cease to have confidence that he
could perform his promise at all, and they would not
receive the paper, and consequently it would cease to be
a currency.
20. I'he examples given in the second and last para-
graphs will serve to illustrate the difference between two
expressions, which, though often used indiscriminately, are
essentially distinct, viz., diminiUion in value and deprecio'
tiofin An alteration in value of any commodity means
* Wealth of NaUona^ Vol II. p. 274. Wakefield's Edition.
30 SLEMSNTS OF POLITICAL ECONOlCr.
that the quantity of it which was considered as an equi-
valent for a certain amount of some other commodity
with which it is compared, has undergone a change.
Depreciation means that it is not really of the value it
professes to be. Alteration tn value of a commodity is
always used in reference to some other commodity, with
whicn it is compared ; depreciation^ in reference to itself.
Thus, if at any given time, an ounce of gold will exchange
for fifteen ounces of silver, and owing to any great and
sudden increase of the quantity of silver, while the quan-
tity of gold remains the same, one ounce of gold becomes
able to purchase twenty ounces of silver, then silver is
said to have sustained a diminution of value with respect
to gold, or if while silver remained the same, gold be-
came very scarce, so that one ounce of gold would only
Eurchase ten ounces of silver, then gold would be sidd to
ave risen in value with respect to silver. But if a bank
note which professes to be of the value of five sovereigns,^
will only purchase four sovereigns, it is depreciated; or
if a guinea, which professes to contain a certain amount
or fixed weight of pure gold, does not contain that
amount, it is depreciated. The expression diminution in
value is applicable both to commodities and money; the
word depreciation is more properly restricted to currency ;
when an analogous change takes place in commodities, it is
usually called deterioration.
21. This currency would have another inconvenience.
In such a written obligation as we have supposed the
amount of the debt due would of course be expressed,
and it might very often happen that the person wno was
the owner of the obligation, would not require to have
the whole amount of it rendered at one time. If he
required only part of it to be rendered, he would have to
S've up the original obligation, and receive a new one for
e remainder. This operation would be both tedious
and inconvenient, and the next improvement would be to
have a currencv which should not only be evidence of
the debt, but also be capable of measuring its amount.
DEFINrnOKS AND nXUfTTBATIONS OF TEBMS. 31
SO that the quantity of the currency should bear some
relation to the amount of the debt.
22. If the debtor were to acknowledge his debt on
paper of a certain size, it would be very inconvenient in
practice to represent half the amount of the debt by cut-
ing the paper in half, and so on in smaller proportions. So
that if the material of the currency was paper, he would
have to write an acknowledgment for each minute frag-
ment of his debt on a separate piece of paper. This wouM
be both laborious and tedious, and the next improvement
would be, to have the currency made of a substance, which
might be divided into any number of fragments, and each
lament represent a proportional part oFthe debt.
23. As soon as this idea was introduced, it would be
obvious that the substance used for a currency should
possess several qualities. It should be uniform in its
texture, and easily divisible into minute fira^ents, and
it should not be subject to decay. Taking the whole of
these requisites into consideration, it is mamfest that there
is no substance which combines these qualifications so
well as a metal of some description. Metal is uniform in
its texture, and it can be divided into any number of
fragments, each of which shall be equal in value to another
fragment of equal weight, and if required, these fragments
can always be reunited, and form a whole again of the
aggre^te value of all its parts. By this means, if we can
estabbsh a relation between the quantity of the metal and
the amount of the debt, then whatever that relation be,
or whatever quantity of metal be taken to represent any
amount of debt, any fragment of such metal will always
represent a proportionate amount of the debt.
24. In adopting a metallic currency, it would be well to
regard a quality in the metal selected for the purpose,
namely, that it should be the metal of the greatest value.
It should be that metal^ of which the smallest quantity
should be considered as the equivalent for any quantity
of any other metal. The exchangeable values of the
different metals are settled exactly on the same principles
82 ELEMEHTS OF FOttTICAL ECOKOlir.
as the exchangeable values of all other commodities.
Men saw that metals were capable of being applied to
different useful purposes. They then, of course, became
willing to give other objects or services in exchange for
them. Those which were most scarce, and most highly
prized, acquired the greatest value. The greater tlie
intrinsic value of the metal, the better is it qualified to
Eerform the functions of a currency. All metals are
eavy and inconvenient to carry, and if a very abundant
one were selected for the purpose, the quantity which
would be required to denote even a moderate amount of
debt, would be a serious inconvenience. The more rare
and valuable the metal, the more portable and convenient
would it be, so that a man might carry about with him,
as it were, a concentrated essence of power of commanding
services. Of all the metals that were first discovered,
gold and silver combined these advantages in the greatest
egree, and from the earliest antiquity, the most civilized
nations appropriated them to that purpose, and they
gradually superseded the inferior metals, and other sub-
stances used by other nations, and their exchangeable
values relatively to each other, as well as to other metals
and commodities, was determined.
25. A metallic currency possesses another advantage
over the one we described at first, which derived its
current value from the belief and confidence of the persons
who received it, that the debtor could perform bis promise.
That confidence would natually exist only among his own
neighbours, and, at most, among a comparatively small
number of persons, who had full opportunity of knowing
the circumstances of the individual, and if the persons
who took it had dealings with foreigners or strangers,
who had no knowledge of the debtor, they would not
receive such an obligation. Moreover, the service denoted
by such an obligation could only be demanded from the
individual who gave it, and people in general would not
be willing to give their services, when they could demand
services m return from only one person. That person,
DBFINITI09S AND ILLUSTEATlOVS Ot tSRMS. 33
too, might die or become insolvent, which might seriously
affect the value of his obli^tions. Now, a metallic
currency is free from this objection. Its utility was so
evident to all persons who had commercial dealings, that
they universally agreed to receive it in return for services.
So that when a person receives an obligation expressed
by a metallic currency, he is able to command the services
not only of the original debtor, but also those of the
whole industiial community. It is, in fact, according to
the fundamental conception we have established, and, as
observed by Adam Smith, a bill upon each person of the
trading community.
26. The general consent of the whole nation, or of
any number of nations, to receive this metallic currency
in return for services, would not in any way alter its
nature, nor would it have any value beyond those coun*
tries. Consequently it would only perform the same
functions as the paper currency, but in a wider circle,
and upon an extended principle. Supposing that any
nations had peculiar forms of their own, they could not
have commercial dealings with each other, except by
way of barter, that is, they would have to revert to the
interchange of the services themselves instead of their
representatives, and would be somewhat similarly cir-
cumstanced to persons who could not communicate their
ideas to each otner, through the medium of any common
language.
27. There is clearly, then, no difference in principle
. between a metallic and a paper currency, only one de-
pends upon a under basis of credit^ or of acceptance^ than
the other. A metallic currency is subject to its own
peculiar disadvantages, because by its constant wear and
tear as it passes from hand to hand, it suffers considerably
by abrasion, not to mention any bad practices that may
be resorted to, to lessen its weight, and as we have seen
that the quantity or weight of the metal represents the
amount of the service the owner can command, as the
metal decreases in weight, so does the amount of service
c
34 ELEBfENTS OF POLITICAL ECONOMT.
it represents, gradually and corresnondingly diminish.
Paper is not subject to this intrinsic depreciationy so that
if it were possible to have a paper currency based upon
the same credit, and which should be as generally receiv-
ed as a metallic one, it would be a preferable form.
28. The paper currency we have described, would in
its simplest form have the particular service, or produc-
tion, it was intended to command, stated on the face of it.
This, however, would manifestly limit its utility, so by
universal consent, it is almost invariably usual to make
the paper currency of a country represent a certain
portion of the metallic currency, which is the generally
received power of commanding all services and commo-
dities. Paper currency, therefore, in modem practice,
instead of promising that the debtor will render any
amount of particular service, almost always expresses
that he will give a certain amount of metalUc currency,
either on demand, or at some fixed time.
29. As an example of the species of currency describ-
ed in the opening paragraphs, we may take the case of
postage stamps. These are a rude form of currency, for
they represent the power of commanding a certain service,
and as every one has sometimes the necessity of sending
letters by post, these stamps have come into very gene-
ral use as small change, and are almost as universally
received as payment for small sums, as money itself.
As another example of this species of currency, it is said
that in the Ionian Islands, it is very usual for the farmers
to give promissory notes for the delivery of a certain
quantity of oil at a given date at a fixed price.*
80. The observations contained in the preceding
paragraphs shew that the idea of a "currency" is quite
independent of and essentially distinct from that of
"money," and that it would be quite possible to have a
currency, even though its most useful form, that of
money, had never been thought of. If transactions take
* Encyclopiedia Britan. : Art Ionian Islands. 8th Edit.
DEFmrnOKS AKD HXlTSTRATKMrS- O* tHBMS. 35.
place Between individuals, it is scarcely possible to
imagine that there should not be debts, or balances of
services due, arising between them, and this is the basis
of a currency. But it does not necessarily follow that
there must be "money." If the method of conducting
commerce by way of money had never been invented, a
grocer and a wine merchant might trade with each other.
If they had agreed that a bottle of wine and a pound of
tea should be considered as equivalents, the grocer might
wish to purchase a bottle of wine, and if the wine mer-
chant wanted in return a less amount than a pound of
tea, he might let the grocer have the bottle of wine, upon
his giving him a promise to pay the remainder of the tea
whenever required. And this note might be made trans-
ferable, and it might pass through a hundred different
hands before the owner of it demanded the actual tea. It
would, therefore, be "currency," but it would not be
"money," because it has no intrinsic value. The diffe-
rence between conducting commercial transactions by way
of barter, and by means of the invention of money, is that
in the former case commodities are considered directly
as equivalents, in the latter they proceed upon the tacit
assumption of the geometrical axiom that things that are
equal to the same thing are equal to each other. Now,
money is that third thing which is used as the common
measure to which everything else is referred, and the
superiority of the latter mode of conducting commerce is
so obvious and decided that it has universally superseded
the other in civilized countries, and currency has followed
this change, and represents this common measure of value,
and is often considered to be identical with it, though not
correctly.
31. In the preceding paragraphs we have endeavoured
to describe the circumstances out of which the necessity
for a currency arises, and its advantages and uses, and
to arrive at a definition which may serve as a criterion to
decide what is, and what is not to be included under the
title of currency. We have also endeavoured to trace
c 2
86 ELEMEisrrs of political ACOKOKT.
the successive steps in generality it assumed, from its
simplest and most inartificial form, when it represented
only a particular service, which could he demanded from
a single individual, and availahle in a very small circle
of persons, till it finally became a general power of the
person who held it, to demand any description of service
from the whole industrial community.
32. In giving this description of the nature and uses
of a currency, we hope we shall not be so far mistaken
as to be supposed to allege that these were the actual
steps in its progress. It is a trite remark that practice
has always preceded theory. Indeed, the remark is a
truism ; from the very meaning of the words, it must be
80. For a theorist is a looker on, (Geirtpoc) a spectator,
who looks on upon something he sees actually occurring,
and tries to discover the reason of what he sees, or the
laws of the phenomena. Every person who tries to give
a reason for what he sees is a theorist ; the only difference
lies between a good theory and a bad one. But he must
see something before he can try to give a reason for it, or
to investigate its laws. Thus, language was universally
used many thousand years before grammar, or the theory
of language, was thought of. It was from studying the
practice of reasoning, that Aristotle laid down the theory
of reasoning, or logic. The elementary principles of
mechanics were discovered after long and laborious re-
flection upon mechanical phenomena; and so also the
true nature and principles of a currency could only be
discovered long after the natural instinct of mankind
prompted them to make use of one.
33. The metallic currency is termed money, and the
Saper currency of all sorts is termed Security fob
foNEY. These securities for money, or the paper cur-
rency, are divided into two general divisions, firstly,
promises to pay money — called Promissory Notes, and
secondly, orders to pay money — called Bills of Ex-
change. Each of these general divisions, again, is sub-
divided into several varieties, which will be examined at
DEFINITIONS AND ILLU8TRATI0NS OF TBBMS. 37
full length hereafter. Some descriptions of paper currency
are so perfectly secure that they are often treated as
money, or cash. Thus, Bank of England notes are usually
designated as money, but that only arises from the perfect
confidence reposed in the stability and solvency of that
institution, and in a work of this sort we must adhere to
precise and accurate ideas. Bank notes, then, whatever
repute they may enjoy, are still only securities for money,
because they contain a promise to pay so much money
on demand, and it is only the belief generally entertained
that the bank can fulfill this pronuse if required, that
gives them their current value.
34. The name of currency, as we have seen, is given
to some substance^ which is capable of passing from hand
to hand, and denotes the power its owner has of command-
ing services. Every transfer denotes an operation,
because it is evident that in commerce, every transfer of
currency necessarily involves also a transfer of some
service. The amount of the sum total of all the transfe-
rences of the currency which take places, is properly
called the Circulation. Hence, a single piece of money
may add considerably to the circulation, for every time
it is transferred it is an addition to the circulation, though
it is no increase of the currency. We must observe,
tliat this is not the meaning usually a£Sxed to the word .
^^ circulation." It is generally used as synonymous with
money and bank notes, and more particularly the latter.
Thus, the number of notes issued by the Bank of
England, or any other bank, is frequently called its circu-
lation. Of all the terms in common use, this is one of
the most objectionable. To call the notes which circulate,
the circulatiariy seems as great a confusion of idea, as to
call a wheel a rotation. We shall aocordinglv never use
the word circulation to mean the amount of the issues of
a bank, the more correct expression is evidently to say,
the number of its notes in circulation. We shall always
use the words currency and circulation to mean dif-
ferent tilings, the first to d(^note the substance itself^ the.
SS^ . ELEMENTS OF POLITICAL BCONOMT.
second the amount of its transferences from hand to
hand. It is also clear that the currency and the circu-
lation do not bear any fixed relation to each other, for
there may be a large amount of currency in a country,
yet if the industrial operations be few, there will be a
small circulation ; on the other hand there may be a small
amount of currency, yet if the people be active and in-
dustrious, it will pass frequently from hand to hand, and
there will be a large circulation.
85. The use of the currency being to record and
transfer debts, if we could imagine a great Public Book
kept by the national authority, in which every one was
entitled to enter his services, which should be valued at a
certain amount in figures, it would present the most per-
fect idea of a currency. For any one who had credit in
that book, might require the services of another person,
and give an order to the national bookkeeper to transfer
the figures, denoting their amount, from his own to his
creditor's column. The book itself would be the
record of the evidence of the debts, the total amount
of the figures at the credit of each person would be the
total amount of the currency in the coimtry, and the
transference of the figures from one column to another,
would be the transference of the debt, and would denote
an operation just as the transference of money from one
person to another, and the amount of these transferences
would be the circulation.
36. Gold and silver being useful for other purposes
besides serving for a currency, have a certain intrinsic
value, and for that reason alone, they are to a certain
extent, wealth in themselves. Being used as the measure
of wealth, and the value of all commodities and services
being expressed as worth so much gold or silver, many
persons who were unable to discriminate the simple ideas
mvolved in a complex one, have been led to entertain
very erroneous notions upon the subject, and have con-
sidered money and wealth as convertible terms. Gold
and silver, however, derive their chief value from their
DBFINmONS AND ILLUSTBATI0N8 OF TEBBiS. 89
peculiar fitness to form a currency, and they are lesd
useful for general purposes than almost any other metal.
37. Currency and commodities are things essentially
distinct in their nature. It is often considered that
currency represents commodities, but such an idea must
be carefully guarded against. Currency does not repre-
sent commodities^ but an abstract right or power of
demanding services in general, which may or may not be
commodities. Now, transactions between individuals
may be an interchange of things of a like or an unlike
nature ; when the interchange is of things of a like nature,
such as currency for currency, or commodities for
commodities, it is called an Exchange, or in the case of
commodities, frequently Barter. Thus, we speak of
the Foreign Exchanges, or the value of the currency of
one country in terms of the currency of another; or
we ask for the change (i. e. the 'change or exchange)
of a £5 note or a sovereign ; so we speak of exchanging
a picture for a statue, or one book for another. When
the interchange is of things of an unlike nature, such as
currency for commodities, it is called a Sale, and the one
that gives currency is said to Buy the commodity, and he
who gives the commodity is said to Sell it. Thus, we
buy a horse or a house with money, so an officer buys
a commission in the army, but he exchanges firom one
regiment to another; so, in Lear, when Albany throws
down his glove to the traitor Edmund, the latter throwing
down his own replies, " There's my exchange," n^eauing
like for like ; so in Hamlet, Laertes says,
" Exchange forgiveness with me, noble Hamlet."
The quantity of the currency given for the commodity ia
called its Price, and when the buyer of the goods
transfers their stipulated price to the seller, he is said
to Pay for them.
38. The subtle question whether, if a fair exchange
of goods were substituted for the payment of money, it
was to be consideired as a sale, was warmly debated for
40 KLEMEHTB OV POLITICAL SCONOICT.
150 years by the two £unou8 sects of Roman lawyers,
the Proculians and the Sabinians, from the time of
Augustus to that of Hadrian. Both parties appealed to
Homer in support of their views, but the opinion of
Proculus finally prevailed, that a 9ale and an exchange
were operations essentially distinct in their nature. This
was confirmed by the Emperors Diocletian and Maximian,
and was ratified by Justinian.* The conclusion was just,
though the reason assigned for it is scarcely satisfactory,
that ^^ in the exchange of two things, it can never appear
which has been sold and which has been given as the
price of the thing sold, and it is contrary to reascm that
each should appear to have been sold, and that each
should appear to have been given as the price of the
other." It would rather appear that when we exchange
one commodity for another, we exchange one whose
useftil qualities are known, for another whose useful
qualities are also known; that is, we exchange two
things which are acknowledged to be equivalents. But
the currency represents an abstract quality or right.
In changing a commoditv for currency we commute
a known useful quality ror an abstract right; that is^
we give a commodity and receive in return only the
power of obtaining an equivalent; or we exchange
something that is definite for another that is indefinite^
two operations which are essentially distinct, and it is
better to appropriate different expressions to operations
of a different nature.
39. We must carefully observe that the word CuR-
BENCY is a complex term, invoMng two simple ideas, and
we must resolve it into them. From its first representing
a debt, its fundamental idea was, that it was something
that denoted the power of demanding services, and se-
condly^ it also passed from hand to hand itself. Of these
two ideas it must be especially observed that the former
is the fundamental idea, but it has received its name from
* Institutes, L. ni., c. 24.
DBFINinOKS AND ILLUST&ATIONS OF TBBMS. 41
the latter. Resolved into its elementary ideas it is^ there-
fore,
1. That which circulates commodities^ i. e.j which
causes commodities to circulate ; where circulates is
an active verb,
2. That which circulates itself; where circulates is a
neuter verb.
From the first of these ideas it has acquired a name in
modem times significative of its quality, viz.^ CiBCULATisra
Medium.
40. We shall find hereafter, that it is of great impor-
tance to fix the precise meaning of the term Circulakng
Medium, because a misconception of its true meaning hM
had several very important consequences in Political
Economy. What these are, we shall defer saying, till a
future part of this work. We shall simply say at present,
that the meaning universally given to the term Circulating
Medium, at the time it originated, was the medium that
circulated commodities. In recent times it has been used
to signify the medium which circulates itself, which is
quite erroneous. As, however, we wish to avoid contro-
versy as much as possible at present, we shall defer a full
examination of this question till a future chapter.
41. The amount of the currency, or circulating
medium, in any country, is the aggregate amount of it
belonging to everv individual. Now, whatever represents
the amount of debt due to any individual over and above
his possessions in commodities, in whatever form that
debt be recorded, whether metal or paper, or whether it
exists simply as a debt, is the amount of currency belong-
ing to him. Whatever, therefore, confers the power of
demanding services or commodities, or professes to confer
the power of demanding them, is the currency or cir-
culating medium of any single person; and includes not
only the current coin of the realm, but all its substitutes
of every description, and whatever else represents or dis-?
places it. Adopting this definition, we may enumerate
the different species of it as follows :
42 SLBIOCNTS OV POLITICAL XCONOHT.
1. Coined money; gold, silver, and copper.
2. The paper currency, — including promissory notes
and Dills of exchang-e, with all their varieties.
3. Simple debts of all sorts; such as balances at
bankers, book debts of traders, and private debts
between individuals.
42. Balances at bankers are clearly a portion of the
currency, or circulating medium, because the figures repre-
sent sovereigns, and the creditor can demand sovereigns
for them, or he can convert them at any moment into a.
cheque, which is a Bill of Exchange payable to bearer
on demand, and it is in all respects equivalent to a bank
note, and is capable of performing the same functions.
That the sum standing at a customer's credit in his
banker's books is to be considered as money has been de-
cided in Chancery.* Nor can a debt due from a private
person be treated on any different principle, because it
can be converted into a Bill of Exchange at any moment,
at the pleasure of the parties.
43. It is certainly true that some of these descriptions
of currency are more eligible and secure than others, but
they are all of the same nature, and perform the same
duties, with different degrees of advantage. The metallic
currency rests upon its own intrinsic value, the credit of
the state, that it is of the proper weight and fineness, and
the universal readiness of people to receive it in return
for services. Paper currency, in this country at least,
rests entirely upon private credit, and is of all possible
degrees of security, from a Bank of England note down to
a gambler's I.O.U. There are several different kinds of
paper currency possessing more or less of a circulating
power. But yet all these different descriptions of cur-
rency, though more or less eligible and secure, represent
but one fundamental idea — debt. From these considera-
tions, it follows that the amount of the currency or circu-
* Manning v. Purcell, 23 .L. J. Chanc. 423.
DEFINITIOVS AND ILLUSTRATIONS OB TBRBfS. 43
lating medium in any country is the sum total of all the
debts due to every individical in it.
44. It might be objected, perhaps, to the opinion that
a private debt is to be considered as currency, that it is
what is called in English law a chose in action^ or mere
right of action, and is not assignable at common law. The
reply to such an objection is, that the non-transferability
of aebt is a local peculiarity of English law. It was
merely devised on account of certain arbitrary ideas of
public policy, and is not to be considered when we are
treating of things according to their natural qualities.
The most perfect freedom m the assignment or trans-
ference of private debts is the very foundation and life-
blood of modern commerce. This is effected by means
of Paper Currency, and the whole system of Bills of
Exchange, Promissory Notes, and Cheques, is a direct
violation of the common law of England, and they were
so regarded when they made their first appearance in
Westminster Hall. The fundamental principle of modem
commerce, and that which has given it such an immense
extension is, that a debt is treated in all respects as a
saleable commodity. It is considered as a species of mer-
chandize, just like money. In dealing, therefore, with
the generaS principles of the subject, we must consider
the non-assignability of debts in England as a mere local
caprice which does not affect the nature of the thing.
45. The extreme impediment to trade caused by the
obstructions placed by the common law on the transfer-
ence of private debts, was clearly seen by Sir Josiah
Child, in the 17th century, who has a chapter on the
subject, in his Discourse on Trade ; and he even went so
far as to wish not to leave it optional to the vendor and
purchaser, in the case of the non-payment of ready
money, to leave the debt in a verbal state, but he pro-
poses that it be enacted that every person whatever, who
bought goods, and did not pay ready money for them,
should be compelled immediately to give a bill, under
bis hand and seal, for the amount, with the time of
44 ELEMENTS OF POLITICAL ECONOMY.
payment agreed upon, which should be as transferable
as money.* Sir Josiah thus hit upon the true idea of a
currency. In a future chapter we shall see that the
business of banking chiefly consists of buying and selling
debts.
46. Mr. Henry Thornton, the author of the Inquiry
into the Nature and Effects of Paper Credit, seems to have
been the first to perceive that balances in the bank, were
to be considered as part of the currency of the country.
In his evidence before the committee of secrecy of the
House of Commons, in 1797, on the occasion of the bank
restriction, he says, (p. 94) ^^ balances at the bank are
to be considered very much in the same light, with the
paper circulation." In recent times, however, a different
opinion has prevailed, which we shall discuss hereafter.
47. We shall, therefore, use the terms " currency,"
and ^^ circulating medium/' in this work^ as absolutely
identical, and co-extensive, the latter being founded upon
its fundamental conception of circulating commodities,
the former on that of circulating itself. It is true that
the former is considerably the older term, and is derived
from that portion of the circulating medium, which was
most frequentlv thought of. Some persons, too, might be
a little startled at first, at seeing such an extension given
to the word " currency." But it is merely an instance
of what has repeatedly happened in other sciences, that
names have been given to substances from some particu-
lar quaUty in them, which first attracted attention, and
it has been afterwards discovered that that was not their
fundamental idea, and the class has been extended, through
the exigences of science, to include other things which
have no trace of the quality, whence it derives its name.
We may mention as familiar instances, two cases in
geology, and chemistry. In geology the term " oolite,"
was first applied to rocks, which resembled the roe of a
fish, but the necessities of science compelled geologists
* A New Discourse of Trade, p. 126. Edit. 1698.
DEFOrniOVS AKD ILLXTSTBATI0H8 OF TBHBCS. 45
to class certain other formations, which have no resem-
blance to roe, under the term of oolite, and such classi-
fication is universallj adopted. So also ^^ white chalk
iQAy he yellow, green, or black, and is actually of tliese
colors in some places, but notwithstanding these stains
upon its character^ it is still called ^^ white" by
courtesy.* So the term "combustion" was applied to
certain phenomena in chemistry, on account of heat
being developed during the process. But a deeper
knowledge in chemistry disclosed that it was merely the
process of oxygen combining with some other substance,
and the quality of the evolution of heat was accidental,
and that there are cases of the combination of oxygen
with substances where no heat is developed. And yet
these are classed under the term combustion. Thus, the
rusting of iron is merely the process of oxygen combining
with it chemically, and is classed as combustion, though
no heat is developed. So the word acid has received an
extension which includes many things which are not
sour. To say, then, that private debts are to be classed
under the term currency, can be no stumbling-block for
an instant, to any one who considers these analogous
cases. It is merely an example of what has repeatedly
happened in other sciences, when more correct views
were entertained of the proper classification of their
objects.
48. It would be quite easy to multiply instances of a
similar necessity which have occurred in many other
sciences^ but the ones we have given are sufiScient for the
purpose. "Descriptive names," says Dr. Whewell,f "al-
though thev might be supposed to be the best, have, in
£EU^t, rarely been fortunate. The reason of this is obvious :
— the mark which has been selected for description may
easily fail to be essential, and the obvious connection of
• Quarterly Review. Vol. xcv., p. 393. See also Whewell's Phil.
Ind. Sci. for other examples.
f Hist, of the Inductive Sciences. Vol. in. p. 433. Edit. 1857.
46 SLEMSNTS OF POLITICAL ECOKOICT.
natural facts may overleap the arbitrary definition. • ♦
The signification may assist the memory, but must not be
allowed to subjugate the faculty of natural classification."
49. It is most particularly to be observed that it is
the essential quality of currency, that it is a general
charge of debt upon the person of the debtor, or obligant ;
and is not a title to any specific or particular articles.
In all cases whatever, it involves the idea of personal
liability. Thus, in Section 30, where the wine merchant
is supposed to take the grocer's promise to pay a half
{)ound of tea when required, in return for the wine he
ets him have, it must be distinctly remembered, that
this is a general power to demand so much tea from
him, and is not a particular appropriation of any specific
quantity of tea. The whole ot the grocer's stock of tea
remains his own property until the demand is made upon
him for payment. Consequently he can seU or dispose
of it all, if he pleases, which he could not do if any par-
ticular part was set aside as the property of another
person, and he was merely the keeper of it.
50. This distinction is of the utmost importance, and
it serves to shew that the transferability from hand to
hand is not the fundamental conception of a currency.
There are certain commercial documents which bear a
resemblance to Bills of Exchange, in respect of their being
transferable from hand to hand, and are supposed to be of
the same nature. These are Dock Warrants, and Bills
of Lading. When property is deposited in the Docks,
the owner of the Dock grants a receipt for it, and this,
for the convenience of commerce, is assignable at will,
and whoever is the holder of it is the owner of the pro-
perty. So, when a ship is loaded for a foreign port, the
shipmaster grants receipts for the goods on board of her,
ana these "Bills of Lading" may be sold fifty times
before the actual property is demanded. Both Dock
Warrants and Bills of Lading are merely the titles to
certain specific goods, warehoused in the dock, or on
board ship, and involve no personal liability or 4ebt.
DEFTNITIOKS AND ILLITSTRATIOKS OF TERMS. 47
On the other hand, a Bill of Exchange is purely a charge
of debt upon some particular person. It is expressly
contrary to the fundamental conception of a Bill of Ex-
change^ that it should be an appropriation of any specific
funds. If a document purporting to be a Bill of Ex-
change is a specific appropriation of any particular funds,
it immediately ceases to be a Bill of Exchange.
51. The great importance of distinguishing between
the fundamental conception of Bills of Exchange, and
that of Bills of Lading and Dock Warrants, may probably
not be apparent at present ; but it wiU fully appear here-
afler. Some most dangerous and fatal ideas on the sub-
ject of Credit are founded upon confounding the two
things. One thing only we will note at present, ~that
Bills of Lading and Dock Warrants can never exceed in
quantity the property they represent, but that Bills of
Exchange greatly exceed the quantity of coin they pro-
fess to represent, because they do not represent any
particular coin, but they are only an engagement that a
person shall have the money at some given time, and
it is quite possible that the same coin may discharge a
hundred Bills of Exchange in succession.
52. It is of such great importance to fix the preceding
classification and distinctions in the mind, that we will
illustrate them further by quoting from I)r. Whewell,*
a conversation between Linnaeus and one of his pupils^
Giseke, which presents an exact analogy to the views
we are seeking to enforce. Giseke was much puzzled
by being unable to see the intelligible grounds upon
which Linnseus proceeded in his collection of natural
orders. He narrates a conversation which he held
with the great teacher, upon the subject which presents
the most striking points of similarity with the preceding
paragraphs. Giseke began by conceiving that an order
must have that attribute from which its name is derived,
that the UmbellatcB must have their flower disposed
• Hist. Ind. Sc., Vol. in., p 270, Edit, 1857.
48 ELEMEHTS O? POLITICAL SCOVOKT.
in an umbel ; the mighty master smiled, and told him not
to look at names but at nature.
*' Oueke. — Bat what is the use of the name if it does not
mean what it profesaes to mean? ^*
** LmtuBus. — It ia of small import what jon call the order,
if jou take a proper aeriea of plants, and give it some name, which
is clearly nnaerstood to apply to the plants, which you have
associated. In sudi cases as you refer to, I lollowed the logical
rale of borrowing a name a poHori from the principal member. Can
yon give me the character of any single order ? "
^' Oiseke. — Surely the character of the umbeOatoB is that they
have an umbel ?
*' Zenfiontf.— Good, but there are plants which have an umbel
and are not of the umbellatcB f "
'* Gueke. — ^I remember; we must, therefore, add that they have
two naked seeds."
" lAnncBus. — ^Then Echinophora^ which has only one seed, and
Eryngiumj which has not an umbel, will not be Umbellatce^ and yet
they are of the Order. Both are beyond dispute Umbellatoe,^'*
53. Let the reader of this work thoroughly imbibe
the spirit of the preceding conversation, and not proceed
any further until he masters the idea that we must
look beyond names to the nature of the objects we are
treating about, for a proper classification of them. Just
as there were plants which had no umbel, and yet
were of the order umbelkUcB; so, though private debts
are not current, yet still they are currency \ and as
there were plants which had umbels, and yet were
not of the order umbellatce ; so also dock warrants and
bills of lading, although they are current, are yet
not currency.
54. The definition we have established of the nature
of a currency, furnishes us with a criterion to decide
whether certain things are currency which may appear
at first sight to be so, or at least to bear a close affinity
to it. We may take Government Stock, or the Public
Funds, as the representation of the class, which includes
Bank, Insurance, Railway, Dock, and other shares^
and all that class of securities which appear on the
DSFnmioirs and illustbations of tbbms. 49i
fistce of them to represent money. Many persons have
made their wills, intending to liequeath their property
in the Funds in a particular manner under the title
of money. But the Courts of Law have uniformly
rejected that interpretation, and held that Stock is not
included in the title of money, though they expressed
their regret at being obliged to do so, as they did not
doubt that if the testator could have explained his
intentions, he would have said that he meant to indicate
stock by the word money. Is, then, Grovernment Stocky
and the class of securities of which it is the type,
currency ? The answer is that they are clearly not
currency. A Bailway Share does not represent money,
but it is a certificate that the owner of it has paid a
certain price for the purchase of a certain portion or
share of the railway. The value of that share is
estimated by the profits it is expected to produce. This
share, then, does not represent currency, out an interest
in property, the value of which is variable, and rises
or falls according as the profits of it are greater or
less. Similarly, Bank, Insurance, and other shares
represent a certain interest in the property of these
concerns; these shares are, therefore, to be placed in
the same category as title deeds to property, and are
not to be considered as money, or currency* And Grovem-
ment Stock is exactly of the same nature. The
Public Funds are an estate or property, producing a
certain known revenue, guaranteed by the public faith,
and what goes by the name of Stock, is a certificate
that the owner of it is the possessor of a certain amount
of this estate or property, and the value of this property
varies according to the profits derivable from other
investments, and from time to time either exceeds or
falls short of the price originally paid for it.
55. On the other hand, a Bill of Exchange or a Bank
Note, professes to represent a fixed sum of money, and
nothing else, and the holder of such a security does not
expect to receive more or less money for it than is stated
D
50 XLEMENTS OF POLITICAL SCONOBIT.
on the face of it. But the holder of stock and other
similar securities, hopes or fears to receive either more or
less than he gave for them^ according to a multitude of
causes that affect their value.
56. There are two expressions which are very apt to
be confounded, but which are very distinct in their nature,
viz.. Securities for money ^ and Convertible Securities.
The former mean securities for the payment of a definite
sum of money at some given time, the latter are merely
title deeds, or certificates of property. Securities for
money, by the considerations we have established, are
currency; convertible securities are not currency, but
property. Securities for money comprehend all obliga-
tions to pay money, such as Bills of Exchange, Promissory
Notes, Cheques, Bank Notes, Exchequer BiUs, Na^ Bills,
&c., &c. Convertible securities include Bills of Lading,
Dock Warrants, the public funds, shares in all sorts of
companies, and all title deeds to property of a moveable
description, the property of which passes by simple de-
livery, and at a short notice. Convertible securities mean
those securities which can be converted into money at a
short notice, or for which a purchaser can readily be
found. The difference between the paper currency, or
securities for money ^ and convertible securities is, that one
represents merelv promises to pay something, but the
others are the titles to the actual property itself; a dis-
tinction of the utmost importance, because promises to
pay money may be, and are, multiplied far beyond the
actual quantity of money, which is the system of credit ;
in the latter case, by the very nature of it, the titles can
never exceed the actual quantity of property in existence.
We may state it thus,
' Securities for money never represent any specific
money, but always a claim on the person.
Convertible securities always represent some specific
goods, and are never a claim on the person.
57. A variation in the price of securities for money^
finch as Bank Notes, &c., and convertible securities, such
DEFlKnl:OKB AND ILLUSTRATIONS OF TfiRMS. 61
as the Funds, &c., dearly illustrates the distinction
between the term depreciation and diminution in value.
A Bank note professes to represent a fixed sum of
money, and if it will not purchase that amount it is
depreciated. On the other hand« the value of Stock, &c.,
is known to be variable, and if it sells for less than was
paid for it, it is diminished in value.
&8. The simplest and most perfect form of a currency
is that which represents nothmg but transferable debt,
and of which the material is of no intrinsic value, such as
Eaper. It is only, however, when States have reached a
igh degree of civilization that they adopt this perfect
form. Before they attain that, the material of it entirely
consists of something which has an intrinsic value, such sa
Gold or Silver. From this circumstance, the purchase of
an article with a gold coin is of a mixed character, and
partakes somewhat of the nature, both of a barter^
and of a sale. But this intrinsic value is a secondary
circumstance, and not the one which gives it its character-
istic as a currency. It is its general reception as the
visible symbol of transferable power, Which is also called
negotiability, which is the essence of a currency, and dis^
tinguishes a coin from a medal.
59. In speaking of the word Value, writers on Politi-
cal Economy are frequently in the habit of considering it
as the quality which renders objects sought after. But
this is clearly an error. Political Economy has nothing
to do with the reasons why people are led to desire cer-»
tain objects rather than others. That belongs to a diffe--
rent science altogether. Political Economy has no more
to do with the reason why people desire certain things, than
Astronomy has to do with the metaphysical cause of gra-
vity. All it has to do is to accept the fact, and trace its
consequences. To apply the name of Value to the qualities
which render any object desired, is an example of the
common fallacy of giving the same name to the phe-
nomenon, and to the cause of the phenomenon, which haa
D 2
92 VUEXEHTB OF POLITICAL ICONOIfT.
been well reprehended by Mr. Mill.* In the present
science we must rigidly limit ourselves to the fact that
persons do actually desire certain objects, and that they
will give other objects, as well as tiieir own labor, to
obtain possession of them, and the quantity of these
objects which they will give for any other object, is
termed the Value of that object in respect of the others.
By the word Value, then, we mean nothing but the ex-
changeable relation of objects with respect to their nu-
mSl quantities.
60. From this error of considering value to express
the quality which makes an object desired, Adam Smith
has adopted from Turgot, a distinction which is most
unphilosophical, namely. Value in use and Value in ex-
change. Thus, he remarks, as John Law had done before
him, that water has a great vali^ in tise but none in ex-
change, and a diamond has a great value in exchange
but none in use. This distinction has been admitted by
most succeeding writers, but it is extremely detrimental
to the true conception of the subject, and must be care-
fully guarded against. We must entirely discard all
reference to the use of things in speaking of their Value.
When it is said that water has no value in exchange, it
is merely an example of the mathematical S3rmbol 0. It
coincides exactly with the popular use of the word
nothings which does not mean an absolute positive
nothing, but something so infinitesimally small, as to be
beyond conception, but which may be developed under
certain circumstances. It has the germ or trace of value.
There are circumstances in which a glass of water may
fetch a very high price, as at the coronation, and similar
cases. In all towns where water-rates are paid, every
drop of water which is used manifestly costs something,
although it is inappreciably small. The distinction, then,
is utterly destructive ot all philosophical symmetry.
Water is merely the lowest term of a series, of which the
highest is the diamond.
^ SjBtem of Logic. Vol. ii. p. 424. 4th Edit
DEFINITIONS AND ILLUSTRATIONS OF TERMS. 63
6 1 . Hence, all objects which We require, and for which
we would rather give a price than want, but whose quantity
is so abundant that we can obtain them for nothing, maj
be said to have the value 0, as water, air, &c. : among
these things many writers place the natural force of the
wind. Now, the wind is common to the whole world
when it blows. But the wind is capricious ; sometimes it
does not blow when it is wanted, sometimes it blows in
the contrary direction, and in all these cases we go to
an expense to obtain a substitute more obedient to our
desires. Steam mills are fast superseding wind mills,
because the wind is so uncertain, and steam ships are
superseding sailing ships. Now, the sum we pay for
erecting an intrinsic moving power like steam, shews
exactly what the value of the wind is; t.e., what we would
be willing to pay for a constant supply of wind ; and so on
of other similar things. Hence, whatever we require, and
would be willing to pay for rather than want, has a value,
however small it may be, and is merely the lowest term in
the series.
62. The ideas of labor and valtie are so intimately
connected, that to separate them seems an operation of
almost as much nicety as Sir Charles Bell's separation of
the nerves of sensation and motion. But it must be care-
fully done. Labor and value have no necessary relation
whatever. It is certainly generally true that most values are
the result of great labor, but yet labor is in no case
whatever the cause of value. It is the result, and the
result alone, which possesses value, whether that result
was obtained with much or with littie labor. If a man
Eicks up a diamond, that diamond is equally valuable as if
e had bestowed twenty years in searching for it. It is not
valuable because he picks it up, but he picks it up because
it is valuable. One man may expend a great deal more
labor or money in producing a given result than another
man, but the result is not the least more valuable on that
account, and if it is inferior in quality will be less valu-
able. This will be illustrated at greater length hereafler.
54 ' ELEMSNTS OF POLITICAL ECONOMY.
^ 68. Again, all valae is purely local. Results produced
for which there is no demand have no value, or results re-
inoved from places where there is a demand for them, to
places where there is no demand for them, lose their yaluei
If a person were to expend a great deal of labor and expense
In learning Chinese, such an accomplishment might be very
valuable m London or Paris, where there is usually a
demand for such acquirements. The possession of this
knowledge has a value in such places. But if that person
Were to go and live in the Hebrides among the cottiers^
there could be no possible demand for such knowledge
there, and consequently it would have no value. The
same reasoning is universally true, the same principle
iapplies to every other result produced. A guinea has
great value in most countries in Europe, but removed into
the interior of Africa it would have none. A £5 Bank of
England note is at present in London in all respects equal
*o five sovereigns, and while it is received with equal readi-
•ness, is of exactly the same value. Removed to a place
where people would not receive it, it would lose its value.
Among a certain class of people, a Raphael or a Correggio
is of inestimable value, others would greatly prefer a fine
flaring signboard. In no case, then, is it labor that con-
fers value on a result^ but only the demand for it.
' 64. It is not, then, labor that confers value, but value
or demand that attracts labor. Now, it is evident that
'labor may have value from two entirely opposite reasons.
Persons may require services for two opposite reasons.
They may spend money either to obtain something they
want, or to get rid of something they don't want. Either
to purchase an enjoyment, or to get rid of an encumbrance.
This distinction is of the most important nature. To
the person who is able to render such services it makes
no difference, he gains his fortune either way. But to the
' community at large, the distinction of the nature of these
employments is very important. We may denominate
-those objects which we would pay to obtain, Positive
DBtlKITIONS AND ILLUSTRATIONS CNP TEBMS. &S
Values, and those which we would pay to get rid of, Nega-
tive Values.
rt6. Thus, if I see a book or any other article I desire,
and will give something to obtain it, such an article has
positive value. On the other hand, I may be burdened
with something noxious and injurious to me, and I
may be willing to pay to get rid of it. Such a thing has
Negative Valtie. In either case the capability of a
person to render me this service is of value to him.
Thus, if a river or the sea overflows my land, and thereby
renders it impossible for me to cultivate it, I pay an
engineer to raise an embankment to keep it out, I have
too much water, it is a nuisance to me, I pay to get rid of
it. It is, therefore, a negative value.
66. Or my land may be covered with rocks, or a
forest, or anything else. I must pay money or bestow
labor in clearing it. All such things have a negative
vklue. Or if my land is encumbered with old buildings,
which must be pulled down, before I can build a new
house, I must pay to get rid of them. These things,
therefore, have a negative value for me. Therefore, the
zero point of value is where my property is in such a
position that I may begin to lay out money profitably upon
It, as when the ground is cleared for cultivation or build-
ing. Benefits, therefore, are positive values, encumbrances
are negative values.
67. Now, it is evident that a very large class of pro-
fessions are solely employed about negative values.
Thus, when I am encumbered with disease I employ a
doctor to get rid of it. When I am oppressed with injus-
tice, I employ a lawyer to obtain redress. When I am
in fear of being oppressed by violence, foreign or domes-
tic, I pay soldiers or policemen to defend me ; and as
mankind are weighed down with evil and sin, they pay
clergymen to aid them in getting rid of it. All these are
negative values, and all the money spent by men for
these purposes, is only to restore them to the position
they ought to have been in, without their assistance.
56 ELEMENTS OF POLITIGAL ECONOICT.
. 68. Now, it is quite clear that we cannot begin to
make profit of anytiiing until its negative value is got rid
of. Hence, all negative values are subtractions firom
national wealth. All the money spent upon n^ative
values is only to remove obstructions to the progress of
wealthy and it is quite clear that if the cause of those
negative values or encumbrances could be removed, the
money and industry spent upon them might be employed
in positive values. Kemove the causes of disease, and
the money spent upon doctors, and the doctors themselves,
might be employed upon positive values. If my land
were not overrun with the forest, or encumbered with
old buildings, or deluged by the sea, the money spent
upon removing those obstacles might evidently be devot-
ed to develop its fertility, or in other emplo3rments of a
positive value. The quantity of money or labor neces*
sary to expend, to put it into a condition to be profitable,
is its negative value. And when anything is in this
state, it IS evidently necessary that it shomd produce
double profits to the extent of its negative value, m order
to render it worth domg.
69. Hence, all employments may be divided into
those based upon positive values, and those based upon
negative values. And though to individuals themselves
each of these employments may be equally useful and
profitable, yet it is always a good sign in a state wheii
the number of persons emploved on positive values
increases, and that of those employed in negative values
decreases.
70. The Resources of a coimtry are all those objects
which taken by themselves are not wealth, but which are
capable of being applied to the production of wealth.
They comprehend in the first place the object upon which
industry may be usefully employed, such as a fertile soil,
minerals, forests, fisheries, &c., secondly the fund of
industry, skill, and talent which may be employed upon
l^em ; and, thirdly, the power which puts industry in
motion^ which is currency. Neither of these three taken
DEFINITIONS AND ILLU8TBATI0NS 09 TERMS. 57
singly can be of any use. But a judicious combination
of the whole produces wealth. We shall always preserve
a distinction between wealth and resources ; the former
being the production which is an end, or an object of
desire for its own sake, the latter being the materials or
means applicable to such purposes. The currency is
more properly to be regarded as one of the resources of
the nation rather than part of its actual wealth, because,
though industry has been bestowed upon its production,
yet its production is rather a means to an end, and not
the end itself.
71. As the use of the currency is to set industry
in motion, and inasmuch as it has no use except so
far as it does that, its beneficial effects are not to be
measured by its actual amount, but by the quantity
of industry which it generates. Money lying locked
up in a box cannot increase of itself, and only represents
latent power and not actual power. It may be called
power, or wealth in the latent state, and resembles the
steam engine of a mill which is not going, and is of
no use unless it is set in motion, and as the produce
of the mill is measured by the quantity of the motion
of the engine^ so is the useful effect of the currency
measured by the quantity of its motion, which we have
caUed the circulation, ^ow, as this circulation, which is
the sole test of its useful effect, is the product of its
amount multiplied into the velocity of its circulation,
it is clear that if by any means we can increase the
rapidity of the circulation of the existing currency, it
wul add greatly to its beneficial power, or if only a certain
amount of business can be done, we may diminish the
quantity of currency necessary to carry it on by increasing
its rapidity of circulation. Engineers usually call the
quantity of the motion of the engine its duty, so we
may call the circulation of the currency its duty.
72. It is so essential to have a clear conception of
the useful effect produced by any given amount of
currency, that we may add another illustration. The
$8 BLSMBNTS OF POLITICAL ECONOMT.
effect produced by any body in motion is determined,
not only by its weight or mass^ but also by its velocity,
and is called its momentum. If the mass l>e diminished,
yet by increasing the velocity, the result or momentum
may still be the same. Thus, if a body of 100 pounds
Weight move with a velocity which we may call 1,
its momentum will be 100; now, if we diminish the
weight to 50, and can double the velocity, the effect
or momentum will stiU be 100, the same as before*
The operation of the currency is precisely analogous
to this. Its useful effect is the result of its combined
amount and rapidity of circulation, which we have
called the Circulation. If we can make £50 circulate
with twice the rapidity that £100 did before, the useful
effect or circulation will be the same. Thus, the
circulation of the currency may be aptly compared
to the momentum of a body; hence, we may say that
the circulation is the momentum or duty of the Currency.
73. As the useful effect, or the industrial operations
promoted by the currency, does not depend solely on
its amount, we may see how impossible it is to form
any estimate of the wealth of a country by the amount
of money, or gold and silver in it. One country may
abound in gold and silver, and yet be poor ; and another
may have comparatively little, and yet be rich. Spain
was a country in which, at one time, gold and suver
were more plentiful than any other in Europe, and
yet the more gold and silver were poured into it, the
poorer it became. Adam Smith says that, except Poland,
it was the poorest country in Europe. On the other
hand, Scotland is the country which has the least amount
of gold and silver currency, with the greatest comparative
amoimt of wealth. The quantity of gold and silver
currency in France is much greater than in England,
and yet England is much the wealthier country of the
two, and there are good groimds for believing that
the proportion of currency to industrial operations in
Englana considerably exceeds that in Scotland. These
DEFIKmONS AND ILLUSTRA^ONS OF TBBMS. 69
examples shew that the comparative amount of visible
currency in different countries is no evidence whatever,
of the comparative wealth of those countries; on the
contrary, it may be a proof of waiste of wealth, that
is, a waste of resources which might be better employed.
74. We must now demonstrate a proposition which
is of the greatest importance in Political Economy, and
on which errors of the most serious nature are very
prevalent; it is this, — That the quantity of money in
any country bears no necessary relation whatever^ to
the quantity of other goods ^ Sfc.^ in itj or to their price.
Many writers on Political Economy suppose that the
quantity of money in a country bears some necessary
relation to the quantity of commodities in it; many
more think that the prices of commodities are determined
by the proportion which the quantity of money bears
to the quantity of commodities. That this is a very
grievous error can easily be shewn ; thus, let us suppose
that two persons, A and B are reciprocally indebted
to each other for the sale of ^oods; let us deal in
small figures, as that will exhibit the principle of the
thing as well as large ones. Let us suppose that A
has bought goods of B to the amount of £10, and B
has bought goods of A to the amount of £13; then
it is quite clear that there are three different ways
of settlmg their dealings.
1. Each may send a clerk to the other with the
amoimt of his debt to the other. To settle the
matter in this way would require £23.
2. A may carry £10 to B in discharge of his debt,
and B may pay it back to A, together with £3 in
discharge of his own. This method would require
£13.
3. They may meet and set off their mutual debtd
against each other, and pay only the difference
in coin. This method would require only £3.
Now, it is quite clear that a very different amount
of money would be required to carry on any given
of bamwiij accaidiiigas eidier of finest tkree
seilMik WM adopted. Beivceii die first and tke third
there in a difirence of £20; but there woeld be no
dMTeieiiee in the priees of coiii]iiodhie&. So that by
a mafile diaiige in the method of doii^ bosiBeaB, £20
wat^ bo withdrawn from drcohuion altogether, if odIt
the tasM; qoanti^ €ft business can be carried on.
75. Fnym these conadetations it manifisstlj appears
that there may be rerv different quantities of money in
dUTerent countries, which may exercise no infinenoe wbat-
erer on prices, and the propMtion between mon^ and
eommodities yaries Tery greatly, accmdiii^ to the method
in which business is conducted. Now, it does ha|qpen that
in different countries all these three methods of carrying on
boMness prerail, the result of wluk^ manifestly is, that
these countries will require very different quantities of
money' to carry on the same quanti^ of business. And it
is quite pos»ble that one country in which the first and
most troublesome of these methods of carrying on business
prevails, may be a much cheaper country than one in
which the Isiet and best method prevails. And this was
actually the case in France where the first method prevailed,
compared to England, where the third method prevails to
a much greater extent. It is a well known fact that Uving
in France used to be much cheaper than Uvin^ in England,
although the proportion of money to commodities was very
much greater in the former than in the latter, because
transactions were settled with ready money to a much
greater extent in France than in England.
76* Now, let us suppose that at any given time the
operations of a country are conducted by a purely metallic
currency to the amount of £1,000,000, say. Then, if per-
sons import money to the further extent of £500,000, such
a fresh importation would be an addition to the resources
of the country. But three things may happen. Firsts an
additional quantity of industry may be generated in exactly
the same proportion as the increased quantity of money.
If that be the case^ no change in prices will occur, but a
DEFUnnOHS AND ILLUSTBATIONS OF TBBMS. 61
ereat amount of additional wealth may be called into ex-
istence. Secondly^ no additional industry may be gene-
rated, and then the extra quantity of money will be forced
into the old channel of circulation, and £1,500,000 will
now do the same dutjr that £1,000,000 did before. The
only consequence will be that prices will rise 50 per cent.,
but no additional wealth will be created ; and persons who
are paid in a fixed quantity of money will find their in-
comes diminished in value, one-half. Thirdly^ a result
intermediate between these extremes may take place, and
additional wealth, to a certain extent, may be created, but
not to the full proportion of the additional money; then the
result will be both creation of additional wealth to a cer-
tain extent, and also a rise in prices, which will manifestly
be proportional to the ratio which the surplus, after the
creation of additional wealth has ceased, bears to the whole
quantity of money employed.
77. Now, if we take the example of a country con-
ducting its operations entirely by the first method above
described, and if we suppose that it requires £1,000,000
to settle its transactions, then, if it adopts a change in the
method of doing business, and uses the third method in-
stead of the first, it is perfectly clear that a very large
quantity of money will be disengaged from circulation.
That quantity of monev being disengaged from previous
operations may be apphed to promote new ones, and in all
its practical effects is an addition to the previously existing
quantity of money. Hence, the various methods of
economizing the use of money are strictly to be considered
as an increase of the resources of the nation. If by an
improved method of doing business, we can dispense with
£500,000 in settling transactions, that is equivalent to add-
ing £500,000 to the resources of the nation, and the
e&cts of this addition will be identical with those described
in the last section. It is one of the great functions of a
Bank to promote such a change of doing business, and to
bring people together to balance their mutual debts with-
62 ELEMElffTS O? POLITICAL ECONOKT.
out the intervention of money ; and we shall shew hereafter
how greatly the skilful employment of such methods
economizes and develops the national resources.
78. We must now endeavour to settle the meaning of
two words, about which there has been much difference
of opinion among Political Economists, and upon which
most extensive errors prevail. We mean Capital and
Credit. To fix and define the meaning and extent of the
word capital is one of the most important points in the
subject, as it has undergone so many Protean changes of
signification by writers who use it in different senses, that
much confusion has been created. We must enter into
some little examination of its nature, and endeavour to
discover what is its primary conception, and what its
metaphorical and secondary meaning, so that we may al-
ways see in what sense it is used. But to do this satis-
factorily we must trace its growth fix)m its very first origin.
79. The state of barter which we began by assuming
in the beginning of this work, is that which we know did
actually prevail in the first ages of the world. Though
no doubt the origin of a currency as described there was
imaginary, still, if it had been thought of, it would have
supplied a remedy for many inconveniences which must
have occurred in such a state of things. Thus, when men
had done services to their neighbours, and were not paid
in money but in kind, if they did not happen to require
anything in return at the time, they must, nevertheless,
have accepted those things in return, or else have had
merely the right to demand them at some future time,
which rights or debts would soon have been disputed, or
forgotten. Now, if we suppose that the hunter had ex-
changed some of his produce with a farmer or a shepherd,
we may very well suppose that he would not require for
his own use all the corn or the sheep which he obtained
in return ; so that if this went on for a time, a year say,
he would have accumulated a store of com and sheep, be-
yond what he had any immediate occasion for. This
DEFINITIONS AND ILLUSTRATIONS OF TERMS. 68
accumulation or saving is the first conception of Capital.
But the hunter would find it very inconvenient to turn
fanner himself, and the com in his granary could be of
no use to him, and would spoil. He would, therefore, pro-
bably look for some person who made it his business to
grow com, and he would lend him this com, on condition
of receiving an equal quantity back again, together with
a certain portion of the increase, by way of reward for the
benefit rendered to the farmer. In a Bimilar manner, he
would lend his sheep to the shepherd, upon the same con-*
dition of receiving part of the increase by way of reward.
Such is the first conception of Interest or Usury. Thus,
we see that capital and interest were conceptions anterior
to the use of money.
80. Now, though our conception of the origin of
currency is imaginary, this description of the rise of
interest or usurv is historically true. We know it as a
I)ositive historical &ct, that the practice of usury existed
ong before money was invented. Thus, it is well known
that there was no money in Greece in the days of Hesiod,
yet Hesiod expressly mentions this species of usury.*
And Moses classes the two species of usury together.
" Take thou no usury of him, or increase. Thou shalt
not give him this money upon usury, nor lend him thy
victuals for increase.^^f This example of the rise of
interest is exactly analogous to what prevails in many
countries at the present day with respect to rent. In
some countries it is the custom to give the landlord a
certain quantity of the actual produce of the land;
though, in more civilized ones, it is commuted into a
money payment.
81. It is clear, however, that this primitive mode of
accumulating capital would be very inconvenient and
burdensome. If any one were to accumulate any con-
siderable quantity, he would require to have large gra*
naries, large flocks, large stores of every kind, which it
♦ Op. et Di. 371. t Levit. xxv. 37.
64 ELElfESTS OF POLITICAL KCONOBIT.
would be a great trouble to look after. Consequently,
such a rude way of doing business would have a great
tendency to prevent an accumulation of capital. It
would greatly obstruct the growth of wealth.
82. In this example, too, we see the first rudimentary
form of Credit. The person who had accumulated
capital, not being able to employ it all himself, would
lend it to some one else, on the condition of receiving it
back again at a fixed time with interest. In this pri-
mitive state. Credit would only consist in the transfer of
previously existing Capital from the hands of one person
to another, who had more opportunity of applying it
in a profitable manner. Consequently^ in such a state.
Credit would be no increase of capital.
83. Mr. Laing* gives an interesting account of insti-
tutions which exist in Norway, which exemplify the
whole course of procedure described in the preceding
paragi*aphs. He calls them aptly Com Banks. In that
thinly peopled country, there are no dealers or weekly
markets attended by purchasers, who buy at one pkce
and sell at another. If the farmer has any gram to
spare, he can do nothing with it^ unless he happeus by
chance to find consumers on the spot. To remedy this
inconvenience, magazines are established all over the
country, to which the fiirmers take their surplus grain,
and for the time it remains, he receives at the rate oi one-
eighth of increase per annum, or 12^ per cent. If he
deposits eight bushels, he can take out nine at the end of
twelve months, or in that proportion for shorter periods,
and he is charged at the same rate of one-eighth per annum,
for any portions of his quantity he may take out. If he
overdraws his account, or had none deposited, but receives
a quantity in loan, he pays for such advance at the rate
ef one-fourth of increase per annum. Thus, if he takes
eight bushels, he pays back ten at the end of twelve
months, or at that rate for the time he has the loatu"^
* Beoadenoe in Norway, by Samuel Laing. TVaYeDen^ Libr. p. 169.
DEFINITIONS AND ILLUSTRATIONS OF TEKMS. 65
In these primitive Institutions we see actually exempli-
fied the first rudimentary conceptions of Capital, Credit,
and Interest, as they may exist anterior to the adoption
of money.
84. lieflecting only on these rudimentary conception^,
the principal writers on Political Economy have laid down
certain dogmas, which are now part of the established
belief on the subject. They are, first, that Credit is only
a loan of existing Capital, and, secondly, that production
is limited by capital.
85. These propositions are no doubt to a certain
extent true, if we do not proceed further than this ru-
dimentary form. But with the introduction of Money,
we shall find that a complete revolution takes place in
the subject, and we must mark the progress of the details
very closely, because the consequences are of great
importance, and have been greatly misunderstood. Even
at the risk of being tedious, we must start again from
the banning, in order that we may be sure of not missing
a single step in the operation.
86. When a man is bom without hereditary possess-
ions, and has no property presented to him, there is but
one method by which he can live, that is, personal services
or labor of some description, either mental or bodily.
When such a person has Ibund some one else who stands
in need of his services, and employs him, he is entitled to
some compensation, or wages. His employer must either
give him what he requires directly, such as food, clothing,
and shelter, or whatever else may be stipulated, or he
must give him something which will enable him to get
from some one else, what he requires. That something,
which is not an equivalent itself, but only the means of
obtaining an equivalent^ is money. This latter method of
rewai'ding services lias been almost universally adopted
among civilized nations. Now, when the laborer has re-
ceived his wages in money, he has not received an equiva-
lent for his labor, but only something which will enable
him to get what he requires, or chooses. The money,
E
06 xuQfEirrs op political booromt.
therefore, that he possesses is not the equivalent^ but it is
the sjrmbol or proof that he has rendered services ifor which
he has not yet received an equivalent. The laborer
does not receive the coin for its own sake. The actual
silver can be of no use to him directly. But it is the uni-
versally recognised and accepted power of commanding
what he wants. Now, if the laborer spends all his money
in buying commodities for use, it is clear that at the end
of the year he Ls in no better condition than he was at the
beginning. There is nothing but the same weaiy round
of toil before him. He must again enter on a similar
course of labor, or personal services, to earn again the
means of subsistence, and so on for all his life. But sup-
pose that, instead of spending all his earnings on commo-
dities, he saves a portion of them ; then his condition at
the end of the year is better by just so much as he has
saved. And that saving represents such portion of his
services rendered for which he has not yet received an
equivalent. And that saving is called CAprrAL. Whether
it be a penny, a shilling, or a pound, that is the first germ
of Capital ; and the more the laborer saves from spending
the more does his capital grow. The part of the money
he spends we may denominate Revenue, and the part that
he saves is Capital. Hence, the fundamental idea of
Capital is the store of accumulated labor which its owner
has not yet spent in purchasing commodities. It does not
represent commodities in any way whatever, but only the
power its owner has of purchasing what he wants. It is
also manifest that it bears no definite relation to commo-
dities, because the quantity of capital the laborer accumu-
lates is just the quantity he refrains from spending.
87. Such, then, since the introduction of money, is
the fundamental conception of Capital. It is, therefore,
nothing but a store of accumulated labor which has not
yet been spent, and it is necessary to have some material
substance to represent and measure it, and that substance
is money. Capital, then, in its primary, genuine, and
original meaning, denotes the accumulated savings of
DEEINITIONB AND nXUSTRATIONS OF TERMS. 67
labor, and its S3rmbol is money. The first meaning* which
every man in business attaches to the expression, Capital,
is money. Thus, a capitalist is, technically, a person who
has a large stock of ready money at his disposal. To
bring Capital into a business, is to bring money into a
concern. When a man is said not to have sufficient
Capital to carry on a business, it means that he has not a
sufficient command of ready money.
88. Now, as soon as persons began to labor for hire,
it became necessary to fix upon some substance to repre-
sent labor, which should be received as the general power
of commanding services. And it also became necessary
that a specific quantity of that substance so selected,
should represent a specific quantity of labor. Different
nations have selected different substances — some tobacco,
some chocolate, some sugar, some shells, some leather,
but they all selected some particular substance for this
purpose. The most civilized nations have, however, both
in ancient and modern times, given the preference to two
particular substances, above all others, for this particular
purpose, and these are gold and silver bullion. It has,
also, always been settled among these nations that the
quantity of bullion is always proportional to the value of
the service, at the time it is rendered. Not that the same
quantity of bullion will always command the same amount
of service or commodities at different times, but at the
same time one-half of the quantity of bullion will only
command one-half the quantity of services. Among all
these nations, then, the weight of bullion is the measure
of value. We must be especially careful not to imagine
that the measure of value is an abstract thing, like a foot
or a yard the measure of length, or a pound the measure
of weight. A length of rope which measures twenty
yards to-day, will do so to-morrow, or a year hence. It
will be of the same length at London, or in Calcutta.
A quantity of lead which weighs twenty pounds to-day
wiQ do the same to-morrow, or a year hence. It will
weigh twenty pounds in any part of the world. But value
E 2
68 ELEBfENTS OF POLITICAL ECONOBIT.
is always measured by the relative quantities in which
two substances will exchange, and may vary from hour
to hour, or from day to day. A quarter of wheat may
be worth 50s. to-day, and 60s. to-morrow, and 120s. three
months hence. Still less is it likely that they will have
the same exchangeable relation in different countries.
Also, if there were twenty thousand million yard mea-
sures in the country, that would make no difference in
the length of the rope, nor if there were twenty thousand
millions of pound weights, would that make any difference
in the weight of the lead ; but if twenty thousand million
sovereigns were suddenly introduced into the country,
that would veiy probably make a difference in the ex-
changeable relations of gold, and other commodities.
Hence, when we speak of a measure of value, we do not
speak of an absolute invariable measure, like that of
length or weight, but only of one which affords a conve-
nient method of comparing the exchangeable relations of
quantities at any given time or place. The quantity of
substance which was the original measure of value in
England, Scotland, and France, was a pound weight of
silver bullion of a definite Jlneness.
89. Now, let us suppose that our laborer having ac-
cumulated a store of capital, i. e., of its symbol, money,
by abstaining from spending his earnings as revenue, or
has a quantity of it given him, which is merely the
result and the accumulated store of some one else's
labor, and becomes a merchant or trader, let us trace the
operation of capital, and its change of meaning then.
90. The object of commerce, and the business of
every merchant and trader, is to cause a circulation of
commodities, to bring commodities from persons who
have more than they require, to persons who have less
than they require. As soon as a merchant, or trader,
has discovered persons in this condition, it is his business
to step in and restore the equilibrium, and this he does
by buying commodities from persons who have too
much, and selling them to those who have too little.
DEFnsnnONS and illustrations of TERlfS. 69
The greater the stream of commodities he can cause to
pass through his hands, the greater will be his profit,
r^ow, as the commencement of his operation must be
buying the goods he means to sell, what is the power
wmch enables him to purchase them ? Capital. Capi-
tal is, therefore, the purchasing power, the moving power
of commerce, the power that causes the goods to move
from the producer to the merchant, or it is the circulate
inff power, which causes the goods to circulate. In its
primary meaning, it does not mean the commodities
themselves, but the power which transfers the property
in them from one person to another. And that this was
the use of money in commerce both Adam Smith and
Ricardo saw clearly.
91. But the object of the merchant in buying the
goods, is not to keep them to himself, but to sell them to
other people, and to sell them for as much more than be
gave for them, as possible. The obtaining the goods in
the first instance, was only a means to an end. The
true oWect of the merchant is to possess more money at
the end of the transaction than at the beginning. If he
gave £1,000 for the goods, he hopes, perhaps, to receive
£1,500 for them. Thus, in their turn, the goods become
the moving power, the purchasing power of this £1,500,
and consequently, by a simple transition, the name of
capital is applied m a secondary, and metaphorical,
sense to the goods which are the moving power to enable
him to get possession of the £1,500. When a man has
bought goods and sold them, he is said, in mercantile
language, to turn over his capital. Hence, it must never
be forgotten, that the original and primary sense of
capital is the circulating power of commerce, and that
when applied to commodities, it is only in a secondary
and metaphorical sense, because they complete, as we
may say, the revolution of capital.
92. But tbe word capital is capable of a still further
metaphorical extension of its original and primary mean-
ing. As the object of every man's labor is to gain money,
70 SLBifsms Of FOLrncAL soohomt.
whatever conduces to that end maj, in a fignradve sense,
be denominated capital. When a man invests money
as capital, viz., with a view to make a profit, the precise
form in which he invests it can make no difference in
the principle. One man invests his money in cultivating
a fiEtrm, for the purpose of selling the produce ; another
man invests money in buying commodities, for the pur-
pose of selling them with a profit ; another invests his
money in cultivating his mind, by learning a profession,
for the purpose of making a profit by exercising that
profession. As a question of Political Economy all these
modes of investing capital must be treated in the same
way. They must be classed together, though they may
be distinguished as far as regards the species. Thus, one
may be called material capital, and the other personal,
moral, intellectual, or imnuiterial capital.
93. Capital, then, in its most extended and general
sense, which is the proper one to be employed in Poli-
tical Economy, may be said to be anything which a man
can trade with, or which he can turn to the purposes of
profit, or which helps him to gain an income. Any
property or quality he possesses, which enables him to
increase his wealth, any instrument however humble,
or any contrivance however simple, which abridges labor,
and increases production, is truly to be ranked as capital.
Thus, the tools of an artizan, together with his skill and
industry, form his capital. The education and books,
and the skill of a physician, and lawyer, are their capital ;
the goods of a trader, and his skill and judgment, are his
capital ; the land of a landlord is his capital, which he
cultivates himself, or lets to farmers. So a good cha-
racter serves as capital to many persons who can obtain
the use of money, or a situation, from their known
integrity. Now, with these elementary truths clearly
impressed upon us, we shall be at no loss in any case to
understand the meaning of capital^ whether used in its
original and genuine sense, or in its derived and meta-
phorical one.
DEFDnnoms ard hxustratioks of terms. 71
94. But a man's integrity, skill, and judgment, may
serve him as capital, in a much more direct sense than
the latter one we have just spoken of, namely, as the
direct circulating power of conmiodities. When the
merchant bought goods with capital, he invested a portion
of the realized symbol of his past skill, judgment, and
industry. But mercantile instinct devised a circulating
power which should be the symbol of future skill, judg-
ment, and industry, and this circulating power is Cbedit.
The merchant, instead of buying goods with actual money,
is allowed to buy them with a " promise to pay " money at
some future period. By paying money he gives the
result of his former industry, by buying with a " pro-
mise to pay " money, he pledges the result of his future
industry. The actual money out of which payment is
to be made for them, is to be obtained by his future
labor, skill, and judgment in selling them advantageously.
Monejf^ labor J and credit represent simply industry past,
present, and future. Now, this system of buying goods
with a " promise to pay, " is called the system of credit.
It must be carefiilly observed that these goods are not
advanced as a mere loan^ but the property of them passes
to the buyer equally whether the operation be by actual
payment, or only by a " promise of payment." Whenever,
therefore, sales are made upon credit, credit is equally a
circulating power with real capital.
95. Now, let us examine the result to the merchant,
according as he employs capital, or credit, as purchasing
power.
If he possesses £1,000 of capital, at the beginning of
the transaction, and invests it in commodities, and sella
them for £1,500, he is better off, at the end of the tran-
saction, by the sum of £500, which forms Ins prof t.
If he buys them with his " promise to pay, " the pro-
ducer makes a difference ; he stipulates to have a some-
what higher payment, in consideration of its being post-
poned, and that according to the length of the postpone-
ment. Thus, if he sold for ready money for £1,000, if the
72 ELElfENTS OF POLITICAL SOONOICT.
payment was postponed for a year, he would probably
demand £1,100, and so in proportion for any lesser time.
Now, if the merchant bought upon these terms, if he
bought the goods with a promise to pay £1,100 at the
end of the year, and if he sold them, as before supposed,
for £1,500, his profit at the end of the operation would
only be £400, instead of £500, and this difference of
£100 is called the discount. Hence, credit is less profit-
able to the merchant than capital by the discount.
96. Hence, we see, that so far as regards the circulation
of commodities, credit performs exactly the same fimction
as capital. A merchant makes a profit by trading upon
credit, not so great a profit, it is true, as if he were
tnuling with real capital, but yet, if he has credit, he
makes a profit where otherwise he would make none.
Hence, it follows according to the conception of capital,
that credit is capital. All goods are circulated, either by
capital, or by credit ; hence, capital and credit constitMe
the circulating medium.
97. What we have already said must suffice in this
place to shew the first principles of capital and credit.
The system of credit, however, is of such transcendant
importance in Political Economy and commerce, and it
lias been so completely misunderstood by writers on
Political Economy, that it requires to be thoroughly
investigated and described, and the whole details of the
system will be exhibited in a future chapter.
98. We have observed in our preliminary remarks, that
the earlier writers on Political Economy only considered
the subject as far as related to material capital, or material
products, and that subsequent writers have extended it to
mclude mental capital, or mental wealth, in which they
ai-e unquestionably correct. Because intellectual capital
is just as much a source of profit to its owner as a farm
or a manufactory. No doubt it is liable to perish, but
that does not invalidate in any way its being capital, or
wealth, as long as it exists. So, any accomplishments, or
any profession whatever, by which persons gain their live-
DBFIMITIONS AND ILLUSTRATIONS OF TERMS. 7S
lihood, are capital to them. The powers of sin^ng and
dancing possessed by performers at the opera are capital to
them. To say that their labour produces nothing* per-
manent is nothing to the purpose, because the very same
objection would be applicable to an immense quantity of
material products which are produced for the very purpose
of being destroyed. Thus, no one would deny that a cigar
is capital to the tobacco merchant. The tobacco grower
sees that men like smoking, and he expends his time, labour,
and money in producing something to minister to that want.
So an opera singer perceives that such qualifications are
desired by men, who ai-e ready to pay for their enjoy-
ment. He expends his time, labour, and money in cultivating
his powers, which enable him to produce something that
will minister to that desire. How is the song which he
can produce less capital to him than the cigar to the to-
bacco merchant? They each of them perish in the using,
but they are both equally sources of profit to the person
who can supply them. They are both equally subjects of
of sale, and, therefore, of property.
99. From the foregoing considerations, then, it will be
seen that, in its most general sense, the word capital is
rather to be applied to the method of employing a quality,
than to any particular thing. It is impossible to say tliat
such an article is capital, and such another article is not
capital, because everything depends upon the method of
employing them. We must rather speak of things being
employed as capital. Thus, a farmer has a quantity of
com, it is impossible to say whether it is capital until we
know how he is going to employ it. It is not possible to
say absolutely that thid parcel of wheat is capital, and this
parcel of wheat is not capital. The fact is, the part that
he sows a^ain is capital, the part he uses for his own con-
sumption IS not capital ; and so of other things. And so
with mental acquirements ; when they are employed so as
to produce an income they are capital. It is quite im-
possible to restrain the word capital to material products ;
because towards tiie general end, which is profit, the
74 MfJMHFIH OV POLITICAL BOQMlfr.
qmlities of the nmid are equally essential as the material
|m>dact. If the guiding mind be wanting, the material
ffrodott is barren and useless. Each of them, then, is an
eqoallj necessary ingredient of the result. The qualities
of the mind are the subject of commerce in exactly the
aame manner as material products.
100. But even the writers who have admitted and
established these principles have stopped short there; and
tfey have fidled to recognize an immense body of property
iriuch £dls under neither of these heads, and which yet is
the snl^ect of bar^gain and sale, and is an article of com-
■leroe just as much as any existing property. And this
eoDprefaends all future payments, annuities, and incor-
poreal rights, reversionary payments, and vested interests,
which cannot by any possibility be excluded from the
bounds of Political Economv, and which are each of
them separate and independent values. All certain
fiitare payments have a present value, as it is caUed^
which is an article of commerce, and saleable just like
merchandize*. A sum of money which is payable one
year hence, has a Present Value, which is a marketable
commodity, quite independent of the actual money in which
it may ultimately be paid ; it may be bought and sold, just
like a table, or a chair. Upon this doctrine rests the whole
of commercial credit, which consists in Bills of Exchange.
A Bill of Excban^ is usually a deferred payment, but it has
a present value ; it is a saleable commodity^ and has an in-
dependent value, just as much as a loaf of bread; and
this present value is perfectly independent of the money it
will ultimately be paid in. Some idea of the enormous
value of this sjiecies of proj>erty may be gathered firom the
fact, that the quantity of it consisting of bills of exchange
alone is al>out £500,0iX\000 ; aiui what it may amount to
in Uio other tilings of this nature, it is utterly impossible
even to conjecture.
101. Now, it is a noiut of the most fuiuiamental impor-
tance to umloi*stniul clearly that this enonuous amount of
property, ui bills of exehaiige, is an independent value. It
DESimnOKB AlilD ILLUSTRATIONB 09 TEBM8. 75
does not represent any particular sum of money whatever,
still less any commodities, on which there is a very com-
mon delusion. But it is property of separate value to that
amoimt, perfectly different from dock warrants and bills of
lading, wnich merely represent so much specific property.
102. A total misconception on this pomt is one of the
subjects on which the established doctrines of Political
Economy are preeminently defective, and to illustrate the
matter more clearly, let us take an example. It must be
clearly understood, then, that because a man has made an
engagement to make a payment at a future time, he is not
in debt until that time comes ; it is no diminution of his
actual property. Thus, take the case of a farmer who
makes an engagement to pay rent year by year for a farm :
now, though he has made an engagement to make a pay-
ment next year, he is not in debt at present ; that future
payment is no diminution of his actual existing property.
But yet that future payment to be made by him has a
present value. It may be bought and sold like other mer-
chandize, and, in fact, it is by adding up a series of these
deferred payments that the value of an estate is estimated.
Now, these future payments to be made by the farmer are
exactly like bills of exchange, payable at these respective
d.te,^ut though the fenfe; VuBder thi, ^riJof ea-
gagements, he is not m debt at the present time. They
are no diminution of his present property ; they are merely
a lien upon future property. Nor does the engagement the
farmer has made to pay the rent in future times, represent
any particular sum of money ; its present value is a value
quite independent of any sum of money. It is exactly the
same with a merchant who has accepted a bill of exchange.
It is merely an engagement to make a future payment,
and is no diminution of his actual property, and is per-
fectly independent of any particular sum of money. And
the same reasoning is true of the general amount of bills
of exchange.
103. Hence, we must understand as the very foundation
of the subject^ that a bill of exchange is an independent
76 ELEliENTS OF POLITICAL ECOKOBIT.
value, just like a house, or a ship, or a horse, or money
itself, every single thing that can be bought and sold is a
separate value.
104. Now, the property which exists in this country of
this colossal magnitude, is almost entirely the child of mo-
dem civilization and intelligence. It depends purely on
confidence, and is subject to be annihilated by the de-
struction of the quality it is based upon. And it must be
understood that the destruction of this, is the destruction
of a real value, just like the destruction of so much
capital of any other sort. So that, as credit is capital, a
destruction of credit is a destruction of capital. Having
in this place indicated the existence, and described the na-
ture of this series of property, we shall in the next chap-
ter, which is its appropriate place, show how the value of
such property is estimated.
105. The object of the employment of capital is that
it may replace itself, together with a certain increase.
This increase, or excess of return over the original ex-
penditure, is called the Profit, and its magnitude, or
rate, is estimated not simply by its absolute amount, but
also by the time required to produce it. The standard of
estimating the rate of profit is usually the year ; so it is
said that the rate of profit is so much per cent, per
annum. It is quite clear that when we hear that so
much profit has been made by any operation, it is im-
possible to judge whether it is much or Uttle, unless the
time in which it took to accrue is also given. If an
operation produce a profit of 5 per cent, in three months,
it is a very different thing to what it would be, if it took
a year or more to produce that excess.
106. Capital may be employed in two ways. First,
it may be m vested in objects which are meant to be sold,
and then the whole of the original sum, together with
the excess, or profit, may be recovered in one operation.
When employed in this way, it, or the objects in which
it is invested, is termed Floating, or Circulating
Capital, because it goes altogether away from the owner.
DEFINITIONS AND ULUSTRATIONS OF TERMS. 77
Secondly, it may be invested in objects which are not
meant to be sold and parted with, but which remain with
the owner and yield him a profit by their use. When
employed in this way, it, or the objects in which it is in-
vested, is termed Fixed Capital.
107. It is clear that if the return be made in one
operation, it must include the whole sum necessary to
replace the article, as well as the intended profits. But
if the return be made by instalments at fixea periods, say
a year, each instalment must consist of a sum partly to
replace the deterioration of the article itself during that
period, and partly to form the excess, or profit, of the
capitalist, so at the end of the term when the article is
worn out, the sum of all these instalments should be sufii-
cient to replace the original article together with the
profits.
108. It is clearly to be understood, that it is according
to the intention of the person who produces an article,
and the purpose for which it is produced, that it receives
either of these names, and not according to the nature of
the article itself. The same article may receive different
names, according as it passes to different owners, who
produce it, or cause it to be produced for different pur-
Eoses. The same article may be floating capital in the
ands of one man, BXid. fixed capital in the hands of its
next possessor, if the first produces it for the purpose of
selling it, and the second purchases it for the purpose
deriving an income from its use.
109. This distinction may also be stated thus. That
if the whole price of the article is paid out of the current
income of the country, it is floating capital ; hut if only
the interest, a revenue derived from its use, then it is
flxed capital. This distinction is oflen overlooked, and
the term fixed capital is applied to articles of a certain
nature, and floating capital to articles of another nature.
Thus, houses and lands, machinery, railways, and ships
are frequently termed fixed capital. But this is extreme-
ly erroneous. If a person employs his capital in build-
78 ELEMENTS OF POLITICAL SCONOMT.
ing houses for the purpose of selling them immediately,
they are floating capital in his hands, for their price is
paid in one operation. But if another man buys them
for tlie purpose of letting them out to tenants, and so
only deriving a revenue from his capital, they become
fixed capital in his hands. JVIany persons buy land on
speculation, for the purpose of selling it again at a profit.
The land in the hands of these jobbers is floating capital^
but if another buys that land for the purpose of letting
it out to farmers, or cultivating it himself, and so only
making a revenue of it, it becomes fised capital to him.
So with machinery ; to the machine maker, w^ho makes it
for the purpose of selling it to the manufacturer, it is
floating capital. In the hands of the manufacturer, who
buys it for the purpose of increasing the quantity of his
productions by its use, and so only making a profit of
it, it hecomes Jised capUal. Hence, we may state general-
ly, that all articles whatever be their nature, while they
are in the hands of a person who deals in them, that is,
who produces or buys them for the purpose of selling
them again, as soon as he can, are floating capital.
As soon as they pass into the hands of a person, who
only makes a profit by interest derivable from their uise,
they SLvefljced capital.
110. The articles we have just mentioned are, it is
true, generally produced with the intention of their ulti-
mately becoming fixed capital, but we have shewn that
they may, or they may not, be fixed capital, when they
are produced, according to different circumstances, and
unless we know what those circumstances are, it is im-
possible to decide which name is to be given to them.
It may also be easily shewn how articles which are
usually classed as floating capital, may become fixed
capital. Furniture and clothes would usually be termed
floating capital, because they are generally made for the
purpose of being sold. But if a person made them for
the purpose of only letting them out for hire, they would
become fixed capital in his hands. An ordinary tailor
DJBJflNlTlOJSB AMD ILLUSTBATIOKS OF TEBMS. 79
usually makes clothes to be sold to his customers, so
they are floating capital to him. But in the hands of
Nathan, who lets out uniforms and dresses for particular
occasions, they become fixed capital, just as much as a
house or a mill. So, if a cabinet mak(T makes furniture,
for the purpose of letting it out for hire, that furniture is
as much^i:^rf capital as any railway.
111. We thus see how improper it is to apply the
term either of floating, or fixed capital to any object,
whatever be its nature, unless we know the intention of
its owner in usin^ it. And unless an article is incapable
of being applied to more than one of these purposes, it
is not correct to call it by either name. There are very
few articles to which the name of fixed capital may be
invariably applied, none to which it is necessarily applied.
Those to wmch it may be applied with the least nsk of
error are Bailways, Canals, Docks, and agricultural
improvements. The instances are very rare in which
such things as Railways, &c., are made for the purpose of
being sold. If that did happen, they would have to be
called floating capital, in the hands of such a person, or
company. So that we may safely say, that there are no
articles which are necessarily fixed capital. Nor are
there any which are necessarily floating capital. The
mode of expending capital, which is almost invariably
floating capital, is the wages of labor. In all ordinary
cases m this country the wages of labor are floating
capital. But in slave countries the case is different.
There the slaves are fixed capital. The same thing
occurs in this coimtry, where people sometimes enter as
it were into a species of modified servitude. Sometimes
people hire themselves out to others for a certain period,
who are allowed to let them out for particular occasions,
and receive the money for their performances. Thus, it
is not unusual for the most eminent singers and mu-
sicians, to agree to serve the large music sellers for a
definite period, during which their employer has the right
80 ELEMEHTS OF POLITICAL SCONOKT.
to let them out on occasions, just like instnunents, or
plate.
112. To the capitalist who lives merely on the profits
of his capital, it may make verj' little diflrerence whether
he reaps that profit in one operation or in many, as
the result must always be the same to him in the end.
But to the class of persons who live by their daily
labor the workmen in his business— the difference in
the mode of employing capital is of vital importance.
Thus, if the builder of a ship means to sell it immediately,
and be paid the whole price of it at once, he will
employ tnat money in building another ship, and the
full amount of the price of the ship, deducting the part
wliich goes to support himself, will be expended in
the wages of the shipwrights, and on the producers of
the materials for the new ship. In this case it is
floating capital. But if the builder of the ship means
only to let it out for hire, and receive a periodical
instalment for its use, he can only employ the part
of that instalment which represents its deterioration
in building a new ship ; consequently, if he changes the
nature of his business very suddenly, that is, if he
suddenly turns his floating into fixed capital, the fund
applicable to the promotion of labor will be greatly
diminished, and it must infallibly cause great distress
among the persons who were dependent on him for their
support. By seeking other employments they may,
perhaps, ultimately be as well off as before; but it is
quite clear that if a large number of persons have been
accustomed to have a particular kind of labor found for
them, any sudden change by which the system is dis-
organized, must produce at least temporary distress. It
might be said that the capital of the purchaser of the sliip,
instead of going to the builder of the ship, and being
spent among that class of workmen, might be employed
in encouraging other species of industry, so that the result
to the whole community would be the same. But the
overthrow of any system upon which a great number of
DEFINITIONS AND ILLUSTRATIONS OF TERMS. 81
people depend, must be followed by mucb suffering. It
appears, then, that the conversion of floating into fixed
capital, requires to be done with great caution, and only
in certain quantities, to avoid its being injurious to the
interests of large classes of persons. And if a large class
of the public are seized with a sudden mania to convert
an unusual quantity of their floating into fixed capital,
it must inevitably be followed by at least temporary
distress.
113. We have observed that>, if the owner of an article
disposes of its use for ever, or sells it, the price should be
sufficient to replace the article, together with the profits.
When he only lets it, the rent or hire is composed of one
part for the deterioration of the article, and the other
for the necessary profits. From this it follows, that the
more permanent the article is, the lower will be the rent,
or hire, compared to the price, because, assuming the
profits to be tiie same, the deterioration is less during any
given time. If it be of a perishable nature, the hire will
be high compared to the price, because the deterioration
will be great. A few cases will verify this remark. The
rent of land is very low, compared with its price, usually
not more than 3 or 4 per cent., because the deteriora-
tion is very small. The rent of houses is much greater
compared to their price, usually 7^ or 8 per cent., because
the deterioration is greater ; the hire of furniture is con-
siderably more, usually 15 or 20 per cent., because the
deterioration is greater still, and so on, so that the hire
must always be greater as the deterioration increases.
From this it follows, that the hire of any article is by
no means proportional to its value. Some important
questions connected with these considerations will occur
hereafter.
114. When the absolute property of any article is
transferred for ever, from one person to another, the sum
of money given for it is universally termed its Price.
From the considerations presented in the opening para-
graphs, it appears that the price is the same thing as the
F
83 ELEMEnS 09 POUIICAI. EOOBOmT.
palue in money. But as h is inTmmbly asasl to esti-
mate the value of eTery commodity by its price^ or its
talne as regards money, and nerer by its Tahie as regards
other commodities directfy* bat always by their common
rebition to money, the words price and tHilue hare become
identical and interchangeable expressions. The price^ or
value of an article is, therefore, tne quantity of l^<il coin
that is given in exchange for any commodity. There is
one species, however, of incorporeal property of a very
extensive nature, whose price or value is estimated in a
peculiar manner, which must be explained, and that is the
price of debts. In modem commerce the sale of debts
plays a part of immense importance. A debt is considered
as a saleable commodity, exactly like a quarter of com, or
a ship, and'tnay be bought and sold a hundred times over.
The business of Banking consists chiefly in baying and
selling debts. Now, the price of debts is expressed in a pecu-»
liar way. It is necessary to have some umt of debt. Now,
debts are measured by time, and we may take £100
payable one year hence, as the imit of debt. When a
man buys a debt, he pays a sum of money down, and the
difference between the price of the debt and the amoimt
of the debt is called the Discount, which forms his profit.
Now, if a man buys a debt of £100, payable one year
hence, for £97, the discount is said to be 3 per cent. And
the price of debts is always indicated by naming the dis^
county and never by the price, as is usual in all otiier
cases. Buying and selling debts is the subject of the
system of credit, the details of which are fully exhibited
in Chapter III.
115. J£ the absolute property does not pass to the
purchaser, but only the right of possession, or of use, for
a limited period, arter which it reverts to its true owner,
the sum of money paid for such a service receives different
names, according to the nature of the service or property.
1. If the money be paid for personal services, it is
called WiiGES, or Salary, or Pay, or Fees, accord-
ing to the different species of service.
DBFnnnONS AKD nXUSTRATIOm OF TERMS. 88
2. If the money is paid for the use of property, such
as is usually classed as fixed capitaL such as the
right to us/ land, or hoSs, or ^^^ water, as
a mill stream, or mines, or fisheries, or a patent,
it is called Rent.
3. If for the use of property which is more usually
floating capital, or personal property, it is called
Hike.
4. If it is for the use of money, it is called Interest.
All these names are, therefore, applied, when the pur-
chaser buys only the use of a thing for a limited period, and
that according to the nature of the object.
116. The expression Value of Money, denotes exactly
the same thing as the value of anything else. It means
the relative quantities in which money and other objects
will exchange. And money is said to rise or fall in value
in the inverse proportions in which it will exchange with
other things. The value of money is said to rise, to be
greater, when a smaller quantity of money will exchange
lor objects, and to fall or be less when it requires a greater
quantity of money to purchase commodities. With respect
to the price of debts, however, which are estimated by the
discount, and not by the actual price, it is clear that the
value of money rises and falls with the discoimt. Thus,
by the former sentence the value of money is greater
when the price of the imit of debt is £94, than when it is
£97. That is, when the discoimt is £0 per cent, than
when it is £3 per cent. Hence, the value of money always
varies inversely as Price, and directly as Discount. To
discover and accurately express the causes of the changes
in the Value of Money, is the grand problem in Political
Economy. It is, in fact, to discover tJie laws which regu-
late the exchangeable relations of quantities which con-
stitutes, according to the views we adopt, the Science
of Political Economy. Under its appropiate name, the
Theory or Pbices, it is fully treated in the next chapter,
and the succeeding ones are chiefly developments of
particular cases of it.
F 2
84 ELfiMBTES OP tOUTKAL BOOSOHT.
117. The word Peodcctkbi is used in different
senses by difiereni writers. Some consider the term to
be limited to makins: some material change in the form
of the materiaLss o^ which the olgects are conipoeed» or
some comUnation of materials. Thns^ dianging: the
ibrm of the wool or the cotton into thieaid, or wearing that
thread into clothe or d rii^ the cloth —or sowing the com
and reaping the harvest — grinding the [»rodnce into floor —
aud baking the flour into bread-- are operations nniTer-
sally claissed under the term Production. All persons
en^iged in them are termed prodnoers. Some wiiters
hold that there is another dasa of peniona who ditirHmU
the things so produced. Theiie operations are tzeafted c£
under the heads Production and IKstribotion. Tliis
distinction is not periiaps mc€frrect, but it is nnneceasary
and superfluous. It is more Mmple to group together,
under one head, all the persons and operations necessary
to place any required object in a given spot. All pro-
duction is summed up, in placing an object on the spot
in which it is required. Thus, if production were limited
to the persons only who change the form of the matmals,
we might in strictness say, that those persons who are
employed in carrying the produce from the mills to the
warehouse were distributors. Now, if the carmen and
labourers who convey the materials to the mills, or the
produce of the mills to the warehouse, are to be classed
with producers, it is merei v an extension of the same
principle U) clam the ifbipptUieperH and tradesmen, who
order the goods from the manufacturer to meet the ex-
pected demand from their customers, under the general
nead of producers. As far as regards the customer who
buys the article, the tradesman in whose shop he buys it
is the producer. What difierence can it make, whether
that tradesman paid wages to workmen in his direct em-
ployment, and carried the article from his workshop to
nis countor, or whether he pays an independent manufiEu;-
turer in a town 100 miles off, and transports it from that
place to his own shop. ? So far as reganis the customer,
DEFINITIONS AND ILLUSTRATIONS OF TERMS. 85
the person for whom the ^oods were made, the shopkeep-
er is the producer. This view not only simplifies the
matter by abolishing an unnecessary distinction, but has
the further advantage of strictly corresponding with the
Senuine meaning of the word produce. To produce in
Inglish does not mean simply to manufacture, or to form,
but to bring out^ to place in a given spot. Thus, in
Isaiah xli. 21, it is said, ^*'Prodicce your cause, saith the
Lord, bring forth your strong reasons, saith the King of
Jacob. Let them bring forth and shew us what shall
happen." And the marginal note says, " Produce —
cause to come neary And they were not told to make
strong reasons, but to bring out the existing reasons. So
also m a Court of Law, a witness is ordered to produce a
deed, i. e., not to write it, but to bring it out, and place
it in a required place. So the gaoler is ordered to pro-
duce the body of his prisoner, L e., not to manufacture
him, but to place him in Court. So when any person
is ordered to produce anything, it usually means simply
to bring it forth.
118. In a general way, then, the person who places a
required article on any given spot, is, for the purposes of
Political Economy, to be considered as the producer of
that article, whatever be the means adopted for placing
it there. By a very common philosophical inaccuracy,
the word production is frequently applied both to the act .
of producmg, and to the thing produced, though the
word product or produce, is frequently used in the latter
sense. It is better to limit the term production to the
operation, and to denominate the quantity produced by
the word Supply.
119. There has also been much difference of opinion
as to the meaning of the word Consumption. Some con-
sidering it to imply destruction. But we shall use it
simply in the sense of sale. When we speak of the con-
sumption of an article we mean simply the quantity sold.
The producer is the person who brings forward the
86 SLEMSNT8 OF POLITICAL ECOXOHT.
article for sale, the consumer is the person who takes it
off, by purchasing it. And as the quantity produced is
the supply, so the quantity sold is the demand. Thus,
the terms Production and ConsumptioiL, Supply and I>e-
mand, mean nothing more than the quantity off^:^ for
sale, and the quantity sold.
120. Although people are not divided into producers
and consumers generally, 3ret in respect to each particular
article they are. Nor is it any oojection that some are
both produc^*s and consumers of the same article, as
a farmer is of com, and a cloth manufacturer is of clothes,
a baker of bread, &c. Nothing is more common
than for a man to act in two capacities, apparently incon-
sistent with one another. Thus, a man may lend to
himself, and borrow from himself. He may be the Shsre-
holder in a Joint Stock Bank, and also be a customer of
that Bank, and he may borrow money from that Bank.
He, therefore, both lends to and borrows from himself.
He is both his own Banker, and his own customer.
121. The series of persons who deal in any article of
commerce are alternately consumers and producers of
that article. ITius, the foreign merchant or the importer,
is a consumer of that article as regards the foreigner, he
is then a producer of that article as regards the wholesale
dealer. The wholesale dealer is a consimier as regards
the importer, but a producer as regards the retail dealer.
The retail dealer is a consumer as regards the wholesale
dealer, and a producer as regards his customer, who is
the final consumer, and for whom all the series of previous
operations took place.
122. Possessions or Property of all sorts, may be di-
vided into Wealth and Resources. By the former we
denote all such objects as men seek to acquire for tiieir
own sakes, and their own qualities, and which are in a fit
state for actual use, and such as are not merely agents in
the production of others. By resources we mean all such
things, of whatever nature they may be, which are em-
ployed as agents in producing others, and which are not
DEFIHIXIONS AND HXUSXBAXIONS OF TEBMS. 87
directly useful, but only bo far as they produce a profit,
or which may be brought into use, but are not yet in a
fit condition to be used. Thus, while tiiie minerals and
coals are still in the mine, or the fish in the sea, we call
them resources ; when they are actually got and reduced
into possession, we may call them wealth It is only
necessary to consider what is the object of any particu*
lar thing, to determine under which head it is to be classed.
It is absolutely necessary to understand clearly the
distinction between these two classes of possessions,
because it often happens that as one is increased, the
other is diminished. The wealth of a country is not to
be estimated by the actual amount of commodities it has
at any given moment, but by the power it has of produc*
ing any required amount, in the shortest time, or by its
command over production. This consideration shews
that the increase of the wealth of a country, is not caused
so much by having more commodities in it, as by the aug-
mentation of its wealth-producing powers, or its resources.
A country may often be the most really wealthy, when
it has the least amount of visible wealth. Since the in-
troduction of railways, and the increased facilities of
communication, it is probably not necessary to keep in
store more than one fourth part of what was formerly
requisite of many commodities. In the old days of pack-
horses it took perhaps fifteen days to transport any quantity
of goods from Manchester to London. Consequently to
supply the stream of demand, it was manifestly necessary
to have fifteen times a day's consumption in existence, and
on the road. When the canal reduced the time of transport,
to five days, the necessary quantity in existence was reduced
to five days' consumption. And when the railroad reduced
the journey to one day, it was evidently necessary only to
have one day's consumption on the road. But it would
be a grievous error to suppose that the nation was less
wealthy, because there were not so many commodities in
existence, at any given instant. On the contrary, the
nation is far more wealthy on that account. Though
88 ELEiiEirrs of political economt.
they are not in existence, any one who requires them, can
have them called into existence, far more easily than
formerly. If an order be sent from London to Manches-
ter for goods, these can be supplied in days now, where
it would formerly have taken weeks, or months. Hence,
the wealth of a coimtry is not to be judged of by the
quantity of goods it has in stock at any given instant,
but by the speed with which it can supply any given
demand. The very fact of a great abundance of stock
may prove poverty of resource. If we see a canal with a
multitude of reservoirs along its banks, we immediately
conclude that the supply of water is apt to fail. People
do not lock up a great deal of their capital in stock,
unless a failure of resources is apprehended. If the
supply of water is steady, there is no need of reservoirs,
so ii the supply of goods is sure, there is no need of an
accumulation of stock. Now, money is to be classed
under the term resoiu-ces. People of right mind do not
seek to obtain money for its own sake, any more than they
build mills, or manufactories, or steam engines, for their
own sakes, but for the power they confer of producing
commodities. No one would buy a cotton mill, for the
mere pleasure of possessing the machinery, as he would a
house, or a picture.
1 23. A country, then, which abounds with gold and
silver coin, cannot properly be said to be wealthy, any
more than one wliich abounds with machinery. So long
as these stand idle, the country must remain poor, like
a manufacturing town in a strike. It is their motion or
circulation, which generates wealth,, and the rapidity of
that circulation, wliich indicates the rate of increase or
progress. This consideration will enable us to solve a
question, wliich was long agitated by Political Economists
and statesmen. Which employment conduces most to
liational opulence? From the time of Colbert, to the
French Revolution, the question whether the towns or
the country most conduced to national wealth, was
keenly disputed, and according as one side or the other
DEFlNinOKS AKD ILLUSTRATIONS OF TEBMS. 89
prevailed, the one was encouraged and cockered, and the
other depressed. Now, as the velocity of the circulation
indicates the rate of progress, whatever employment
causes currency to circulate with the greatest rapidity,
most augments national opulence. Currency is the en-
gine of circulation, and industry is its motive power,
whichever species of industry drives the engine fastest,
most rapidly augments the national wealth. Now, it is
well known that of all species of industry, agriculture
causes the most languid circulation of the currency. By
offering an extra stimulus of reward, the productions of
human industiy can be multiplied and quickened to an
extraordinary extent, but the process of nature is slow,
and cannot be accelerated at command. Different trad-
ing pursuits cause a brisker circulation, in different
degrees — all much faster than agriculture. Hence, a
purely agricultural country must increase slower in opu-
lence, than any other, and other countries very much in
the proportion of their inhabitants engaged in agriculture,
as compared to other pursuits. Experience amply verifies
this remark. Poland and other countries, which have few
resources but agriculture, are the poorest and most barba-
rous in Europe. Great Britain and Holland, in which
the smallest proportion of the inhabitants are engaged in
raising food for the rest, are the wealthiest, and other
countries very much in similar proportions. The in-
stances are not many, in which people have made for-
tunes by agriculture, but there is scarcely probably a
small country town, where some industrious and ener-
getic individuals liave not realized a competence, by
trading.
124. From the extravagant and mistaken ideas that
prevailed as to gold and silver money beuig wealth, there
are few nations which have not inflicted upon themselves
incalculable mischief by their conmiercial policy. When the
Spaniards discovered and conquered the gold-producing
districts of America, they thought that nothing but gold
and silver was wealth. Dazzled with the brilliant prospect
90 MLMMKKTB OF POIXHCAL SOOSQMr.
of becomiiig wealthy without bibor, they imagined that the
whole of their well being consisted in amasKing enminoiis
heapn of gold and sQTer, whoUy mistaking the means for
the end, and not discerning that the precious metals were
only precious so long as they were used for setting human
industry in motion, while they encouraged the tilling of the
land, the mother of increase, or the building of ships to
promote the intercourse of nations, or plying the loom to
produce clothing for mankind.
125. It would be beyond the limits of this work to
dwell upon their well-known policy, and its £fttal results.
While tue precious metals poured in in boundless quantities,
till the country was saturated with gold and silver, which
the people of that day thought woidd make them the
rulers of the world, it began, immediately, to decline in
wealth, and continued to dwindle away till, at last, she
presents the melancholy spectacle we now see, when she is
reduced to the lowest depths of poverty, weakness^ dis-
honesty, and contempt. Never has the world seen a country
blessed by so many resources by nature, so suddenly and
rwidly descend from so lofty an eminence to such a pitch
or degradation ; and it was, emphatically, wicked and un-
just laws, and erroneous ideas respectii^ the value of gold
and silver, that did it all. Spain fairly earned the eminence
she attained to, by her industry and energy, and nothing
could be more useful or instructive to statesmen and to
Ejople, to show how a ^eat state may be ruined by evil
gislation on such subjects,— to shew how to reverse the
boast of Themistocles— than a plain and simple history of
the terrible catastroplie of Spanish grandeur. So it was
with Napoleon. He was perpetually hurling taunts at
Political Economists, and it was precisely because he
violated every principle of Political Economy, that he
ruined liis country and himself. The legislation of this
country was, for a considerable period, tainted with simi-
lar errors, though in a milder form, and they produced
consequences, the same in kind but less in degree, owing
to the innate industry and indomitable energy of the
DEI1SITI0N8 AND ILLD8TBATIOH8 OF TEBMS. 91
people, who at last discovered their mischief and burst their
SstteFB.
126. The absolute amount of the currency, compared
to the services it represents, varies in different countries.
When its proportion in one country greatly exceeds that
of its neighbours, it is a very great evil, because the cost of
producing an3^hing in that country is so much higher than
in the neighbouring ones, that it is far cheaper to import
eoods than to produce them at home, and so native industry
uuiguishes and dies. It was this cause (joined to others
of which it is not necessary to speak here, ) that destroyed
the industry, and with it the power of Spain. The
Spaniards endeavoured to counteract the evil effects, which
were so apparent, by absolutely prohibiting the importation
of foreign goods, so as to compel native production, and if
it had been possible to exclude foreign commerce entirely,
the price of every article being r^ed corresoondingly,
none would suffer. But this is wholly impossible ; human
nature revolts against it; the interests of mankind are
amt}^ against such a proceeding. The profits and,
therefore, the temptation of smuggling are so great, that all
men become smugglers. The instincts of men are so pow-
erftd in that direction^ that no law or danger can restrain
them, and the trade, instead of bein^ legitimate, merely
assumes the form of smuggling. So it was in Spain, and
so it continues to the present day. The chief trade of
Spain is smuggling, and the greatest smugglers are the
officers of the government, and the most powerful men ;
and while the cotton goods of England were absolutely pro-
hibited from being brought into the kingdom, they were
notoriously sold in Maiirid at about 30 per cent, dearer
than in Manchester itself.
127. In England the currency is more abundant in
proportion to the services it can command, than in con-
tinental countries, so that the same evil consequences
would be manifested here, unless there were means taken
to counteract them. And this is done by diminishing the cost
of production by the use of machinery. Powerful machinery
02 BLBMRNTS OF POLITICAL BCONOlCT*
produces the effects of thousands of men at an inappreciahly
small cost. Hence, this machinery will produce as much
wealth as many thousands ofmen, and this reduces the actual
cost of production of any given quantity so much^ that
we can sell the commodities at a much lower price than
any other nation. It is often remarked how prolific the
year 1769 was of great men; towering above all, are
enumerated Napoleon and his great antagonist Wellington ;
but another great antagonist of Napoleon came into ex-
istence that year, whose name deserves to be ranked with
the most eminent of his vanquishers, and that is the
Spinning Jenny. It was not the quantity of gold and
silver currency in the country that carried England
through the last war, but the exhaustless powers of her
machinery. It was James Watt and the ceaseless whirr
of the Manchester mills, that produced the navies which
swept the flag of her enemies from the ocean ; and when
the thunder-clouds of war gathered over her from all
quarters of the horizon, enabled her to equip and send
rorth the armies of Wellington, to conduct away the
tempest to spend its violence on a foreign land. It was
this inexhaustible wealth-producing power, that saved the
inhabitants of Britain m>m feeling the bitterness and
horror of an Austerlitz or a Jena, in their own homes,
when
"Europe at large was a province of Gaul."
CHAPTEK IL
THE THEORY OP PRICES.
'' The Theory of Prices, and their variationB, is the darkest part of onr
Bystem."
'^ A statist does nothing for philosophical economy, unless he ascertains
and describes changes, and such relations among his details as are matter
of foot."
Life of Francis Horner, p. 154-5. (Chambers' Edit.)
'' Ex omnimod^ experienti^ primnm inventio cansarmn et axiomatom
verorom elicienda est; et lucifera experimenta non fractifera quasrenda.
Axiomata autem recte inventa et constitnta praxin non strictim, sed oon-
fertim instruont, et operom agmina ac tnrmas post se trahont."
Bacon. Nuv, Org, Lib. I. Aphor. lxx.
^ All truth and all error lies in propositions."
J. S. Mill, S^sUm of Logic. 4th Edit p. 18.
THEORY OF PRICES. 95
THEORY OF PRICES.
PRELIMmART CONSIDERATIONS.
1 . Tn the preceding Chapter, we have endeavoured to
ascertain the meanings which should be affixed to the
terms employed in Political Economy. Following the usual
course of scientific inquiry, our next endeavour is, if
possible, to discover some general expression which
mdicates the causes which govern the exchangeable
relations of these quantities^ or their changes of value*
The value of every quantity with regard to every other
being, as we have shewn in the preceding chapter, the
respective quantities in which they can be exchanged at
any given instant. It is never, however, the custom in
civilized countries to consider the values, or the exchange-
able relations of quantities with respect to each other
directly, but always in reference to some given commodity,
named money. The value in money of a commodity is
called its price. The object, therefore, of our present
inquiry is to discover the causes which influence prices,
or a change of price. If we can discover some general
form of expression which is applicable to all cases, at all
times, and m all places, then the science we are consider-
ing takes rank as an Inductive Science. But if it be
impossible to discover any such form of expression, and
96 ELEMENTS OF POLITICAL BCONOMT,
if each separate case is influenced by its own peculiar
causes, then it is not an Inductive Science. We shall
endeavour to shew that the former is the case, and that
a general form of expression may be found, which is
umversally applicable.
2. We have already observed, that the quantity of
the currency that is given for any service receives different
names according to the nature of the service. If the entire
property of the thing purchased pass front the seller to
the buyer, it is called its price; though in the case of
debts, it is usual to speak of the discounty or the difference
between the debt and its price. If the service consists
only of the temporary use of anything, it receives different
names according to the nature of the service. For
personal services, it is called wages, salary ^ pay, or fees ;
for the use of property, rent^ or hire; and for the use of
money, interest. In all these cases we shall endeavour
to shew that the quantity of money given for the service
rendered is determined by the intensity of the service
rendered, together with the comparative power of the per-
son who renders the service over the one who purchases it.
3. We have hitherto spoken of the exchangeable
value, or simply, the value of an article. This expression,
as generally understood, denotes the value of an article,
sold by competition in the public market. It is also
frequently called the market value. But it is clear that
this expression wUl not include all cases where a sale
takes place. Many transactions take place, in which it is
impossible to discover what the market value is. In fact,
unless all commodities are brought into one focus, and all
the purchasers come there to bid, it is scarcely possible to^
fix the market value of anytliing. Now, as our object is
to discover a rule which shall determine the actual cause
of price, whenever a real transaction takes place, we are
not concerned to consider what it might have been under
other cu'cumstances, but we require some more general
name for the value, or the price given for the purchase of a
service, in every transaction between buyer and seller.
THEORY OF PRICES. 97
4. To shew how many transactions take place without
its being possible to define what the market value is, we
have only to consider the number of private sales that
occur. A person may have a horse, or a picture, or a
house, which he may wish to sell, and yet he may be very
unwilling to put it up to public sale, and so he may offer
it about privately, and he may get several offers, all
different, and who shall say whether any, or which of
these, is the market value? The same quality of article
may be offered for sale in several shops, and the price
different in each, which of them can be said to be the
market value? Again, it may often happen that the mar-
ket value is merely nominal, and that no purchaser can
be found to give the price quoted in the public lists ; as
often happens in the very extensive description of property
consisting of shares of an sorts, Bank, Railway, Insurance,
and other public companies. These are generally quoted
as being worth a certain price in the market, and yet their
value may be only nominal, as it may happen that no
one will buy them, so that it is impossible to obtain the
money for them which they are reputed to be worth.
But the holder of such shares, as well as of all other pro-
perty, is frequently obliged by circumstances to part with
them for what he can get, as in cases of bankruptcy, &c.,
when it is necessary to force a sale. Now, if we wish t6
obtain a general rule of any use, it must comprehend all
cases of whatever description, in which a sale is effected.
Consequently, what we want, is a name which shall uni-
versally express the price given for an article at the
instant of the purchase. Sales may be either public, or
private, voluntary or forced ; and we require a name that
shall indicate the value of the commodity at the instant,
and under the circumstances of any one of these cases.
5. There is a term in astronomy, which aptly expresses
the idea we require, and which we may fairly borrow for
our purpose. Theoretically speaking, the path of a planet
round the sun is an ellipse, and if there were but a single
planet not acted upon by any disturbing forces, this would
G
. I
K
tkns d propertj. tjvj froM ^b j to dnj^ a»i h%ma
]KHir,fitiiB a — haiarfcr of f iMn wimk nutnfft he
cr eoDtroUed, and die [
a mnsacdon iaL» fibhoe. i§ ifliiBMni fc^r Um; f«3i«ii^
pofiitioiis of the buj^r and idkr M AtA MTlietikr u
and noi br vbat us radrne ■iiJht lunre taMm^ ttader
eireumssaiiees;. Qace. ve 105 fmfy
tuallj pakl ia aar tnagacsiML dke hmuanMsmjci
aad lliM^ aaaie is of a £v
other two, aad will um\mh
w* Waea a jgreat aaMsat of
iawO 0fMMe, the eflS^t prrjdneed
ht ^err imiemsft. TTiniT if i yim" naiiii rf F^la
eMd» fr4!>m a mmH hmrnr^ - - ^- -
B^j ^, akr>, ir<«? lii^Mk
finn, m(^9MM^ ^4^KUmmi^ Ae,; and in a general
w^ irp^^k i4 dHUr^fni dtsfreetk of power in a g
w^ m^wmr^ th^m hy timr rf^btlire intenatr.
7- Wft nrny^ in h pkmUar manner^ neak of serrices of
(Wt^Pini fU'it/p4m //f inienmiy^ aeeofdmg to the ciremn-
BtMtic^ fimkr wkidi iltey ar<$ done. The Terj same thii^
ntny if^ (4 tut twfr^ t$m Hi r/ne time than at another, and
h^c^^ trim i\H^ nmU^y $4 the eaue^, we may call it a
CtU^^ (4 ^^atw iff \mm \uUmMiy. Thiw, if a man who
J Jti#i i^Mt^iri a ^Miff|Hlti^rii# diiiiK^r^ were offered a crust
THltoBT OF PRICB9. 99
of bread, and a cap of cold water, they might, being
presented at such an unseasonable time, excite in him a
feeling bordering upon disgust. But, if the same man
were left alone upon a desert island, in the last gasp of
starvation, or in a caravan among the sands of Amca,
overwhelmed with heat and thirst, with what different
feelings would he receive the same food! Under such
circumstances, a person who had such things to dispose
of, might almost extract from the sufferer any price that
he was able to give. In these two cdses, the act done was
precisely the same. But the value of the act, or the desire
of the person who received it, to have it done, and thd
sum he would give to have it done, was very different^
and we may call the service done in the latter case, one
of much greater intensity than in the former.
8. Or we may suppose a vessel to founder, at some
distance fh>m the^ ^leaving only a small portion of the
mast above water, to which a passenger might cUng. If
a boatman were to row off to him §om the shore, he
might extract any price he could give, to save his life.
Now, the fact of rowing a man a mile or so, in a boat,
would be no great thing, taken by itself, but under the
circumstances of such a case, it would be of very great
value, and so it would become a service of great intensity.
If only one boatman came off to save the drown^
ing man, not only would the service be one of great
intensity, but he would be absolutely in the power
of the boatman, and must yield to his terms, however
cruel or exorbitant they might be. But if two or more
boatmen, instead of one, came off, they would probably
bid against each other, and the price be reduced, because
they would be eager to gain, by rendering the service.
The service, however, to the drowning man, would be of
the same intensity, whoever did it, though he would be
less in the power of any one boatman, if there were
several competitors to render it. Now, the effect of
the intensity of the service rendered, would be to raise
the price of the service, and the effect of the one
G 2
100 ELEMBNTS OF POLITICAL ECONOMT.
boatman having complete power over the drowning
man, would be to raise it still more ; but, on the contrary,
the effect of there being two or more competitors to do
the service, would be to diminish the power of any one
of them over the purchaser of it, and would consequently
diminish the price. The price of every service rendered
consists of these two elements, viz., the intrinsic value,
or the intensity of the service itself, which we may also
express by the necessity of the person who requires it,
and the power of the person who renders it, over the one
who receives it ; or we may say that the price varies,
as the intensity of the service rendered, and the power
of the seller.
9. We may express this in rather a neater form.
If the price mcreases according to the power of the
seller, it must diminish according to the power of the
buyer. Now, prices are a continual contest between
buyer and seller, and these are the weapons with which the
respective parties are armed ; on the one side, the intensity
pf the service to be rendered, or the necessity of the
person who requires it, on the other, the power of the
person who wants it to choose among a greater or less
number of competitors to render it. These are the two
elements which, in their ceaseless conflict, determine
the price at the point where they meet and neutralize
each other; and as one prevails over the other, the price
advances or recedes, as the foam at the meeting of oppos-
ing tides is borne backwards or forwards, according to
the varying force of each.
10. The rule, then, which determines price, may be
expressed in this way —
Price varies directly as the intensity of the service
rendered^ and inversely as the power of the buyer over
the seller.
This expression, properly interpreted, will be found to be
of universal application, and to comprehend all transac-
tions of whatever nature they be, whether by way of prices,
or absolute purchase, or wages, or rent, or interest.
THEOBY OF PRICES. 101
11. This law obtained by the most rigorous induction
from feigned cases which are possible, and therefore to
be admitted in philosophy — cases which are the lucifera
expeHmentay so earnestly insisted upon by Bacon, for
the purpose of discovering general principles,~is that
great general law, which universally governs the ex-
changeable relations of quantities, of which we were in
search. It is an example of what is called the law of
continuity in the Inductive Philosophy, because, as we
have shown that the law is true at both the extremes
of prices, it must also be necessarily true at all the inter-
mediate points. For that which is true at the extremes,
is true at the means. We shall now proceed to shew its
application in Political Economy, and examine some
other rules, which have been proposed by other writers
on the subject. For the sake of convenience, we shall
consider the application in two sections.
I. When the absolute property of the quantity passes
from the vendor to the purchaser — where there is an ac-
tual change of ownership — that is, cases of Sale.
II. Where the purchaser only acquires the right to
the temporary use of the quantity, or the right of pos-
session for a limited period, but there is no change of
ownership, and the property of the quantity remains with
the seller of the service, and the possession of it reverts
to him, after the expiry of this limited period.
One advantage of this method of treating the subject
is, that it groups together, and keeps in juxtaposition,
subjects such as rent, and interest, which are in their
nature exactly analogous, but which are too oft«n se-
parated, and their natural connection severed, in treatises
on Political Economy.
302 ELEMENTS OF FQUTICAL ECONOMY.
SECTION I.
ON THE APPLICATION OP THE LAW OF PBICE TO
CASES OF ABSOLUTE SALE.
1. The formula which we arrived at in Section 10, is
Bianifestly only another form of the expression, that value
depends upon the relation between supply and demand.
It, therefore, asserts that price is in all cases governed by
the relation of demand a^d supply. If, therefore, we were
BOW laying down the science for the first time in a positive
form, we should at once proceed in the usual manner^
](iaving obtamed this law inductively, to apply it deductively
to the explanation of phenonema. But uidfortunately an-
other law has been devised by the best known writers on
Political Economy, and has been extensively received.
It is this, that cost of prodicction regulates value. It is,
however, nothing but an utter and mischievous fallacy, to-
tally subversive of the science of Political Economy. We
must, therefore, demonstrate its fallacy, and also complete
the proof on the principles of the Inductive Philosophy,
by showing that the cases which are apparently accounted
for by the false law, are all in reality only particular cases,
or examples of the true law. We shall show, as is in-
dispensably necessary to make good our assertion, that the
law we have obtained is of universal application, that it
absorbs not only all the cases which appear to be ex-
ON THE APPLICATION OP THE LAW OP PBICB. 108
plained by the Mae law, but also all other cases which the
raise law does not even pretend to account for.
2. Adam Smith and Ricardo, who are the original
writers in this country who have hitherto exercised the
greatest influence over opinion in these subjects, saw the
necessity of endeavouring to arrive at some general rule
expressing the cause which governed value. Adam
Smith founded all his ideas of value upon labor. Thus,
he says "Labor, therefore, is the real measure of the ex-
changeable value of all commodities. The real price of
everything, what ever3rthing really costs to the man who
wants to acquire it, is the toil and trouble of acquiring it.
What everything is really worth to the man who has ac*
J[uired it, and who wants to dispose of it, or exchange it
or something else, is the toil and trouble which it can save
to liimself, and which it can impose on other people.'^
"Equal quantities of labor, at all times and places, may
be said to be of equal value to the laborer." "Labor
alone, therefore, never varying in its own value, is alone
the ultimate and real standard by which the value of
all commodities can, at all times and places, be estimated
and compared It is their real pnce, money is their
nominal price only." "Labor, therefore, it appears
evidently, is the only universal, as well as the only accu-
rate measure of value, or the only standard by which we
can compare the values of difierent commodities at all times
and all places."*
The fundamental principle of Adam Smith's system of
Political Economy is, that labor is the measure of value^
and that equal quantities of labor are always of equal
value.
3. The least reflection will show how utterly and en-
tirely fallacious this measure of value is. If it were true,
it would follow that every object was valuable exactly in
proportion to the labor bestowed upon producing it.
Consequently, if we were to sink a well to a great depths
•Wealth of Nations, Book i. Chap. 6.
1Q4 ELEMENTS OF POLITICAL ECONOHT.
the pebbles and rubbish brought up from the bottom of it,
ought to have an enormous value, but a diamond picked
up on the surface of the ground, should have no value.
By a parity of reasoning, the same product ought to have
the same value in all places where an equal quantity of
labor had been bestowed in producing it. But these ideas
have been elaborately refuted in the previous chapter,
where we have endeavoured to establish it as the fim-
damental principle of Political Economy, that it is not labor
that confers value, but value that attracts labor ; and that
all value is local. We have already so fully shown that
value springs entirely from the desires of others, and that
no amount of labor can confer value on any product if it
is not wanted, that we need not spend any more time in
refuting this error.
4. But Adam Smith's work is unfortunately wholly
destitute of that singleness and simplicity of conception
which is indispensably requisite in a scientific treatise. He
has involved himself in inextricable perplexity by adopting
two distinct measures of value. First, the quantity of labor
bestowed upon producing an article ; secondly, the quantity
of things it will exchange for. Ricardo clearly perceived
this inconsistency, and justly censured him for it ; ^*Adam
Smith, who so accurately defined the original source of
exchangeable value, and who was bound in consistency to
maintain that all things became more or less valuable in
proportion as more or less labor was bestowed upon their
production, has himself erected another standard measure
of value, and speaks of things being more or less valuable
in proportion as they will exchange for more or less of
this standard measure. Sometimes he speaks of corn, at
other times of labor, as a standard measure^ not the quantity
of labor bestowed on the production of any object, but the
quantity w^hich it can command in the market, asif these were
two equivalent expressions, and as if because a man's labor
had become doubly efficient, and he could, therefore,
produce twice the quantity of a commodity, he would neces-
sarily receive twice the former quantity in exchange for it.
ON THE APPLICATION OF THE LAW OP PRICE. 105
If this, indeed, were true, if the reward of the laborer were
always in proportion to what he produced, the quantity of
labor bestowed on a commodity, and the quantity of labor
which that commodity would purchase, would be equal,
and either might accurately measure the variation of other
things ; but they are not equal, the first is under many
circumstances an invariable standard, indicating correctly
the variation of other things; the latter is subject to as
many fluctuations as the commodities compared with it."*
5. Ricardo, therefore, condenms and rejects Adam
Smith's idea, that as labor may sometimes purchase a
greater and sometimes a smaller quantity of goods, it is
their value which varies, not that of the labor which
purchases them, "and also that labor alone, never varying
m lis own value, is alone the ultimate and real stand-
ard by which the value of all conunodities can, at all
times and places, be estimated and compared." But he
adopts what Adam Smith has also said, " That the pro-
portion between the quantities of labor necessary for
acquiring different objects, seems to be the only circum-
stance which can afford any rule for exchanging them
for one another." Or as fiicardo expresses it, *'That
it is the comparative quantity of conunodities which
labor will produce, that determines their present or past
relative value, and not the comparative quantities of
commodities which are given to the laborer m exchange
for his labor." f
6. Ricardo, then, adopts labor as the foundation of all
value, and that the relative values of commodities will
be governed by the relative quantities of labor bestowed
upon their production. J As a necessary consequence
he says that, that commodity only can be invariable in
value which at all times requires the same sacrifice of
toil and labor to produce it.§ He very justly says that
no such commodity exists, because it is impossible to
* The Principles of Political Economy and Taxation. 3rd Edit, p. 5.
f Do. p. 9. t Do. p. 46. § Do. p. 323.
106 ELEMENTS OB POLITICAL ECOVOMT.
nm.infiLin the Conditions of production always uniform.
But it is quite possible to a^ree and speak about it^ as if
such a one did exist. He sSso says that though Gold by
no means accurately conforms to this principle, it does
fio more nearly than any other commodity, and is there-
fore the best material of which to make a measure of
value. He rejects the idea of estimating the value of
commodities by the abundance of other commodities they
will exchange for.*
7. The Law then proposed by Ricardo, and which is
the Amdamental principle of his system of Political
Economy, is that Cost of Production regulcUes Value.
Thus, speaking of com, he said f that the cost of pro-
duction did not the less varv, and that must regulate
price; and again, ^^no principle was more true than that
the cost of production was the regulator of value.'*
8. Ricardo, however, admits that this rule is not
applicable to all commodities. Thus, he says, ^^ There
are some commodities, the value of which is determined
by their scarcity alone. No labor can increase the
quantity of such goods, and therefore their value cannot
De lowered by an increased supply. Some rare statues
and pictures, scarce books and coins, wines of a peculiar
quahty, which can be made only f5pom grapes grown on
a particular soil, of which there is a very limited quantity,
are all of this description. Their value is wholly in-
dependent of the quantity of labor originally necessary
to produce them, and varies with the vaiying wealth
and inclinations of those who are desirous to possess lliem.
" These commodities, however, form a very small part of
the mass of commodities daily exchanged m the market.
By far the greatest part of these goods which are the
objects of desire, are produced by labor, and they may be
multiplied not in one country alone, but in many, almost
without any assignable limit^ if we are disposed to
bestow the labor necessary to obtain them.
• The PrinciDles of Political Economy and Taxation. 3rd Edit. p. 333.
-|- Hansard Pari. Debs. New series, Vol. vii. p. 949.
ON THE AFFLICATION OF THE LAW OF FBICE. 107
^^In speaking, then, of commodities, of their exchange-
able value, and of the laws which regulate their relative
prices, we mean always siich commodiiies only^ us can be
increased in qtcantity by the exertion of human industry^
and on the production of which competition operates
without restraint.^ *
9. To this we reply that the exclusion of the classes
of articles, which are not the subject of imlimited pro-
duction and competition, from the terms of a general rule,
cannot for a moment be permitted by any one who under-
stands what Inductive Philosophy is. To limit the
scientific rules of Political Economy to certain classes of
cases alone, is just as erroneous aa to limit the science of
Astronomy to certain phenomena, which can be account-
ed for only by some particular hypothesis, such as the
Ptolemaic; or to limit the science of Optics to those
phenomena alone, which can be accounted for on the
corpuscular theory of light; and so on of other cases.
But such ideas cannot be tolerated at the present day.
How earnestly does Bacon over and over again inculcate
that the negative cases are more powerful than the
positive ones, and to take heed that we verify our general
rules, by applying them to all cases, lest peradventure
the little I>avid be forgotten. Never waa there a more
bold defiance and contravention of all the well established
laws of modem science than Ricardo's idea. But it must
be inexorably rejected. Nothing less wiU satisfy the
requirements of science, than an expression which in-
cludes aU cases without any exception.
10. The law laid down by Ricardo is so palpably falla-
cious and incomplete, that those even who most stre-
nuously admire him have been compelled to qualify it.
Thus, Mr. J. S. Mill, in summing up the causes which
regulate value, says: "Demand and supply govern the
vidue of aU things which cannot be indennitely increased ;
except that even for them, when produced by industry,
* Principles of Political Economy and Taxation, p. 3.
108 ELEMENTS OF POLITICAL SC0N0M7.
there is a minimum value, determined by the cost of pro-
duction. But in all things which admit of an indefinite
multiplication, demand and supply only determine the
perturbations of value, during a period which cannot
exceed the length of time necessary for altering the sup-
gv." But this conclusion is, if possible, worse than
icardo's. Ricardo boldly put out of sight what did not
square with his rule. But Mr. Mill does exactly what
those would do in Astronomy, who made a system, and
said that some phenomena were to be explained on the
Theory of Ptolemy, and other phenomena on the Theory
of Copernicus and Newton. Or who said that, in Optics,
some phenomena were to be accounted for on the corpus-
cular theory, and other phenomena on the imdulatory
theory. What should we think of such doctrines at the
present day?
11. It is perfectly evident that Ricardo's rule, that
cost of production regulates value, is amenable to exactly
the same censure, which he has so justly visited upon
Adam Smith's rule, that labor is the measure of value.
The true use of science is to point out to us the true
causes that influence events, and to show how we are to
act in order to produce a required effect. Most truly does
Bacon lay it down as one of the first canons of his Philo-
sophy : " Tliat which in Theory is the cause, in Practice is
the Rule.''* The meaning and the application of this ca-
non to the present question is obvious. Ricardo instinc-
tively applied it to Adam Smith's rule, and he must be
judged himself by the same law. Now, if Ricardo's rule
be true, it means that, if we want to change the value of a
commodity we have only to change the cost of its prodttc-
turn. If it were true, it would necessarily imply that a
perseverance in producing any article at a great expense,
if continued long enough, would in the end succeed in
nusing its value. Now, this doctrine is notoriously absurd,
because if an article is produced in greater quantities than
• Nov. Org. Lib. i. Aph. 3.
ON THB AFFLICATION OF THB LAW OF FBICE. 109
required, its value will infallibly £Edl, and we shall shew
hereafter, that in many cases while the cost of production
increases, the value of an article may diminish.
12. The importance of this doctrine demands the ut-
most attention, for an erroneous conception of the source
of value is one of the cardinal errors of Adam Smith, and
is the very foundation of the Protectionist system of Poli-
tical Economy, which so long afilicted this coimtry, and
which still impoverishes nearly every nation on the conti-
nent. And in this he has been followed by Ricardo.
These two writers maintain that there are two different
species of price, one the natural price, and the other the
market price. Adam Smith says:* "When the price
of any commodity is neither more or less than what is
sufficient to pay the rent of the land, the wages of labor,
and the profits of the stock employed in raising, preparing,
and bringing it to the market, according to their natural
rates, the commodity is then sold for what may be called
its natural price." The apparent good sense, clearness,
and precision of this sentence might, perhaps, entrap an
imwary thinker into giving it a ready assent. No sooner,
however, do we come to analyse it, than we find that it
would be difficult for so few lines of so plausible a sound, to
contain a greater amount of vagueness and inaccuracy,
and when we endeavour to extract some tangible meaning
from it, it vanishes away into nothing. What is the
natural rent of land? What are the natural wages of
labor? What is the natural cost of raising, preparing, or
bringing it to market? One producer may be more skilful
and mdustrious than another, or may discover more econo-
mical methods of producing than his neighbours, and
these differences may exist in a great variety of degrees.
Which of these are the natural rates? Does the natural
value differ in every case? Let us take the example of
wheat. Wheat is grown in one county where wages are
14s. a week, in another where they are 10s., in another
* Wealth of Nations. Book i. Chap. 7.
110 £LEBiSNT8 OF POLITICAL SCONOMT.
where they are Ts., in other parts of the world where it is
raised by the labor of serfs. Rent may be 30s. an acre in
one county, 20s. in another, and 15s. m another. Which
of these is the natural rent? The cost of transport from
one county may be 2s. a quarter, from another 5s., from
another 10s. Quantities of wheat produced under all
these vaiying circumstances, mingle in the same market^
and it never happens that each separate parcel of wheat is
sold according to what Adam Smith would call its natural
price. On the contrary, is it not notorious that wheat of
the same quality will sell at the same price, in the same
market, at the same time, whether it comes from Essex or
Peru? Whether it be produced at an expense of 25s. a
quarter, or 2s. ? No consideration whatever influences the
price in the market, but that of demand and supply. If a
small quantity of wheat, produced at a very low price, be
brought into the market, its value will immediately conform
to the ruling market price ; if a large quantity be thrown
on the market, its effect will be to depress the value of the
whole quantity in the market — no matter what might have
been its cost of production ; and in all these cases simply
according to the rate of alteration it produces in the rela-
tion between demand and supply. On the news of the
declaration of war being received in a peaceful market,
the price flies up immediately, because it is apprehended
that war will cut ofi* the sources of supply, and cause a
scarcity. On the other hand, if in the midst of war, the
news comes that the arch enemy is no more, the price
immediately falls, because it is expected that peace will
again open the flood-gates of abundance. Now, these, and
whatever other causes act upon the price of wheat, do so
simply through the prospective changes in the rela-
tion of supply and demand that they are expected to
produce, and without the smallest reference to the cost of
production.
13. The systems, both of Adam Smith and Ricardo,
although there may appear to be a difference between
them, are, nevertheless, identical in their fundamental
OK THB APFLICATIOK OF THE hAW OF PRICE. Ill
error, for they look to the wrong person as conferring value
on any article. They both look to the prodtu^er as con-
ferring value on the article, whereas it is unquestionably
certain that it is the consumer who bestows value. Adam
Smith says, that it is the labor which the producer bestows
upon the article that gives it its value, wnereas it is per^
fectly indisputable, wat things have not value becatue
labor is bestowed upon producing them, but much labor is
bestowed upon producing them because people desire
them very much, and will give a great price for them, and,
therefore, they have a great value. Ricardo says, that
cost of production regulates value. But it is indisputably
true, that things are not valuable because they are pro-
duced at a great expense, but people spend much money
in producing because they expect that others will give a
great price to obtain them ; that is, the things will be of
great value when produced. Buyers do not give high
prices because sellers have spent much money in pro-
ducing, but sellers spend much monev in producing because
they hope to find buyers who will ave more.
14. The universal law in Political Economy is,
therefore, that the relation between demand and
SUPPLY IS THE SOLE REGULATOR OF VALUE. This laW,
like the law of gravity, holds good in all cases whatever.
It not only governs the value of any article^ but also
governs the value of every separate item of which
that article is composed. All circumstances whatever
that influence value, can be shewn to do so solely
through their efiect in altering the relation of supply
and demand.
15. Price, then, is a perpetual struggle between the
buyer and the seller, and the circumstances which compel
one party to yield, are the only measure of value at the
time of the purchase. To say that the cost of production
regulates price is only true in this sense, that no man
would willingly sell any article he had produced at a
less price than that, together with sometlung additional,
by way of reward for his own labor, and he could no^
112 ELEMBNTS OF POLITICAL SOOHOlCr.
continue do so for any length of time; but having
settled that in his own mind as the lowest limit, he
always endeavours to get as much more as he can,
without the smallest reference to the cost of production,
and how much more he can get is determined by the rule
we have given above, namely, by the necessity the
purchaser has for that particular service, together with
the number of competitors to render it; on the otiier
hand the purchaser cares nothing for the cost of production,
his only object is to buy as cheap as he can, and he takes
no thought whether the seller is selling at a loss or not.
The result of this will be that if the selling value of
any article fells below its cost of production, for a lengtii
of time, it will cease to be produced. Every man
endeavours to produce as cheap as he can, and to sell
as dear as he can, and the two operations are quite
independent of each other.
16. When we say that the relation between supply
and demand is the sole regulator of value, we mean to
say that a change of value depends solely upon a change
in that relation and upon nothing else. No change in
the cost of production will make any change in value,
unless it is also accompanied by a change in the relation
of demand and supply, and it is only tiu*ough and by
means of causing such an alteration, that a change in
the cost of production is usually accompanied by a
change in value.
17. In order to illustrate this, let us take a few
examples; let us take any article, such as stockings,
and let us 8u()pose that at any given time they bear a
certain price in the market, no matter what, and that there
is a certain demand for them at that price.
Let us suppose that at a certain time before the
introduction of machinery, a manufacturer employed 1 ,000
hands ; let us also suppose that he at some time invents
a piece of machinery by which he can produce the same
quantity of stockings, but at the same expense as 50 men
wotdd be. Now, if he only produces the same quantity
ON THB APPLICATION OP THB LAW OF PRICE. 113
^ bef6re, as he will of course take the best price he can
get for them, the demand remaining the same^ it is quite
evident that no alteration in price will ensue, and all the
profit accruing from this diminution in the cost of
production will go into the pocket of the producer;
consequently^ if he does not manufacture any additional
quantity, no alteration in the market price will foUoWi
everything will go on as before ; the only difference will
be that that particular manufacturer will make enormous
profits, owing to his sagacity and skill in inventing this
machinery. But if the materials for making the stockings
can be supplied in unlimited quantities, the manufacturer
will naturally wish to increase the quantity he produces,
and realize greater profits ; but if he produce a greater
quantity than before, that increased quantity will not be
sold, unless ofiered at a diminished price, so as to increase
the circle of buyers ; but as the cost of their production
has been diminished to him, he can afibrd to sell at a
diminished price, and the more he wishes to sell the more
must the price be reduced. Now, it is quite evident that
the increased quantity of this single manufacturer thrown
upon t)ie market, and ofiered at a diminished price, will
affect the prices of the whole quantity in the market,
because every one else must consent to sell at the same
price to effect a sale at alL It is also clear that every
single manufacturer must accommodate his prices to the
market price, and if he cannot produce at the market
price he will have to cease producing; and as we may
suppose that there are several degrees of skilfulness and
economy among the various manufacturers, it is quite
evident tliat at every successive diminution of the market
price, those in succession will have to cease working
who are least able to produce cheaply. Hence, it is quite
clear that it is the market price which regulates the
quantity of expense that can be afforded in produdug^
and that it is the quantity that can be produced at ihei
least expense, compared to the whole quantity that can
be sold, that regulates the market price.
H
1 1 4 KLRMcrrs of pauncAL tcommr^
lleiice. iil^v wo s«e the utter fidkcr of Ricardo's rule^
whicli will be more particularly alluded to in the next
flection, that it is the coc4 of production under the most
untavomble inrciunt^ance^ tliat regulates price* The
tnitli is that it is the exact reverse. The price rmilates
the griHitost c^^st i^'^ production that can be afforded, or
the UHist unikvomMo drcumslances under which produce
tiiHi can take plact\
18. Let us Airthor illustrate this bv the example of
rom« because Kic«nlo*8 Theonr of Rent is one of the
princijuil things upon which his reputation rests. Ricardo
supiK)ses that wIhhi a country is first settled that the
best ami mi>st fertile land is first cultivated, and as
^pulation increases cultivation gradually extends to
tuts of interior quality^ and more distantly situated
fttnn the gnnving nuu*ke(s« to which the cost of trani^rt
constantly increases as the distance increases. This
mipiHmtion is pertectly Ultimate. Now, the cost of
production to the culti^*ator who wishes to sell his com,
IS the iHist ivf phnnng it in any required market; and
it is miiti^ clear that combining all the circumstances
of pr\Hluction in dillerent cases, there is a rwukur smes
of gradations of ctist of production of corn m difleient
localities. Hence, the profits, or the diffiTfnoe between
tlw ciwt of placing the com m any given market, and
the sum actually received for it, must also vary in a
regular series of gradations till they diminish to nothing.
That is, the inducement the cultivator has for sending his
produce to market will ultimately vanish, and no com can
be produced, i. e., sent to market, under more unfavorable
circumstances than this vanishing point.
19. Now, let 11H MippoHe that there is a certain market,
which IS supplied with com, produced under these va-
nous degrees of coHt of production, so that the hist
j^iwntity siipi)li(5d only ju8t leaves sufficient profit to
mAice thoeiiltivutor to Hend the com to market. Then
Wcardo asserts, that it is the com produced under
the most unfavorable circumstances, that regulates the
ON THE AmJCATIOH Ot TttB LAW OF TBlCJt. 115
market price.* It is quite clear that it is exactly the
reverse, it is the market price of com which indicates
the most imfavourable circumstances, i. e.^ the greatest
expense under which it can be produced.
20. Suppose that, while a great number of cultivators
send their corn to market, one of them acquires greater
skill, or devises some machinery for cheapening cul-
tivation, or discovers some manure that increases the
quantity produced, then if he sends no more to market
than he did before, no alteration of the market price will
take place, and the extra profits arising from the diminu-
tion of the cost of production, will go into the pocket of the
producer. And so on, of any number of cultivators, who
can diminish their cost of production, if they do not in-
crease the quantity sent. But if an increased quantity
be sent, it must be offered at a reduced price, in order to
cause an additional sale. That reduction of price will
annihilate the profits upon the last quantity produced,
and com will cease to be produced under such circum-
stances. Or if we suppose a quantity introduced from a
foreign countrj^, that quantity will lower the price in the
market, and annihilate the profits of those quantities pro*
duced under the most imfavorable circumstances, and
that, just in proportion to the additional quantity ofiered
for sale. And as more is imported, those quantities pro-
duced in the increasing scale of unfavorable circumstances
will successively cease to be produced. Again, if the
foreign importations are diminished, the market price will
correspondingly rise, and cultivation may be gradually
resumed under increasingly unfavorable circumstances.
Hence, we see, that it is always the ratio of supply and
demand that regulates market price, and the market
price which regmates the greatest amount that can be
afforded as cost of production, or indicates the most un«
fevorable circumstances under which production will
take place.
* Principles of Economy and Taxation, p. 60-1. 3rd Edit
H 2
IIB / KLBMEirrS OF POLITICAL ECONOMT,
' SI. During the gi*eat revolutionary war, a succession
of bad harvests, joined to other causes, produced an enor-
mous rise in the price of com, so that in 1812 it reached
the price of 130s. a quarter. Owing to this extraor-
dinary rise of price, an immense quantity of inferior knd
was taken into cultivation at an extravagant cost, because
the farmers expected that high prices would be permanent.
Kow, let us suppose that the old lands in cultivation
had produced no more than they had done during the
years of scarcity, what would have been the necessary
consequence of this additional quantity of com added to
the market? As the quantity of land taken into cultiva-
tion could only be increased gradually, the first quantity
added to the existing supply would not have added
much to it. The proportion between the increment and
the existing supply would not have been great, conse-
quently it would only lower prices a little, and would leave
a large profit to the producer. But the more land that was
brought into cultivation, the more would the quantity of
com brought to market be, and the more would prices
be lowered. And this might go on until the constantly
increasing quantities of com lowered the price so much,
that it would only just leave a profit, and further produc-
tion would cease. And it is perfectly evident, that it
would always be the market price which would indicate
how great an expense could be afforded as cost of pro-
duction. Hence, we see, that it was the increased price
of com that called inferior land into cultivation, and it
was the increased quantity of com produced, that lowered
the market price, until the cost of production and the
market price might possibly meet. But whether they did
so or not, would entirely depend upon the quantity
produced.
- 22. Exactly the same principle holds good with
regard to mines. Tha^cost of production of all minerals
may vary in a regular series, and at any particular time
it is the market price which regulates the most unfavorable
circumstances under which production wiU take place.
ON THB APPLICATION OF THE LAW OF PBICE. 117
Thus, in the case of Gold mines, we may legitimately
presume that there were some mines worked, which only
just paid their expenses. Now, when the amazing abun*
dance of the gold fields of California and Australia began
to produce their effects in that district, by a rise in the
})rice of wages and commodities, it is evident that the
east productive mines would have to be abandoned in
succession. Consequently it would be the market value
of gold, which would regulate the most unfavorable cir«
cumstances under which gold would be produced. The
same is true of any other minerals, such as coals. And
from the case of coal mines, we may draw an example
which shews the entire fallacy of the Ricardian doctrine^
that cost of production regulates value. Nothing is more
common in coal mines, than to have the different strata
of coals, which are comparatively speaking quite close to
each other, of entirely different qualities, and suited
to totally different purposes. Yet the cost of working
each of them may be exactly the same. Now, it is mani-
fest that the better qualities of coal will command a better
price in the market than the inferior qualities, and yet
their cost of production is the same. That is, with the
same cost of production their values are different. What
then becomes of the Bicardian doctrine, that cost of
production regulates value ? Is it not seen to be a pure
fallacy? On the contrary, as we have shewn, it is the
result, and that alone that has value, and what that value
is depends purely on the supply and demand, and is quite
independent of the cost of production.
23. Hence, we see how utterly fallacious is Ricardo's
doctrine; " When land of an inferior quality is taken
into cultivation^ the exchangeable value of raw produce
willrise^ because more labor is required to produce it.***
What confusion of language and idea ! It is perfectly
clear that the subjects connected in this paragraph, should
have been arranged, thus, — " When the exchangeable
♦ Principlea of Political Economy and Taxation, p. 60.
118 XLSMEKTS Ot FOUTICAL SCOKOMT.
vcUue of raw produce rises, land of an inferior qualify
will be taken into caltwatianj because more labor VMOf be
prq/Uabfy employed in producing itJ^
So, also, how utterly fallacious is the following! — ^*The
exchangeable value of all commodities, whether they be
iiianu£Eictured, or the produce of tlie mines, or the pro-
duce of land, is always r^ulated, not by the less quantity
of labor that will suffice for their production under
circumstances highly favorable, and exclusively enjoyed
by those who have peculiar facilities of production, but
by the greater quantity of labor necessanly bestowed on
their production by those who have no such facilities, by
those who continue to produce them under the most un-
fiivorable circumstances ; meaning by the most unfavor-
able circumstances, the most unfavorable under which the
quantity of produce required, renders it necessary to carry
on the production."
A consideration of the preceding cases, shews that it is
exactly the contrary of what Ricardo asserts. It is in
all cases whatever, in the produce of manufactures, mines,
and land, the market price, and that alone which indicates
the most unfavorable circumstances under which pro-
duction can take place. The market price purely de-
pends upon the relation of supply and demand, and is
wholly independent of the cost of production. And it is
the quantity produced under the most favorable cir-
cumstances compared to the whole quantity for which
purchasers can be found to give a certain price, that re*
gulates the supply or the quantity that wUI be produced.
24. Now, this is no inunaterial dispute about words,
it is not mere logomachy, but it is a fundamental dif-
ference of princime between two distinct systems of Poli-
tical Economy. What we say is, that Ricardo has plainly
inverted cause and effect. That his views and principles
lure as entirely fallacious as if he had composed a treatise
on heat, and laid it down as a fundamental principle, that
it was the rise of the mercury in the thermometer that
x^ulates the heat of the atmosphere, or that the rise
ON THB AFf!LICATION OF THX LAW QUi FBICE. 119
of the mercury in the barometer caused fine weather.
And those who admire Ricardo's principles of Political
Economy, ought in consistency to maintain the two latter
propositions.
25. It is so extremely important to understand the na-
ture of the fallacy which runs through the whole of the
Ricardian system of Political Economy, that we may give
another illustration. It is well known that the cultivation
of certain agricultural products, and the climate they caa
flourish in, are intimately connected. At certain points
the cultivation of maize, the vine, olives, the palm, ceases,
and it is possible to ascertain by experience the average
temperature of the country in which these things occur.
Now, reasoning exactly as Ricardo does, we ought to say,
that the boundaries of the cultivation of these products
reguldted the climate of that place, when it is manifestly
the reverse, it is the climate that regulates their production.
The cultivation of a certain vegetable may indicate the
climate, but it does not regulate it any more than the speed
of the paddle wheels regulates the motion of the engines.
The whole of Ricardo's palpable fallacy is based upon a mis-
conception of the meanmg of to regulate.
26. It is perfectly true that in a great many, nay^ the
majority of cases, the natural effects of competition will
cause die price to approach very nearly to the cost of
production, and Ricardo's rule will apparently be foimd to
answer. But this is just one of the things which must be
most sedulously guarded against in science, viz., to give in
a careless adherence to a form of expression which is
radically erroneous, because it appears to account for
phenomena. We will give an exact parallel. In the olden
times philosophers thought that the motion of projected
bodies had a natural tendency to decay. They always saw
that the motion of a body projected gradually diminished,
and finally ceased. Now, it is quite easv to calculate re-
sults upon this principle. Given a certain velocity of pro-
jection. It would have been quite easy to calculate wnen
the motion would cease, upon the supposition that it na-
120 ELEMEKTS OF POLITICAL KCONOMT.
turally decayed. And the results would have agreed with
the calculation. What could he more satisfactory? If,
then, it is hastily assumed that, because results may agree
with calculation, the principles of those calculations are,
therefore, necessarily true, those opinions might have
maintained their ground. But it is well known that mo-
dem philosophers have entirely rejected such a notion, as
that motion has a natural tendency to decay. But they
arrive at the same result by a totally distinct principle.
They say that motion has no natural tendency to decay,
but that, in all the cases we see, there are counteracting
principles, such as the resistance of the air, friction, &c.,
which oppose it, and finally destroy it. And they una-
nimously reject the former mode of accounting for the
results, and adopt the latter. Hence, we see that though
principles are manifestly erroneous, which do not account for
results, yet it does not necessarily follow that any principle
which does account for them, is, therefore, necessarily true,
because, in fact, it may happen that several different prin-
ciples may account for the result, and it requires judgment
to decide which is the true one. Now, the Ricardian prin-
ciple of value is just like the former of those of motion.
It apparently accounts for results in a great many cases,
and, therefore, may impose upon an unwary thinker. But
it is a dangerous and seducing error, utterly false in
principle, and to be repudiated and rejected by those who
study Political Economy in the true spirit of science.
27. In a great number of cases it is impossible to say
what the cost of production of any article is, and the very
&ct of a market being oj>ened up for it, is the very thing
that confers value on it. In the last century, eggs were
at Id. a dozen in the Highlands of Scotland, and salmon
was so abundant, that it had scarcely any saleable value
at all, there being no communication with the Southern mar-
kets. When this communication was opened eggs rose
to 4d. or 6d. a dozen, and salmon acquired a value of
about Is. a pound. That was because agents from the
South came and bought up the produce, because eggs
ON THB APPUGATION OF THB LAW OF PRICE. 121
were, perhaps, Is. 6d. a dozen in the London markets, and
sahnon was 2s. 6d. a pouhd. Now, eg^ were not Is. a
dozen in London because they were 4d. a dozen in the
Highlands, but people gave 4d. a dozen for them in the
Highlands because they could get Is. a dozen for them in
London. What, then, becomes of the Ricardian rule, that
cost of production regulates value? In this case it was
the value of the eggs in the London market, that regulated
their value in the Highlands, and not the reverse, and the
same is obviously true of all other species of produce.
28. Again, let us observe what is the result of a di-
minution of the cost of production, according to various
circumstances. The Northern counties of Scotland export
com and cattle to the Southern markets. They were
served by a Steam Company, which had a monopoly of the
trade. The usual consequences of a monopoly followed.
Those which concern us here, as a question of Political
Economy, were, that the freights and fares were most
extravagant, and all petitions for reduction were unheeded,
as the Company thought there was no danger of opposition.
However, the people of the North could stand it no longer,
and they determined to provide steam-boats of their own.
The natural consequence immediately followed, freights
and fares were reduced nearly one half. Almost all the
farmers subscribed for shares in the steamer, and many
of them told me that if they lost all the money sunk in the
steamer, they would still be great gainers by the saving of
freights. That is, the diminution in the cost of production
(e.g., the expense of placing their produce in the Southern
markets,) went into their pockets. And why was this ?
Because the additional quantity of com, &c., thrown by
the Northern districts upon the Southern markets, was
a mere drop in the bucket, compared to the demand of the
Southern markets, and had no appreciable effect in lowering
prices there, consequently, all the profits arising from the
saving of freight, and the diminution of the cost of pro-
duction, went into the pockets of the Northern farmers
and landlords.
122 ELBHEMTB Olf POLITICAL SC0K0M7.
29. It is perfectly manifest that any diminution of
the cost of production, through however large an extent of
country it might cover, would have no effect whatever
in altering the market price, until the extra quantity
thrown upon the market hore an appreciahle proportion
to the previous supply. And if districts of country are
excluded from markets, either by want of communication
or by prohibitive laws, then, when there are markets
opened to them, their produce will acquire an immensely
increased value to what it had before. That is, the
opening of the markets will immensely increase the value
of the produce in the country, and the increased quantity
of produce thrown upon the market, will tend to lower
the value of the produce in that market, and these two
values will approach to each other in the inverse propor-
tion of the respective quantities, precisely as the space
travelled through by each of two bodies under the influ-
ence of gravity, is in the inverse proportion of their
masses. The establishment of steam navigation enor-
mously increased the value of produce in the north of
Scotland, the repeal of the com laws enormously in-
creased the value of produce in the Danubian princi-
palities.
30. A consideration of the preceding examples will
furnish us with the following rules : —
1. No change in the cost of production will cause a
change in value, unless it is accompanied by a change
in the relation of supply and demand.
2. A diminution in the cost of production, whea effect-
ed without an increase of the quantity produced,
goes entirely to the benefit of the producer.
8. A diminution in the cost of production, in cases
where the quantity of the produce can be increased
without limit, goes entirely to the benefit of the
consumer.
4. A diminution in the cost of production, in cases
ON THB APPLICATION OF THE LAW OF PRICE. 183
where the quantity is increased, but not without
Umit, goes partly to the benefit of the producer, and
partly to the benefit of the consumer, and this
benefit is divided between the two in the inverse
proportion of the extra quantity added, compared to
the previously existing consumption-
Si. It is necessary to observe, that when we say that a
change in price invariably depends upon a change in the
relation of supply and demand, we by no means assert
that the change in price is directly proportioned to a change
in that relation, so that, for instance, an addition of one-
fourth of the quantity, would produce a reduction of one
fourth in price. It is well known that this proportion
does not hold ; and that a difierent proportion is found
to obtain among different articles. Nor, though at-
tempts have been made m some mstances, such as com,
to discover the relation that exists between the two, does
it appear that any satisfactory solution has been obtained.
All that can be said is that it is a change in the one that
produces a change in the other, without asserting that
there is any fixed proportion between the two changes,
because it may very well be, and we believe it to be the
case, that that proportion follows no fixed law, but varies
according to time and circumstances.
32. We shewed in Chap. I. Section 5, that in the earlier
stages of society, before the introduction of a currency,
there would be a natural tendency towards an equilib-
rium of advantages, in all cases where the production
was open to general competition. Exactly the same
thing takes place, when all values and profits are esti-
mated in money. When the production of any article is
open to general competition, there will be the same inevita-
ble tendency to an equality of profits. The profits being
measured by the difference between the cost necessary to
Eroduce the article, and the price realized for it, if there
e any article by which unusual profits can be realized,
there will be a strong competition to produce that article,
until the extra quantity so produced reduces the profits
l24 ELEMElfTS OF POLITICAL ECONOMT.
to the level of other profits. That this is the case with
the great majority of articles, is quite true, and, therefore,
the generality of manufactured articles, and which can
be produced, at nearly equal expense by different manu-
facturers, will have a tendency to keep pretty near that
limit. But it must be carefully observed, that the change
in price is universally caused by the change in the rela-
tion between supply and demand.
33. Hence, we may express the laws of the subject in
this way :
1. The relation between demand and supply is
universally the only regulator of value.
2. In siu)h cases <is prodicction can be increased
without limit^ people learn to adjtist the supply to
the demand^ so that the value of the article will nearly
agree with its cost of production.
84. No one who understands the principles of philo-
sophical reasoning which are universally allowed to be
conclusive in other sciences, and wishes to preserve that
continuity of the sciences so earnestly insisted upon by
Bacon, can fail to see that the preceding considerations are
absolutely conclusive as to the fundamental error of the
Ricardian system of Political Economy. If it be possible
to obtain a general philosophical rule, it must be appli-
cable to all cases. It is the very essence and genius of the
Inductive Philosophy to analyze particular cases, deduce
general rules from them, and shew how they apply to all
other cases. It is the very test of the truth of rival
theories to explain particular cases. There is no other
way of testing their truth, and, accordingly, when two
apparently plausible theories have been brought to the
trial, and one of them has failed to account for phenomena,
it has invariably been rejected. A true theory, therefore,
must account for all the phenomena in a science. It must
be true in all classes of cases, and to any extent. A
single fact that can be shewn to be absolutely irreconcil*
»ble with a theory is fatal to it.
ON THE AFFLICATION OF THE LAW OF PRICE. 123
35» In many other sciences it has happened that
theories have appeared to account for a considerable num-
ber of phenomena, and have for a lonff time been accepted
as true, but in course of time other classes of phenomena
were observed which were wholly irreconcilable with the
received theory. It, consequently, became necessary to
devise new theories capable of comprehending the new
classes of facts. Of course it was manifestly necessary
that the new theory should absorb all the facts accounted
for by the old one, and explain them equally well. When
this has happened, when it has been proved tliat the new
theory accounts for all the observed facts, the old theoiy
has been invariably superseded, and the new one adopted.
36. Precisely the same process of reasoning holds good
in Political Economy. Just as it is a universally acknow-
led^d principle in experimental science that that law only
is the true one, which explains all the cases in the subject,
we lay this down as an unquestionable truth in Political
Economy :
That if two or more forms of expression will explain or
account for any phenomena regarding price^ or the change
of price J that form of expression only is to be adopted as
the true one^ which explains all the phenomena in the
science^ and not the individtuxl ca^se only.
37. Tried by this law, which is indisputably true, the
law that cost of production regulates value, breaks down
and utterly fails. In the first place there are whole classes
of cases to which it is admitted by its author that it is
utterly inapplicable, as, for instance, the prices of all
objects of art, such as pictures, statues, compositions in
music ; all questions of personal skill, such as barristers'
fees, salaries of actors, the remuneration of authors, besides
many others, as, for instance, all cases where the same
cost of production produces articles of diflferent qualities.
These facts are quite sufficient to seal its condemnation.
38. Moreover, if there be a general form of expression
for the causes which universally cause a change of rela-
tions of quantities, it must indicate on the face of it all the
126 £LEMEKT8 09 POLITICAL ECONOMT.
possible causes of chan^, so that by the variation of
potency of each particular cause in each separate case,
the same general expression may be applicable to all classes
of phenomena in the science, and to any extent* Every
true formula^ or general rule^ musi bear an the face of it
all the elements which influence its action. The effects of
each element may vary from zero up to any extent, and
will modify the result accordingly. Now, talie the quality
of the result, or the demand for it, as elements which mani-
festly influence value, and what trace of them appears
on the face of the rule that cost of production regulates
value?
89. The only true way of constructing a philosophical
rule regulating price, or value, is to consider all the causes
which affect it. There are a certain set of causes which
tend to elevate it, and a certain set which tend to depress
it. Price, then, will vary directly as the causes which
tend to elevate, and inversely as the causes* that tend to
depress it. And that is the method we have adopted in
constructing a formula in the beginning of this chapter.
40. And when the general expression we have
obtained, is applied to the eimlanation of phenomena,
it is found that it is true in all classes of cases, and to
any extent. All the cases which are exceptions and
contradictions to the law, that cost of production
regulates value, are examples of the law of supply and
demand, or of the expression we have obtained. It
explains not only all classes of cases, but all the range
of prices in each class, from 0 up to any extent. It
absorbs and accounts for all the cases which are
apparently accounted for by the false law. It bears,
therefore, all the indelible marks of truth.
41. Tried by the well recognized standard of
philosophical reasoning, the Ricardian Law entirely
fails. But it is founded on a much deeper error
in the nature of commerce. For it is akin to this
fundamental fallacy, that people buy because other
people produce; whereas the contrary is the feet,
OK Tti^ APPUCATIOK Ot THfi LAW OF FRIC£. 127
peopk piroduce because thej hope and expect that others
will buy. All production is founded upon speculation.
Producers find out or think of what other people
want, and then they produce. A constant supply of
some things is wanted. Inventors hope that they may
excite or create a desire, but it is no reason that people
will buy, because others produce, and if none want or
will buy what is produced, such an article has no value.
All production, then, is founded on speculation, varying
through all degrees of prudence, certamty, and risk. All
producers speculate that there will not only be buyers
who shall want their products, but shall want them to
such a degree of intensity as to be willing to pay a
sum at least su£Scient to pay the cost of production,
and a profit besides, sufificient to remunerate them for
their time and trouble. Now, the powers of con*
sumption generally speaking are limited, but in most
cases the powers of production are much more easily
extended, and the amount of value, or the price, depends
upon the proportion between the production, or the
supply, and the number of persons who are willing to give
an adequate price, or the consumption, and hence pro-
auction must always be adjusted to consumntion, and
not the reverse. Hence, also, we have this funda-
mental truth that Speculation is the mother of Pro-
duction, BUT Demand is the origin of Value.
42. Whoever is well acquainted with the subject,
must perceive that the preceding considerations contain
the entire overthrow of the established doctrines of Poli-
tical Economy. "Labor," says Ricardo, " is the foundation
of all value." We have already shewn in Chapter I.
that this is a fundamental error. Value does not spring
from the labor of the producer, but from the desire of
the consumer. The modem doctrines of Political Eco-
nomy look entirely to the wrong source for value. Aiis-
totie saw the matter most clearly in its true light. He
makes value spring from demand.* While we have had oc-
^ Politics. L. m. Nichomac. Ethics, L. v. G. 5.
128 ELEMSNT& OF FOLITICAL ECOKOHT-
casion to reject the conception of money as propagated by
Aristotle, and adopted by modem economists, we may
help to rehabilitate his doctrine of value, which is rejected
by modern writers. Labor is, in no case whatever, the
cause or foundation of value. No amount of labor, or
cost of production, can ever bestow or ensure value. In
all cases whatever, it is because articles have great value,
that great labor or great expense is expended in pro-
ducing them.
43. It is, then, universally the Result, and the result
only, which has value, whether that result be obtained by
great or by little labor, although it is imdoubtedly true,
that valuable results are scarcely ever attained without
great labor or expense. Nevertheless, we must rigidly
guard ourselves from thinking that it is the labor that
confers the value. An able and skilful man may obtain
a result of great value with comparatively little labor,
and an inferior man may bestow many times the amount
of labor, and never attain so valuable a result. No class
of persons are so apt to estimate the value of a thing by
the labor it has cost them as authors, and consequently it
is a very common remark that authors are generally
the worst judges of the relative value of their own per-
formances. Archbishop Whately cautions an intended
writer of the Histoiy of Logic thus, "he should possess
the power of rightly estimating each according to its
intrinsic importance, and not (as is very commonly done)
according to the degree of laborious research it may
have cost him." * And this remark is of imiversal applica-
tion.
44. In accordance with the erroneous views regarding
value which we have alluded to, many writers enter into
laborious accounts of the various items which constitute
price. ThiLS, they add wages, and profits of stock, cost
of machinery &c., together as the cause of price. Thus,
Adam Smith says, "high and low wages and profit are
* Elements of Logic. 9ih Edit. p. 2.
ON THE APPLICATION OF THB LAW OF PRICE. 129
the causes of high and low price/' * and he adds up
natural rent, natural wages, natural, &c., and calls the
sum of these the natural price. Now, the fact is, that
prices are not high because expensive machinery is
employed in producing things, but expensive machinery
is employed because prices are high. It may be that
some persons may think this a subtle distinction, because
the two are oflten so bound up together that it is not easy
to separate them, but yet they proceed from two distinct
fundamental principles. Adam Smith, whose work is
unfortunately so full of inconsistencies, says most truly,
in the same chapter as we have just quoted, when speak-
ing of the value of particular wines, **For though such
vineyards are in general more carefully cultivated than
most others, the high price of the wine seems to be not so
much the ejfect, as the cause of this cultivation."! Here
Adam Smith touched the true frindamental principles
of Political Economy, and if he had made this con*
ception the basis of his work, it would have saved a
world of trouble and confusion. But, in fact, the tri-
bunes of the commons had enunciated the true doctrine
a very long time before ; " Eo impendi laborem ac peri-
culum ♦ ♦ • magna prcemia proponantur.*^'^
45. This, then, is the universal law of Political
Economy. That people bestow much labor or expense
in producing commodities, because they expect that others
will give a high price for them. It may be a reason for
asking a high price, that they have bestowed much labor,
but that is no reason why otiiers will give it. In many
trades it is perfectly well known that the public will give
a certain price and no more for an article^ and the
problem is to produce the article for the price.
46. We must also be on our guard against admitting
a specious form of expression which J. B. Say uses,
" Thus, without examining yet, why olive oil is worth 30
* Wealth of Nations. B. i. ch. xi.
f Do. B. I. ch. XL J Ldvy. iv. 35.
130 ELEMENTS OF POLITICAL ECONOHT.
SOUS a pound at Marseilles, and 40 sous at Paris, I say
that he who sends it from Marseilles to Paris adds 10 sous
to the value of each pound of oil/' • " Products
successively increase their value in passing through the
hands of their different producers/' f It is never the
producers that confer value, but the consumers; it is
each successive consumer that confers the value. If it
was the cost of transport that added to its value, it would
necessarily follow that to send it back again from Paris to
Marseilles would still further add to its value, and to
send it backwards and forwards twenty times ought
to add twenty times the cost to its value. The truth
manifestly is that people incur the cost of transport
because they expect that the difference of the value
between the two places will repay the cost ; but no cost of
transport can really add to its value. Thus, a Library or
Museum may be brought up to London from the country
for sale, but the expenses of the transport do not add to
the value of the books, but they are brought up to
London because it is expected that their higher value in
London will repay the cost of bringing them there.
47. To exemplify, and still furmer to enforce the
truth of our formula, we may take the case of diamonds
and other precious stones. Their value depends entirely
upon their rarity, and the extreme desire of rich persons
to possess them, and has no appreciable relation to the
labor of finding them. They have acquired a certain
estimation in the eyes of men for certam reasons, and
they are scarce, and it flatters the pride of men to be the
possessors of rare articles. The finding of diamonds is a
great hazard, and they are only found in a few places, and
of certain sizes. If a few persons were to be so fortunate
as to discover a few hundreds of diamonds of large size,
their value would be immensely diminished all over the
world; nor would it be possible to assign what proportion
• Traits d'Economie Politique, p. 101. Edit Gillaumain.
f Do. p. 531.
ON THB AFPLICATIOK OF THE LAW OF PRICE. 131
the labor of producing them would bear to then* price. On
the other hand, were a million of men to devote themselves
to search for them, and if they searched in vain, and found
none, that circumstance would not have the smallest
effect in raising the value of a single diamond. So that
the real truth is, that men are willing to devote themselves
to search for diamonds, because they are of great value
when found. A diamond is not valuable because a great
deal of labor has been bestowed on finding it, but a man
searches for diamonds because, though he may only find one
at rare intervals, the value of it when found is so great,
that it will repay him for a long course of unsuccessful
labor. Thus, also, pearls are not dear because so many
fishermen seek for them, but so many fishermen labor to
find them, because they are highly esteemed, and rich
people are willing to pay high prices for the pleasure of
possessing them. Hence, we may say, that it is true of
diamonds and pearls, and all that class of productions,
that a great deal of labor is bestowed on producing them,
because a high price is given for them, and that it is
a mistake to say that a high price is given for them
because a great deal of labor is bestowed on producing
them. Sidney Smith was in a fever of anxiety to sefi
some jewels he had, to set up house, lest mankind
should awake from their folly and refuse to buy these
glittering baubles. No examples can be taken better than
these to shew the total want of any necessary relation
between labor and valine.
48. An attentive consideration of this last example is
of the utmost importance, and is of universal application
in Political Economy. We observe that the quality of
the diamond is not in any way affected by the quantity of
labor bestowed on finding it. A diamond of the nrst
water may be found after a search of five minutes; a
search of as many days, months, or years, may only be
rewarded by finding a very inferior one. But yet the
result of the lesser amount of labor may be far more
valuable than the result of the greater amount* This
i2
182 ELEMENTS OF POLITICAL ECONOMT.
is a universal truth in Political Economy. In all cased
it is the result^ and that only, which is looked to, wholly
independent of the labor by which it has been arrived at.
49. Ricardo has brought forward in support of his
fiindamental principle, that cost of production regulates
value, an example that deserves to be examined. He
says,* " Gold and Silver, like all other commodities, are
valuable only in proportion to the quantity of labor neces-
sary to produce them and bring them to market. Gold is
about fifteen times dearer than silver, not because there is
a greater demand for it, nor because the supply of silver
ujifteen times greater than that o/'gotd^ InU solely because
fifteen times the quartttty of labor is necessary to produce a
given quantity ofit.^^ Such an assertion as that it is fifteen
times more expensive to obtain gold than silver carries its
own refatation on the very face of it, and is just one of
those tests which, being inconsistent with a known truth,
proves the fallacy of the whole of Mr. Ricardo's argument.
A gold mine is not more costly or laborious to work than
a lead, or tin, or copper mine. But it is a much scarcer
metal than any of tibe others, and it is extremely useful
for certain purposes. It is not the greater amount of
labor bestowed upon producing gold that gives it its
greater comparative value to silver, but its greater com*
parative scarcity to that metal. So far from its being
true, as Ricardo says, that the supply of silver is not fifteen
times as large as that of gold, the fact is that until the
discovery of California and Australia, the supply of silver
was forty times as great as that of gold.f Ihe reason
why, when it was forty times more abundant, it was only
fifteen times less valuable than gold, will be shewn a little
further on. Now, this is exactly what Bacon calls a
crucial instance ; and is absolutely decisive of the merits
of Ricardo's system. According to his doctrine, the only
reason why gold could be fifteen times more valuable than
* Principles of Political Economy and Taxation, p. 421.
t Maooullooh's C!ommerciul Pictionary. Art. Precious Hetah.
ON THB AFPLI€ATI01f OF THE LAW OF PBICE. 133
silver would be that it was fifteen times more expensive
to produce it. But this is known to be a fallacy, and is
decisive of the fallacy of the system built upon such
doctrines. If gold were as abundant as silver, it would be
much more convenient to have silver coin than gold ones,
as an equal quantity of silver would be much lighter and
more convenient to carry than the same quantity of gold.
It is, in fact, the peculiar qualities which render gold so
usefiil as a currency, that give it the greater portion of
its value.
50. The different value of houses according to the
locality in which they are built, well exemplifies how
greatly more surrounding circumstances influence the value
of an article than the cost of its production. It would not
cost more to buUd a house, or a range of oflSces in the
heart of the City of London, opposite the Bank of England,
or the Exchange, than in the most unfrequented suburb,
but of what different values they would be ! Now, it is
clear that the greatly augmented value of the buUding in
the City would be almost entirely due to the great demand
for offices in that locality, and would have no reference to
the cost of its production. Nay, so much is value affected
by external circumstances, that a house or a shop will be
far more valuable on one side of a street than on the other,
as it may be more fashionable or simny, or the reverse.
So apparently minute are the circumstances that cause
great dififerences in value. Again, an unexpected change
in the fashion, which is merely another name for the
demand suddenly ceasing, causes the most violent depres-
sion in the value of the most expensive articles. A few
years ago a species of carriage called chariots were the
most fashionable of any — now there are very few re-
maining, and a good chariot which in former times would
have cost several hundred pounds, would not now fetch
more than a few pounds, the mere value of the wood and
iron, because they have been superseded by more conve-
nient forms of carriages. These examples are sufficient
to show how erroneous it is to think thiit the value or
134 ELBBCENT8 OF POLITICAL BOONOMT.
price of an article can be controlled by its cost of pro-
duction.
51. Tlie value of pictures, sculpture, and all objects
of art is so entirely allowed by the advocates of the law
of cost of production regulating value, to be an exception
or contradiction to that law, that we need not further
allude to them, than to remark that they are examples
of the law of supply and demand, and are universally
allowed to be so.
52. Many railway companies, in regulating their fares,
have acted upon an error analogous to the doctrine that
the cost of production regulates price. It used to be
not an uncommon argument for keeping up fares very
high, that the cost of making the railway was very high,
and therefore the fares must be high. The two things
have no relation whatever. The object should be so to
regulate the fares as to produce the greatest amount of
revenue possible. The companies should have calculated
before making tlie railway, the amount of revenue they
could })robably obtain, which would determine the value
of the railway when made, and then the cost of making
the railway, and if the revenue would pay the interest of
the money expended in making the railway, then they
should make it, otherwise not.
53. It is quite easy to shew that the value of an article
may diminish, as the cost of its production increases.
Let us take the example of a ship, as that will illustrate
this principle as well as any other. The value of a ship
at any given time (omitting the question of how long she
may last) is measured by the amount of freight she can
earn. If the demand for ships be great and the number
of them few, the value of shipping will of course be high ;
but if the number of ships be increased, while the demand
for them remains the same, the value of each will be
diminished. Now, if the value of ships be high, it will
naturally cause a greater number to be built, which will
stimulate industry in that trade, and certainly cause an
advance in shipwrights' wages. Thus, the cost of pro-
ON THE AFFUCATION OF THE LAW OF FRIC^. 135
duction of each ship will be increased, while each new
ship that is built will diminish the value of the whole ;
and the more that are built will still further diminish their
value, till at last the value of each will diminish so much,
that it will scarcely exceed the cost of production, and
then they will cease to be built. If the demand varies as
well as the supply, it is quite easy to discover what its
effects must be according as its rate of increase is greater,
equal to, or less than the supply.
54. It is far more generally true that it is the value
of the article when produced that governs the cost of
production, than the contrary rule. It is true that it is
often said that the prices of goods are raised because
wages have risen, — as was the case with the iron trade
in 1854 — but, then, what was the cause of the rise of
wages? Simply a greater demand on the part of the
public for articles of iron, for ships, for rail-roads, steam
engines, &c. It was this original demand on the part of
the public for iron that raised the price of labor, and the
rise of wages reacted upon the price of iron. The pro*
ducers of iron articles were able to raise their price to the
public because there was a great demand for them. The
demand by the public increased faster than it could be
supplied. If the increased supply required could have
been fumisiied as quickly as it was wanted, there would
have been a rise in wages, but not in the price of the
article itself. Hence, the true cause of the rise in the
price of the article was not the rise in wages, but the
demand for the manufactured article increasing quicker
than it could be suppUed. A few months after that, a
great revolution took place, the price of iron fell 30 per
cent., and wages were reduced ; but was it the reduction
of wages, t.6., the cost of production, that caused the fall
in the price ? Certainly not, but it was the fall in the price
caused by a diminution of the demand compared to the
supply, that compelled a reduction in the cost of produc-
tion, or wages.
55. The fundamental fallacy of the doctrine, that
136 ELEACENTS OF POLITICAL EC0N0BC7.
the cost of production regulates value, is that it wholly
omits to take into consideration the effect that an excess
of quantity has in depressing the market. If producers
of articles had always a full knowledge of the supply that
would he required, and refrained from throwmg more on
the market than could he taken off at a remunerative
price, that doctrine might appear more specious. But all
commerce is full of overtraiding, and if commodities are
thrown upon the market, there is no limit to the depres-
sion of price they may undergo, whatever may he their
cost of production. When this is the case, the article
ceases to be produced until the excessive supply is worked
off, and the price has risen on account of the increased
Eroportion of demand over supply. As soon as the en-
anced price caused by the limitation of the supply, and
by that only, makes it profitable to produce, production
will be resumed. If the price continues to rise, production
will be still further stimulated, and capital will be attracted
into that branch of business, until the increased proportion
of supply compared to the demand again causes the price
to fall. But in all these cases it is the rise or fall of the
price that attracts or repels capital, and not the employ-
ment of capital that regulates the price. The idea that
cost of production regulates value proceeds upon the
supposition that the individual can control the market,
whereas in all ordinary cases it is the market that controls
the individual. In those exceptional cases where a single
individual has sucli power over the production of any
article as to be able sensibly to influence the market, he
can of course raise the pronts of that article far above the
usual commercial profits, simply from his power of keep-
ing competitors out of his line of business.
56. These considerations are sufficient to shew the
fallacy of the doctrine, that it is the cost of production
which regulates price or value. On the conti'ary, it is
generally the value an article is expected to have, when
Kroduced, that causes it to be produced. The diflference
etween the cost of its production and its value is called
OH THB APPLICATION OF THE LAW OF PRICE. 137
the profit^ and the course of a prudent man would be^ first
to calculate the cost of production of the article, then to
consider what would be its probable value when produced,
and if the difference between the two, or the profit, is
su£Scient to make it worth his while to produce it, he will
do so, if not, he should try to discover some more profit-
able operation. If the value of the article when produced
is only equal to, or less than the cost of production, he
must sell at a loss, and repeated operations of this nature
wiU end by ruining him. The history of all commerce
is but too full of examples of the value of articles falling
below their cost of production, and of mercantile enter-
prises which never pay their expenses. There is but one
way by which a producer can govern price by the cost of
production, and that is when he can obtain a command
over the supply, and limit it artificially, and not produce
more than the public can be made to buy at a particular
price. The Dutch acted upon this principle when they
conquered the Spice Islands in the Eastern Archipelago.
With contemptible selfishness, they cut down three-fourths
of the spice-bearing trees, and so artificially enhanced the
value of the remainder. It is also said that there is but
one mine in England which produces plumbago, or black
lead for pencils, and this T>eing in the hands of one pro-
prietor, he carefully limits its annual produce to force up
its price in the market.
57. The doctrine, that no change in the cost of production
will produce a change in value, unless it is accompanied
with a change in the relation of supply and demand, fur-
nishes a very simple solution of what J. B. Say declares
to be one of the most thorny questions in Political
Economy. He states the question thus : — " Wealth, being
compost of the value of articles possessed, how can it be
that a nation shall be just the more rich, as things are
there at a lower price?"* The problem, as far as we under-
stand it, is this, ^^ If wealth depends upon the value of
^Gonn D'Economie Politiqae. Vol. i. p. 371. Edit. Gillaumin.
138 ELEMENTS OF POLITIOAL ECONOlfT.
articles, how is it possible that a nation can be richer when
cotton goods are 6d. a yard, than when they were at 3s. 6d. a
yard ? The answer is very simple. Let us suppose that,
at any given time, cotton goods were 3s. 6d. a yard, and
there was only a certain number of people who could
afford to buy them at that price, but there were a great
many others who would buy them if the prices were reduced
within their means. Now, the question is, to discover what
reduction of price will enable any given increased pro-
duction of cotton goods to be bought. What reduction of
price, for instance^will cause the consumption to be doubled ?
jSTow, if by ingenious devices the manufacturers can diminish
the cost of production of the cotton goods to one fourth,
but no increased quantity is produced, we have already
shewn that no reduction in price will ensue. Hence, we
may say, that the value of the cotton goods, (e.^., what
people will give for them) is 3s. 6d., without reference to
their cost of production. Now, if the change in price bore
the direct proportion to the change in the relation between
supply and demand^ it would require the price to be re-
duced one-half before the consumption could be doubled.
That is, though a greater number of individuals might re-
ceive the convenience of having cotton goods, still the
total value of the whole quantity produced would still be
the same as it was before. But in practice this is not
foimd to be the case. Instead of requiring a reduction of
one-half in the price to ensure a consumption of double
the quantity, it is probable that a reduction of a fifth, or a
fourth in the price would do so. If a reduction of Is. were
effected in the price, it would probably quadruple the con-
sumption. Then the value of the total quantity consumed
would be 10s. instead of 3s. 6d. Consequently the total
wealth of the nation would be increased by that amount.
And as the price was still further reduced, the consumption
would proceed in a still more rapid ratio, in proportion to
the greatly increased number of persons who would find
the article within their means of purchase. A reduction
of the price from 3s. 6d. to 6d., instead of increasing the
ON THE APPLICATION OF THE LAW OF FRICB. 189
quantity consumed sevenfold, would probably increase it
a thousand-fold. That is, as the diminution in price pro-
ceeded in an arithmetical proportion, the quantity consumed
would increase in a geometrical proportion of a very hi^h
order. And the value of the totality of the article woiQd
proceed in a similar ratio. Thus^ though the value of each
individual yard was seven times greater in the former case,
yet the value of the total quantity produced would pro-
bably be at least a hundred-fold in the latter, and the
wealth of the nation is to be judged by the value of the
totalities, and not by that of each yard. This is universaUy
true. The value of the totality of the cotton manu-
factures of Great Britain is probably a hundred-fold now,
to what it was when the value of each piece was ten-fold
what it is now. So of books. The value of the totality
of book manufactures is now probably a hundred-fold
what it was when each separate book, being in M.S., cost
a hundred-fold as much. The only apparent paradox in
the case, lies in the ambiguous form of expression in which
Say has stated the question, because in the first part of
the sentence, ^^the value of the articles possessed," it mani-
festly means the totality of the articles possessed, in the
latter part it refers to the price of each individual article.
58. Persons who engage in trade must live by their
trade ; they must, therefore, necessanly charge their cus-
tomers such prices as wiU enable them in the long run to
support themselves out of the profits. Hence, when transac-
tions are very trifling in number and magnitude, they must
charge very high prices in order to enable them to live.
But when the transactions increase in magnitude and
number, they are enabled to reduce the profits upon each,
and lower their price. It is this circumstance tnat com-
pels small shopkeepers in rural districts to charge such
nigh prices for their goods, to the great indignation of
many well-meaning but unreflecting persons. It is not
uncommon to hear such persons exclaim against what
they call the extortionate charges of country shopkeepers,
quite forgetting that if the traders cannot make a living
140 ILEMEITTS OP POLITICAL ECOKOinr.
out of their business, they must give it up altogether, and
the people be totally deprived of the convenience.
59. It has sometimes happened that gentlemen,
having plenty of other means to back them, have esta-
blished rival shops for the express purpose of beating
down the prices of the country shopkeepers. The conse-
quence has been that the traders who had nothing but
their business to support them have been ruined^ the
gentleman in process of time either got tired of his whim,
or for other reasons abandoned it, and the germ of a
nascent trade in a district destroyed, a pregnant example
of the Spanish proverb, — " Hell is paved with good
intentions."
60. There can be nothing more mischievous or
injurious to a trade than for persons to interfere with it
who are not regularly engaged in it. Mr. Laing mentions
a very remarkable instance of this at Drontheim.* " I
was surprised on inquiring at the only bookseller's shop,
for a new testament in the Norwegian tongue, to find
that he kept none ; I thought at first he had misunderstood
me, but really found that he did not keep any of late
years. As he understood Grerman^ I asked him how in a
population of 12,000 people, the only bookseller kept no
stock of testaments and bibles; he said that country
booksellers did not find it answer, as the Bible Sociel^
in London had once sent out a stock which were sold much
lower than the trade could afibrd, and it was only after
the Society's bibles were sold that they could get clear of
what they had on hand ; hence, they could not venture to
keep any now. It is plain if any benevolent society were
to supply a parish with boots and shoes below prime cost,
until all the shoemakers in the parish had turned to other
employments, the parish would soon be barefooted, and
that they would do more harm than good unless they had
funds to continue the supply for ever. This bookseller,
a very respectable man, laid no stress upon the circum-
• Bosidence in Norway, p. 79. Traveller's Library.
ON THB AFFLICATION OF THS LAW OF PBICB. 141
Stance, but simply explained it as he might have answered
any other inquiry about books ; and a bookbinder, whom
I afterwards saw, gave me the same reason. Men of the
first capacity are connected with our societies for the
distribution of the scriptures, and it may well deserve
their consideration whether such distributions may not, in
the long run, do mor^ hann than good. If the ^ordinary
mode of supplying humau wants, by affording a fair
remuneration to those who bring an article to where it is
wanted, be invaded, they may be interfering with, and
stopping up the natural channel, by which society must
in the long run be supplied with religious books."
6 1 . Thus, is the science of Political Economy vindicated
by experience. There is nothing more certain to destroy
trade and commerce, and to augment the very mischief
complained of, and sought to be remedied, than an
irregular and capricious mterference with it. In 1775,
during a severe scarcity in France, the municipality of
Lyons and several others^ bought up com in the country,
and sold it at a loss in the city. At the same time, to
defray the expense of this operation, they imposed an
addition to the octroi, or the* auty which provisions pay
on entering the town. These measures only augment^
the distress, the market of the persons who were regularly
engaged in the trade was destroyed, they saw themselves
undersold, and when they introduced provisions they
were taxed for it.* During a scarcity in the year 362,
the Emperor Julian sold at Antioch, at a very low price,
422,000 modii of corn which he brought from Chalcis and
Egypt; this distribution destroyed the regular trade and
increased the distress.f The Roman Emperors were in
the habit of making gratuitous distributions of corn, the
consequence was that this greatly injured the regular
trade, and Rome was in a state of chronic distress. So
in France in 1789 a scarcity was apprehended. Necker
* J. B. Say. Traitd d'Economie Politique, p. 213. Edit Gillaamin.
t Gibbon. Gh. 24. Vol. m., p. 183. Murray's Edit., 1864.
142 ELBMBNTS OF POLITICAL BCOMOMT.
pompously announced that immediately on his becoming
minister, he hastened to obtain information as to the
produce of the harvest and the wants of foreign countries.
J. B. Say aptly remarks, what satisfactory information
could a minister obtain ? The mayor of a village could
not tell what quantity of com his own commune had
produced ; how, then, could a minister ascertain what a
vast kingdom had produced, and how much had been
sold. Arthur Young, who travelled in France in that
year, says that he was every where told that the harvest
was an ordinary one, and that as soon as Necker
announced in the National Assembly that the government
had bought up 1,400,000 quintals of com abroad, of
which 800,000 had already arrived, which it would ap|>ear
should have lowered the price of wheat, the price
immediately rose in all the markets of France.* In the
vear 1847 there was, as is well known, a severe scarcity
in these islands, owing to the failure of the potatoe crops.
In the county of Ross in Scotland, the distress was felt,
though not nearly to so great an extent as in Ireland, or in
many other counties, owing to the fortunate substitution
of the large farm system for the cottier system, f There
were abundance of meal dealers in the county ; neverthe-
less at a special county meeting, the gentlemen of the county
determined to take measures to obviate the apprehended
scarcity, and provide meal. Their intentions no doubt
were very benevolent, but this injudicious interference
with the ordinary course of trade only resulted in bringing
a considerable loss on themselves^ and making meal dearer
than it was before. Thus, the true principles of science
manifest themselves in all countries and times.
62. It is because that no single trade is sufficient to
occupy a man's time or gain him a livelihood, that dealers
• J. B. Say. Cours d'Economie Politique. VoL n., p. 184. Edit.
Oillaumain.
*{- See my letter to the Board of Supervision in Scotland, '' On the
EffectsoftheEstablishment of aPoorhouse in Easter Ross,'' printed in the
Appendix to their Seventh Annual Report to Parliament, 1861.
ON TH£ AFFLICATION OF 1SS LAW OF PRICB. 143
in country districts^ and in the commencement of trade,
are obliged to unite so many different kinds of business.
At a small watering ^[ace in England we saw the prospectus
of a tradesman, who united thirty-six kinds of trade. As
population and wealth increase there are more demands
m each of these different kinds of business, and the trader
finds he can gain a living by confining himself to a fewer
number. At last, every one confines himself to one
business alone, being able to make a livelihood out of it.
Thus, also, in the rise of the arts, Michael Angelo was
sculptor, painter, architect, and engineer. Gradually these
employments disintegrate. Not only, in time, each man
confines himself to a sin^e trade, but even to one small
department of a trade. Each department of trade sepa-
rates itself into a distinct employment. This is also
universally the case in the sciences, as soon as they attain
a certain magnitude. Not only, in modem times, do men
devote themselves to a single science, but in many cases,
a single branch of that science is sufiScient to employ a
lifetime. This is that principle of the separation of em-
ployments, or the " division of labor," which Adam Smith
nas obtained so much fame for explaining, but which was
perfectly well known and observed long before his time.*
At Venice, so early as the 12th century, it was forbidden
to every workman to employ himself in more than one
sort of trade, in order to make him bring that to greater
perfection. f And the same law was enacted by Philip le
Bel in France.
68. Hence, we see that, when transactions are few and
paltry, prices, and the profits upon each, must be high^
and that a multiplication of transactions, and an increase
of their amount, has a tendency to lower prices. Nowhere
are rents so high as in the city of London ; and nowhere
are prices for ordinary goods so moderate. Goods in the
city are in many cases twenty-five per cent, cheaper than
* By Xenophon for example,
f Blanqui Histoire de rEconomie Politique, Ch. xx.
144 ELEMENTS OF POLITICAL ECONOliT.
in the suburbs, and this is not entirely the result of com-
petition, which is equally active in the one as in the other,
out is the result of the great numlyr and magnitude of
their transactions. The profits upon each transaction are
much less than a country shop-keeper receives ; but it is
found that a small profit upon a large and rapid circula-
tion of commodities loads much faster to opulence, than a
large profit upon a slow and small circulation. Instead
of the grasping rapacity which formerly used to make
as great a profit as possible upon each transaction, modern
experience demonstrates that the true axiom of trade is
^mall profits and quick returns.
64. It is unquestionably true, that a very rapid sale,
accompanied by an unlinuted supply, has the effect of
lowering prices, even where the cost of production is
increased. As a familiar instance, we may take the fares
of cabs in London and the provinces. Cabs are sixpence
a mile in London, but much higher in all provincial
towns. Now, the cost of maintaining cabs, feeding horses,
rent of stables, &c., is much higher in London than in the
provinces. And, therefore, according to the notion that
cost of production regulates value, the fares ought to be
much higher. But the fact is, the demand for cabs is much
greater in London than in the country. A London cabby
gets many more fares than bis provincial brother. Thus
the returns are made so much more quickly, that a much
greater amount of profit is made in the same time, and
fares adjust themselves to that.
65. Bacon saw clearly, what has been far too much
overlooked by writers on Political Economy, that the
frequency of returns is of far more consequence than the
magnitude of each case of profit. ''The proverb is true
that light gains make heavy purses, for light gains come
thick, whereas great come but now and then."* In fact,
a great deal of misconception has arisen from the want of
always considering that profits must always be reduced
* Essays ; Of Ceremonies and Respects.
ON THB AFFLlCATIOtl 0^ Tfifi tulW Ot PRICE. 146
to the standard of the year. Profits must always be esti-
mated at so much per cent, per annum. In common
parlance interest is always reduced to this standard^ and
no confusion arises ; but this is scarcely ever done with
regard to profit, and hence much misconception arises.
Adam Smith uses the expressions '^ rate of interest " and
^' rate of profit,'' without seeing that both rates must be
reduced to the same standard. The whole of Ricardo's
chapter on profits is based upon this most palpable fallacy*
His doctrine is that profits depend purely on wi^es.
They fall as wages rise, and rise as wages fall. Mr. J. S.
Mill adopts this conclusion, with a verbal alteration, which
no doubt more truly expresses Ricardo's meaning than
his own phrase. Mr. Mill says* that they depend on the
cost of labor J i«e., the efficiency of the result compared to
the cost of it
66. Ricardo's error and that of his followers is in
confounding the actual profit with the rate of profit — ^the
absolute quantity with its raie. Now, it happens that
the rate of profit on each transaction may be the greatest,
where the actual profit is the least. Thus, if a man were
to make a profit of 50 per cent, on one transaction, that
would be a high profit. But if he only made one trans-
action in the year, he would not increase fast in opulence.
His rate of profit would be 50 per cent. But suppose
that he only makes a profit of 5 per cent, on a transaction,
but makes that profit in one day, then the rate of that
profit is upwards of 1,700 per cent, per annum, and if he
could make a transaction at that profit each day, his
actual profits would be upwards of 1,700 per cent.
Hence, the rate of profit would be very high, but the
actual profit would be very low. And if the trader re-
invested the profits as they occurred as capital, his rate
of profit on his original capital would increase at compound
interest, and be enormously greater. Now, if transactions
are effected very slowly, we have before shewn that the
* Principles of Political Economy. Vol. i., p. 509.
K
146 ELEMENTS OF FOLITICAl!. ECONOMTw
actual profits on each must be very high, and circulation
will not be brisk, consequently wages will not be high ; but
if the circulation increases and transactions are efiected
with much greater rapidity, it is an infallible certainty
that wages will rise. The actual profit upon each trans-
action will diminish, but the rate of profit will enormously
increase. No where are wages so high as in the City of
London, no where are the actual profits on each transac-
tion so small, and no where is the rate of profit so great^
or the increase of opulence so fast.
67. This doctrine of the rate of profit has been most
grievously misunderstood. Mr. Mill says,* " The cost of
labor, then, in the language of mathematics, is a function
of three variables, the efficiency of labor ; the wages of
labor, meaning thereby the real reward of the laborer;
and the greater or less cost at which the articles com-
{losing that real reward can be produced or purchased,
t is plain that the cost of labor to the capitalist must be
influenced by each of these three circumstances, and
cannot be affected by any others. These, therefore, are
all the circumstances which determine the rate of profit^
and it cannot be in any way affected except through one
or other of them.'' To which we reply, that a very much
more effectual way of affecting the rate of profit is to
increase the rapidity of sales. A profit of 6 per cent,
made in one day is three times a greater rate of profit
than 50 per cent, made in one month. When a man has
bought goods and sold them again, he is said to tarn aver
his capital. Now, every trader knows that what conduces
most to his opulence is not making a large profit upon a
few transactions, but upon turning over his capital as
often as possible, and that he will probably get rich much
faster where his profits are the smallest. These considera-
tions will be illustrated more fully hereafter^ when we
come to speak of interest.
68. The formula we obtained explains a very well
♦ The Principles of Political Economy. Vol. i., p. 510.
ON THE AFFLICATIOK OF THB LAW OF FBICE. 147
known phenomenon in the change of prices, that a small
variation in the quantity of com causes a greater variation
in the price of bread than a similar variation in the quantity
of any other produce causes in its price. Bread is an
article of prime necessity to mankind, whatever else fails
they must have that, and they cannot do without it for
any length of time ; consequently, as the supply dimin-
isbes, and people begin to feel the want of food, not only
is it a service of greater intensity to supply them, but the
power of the seller greatly increases over the purchaser,
as the former can hold out much longer than the latter.
The necessity of the purchaser is much greater than the
necessity of the seller, and of course the sellers will have
acuteness enough to take advantage of their power, and
so the price of bread is rapidly niised. On the other
hand, if there be a superabundance of com, the power of
the purchaser to eat is not increased in proportion. He
must have a certain quantity to eat, however scarce food
is; and he cannot eat more than a certain quantity how-
ever abundant it be, consequently, as the quantity of com
increases, and only a certain quantity can be consumed,
it is every producer's wish to have his own disposed of,
and his eagerness to sell increases the power of the pur-
chaser over him in a very rapid degree, which causes a
great £Edl in the price.
60. A diminished quantity in the supply of wool
does not cause, by any means, so great a variation in the
price of cloth as in the case of com, because it is no such
great necessity for a man to have new clothes as food.
If times are hard, and he must economise, he may deny
himself new clothes for a long time, and consequently
the seller of clothes has by no means such a powerful
hold over him as the seller of food. On the other hand, an
increased supply in the quantity of wool does not cause
such a diminution in the price of cloth as an increased
supply of com in the price of bread, because when people
are well to do and thriving, they are apt to indulge them-
selves in new clothes before most other things, and they
K 2
148 mSEUlSHVIB OF POLITICAL ECONOMY^
can increase their consumption of clothes to a much
greater degree than they can their consumption of food,
and this keeps up the demand for them, and prevents
their price falling.
70. Com is an excellent example to show the fidlacy
of the maxim that price depends upon the cost of pro-
duction. When the farmer has produced com he does
not regulate the price of it by the sum it costs him to
produce it, but he endeavours to obtain as high a price
as he can squeeze out of the necessities of the public.
The farmer sells his corn to the miller, who bestows his
industry upon it, and sells it as flour to the baker. The
baker bestows his industry upon the flour, and sells it as
bread to the public. Now, it is evident that the cost of
the article at each stage of these operations is the sum of
the cost of all the preceding ones, together with the price
which the holder of the com may set upon his own in*
dustry, and the ultimate price to the consumer, to enable
all these operations to be conducted permanently, must be
ctt least the sum of the cost of all the previous operations.
But no one will say that is its instantaneous value. On
the contrary, it is notorious that each holder at every
«tage does all he can to aggravate the difference between
the cost of production and the instantaneoujs value. The
cost of production is merely an inferior limit, below which
the instantaneous value must not fall, if the business is to
be self-supporting. The farmer seeks every opportunity
to raise the price of com to the miller— the miller strives
to buy as cheap as he can from the farmer, and sell as
dear as he can to the baker, and the baker tries to buy
his flour as cheap as he can from the miller, and to sell
his bread as dear as he can to the public. And the power
of the holder at each stage of the operation is lunited
and controlled by the necessity he has to sell, either on
account of the depreciation of the article itself by time
or by his other necessities ; but limited and controlled by
these circumstances, the operations of each are wholly
independent of each other.
ON THB APPLICATION 07 TBE LAW Ot PSICE. 149
71. Both these cases of com and wool^ shew how the
instantaneous value depends upon the ratio of supply and
tlemand, but they do so in different degrees. Com is,
probably, the most sensitive of any article, from the mag-
nitude of the interests involved in it, and the constant
necessity that exists for transactions taking place in it.
There can be no better subject to exhibit the extreme
sensitiveness of value to the influences of the instant, with-
out reference to anything else. A few fine or wet days,
or a passing rumour in Mark Lane, may produce a very
material alteration in prices. It would be easy to shew
that the very same considerations apply to every com-
modity, though not in so perfect a degree. Though the
prices, thererore, of all commodities are governed by the
same principle, they are affected in very different pro-
portions ; and the degree of variation produced in each one
by an alteration in the ratio of supply and demand, de-
pends upon its own peculiar circumstances, which it would
be manifestly impossible to discuss here.
72. The description of sales we have hitherto been
considering are all volimtary, and we have seen how the
rule we obtained acted in each of them. But there is
another very large class of sales, which frequently occur^
and our rule would be wholly wanting in that generality
which we claim for it, unless it also accounted for them.
The class we allude to includes forced sales of all descrip-
tions, where, imder the pressure of particular circum-
stances, persons are obliged to part with their property.
Such, for instance, are all sales of bankrupt stock. It is
well known that a forced sale is almost universally a loss
to the seller, and that he very rarely gets what, under
other circumstances^ would be the ordinary value of the
article he parts with. And this is simply because on ac-
count of his necessity to sell, his power over the pur-
chaser is diminished, he must tempt the purchaser to Duy
by giving him an advantage in doing so. If the pur-
cnaser does not much requu^ the article, the service is
one of small intensity, and the seller must part with his
150 ELEMENTS OV POLITICAL ECOVOMT.
property at a sacrifice. Thus, the power of the pur-
chaser increases over him very rapidly, and the price
diminishes in proportion. On the other hand, many per-
sons sometimes attend the sale, and bid against each other,
and so raise the price, because, as the number of competi-
tors to purchase increases, the power of the seller over
each of tliem begins to revive, and it may happen, that if
the competition is very keen, the article may be sold at
its full value.
73. We have in the preceding chapter carefully dis-
tinguished between the expressions depreciation and dimu
nution iii value; the former being internal, and the latter
external. Under the operation of the principle of demand
and su])ply, an article which may be greatly deteriorated
in quality, and therefore depreciated^ may from the great
demand for it, and its scarcity, be greatly increased in
value. A familiar, but extreme instance of this, is what
sometimes occurs in besieged towns, when the vilest food
often sells for fabulous prices. So also the price of lod^ngs,
during the assizes, races, or any public festival. A second-
hand book may be considered as depreciated in a com-
mercial point of view. It mattei-s not that it be perfectly
clean and good in every respect, if it has been the property
of a purchaser for a day, the charm of novelty is gone,
and it loses greatly in selling* value. But if it be a work of
celebrity and scarce, a second-hand copy will sometimes sell
for more than the original published price. An instance of
this was the first edition of Professor Peacock's Treatise ou
Algebra. It was soon out of print, but so great was its
fame, that well worn second-hand copies cost more than its
price when new. In 1707 a second-hand copy of Newton's
Principia sold for four times its original price. We shall
find that the difference between depreciation and diminution
in value of the currency is of great importance in a future
part of the work, and we cannot give a better illustration
of it than an answer by one of the witnesses before the
Bullion Committee:* "Are not the Bankers in the habit
• W. Merle, Esq., Bullion Report Appendix, pa^ 54.
ON THE AFFLIGATION OF THE LAW 09 PRICE. 151
of giving a premium for sUver? • • • • I have given
£101 for a quantity of coin worth about- £60 if it was
melted down, though passing for £100, but I have given
that premium, bad as it is, particularly at harvest time ; it
is always veiy scarce then."
74. We have seen that Profit is in all cases the
object or the inducement to production, and when profit
ceases, production ceases. 13entham either originated or
did much to propagate a doctrine that production is limit*
ed by capital. This doctrine is founded upon that
rudimentary idea of capital we have described in the
preceding chapter. But when we look at the extended
meaning of capital, the doctrine is scarcely intelligible.
It may possibly be true in some remote and indefinite
extension of production, but for all practical purposes
this proposition is useless. For all practical purposes
production is limited by profit. There is no enterprise
in this country for which capital cannot be found, and
the way to curb production is to destroy profits. The
fact is that capital, which includes credit and industry,
is so redundant in this country, that there is a constant
tendency to over-production^ which requires to be curbed
in time. The difficulty in this country is not to find
capital, but to discover profits. Whenever a profit is
to be made, there will always be found abundance of
capital to make it.
75. As a general proposition it is no doubt greatly
to the advantage of the general public that things should
be abundant and cheap. But there is a very manifest
limit to this. It is not good for the permanent interests
of the pubUc, that the prices of commodities should
fall below the cost of tlieir production, because if thev
do so the producers will be ruined, and the pubUc will
either want the article altogether, or the price may
afterwards become high, owing to the scarcity of the
thing. When the market price of a commodity falls
below its production, it is called Over-production, and
it shews that further production should be curbed* It
152 XLSKEKTS OF POLITICAL SCONOlCr.
is manifestly the best for all parties ihat the prices
should just be so low as to leave the producers a fair
average profit. It would not be for the permanent
interest of the people, that the price of com should be
so low that the producers of corn would be ruined.
And it is highly desirable for the general benefit of all
parties, that if such a misfortune should threaten, as
timely notice of it as possible should be given, to enable
people to accelerate consumption and curb production,
and arrest the calamity. On the other hand if tiiere is
danger of an unusual scarcity, it is also equally for the
benefit of all parties, that timely notice of it should be
given, so that not only consumption may be retarded,
but production stimulated — in each case, in order to
restore the usual equilibrium between production and
consumption, as quickly as circumstances will permit.
76. We have observed, that the price of an article at
any given time, depends upon the ratio of supply and
demand. A fluctuation in price, then, arises from a
change in these proportions. When the supply of an
article is diminishing as compared to the demand, the
price rises, the article rises in value compared to money,
and money falls in value, compared to the article. When
the supply is increasing faster than the demand, the
phenomena are reversed, then the price falls, the value of
the article falls compared with money, and money rises
in value compared to the article. These changes in
price especially in articles of prime necessity, are very
inconvenient. As all commercial transactions are esti-
mated in money, all profits and losses are reckoned
simply by the difference between the money expended on
producing a result, and the money received for it, it
would no doubt be much more convenient for all parties
if prices did not change. These fluctuations in price
being felt to be inconvenient, very inaccurate conceptions
on the subject became prevalent, and it came to be
considered that these variations were the evil, and many
attempts have been made by various laws, in nearly
ON THE APPLICATION OF THB LAW OF PBICE. 158
every country^ to fix prices at a uniform rate. But the
fluctuation o^rices is not the evil, it is only the sign
of the evil. The real evil is the change m the proportion
between supply and demand. When the supply is
greatly diminished, and the price rises very high, it is
not the high price which is the real evil, but the scarcity
of the article. When the supply is excessive, and the
price fSftlls very low, it is not the low price which is the
evU, but the over-production of the article. A fluctua-
tion in price so far from being the evil, is, in fact, the
great corrector provided by nature to remedy the
evil. When the evil is scarcity, a rise in the price not
only warns people to be economical in the consumption
of the article, but, by the hope of profit, attracts it from
other places, where it is more abundant, and so provides
the only natural remedy that is possible for a scarcity,
namely a more abundant supply. A rise in prices is
a signal of distress to attract relief; it is a beacon to
warn consumers of the danger of an exhaustion of the
article, and it is the only beacon they can have. It
was formerly the idea, that wicked farmers and corn-fac-
tors, were the sole causes of high prices, and whenever
they occurred, it used to be the fashion to wreak the
popular vengeance upon these men, who were, in fact, the
greatest benefactors to the public. And such ideas are
not wholly eradicated from the vulgar yet. The
Patriarch of modem Political Economy, says with weighty
wisdom,* *^Ce que Ton appelle la cherfe est Tumque
remede k la cherts : cherts foisonne;" an immortal
truth, which it would be well if the rulers of his country
in the 19th century would lay to heart. On the other
hand, when the supply is too abundant, so that prices
£sdl below a remunerative level, a fall in the price gives
warning to producers to diminish their productions, in
order that the value of their produce, may not fall still lower,
and it repels those articles from coming where they are
♦(Euvres de QuesDay, p. 66. Edit Gillauniiik
154 ELEMENTS OF POLITICAL SCONOHr.
nlrendy too abundant. Paradoxical, therefore, as it maj
a]>]K'ar, a rise in ])riccs is a warning for the ultimate
bonelit of consuiuei's, to prevent themr uining t'leni^olvos
by too rapid a consumption ; a fall in prices is a wanung
for the ultimate benelit of producers, to prevent them
ruinhig' themselves by over-production. Thoug'', I le
many other medicines, these changes are chiefly distastefbl
to the very ]>ersons for whose ultimate benefit they are.
The fluctuation in price is exactly identical in pnnciple
with tlie governor of the steam engine. When steam is
rushing in in too great quantity, the governor is adapted
by macrhinery so as to cut oft* the supply; when the
sun]>ly of steam is too suiall^ the governor opens the
valve and admits more. Consequently a chan^ in the
veh)city of the governor is the corrector of the evil,
which is a change in the uniform quantity of the supply
of steam. Now, a fluctuation in price acts exactly in a
similar way to the governor of the steam engine. It is
the great natural corrector provided to preserv? ths
uniformity in the proportion of the supply, compared to
the demand. It is the great regulating power of com*
merce to guard against the evils of scarcity and excess.
And those who interfere with the course of nature by
attemptint; to fix prices, do exactly as foolish a thing, as
if they were to attempt to force the governor to revolve
with uniform velocity.
77. We thus see the truth more clearly of what was
said in ])aragra])h 74, that the principal way to encourage
production is by the increase of profits; the proper and
natural way to curb production is by the annihilation of
profits^ a ])rincij)le of the first importance in practical
l*oIiti(!aI Economy, as will l>e shewn more fully hereafter.
78. In the observations we have hitherto made, we
have tjicitly assumed that the cun'cncy was an invariable
standard o^ value, and that the changes in price were caused
solely by the action of a change in the relative demand and
su])ply of the commodities themselves ; nor in the examples
we have given would there be any error in doing so,
OK THE APPLICATION OF THE LAW OF PRICE. 155
because they were all supposed to be transacted in a very
short time. But if we compare prices at long intervals or
periods of time, there are other causes of a more compli-
cated nature, which come into play, and must be taken
into consideration, which arise out of a variation in the
value of the currency itself. It would be premature here
to enter into any discussion of the variation in prices
alleged to be produced by the issues of Banks, as that
would anticipate the consideration of the credit system,
which we have not yet come to. We shall not then, at
present, speak of any changes m the value of the currency
except those that would occur under a purely metaUic
system.
79. The first requisite of any substance used as a
currency is steadiness in value, and just as that steadi-
ness approximates to invariability, the more desirable it
becomes. The currency being not only the evidence of
services due to the possessor of it, but also the measure of
their amount, it would manifestly be of great advantage
that the same amount of gold should always be able to
purchase the same amount of service, that is, that the value
of the currency should be uniform. To have a currency
constantly changing its value would be as inconvenient as
to have tne length of the yard measure changing from day
to day, or to measure time by a clock which was constantly
changing its rate of going. These two cases are entirely
within our own control; we can absolutely fix the length
of the yard, and our mechanism is so perfect that we can
almost attain perfect accuracy in our measure of time, and
even if that should fail, we can always detect the minutest
imperfection by the uneiTing clockwork of heaven. But,
imfortunately, the case is far different in the measure of
value, which is constantly liable to undergo a change.
80. As the exchangeable value of the currency and
the debts it represents, or the services it can command,
follows exactly the same rules as the relative values of any
other commodities, a change in the value of the currency
may be attended with very serious consequences. In the
156 ELEMENTS OP POLITICAL ECONOMT.
operations of buying and selling it may be of comparatiTely
sir all importance, because these take so short a time to ue
c : mpleted that no perceptible change can occur. But it
often happens that debts are contracted which are not
intended to be discharged for long intervals of time, such
as mortgages on landed property, and the changes in the
value of the currency between the times when the contract
was made, and the time when it has to be fulfilled, may
have very ruinous consequences to individuals. Thus, the
owners of estates frequently borrow large sums upon
agreeing to pay interest for their use. Now, if any serious
duninution in the quantity of the currency takes place, it
is evident that the commodities I'alsed from the land which
enable the landlord to purchase the gold which he has
promised to pay, may not be able to purchase so much of
it as they might have done when the contract was made^
and then he may be ruined, although the commodities
themselves are as useful as ever they were, and their
exchangeable relation with other things, except money,
may not be altered. In other words, his rents will fall
while his debts remain the same. But if a great increase
takes place in the quantity of the currency, his commodities
will purchase a greater amount of it than they could before,
and as he only promised to pay a certain quantity of gold,
he has more to spare after ne has fulfilled his contract.
That is, his debts remain the same, and his rents will rise.
The greater part of the community are included in the
classes of debtor and creditor, and their interests are
always opposed to each other ; it is always the interest of
the former that the quantity of the currency should
increase, and of the latter that it should diminish, while
true justice can only be done between them when the
measure remains invariable.
81. But these inconveniences, great as they are, are
by no means the most important that may occur in modem
times from a serious alteration in the value of money.
Private contracts of debt are generally not for a longer
period than a few years. But, since the last great altera-
ON THE APWICATION 0* THB LAW 0^ PRICE. I5t
tion in the value of money, by the discovery of the mines
in America, a new species of contract has sprung up of a
far more important nature. And these are the public
debts of the various states of Europe. These debts are
contracted in perpetuity. It is the very object of these
debts that the State should never be compellable to pay
off the principal. If an individual wishes to realize his
debt, all he can do is to discover some one else who will
buy it from him, and the price is a matter of private
arrangement between these parties. All that the State con-
tracts to do, is to pay a certain definite amount of bullion
in perpetuity to the holder of the stock. Now, if the ex-
changeable value of money undergoes a very serious
change, either one way or the other, it may have very
serious effects, either upon the state itself, or upon the
property of individuals. If the value of money rises to
a great extent in consequence of a very great scarcity of
the substance of which it is composed, the public debt
will become a much heavier burden on the industry of the
nation than it was before. Although the nominal amoimt
may be the same, yet the spirit of the contract will be
entirely altered. Some writers assert that this happened
at Rome in the second Punic war. The public debts
of Rome were contracted in copper. When they were
contracted, copper was an extremely abundant metal in
Central Italy. It is asserted, however, that it afterwards
became extremely scarce, so that the spirit of the contract
between the State and its creditors was entirely altered,
to the disadvantage of the former. Under these circum-
stances the as^ the Roman unit of value, was reduced
from a lb. to an ounce, and some writers maintain this
reduction was only proportional to the increased value
of copper, and was, though in appearance a bankruptcy,
only an equitable arrangement between the two. We
cannot inquire here, what foundation there may be for
this opinion, but it is perfectly possible in the nature
of thii^. On the other hand, the material of the currency
may become imexpectedly and remarkably abundant, so
158 ELEMENTS OF POLITICAL ECONOICT.
that it may undergo a serious diminution in exchangeable
value, and then of course the State will gain, and the
creditors will lose. There is no doubt whatever that
these changes in the value of money do occur in course
of time, and under a system that contracts to pay a definite
amount of bullion in perpetuity, it must happen that in
the lapse of time the equity of the original contract is
departed from, to the prejudice of one party or the other.
82. When we said that prices dependeid in every in-
stance on the relation between the supply and demand,
we may appear to have alluded only to the article itself^
and to have considered the money as a fixed quantity.
Nor is there any real error in our argument from doing
so, because the variations in the real value of money are
extremely slow, and the variations in the value of commo*
dities are extremely rapid. So that for short periods no
error whatever arises in considering the value of money
as fixed. Just as in astronomy the changes of the position
of the heavenly bodies, which are at a very great distance
from us, are barely perceptible after long continued obser-
vations, and they may be used to serve as standard to
note the changes in position of those which are compara*
tively speaking close to us — such as the moon and plsmets.
And the former are termed " fixed," though in reality it
is known that they are all in rapid motion. So for short
periods, the value of money may be considered as fixed,
without material risk of error ; and changes in the value
of money may be compared to the secular variations of
the heavenly bodies. Now, it is a question of very con-
siderable interest to inquire what are the circumstances
under which an alteration in the value of money can take
place, and whether there is any danger of the prodigious
supplies from Australia and California producing the same
changes as the discovery of America did.
83. Lord Lauderdale has stated that in regard to the
exchangeable relations of two quantities in reference to
each, assuming one of them to be fixed for the time being,
that there are four causes which will influence the ex-
ON THE APPLICATION OP THE LAW OF PRICE. 159
changeable relations of the other towards it. It would
be subject to an increase of its value from —
(1.) A diminution in quantity. (2.) An increase
of demand.
To a diminution of its value from —
(3.) Increase of its quantity. (4.) A diminution of
demand.
And as the same principles are true with respect to
the other quantities as well, it appears that there are
eight causes which may produce an alteration in the
exchangeable relations of quantities. It is quite impos-
sible to have stated the matter better and more compre-
hensively, than Lord Lauderdale has done. Ricardo
admits* " this is true as regards monopolized commodities,
and indeed of the market price of all other commodities,
for a limited period," If Ricardo had been properly
trained in science, he would have seen that it is true of
all commodities at all periods, and he would never have
formed the erroneous system which he has done.
84. This doctrine of Ricardo's, that the laws proposed
by Lord Lauderdale are true as regards monopolized
commodities, and indeed of the market price of all other
commodities for a limited period, which is also adopted by
Mr. Mill, who says,f "Money is a commodity, and its
value is determined like that of other commodities,
temporarily by demand and supply, permanently, and on
the average, by cost of production," is a most manifest
breach of the Law of Continuity. To say that at all
other points in the range of prices, they depend upon one
law^ and at a single point upon a totally different law, is
most plainly erroneous. Which is the exact point at
which this change in the regulating law takes place?
Because prices may approach very nearly to the cost of
* Principles of Political Economy and Taxation. Ch. xxx. p. 464. 3rd Edit,
f Principles of Political Economy. Vol. ii. p. 10.
160 ELEMENTS OF POLITICAL ECOKOBIT.
production, and yet differ. And where is the exact point
at which this change in the law takes place? So that on
the point on either side of it, we change from cost of
production to supply and demand ? But, in fact, we have
shewn that in no two cases is the cost of production the
same. It is perfectly plain that it is the law of supply
and demand at every point, and at every time, and it is
merely that, when competition is unlimited, the supply will
be adjusted to the demand, so that price will usually average
about the cost of production. If, as Ricardo admits, the
prices of all commodities are at all times governed by
supply and demand, what other times can there be, when
they are governed by cost of production ?
85. Dr. Whewell, gives an example of a breach of the
law of continuity which is pertinent to the present case.
He says,* "The Aristotelians made a distinction between
motions according to nature, as that of a body falling
vertically downwards, and motions contrary to nature, as
that of a body moving along a horizontal plane; the
former they held became naturally quicker and quicker,
the latter naturally slower and slower. But to this it
might be replied, that a horizontal line may pass by
gradual motion, through various inclined positions to a
vertical position, and thus the retarded motion may pSiSS
into the accelerated, and hence there must be some in-
clined plane, on which the motion downwards must be
naturally uniform, which is false, and therefore the dis-
tinction is unfounded." The same fallacy is apparent in
the doctrine of Ricardo's above quoted. There is no
point at which the one law passes into the other.
86. A thorough apprehension of this Law of Con-
tinuity will be found to be of great importance in future
parts of this volume, and Dr. Whewell's remarks are
strikingly applicable.f "The evidence of the law of
continuity resides in the imiversality of those ideas, which
♦ Phil. Ind. Sc., Vol. u. p. 413. 2nd. Edit.
i Ibid. p. 415.
ON THE APPLICATION OF THE LAW OF PRICE. 161
enter into our apprehension of Laws of Nature. When
of two quantities, one depends upon the other, the Law
of Continuity necessarily governs this dependence. Every
philosopher has the power of applying this law, in pro-
portion as he has the faculty of apprehending the ideas
which he employs in his induction, with the same clear-
ness and steadiness which belong to the fundamental ideas
of quantity, space, and number. To those who possess
this faculty, the law is a rule of very wide and aecisive
application. Its use, as has appeared in the above ex-
amples, is seen rather in the disproof of erroneous viewsy
and in the correction of false propositions^ than in the in-
vention of new truths. It is a test of truth, rather than
an instrument of discovery." We merely quote this
passage here, and shall shew its utility hereafter.
87. Now, these rules were completely applicable to
the exchangeable relations of bullion and other com-
modities, while bullion was considered merely as a com-
modity. But when the conception of money was in-
troduced, and bullion was the substance appropriated to
the purpose of money, changes of a veiy subtle nature
necessarily took place. Because bullion in the form of
money was then appropriated to represent debt, and debts
and the bullion which represents them, have exchangeable
relations, just in the same way as any other two com-
modities. The chief purpose that gold bullion is put to,
is to make money, and the use of money is to represent
debt. Consequently, if the quantity of money always
varies in exact proportion to the work it has to do, if it
always varies exactly as the quantity of debt, no change
in the value of money takes place whether its quantity
be diminished or increased. On the other hand, if it does
not vary in this proportion, a chatige will necessarily take
place. Now, in former times, when industry was com-
paratively speaking lethargic, and communication be-
tween places was slow and expensive, and even dangerous,
there might very well be in one place a great accumula-
tion of money without being able to difiuse itself over a
L
162 ELEMENTS OF POLITICAL ECOKOKT.
great extent of country, and a considerable diminution in
its value might occur there. But even in those days, it
is certain that a very great extension of industry took
place in consequence of the importation of the precious
metals from America. All authorities agree that the fall
in the value of ffold was by no means proportional to
its increased quantity. J. B. Say says that the increase
in quantity was twelvefold, but the diminution in value
was only sixfold. And this diminution in value took a
very long period to effect. At the present day there is
no reason to fear any such result. Even supposing that
the supplies of gold continue as plentiful from Australia
and California, for a very long series of years as they are at
present, the colossal commercial entemrise of the present
age, will be able to absorb them all. The rate of interest
at the present day shews the tension on Capital. In
former times a dimmution in the value of money would
very soon manifest itself in a change of i)rices, because
in those days, the owners of the gold kept it in thdb* own
Sossession, and exchanged it directly for commodities,
(ut in modem times gold is not kept m the possession of
private individuals, an unusual quantity of gold is sure
to be deposited in Banks, and the mamfest consequence
of this is to cause a diminution in the rate of interest. In
modem times, it is perfectly indisputable that the first
effect of a great influx of capital is a great diminution in
the rate of interest. This was particularly shewn in 1824,
when the plethora of capital was so great, that the Scotch
Banks gave no interest on deposits; again, in 1844^ an
immense accumulation of capital took place, and the
discount on good bills fell to If per cent. Now,
though no doubt a great increase of capital might ul-
timately affect prices generally, or the value of money,
yet the first effects, by the modem system of trade, are
to lower the rate of interest, but every lowering of the
rate of interest at the present day, calls into existence
immense quantities of enterprise. And even if there
should be no employment for it in England, it is im-
ON THE AFPUGATION OP THB LAW OP FBICfi. 163
mediately difiiised over the continent and the whole
civilized world. Every where there are gigantic enter-
prises ready to start into existence, the moment that
capital can be had on reasonable terms; immense
rwlway schemes throughout the whole civiUzed world,
canals, steam navigation^ &c. ; new continents are rising
into powerful empires; everywhere a demand for
commercial enterprise; barbarous empires have to be
civilized by railroads, and increasea means of com*
munication. Hence, not only is the demand for capital
immensely increased, but the area of its difiusion is
immensely extended. And the quantity of water which
may produce a serious alteration in the height of a pond,
will have no perceptible influence on a lake^ or a sea.
There does not seem, therefore, to be the least fear of the
augmented supplies of gold from these quarters, how-
ever surprising they may be, producing any real alter-
ation in the value of gold as money, though it is very
possible, and we believe it to be actually the case, that
the comparative value of gold with the other metal, which
is extensively used for the same purpose, namely, silver,
has undergone a variation.
88. Gold and silver being used in all civilized com-
munities as the measures of value, it is not unusual for
persons who are not sufficiently precise in their language
to call them the standard of value. But this latter
expression is certainly incorrect, as a standard means an
invariable measure, which is capable of being defined and
fixed, as the measure of length, weight, and time. These
are capable of being fixed once for all, because they are
certain portions of the quantities themselves ; but value
depends upon the ratio of quantities, which by the very
nature of things it is impossible to control, and the actual
alteration in the quantities of the precious metals has
materially altered theirvalue at different periods of history.
89. Many political economists perceiving that the
precious metals could not be accepted as the standard of
value, have endeavoured to discover some product which
l2
164 ELEMENTS OF FOLinCAL EC0H0M7.
miglit serve as a better one, and some of great eminence
have selected wheat, but this will not stand the test of
examination.
' 90. If wheat were allowed to bear its natural price^
by which we mean its price when left to the free competi-
tion between buyer and seller, in the market of the worlds
it might perhaps lead to results of great interest and value.
But with scarcely any exception the trade in corn has never
been free and unfettered, either in England or in any
country in Europe. Either there have been laws to en-
courage exportation or to prevent it, or to encourage
importation or to prevent it, which have always exercised
certain influences which it is absolutely impossible to ascer-
tain, and yet which it would be necessary to disengage
before we could set up wheat as a standard. An inspec-
tion of a table of prices of wheat for many hundred years
will shew how unfit it is for such a purpose. In no article
whatever are there such violent fluctuations in price either
m long periods or in short ones. Wheat, moreover, is
clearly a manufactured article ; by skill and the application
of science, wheat may be grown much cheaper in one place
than another, and at one period than another.
91. It would be far too long to trace here the various
alterations in policy which have taken place in England in
the laws r^arding com. Since the year 1225, when the
first law relating to com was made, to 1846, when they
were for ever abolished, about 150 Acts of Parliament
were made for the express purpose of tampering with the
price of com. Many, if not most of these, did exercise
some influence on its price, and it is chimerical to suppose
that any one could pretend to state precisely what influence
each one had in raising or lowering its price, and yet this
must be done before we could arrive at a result of any value.
And the same observations will apply to any other com-
modity whatever, the value of which changes in proportion
to its greater or less abundance in comparison to the de-
mand, or the various methods which may be discovered for
diminishing the cost of its production, together with an
unlimited supply.
ON THB APPLICATION OP THE LAW OP PRICE. 165
92. Other writers of eminence suggest the wages of
labor, as a surer standard, but this will be found upon
investigation to be a more fallacious idea than the former.
The wages of labor depend, like any commodity, on the
demand and supply. The greatest possible difference
exists between the rates of wages in different parts of the
same coimtry, and still more in neighbouring countries,
and which of these is to be considered as the standard of
the age? The wages of labor have risen greatly in most
trades since the beginning of this century, and yet it is
generally supposed that the currency was then more
abundant, comparatively speakings than at present, and
the reason is clearly that industrial operations have so
greatly multiplied since then.
93. These considerations shew that any attempt to fix
upon a standard of value is quite hopeless, and that there
are so many corrections necessary to be applied, which
arise from artificial restraints, taxes, and a multitude of
other causes, which utterly elude the grasp of the acutest
intellect, or any possibility of testing their accuracy, that
we may say with little hesitation, that such a thing as a
standard of value has either no existence at all, or which
is much the same thing practically, it is impossible to
ascertain the necessary corrections which must be made
before it can be settled. J. B. Say aptly says, that the
attempt to discover a standard of value is the quadrature
of the circle of Political Economy.
94. Since value depends entirely upon the ratio of
demand and supply at any particular time, it is quite clear
that it is wholly beyond the power of any law to fix the
value of any one commodity as compared with any other,
whether it be gold in reference to corn, or cloth, or wa^es,
or anything else. These things were not properly under-
stood in former times, and our early history is full of
legislative attempts to fix the price of bread, beer, wages,
and other commodities, but they all failed in their effect.
As commercial ideas gradually advanced, these attempts
were abandoned one after the other, and the last which
166 ELEMENTS OB POLITICAL SCOKOinr.
lingered was the attempt to fix the yalue of gold in
reference to silver. In a subsequent chapter we shall
trace the history of these regulations, which were only
finally abandoned in 1816. After consideraUe varia-
tions, the relative values of these metals were fixed
in 1717, on the report of Sir Isaac Newton, the Master
of the Mint^ at tne denominations now in force, and
the terms then really meant the price of one metal in
reference to the other. Accidental circumstances com-
bined during the greater part of the last century to keep
this relation pretty steady, so as to conceal Uie faulty
principle, till near the close of it, when their values under-
went a great change. Soon after that the suspension of
cash payments took place, and when they were restored
in 1821, the true prmciple of having but one standard
metal was in force. Since the year 1816, when this took
place, gold has been the only standard currency of Great
Britain, and silver is merely made into tokens for small
change. It is true that the old expression of saying that
the mint price of gold is £3 17s. 10.^d. per oz. is still
retained, but we shall see that it has whollv changed its
meaning, and has no reference to silver at all. We shall
see hereafter that it is of great use in testing the depre-
ciation of the currency, but in its present meaning it is
no violation of the principle we have noticed above. The
ambiguous meaning of the word ^' price " in the expression
has sometimes been overlooked, and warm animadversions
been made on the supposed attempt at fixing the price of
gold, as if the phrase meant the same thing now as it did
when silver was legal tender.
95. We have before observed that the value of metals
is always measured by their weighty and not by their
(]^uantity or bulk. The comparative value of gold and
silver at present is about 15 to 1. The actual quantity of
silver in use is supposed on the lowest estimate, to be
forty times that of gold. But while its weight is more
than 40 to 1, its value is less than 1 to 15 to that of gold*
How is this difference to be accounted for? — by the rule
ON THE AFFLICATIOK OF THS LAW OF PBICE, 167
we have been discussing at so great a length, — the pro-
portion of the demand to the supply of the two metals,
lilver is &r more extensively useftil than gold. There
are few persons in easy circumstances who do not possess
more or less of solid silver plate, but such a thing as solid
gold plate scarcely exists. What is called gold plate is
only silver-gilt. Solid gold is only used for such purposes
as watch-cases^ or trinkets, such as chains, or pencil-cases,
or brooches, &c. Silver, therefore, is in far greater de-
mand for commercial purposes than gold, and it is this
that raises its value to a higher proportion in comparison
to gold, than we might expect from their comparative
quantities by weight. It might no doubt be said that it is
its very cheapness in comparison to gold that makes it
more sought after, and the excessive deamess of gold that
prevents it being used as extensively as silver, which is to
a certain extent true. But the very cheapness of silver
causes a much greater number of persons to be able to af*
ford to have it than gold, and consequently the proportion
to the demand for silver, compared to the supply, is greater
that the proportion of the demand of gold to the supply ;
and it has the effect of raising the comparative value of
silver as compared to gold.
96. The attempt to have a le^ currency of both
metals of unlimited amount, with a nxed relative value, is
always liable to derangement from the excess of one or the
other, so long as any one has the privilege of having an
unlimited quantity of bullion coined into money. This in-
convenience was repeatedly felt in England, when both
metals were coined in unlimited quantities; but since 1816
this inconvenience has been obviated by the artificial
limitation of the quantity of one metal in strict accordance
with the formula we have given.
97. Kwe suppose any other substance to be used as a
currency, the very same principles apply. However good
or safe it may be in itself an excessive quantity necessarily
and infallibly causes a diminution of its value. The paper
currency of the country bears on the face of it a i)romise
168 ELIMEKTS 07 POLITICAL BCQMOlfr. *
to pay a given sum of money on demand. As \ong as a
bank does not issue more of such promises to pay tban it
is believed to be able to fuliil, or than the traae of the
district requires, they will circulate at their full value.
But if it issues more than people think prudent, there will
be a general disinclination to receive them at their nominal
value, and the inevitable consequence will be that the hold-
ers of them will immediately go to the Bank and demand
pfiyment for them ; or if it issues more than the trade of
the district requires, they will be returned on it for pay-
ment. In either of these cases, therefore, so long as the
Bank is solvent, and can pay its notes, a temporary over-
issue has an immediate tendency to correct itself; the
withdrawal of the excess of quantity of the notes will
restore them to their par value, to the loss of the Bank,
very probably, but still, if the Bank can bear the loss, the
public will not suffer.
98. Suppose, however, while the Bank is notoriously
wealthy and solvent, and has a considerable amount of its
notes in circulation, they are suddenly declared to be
inconvertible^ — that is, the Bank is released from its obli-
gation to pay its notes in money,— if the public agree to
receive them in payment as before, while the same caution
is exercised in issuing them as would be required if they
were payable in money, they will still pass for their par
value. iBut in this state they are to be considered as a
distinct and independent substance — a currency of new
material — ^just as gold and silver are, and they will follow
the very same rules ; that is, their value will depend upon
the quantity of them which is issued. If while g'old and
silver are equally legal tender, and inconvertible with
respect to each other, a very great increase in the quantity
of silver takes place while gold remains the same, the
silver inevitably diminishes in value, and a sovereign
would pass for twenty-two or any greater number of
shillings according to circumstances, supposing a perfect
freedom in prices to be allowed by law. A tradesman
would make a difference in the prices of his goods accord-
ON THfi APFLICATiON OF THE LAW OF PBICR. 169
ing as he was paid in gold or silver. Thus, a shilling,
instead of representing the one-twentieth part of a sovereign,
would only represent the one-twenty-second part ; and it
is quite obvious that the difference between ^ and j^ would
be the exact measure of the alteration in the value the
silver currency had undergone compared with the gold.
Now, an inconvertible paper currency is to be treated in
all respects as an independent species of currency, like
silver, and will follow exactly the same rules. No matter
how good it is, or how wealthy the corporation be that
issues it, an excess in quantity will infallibly cause a
diminution in value. If the natural remedy of an excess
of paper be withdrawn, namely, a power to demand pay-
ment for it, the excessive quantity will remain in circulation,
and the very same result will follow as in the case of silver :
it will diminish in value as compared with sovereigns.
There will be two prices for articles — one when paid in
gold and another when paid in paper — and the difference
between the two will evidently be the measure of the
diminution in value of the paper.
99. We have seen that the value of any article when
sold by a private transaction between two individuals, is
measured and determined by the relative circumstances of
each. The price or general value between the seller and
a lai^r circle of purchasers, is determined at a local
market, and the larger and more open this is, the more
nearly do we approach to the real value of the article.
If there are many markets for an article, its price will
of course vary according to the local circumstances of
each, but it is quite clear that the more the means of
transport are increased, accelerated, and cheapened, the
more nearly will its value in the different markets be
equalized, and if there be no artificial obstruction by law,
or otherwise, to impede its being freely transported from
one to the other, the difference in its value in different
markets cannot much exceed for any length of time the cost
of its carriage from one to the other. Hence the inevitable
tendency of improving and accelerating the means of
170 XLSMBNTS 07 POUTICAL XCOHOICT.
transport is to equalize prices throu^out the whole extent
of country in which it takes place. JBefore the introduction
of roads into a country, one province may be starving from
a dearth of provisions, while in another, not far on, tliey
may he so abundant as to be going to waste, while the
expense of transporting them from one to the other may be
so great as to make it impossible to do so. It is said that
on one occasion in Spain, the inhabitants of one province
were dying of famme, while in another there was a
superabundance, and it was found cheaper to import corn
from America to the starving province than from another
part of the same country. Exactly in the same way
the introduction of turnpike roads, and afterwards of
railroads in England, has had the effect of raising the
price of all sorts of agricultural produce in the distant
counties, and depressing it in those near the metropolis,
and the introduction of steam navigation has rais^ the
rental of the remote parts of Scotland many thousands of
pounds annually.
100. Since it is quite evident that the difference in the
{)rice of an article at any two mai*kets can never, for any
ength of time, exceed the cost of conveying it from the
cheaper to the dearer, it is also clear that the greater its
intrinsic value is, i. ^., the greater its value in comparison
to its bulk, the less can its difference in price be in any two
markets, and the more uniform will its value be in all the
markets of the world. Thus, diamonds, to which men have
universally agreed to assign the highest value of any pro-
duction, are nearly of uniform value throughout the world,
owing to the facility of their transport, which bears so
inappreciable a relation to their a alue. In times of great
public danger, it is quite common for people to invest their
whole property in precious stones. Precious stones,
however, for many reasons which are too obvious to
mention, are unsuitable to form a currency. Next after
the precious stones, men have agreed to attribute the
greatest value to gold, beyond any other existing substance,
and from the same circumstance, gold bullion preserves a
ON THE AFFEIGATION OF THS LAW OF PRICE. 171
.greater uniformity of value throughout the world than
any other substance, and the increased means^ rapidity,
and safety of transport, which now connect the nations of
the earth, will continually tend more and more to confine
the possible variations of its value within constantly
decr^sin^ limits.
101. We have already seen that the idea of a standard
of value is wholly illusory, and is as impossible in the
nature of things as the philosopher's stone, or the perpetual
motion. Though gold bullion never can fulfil the impos-
sible duty of being a standard of value of other articles, it
is an infallible standard of measuring the value of what
professes to represent it, namely, the currency of this
country. Gold bullion, which is received in all markets,
must necessarily be of more uniform value than gold coin,
which passes in only one country. Coin can quickly be
reduced into bullion, but to have bullion changed into
coin is a comparatively slow and expensive process for any
private individual. Hence, it is impossible that bullion
can ever be really more valuable than coin, which
professes to contain a certain amount of it, and if the price
of bullion rises in the market above the value of the coin,
which professes to contain a fixed amount of it, it
is an infidlible proof that the coin has sustained some
diminution in weight or purity from the standard, or
is depreciated.
102. We shall have occasion to discuss this latter
point at much greater length, when we come to consider
the nature and effects of a paper currency. In former
times, when the means of transport were so much more
unfrequent, slower, unceilaiu, expensive, and hazardous
than at present, it was possible for gold bullion to undergo
much greater variations in value, boui in duration and extent,
in different countries, and the severe penal laws regarding
the melting or exportation of the coin of the realm,
frequently caused an artificial difference between coin and
bullion^ nence the test we have spoken of was not so
easily recognizable or so certain as now, but a long course
172 ELEMENTS OF POLITICAL SCONOMr.
of the observation of effects in a particular direction^
after making due allowance for other disturbing causes,
may lead to results upon which reliance may be placed.
103. It has frequently happened in this countr}^, as
well as in every other in Europe, that the changes in the
value of commodities indicated by their nominal prices
in money have been only apparent and not real. The
Sovereigns in former days attempted to multiply their
resources by diminishing the quantity of bullion in the coin,
while they retained its nominal value. The people, however,
even in those times, were sharpsighted enough to detect the
fraud, and to counteract this depreciation of the currency
they immediately raised the nominal prices of their goods,
so as to insure receiving the same weight of silver. Thus
the *' pound," in days of William the Conqueror, actually
was a pound weight of silver, and a shilling was the 20ta
part of a pound weight of i^ver. Repeated reductions
were made in the weight of the pound, and at the present
day it is coined into 66 shillings, so that, leaving out of
consideration the diminution in the value of silver, from its
greater abundance, the nominal prices of the present time
must be reduced in the proportion of 20 to 66, or 1 to 3-fw,
before a just comparison can be made of the purchasing
power of silver at these two periods. This is properly
called a depreciation of the currency. But in addition to
this, silver is unquestionably far more abundant now than
in those days, and it has consequentiy diminished in value.
So that we may say, that the currency is both greatly
depreciated as well as diminished in value within the last
eight centuries. Hence, in considering changes in price,
we must always be careful to ascertain whether the change
is real, which may be either through some alteration in the
condition of production or demand of the article itself, or
of the greater or less abundance of the precious metals ;
or whether it be only apparent and caused by a deprecia-
tion of the currency.
104. A certain relation having been established between
the currency and the services, or industrial operations it
OK THS AFFUCATIOir OF THE LAW OV FRICfE. 173
represented, tbeir value would not alter so long as this
proportion remained the same. But if either one or the
other altered considerably in quantity, a change would take
place in their value. In early times, when the precious
metals were comparatively scarce, the different Sovereigns
of Europe engaged in wars and other operations, which
required a much greater quantity of money than they
could readily command. In these difficulties they had
recourse to the fraudulent plan either of diminishing the
standard weight of the coin, or of making it of debased
metal. Afterwards, when gold became more abundant,
both gold and silver were coined into money. Pieces were
struck to represent the assumed relative values of the two
metals, but from a want of nicety and accurate knowledge
of the subject, these two standards were always getting
out of adjustment with each other, to the great detriment
and annoyance of all who engaged in mercantile contracts.
The inconveniences of a douBle standard were of too great
importance to be continued in a mercantile country, and it
being necessary to select one, gold was for various reasons
chosen, and the danger of a scarcity of currency necessary
for a due development of the industry of the country is
obviated by the ingenious system of Bank notes.
105. Smce the currency any one possesses is evidence
of services due to him, it is evident that when he requires
some of these services to be rendered to him, the arrange-
ment of the price or the value of the service should be lefl
entirely to the mutual agreement of the buyer and seller.
Who can tell so well as they what is the real value of the
service? Now, suppose that when the price of the service
was so agreed upon and settled between the parties, some
artificial force were suddenly put into the power of either
of them, beyond what arose from their natural position, to
enable one of them to compel the other to yield up more of
his industry than he ought to do ; such a force suddenly
put into the hands of either party, whatever its nature be,
wliether moral or material, would clearly be unjust in its
very nature, and it would be nothing more than a force
enabling one party to rob the other.
X76 ELEBiEKTS OF FOLITICAL fiCONOMT.
day obtaining a greater influence in legislation, and many
of the most striking and beneficial reforms of the present
day have been to abolish and set aside the partial and un-
just laws which encumbered the statute-book. It is not
so very long ago that public opinion in this country tole-
rated, and men of eminent- piety saw no harm in the slave
trade, in stealing men from their homes and transferring
them to foreign countries to labor for the benefit of their
masters. But public opmion gradually became convinced
of its abomination, and not only put it down, but declared
it to be a great crime. What was considered to be legiti-
mate traffic fifty years ago, is now declared by law to be
Siracy, and Englishmen who engage in it are liable to be
ealt with as puates. Now, there is not at bottom much
difference in the idea involved in protection and the slave
trade. They both seek to effect the same object by some-
what different methods. They are both for the purpose
of enabling one set of men to appropriate to themselves
the fruits of their neighbours* industry — the one by the
coarser method of force, the other by the more refined sys-
tem of fraud. Lord Macaulay remarks,* that the two great-
est and most salutary social revolutions which have taken
place in England, were those which in the thirteenth cen-
tury put an end to the tyranny of nation over nation, and
that which a few generations later put an end to the pro-
perty of man in man. To these we may venture to add a
thirds not less great, and not less salutary than the other
two — the great revolution in the ideas of the age which,
in the nineteenth century, abolished for ever the property
of one set of men in the industry of others.
109. The protective system is, therefore, nothing
more than a method by which producers endeavour to
force consumers to pay a higher price than they other-
wise would for their commodities. Now let us consider
a somewhat different case.
110. Suppose that the Legislature, being entirely
* History of England. Vol. i., p. 22.
ON THR APPLICATION OF THE LAW OF PRICE. 177
composed of comsumers, should pass a law forBidding the
farmers to sell their produce above a certain price, or to
export it to foreign countries, where they might find a
better market for it. Or suppose laws had been passed
to prevent workmen from demanding above a certain rate
of wages, or compelling producers to bring their produc-
tions to market, and accept a price for them much below
what they would fetch if there were no such law. This
would be a case on the part of consumers precisely analo-
gous to what protection is on the part of producers.
111. This form of economic error never was sufficiently
prevalent in this country to acquire a distinctive name in
our language, but it did in France. During the height of
the horrors of the French Revolution in 1793, when the
insecurity of property had scared away almost all sorts of
produce from the market, the French Convention passed
the severest laws to limit the price of commodities, for-
bidding persons to sell their produce above certain fixed
prices, whence they were called the laws of the Maximum.
As might have been foreseen, these laws only aggravated
the evil ; and their disastrous effects are set forth with
great minuteness in the 3rd, 4th, 5th, and 6th volumes of
Alison's History of Europe (7th Edition), though the
author overlooks the feet that the very same objections
apply against the system of protection of which he is so
strong an advocate.
112. Each of these systems, then, is erroneous, but in
opposite directions; that of Protection, by which the
producer obliges the consumer to buy from him his pro-
duce at a price above its intrinsic value; that of the
Maximum, by which the producer is obliged to sell his
produce to the consumer at a price below its marketable
value. Now, every law whatever that interferes with
the natural course of trade, which attempts to regulate
the wages of labor or tlie price of commodities, which
attempts to meddle with the free exchange of industry
between man and man, must necessarily fall under one
of these forms of error. Every such law sins against
M
178 SLSMSNT8 OF POLITICAL SCONOBCT.
natural justice more or less, in one direction or the other,
and is an aggression of one party on the other, either as
it assumes the form of Protection or the Maximum ; and
it is just as clear as the sun at noon«day that the only
true, just, and proper course is to leave things to find their
own level — or, in other words, to establish and maintain
absolute freedom of trade.
113. The fact is, that both of these erroneous systems,
both Protection and the Maximum, are forms of Socialism.
For it is an interference with the free exchange of industry.
And they are especially designed for the very purpose of
interfering with the natural value of commodities. Con-
sequently^ whichever of the parties is able to compel the
other to part with his commodities in a different proportion
to what he would do if unconstrained, is able to appropriate
to himself a portion of that other man's property. And
this is the very essence of socialism. Protection is the
Socialism of producers, the Maximujn is the Socialism of
consumers. And nothing is more natural than that where
we find the one doctrine fashionable with the higher orders,
the other will be popular with the lower. Of this we may
see an example in France, where protection is the policy
of the state, and socialism the creed of the people. In
England there are, happily, few of either Protectionists
or Socialists.
114. Now, the idea that was at the foundation of all
this legislation was, that the cost of production should
govern price, and that persons who produced articles had
a right to have remunerative prices secured to them by
law. This idea was a very natural one to occur to pro-
ducers, and when we think of the condition of Parliament
at the time when this species of legislation was in fashion^
we shall not be surprised at its having prevailed. In the
last century, it is true, there were at various times laws
enacted for the purpose of disturbing the natural course
of trade, but the corn-laws, which lasted with various
alterations till Sir R. Peel so happily abolished them,
were made in 1815. Now, what was the state of Parlia*
ON THB AFFLtOATION 01 THB LAW OF PRICE. 179
ment at that time ? One branch was entirely composed,
as it still is, of agriculturists ; the other principally of
agriculturists and the nominees of agriculturists, as well
as great manufacturers, great merchants, great shipowners,
and great producers of all sorts. It was entirely a Par-
liament of sellers — a vast, close, and corrupt combination.
The great body of the people, i.e., the consumers, had
scarcely any influence wnatever in the House of Conmions.
The sellers had a complete monopoly of law-making, and
their legislation was exactly what might have been ex-
pected. All the producers in turn were permitted to
plunder the public for their own benefit. It was nothing
more than a gigantic conspiracy of all the sellers against
all the buyers. Though these laws were intimately con-
nected with currency, we cannot speak more of them, but
they are a striking proof that no one man, nor can any
single interest be entrusted to frame laws for the whole
community in a spirit of justice, but to insure that, all
interests must have a voice.
115. There is one case of Value, which may seem
rather anomalous, and which deserves notice, as its
principle is more extensive than may at first be supposed,
if one were to go into a general exhibition of manufactures,
one might chance to see a circular piece of glass about
twelve or fourteen inches in diameter, and perhaps three
inches thick. If an uninitiated person were asked what
was the value of this piece of glass, he might perhaps
think himself extremely extravagant if he were to answer
two or three pounds. He might then learn to his amaze-
ment that the price of that conmion looking piece of
glass was £1,200. It was intended for the object glass
of a telescope. The reason of its enormous price is, that
to be fit for this purpose, it requires to be of the most
&ultless purity. The slightest stria or bubble in it would
render it useless. The difficulty of obtaining a glass fit
for this purpose is so great, and the risk of accident
through its various stages of manufacture is so great, that
out of a thousand attempts perhaps only one succeeds.
m2
180 BLBMBlffTS OF POLITICAL BCONOMT.
The consequence is that the successful one must pay for
all the expenses of the 990 failures. And, hence, what
is intrinsically worth perhaps only a few shillings, cannot
be sold for less than a thousand pounds. This probably
is the most conspicuous instance of this principle, but it
more or less pervades all trade. All traders are subject
to make bad debts, and the losses they make must be dis-
tributed over their other business. Part of the price in all
cases goes to cover losses by bad debts.
116. In treating of prices, we have carefully adhered
to the most general form of expression possible, "service
rendered,'' in order more clearly to keep in view, that
a service rendered may be of very different natures , such
as moral, intellectual, or material, all of which are mea-
surable by price, and all of which are the producer's
property.
117. In former ages, when people had scarcely
emerged from barbarism, nothing was considered as pro-
perty but land^ which was solid and unmoveable. As
they became more civilized, and their ideas more refined,
moveables were admitted to take rank as property : but
still no property was held in regard but what was sensible
to the eye and tangible to the hand. In process of time
as refinement increased, men began to reflect that they
had minds, and that their minds might be improved.
Accordingly services rendered to the mind began to have
value, and to be capable of being estimated in money.
The way to render service to the nund is by communicat-
ing to it ideas, which convey to it perceptions of what is
noble, and just, and true, and elevate the nature of what
is really and truly the Man. When men saw this in its
proper aspect, they saw that a person who was capable
of rendering services to them in this way, should be
allowed to have property in his own productions, as well
as the producers of material wealth. Hence, they
recognised the right of man to have property in ideas.
The law which gave men property in then* own ideas, is
called the law of Copyright or of Patent*.
ON THB APPLICATION OF THB LAW OF PRICE. 181
118. Just as the mind of man is admitted to be of
a much higher nature than his body, so is the service
rendered to his mind, of a much higher nature than one
rendered to his body. Hence, ideas are much loftier
species of property than material wealth. True ideas
are the foundation of good government, and of the hap-
piness and wel&re of the whole human race, both here
and hereafter; audit should be the object of every man
to gather true ideas wherever and whenever he can, and
follow them in practice. True ideas are the riches of
the mind— riches, which neither moths can devour, nor
rust corrode, which do not make themselves wings and
fly away from us as an eagle, but which bear us hke an
eagle towards heaven— riches which some would have
us believe we can take beyond the grave. And they are
preserved and propagated in books ^'exempted from the
wrong of time^ and capable of perpetual renovation.
Neither are they fitly to be called images, because they
generate still, and cast their seeds in the minds of others,
provoking and causing infinite actions and opinions in
succeeding ages : so that if the invention of the ship was
thought so noble, which carrieth riches and commodities
from place to place, and consociateth the most remote
regions in participation of their fruits, how much more
are letters to be magnified, which as ships pass through
the vast seas of time, and make ages so distant to par-
ticipate in the wisdom, and illuminations, and inventions,
the one of the other."*
119. There is a peculiarity about the law of copy-
right and patents, which is worth noticing. No man can
have property in a general truth, or a principle, but only
in a particular demonstration of the truth, or an application
of the principle. No one can have a patent for a
discovery^ but only for an invention. As soon as a
general principle is discovered, it becomes universal
property, and every one can appropriate to himself any
♦ Bacon. — Advancement of Learning.
182 BLBlfSNTS OF POLITICAL SC0N01C7.
new demonstration or application of it he can devise.
No man can appropriate to himself a scientific truth, nor
can he have a patent for a principle ; thus, he cannot have
a patent for the general pnnciple of the use of steam, or
air, or electricity as a motive power, but only some
particular form of its application.
120. Seeing, then,«tnat the productions of a man's
mind are now recognized to be as truly his own property
and the fruits of his industry, as the production of material
wealth, it is hard to see on what grounds he can be
denied the same tenure in one as in the other* Surely no
one can deny that a great work in literature is of as great
a service to a country as a chair, or a table, or a ship ; and
yet the producer of one is not allowed to derive the same
benefit n-om his services as the other. In the latter case,
his right is acknowledged to be perpetual, and he may
dispose of it as he pleases, and transmit it to his
descendants as long as the thin^ continues in being ; but
the rights of the other are omy transient, and after a
certain brief period, by the existing law, cease for ever.
The merchant who labors for commodities may found a
family, and his descendants may be released for ever £rom
the necessity of toil, through the wealth accumulated by
their ancestor. But the descendants of the author, who
may spend his life in producing a work which may adorn
the literature, and be an everlasting possession to his
country, may starve in the streets, whSe all the world may
appropriate to themselves the profits made by publishing
the works of their ancestor.
121. These things should not be. There can be no
just grounds pointed out for the distinction ; if an author's
right in his own works exists at all, it exists for ever, and
cannot be limited to 7, 14, 42, or any finite number of
years ; and just as the works of a Shakspeare, a Milton,
or a Bacon, are a nobler possession for a country to
inherit, than the most magnificent ship that ever floated
on the ocean, so ought the rights of such a benefactor to
his country to be preserved and guarded with as jealous
ON THB AFFUOATION OF THE LAW OF PRICE. 183
care, as those of the other, in any state where the rights
of property are held sacred.
122. Mr. MaccuUoch, in his Commercial Dictionary,
argues against the expediency of extending the present
term of copyright, 42 years, and while he doubts that any
advantage would accrue to authors, he thinks it would lie
detrimental to the public interest, and he instances a man
computing a table of logarithms to five, or seven places,
and says, that if his computations are correct, no im-
provement can be made upon them, to the extent at least
to which they go ; and he then asks, if he or his assignees
are to be entitled in all times to prevent other persons
from publishing similar tables, as an invasion of private
property. Mr. Macculloch does not seem to be happy
m his arguments on the question, and he is still more
unfortunate in the instance he has selected to illus-
trate them, because a table of logarithms is a scientific
truth, in which no one can have copyright, and is an
instance of the exception stated in Section 119. The loga-
rithm of a number, or of any other quantity, is a scientific
truth or result, which every one is at liberty to calculate
for himself in his own way, and if any one were to
discover a new method of calculating logarithms, he
would undoubtedly be entitled to copyright in that. But
no one can have copyright in the actual result, any more
than in any other scientific truth. Mr. Macculloch
further states that in his opinion, more injury than benefit
would result to literature from making copyright perpetual,
but he gives no ground for such an opinion, and the
benefit or otherwise to literature is wholly beside the
question, which is, what are the rights of authors ? The
copyright of Clarendon's History of the Rebellion is the
perpetual property of the University of Oxford, and there
IS a provision by statute, that all copyrights bequeathed
to the Universities are perpetual ; and we may well ask
why the Universities should be permitted to have a perpe-
tual copyright rather than an Author. The Universities
evidently deem it an advantage to possess this property,
184 ELEMENTS OF POLITICAL ECOKOMT.
and the question is not the advantage of the public, but
the rights of property. It would be an undoubted advan-
tage to the public, and a great benefit to agriculture^ if
many of the gigantic estates in this country were broken
up into smaller ones, and in the hands of more numerous
Bad enterprising owners, but none but a few wild dreamers
think of such an invasion of the rights of private property.
Now, the right of an author in his own book is just as
sacred as his right to his own land, and he ought no more
to be deprived of one than the other.
123. The feeling of the law with respect to literary
property, is very much that of the French Revolutionary
tribunal. A n elderly gentleman had been dispossessed of
some old family property by violence during the revolu-
tion. He went to the court of justice to get them to
expel the intruder. He pleaded that the property had
been in his family for many generations, " Oh ! '' said the
judge, " that is the veiy reason why I shall not give it
to you back. Your family has had it so lon^, that it is
right that some one else should have it now ! T" So it is
with literary property. The law thinks that 42 years
is quite long enough for a man's family to enjoy the
right of their own property, It is then some one else's
turn to have it. In 1794, a notorious Scotch judge,
Lord Braxfield, had no higher term to call men who held
nothing but personal propeiiy than "rabble." The
sentiments of the owners of material wealth towards
authors is somewhat tinged with the same feeling. They
meet with little sympathy from society in general.
124. The progress of public opinion evidentlv tends
in this direction ; something was done by the last Act, but
the advancing voice of refinement, and the increasing per-
ception of moral right, will probably demand more.
Why should a man who devotes his life to carve out an
estate in fame, be denied equal rights with one who seeks
to agglomerate material wealth? Let us hope that the
day IS coming when the owners of the ideal ships that
sail down the seas of time, freighted with the hoarded
ON THE APPLICATION OF THE LAW OP PRICE. 186
treasures of the wisdom, and learning, and worth of
successive generations, to illumine the understanding
and gladden the hearts of the latest posterity, may enjoy,
and transmit to their descendants, the same rights as the
owners of the wooden and iron ships, which bring com
and cotton, and whatever else mimsters to the material
requirements of mankind.
125. The property we have already discussed at so
great a length is all actually existing, but in all civilized
countries there is property of a much more subtle nature,
which has only a future existence, which has yet a pre-
sent value, and may be bought and sold. And even the
value of an immense quantity of existing property is
calculated, not by what is visible and existmg, but upon
what is future. The most general name for this species
of property, is that of the present value of future
payments. The value of landed property is calculated
by the annual rent it yields, and the rate of interest at
the time of the purchase. The worth of landed property
consists in its producing a regular series of stated annual
payments for ever. Now, though each of these only falls
due year by year in succession, each of them has a pre-
sent value, and is capable of being bought and sold.
And the value of the property is estimated by adding up
this series of the present values of these future payments
for ever. Now, the present value of a sum of money
payable one year hence is such a sum of money as placed
at the interest agreed upon would produce that sum.
The present value of a sum of money payable two years
hence, is such a sum as placed at compound* interest,
for two years, would amount to that sum. The present
value of a sum of money, payable tliree years hence, is
such a sum as placed at compound interest for three
years would amount to that sum ; and so on. Now, it
• The reader must observe that the Present Value of annuities is
always calculated at compound interest ; to do so at simple interest leads
to an absurdity. Vide. Lund's Wood's Algebra. Art. 381.
186 SLKumm en poutigal
is evideiit that this series of values dnninisheB very
mpvSlj^ till at l^igth we come to one so infimtesiTiuiHy
SDiall, that all after it may be n^ectecL And conse-
quently the present value of the whole annuity for ever
is the sum of these separate present values of each year.
The number of terms in this series before we arrive at
one infinitesimally small, depends entirely upon the rate
of interest. The higher the rate of interest^ the shorter
manifestly will the series be. Although this is the strict
way of looking at the matter, it would be a very tedious
operation to calculate the present value of each t^rm
separately, and the practical result of the algebraical
formula is very simple and easy. It gives us this rule
simply. Divide the annual amount by the rate of interest
and the result is the present value of the annuity.
Thus, the present value of an annuity of £1 payable for
ever at 10 per cent, is £10. At 5 per cent, it is £20 ;
at 3 per cent, it is £33 6s. 8d. ; at 2 per cent. £50 ; and
each term in the series which makes up this amount has
a separate value, quite independent of the money it will
be redeemed with.
126. It is upon this principle that the value of all
property which yields an annual rent, or which may be
resolved into an annuity, is calculated. It comprdbends
all landed property, and all the public debt, bendes an
immense variety of rights of all sorts. And in a similar
way, all future payments whatever have a present value
quite separate nrom the money they will ultimately be
paid in, and may be bought and sold like any other mer-
chandize.
127. Wie have seen that each of the annual rents of
a farm payable at a future time has a present value,
which is bought and sold in the confidence that the
future products of the farm will redeem it. Now, ex-
actly analogous to this is the skill of a trader, it resem-
bles the fertility of a farm, and as the future produce
of the farm may be bought and sold, so the trader may
pledge the produce of his future industry. He may
OF THB APPLICATION OF THE LAW OF PRICE. 187
create a promise to pay at a future time ; and that deferred
payment has a present value, and may be bought and
sold, exactly in the same manner as the deferred pay-
ment which will arise out of the expected produce of
the farm. Upon this doctrine rests the whole system
of mercantile credit. This property exists chiefly in the
form of Bills of Exchange, and is of the enormous value
of not less than £500,000,000 in this country.
188 KLXMERS or POLITICAL SCQS«ar.
SECTION n.
OH THE APPLICATION OP THE LAW OP PRICE TO GASES
OP THE PURCHASE POB A LIMITED PERIOD OF THE
USE OF ANYTHING.
L Having in the preceding section discussed the causes
of the changes in price, where the entire and perpetual
property of the commodity passes from the vendor to the
purchaser, it remains for us to discuss it in those cases
where the price is paid for the temporary usufruct of
anything. This price receives different names according
to the nature of the article whose use is purchased.
The word Rent is used when the commodity is land or
houses, or mines, fisheries, forests, watercourses, or
patents ; i.^., where the property is of the nature
of what is generally jf£rer/ capital^ or real property.
The word Hire is used when the commodity is of the
nature of what is usually floating capital^ or
personal property^ such as furniture, horses, and
carriages, &c.
The words Wages, Fees, Salary, Pat, are used in
cases of personal services, such as laborers, servants,
professional men, employes of all sorts, soldiers^
sailors, &c.
The word Interest for the use of money.
ON THE APPLICATION OF THE LAW OP PRICE. 189
2. Of all species of capital, land is the one which is
most coveted, and whose owners are least able to super-
intend any considerable quantity, so far as regards value.
Moreover it is a species of capital which seems sometimes
to be very erroneously considered beyond the pale of
commerce. Without entering into any historical account
of how individuals came to be possessed of large quanti-
ties of land, it is well known that the ownership of the
soil is in most countries in the hands of a, comparatively
speaking, small number of persons. These are generally
not in a condition, for many reasons^ to work their capital,
as manufacturers and other persons in commerce do^ by
the direct payment of wages to persons in their employ-
ment ; but whenever the extent of their land attains any
considerable size, they are in the habit of admitting other
persons into a species of quasi-partnership for a umited
period : and instead of receiving payment from the owner
of the soil, they render certain dues to him for the use
of the land. These dues may consist either in personal
services, or part of the actual produce of the Iwd, or a
payment in money. In the eastern part of Europe the
peasantry are allowed certain quantities of land for their
W^us^ on the condition of giving a certain number
of days' service on the lands of their lord. This species
of service is termed Robot. In other parts of Europe
the tenant pays to the landlord an actual portion of the
produce of the land, usually the half, whence they are
called Metayers ; and this formerly prevailed very widely
in all countries where money was scarce. But in most
civilized countries, this payment in kind has been com-
muted into a payment in money, and this is what is more
properly termed Rent.
3. xhe term Rent, therefore, is applied to the share
which the landlord receives of the pronts accruing from
the working of the Idnd, as the interest of that species
of capital. It is also applied to mines, fisheries, forests,
water-courses, houses, and patents. It is also applied
generally to the purchase for a limited time of the use
190 ELEBiSNTB OF POLITICAL BCOKOICT.
of such property, even when no profit is intended to be
made, as in the case of dwelling-houses, houses in the
country, shooting grounds, &c. Hence, rent only arises
when the property in question is lent out to some one.
When the owner of the article uses or works it himself,
there is no such thing as Rent, any more than when a
man trades with his own money, can there be any such
thing as Interest.
4. When one person agrees to collect a certain revenue,
paying a certain fixed sum to the landlord, or owner, and
retaimng all the surplus for himself, he is said to farm
that revenue, and is called a Fabmsr. Thus, it was for-
merly the custom in England and in France, up to the time
of the revolution, to farm the taxes : that is, capitalists
agreed to ^ve the government a fixed sum, and they were
then allowed to collect all the taxes for their own benefit.
This system being applied to the cultivation of land, the
quantity of land, by a perversion of language, so lent out,
came to be called a farm^ and to farm came to mean to
cultivate the land. A good farmer has come to mean a
person who is a skilful cultivator of land; and by a
grotesque confusion of ideas a gentleman who cultivates
his own land is caUed a gentteman-farmer :— the only
{)roper meaning of which phrase can be, a gentlmnan who
enos out his own land to himself, and pays himself a rent
for the use of it. By a somewhat similar contortion of idea
the word premises, which really means the ^ aforesaid
things," has come to signify a house.
5. In the case of the metaver system, the quantity
and the value of what the landlord receives, varies fix>m
year to year, according to the harvest, and the price of
the produce. But in countries where the more perfect
svstem of Rent prevails, it is more generally usual for
the farmer to contract to give a definite fixed sum for the
use of the whole farm to his landlord, which does not
fluctuate according to the variable prices of produce.
Having paid this, the farmer has all the rest of the value
to himself, whether it be much or little.
OK THB AFFUCATIOK OF THB LAW OF FBICS. 191
6. To many persons it appears an inequitable
arrangement that the tenant should pay a fixed sum to
the landlord, whatever be the price of com, which is
notoriously an article whose value is of the most fluctuat-
ing description. And no doubt to persons who are not
much acquainted with the subject, the metayer system
may appear to be more equitable. But it is not found
to be so in practice. Payment of rent in kind used to
prevail to a considerable extent in Scotland. In many
parts of the country there are still to be seen large
buildings, in which the farmers used to store the rents
of the landlord. But the unfortunate landlord of course
got the worst part of everything. And as civilization
advanced this payment of rent in kind was universally
abolished, and a payment in money substituted. Now,
as the people have universally abs^doned a pa3mient in
kind, and substituted a payment in money, it is the best
proof that can be had that the latter method is more
practically convenient than the other.
7. But even though the payment in kind of a portion
of tiie produce has been abandoned, and the payment
made i£ money, many schemes haVe been devised to
ensure what appeared to be a more equitable division of
the profits between landlord and tenant, according to
the varying price of com. And different modifications
of this system, which is generally called ^^com rents,"
are in favour in this countiy. It is necessary to observe
the distinction between the system of Metayers, and
com rents. The former is a mvision of the actual pro-
duce of the soil between landlord and tenant, the latter
is a payment in money, but varying according to the
price of com. WhUe, in some parts of this country,
opinion is much in favour of com rents, on the other hand,
in many other parts of the country which are in the
highest state of cultivation, and where the highest
science prevails, com rents are held in utter abhorrence,
and opinion is equally tenacious of fixed rents.
8. At the first blush of the thing it might appear
192 SLBMENTS OF POLITICAL BCOKOMY.
that com rents were manifestly the most equitable.
To this we say, that so many diflTerent systems have
been proposed, that it is impossible to give a general
answer. Some that have been proposed can be clearly
shewn to be most unfair. To give, therefore, a proper
answer we must have the particular system that is
proposed. But our own observation leads us to doubt
whether these com rents are so advantageous as is
frequently supposed. In the first place, as agricultural
science improves, the greater is the variety of the pro-
ducts of the farm, and the greater is the complexity of
accounts required to calculate the rent. Brides, we
believe that it will be found that there will be less
variation in the value of the whole produce of a farm,
than in its quantity. When the quantity is great, the
price will be low, when the quantity is small the price
will be high, consequently the total money value will
probably be more steady from year to year than the
whole quantity. And it will be found that farmers in
general, at least those of substantial capital, who are
most desirable to have as tenants, prefer to have a fixed
charge once for all, which they know beforehand, and
which they can calculate upon, than a varying one.
9. From the entirely erroneous views propagated by
Adam Smith and Ricardo, as to the cause of value, i. e.j
supposing that labor or cost of production is the cause of
value, one of those vermicular discussions has arisen,
namely, whether rent is a component part of price or not.
And much controversy has been expended upon this
unprofitable discussion. Rent comes out of price, and
that is all that can be said.
10. Rent, however, may be increased by increasing
the quantity produced, even though the market price
does not vary. The improvements of agricultural science,
such as draining, manuring, the rotation of crops, &c.,
may, up to a certain length, increase the quantity pro-
duced in a very much greater ratio than the expenditure
of capital. And this is manifestly equivalent to diminish-
ON THB APFLlCATtOK OF THB LAW OF PBICE. 193
ing the cost of the production of the whole. Diminution
of the cost of transport has also the most material effects
upon agricultural prosperity. Thus, rents may be
increasend even though the average price is not increased,
or is even diminished.
11. We have in the preceding section shewn that
taking all the requisites for producing corn, t. e., placing
it in a given market, we may suppose that there is a
regular series of gradations of the cost of production of
agricultural produce in different places. Hence, the
profits, or the difference between the cost of placing any
quantity in that market, and the sum actually received
for it, must also vary in a series of regular gradations,
till they diminish to nothing. Accordingly as the rent
paid by the tenant is paid out of these profits, there
must be a descending scale of rents payable out of the
price realized till the quantity of rent vanishes, or no
rent can be paid.
Now, we have seen in the preceding chapter, that the
ratio of supply and demand regulates the market price,
and the mawet price regulates rent.
12. Now, if a country is very well peopled, and
thickly studded with markets, it may be that all the land
in it can be let at a good rent. But if we suppose it of
indefinite extent, and only partially occupied, it is quite
evident that in the descending scale, we shall arrive at
some land in which the circumstances are so unfavourable,
that is, the cost of production is so great, that it will only
just be possible to cultivate it with a profit, and beyond
that, any cultivation beyond what may be necessary for
the actual wants of the persons living on it, must cease.
The point where this will occur purely depends upon
the circumstances under which profit ceases. If prices
rise, or the cost of production is diminished, the land
under more unfavorable circumstances may be brought
mider cultivation; if tlie price falls, or the cost of pro-
duction is increased, then a certain portion of the land
already in cultivation will be abandoned.
N
194 ELEICENTS OF POLITICAL ECONOBCT.
The result of all this is, that the average price of com regu-
lates the most unfavorable circumstances under which com
can be produced, or it regulates the greatest cost of pro-
duction that can be bestowed in producing com, and it also
regulates the most unfavorable circumstances under which
rent can be paid, and the amount of rent in all cases.
13. Such is the whole theory of rent, which is plain
and simple enough. But we must now notice the Theory
of Rent advocated by Ricardo, and which bears liis name,
though he does not even pretend to have originated it.
We only do this on account of the exaggerated im-
portance which has been attributed to it. It has been
called the ^'pons asinorum^^^ and the comernstone of
Political Economy, with what justice we shall see.
14. Ricardo be^ns by defining rent to be that portion
of the produce of die earth which is paid to the landlord
for the use of the original and indestructible powers of the
soil.* The Romans held it to be an evil omen to stumble
on the threshold. Any one who has the slightest know-
ledge of agriculture can see at once that Ricardo*s
de&iition of rent is absurd. The earth has no ^^ original
and indestructible" powers in the sense he means. The
only original and indestructible power that it has, is that
of extent. There is scarcely any land whatever which is fit
for cultivation without a very considerable expenditure of
labor or capital, and the powers of the earth are so far
from being indestructible, that except in a few &vored
regions, they wear out very fast, and require a constant
renewal of labor and capital to keep it in a fit state for cul-
tivation. He then says, "It is often, however, confounded
with the interest and profit of capital, and in popular
language the term is applied to whatever is annually paid
by a farmer to his lan^ord. If, of two adjoining farms of
the same extent, and of the same natural jertility^ one had
all the convenience oi farming buildings^ and besides, was
properly drained and manured, and advantageously divided
* Principles of Political Economy and Taxation, p. 53.
ON THE APPLICATION OF THB XiAW OF PRICE 195
by hedges, fences, and walls, while the other had none of
these advantages, more remuneration would naturally be
paid for the use of one, than for the use of the other, yet,
m both cases, this remuneration would be called rent.
But it is evident that a portion only of the money
annually to be paid for the improved farm, would be given
for the original and indestructible powers of the soil ; the
other portion would be paid for the use of the capital
which nad been employed in ameliorating the quality of
the land, and in erecting such building as were necessary
to secure and preserve the produce/' With respect to this,
we may say that rent is the word invariably applied to
remuneration paid for the use of houses and buildings,
and therefore nothing can be more proper than to include
the sum paid for them in rent. With respect to the other
things which are necessary for the due cultivation of the
&jrmy to deny to the name of rent to the remimeration paid
for them, is as frivolous as to say, in speaking of a house,
that the word rent is to be restricted to the sum paid for
the use of the bare walls, but that the remuneration paid for
the paintinff, papering, fittmg-up, and all the decorations, is
to be called interest for capital.
15. Ricardo then says, ^' Adam Smith sometimes speaks
of rent in the strict sense to which I am desirous of con-
fining it, but more often in the popular sense in which the
term is usually employed. He tells us that the demand
for timber, and its consequent high price in the more
southern countries of Europe, caused a rent to be paid
for forests in Norway, which could before afford no rent.
It is not, however, evident that the person who paid what
he calls rent, paid it in consideration of the valuable
commodity which was then standing on the land, and that
he actually repaid himself, with a profit, by the sale of the
timber. If, indeed, after the timber was removed, any
compensation were paid to the landlord for the use of the
land, for the purpose of growing timber, or any other
produce, with a view to future demand, such compensation
might justly be called rent, because it would be paid for
N 2
106 ELEMENTS OF POLITICAL ECOKOMT.
the productive powei^ of the land *, but m the case stated
by Adam Smith, the compensation was paid for the liberty
of removing and selling the timber, and not for the liberty
of growing it."
This objection of Ricardo's is manifestly of no weight,
because rent is in all such cases part of the profits of the
produce of the soil, and the distinction made between the
remuneration paid for the right of cutting that timber,
and the right of growing future timber, is manifestly
fiitile, because though the sum paid for that single crop is
limited, it is manifestly paid for the use of the productive
powers of the earth, so far as regards that crop, just as
much as the future produce of the productive powers of
the earth.
16. Ricardo then goes on, ^^He speaks also of the rent
of coal mines and of stone quarries, to which the same
observation applies— that the compensation given for the
mine or quarry is paid for the value of the coal or stone,
which can be removed from them, and has no connection
with the original and indestructible powers of theland. This
is a distinction of great importance in an inquiry con-
cerning rent and profits, for it is found that the laws which
regulate the progress of rent, are widely different from those
which regulate the progress of profits, and seldom operate in
the same direction.^' The objection taken by Ricardo to
Adam Smith, has no force whatever. The fact is, that
his own definition of rent is purely arbitrary and futile.
It is a matter of utter impossibility to distinguish the por-
tion of the remuneration which is paid for the use of the
original and indestructible powers of the soil, and the
portion which is paid as interest of capital expended upon
it. To do that strictly, all the labor which has been ex-
pended upon bringing it from a state of nature must be
called capital expended upon it, and the remuneration
paid for that must be subtracted from the rent. And
then what will remain for rent? The fact is, that the sepa-
ration of rent and profit, as proposed by Ricardo, is a
thing that cannot be effected, and is nothing more than a
play upon words.
ON THB APPLICATION OF THE LAW OF PRICE. 197
17. Having thus proposed a definition of rent wliioh
is highly incorrect, Ricardo then goes on to explain how
rent arises. He says that on the first settling of a country
in which there is an abundance of rich and fertile land, a
very small proportion of which is required to be cul-
tivated for the support of the actual population, or
indeed can be cultivated with the capital which the po-
pulation can command, there will be no rent. For no one
would pay for the use of land, when there was an
abundant quantity not yet appropriated, and therefore at
the disposal of whosoever might choose to cultivate it
any more that he would pa^ rent for the use of air, and
water, or any other of the gifts of nature, which exist in
boundless quantities. It is only, then, because land is not
unlimited in quantity, and uniform in quality, and because
in the progress of population, land of an inferior quality
or less advantageously situated, is called into cultivation,
that rent is ever paid for the use of it. ^^ When, in the
progress of society, land of the second degree of fertility
IS taken into cultivation, rent immediately commences on
that of the first quality, and the amount of that rent will
depend on the difierence in the quality of these two por-
tions of land. When land of the third quality is taken
into cultivation, rent immediately commences on the
second, and it is regulated as before by the difierence of
their productive powers. At the same time the rent of
the first quality will rise, for that must always be above the
rent of the second, by the difiTerence between the produce
which they yield, with a given quantity of capital and labor.
With every step in the progress of population which shall
obliee a country to have recourse to land of a worse
auafity to enable it to raise its supply of food, rent on all
le more fertile land will rise."
18. To the preceding paragraph it would be difiicult
to raise any objection, except that in no case at all can
rent arise unless land is let by a landlord to a tenant.
But as invariably happens when persons start with a false
conception of the very nature of their subject, although
198 XLEMENTS OF POLITICAL ECONOliY.
they may go on a little way with apparent correctness, yet
when they proceed to develop their views, they are sure^
ultimately, to involve themselves in error ana confusion.
So it is in this case. Eicardo proceeds, ^^rent is always
the difference between the produce obtained by the
employment of two equal quantities of capital and labor/'
"Bent invariably proceeds from the employment of an
additional quantity of labor with a proportionally less
return ;" and he then immediately proceeds to say, " When
land of an inferior quality is taken into cultivation, the
exchangeable value of raw produce will rise, because
more labor is required to produce it," and that it is the
quantity produced under the most unfavorable circum-
stances that regulates price, of which proposition we have
shewn the entire fallacy in the preceding section.
19. Pursuing a similar train of error, he says,* " The
reason why raw produce rises in comparative value, is
because more labor is employed in the production of the
last portion obtamed." ** The value of com is regulated
by the quantity of labor bestowed on its production on
that quantity of land, or with that portion of capital,
which pays no rent." But immediately afterwards^ with
that curious mixture of truth and error which pervades
the whole of the exposition^ he says, " Com is not high
because a rent is paid, but a rent is paid because corn is
high ; and it has been justly observed that no reduction
would take place in the price of com, although landlords
should forego the whole of their rent. Such a measure
would only enable some farmers to live like gentlemen,
but would not diminish the quantity of labor necessary
to raise new produce on the least productive land in
cultivation." This observation of Ricardo's is perfectiy
just, but it is unfortunately at variance with the rest of
is system.
20. We shall find that the rent of land is an excellent
example of the rule we have established for determining
* Principles of Political Economy and Taxation^ p. 63.
1"
ON THB AFFLIGAXION OF THE LAW OF FBICE. 199
instantaneous value. The rent is the money paid by the
farmer to the landlord for the use of the land. The first
indispensable condition of rent arising is, that one person is
the owner of more land than he can conveniently cultivate
himself. A landlord is a capitalist whose capital consists
of land ; and like all other capitalists, he either trades with
it himself^ or lets part of it out to others to trade with,
and of course he is entitled to receive interest for the use
of his capital like any other capitalist. The difference
between a landlord who cultivates his own land and
a farmer, is just the difference between the man who
trades with his own, or on borrowed capital. A man who
has a larg'e amount of capital in land is in a very different
position to one who has his capital in money, because no
single man can trade with any very large amount of land,
It is very rarely a man farms more tiian a thousand acres
of land, but many a merchant trades with half a million
of money. Now, unless a man can trade with his land
himself, or get some one else to do so, it is of no value to
him; but if the merchant cannot trade profitably with
half a million of money, it will still be useful to him — he
can always get some interest for its use, however small.
It is, therefore, a positive necessity to a man who possesses
a large estate, to let part of it out to farmers. No
misfortune to a large landed proprietor could be worse than
to have a considerable extent of his estate thrown upon his
hands at once. Now, this circumstance increases the
power of the person who wants to borrow the capital,
over the one who wants to lend it ; it is a greater service
done to a landlord to take a farm, than it is to a tenant
to let it to him. In this case, like as in other loans of
capital, we must consider the farmer as the purchaser of
the service ; but when the capital to be borrowed is land,
the power of the purchaser over the seller is much greater
than when it is money. Hence, we must expect that the
price of it should necessarily be lower ; and this is what
we actually find to be the case. The rent of land, or the
money paid for the use of that species of capital, is much
200 iLEMBNTS OP POLITICAL ECONOMT.
less than in the safest mercantile operation. There are,
no doubt, other causes which also tend to produce a
similar effect, operating simultaneously to increase the
difference ; but the cause we first assigned is a true cause
of a certain amount of that effect, though not of the
whole of it. The rent of land rarely exceeds 2^ or
a per cent, of the value of the land, and is often
less than that.
21. Having thus shewn that the average amount of
the interest of the species of capital which consists of land,
must in general be less than tne average amount of the
interest of capital in the form of money, we must now
consider how rent arises at all, and show that the actual
amount of it in any particular case conforms to our rule.
If we suppose the produce of the farm, carried to market^
and realized in money, it is evident that the first charges
upon it are the public burdens, which the state requires
by way of taxes, the farmer's own living, the cost of all
the laborers and animals upon his farm, and the cost of
conveying* it to market. When all these necessary and
preliininary charges are deducted fi'om the price realized,
the remainder is the fund which provides for the landlord's
rent and the farmer's profits. The proportion in which
this fund is finally divided is settled by our rule. But
the tenant has a stronger natural position than the land-
lord. The landlord has a very strong necessity to let the
farm, the farmer has no very strong necessity to take it,
and if he is unable to gain a fair profit by doing so, he has
more resources open to him to employ his capital in, than
the landlord has. Hence, when the farmer's profits and
the landlord's rent come into collision, the landlord's rent
must give way. The inherent strength of the tenant's
Eosition must, therefore, in the long run, prevail over the
indlord, and, hence, we see why it is that the price of com^
determines the rent.
22. The sum which the farmer ha^ to pay as rent is
included in the total cost of production, and it will be
determined exactly in the same way as the price of any
OK THS APPLICATION OF THS LAW OF PRICE. 201
other service, by assi^in^ a proper value to each quan-
tity in our formula. We have already shown that it will
in general be lower than the money paid for the use of
any other kind of capital, because the power of the pur-
chaser over the seller is greater than usual ; but if there
be many competitors to purchase the service, the power
of the seller over each oi them will increase, and this will
raise the price of the service. That is to say, if there be
many competitors for the farm, the rent given for it will
be greater than if there are few.
23. From these observations we gather that the
fiumer is just in the same position as the manufacturer;
neither of them can command the price they please for
the articles they have to sell; consequently they must
each consider what will be the probable value of it when
sold, and then they must devote the whole of their skill
and energy in diminishing the cost of production. In
order to do this each of them calls in the aid of science;
the manufiEu^turer in the mechanical form of machinery,
the fiutner in the chemical form of manures and draining,
and every other means that science or skill can suggest
to develop the productive powers of the earth. Neither
of them can fix absolutely what the cost of production is,
until every improvement in science has been adopted, and
every resource exhausted. It is undoubtedly true that
the cost of production and the value of the produce must
have a relation to each other, but the question which is
to govern the other is the whole difierence between pro-
tection and free trade. Under the former system, the
cost of production might be as extravagant and wasteful
as possible ; the land might be undrained and badly cul-
tivated, and the object was to secure by law a price which
should under all circumstances, cover every conceivable
piece of waste and bad management, which was, with
somewhat of a mauvaise plmsanterie^ called the natural
price of com. While the one system held out a direct
reward for every species of mismanagement and ignorance,
and stinted production, the other, on the contrary, en-
202 XLBMSNTS OF POLITICAL ECONOKT.
courages skill and energy, and stimulates production,
and so confers upon the community at large the blesssings
of as great abundance and cheapness as circumstances
permit.
24. Our formula at once explains a fact which is
well known to every one who has practical acquaintance
with the management of estates, that it is £eu* more advan-
tageous for a landlord to have his estate divided into
fiums of moderate size than very large ones, because so
many more persons have a moderate than a large quantity
of capital, and consequently so many more are able to
compete for a moderate sized farm than a large one. The
landlord being the seUer of the service, his power over
each competitor increases according to their number^ and
he can demand a higher price for it. But if a farm is
very large, so few can compete for it, that the landlord's
power over each diminisnes^ and he will ujsually be
obliged to let it low. The same remark holds good in
houses^ and for the same reason ; houses of a moderate
size let much better than those of a large one.
25. Having said thus much concerning Bent, there
is nothing to detain us on the subject of Hire^ which is
the sum paid for the temporary use of what is usually
floating capital^ or persomd property, except this, that
the sum paid for its use must include two elements, one
the ordinary profits of the capital invested in the article,
and the other to represent the deterioration of the article
by wear and tear, so that when it is worn out, the total
sum received must be sufiScient to replace the article^
and to give the necessary profits to induce production.
In every particular case, tne sum paid will follow the
law of supply and demand^ but no deviation from the
general level of profits can long occur, because objects
which are the subjects of hire are so easily and quickly
produced, that if any extraordinary profits are made,
competition quickly reduces profits to their lowest remu-
nerating level.
26. We now come to the cases of personal services
OK THB APPLICATION OF THB LAW OF PRICE. 203
of all descriptions^ which is a very extensive branch of
our subject^ and which will be found to be complete
examples of the general law we obtained in the preceding
section. That rule shows why the wages of a skilfiu
workman are so much higher than those of an ordinary
one, because the work bemg of better quality^ it is a
service of greater intensity, and the skilful workmen
being comparatively few, the employer is more restricted
in his choice, and so his power over them diminishes, and
he must yield to their terms to a certain point. But if
he were to go beyond a certain point, he knows very well
that the vcdue of the article when produced wiU not be
sufficient to cover its cost of production and the necessary
profits, so rather than exceed that point, he will not
produce the article at all. On the other hand, the skilful
workman must live, and he knows that the emplover
cannot ^ve beyond a certain price, and he is obliged to
yield rather than starve ; so these circumstances determine
the rate of labor or wages. But if the number of skilful
workmen increases, he has greater power over them, and
the wages of their labor fall. Thus, it is universally
observed that when some new invention comes out, the
article produced is high in price, because so few can
produce it, and so many requure it; as soon, however, as
it becomes better known, and more can produce it, the
price of it falls, though the workmanship is in no whit
mferior, and this is because there being more competitors
for purchasers, the power of the purchaser over each of
them increases.
27. It was a doctrine long n^aintained, even by res-
pectable writers, that the wages of labor were in pro-
J)ortion to the price of food, but there never was a more
allacious idea. Burke said that the Norfolk squires
had dined when they gave it as their opinion.* If the
wages of labor depended upon the price of food, it
would necessarily follow that the wages of all trades
* Thoaghts and Details on Scarcity. Works ; Vol. u. p. 248. Bohn's Edit.
204 ELEMBNTS OF POLITICAL ECONOMY.
should rise and &11 together. But it is notorious that
such is not the case, for it frequently happens that while
one trade is enjoying great prosperity, another is greatly
depressed. It is often remai'ked that those towns where
a great variety of trades are carried on, are most
uniformly prosperous^ because the probability is that if
one trade is doing badly, others are doing well, and it
seldom happens tnat all trades are simultaneously de-
pressed, whereas those towns in which only one trade is
carried on, are subject to alternate fits of great prosperity
and great depression. The wages of labor, however^ in
each trade are determined by the circumstances of that
particular trade, though it is often the case that particu-
lar circumstances may affect several different trades
simultaneously.
28. So far is it from being true that a rise in the
price of food causes a rise in the rate of wages, that the
effect is generally the reverse, and a rise in the price of
food depresses wages. When the community at large
has to payaa enhanced price for theirfood, which isan
article of prime necessity, they have less to spare for
clothing and other ^oods." These being less sought after,
will diminish in value, consequently as the manufacturer
cannot get so much for his goods, he must either diminish
the cost of their production, or cease to produce. He
must either force down wages, or shut up nis mills. So
that the necessary result of a considerable rise in the price
of food is a fall in wages. That this is the case in manu-
fietcturing districts is too notorious to be disputed. Now,
the wages of labor in this case depend entirely upon the
relative necessities of the workmen and the employers,
and their relative power over each other. The workmen
will of course resist a fall in wa^s as long as they can,
but if the master cannot reduce them to a certain rate, he
cannot repay himself for his outlay, so that if the work-
men refuse to work for those wages he must shut up his
mill ; but if the workmen cannot find employment thev
must starve, so they must at last consent to the master^
ON THB APFLtCATION OB THE LAW OF PRICE. 205
terms. On tbe other hand, when there is a good sale
for the master's productions, he is anxious to supply this
demand and realize profits, and the workmen soon find
this out and refuse to work unless for higher wages, but
in this case there is also a limit which the master cannot
go beyond, and there he takes his stand as before, and
the workmen must yield. It sometimes happens that the
workmen are so misguided as to think that by increasing
the price of their labor they c^m force up the market
value of the article, which erroneous idea has given rise
to a great number of unhappy proceedings, so well known
as ^^ strikes," in the manufacturing districts. These
strikes have repeatedly happened, both when trades have
been in a state of o^'eat depression, as well as when they
were prosperous ; m the lormer case, when the masters
found it necessary to reduce wages, the men combined
to resist the reduction ; in the latter case, when the men
combined to raise their wages, and the masters resisted
them, so that the men struck to compel the masters to
jdeld. From these examples, as well as others which
will be adduced, it will be seen that instead of the cost of
]m>duction regulating the value of an article, it is fre-
quently its value which determines the cost of production.
29. Hence, we see that wages, or the price of labor^
are determined by the value of the service at the time it
is rendered. If there is a great demand for goods, there
is a great demand for men to make them, and every
master who has orders to execute is anxious to engage
men to enable him to do so, and the inevitable consequence
of this is to give the men a greater power over their em-
ployers, and enable them to raise their demands, and the
masters can well afiford to do so, because though by the
rise of wages their profits upon each individu^ transac-
tions may be dimimshed, yet from the greater number of
operations^ their profits are increased upon the whole.
Cm the contrary, when the demand for goods falls ofiT, and
the quantity of the work to be done is diminished, there
are so many workmen to do it^ that each is anxious to
206 ELEMENTS OF POLITICAL ECONOMY.
secure a share of it for himself, and then the power of the
masters increases over the men, and they are enabled to
reduce wages, nay, th^" miist do so in self-preservation,
because the number of their operations bein^ reduced,
the profit on each must be increased, to enable them to
live. Now, when is it that the demand for goods in-
creases? Common sense and universal experience reply,
when the price of food is low, for then the people are
able to indulge in other luxuries, and ^ive a spur to
labor. On the contrary, when food is high they have
less to spare from food, which is an absolute necessity to
them, and they must curtail their expenditure on other
articles, so that there is less demand for labour, and in the
natural order of things, the price of it falls because the
power of the laborers is diminished. The history of
prices in this county will be found to confirm the truth
of these observations, never was the price of labor so
high as when food was cheap, on the contrary as food
rose the price of labor fell. These fluctuations in wages,
produced by causes which were ill understood, alarmed
and irritated the workmen, and opened an uiibrtunate
field for a number of designing knaves to prey upon their
ignorance and misery.
30. It is not surprising that ignorant and unin-
structed workmen should fall into this mistake, when we
see persons of much better education commit precisely the
same error. The fundamental error which brought about
80 many of these unhappy strikes was, what has been
said by persons of repute, that the cost of production of
an article regulated its price. Many of these strikes were
the nothing more than the attempt to carry out to their
practical and logical conclusions the doctrines which emi-
nent political economists had enunciated with applause.
The workmen thought that by combining to raise the
price of their labor they could force up the price of the
article. But these proceedings have invariably ended in
£Eiilure and disaster to their authors, for they neglected
to take into their calculation the necessity the pubuc had
ON THB APPLICATION OF THE LAW OP PRICE. 207
for the article, and their means of supplying themselves
with it elsewhere, which are essential elements in deter-
mining the price.
31. It is no doubt true that there is a limit below
which the wa^es of labor cannot fall for any permanent
time, and whicn is determined by the price of food, but
this only relates to the very lowest, rudest, and most un-
skilled species of labor, and even that limit has happily
never yet been reached in England, because it depends
upon the lowest, cheapest, and worst kind of food capable
of supporting man. The poorest laborer in England has
now wheaten bread to eat, such as probably, in the
mediaeval ages, for which there has been lately such a
ridiculous enthusiasm, a nobleman could not obtain. If
such bread as is usually consumed in many a nobleman's
house on the continent were given to the inmates of an
English workhouse, it would infallibly cause a riot. The
lowest class of laborers have fortunately never been re-
duced to such a point continuously, though it may some-
times happen that when work is scarce, they can earn very
little, and then they may be driven to receive relief from
public or private charity, which takes them out of the
operation of the law of supply and demand. It is also
universally observed that when the price of bread rises
very high, the wages of the lowest class of laborers
never rise in any like proportion. The way of raising the
wages of labor, then, is not by raising the price of food,
but by diminishing the number of competitors for it, for it
is the number of competitors compared with the quantity
of work to be done, that influences the price of labor, and
not the variation in the price of food.
32. It is no mere speculative opinion that a general
and long-continued low price of com is not only not
necessanly accompanied by a low rate of wages, but most
probably by the very reverse. The most remarkable
continuance of generally fine seasons and abundance of
com ever known occurred in the last century. For the
extraordinary period of sixty-five years, from 1701 to
208 ELEMENTS OF POUTICAL ECONOMY.
1765, there was, with a few exceptions, a continued series
of plentiful harvests. The average price of com for that
period was 10 per cent, less than the average price for the
E receding century ; but notwithstanding that, the price of
ibor rose greatly during the same period, and, what was
least to be expected, agricultural labor rose 16 per cent.
Mr. Tooke says,* " The fact, indeed, of a rise of money
wages in this country, coincidently with a fall in the price
of corn during the long interval in question, rests on
unquestionable authorities ;'' and, says Adam Smith, ^^ In
Great Britain, the real recompence of labor, it has already
been shewn, the real quantities of the necessaries and
conveniences of life which are given to the laborer, has
increased considerably during the course of the present
century (t. ^., the 18th). The rise in its money price
seems to have been the effect, not of any diminution of
the value of silver in the general market of Europe, but
of a rise in the real price of labor in the particular
market of Great Britain, owing to the peculiarly happy
circumstances of the countrv ;" and, " The money price
of labor in Great Britain has indeed risen during the
course of the present century. This, however, seems to
be the effect, not so much of any diminution in the value
of silver in the European market, as of an increase in the
demand for labor in Great Britain arising from the great
and almost universal prosperity of the country.^f In
the latter part of the century, the price of wheat rose
enormously in consequence of a long succession of bad
harvests, but there was no corresponding rise in wages.
33. Mr. Ricardo ssja^X ^' Labor, like all things which
are purchased and sold, and which may be increased or
diminished in quantity, has its natural and its market
price. The natural price of labor is that price which is
• History of Prices. Vol. i p. 55.
f Wealth of Nations. Book i. ch. zi., Vol. n. p. 91. Wakefield's
Edition.
\ Principles of Political Economy and Taxation. 3rd Edition, p. 86.
OK THE APPLICATION OP THE LAW OF PRICE. 209
necessary to enable the laborers one with another to
subsist and perpetuate their race, without either increase
or diminution." " The natural price of labor depends on
the price of food, necessaries, and conveniences required
for the support of the laborer and his family. With a
rise in the price of food and necessaries, the natural price
of labor will rise ; with a fall in their price the natural
price of labor will fall." " The market price of labor is
the price which is really paid for it, from the natural
operation of the proportion of the supply to the demand ;
labor is dear when it is scarce, and cheap when it is
plentiful. However much the market price of value may
deviate from its natural standard, it has, like commodities,
a tendency to conform to it.'' A little examination will
shew how vame and inaccurate the ideas in these sen-
tences are. What are the natural food, necessaries, and
conveniences of a laborer? The standard varies in every
country. Are we to take the wheaten standard of England,
the oaten standard of Scotland, or the potatoe standard
of Ireland? or the black rye bread standard of Poland?
Which of these is the natural standard ? Wages in the
West Riding of Yorkshire used to be 14s., in Dorsetshire
7s. a week, which of these was the natural standard?
A little reflection will show that the idea of a natural
standard is a mere chimera. The same principle deter-
mines the rate of wages in each of these cases ; it is the
Eroportion existing between capital, employment, and
iborers in each locality. What made wages so low in
Ireland and Dorsetshire? The abundance of laborers,
and the scarcity of capital and employment. What made
wages so high in Yorkshire ? The abundance of capital
and employment, and the scarcity of laborers. If any cause
produces a change in the relative proportions of these
three elements, a change in the rate of wages necessarily
results. Since the famine and emigration have relieved
Ireland of the superabundance of laborers, wages have
risen greatly. Emigration has produced the same effects
in Dorsetsmre, and if the same proportions as now exist
o
^. ^ ttttt^^^"^^ ^^^ rOLinCAL BCONOMY.
Wh ^xs>m ih\v«i> lKi\^ olonuMits be preserved, the ordinary
Hi^v x^ ^^^"^ ^^^'' tHMitiime as at present. We see, then,
^, xAi*>^*H* UM^wumov of speaking of the natural price
v> k^lsM^ WliHl Mr. kieardo means by the natural price
^ ii\^K^HA ^^^^^"^ ^'^'^'^ ^h^ usual market price, which has
^s^«« I^xhUkhhI hy a long-continued steadiness in the pro-
k^v\t^v^^« U^twoou tlie elements of wages, but if any causes
vH*^HA^ (Imt pmportion, the ordinary market price changes
u^lUii Hence, we see that the relation of supph' and
vkvuM^uU IH the sole rule that governs wages.
M- It will be seen that Ricardo's views on the subject
v^ IuUms are influenced by exactly the same error, which
U Uiu fundamental defect of his doctrine of Value, namely,
HU inversion of cause and effect. It is perfectly manifest
0iat It is not the price of food which regulates wages,
(lilt the wages received which indicate the most expensive
(uMil which the laborer can afibrd to buy. Wages in
Ifingland have not risen because the laborei*s eat wheaten
bread instead of rye bread as formerly, but they eat
wheaten bread because their wages enable them to do
00, The wages in Ireland were not so low, because the
people eat potatoes, but the miserable peasantry were
oriven to feed upon potatoes, because their wages were
80 low, because there were so many laborers and so little
employment. So the people in Scotland eat oatmeal
porridge and oatcakes, because their wages were not
sufficient to allow them to eat wheaten bread Just for
the same reason in the northern districts they used to
wear kilts, because they were too poor to wear better
clothes. But since they have become better off, they
dress like their southern brethren, and they eat wheaten
bread to a very much greater extent than formerly. And
so it is on the continent of Europe. The people in a
great many of the continental countries live so badly,
oecause their wages are so low. There are so many
people, and there is, comparatively speaking, so little
employment. Nothing can shew more clearly the error
of the idea that the price of food regulates wages tlian,
ON THB APPLICATION OIT THB LAW 01 PBICB. 211
on the one hand, the case of the United States of America
and Canada, where food is extremely cheap, and wages
extremely high. What is the reason of this ? It is that
food is very abundant, and labor very scarce. It is
nothing but the supply and the demand of each article.
On the other hand, we may take as a reverse case, the
example of the unfortunate needlewomen of London and
other cities of western Europe. Gamier remarks* exactly
the same thing of the needlewomen of Paris. ^^A Paris
par exemple tout le travaille d'aiguille est tomb6 k un
taux insumsant pour fair vivre celles qui n'ont pas d'autre
ressource." And Dr. Mayer says that at Lille the worki
women who make the lace gain from Id. to l^d. a day,
working 16 hours. And population has increased so
much compared to employment, that those who could
gain two or three francs a day 30 years a^o, in 1845 could
gain only one franc, and those the most ravored. At the
other extremity of the world, we may take China as an
example of the same truth. Travellers give us accounts
of the disgusting garbage which the poorer Chinese will
eat : now, the rate of wages there does not depend upon
what they eat, but they are driven to eat that abomina-
tion, because the remuneration for labor is low. And
this is on account of the prodigious numbers of the
people.
35. The law of supply and demand, then, holds uni-
versally with regard to wages. An excessive increase of
the people forces down wages by an inevitable law of
nature, and as their numbers increase faster than employ-
ment, their wages must progressively diminish, and their
comfort and scale of living become rapidly deteriorated.
Nothing could save the scale of living of the poorer
classes ixy this country from descending to the level of
the Irish, or the Chinese, if their numbers went on in-
creasing without a corresponding increase of employment.
It is not unusual to hear persons of benevolence, who
* Elemens d'Eoonomie Politique, p. 404.
0 2
212 njQfsns or pmitical icxmsnr.
wee the diockhig misenr, which even now jurevails smoi^
•o mao J in this conntwy^ excUim that employers ooght to
my higher wages. Bat all such ideas are Tisionaiy.
There is onl j one effeetnal mode of relief and that is to
diminish their numbers, bj profiding outlets fin* the
superabundant hands, until the diminutimi of their num-
hen ma J again raise their wages, so that they can find
ecmstant employment, at wages which will enable than
to live in comfort.
36. The greater part of Adam Smith's chapter on
^ Wages and Profits in different employments,'' * is a
enrious example of the same inversion of cause and eflfect,
and a consideration of the phenomena detailed in it,
wfll afibrd a further indication of the truth of the
preceding principles. He says that there are five
principal circumstances which make up for a small
pecm&iry gain in some employments, and counter-bidance
a great one m others : —
1. The agreeableness or disagreeableness of the em-
ployments themselves.
2. The easiness and cheapness^ or the difficulty and
expense of learning them.
3. The constancy or inconstancy of employment in
them.
4. The small or great trust which must be reposed in
those who exercise them.
5. The probability or improbability of success in
them.
These considerations of Adam Smith have been very
generally approved of, and have acquired some celebrity ;
yet it is quite easy to show that they are aU reducible to
the general law we have arrived at, and that in some of
them Adam Smith has most manifestly inverted cause
and effect.
37. When he says that the wages of the more agreeable
trades are lower than the disagreeable ones, the reason is
* Wealth of Nations. Book i., Chap. x.
OK THB AFFUCATIOH OF THB LAW OF FBICB. 218
very plam. Persons in general prefer the most afiTeeaUe
tiJeC conseiiueiitly thTre ar/ more competitors for
employment in them; but there is also a necessity for
disagreeable trades as well, and higher wages in them
must be offered to tempt workmen to embark in them.
These causes are manifestly to be referred to the law of
supply and demand, the various degrees of desirability
of the different trades, being merely the circumstances
which influence the relation of supply and demand.
38. In the second case, Adam Smith has most mani-
festly inverted cause and effect, and his ideas are pervaded
with the radical error of his system. After enumerating
several species of business, he says, ^^ Education in the
ingenious arts, and in the liberal professions, is still more
tedious and expensive. The pecuniary recompense,
therefore, of painters and sculptors, of lawyers and
physicians, ougnt to be much more liberal, and it is so
accordingly." A very slight consideration will shew that
it is exactly the reverse of what Adam Smith says. The
rewards of lawyers, doctors, &c., are not high because
their education is expensive, but they expend much
on education because the rewards are high. There
is no better example of the truth of the principle we are
contending for, and of the fallacy of the one we are
combating, than these cases. There is, probably^ no
difference whatever in the expense of the education of
the most able and the least able doctor or lawyer ; but
there is a prodigious difference in the result, owing
chiefly to the differences in the innate capacities of men,
and the success or the contrary will in general depend
upon the qualifications of each man; the quality of
the result, and not upon the cost of its production.
We shall, however, consider these more fully under
the last case.
39. The third case is also manifestly reducible to the
law of supply and demand, just as the first is, because
men naturally seek for constant employment rather than
precarious employment, consequently they will crowd
214 ELEBISRTS OF POLITICAL ECONOMT.
into one more than into the other. And the employers
in the trade in which work is less constant, must necessa-
rily give higher wages than those in which it is more
constant, to attract persons to it. Exactly in the same
way, in places of trust, the qualities which fit persons for
such employments are comparatively rare, and unless a
hi^h price be offered, it is not likely that the employers
will nnd a suitable person.
40. The last cause which, according to Adam Smith,
influences the wages of labor, is the probability or impro-
bability of success in the employment. In considering
this case, this celebrated author has suffered himself to be
led away by one of the most curious instances of
misanalogy anywhere to be met with. People speak
figuratively of life being a " lottery," and of the uncer-
tainty of success in it. Adam Smith, seizing upon the
word lottery^ has been led away into a most curious fancy,
which has also deceived some later writers. ^^ The
probability that any particular person shall ever be
qualified for the employment to which he is educated, is
very different in different occupations. In the greater
part of the mechanic trades success is almost certain, but
very uncertain in the liberal professions. Put your son
apprentice to a shoemaker, there is little doubt of his
learning to make a pair of shoes ; but send him to study
the law, it is at least twenty to one if he ever makes such
{proficiency as will enable him to live by the business,
n a perfectly fair lottery, those who draw the prizes
ought to gain all that is lost by those who draw the
blanks. In a profession where twenty fail for one that
succeeds, that one ought to gain all that should have been
eained by the unsuccessful twenty. The counsellor at
Ikw, who perhaps at near forty years of age, begins to
make something by his profession, ou^ht to receive the
retribution, not only of his own so tedious and expensive
education, but that of more than twenty others who are
never likely to make imything of it. How extravagant
soever the foes of counsellors at law may sometimes
ON THS AFFLICATION OF THB lAW OF PRICE. 215
Itppear, their real retribution is never equal to this.
Compute in any particular place what is likely to be
annually gained, and what is likely to be annuaUy spent
by all the different workmen in any common trade, such
as that of shoemakers or weavers, and you will find that
the former sum will generally exceed the latter; but
make the same computation with regard to all the
counsellors and students of law in all the different inns of
court, and you will find that their annual gains bear but
a very small proportion to their annual expenses, even
tliough you rate the former as high, and the latter as low
as can well be done. The lottery of the law is^ therefore,
very far from being a perfectly fair lottery, and that as
weU as many other uberal and honorable professions, is in
point of pecuniary gain, evidently under-recompensed."
41. No one who really examines the foregoing ideas
can fail to see their utter incongruity. In a lottery, the
chances of each individual who ventures in it are
absolutely equal ; no personal qualification can influence
his chance in any way whatever ; the greatest simpleton
may draw the greatest prize, the wisest man may draw a
blank. In many cases it may be certainly predicated of
an individual who adopts a profession, whether he will
succeed or fail, and success in all cases is the result of
personal qualifications. In a lottery it is perfectly well
known that only a certain number can by any possibility
succeed, and all the rest must necessarily fail. In a
profession it is quite a matter of possibility that all may
attain success, and it is also a matter of possibility that
none may attain success sufficient to enable them to live.
To carry out Adam Smith's analogy, we might just as
well say that poetry is a lottery, and that the sum paid
to the good poets should recompense all the waste of
time by the bad poets.
42. It is quite evident that the fees of counsel are
simply examples of the law of supply and demand.
Nothmg can be more erroneous than the idea that the
fees are high, because the education is high. The truth
216 ELEMENTS OF POLITICAL ECONOMT.
is, that people spend much money upon a professional
education, because the rewards are so high; and the
rewards are so high, because they are of so great im-
portance to mankind, and because great skill in them is
so comparatively rare. The fees of a FoUett, or a Dun-
ning, or a Scott, were not so high because there were so
many Mr. Brieflesses, but simply because the talents of a
Follett| or a Dunning, or a Scott, were so rare and so
important. If their talents had become more general,
the rewards of their labor would have diminished. It
is exactly the same law in the other professions alluded
to. It is the high rewards that may be won in them,
that attracts high talent into them, and it is for the sake
of these high rewards that men undergo a long, tedious,
and expensive education, and course of labor. Exactly
as the Roman tribune said.
43. Having now considered the cases of rent, hire,
and personal services, we now come to the question of
Interest. When a man employs his own capital in trade
it is perfectly clear that he is entitled to retain for his
own use all the profits resulting from such operations,
whether those profits be twenty per cent., one hundred
per cent., or a thousand per cent. If any one of
superior powers of invention were to employ nis capital
in producmg a machine, which should be of great public
utility, he might realize immense profits and accumulate
a splendid fortune, and no one in the ordinary possession
of their senses would grudge such a man any amount
that he might legitimately make, or would think it in-
herently wicked of him to g-ain as much as he could ; on
the contrary, he would probably be applauded, he would
be called a benefactor to his coimtry, and his name
would be handed down with honor to posterity.
44. It often happens, however, that persons endowed
with such powers of mind and habits of industry as
would tend to enrich themselves and benefit their country,
are deficient in capital, or the means of setting their
industry in motion. On the other hand, it often happens
ON TfiB AFFUCAHON 01* THB LAW 09 FBICE. 217
tbat persons who possess capital, or the latent power of
setting these energies in motion, are deficient in the
active qualities which are necessary to give it efiect, or
they may not have the necessity or inclination to do so.
Under these circumstances it is manifestly advantageous
to all parties, and the community in general, that those
who have skill and industry without capital, and those
who have capital without skill or energjr, should meet
together and combine their respective latent qualities.
Such a combination would produce a beneficial result,
and it seems clear that each party should have the profits
of the combined enterprise in some previously agreed
pn,portion. Such opeUons are exLmely ioSn,
and there are two methods usually adopted as to the
sharing of the profits. The person who advances the
capital may either asree to receive a certain definite
proportion of the pronts realized, or he may stipulate to
receive a certain definite sum in proportion to the capital
advanced. In the former case he agrees to share the
risk of there being no profit at all, or he becomes a
partner. In the latter case he restricts his share to a
certain amount previously defined, however large the
profits may be, but he endeavours to shield himself from
any loss which may arise, and in this case the sum he
receives as a reward or hire for the use of his capital
is called Interest.
46. The price to be paid for the service rendered by
the capitalist does seem to be entirely a subject for
private arrangement between the parties, just as much as
the price paid for any other service; nor does there
appear to tne eye of common sense anything in the nature
of things inherently wicked in any particular division of
the profits they may agree upon between themselves.
The service rendered by lending money in such cases
may vary in intensity according to circumstances, just as
any other service may vary. Nobody thinks it wicked
for a man to make 1000 per cent, of his own capital if
he can do so ; nay, those who do so are frequently looked
upon as the greatest benefactors to mankind. But if one
218 ELBBfSNTS OF POLITICAL ECONOmT.
'person borrow ciGipital from another, and give him a
price for the service rendered, or a share of the profits in
proportion to the capital advanced, it appears to some
people to alter the whole nature of the transaction.
While a return of 30 per cent, was quite an ordinary
return in the way of trade for a man's own capital, they
thought it something essentially wicked for the person
who advanced the capital whereby these profits were
made to take more than 5 per cent, for the use of it.
The above is a simple explanation of the nature of inters
est ; and there certainly seems no imaginable reason why
such a contract should not be left to the private arrange*
ment of the parties themselves as other contracts usually
are. Yet there is no subject upon which men seem so
utterly to have taken leave of their senses as on that
of interest or usury. Dante punishes usurers worse than
those who denied the existence of the deity, and puts a
whole city famous for its monetary business into hell,
as a companion to the cities of the plain. Nor is it
possible to say whether the nonsense talked by Dante, or
the nonsense talked by Aristotle on the subject of usury,
is the greater. And it is not a little humiliating to
think, that within the last twenty -three years it was a
crime punishable by law to take more than 5 per cent,
for the use of money in any case whatever, and that the
usurv laws were only partially relaxed then, and were
not nnally abolished till 1854. And in the most modem
works on Banking published in France, the other eye of
Europe, it is still deemed necessary to retain a chapter
on the lawfulness of interest.
46. Supposing, however, the rate of interest to be
free and unfettered, as it now is, it is very easy to see the
considerations which will govern it. In the first place, as
the interest is always a part of the profits realized, it is
clear that the first element which will determine it will
be the expected rate of profit. The next is the proportion
between capital and industry. If capital be very scarce,
and those who want to borrow it numerous, they of course
ON THE^JIFPUGATION; of THBLiLW OF FBICE. 219
will nataralljgive a gl^tw proportion of the profits to
the capitalists. But ifcapital be abundant, and tnose who
want to borrow it be fewer, the eapitaiists will have to be
contented with a smaller proportion of the profits, and the
rate of interest will fall. These considerations shew at
once that interest conforms to the rule we have already
established for prices, for the profits expected to be realized
by means of the capital are the intensity of the service
rendered ; and the number of those who want to borrow
compared to the quantity of capital to be lent, represents
the powCT of the buyer over the seller. Hence, interest
varies directly as the profits, and inversely as the propor-
tion of the supply to the demand, which, thrown mto an
arithmetical form, is : —
T X X Profits.
Interest= a — i —
Sapply.
Demand.
^ _ Demand x Profits.
Or, Iiitere8t= g^^^^^;
47. The preceding considerations shew that the
Interest of money is precisely analogous to the Rent paid
by a farmer to a landlord. They are each of them paid
out of the profits realized, and they are the hire paid by
the borrower for the use of trading capital, and they
generally bear some proportion to the profits, but what
proportion that will be, is modified by particular circum-
stances in each case.
48. These considerations contain the general prin-
dples which govern interest under ordinary circumstances,
but of course, in times of great commercial difficulty, both
general and particular sums are paid for the use of money
very much higher than the usual rates, which are also
called interest ; but these are exceptional cases, and are
paid, not out of the legitimate pronts of business, but for
some great exigency, as for the use of sums for a short
time to stave ofi^ ruin, or other penalties which may
attach to a trader for failing to meet his engagements.
S20 xLEMEirrs of political xcoiraicr.
The sums paid in such almormal instances are not fairly
to be called interest.
49. Let us consider a practical example, in order to
put the matter in a clearer view. Every one who is ac-
auainted with agriculture knows how profitable it is to
Grain and improve land. In many districts, draining land
Eays 30 per cent., that is, it will repay the whole sum
ud out upon it in a little more than three years.
50. Now, let us suppose that a fermer has an im-
provable farm, and wants capital to inprove it ; he goes
to a capitalist^ and tells him that by laying out £1,000
upon it he can increase the value of its produce to the
amount of £300 a year. Now, if the capitalist and the
farmer agree to combine in this operation, and agree that
the extra produce obtained by that expenditure should be
shared between them in certain proportions, why should
any other person, or why should any law interfere to
decide what that proportion should be ? Why should it
not be left to themselves to settle upon the price of this
service rendered, just as the tailor and the customer agree
between themselves upon the price of a coat, or anything
else?
51. If the case were stated as above to any man
of ordinary intelligence, and he were asked in wliat
proportion the extra produce should be shared be-
tween the capitalist and the farmer, he might very
naturally answer, that it would be fair to have it equally
divided. Now, if we suppose the operation performed
and the produce actually obtained and shared equally
between them, every one would commend so equitable a
bargain. But suppose that instead of the produce being
shared equally in kind, it was previously sold, and its
value in money obtained, then it would appear that the
capitalist received 15 per cent, for his money, and this, in
the estimation of a very general prejudice, which flourished
till very recent times, would alter the whole nature of the
transaction, and the capitalist would be branded with very
opprobrious epithets, and subject to severe punishment.
ON THE AFFXJGATION OF THE LAW OF FRICE. 221
Now all this folly arose from a misconception of the ele-
mentary principles of interest.
52. We are happily relieved from entering into any
discussion of the Usury Laws by their bein^ at length
totally exterminated from our Statute Book. But we
may be permitted to observe that the progress of just
I^slation on this subject must always be remarkable as
an instance of the extraordinary vis inerticB of an estab-
lished law in this country, where no great popular passion
is brouffht to bear on it, even where no great interests are
enlisted in defending it, and where abstract justice and
good sense are not made a popular cry. In the year
1691, Locke published his ^^ Considerations of the Conse-
auences of Lowering the Interest of Money," in which
iie futility of the Usury Laws was periectly demon-
strated. The letters of iBentham upon the ^^ Defence of
Usury " are as splendid examples of unanswerable ar^-
ment as any in existence. The most eminent writers had
pointed out, not only their utter futility to effect their pur-
pose, but their highly mischievous effect in aggravating^
the evil they were intended to pi-event. The experience
of several commercial crises had demonstrated, that in
consequence of the law attempting to prevent people pay-
ing more than 5 per cent, for the use of money, they often
had to pay 60, 60, or 70 per cent, by the methods they
were forced to adopt. They were investi^ted and con-
denmed by a Parliamentary Committee, let it was only
in the year 1833 that the first breach was made in them,
by exempting bills which had not more than three months
to run from their operation, and by temporary extensions
and prolongations, most other contracts were taken out
of their operation, but it was only in 1854 that they were
finally swept away from the Statute Book. Thus, from
the period of their total demolition in argument till their
total demolition in fact, a space of not less than 161 years
elapsed. If it took this period to abolish laws equal in
adsurdity to those of witchcraft,* and which were felt and
* The last trial lor witchcraft in Oreat Britain took place in 1736,
the last case of Usmy in our law books was in 1856,
S2S( XLEMSNTO OF POLITICAL SCOirOKT.
acknowledged to be an unmitigated nuisance by great
numbers of the community, we may well believe that it
will take 20 years* to introduce the decimal system of
coinage, which mi^ht cause a little inconvenience to a few
people for a week or so, but which would be an enormous
saving of time to the whole commercial interest.
53. In the example we have taken of improving
land, we have seen that the first expenditure of £1,000
would produce a return of thirty per cent, on the outlay,
and therefore a profit of fifteen per cent, would be by no
means an inequitable sum for the capitalist to receive. It
would by no means follow that the outlay of another
£1,000 would produce an equal profit, and in fact it would
almost certainly not do so, consequently, the person who
advanced a second £1,000 to be expended upon it, would
not receive so large an amount of interest as the first, if
the same rule were followed of sharing the profits equally,
and with the expenditure of every successive £1,000, the
profits would be less and less, tiU at last they would be
inadeouate to produce any appreciable return on the
capital. In all these cases, however, the rate of interest
paid for the use of the capital would be modified by the
auantity of capital that was to be had, in comparison to
le quantity of it which was wanted to be Dorrowed.
From these circumstances we may see why the rate of
interest will usually be much higher in a new country
than in an old one ; first, because the expenditure of a like
sum of money will generally produce a greater profit in a
new colony, than in the old country ; and secondly, in a
new countrv the quantity of capital in it will be neces-
sarily small, because the community has not had time to
render those services to mankind, which are the only
means by which they can accumulate capital. When an
old coimtry throws ofi^ a swarm of colonists, it is most
generally caused by physical sufFerine at home. People
do not generally desert their ancestral home, unless they
* The opinion of Sir John Herachell — ^which seems too ssngoine.
ON THS AFFLICilTION OF THE LAW OF- FBICE. 22$
find that their means of advancement are circumscribed^
and that they can get no adequate reward for their in-
dustry. A new colony will therefore abound with energy
and industry, but be deficient in capital, which will make
a greater comparative demand for it, and necessarily raise
its value, or the price paid for the use of it. In old and
highly developea countries, interest will necessarily be
low, because there will usually be a great store or accu-
mulation of capital, the fi*uits of centuries of industry and
parsimony, which is transmitted from generation to gene-
ration, and as few people wish to diminish their capital
or property, there will be a considerable demand for in-
vestments by capitalists, and they will by their competi-
tion have to submit to lower interest. A consideration
of these modifying circumstances will be found to be in
exact accordance with the formula we established for
prices in Chapter II.
54. We must also observe, that though rent and in-^
terest are analogous in their nature^ so far as they are each
tike remuneration paid for the temporary use of a species
of capital, yet they proceed in opposite directions m the
Jrogress of society, the reason of which is very obvious,
n an early stage of society, land is very abundant, and
food is very abundant, consequently when every one
can buy land for himself, he will not hire any, and even if
he ' does, the rent must be very low, because the price
of food out of which rent comes is very low. On the other
band^ capital or money is very scarce, and there is a great
demand for it as well as for labor, consequently wages and
interest will be very high. But as population and wealth
increase, the land becomes more scarce, and the demand
for food increases, which raises the price of food. There
is less land to be sold, and its price is much higher, con-
sequently many persons who prefer that mode of life, and
cannot afford to buy land, are obliged to hire it and pay
rwt for it, and as the price of food increases, rent increases
too. On the other hand, each successive generation adds
to the. accumulation of capital; the number of persons
:.• xo>nr.
. ; increases, and this
- v*s})ecially as profits,
: so naturally diminish
The fact is, that these
.'.4 money, arc subject to in-
^ iLNi of society. The demand
,i.L the su])ply, the supply of
...I the demand.
..^ises which permanently govern
..ivst in difterent countries; but in
Liarket rates of different species of
licir rates vary from time to time
..^iiiioos; but yet they will all be found
.»c i:^'neral rule.
i; the question we have hitherto not
^ , , dio danger of the security, but we
aNOStment to be perfectly safe; and it
*wv; ;4nd received for the use of the mo-
* "\ >4i>i* of the security of the investment
\..^v''i^' tei'uied interest. But almost all
x..>ii^'t to more or less risk, and the sum
.-•••^^ "* ..' denomination of interest must include
•^ ■'' ^t^. the actual hire for the money, and the
'"* . **,'.; -J^ ^* insurance on the risk, and just as
*> * ^ ♦v^itor, so must the premium be higher.
V AMind to be exactly analogous to rent or
" ;i iMiapter I. It was there seen that the
^ "''' " ^"* ^nv article comprised two elements, one
4 . " ^ ^ ' .^•capital invested in it, the other to replace
,. --"*'' ' ^^^ ^^j. wear and tenr of the article itself.
u .•^^'''■^' v^ .md losses in trade may be considered as
\. •♦ "^^^ ^..oa ^*^ wear and tear of capital. And the
x, AX' '^'^'^ ''.^^^ ^^j,^, of money in a particular employment
x*-* ^^''^ ""..'uilrtv >VJ\y? comprehend one element for the
-I*
y^^iis"^ ^^ Vt^iH** ^'*^^ ^^^^^ ^^^ capital to that employment
ON INE APPLICATION OF THE LAW OF PEICE. 2S6
unless lie receives in the long ran enoag^h, not only to
give the profits of capital, but also to cover the losses and
replace llie wear and tear, or deterioration, of capital:
Hence, the rate of interest will always rise in proportion
to the risk of the security, and hence there must always
be in the same country, and at the same time, a different
market rate of interest for every investment of a different
degree of security, just as there is always a different rate
of hire or rent for articles of different degrees of perish-
ability. But these different rates will always rise and
&11 together.
57. We may look at the question in another light.
L^idii^ out money at interest may be regarded as the
purchase of an annuity, to last for a longer or a shorter
period^ according to the agrtement of the parties. Hence,
m purchasing such an annuity, the priise of it has to be
considered just in the same way as the price of anything
else. Now^ it is quite evident that the value of the
annuity xnust^ in a great measure, depend upon its
certainty of bein^ paid, or upon its security ; and if there
be one species or security more certain than another, iti$
quite dear 'tihat the former is* a service of greater intensity
than the latter; and must be paid for accordingly. Thus;
we^ may say, that a person who offers to take money at
interest wants to sell an annuity to the lender of
money, and just in proportion as the security he can off&t
is good, so wiU he get a higher price for it ; so that the
interest of money paid by the borrower wiU be just in
proportion to the risk run. Thus, money may be lent to
merchants, to landowners, or to government. Now,
merchants are always subject to unforeseen disasters, not
only from their own speculations, which may turn out
unn>rtunate, but they are usually so involved with others
that they are always liable to suffer f¥om the faults or
misfortunes 'of others; consequently there is always some
risk in lending them money. The owner of land is exempt
from many of the risks a merchant is exposed to ; he id
not generally involved with' others in his buisiness, but
p
226 ELEMENTS OF POLITICAL ECONOMY.
prosperity is based upon the land itself, and, as long as
that IS judiciously managed, it gives forth a sure increase,
unless under the effects of some temporary dispensation of
Providence. Consequently the security for the payment
of an annuity based upon the increase of the earth is
fiu: greater than one which is liable to the casualties of
commerce. A considerably higher price, therefore, will
generally be given for an annuity whose security depends
upon land than upon commerce^ that is, a landowner can
usually borrow on cheaper terms than a trader. The
Government of this country, again, is considered to be
more secure than either land or commerce ; consequently,
by the same rule, an annuity purchased from the Grovem-
ment should usually cost more than either of the two
former ones. And this exactly corresponds with the fact ;
the interest obtained by investing money in the fimds is
usually lower than what is obtained either from mortgage
on land or on mercantile security.
58. We may, therefore, consider that the price paid
for the use of the money always includes these two
el^nents, one of which is the fair earnings of the money
itself, and the other is the insurance to cover the risk of
the loan to the lender. Each of these varies at different
times, according to the particular person to whom the
money is lent, and the total effect will vary accordingly,
and it is sometimes not easy to discriminate the effects
due to each separate cause.
59. These, then, are the circumstances which deter-
mine the relative market rates of interest on different
species of security in any country, at the same time. If
the rates of interest be observed at any particular time^
the difference arises solely from the difference in the esti-
mated safety of the species of security. And it will also
be founds that if the rates in the same species of security
vary, it is because there is more danger than usual in the
particular security offered by an individual. Thus, in the
species of security offered by Grovemments, which are
usually called funds, the price of an annuity of £3 a year.
ON THB AFFUCATION OF THB LAW OV FBICE. 227
from the English Government, is seldom much undei*
£100, while no one would give more than £80 or £35
for a similar one, from the dishonest and bankrupt
Government of Spain. That is, the English Government
can boiTow money at little more than three per cent«,
while the Spanish Grovemment can scarcely do so at
nine. The same may be said in a greater or less degree of
every one of the European Governments, and the prices
of annuities to be paid by them, vary exactly in proportion
to the supposed honesty or capacity of each to fulfil its
am^ements. It is universally true, that the value of the
different kinds of annuities at the same time, and in the
same market, will vary exactly in proportion to the esti-
mated security of each. But this is by no means the case,
if the observation be made at different times, because the
value of money itself changes from time to time, like that
of any other commodity, and accordingly the price paid
for its use will vary according to that vsdue, so that the
interest received irom the most secure species of invest-
ment at one time, may exceed that usually paid for the
least secure species at another time, and this difference in
value will be caused by an alteration in the relation of
supply and demand, in accordance with the general prin-
ciples that govern price. Thus^ when commerce is stag-
nant, or there is a superabundance of money that cannot
find employment^ the competition for lending it increases,
and the power of the borrower increases over each lender.
On the other hand, when commerce is active, there are
more persons who wish to borrow, and of course the
price will rise in proportion to the increase in the de-
mand, and this will cause a rise in the market rate of all
securities.
60. When this general change takes place in the
market rate of interest, it by no means implies that the
securities are more dangerous at one period than anotheri
but only that money itself has risen in value, and the
different species of securities will preserve the same re-
lative differences as before,
p 2
228 ELBKENTS OF POLITICAL BGONOICT.
61. A fall in the rate of interest is so fiur from proving
the safety of the security^ that it will frequently be found
to be worst, when interest has been much depressed
below the usual rate. Because when that happens, all
sorts of wild schemes and speculations are set afloat,
partly on account of the undue fisicility of obtaining capital,
and partly because when interest is so much depressed^
there are so many persons who live upon the interest of
their money who become so distressed by the diminution
of their incomes, they are tempted to embark in all sorts
of hazardous schemes which promise a better profit. All
the great commercial crises of late years have been pre*
ceded by a continued and unusual depression in the rate
of interest. On the other hand, when it rises much
higher than usual, it puts a stop to a great deal of
legitimate business in a manner that is very injurious
to the country. It is clearly, then, most for the public
advantage that the interest of money should neither
be so low as to tempt persons to embark in dangerous
speculations, nor so high as to impede real and usefol
ip,dustry.
62. The rate of interest in the whole market is
affected by the alteration of the ratio of supply and
demand. The whole class of seekers which constitute
the demand is composed of a great many different
^branches, and if there be a great demand for money in
one of these subdivisions, it will affect the rate in the
whole market. One of the most important, if not the most
important, of these subdivisions is the demand for money
for mercantile discounts, and an alteration in the ratio of
supply and demand in this branch always causes the
most important effects in the whole market. But while
Vfemay say that an alteration in this ratio will produce
the(9e effects, we are not yet in a position to consider the
causes that, produce the alteration, until we fully uinder-
st^d the ci^t system, upon which our commerce so
S^eatlj depend?), whiph will be. treated of in the next
chapter. We have seen that the rate depaids very much
ON TBB AFFUCAXION OF THE LAW OF FBICB. 229
on the most sensitive of all feeimg^—conjidence, tod ft is
clear that an Act of Parliament is as incompetent to
r^ulate that as it would be to govern the changes in the
barometer. We are, however, nappily saved the trouble
of demonstrating the unmitigilted ^i^hief of usuiy laws,
by their recent abolition.
63. The expression, value of money, being applied to
the purchase of two distinct species of articles in com-
merce, namely the ratio wluch a given quantity of
money bears to a given quantity of commodities, and
also to the ]^rice of debts, which is measured by the dis«
count, has given rise to some considerations of a somewhat
subtie nature, which we must endeavour to unravel.
We have shewn that the rate of interest, or discount,
depends upon the quantity of debts offered for sale com-
pared to the quantity of capital to buy them with, just
m the same way as the exchangeable relations of money
and commodities are found to be influenced. It might
appear therefore at first, that a great increase in the
quantity of the precious metals which leads to a diminution
of the value of money with respect to one of these articles of
commerce, should also necessarily lead to a diminution
of the value of money in respect to the other. That is
to sajr, for instance, if the value of money were so
dimimshed with respect to commodities, that it required
double the quantity of bullion to purchase any given
commodities, that the rate of interest or discount ought
to fisJl to one half. And conversely, that if there was
such an increase of capital that the value of money
diminishes so much in purchasing debts, that the rate
of interest, or discount, fell to one half, that therefore
the quantity of bullion necessary to purchase commodi-
ties should be doubled. It would appear that such an
idea that the value of money should diminish to one half
with respect to commodities and remain the same with res-
pect to mscount, was paradoxical, and self contradictory.
64. Accordingly Adam Smith says,* that several
* Wefklth of Nations. Book u. Chap. iv.
280 ELEMENTS OF POLITICAL ECOKOMT.
eminent writers have maintained that the increase of
the quantity of gold and silver in consequence of the
discoveiy of the South American mines, was the
real cause of the lowering of the rate of interest,
through the greater part of Europe. Those metals
they say, havmg become of less value (i. e.j of less
pnrchasmg power with respect to commodities) them-
selveS; the use of any particular portion of them became
of less value too, and consequently the price which
should be paid for it. Adam Smith says, ^^ The follow-
ing very short and plain argument, however, may serve
to explain more distinctly the fallacy which seems to
have misled those gentlemen. Before the discovery
of the Spanish West Indies, ten per cent, seems to have
been the common rate of interest through the greater
part of Europe. It has s\nce that time in different coun-
tries sunk to six, five, four^ and three per cent. Let
us suppose that in every particular country, the value
of silver has sunk precisely in the same proportion, and
that in those countries for example, where interest has
been reduced from ten to five per cent, the same
quantity of silver can now purchase just half the quantity
of goods which it could have purchased before. This
supposition will not I believe be found any where
agreeable to the truth, but it is the most favorable to
the opinion which we are going to examine, and even
upon this supposition it is utterly impossible that the
lowering of the value of silver could have the smallest
tendency to lower the rate of interest. If a hundred
pounds are in those countries now of no more value
than fifty pounds were then, ten pounds must now be of
no more value than five pounds were then. Whatever
were the causes which lowered the value of the capital,
the same must necessarily have lowered that of the
interest, and exactly in the same proportion. The pro-
{)ortion between the value of the capital and that of the
nterest must have remained the same though the rate
h^ never been altered, By altering the rate, on thp
ON THB AFFLICATION 09 THB LAW OF FRICB. 231
contrary, the proportion between those two values is
necessarily altered. If a hundred pounds are worth now
no more than fifty were then, five pounds can be worth no
more than two pounds ten shillings were then. By re-
ducing the rate of interest, therefore, from ten to five per
cent, we give for the use of a capital which is supposed to
be ecjual to one half of its former value, an interest
which is equal to one fourth only of the value of tiie
former interest." The fact is simply this, that the
interest comprehends two elements, one part of the profits
paid for the use of the money, the other as insurance for
the risk of loss. Now, no diminution in the value of
money with respect to commodities, can make the
slightest difference in respect to these two elements.
Whatever the quantity of goods be, more or less, that
£100 will purchase, the part of the profits paid for the
use of the money will still be the proportion of the £100.
Nor can any alteration in the value of money have the
slightest efiect in infiuencing the risk of the transaction.
Whether the usual price of goods be £100 or £50, it
can make no difierence in the proportion of the profits
agreed to be paid for the use of £100, nor in the risk,
consequently it can have no infiuence whatever on the
rate of interest. The evident proof of this is, that in
America, where of course money has diminished in
value with respect to commodities just as in the rest of
the world, 10 per cent, is quite a common rate of discount
for the best mercantile paper.
65. As, however, it is unquestionably certain that a
diminution in the value of money, both with respect to
debts and commodities, is caused by an increase of^capital
or money, it becomes a very important and a rather subtle
question, to determine under what circumstances either or
both of these results is produced. And it is a question of
peculiar interest at the present time, when the abundance
of the Australian and Californian gold fields would lead
many persons to expect a similar alteration of value as
took place at the discovery of America*
232 SLEMSNTS OF FOLITIOAL ECONOMT.
66. We <lo not speak of Australia and California
themselves, where gold was a positive drug for some time,
but of the effects which may be anticipated in the old
established countries of Europe. It is evident that as an
increase in the quantity of money is capable of acting on
its value^ both with regard to debts and comu^odities, its
first effects will be manifested in respect of that on which
it first acts. Now, under the artificial system of the
currency produced by modem banking, the supplies of
ffold invariably find their way into banks in the first
instance. And the business of banking, as we shall show
hereafter, consists in buying debts in a peculiar way^ the
discussion of wliich we need not anticipate here. Now, tlie
banks having an unusual quantity of money lodged with
them, are of course eager to employ it profitably, and in
order to do this they lower the rate of discount, t. e., they
give a higher price for debts. Now, tliough a bill of
exchange in its proper sense always represents a past
operation, yet they are brought for sale to bankers, chiefly
for the sake of funds to employ in a future operation.
Now, leaving out of the question any part of the rate of
discount which may be due to the risk, a high rate of
discount is a proof and a sign of the activity of enterprise.
And whenever the high rate of discount arises from the
activity of enterprise, it may be laid down as a certainty
that there is abundance of enterprise ready to start into
existence, and which is only curbed by the high rate of
discount. As soon as the rate of discount is lowered,
this enterprise is called into existence, and new operations
of all kinds are commenced; and as the increase of
operations just corresponds to the increase of capital, no
diminution in the value of money, with respect to commo-
dities, takes place, though it does with respect to debts.
An example of the truth of what we say occurred in the
year 1844, when fi'om various circumstances an unusual
quantity of capital was accumulated in the hands of
bankers, and the rate of discount fell to two per cent., but
ON THB APFLIQATION OF THS LAW OF PRICE. 233
no increaBe in the prices of goods generally took place ;
that is, there was a great diminution in the value of money
with respect to debts, but no diminution in its value with
respect to commodities.
67. But however enterprising the country may be,
there is a limit to its enterprise^ and as soon as that limit
is reached, an increased quantity of money can lead to no
fresh enterprise; the consequence of which is very
manifest. The quantity of money being continually
added generates no fresh enterprise, is forced into the
previously existing channel of circulation, as it is called,
and having no fresh work to do^ it merely requires a
greater quantity of money to do the same work that a less
quantity did before. That is to say, a diminution in the
value of money with respect to commodities takes place.
One hundred pounds perhaps will now only, do the same
work that fifty pounds did before, a permanent alteration
takes place in the exchangeable relations of bullion and
commodities^ and the rate of interest will spring back to
its former level. Because, as we have already observed,
the interest is always a definite portion of the profits.
And the ratio of £5 to £100 must always be the same,
whatever quantity of goods that £100 will purchase, be it
much or little. We, therefore, obtain this fundamental
law of the efiect of the increase of the quantity of money :
That as long as the increase of the quantity of capital
affects the value of money unth respect to debts^ it has no
effect on its valtie with respect to comm>oditieSy and
as soon as it begins to affect its value with respect to
commodities^ it ceases to effect its value with respect to
debts. We have illustrated the first part of this proposi-
tion by a reference to the case of England in 1844, as a
proof of the truth of the latter part of it, we may take the
cases of California and Australia, where the exchangeable
relation of buUion and commodities were so very different
from England, yet the rate of interest is very much
higher.
68. Now, the effect in former times was exactly the
234 ELEMENTS OF POLITICAL ECONOMY.
opposite to what it is now. When the treasures of the
Indies were poured into Europe, there were scarcely any
such things as banks at all, or credit. The consequence
was that the increased quantity of bullion affected its
value with respect to commodities, and had very little
influence on its value with respect to debts. Nevertheless,
it is certain that the increase of money did give a very
great stimulus to industry, even in that age ; for the best
authorities ao^ee that its diminution in value, with respect
to commodities, was only one-half of what it might have
been expected from the increase of its quantity.
69. The preceding considerations shew that two classes
of persons are equally in fault, first, those who clamor for
an unlimited increase of money, thinking that to be the
panacea of all evils ; and secondly, those who assert that
an increase in the quantity of money can do no good, and
will only lead to a diminution in the value of money. It
depends entirely upon the circumstances under which an
increase takes place, whether it is beneficial or the contrary.
70. One tning, however, is positively certain, that
whenever money undergoes a dimmution in value, either
with respect to debts or commodities, in any country
compared to its neighbours, it immediately causes an
exportation of bullion from that country, and an importa-
tion of debts and commodities into it. That is, if the prices
of debts and commodities are very hieh in one country,
neighbouring countries will immediately send their debts
and commodities there for sale. And the people of that
country will naturally send their money to foreign
countries to buy debts and commodities where they may
be had cheaper than at home. Hence, it is a positive
certainty that whenever the rate of discount m two
countries differs by a sufficient quantity to pay the expenses
of transport, it will immediately cause a flow of bullion
from where the discount is low, or the value of money low,
to where the discount is high, or the value of money high.
A principle of great importance which has been very
imperfectly imderstood, and the neglect of which has
ON THE AFFLICATIOll OF THE LAW OF PRICE. 235
brou^t on some of the most severe monetary difficulties
of thw country.
71. We have said that at any particular period, the
difference in the rates of interest or discount for the same
class of securities, indicates a difference in the risk of the
particular security. This does not, however, hold good
with the rates of interest at different periods, because a
high rate of interest may be caused by the activity of
commerce, as well as by the risk of security. Thus, in
America the discount on the best bills is habitually 8 or
10 per cent, and this arises from the activity of commerce.
On the other hand, a veir low rate of interest by no
means always arises from tne safety of the security, or the
abundance of capital, but from the want of enterprise, the
stagnation of commerce. Thus, in 1812, when the French
Empire was verging upon destruction, J. B. Say says,*
"France, from an opposite cause, (t.^., to the activity of
enterprise,) saw contrary effects produced. A long and
destructive war, which closed nearly all communication
with foreign countries, enormous taxes, injurious privileges,
the operations of commerce undertaken by the government
itself, custom duties arbitrarily charged, confiscation,
destruction of property, annoyances, and in general a
rapacious system of administration, hostile towards the
people, had made all commercial enterprise scanty,
dangerous, and ruinous. Although the mass of capital,
probablv continually decreased, the usefol employments to
which it could be applied had become so scarce and
dangerous, that interest never fell so low in France as at
this period, and that which is usually the sign of great
prosperity, became at this time the effect of a great
distress."
72. This is just one of those cases which make many
people think that Political Economy cannot be reduced to
a science, and is enough to distract an ordinary reader —
tliat the same visible effect or phenomenon is produced
* Traite d'EcoDomie Politique, p. 390. Edit. Guillaumin.
S36 ELSMSKTB OF POLITICAL SOONOMY.
hy a totally opposite and contrary cause. But the fact is,
that it is all an example of our general law of supply and
demand. Now, some causes act upon the supply, and
some on the demand. But as supply and demand act in
opposite durections, it is manifestly necessarr that we
must have opposite causes acting upon each of them, to
produce the same phenomena. And the real difficulty of
the case is to determine whether the change of the
Shenomena is due to a change in the supply or in the
emand.
73. The general neglect to observe that profits ought
always to be reduced to the same standard as interest, viz.,
should be reduced to their rate per annum, leads to some
erroneous ideas on the subject of interest. Thus, when
profits are said to be reduced to 10 per cent., it seems
somewhat paradoxical to say that interest can be paid at
15 per cent. It is nevertheless true, and constantly hap-
pens ; the apparent paradox only arises from tlie difference
of ( stimating profits and interest in common language.
When persons in trade pay interest it is always calculated
by the rate per annum, but it is too common to measure
profits by the actual transaction, without reference to the
time; thus, if a tradesman pays interest at the rate of 15
per cent, per annum, he makes profits, perhaps, at tlie
rate of 10 per cent, per week, perhaps per day, which is
the rate of 520 or 3130 per cent, per annum, al-
lowing for the number of working days in the year.
Whicn dissipates the apparent paradox. This at once
explains how trade can be carried on at rates of interest,
which would seem inexplicable. In ordinary times in
London, the second class bill-brokers char^ their cus-
tomers Is. in the pound for three months' bills, which is in
reality interest at the rate of 25 per cent, per annum.
In ancient times, and in the middle ages, we know that
the rate of interest was very much higher than that. An
extraordinary instance is quoted by J. B. Say, from Turgot,
of the mode in which the petty provision merchants of
Paris carried on their trade m his time. In those days
ON THB APPUOATION OF THE LAW OF PRICE. UST
penalties of the most terrible severity were enacted against
the infringers of the usury laws. To shew their absurdity,
Turgot instances the advances which monev lenders at Paris
made to the petty dealers, who buy victuals in the market,
to retail them in the different parts of the capital. The
charge is two sous a week for the loan of a crown of three
fiancs, which is equal to interest at the rate of 173 per
cent, per annum. And it was by means of these loans
that the whole of the small provision trade of Paris was
carried on. "Nevertheless,"* says Turgot on this pointy
**the borrowers do not complain of the terms of this loan,
without which they could not carry on the trade by which
they live. And the lenders do not get very rich, because
the exorbitant interest is only the compensation for the
risk their capital runs. In fact, the insolvency of a single
borrower sweeps away all the profit which the lender can
make out of thirty of them."
74. The idea that trade could flourish upon money
borrowed at the rate of 173 per cent, seems somewhat
startling until we analyse the operation. No doubt the
borrower paid two sous a week for a crown, but then, the
Erobability is, that what he paid a crown or three francs for,
e sold for three francs and a half the same afternoon.
Now, if he repeated this operation once every day, it is
clear he would gain at the end of the year 3130 sous.
That is, with a capital at no one time exceeding 60 sous,
he would gain 3130 sous of profit in the year, which would
be at the rate of 5216 per cent, per annum, and out of this
he would only pay 173 sous for the loan of the money.
So that the apparent paradox vanishes.
75. M. Gustave de Puynode,t quoting fi'om the speech
of a member of the last legislative assembly of France,
M. Aubry de Vosges, gives an instance which is even
* Cours d'Economie Politique, Vol. n., p. 91. Edit. Ouillaamin.
Turgot ; Memoire sur les Fr^ts d' Argent ; (Euvres. Vol. i., p. 116.
t Sitting of the 27 June, 1850. De la Monnaie, du Credit, et de
rimpot. Vol. X., p. 80.
238 ELEMENTS OF POLITICAL ECONOMY.
more startling than the last. He said, ^^ Every moming
the small provision dealers received a five-franc piece to
buy the objects, which they resold with a profit of three
or four francs. In the evening they repay the five-franc
piece, and give 25 centimes in addition. They make no
complaint of interest, which is yet at the rate of 1800 per
cent." Nor had they any reason to do so, for by borrowmg
this five-franc piece they made three firancs of profit, out of
which they only paid 4 franc for interest. If, therefore, the
rate of interest was 1800 per cent, per annum, the rate of
profit, assuming the gain to be 3 francs per diem, was at the
rate of 2 1,600 per cent per annum. And the interest,
which is only one twelflh part of the profit, is not un-
reasonable. And yet, by the law of France it is a crime
to take more than 6 per cent!
CHAPTER m
THE THSOBT OF CREDIT.
'^HoM htt Uieform of eetuid- words."
XL TmOTHT. L 13.
THX THBOBT OF CBEDIT« 241
THE THEORY OF CREDIT.
PBELIUINABT BEMABES.
In the preceding Chapters, we have discussed the
Theory of Prices, so far as regards commodities and
money. We have now to discuss the Theory of Prices,
so far as regards Debts. The trafficking m debts of
different descriptions is termed the System of Credit.
The invention of credit is the great distinguishing feature
of modem commerce. The system of credit performs
exactly the same functions in commerce as the steam-
engine does in mechanics. The subject is somewhat
intricate, and to appreciate it properly requires a thorough
knowledge of its details. It is also the subject on which,
from a want of a mastery over details, modem Political
Economy is utterly at fault. The first requisite to arrive
at an intelligent judgment on the subject, is to have a
description of the actual reality. A misconception of the
real nature of credit, and an abuse of the system, has led
to some of the most terrible catastrophes of modem times.
There are two grand divisions of credit. Mercantile Credit,
and Banking Credit, which are so thoroughly interwoven
with each other in this country, that it is not easy to
separate them, and doing so may perhaps involve some
Q
242 ELElfEirTB OF POLITICAL XCOKOMT.
repetition. Nevertheless, as we think it will conduce to
clearness, we shall do so. The subject of Credit is one
on which it is impossible not to notice the established
opinions. We shall, however, endeavour, as much as
possible, to keep controversy separated from the detail
of facts. We snail, therefore, examine the doctrines of
modem Political Economists in a separate section. We
shall, therefore, divide this Chapter into three sections.
L Treating of Mercantile Credit.
II. The Theory of Banking.
ni. An examination of the opinions of certain Politi-
cal Economists on the subject of Credit.
^ The reader being in the first two Sections put in posses-
sion of the actual details of business, will then be in a
position to iudfice for himself* as to who is correct or not.
ON HBBCANTILE CBEDIT. 248
THEORY OF CEEDIT.
SECTION I.
ON MERCANTILE CREDIT.
1. The operations of buying and selling which we
considered in the first two chapters, represented a contract
which did not involve any ideas of time in it, but only
of value, and the currency which we supposed to pass
between the parties represented a debt, which took
effect inunediately and simultaneously with the transac-
tion it arose from. It often happened, however, that
transactions of great benefit to society could not be per-
formed from the scarcity of the currency, which could
not always be procured in sufficient quantities by those
who were willing to undertake these operations, and yet
when they were done they would repay the original out-
lay upon them, together with a large revenue or profit.
Advancing refinement then perceived the advantage that
might be gained by contriving a currency which should
be evidence of a debt, but which should not be demand-
Q 2
844 ELEKENTS 01* POLITICAL ECONOMY.
able at the time the transaction took place, but at some
fixed period after it had occurred, when it might be com-
pleted, and produce a revenue to discharge the debt, when
it should be agreed to be paid. This is called the system
of Mercantile Credit.
2. Such a system as this could only obtain among
persons who had confidence in each other's honesty, good
faith, and ability to fulfil their contracts, when they
became payable. No man would render a service to an-
other man, and promise not to demand any equivalent in
return for three months or longer, unless he was well as-
sured that the person who received the service would be
able and willing to repay it at the time promised, or that,
if he failed to do so, the law would speedily give him re-
dress. It is evident that the basis of such a system is
confidence^ and it is impossible for it to prevail in any
Elace where the people are not known for their general
onesty and integrity.
3. The operation may be described as follows. A
manufacturer. A, knowing the trustworthy character of
his neighbour B, a retail dealer, sells hun goods, and
instead of requiring immediate payment for them, which
may be inconvenient to B, he takes such an obligation
from him as was described in Chap. I., Sect. 8, only that
he will not require payment until a certain time has
elapsed, during which B may reasonably expect to sell
them, and receive the money for them from his customers.
He must, however, have the evidence of the debt, and the
time when it is to be paid. This obligation may be ex-
Eressed in two ways, 1st. It may be an order addressed
y A to B requiring him to pay a certain sum of money
at a certain time from the date specified in the order, to
A, or to any person he may order. In this form it is
called a Bill of Exchange. 2ndly. It may be expressed
as a promise emanating directly from B, in the form of a
promise by B to A, to pay him or any person he may
order, a certain sum of money at a fixed date. In this
form it is called a Promissory Note.
OH MBBCAimLR CBEDFT. 245
4. A Bill of Exchange is usually in the following
form.
£120 10«. Id. Ixmdon, May Mi, 1857.
Three fnontha after date pav to me (or A B) or order, the
sum of One hundred and twenty pounds ten shillings and four penee^
for value received.
To Mr. Timothy Otbbons, John Stiles.
Linendraper,
Checgmchf London.
John Stiles is called the drawer^ and Timothy Gibbons
the drawee. The Drawer then presents the JBill to the
Drawee to obtain his promise to pay the money at the
date specified ; and if he promises to do so he is said to
'accept the Bill, and he is then called the acceptor.
5. Formerly any assent that the Drawee ^ve to
the Bill was a sufficient acceptance^ and might either be
by parol, or verbally, or by any collateral writing, but
smce 1821, the law, (1 & 2 Geo. iv., c. 78) enacts that
^^ no acceptance of any inland Bill of Exchange shall be
sufficient to char^ any person, unless such acceptance be
in wilting on sudk Bill, or if there be more than one part
of such Bill, on one of the said parts." The acceptance
is usually signified by writing the words ^^Accepted,
Timothy Gibljons," across the face of the Bill. This act
onl^r applies to inland Bills, so that the acceptance of
foreign Bills need not be in writing on the Bill, but any
collateral expression of intention to pay the Bill when it
is due, as by letter referring to it, or yerbally, is sufficient.
If the drawer wishes to transfer his debt to a third party,
he may insert the name of that person in the Bill instead
of his own, and that person is then called the payee.
6. A promissory note is usually expressed thus.
£143 4s. 9d. London, May 4th, 1857.
Three months after date I promise to pay John Stiles, or
order, Hie sum of One hundred and forty three pounds four shillings
and ninepence^for value received.
Timothy OUbons.
24J& ELEBfEin^ OF POUTiCAJ^ BCDKOMT.
I^ this case Timothy Gibbons is called the maker of the
note, and John Stiles the payee.
7. The above form of words, though most generally
used, are by no means essential for their respective pur-
poses. Any form of words addressed by one person to
another, requiring him to pay a given sum of money on
a certain day, to any certain person, is a Bill of Exchange ;
and any form of words addressed by one person to an-
other conveying a distinct promise to pay a sum of
money on a certain day is a Promissory Note. Many
instruments have been worded so obscurely as to render
it a matter of great difficulty to decide whether they are
Bills of Exchange or Promissory Notes, and in such a
case the holder, or legal owner of the obligation, may
treat it as either one or the other ; nor is it necessary to
fiave the words "for value received" on either, though
fliey are generally inserted. And it is also to be
particularly observed, that these obligations must not be
directions or promises to be paid by any specific
sovereigns, or out of anv specific funds, as for instance
out of another sum ot money payable by some one
else, but they must be a general charge of debt on
the person of the obligor, payable at all events. An
instrument of credit made payable out of a specific
fund, or being the title to any specific bag of sovereigns,
is not a Bill of Exchange or a Promissory Note, and
it is not recognized as such either by law or mercan-
tile custom. Thus, affording a most marked and im-
portant distinction between Buls of Exchange and Bills
of Lading, which is too often overlooked by uninformed
writers, and most erroneous views are propagated founded
upon this grievous error.
8. This obligation, therefore, is evidence of A having
rendered B a service, but stipulates that B is not to
be called upon to repay the service until the time
^lentioned on the face of the obligation has expired,
and in this respect differs from the obligation described
in Chap. I. If B is a person in good repute, and is
ON MERCANTILB CEEDIT. 247^
known to be possessed of means so as to be able to
pay the money when the Bill arrives at maturity,
such an obligation is capable of passing from hand to
hand, exactly in ;the same way as the one previously
described. And it must also be carefully borne in
mind, that B is not considered to be actually in debt,
until the day for payment arrives, so that this obligation is
no diminution of his actual property. It is not
intended that it should be paid out of any money in
his actual possession, but out of the proce^ of what
he expects to ^edn by his skill and industry in dispos-
ing of the goods he has bought.
'9. The two forms of expressing this debt are mani-
festly identical in their effect, nevertheless, mercantile
usage invariably adheres to the former form, that of
a Bill of Exchange, and in this work where we merely
discuss the general effects of the system, and do not
enter into a minute account of the petty differences
between Bills and Notes, we shall consider the case of
Bills of Exchange exclusively.
10. Now, A may be a manufacturer, and require cash
to pay his workmen's wages every week, and such a Bill
is unsuitable for that purpose, so he endeavours to find
some one who wiU buy the debt from him for ready
money. There are persons, such as Bankers, whose
special business it is to buy such debts. If the banker
is satisfied of the int^rity and capacity of the acceptor
to fulfill his obligation when it becomes payable, he will
buy the Bill from A. Before doing so, however, he
requires A to write his name on the back of the Bill, the
effect of which is that if B does not fulfill his obli-
gation when it becomes payable, A undertakes to do so
tor him. In this case A is said to indorse the Bill,
and the bank, or person, to whom he indorses it, is
called the Indorsee. The effect of the whole transaction
is, that the Banker buys the Bill from A with a
warranty of payment from the indorser. He then
becomes the owner of the Bill, or more technically,^
248 ELEMENTS OF POLITICAL ECONOMT*
is said to be the Holder of the Bill, and when it be-
comes payable, demands payment of it on his own
account, and not on account of, or as agent for A, to
whom the original debt was due; and if the acceptor
makes default in payment, the holder may sue him in
his own name* In purchasing the Bill the banker
calculates the interest, at the rate agreed upon, and
retains it from the amount of the Bill, and only
advances the difference. This method we have already
described as being called Discount^ so the banker is
usually said to discount the Bill.
11. It is most carefully to be observed that in this
transaction that the banker or other person does not make
a loan of money to the manufacturer. . K he did that, it
would be the duty of the manufacturer to restore the
money when the bill became due. The real nature of the
transaction is that it is a sale of the debt. It is the
duty of the acceptor to pay the money to the banker, or
other holder of the bill ; and the manufacturer's name on
it is merely a warranty of soundness, as it were, of the
debt; and it is only in the event of the acceptor not paying
it, that the manufacturer is called upon to repay the money.
If the banker did not think that the debt was a good one,
he would not buy it, and when the manufacturer has sold
it he never expects to hear of it again. It is just like a
man buying a horse with a warranty of soundness ; if the
horse is sound, well and good, the transaction is finished,
but if the buyer finds out a blemish within the agreed-
upon time, he returns the horse and gets back his money.
It is exactly the same in buying a debt. The debt is an
article of commerce just like the horse, and the liability of
the indorser to repay the money if the debt turns out bad,
only lasts for twenty-four hours after the debt is shewn to be
bad. If the holder of the bill neglect to demand payment
within that time from the indorser, his remedy is gone,
and the indorser is discharged exactly as in the case of an
ordinary warranty. It is commonly said that the banker
lends the money to the manufacturer on the security of
OH MEBCAHTILS CBSDIT. 249
the bills. It would be just as rational to say that the
buyer of the horse lends money to the seller of it on the
security of the horse. The fact, is that the banker buys
the dent with the security of the manufacturer, iust as the
other buys the horse, taking a warranty as his security
that he shall be repaid his money if the horse is unsoundf*
It is of the utmost importance to obtain a true conception
of the nature of the transaction, and from the want of this,
the subject, as usually treated, has been thrown into the
utmost ioi^on.
12. The drawer of a bill of exchange usually makes it
payable to himself or his order. K it is only payable to
nimself, the instrument cannot be passed from hand to
hand, because, by the common law of England, debts are
not assignable. If the bill is payable to the order of the
drawer, it is only necessary that he should write his own
name on the back of it, and then it becomes transferable
from hand to hand just like money, without anything
further it becomes payable to bearer. Such an indorse-
ment is called an indorsement in blank. Sometimes the
drawer only indorses it in fayor of a particular indiyidual,
and then it is called a special indorsement. But this
holder of the bill may, if he pleases, endorse it in blank,
and then it becomes exactly like a bank note, transferable
by mere deliyery. Instruments which may be transferred
from hand to hand by indorsement, or mere deliyery, are
termed negotiable instrvments^ and to sell them is fre-
quently termed to negotiate them. It may also be as well
to observe that the word indorsement legally means, not
merely writing the name on the back of the bill, but
writing and delivery \ without deliyery no property
passes.
13. The holder of this bill, or the owner of this debt>
can treat it precisely as he would any other article of
commerce. If he chooses he can keep it himself and reap
the profit which accrues when it becomes due. If he is
himself in business, and wants to make a purchase, he can
either buy commodities with this bill, thereby selling the
i50 sLEME^rrs ov political economy.
debt again, or if he is in want of cash he can sell the bill
for money to anyone else, and he will at aU events have
the profits due to the number of days he has held it.
If the person who buys the bill takes it without requiring
him to indorse it, or write his name on the back of
it, the transaction is finally closed, it is payment, just
the same as if it were so many sovereigns. If it is
not paid, the holder of it has no recourse against
him. But as the holder of it will in general not forego
the additional security of his name on the back of it, it is
almost invariably usual for each holder in succession to
write his name on it when he sells it. Consequently, a
bill of exchange usually has on the back of it, the name of
every person through whose hands it has passed, except
the last.
14. To show how the system of discounting bills
accelerates the motion of commerce, we may take a few
Examples. Goods or commodities pass through the fol-
lowing hands: First, the foreign importer or manufac-
turer; second, the wholesale dealer; third, the retail
dealer ; fourth, the consumer. To the first three of these
parties the goods are capital^ because they produce, im-
port, or buy them for the purpose of selling them again,
and making a profit from their sale. The fourth buys
them for the sake of consumption. It is evident that the
consumer, or customer, is the final cause of the goods
being produced, and the price he pays for them must be
sufiScient to reimburse all the original expenses of produc-
tion, together with the profits of the three preceding
operations. It may, however, be a considerable time
before the goods pass from the manufacturer to their
final destination, the consumer, and the capital employed
in their production and distribution replaced, so as to be
the cause of producing other operations. Now, it is
quite evident that unless the first tliree classes have
further capital to go on with until the consumer has
bought and paid for the goods, their operations must
come to a standstill for want of moving power, until they
ON liEBCAlinnLE CREDIT. 25 1
are reimbursed. If, however, they can obtain capital,
by selling the debts due to them, to enable them to go
on until the proceeds of the first operation fall in, it
is clear that they can go on producing without interrup-
tion, and supply a continuous stream of commodities.
15. It is for the general interest of the country that
money should not sta^ate, but should put in motion all
the industry it is capsmle of doing. Many private persons
are in no immediate want of the services that money can
command, so that if it remained in their hands it would be
desLd and improfitable. Moreover, the actual quantity in
the possession of each individual may be comparatively
small, but if these sums be collected £rom a great many
individuals in a Bank, like a multitude of nmlets trickling
into a great reservoir, it will have a large sum at its com-
mand, and will be easily able to find profitable employment
for it, because persons who want capital to carry on
commercial operations, know where to obtain the requisite
amount.
16. The functions of a Bank, then, in the commercial
body resemble those of the heart in the human body.
It attracts to itself capital, the life blood of commerce,
from every direction, in the minutest rills, and having
accumulated it in a great reservoir, propels it through all
the arteries and channels of commerce, vivifying and
nourishing it, and spreading vigour and health through
the whole commercial body.
17. As the price realized from the consumer must
afford a profit to each person who renders a service in
the production or distribution of the goods, it might be
that, after a long courae of successful business, they might
each accumulate sufficient capital to be able to continue
their operations during the period before the return of
the first outlay. Tliis, however, can be but seldom the
case; and however great their capital may be, they are
always enabled greatly to extend their business by the
system of selling their debts, which we have described.
18. The great function of a Bank of Discount is to
252 ELEMENTS OF POLITICAL ECONOMT.
supply capital to the different parties by buying the debts
due to them, to enable them to carry on this con-
tinuous stream of operations, and on the payment of a
small sum for the convenience and risk, to anticipate
the receipt of the price from the consumer. The manu-
facturer who sells his goods on credit to the wholesale
dealer, wants this temporary advance to carnr on his
works, until he receives the price for them. He accord-
ingly draws a bill on the wholesale dealer for the amount^
and takes it to his banker, who discounts it for him.
19. Thus, the manufacturer produces the goods and
sells them on credit to the wholesale dealer ; the whole-
sale dealer buys them on credit from the manufacturer,
and sells them on credit to the retail dealer ; the retail
dealer buys them on credit from the wholesale dealer^
and sells them for ready money if he can get it, from
casual customers, or usually on credit to his regular
customers.
20. These are the fewest number of hands that goods,
in the ordinary course of business, will pass through;
and it is clear that in their passage from the manufacturer
to the customer, they will give rise to at least two bills
of exchange — not unfrequently to three. Thus, the
manufacturer draws upon the wholesale dealer, who
accepts to him. The wholesale dealer, who has already
accepted one bill for them to the manufacturer, draws
another biU for them on the retail dealer, who accepts
to him; and not unfrequently, the retail dealer, who
has accepted to the wholesale dealer, draws upon his
customer.
21. The manufacturer takes the bill accepted by the
wholesale dealer to his banker, who discounts it for him ;
that is, he buys the debt due bv the wholesale dealer, and
with the proceeds of the sale, the manufacturer may carry
on his productions uninterruptedly. But the wholesale
dealer has a banker as well, and he is in want of capital
to continue his purchases, so he takes the bill he has
drawn upon the retail dealer to his banker^ who discounts
ON BfEBCANTILE CREDIT. 253
it for him, that is, he buys the debt due by the retail
dealer. Now, the wholesale dealer is the principal debtor
to the manufacturer's banker for the amount of the goods,
and he 'is surety to his own hanker in case of the failure
of the retail dealer to meet his engagement. K the retail
dealer draws bills on his customers for the goods, and can
induce his banker to discount them, he will be similarly
liable on two different obligations for the same goods, as
principal debtor to the wholesale dealer's banker, and in
the second instance to his own.
22. The bills we have just described are all regular
business bills, they originate from real transactions, and
they are what are called real bills, or Value Bills, and
they are (except the last) what arise out of the regular
and legitimate course of business, and are the great staple
of what bankers purchase. It is a very prevalent belief
among commercial men that business bills are essentially
safe, because they are based upon real transactions, and
always represent property, but the foregoing consider-
ations will dispel at once a considerable amount of the
security supposed to reside in commercial bills on that
account, because we have seen that in the most
legitimate course of business there will generallv be
two bills afloat, originating out of the transfers of any
given property, so that in the ordinary way there
will be at least twice as many Bills afloat as there is
property to which they refer.
23. The fact is, that the too common expression
that a Bill of Exchange represents property, leads to
incalculable confusion, and is one of the number-
less instances in Political Economy in which an erroneous
expression* has caused a very general misconception of
the real nature of the transaction and of credit. A BiU
of Exchange does not represent property at all. It
* I regret that I am myself amenable to mj owa censure, in mj
Theory and Practice of Banking, as having, in some instances, unguardedly
used the ezpresBioii without due limitation of its meaning.
254 ELEMBNTS OF POLITICAL EGOSOKY.
represents nothing but debt^ not even any specific money.
It originates out of a transfer of property, but does not
represent it, any more than if the property had been
paid for in money, would the money represent the property,
but would be its Exchangeable equivalent.
84. Now, it is easy to suppose that the manufacturer,
the wholesale dealer, and the retail dealer, may all be
customers of the same bank, and if they all have their
bills discounted by the bank, it may unknowingly pur-
chase a whole series of debts arising out of the transfers
of the same property, and it is scarcely necessary to
remark that in any large bank two or more of these
parties will often be its customers, and the bank will
make advances to two or more persons engaged in the
same series of operations.
25. The above operations are only what arise in the
ordinary course of business; it may sometimes happen
that property may change hands much more frequently,
imd at every transfer a bill may be created* Hence,
where the credits are very long and the transfers numerous,
it is easy to imagine any number of bills being created
by repeated transfers of the same property. In times of
speculation this is particularly the case. Now, all these
bills are technically commercial or real bills ; but it is
evidently a delusion to suppose there is any security
whatever in them on that account. We may either con-
sider that only one of them represents (if we may use
this expression, having explained its great liability to
misconception,) the property, and that the others represent
nothing, or that each of them only represents such
a firaction of the property as is denoted by the number of
bills afloat. This was long ago pointed out by Mr.
Thornton,* who says, "In order to justify the supposition
that a real bill, as it is called, represents actual property,
there ought to be some power in the bill-holder to prevent
the property which the bill represents from being turned
• Enquiry into the Nature and Eflfects of Paper Credit p * 30.
- ON MEBCANTILE CREDIT. 255
to other purposes, than that of pajdng the bill in question:
No such power exists ; neither the man who holds the
real bill, nor the man who discounted it, has any property
in the specific goods for which it was given/' The above
consideration shows that the real security of the bill
consists in the general ability of the parties to it to meet
their engagements, and not in any specific goods it is
supposed to represent, the value of which is vague or
illusory, and impossible to be ascertained by any one who
holds or discounts it.
26. While the preceding sections shew that any
given amount of property may, by repeated transfers,
originate a considerable number of bond fide bills, it is,
on the other hand, very common for a bill to represent
the transfers of several times the amount of property
expressed on the face of it. This is the case whenever
the bill is indorsed and passed away for value, and the
bill represents as many additional values expressed on
the face of it as there are indorsements. A httle reflec-
tion will make this so clear, that an explanation of it
might almost seem superfluous. Thus, let us suppose a
re£U transaction between A and B. A draws a bill upon
B, who accepts it for value. A has dealings with C,
and is indebted to C for value, in payment of which he
tenders his bill upon B, and indorses it over to C. Thus,
the bill, by the time it is in C's hands, represents two
transactions. C deals with D, and in payment indorses
over the same bill to D; it then represents three
transactions. And so it may be indorsed over from one
party to another an unlimited number of times, and will
denote as many transfers of property. When C indorsed
over the bill to D, he merely assigned over to him the
debt which A had previously transferred to him. Now,
that might be done either by drawing a fresh bill on B,
cancelling the first, or simply indorsing over the bill he
received from A. Hence, we see that every indorsement
is equivalent to a fresh drawing ; but if he draws a fresh
bill it will represent nothing but B's debt to him, whereas^
256 ELEMENTS OF POLITICAL GCONOMT.
if he indorses over the bill he received it will represent
B's debt to A, A's debt to C, and C's debt to D; and, con-
sequently, it will be much more desirable for D to receive
a bill which represents the sum of so many previous trans-
actions, and for the payment of which so many parties
are bound to the whole extent of their estates. Some
time ago, almost the entire circulating* medium of
Lancashire consisted of bills of exchange^ and they
sometimes had as many as 1 50 indorsements upon them
before they came to maturity. From this also we see,
that no true estimate can be formed of the amount of
bills of exchange in circulation by the returns from the
Stamp-office, as has sometimes been attempted to be done,
as every fresh indorsement is in effect a new bill. So
that the useful effect of a bill of exchange is indicated
bv the number of indorsements upon it, supposing that
eveiy tmnsfer is accompanied by ^ indorsement, wUch
is not always the case.
27. In the series of operations we have been con-
sidering, the manufacturer is liable on only one obligation,
and not even on that in the first instance, viz., as drawer
of the bill on the wholesale dealer, and is only liable to
pay on his default ; but the wholesale dealer is liable on
two obligations, his acceptance to the manufacturer,
which he must at all events discharge, and, secondly, as
drawer of the bill on the retail dealer, which he must
discharge in the event of the latter failing to do so.
Sinularr^r, the retail dealer is liable twice over if he draws
upon his customer.
28. Now, as the wholesale dealer is always liable for
the goods in the first instance^ and as he disposes of them
probably to a considerable number of retad dealers^ and
takes their acceptances and discounts them at his bankers,
it must often happen, in the course of things, that some
of these acceptances will be unpaid by the retail dealers,
and he will be called upon to pay them. He must,
consequently, to insure his own safety, always keep a
gufficient amount of his capital either in funds at his
ON MBBCAimLE CREDIT. 257
bankers, or immediately available, to meet these con-
tingencies, as, if he fails to meet even one of them, he is
bankrupt in the strict mercantile meaning of the word.
And as we have seen, that the very essence of a bill is
that it must be paid in cash at a fixed time, as the
inexorable day approaches, if he has not cash sufficient,
he must sell his goods to get it, even at a sacrifice, to
meet his own acceptances if his banker stops discountinir
for him. ^ . . .
39. Now, as even in the best of times tiie accidents
of trade are numerous, it is the height of imprudence
for any man to invest the whole of his available means
in business and deal in credit obligations at the same
time, because it will infiiUibly liappen that he will be
sometimes called upon to discharge obligations on the
fiedlure of others, and refund the price of the ^ods. Any
man, therefore^ who locks up all his available means in
commodities, and does not keep a sufficient amount of
cash ready at a moment's notice to meet these unfore-
seen contingencies, is overtradings and the first mercantile
convulsion m which credit is damaged and diminished will
almost certainly ruin him.
30. Great and important, therefore, as are the advan-
^s gained by the trader from the system of discounting
J, it must never be forgotten that they are liable to be
attended with inconveniences of considerable magnitude ;
and that whoever sells goods upon credit, and takes a
bill for them, and discounts it at his bankers, is always
exposed to the risk of having to refund the amount of
the bill he sold to his banker, and this added to the loss
of the payment of the goods themselves, by the failure of
his customer, may subject him to the diminution or loss
of his credit. Consequently, unless he keeps a sufficient
sum of money in hand, or immediately available, to meet
these contingencies, he is overtrading, or trading beyond
the due bounds of his capital.
31. We devoted considerable pains in the second
chapter to shew that the price of articles at any given
B
258 ELEMENTS OF POLITICAL ECONOMY,
time depends entirely u/jon the ratio of demand and
supply at that particular time. If the supply be ex-
cessive, nothing can prevent the price from falling to any
state of depression, until it becomes absolutely unsaleable.
The commodity, therefore, will not pay the cost of its
1 production, and unless those concerned in producing it
lave independent capital to enable them to hold on until
the excessive supply is taken off, and save them from
selling when the price is ruinously depressed, or to stand
the losses, they will all fail.
32. Almost all men in commerce are under obligations,
that is, they accept bills of exchange, which become debts
on a particular day, and must be paid. To meet these
obligations due by them, they have property of two sorts :
first, Debts, or obligations due to them : secondly. Com-
modities. And to meet their own obligations they must
sell one or other of these kinds pf property. They must
either sell their debts to their bankers, or they must sell
their commodities m the market. While credit is high,
that is, while bankers buy debts freely, they can retain
their commodities from the market, and watch their
own opportunity of selling at a favorable moment. But
if credit receives a check, and the banker refiises to buy
their debts, they must still meet their own obligations,
under penalty of ruin. They are consequently obliged
to throw their commodities on the market, and sell them
at all hazards, the supply of them becomes excessive, and
this inevitably depresses the price. Traders who have
capital enough of their own to meet their engagements
without discounting, are able to keep their commodities
back from the market, until the extra supply being ex-v
hausted, prices rise again, from the natural operation of
the demand. Now, as we shall shew in the next section,
bankers always buy the debts of traders by creating debts
of their own, which are called their " issues," and when
bankers refuse to buy the debts of traders, they are said
to ^^ contract their issues." Consequently, a contraction
of issues, or discounts, is generally followed by a fall in
ON BORCAKTILE CREDIT. 259
prices. And this fell in prices happening coincidently
with a contraction of issues, was supposed to be caused
directly by the diminished amount of currency compared
to commodities, wliich is erroneous, because it was in
reality caused by the alteration in the proportion of supply
and demand in the market.
33. We see, then, how utterly impossible it is to
ascertain the precise effect of the contraction of the issues
of banks upon ])rices, because the change was determined
by the quantity of produce which a refusal to discount
compelled the holders of it to throw upon tlie market and
the demand for it, and not by their quantity compared
directly with the quantity of goods. If, therefore, the
holders of one commodity were possessed of much inde-
pendent capital, and were not compelled to realize, to meet
their engagements, a contraction of issues would not affect
them much. On the other hand, if the holders of another
commodity were in general men who depended chiefly
upon credit, and were compelled to sell at a sacrifice
to meet their engagements, a sudden refusal to discount
for them would cause an extraordinary quantity of that
article to be thrown on the market, and would cause
a considerable depression in price, which would be de-
termined by the change in the ratio of supply and
demand.
34. It was maintained by Mr. Turner,* that in i
mixed currency, consisting partly of the precious metals
and partly of paper representing them, that prices werie
artificial — that is, that commodities only bore the prices
they passed for, through the general confidence or credit
of the comnmnity, and that if every person insisted upon
receiving coined bullion for his commodity, that it would
be impossible that commodities should sell at the same
nominal price ; and that when precious metals and paper
• Letter to Sir R. Peel on the Resumption of Cash Payments bv the
Bank of England, in 1819 ; by S. Turner, Esq., F.E.S., a Director of the
Bank. P. 17.
R 2
260 ELEMENTS OF POLITICAL ECX)KOMY.
circulate together, although one may be constantly ex-
changeable for the other, yet that every article is
measured by a standard bearing a higher nominal value
than it would be possible to obtain if the precious metals
were the real measure. Mr. Turner has left one con-
sideration out of view, which will shew that it does not
necessarily follow that if a paper currency had never
existed, commodities would bear a less nominal price
than they do now; because, by the extension of the
circulating medium caused by the introduction of a paper
currency, a very much greater amount of operations may
be carried on than on a metallic basis. If the confidence
in the paper currency is complete, it will support exactly
the same amount of operations, and be in all respects
equivalent to an equal amount of metallic currency.
Hence, when a paper cuirrency is added to a metalUc
currency, if it generates an amount of operations propor-
tionate to its increase, it will cause no change whatever
in prices, because the proportion between currency and
operations will remain the same. If, however, this
increased amount of circulating medium did not generate
a proportionate increase of operations, then Mr. Turner's
view would be quite accurate, and the nominal prices of
commodities would be augmented in the same way as if
an increase took place in the precious metals. And this
was the chief reason why prices increased so much in the
sixteenth century, from the importation of gold and silver
from America. The Spaniards were a lethargic and
indolent race, and they thought that the mere fact of
having more gold and silver in the country, augmented
their wealth, without proportionably increasing their
industry; whereas, the total efiect was that there was
more gold and silver plate and ornaments in the country,
and prices rose enormously, but that was no increase
of weedth. The country was not one whit richer than
before, except by the possession of an additional quantity
of gold and silver plate, but the precious metals diminished
in value. But if the same circumstances happened in a
ON MEBCANTILE CREDIT. 261
commercial and industrial nation like England or Holland,
the probability is that that increase of the circulating
medium would have been employed in developing a
thousand useful works, and have given birth to a propor-
tionate increase of industry, which would have caused no
increase in prices, but a very great increase of national
wealth.
35. But if, under such an extension of commercial
operations produced by the confidence reposed in the
paper currency, that confidence receives a sudden shock,
so that credit is destroyed, and a considerable amount of
the paper currency is suddenly extinguished, before
there has been lime to reduce the operations proportion-
ably, it is quite clear that the metallic basis will have a
much greater burden to bear, or have to represent a
much greater amount of operations than before, and its
value will proportionably rise. There will, consequendy^
be a much greater and more earnest demand for money
tiian before ; and those who require to have it, to support
their credit and meet their engagements, will have to pay
a very much higher price for its use. Money will rise
enormously in value, both in respect to debts and com-
modities ; and just as the general community have been
depending on credit, and carrying on operations upon its
support, so in proportion as that is extinguished, will
the price of the use of money rise, until confidence ia
restored, and people are willing to return to credit, or have
diminished their operations in proportion to the diminished
currency.
36. It is this sudden failure of confidence and ex-
tinction of credit, which produces what is called in com-
mercial language a " pressure on the money market, ^
and which causes money to be " tight." When money is
said to be scarce, it does not mean that there is a smaller
quantity of money actually in existence than before, there
may be more or there may be less — no one can tell what
the amount of money in existence is ; but a great amount
of credit which served as a substitute, and was an equiva^^
262 ELEMENTS OF POLITICAL ECONOMT.
lent for money, is extinguished, and the money is called
upon suddenly to fill the void. When a new field of
commercial adventure is discovered by sagacious dis-
cemers, or a new market is suddenly thrown open by a
ehange in the commercial policy of foreign nations, the
fii*st adventurers usually reap immense profits ; as soon a^
this becomes generally known, a multitude of other specu-
lators rush into the same field, excited by the profits
reaped by the first. Numbers of mercliants and traders
purchase commodities on credit, that is, they incur obliga-
tions which they must discharge at a future day, in the
hopes that their returns will come in before the day of
payment. But the immense quantity of goods poured in
usually gluts the market in a short time, and irom the
excess of supply prices tumble down, often to nothing, so
that the goods become unsaleable, and either no returns
at all come in, or such as are quite inadequate to meet the
outlay. When this occurs it is called overtradings and
when this has been extensively practised, it is necessarily
and inevitably followed by a great destruction of credit,
and a great demand for cash. Thus, credit la destroyed
&ster than operations can be reduced in proportion.
Those ti'aders who have not received the returns they
counted upon to meet their engagements, must raise
money on any terms, and perhaps sell what property they
have at any sacrifice, to save themselves from ruin. The
effect of tliis will be, that money, for which there is an
intense demand, will rise greatly in value, and the rate of
interest or price of its use will increase; but as a necessary
concomitant of such a state of things, a gi*eat quantity of
goods will be thrown upon the market, and their price
will be enormously depressed. These circumstances will,
therefore, produce a veiy high rate of interest, and ruin-
ously low prices, which must continue until the excessive
supply of goods is exhausted, and confidence revived.
In such crises as these, traders who have not sufficient
capital of their own to meet their engagements, and hold
on their goods until prices rise, will infallibly be ruined.
ON MSBCANTILB CBEDIT. 263
Under such circumstances the rate of interest bears no
relation whatever to the rate of profit. The use of ready
money to persons who have overtraded, is of infinitely
more conseqence than the price they pay for it ; it may be
well worth their while to pay 15, or 20, or even 50 per
cent, for the use of money for a temporary emergency,
which may save them from ruin, and enable them to main-
tain their position.
37. It is, therefore, not the scarcity of money, but
the extinction of confidence, which produces a pressure
on the money market; and an examination of all the
great conuuercial crises in this country will shew that
they have always been preceded and produced by a
destruction of this credit, which has usually been brought
about by extravagant overtrading and wild speculation,
as we shall have occasion to see hereafter.
38. The principle which we were at considerable
pains to establish in the second chapter, that the relation
between supply and demand is the sole regulator of
value, combined with the action of the credit system we
have just been considering, will explain all the phenomena
witnessed during a pressure on the money market. The
failure of credit in any one branch of business will pro-
duce its full effect on the general market-rate of interest,
because that is regulated by the ratio of the demand for
money from whatever quarter it comes. But it will not
necessarily follow that the market prices of all commo-
dities will be depressed. The market price for each
commodity will be governed entirely by its own peculiar
circumstances. If the holders of one commodity have
independent capital, and have prudently abstained from
overtrading, the price of such a commodity will not suffer
much, because the ratio of supply and demand will not
be altered, though it cannot avoid sympathising to a
certain extent with other commodities. But if the holders
of another species of commodity have overtraded and
depended too much on credit, without sufificient means,
they will necessarily be obliged to throw a great quantity
264 SLEldEIfTS OF FOLITICAL ECOHOMT.
of their produce on the market to realize, and this
excessive supply will depress the price. And this effect
will be increased, because such are the very times when
persons who have ready money are particularly cautious
m buying*, partly because tliey always hope the market
will mil still lower, and they hope to buy cheaper when
prices have fallen to a minimum, and they will certainly
not buy more of any commodity than they can help
which is diminishing in value ; and partly because they
must keep their ready money by them to maintain their
own position. From these causes, not only is the supply
increased, but the demand is diminished, so that the fall
is doubly aggravated. Thus, we see at once, that a
HeJling market will always be well supplied, because
people who must sell hasten to do so before the price falls
still lower, and buyers hold aloof, waiting as long as
they can, to see the lowest. On the other hand,
when markets are rising, the case is reversed. The
sellers hold aloof^ hoping the price will still be higher ;
and buyers crowd in, hastening to purchase before tlie
price rises more. When a market is desponding and
mactive, the great method of imparting activity to it is to
persuade people that things have reached the lowest, and
are on the turn. It is evident that these considerations
and observations apply to home produce, or at least to
produce which is already in this country, and which can
DC thrown on the market immediately. In order to
attract foreign produce the market must rise high
for a considerable time, with the appearance of con-
tinuing so.
89. Leaving out of the question extravagant credit
and overtrading, which are the abuses of credit, it will
appear that the effect of a legitimate and proper use of
credit is to equalise prices, and to make them more steady
than they would be without it. If the manufacturer
were to call for immediate payment of the goods from
the wholesale dealer, he would have to dispose of them
quickly to realise the proceeds, and if the market were
ON MEBGAirriLE CBEDfT. 265
already overstocked, it would only produce a greater fall.
On the other hand, if there were a great scarcity, and
the price rose high, the manufacturer might not be able
to produce quick enough to meet the favorable moment.
But when the period of the credit is fixed and defined
beforehand, the holder of the article may be more
leisurely in his operations, and watch for a favorable
opportunity to sell without being compelled to glut the
market. It also causes the supply of commodities to be
£&r more abundant, because, if there were no credit, none
but persons of actual capital could invest money in
purchases which would not bring in any return for some
time. But, by the system of credit, persons of small
means are enabled to start themselves in business, and by
strict integrity and frugality may accumulate solid capital
of their own.
40. The part of the general system of credit which we
have been considering, consisted in this, that individuals,
through trust in their integrity, were able to draw into
their possession the property of others. Their ** promise
to pay" was equally efficacious to efiect a sale of goods
to them, as if it were real money. In this case it has
operated to transfer goods that were already in existence.
But it is equally capable of bein^ applied to the creation of
conmiodities,meaning by the word "creation," what Political
Economists generally mean by " production " or "formation,'*
in its limited sense, and not the theological confusion of
its original meaning, which we are chiefly accustomed to.
A trader who buys with his promise to pay, intends that
it shall be replaced by the profits arising from the opera-
tions it generates. But credit may be equally applied to
create a product, with a similar intention of replacing it
out of the profits of the operation. It is often seen that
an enterprise will be profitable and self-supporting, if the
means can be procured for setting it in motion. A loan
of real capital wUl effect this; but in default of real
capital, credit may often be used as efficaciously, for a short
period, to supply the moving power requii'ed to start such
366 ELEMBKTS OF POLITICAL SCONOMT.
an operation, and, having performed this temporary duty,
be extinguished.
41. As an example of such a creaHon of a product,
we may take such a case as this :— Suppose the corpo-
ration of a town wishes to build a market-hall, but has
not the ready cash to pay for the materials, and builders'
and workmen's wages. It may be a matter of perfect
certainty, that if the market were once built the stalls in
it would be taken up immediately, and the rents received
for them would liquidate the debt incurred in erecting it.
But as the workmen cannot wait till that period, but
require immediate cash to purchase necessaries, it is clear
that unless there is some method of providing ready
payment they cannot be employed. In such a case as
this the corporation might either borrow real capital from
other parties, or, if they were in good credit, they might
issue bonds for various amounts, bearing interest, payable
at certain fixed dates. If these were made in sumciently
small sums, and if they were readily received by the
dealers in the town, they might be used in the payment
of the workmen's wages, and perform all the functions of
a currency, and be equivalent to money. They would,
therefore, be as efficacious as real capital. These bonds
might be redeemable at different periods, and when the
market-hall was finished, and the stalls let, the rents for
them would gradually redeem, or pay off the debt
incurred for building it. It is said that more than one
market-place has been built by adopting such a plan
as this.
42. This is an instance of the creation of a product by
credit, and not merely the transfer of an existing product.
The result to the corporation would be precisely the
same, whether they accomplished their object by borrowing
real capital and paying interest for it, or by issuing bonds,
bearing interest, payable at fixed periods. In the one
case, they would be liable to the full extent of their pro-
perty to the persons from whom they had borrowed the
money ; in the other, to those who held their bonds. If
OK MSRCANTILE CREDIT. 267
the operation was successful, its profits would in the first
case pay the persons who had lent the money; in the
second, the profits would pay the persons who held the
notes, and extinguish tlie liability of the corporation. If
the operation were unsuccessfiil, the corporation would
equally have to make good the loss out of their general
effects, either to the lenders of the money, or to the
holders of the notes. It would, therefore, be a matter of
no consequence whatever to the corporation which way
they adopted to accomplish the work ; but it would be a
matter of importance to the town at large, because, if they
borrowed real capital to do it, that would by so much
diminish the fund of moving power applicable to other
species of industry, and raise its price. It is clear, therefore,
that the second method would be so much clear addition
to the capital of the community, and would therefore be
most advantageous for them.
43. This second method of utilizing credit, from not
bein^ based upon real capital, is an instance of what is
usually called JictitiotLS capital, a name of extreme
inaccuracy, which too many persons are in the habit of
using, from the hasty assumption that what is not real
must necessarily be fictitious, and are more led away by a
jingling antithesis of words than an accurate perception of
ideas. If the bonds issued by the corporation were not
redeemable, and represented nothing, the emXhetJictitioits
would be accurate. But such is far from being the case.
In both cases it resolves itself into the present value of a de-
ferred payment. In the first instance, the obligation incurred
by the corporation to the lenders of the money would not be
limited to the specific capital they advanced, but would be
a general charge on the whole property of the corporation ;
the bonds issued in the second case would be precisely
the same, they would confer upon the holders of them a
general charge upon all the property of the corporation.
The security to the holders of the corporation's obli-
gations would be absolutely identical in either case. If
the corporation spepd the money, it is absolutely gone
368 ELElCENtrS Of POLITICAL SCOHOMT.
away from them for ever, and is no more a security to tlie
holders of their notes than if it had never existed. In
either case, then, it is the permanent property of the cor-
poration which is the real security of the holders of its
notes ; and they have the same general charge over it in
both cases. It is, therefore, to the last degree inaccurate
and untrue to distinguish one case by the term real
capital, and to brand Uie other as fictitious. There is ab-
solutely no distinction at all between the two cases, as far
as regards the corporation and the holders of its obligations,
the profits and the losses are identical in their effects in
either case. The true difference is to the community at
large, and the general fund of capital available for its use,
and its only effect is to make capital somewhat cheaper
than it would otherwise be ; and a judicious and successful
employment of it eminently conduces to the national
prosperity.
44. The only advantage of the second method is
ihat it makes capital more abundant, and sometimes
might provide it when not otherwise obtainable. If it
were scarce, or otherwise occupied, it might not always
be possible to obtain it. If nobody had money to lend,
the second method might supply the want, and so long as
it is practised by judicious persons, and used in promoting
successful operations, it is a great blessing. But it is just
on this very point, that it is liable to the most dangerous
abuse. If the corporation were limited to the use of real
capital advanced by some independent person, he would
probably take into consideration the purpose to which it
was to be applied, as well as the solvency ofrhe corporation,
and if he thought it injudicious, he would probably not
advance it. There would, therefore, be so far a check
upon them, but if they were totally destitute of control,
and could embark in any operation, by simply writing a
few ^* promises to pay" upon bits of paper, they may be
led away into wild and dangerous speculations, deceived
by false expectations of profit, and involve themselves
ON MXBCAimLB CBBDIT. 269
and all who trust them in ruinous losses. Because,
though these promises to pay did not represent real
advances, and are therefore inaccurately called fictitious
capital, if they get into circulation and people give value
for them in commodities or services, a disastrous operation
based upon them is just as much loss of capital, as if they
had been real advances.
45. We have thus shewn that in the production of
commodities, which term must be held to include both
the formation and the transfer of commodities, credit
performs exactly, the same functions as money, so far,
therefore^ as production goes, credit is in all respects
equivalent to mone^. And so long as the operations are
successful, everything goes well. Money beinff, as we
have laid down, the representative of the fruits of a man's
fiast industry, and credit a pledge of his future industry,
t is certain that *'credit" exceeds ^^oney" many times
in this country, for whereas it is not supposed that the
actual money exceeds £60,000,000 the credit in Bills of
Exchange, and which is only one form of it, exceeds
£400,000,000. That is, the people of this country have
always pledged their fiiture industry to the extent of
four bundred millions. And this £400,000,000 is equally
capital, it is equalfy a real value as the £60,000,000.
No doubt it is of a different description, it is more perilous,
a portion of it may perish. But it is an undeniable fact
that it has performed the same functions, so far as regards
production, as money. It is a distinct and separate value
over and above commodities, totally different from Bills
of Lading, which merely represent particular commodities.
Bills of Exchange are not a lien upon property but upon
industry, and any property a man possesses is only a
kind of collateral security to make good his engagements,
in case his industry is unsuccessful.
46. In the case we examined of a bank discounting
the bill of the manufacturer A, upon the dealer B, the
transaction was already effected upon which it was found-
ed. A had rendered the service to B for which he was
270 ELEMENTS OF POLITICAL ECONOMY.
to be paid at a fixture day, before he drew the bill upon
him, and originally all bills of exchange represented pre-
viously existing debts, and they bore on the face of them
the words "for value received'^ to testify the fact.
Consequently when A discounts the bill founded upon
that transaction, with the bank, it must be carefully
observed that he is not borrowing money from the
bank, but selling a debt which is his existing property.
And so long as Bills of Exchange are restricted to
representing past transactions, their negotiation is not
borrowing money as is too frequently, said. But the
sharpness of traders discovered that they might be
applied to future transactions.
47. In the case of a past transaction, the bill was
given by B, who had got the goods, to A who had
EVen them, and A had got the money that would
I payable to him at the maturity of the bill,
advanced to him by the bank on the credit of B's
reputation, as well as his own. If B, however, be a
person of wealth and reputation, he may lend the
use of his name to A without any real transaction
having taken place between them. Thus, he may
accept a bill of A's, and A, on the strength of his
name, goes to his banker, and gets the money, with which
he performs some operation, such as manufacturing
goods, and having done so he may sell them to C,
and take C's bill in payment of them, which latter is a
real transaction. Now, the whole of this operation is
based upon the credit of B's name, it is not based upon
anything real, or upon any service previously rendered ;
consequently it is in itself a completely new transaction.
Such a bill between A and B is called an Accommodation
Bill. This name is, however, not confined to cases
where the acceptor lends his name for the accommodation
of the drawer, though that is the most usual form, but
wherever an acceptor, drawer, or endorser puts his name
upon the bill, and therefore renders himself liable to a
holder for value to discharge it, without, as the legal
expression is, consideration moving to him, it is an
OK MERCANTILE CBEDIT. 271
accommodation bill, and the party for whose accommoda-
tion it is negotiated is bound by law to provide funds to
discharge it at maturity, and also to indemnify the
accommodation acceptor, drawer, or indorser, as the case
may be, ag'ainst the consequences of non-payment.
48. The practical effect of this transaction is simply
that B stands security to the bank for the money advanced
to A ; and there is nothing in the nature of such a trans-
action worse than for one man to stand security for another
in any other commercial transaction. In some respects it
is much fairer to the person who runs the risk as security,
because in the ordinary course when one person becomes
security for another, he does not receive any pecuniary
recompense for the risk he runs, to which he was certainly
most fairly entitled, whereas if it be done by way of
accommodation bill he generally receives some quid pro
qtWj and when a bank performs an operation of exactly the
same nature, it always receives a high interest for the
risk it runs, and when judiciously done is a very profitable
source of income. From the extravagant abuse, however,
of such methods of raising capital, accommodation bills
have acquired a most discreditable reputation, and there
is nothing which requires more vigilance in a bank than to
guard against being entrapped into making unwary pur-
chases of such securities.
49. A great deal has been said and written about
the difference between real and accommodation bills, and
while no terms of admiration are too strong for the first,
no terms of vituperation are too severe for the latter.
Thus, Mr. Bell* says : " The difference between a genuine
commercial bill and an accommodation one is something
similar to the difference between a genuine coin and a
counterfeit," as if the act of negotiating an accommodation
bill were in itself one of moral turpitude. It is also
generally assumed that real bills possess some sort of
additional security, because it is supposed that there is
* Philosophy of Joint Stock Banking, p. 51.
272 SLKXEHTB OF POUTICAL SCONOMT.
property to represent them. We have already seen, how-
ever, the entire delusion of such an idea, and that it is a
great mistake to suppose tliat commercial bills have any
specific relation to the property from the transfer of
which they originally sprung. In truth, both real and
accommodation bills have precisely the same security, thev
constitute a general charge upon the whole estates of all
^e obligants upon them. Tne objections to accommoda-
tion bills, therefore, on that ground are perfectly fiitile,
for the socuritv of both is exactly identical, and as
Mr. Thornton long ago remarked:* "The supposition
tlmt ruai bills represent property, and that fictitious bills
do not, seems, therefore, to be one by which more than
justice is done to one of these species of bills, and some-
thing less than justice to the other."
50. The essential distinction between real and accom-
modation bills is, that one represents a past and the other
9k future transaction. But even this is no ground for any
preference of one over the other. A transaction that
liiM been done may be just as wild, foolish, and absurd as
the one that has to be done. The intention of engaging
in any mercantile transaction is, that the result of it
should repay all the outlay, with profit. There is no
otlior test out this of its propriety, in a mercantile sense.
Such things have been heard of in the mercantile world,
as consignments of skates to tropical countries. Now, a
bill drawn against such a shipment as this would pass
muster in technical language as a real bill, while one
drawn to forward some other operation, however sound
and judicious it might be, if it were not yet accomplished,
would be an accommodation bill, and be branded as ficti-
tious. Mr. Bell would call the former genuine coin, the
latter counterfeit.
61. We see, therefore, that the common objectionis
urged against accommodation bills are perfectly futile,
and quite wide of the mark. Whether a bill be a good
* Enquiry into the Nature and Efieots of Paper Credit, p. 32.
09 HDBBCANTILB CREDIT. 273
and safe bill, has no reference to whether it represents a
past or future transaction, but whether it is a safe and
judicious one itself, and the parties to it respectable and
of sufficient means to meet their liabilities. The whole
cash credit system of Scotland, which has conduced so
eminently to the prosperity of that country, is a system
of accommodation paper, which is sufficient to disprove
in the mind of any dispassionate person, that the system
is in itself necessarily dangerous and pernicious, but is
proof enough that if it is judiciously managed it may be
of great advantage.
52. The true objection to accommodation paper is of
a different nature. When the credit system is carried on
duly and properly, and within legitimate limits, it is
the most ingenious method ever devised for promoting
commerce, and where it has been cautiously used, has
marvellously succeeded in so doings But it is a very trite
remark that the best things when corrupted become the
worst. This is eminently true of paper credit. Univer-
sal experience proves that there is nothing so dangerous
and pernicious as for individuals to have an undue lacility
for obtaining credit. When capital is to be had on too
easy terms, it fosters to an extravagant extent the fatal
propensity for embarking in all sorts of wild speculations,
and pushing trade far beyond the possibility of being
remunerative.
53. The considerations we presented shewed the
exaggerated ideas of the security of real bills. But there
is at least this security in real bills, that as they only
arise out of real transfers of property, their number must
be limited, in the very nature of things. However bad
or worthless they may be individually, they cannot be
multiplied beyond a certain extent. There is, therefore, a
limit to the calamities they cause. But with accommodation
paper there is no limit. A beggar may write upon
bits of paper a m)}lion of ^^ promises to pay " as easily
as a Rothschild; and it is far more probable that he
will do so ; a man without a &rthing is proverbially the
a
274 ELEicEinrs of f(»jtical sooHOicr.
most reckless, because, when the bubble bursts, it is a
matter of no consequence to him, he has nothing to lose,
the miseiT and the ruin fall upon his unfortunate dupes.
A man of real capital will be cautious in his operations,
a loss to him will be real, but a man who is not worth a
sixpence, is indifferent whether he loses a £1,000 or a
£1,000,000.
54. This system of accommodation paper of different
descriptions, is one of immense importance in modem
commerce, and its abuse has led to some of the most
terrible mercantile catastrophes on record. It is, however,
so intimately interwoven with banking, that we shall defer
any more mention of it till the next section, which treats
of the operations of Banking.
65. We have observed that so far as regards produc-
tion, which, in a scientific sense, includes the formation
and transfer of products, credit, whenever it is applied^
performs exactly the same function as money. As m this
flection we wish to avoid all controversy, and merely to
state &ets, we will only say that all commercial transac-
tions on credit, are sales. The absolute property of the
article passes from the vendor to the purchaser, just
exactly as if the price had been paid in money. The
only difierence to the purchaser is, that his profits are
less, because the credit price is higher than the money
price. So long as matters proceed smoothly, and transac-
tions are profitable, the bills generated by commerce are
equivalent to so much money. The aifference arises
when the sales are unprofitable, and losses ensue. If the
wholesale dealer buys from the manufacturer for ready
money, and the speculation is unfortunate, the whole
loss &lls upon the dealer, the manufacturer does not lose,
he has got his money. But if the speculation is unfortu^^
nate, and a loss ensues, or if the wholesale dealer fails
from other reasons, the loss may fall upon him. When
he has sold on credit to the dealer, his power over the
goods is absolutely gone; and if the bill is unpaid he
cannot reclaim the goods, even if they are still in the
ON MBBCAiniLE CREDIT. 275t
poBsesfidon of the purclinser, he has no more claim to them
than any other creditor. Consequently, if the dealer has
not sufficient funds to pay his debts, the loss falls upon the
original manufacturer. In this, then, consists the whole
difference between sales on credit, and sales for money,
that if losses ensue they may be differently distributed.
No doubt the manufiu^turer finds that a bill of exchange
is not so negotiable as a bank note or money, but it is of
the same nature, and must be placed in the same cat^ory.
The money is nothing but a bill on the whole community.
Good bills of exchange do to a certain extent circulate m
commerce like money; but the manufacturer generally
finds it more convenient to sell the bill to his banker, and
how the banker buys it will be explained in the next
section.
56. Now, we have shewn in the first chapter of this
work, that capital, in its most general sense, is not any
particular thing, but a particidar method of employing a
quality, be it currency or anythmg else, in reproductive
operations. In its moi« ori Jnal and narrow sense, it
is the purchasing power of the merchant, or it is the
moving power at his command to generate a circulation of
commodities, out of which he reaps his profits ; it is the
power which draws the goods out of the possession of the
manufacturer into the possession of the dealer, for him to
make a profit. The money he has is the fruit of the ser-
vices he has formerly done to the community. Credit is also
the power he has of drawing the goods from the possession
of the manufacturer, and is the pledge of his skill in
rendering future services to the community, by discerning
their wants and supplying them. The effect upon the
markets and upon prices is exactly the same, whether
Eurchases, Le.^ circulation of commodities, be generated
y credit or real capital, and the profits and losses are
exacthr the same to the community, whether the operation
be ejected by credit, or by real capital. Hence, we
arrive at this conclusion^ that mercantile credit is
MERCANTILE CAPITAL.
s2
276 ELEMENTB OF POLITICAL ECONOKT.
57. It has frequently been observed that bH great inven-
tions have an equalmug tendency ; the invention of gun-
powder equalized the condition of the poorest foot soldier
and the wealthiest knight, and it destroyed the supremacy
of the knights; the invention of printing opened up the
paths of knowledge to the poorest as well as to the rich,
and destroyed the supremacy of wealth in the acquisition
of science; the invention of steam and railroads has
equalized the means of locomotion to the humble and the
wealthy; so the invention of credit has destroyed the
supremacy of capital or money, and has provided the
means for the most humble to place his foot on the first
step of the ladder of opulence. It is a matter of common
observation that nothing is so difficult as the first st^ to
w^th ; that many men could get on if they had only a
beginning. Now, credit supplies the means of attaining
that first step to all. Credit is a mighty power, and no
doubt like other great engines, is liable to be abused ; but
it is entided to take rank with gunpowder, printing, and
steam, among the marvels of human ingenuity^ and which
has been the chief cause of the magnitude of modem
conunerce.
TBEOBT OF BANKING. 277.
THEORY OF CEEDIT.
SECTION n.
THEOBY OP BANKING,
1. Having in the preceding section said what ap-
Gared to us to be necessary to explain the nature of
ercantile Credit, we now come to the other grand
division of the subject, namely, Banking Credit. Our
present object is not to consider all the points of prac-
tical banking, but merely to explain the theory of the
subject, and to shew how it acts, and the functions it
performs in commerce.
2. The business of a merchant is to deal in commo-
dities, the business of a banker is to deal in currency.
A merchant buys and sells commodities, a banker
borrows, and buys, and sells, currency - two species of
business which are essentially distinct from one another,
and which can seldom be undertaken on a large scale
by the same person or company, and the attempt to
do so has in many cases led to the most disastrous results.
3. The first thing to be done to gain a clear insight
into the subject, is to determine the meaning of the word
^^ a bank," aqd ^' to bank " ; and to understand in what
278 ELEMENTS OF POUTICSAL BGONOMY«
^banking" consists. It is usual to derive the word
hank and banker from the Italian word bancOy because
the Italian money dealers used to pile their money upon
a bench. It may probably be that this is the origin of
the word banker^ but paradoxical as it may appear,
it seems very doubtful whether the word ** to bank,*'
and ^^ a bank," have any etymological connection with
banker. At all events, however that may be, the words
bank and to bank have acquired a meaning altogether
different from that of the business of the persons who
employed a banco^ and this we now shall endeavour to
elucidate.
4. We must observe that the word in Italian for a
Joint Stock, or common fund, is Monte^ a heap, a bank
formed by the contributions of various persons. Thus,
public loans were always called Monti, it was the com-
missioners charged with the management of the public
loans of Venice, which were called Monti, that were
formed into the Bank of Venice. And this is precisely
liie meaning of the word Bank in our earliest English
writers. Thus Bacon says,* " Let it be no Bi^ or
common stock, but every man be master of his own
money ;" a sentence which is quite imintelligible if bank
is derived from banco. So also Evelyn speaksf of the
^^ Monte di Fietk at Padua, where there is a continual
Bank of money to assist the poor," where it evidently
means an accumulation of contributions. So also he says,;^
**The great Banks are set up for those who play at
basset," again evidently meanuig a heap. So also des-
cribing the scandalous scene at court, on the last Sunday
evening of Charles II. he say8,§ " A Bank of at least 2,000
in gold." It is perfectly manifest that in all these places
the word bank is the equivalent of the Italian word
Monte and not of banco.
5. Be this as it may, howeveri we must state what
♦ Essay upon Usury. t Duwy, ^^1- 1- p. 211. Edit. 1850.
\ Ibid. p. 216. § Ibid. Vol. ii.p. 210*
THSOBT OF BAKKINa. 279
the functions of the first banks were. The cause of the
institution of the Bank of Venice and its uses were these.
Venice was a small state, but gradually became the centre
of an enormous foreign commerce, and as a natural conse-
quence, an immense quantity of coin of all sorts of
different countries and denominations were brought by the
foreigners who resorted to it. These coins were more-
over greatly dipped, worn, and diminished. This degrad-
ed state of the current coin, produced intolerable
inconvenience, disorder, and confusion, among merchants,
who when they had to make or receive payment of their
bills, had to offer or receive a bagful of all sorts of
different coins. The settlement of every bill, therefore,
involved perpetual disputes — which coins were to be
received^ and which not, and how much each was to
count for. In order to remedy this, it became absolutely
necessary that some fixed un&brm standard of payment
should be devised to ensure regularity, and a just mscharge
of debts. In order to do this, the Chamber of Loans,
or the Commissioners who had the management of the
public debt, undertook the fuuctions of a bank of deposit.
Every merchant deposited with the bank all his coins
of different weights and nations. These were all
weighed, and the bank gave him notes, exactly corres-
ponding to the i^ amount of the bullion deposited.
And these notes promised to pay the bearer on demand,
a definite quantity of bullion of the proper fineness.
These notes, therefore, always insured a uniform standard
of pavment, and it was enacted that all bills upon Venice
should be payable in the bank money. The consequence
was evident. As the bank money always retained its
proper weight, it was much more valuable than the
degraded coins in circulation. The difference was
usuallv 9 per cent., though sometimes much more.
This (ufference was expressed by saying that the bank
money bore an agio^ or premium, of 9 per cent, a mode
of speaking very likely to confuse and mislead, because
it is quite evident that it was the bank money which was
280 ELEMKirra op foutical scx>Noicr.
the tme gtandard, and the current coin which was at . a
discount.
6. Moreover, the bank professed to keep all these
coins in its vaults. It made no use of them in the way of
business ; and consequently the notes in circulation were
always exactly equal to the amount of the coin they
displaced. This bank never did any business on its
own account, by way of discounting bills.
7. The Bank of Hamburg was established for the
very same reason, and for the very same purpose as that
of Venice, viz., for the purpose of insuring a uniform
standard of payment of mercantile bUls. It was there
enacted that all bills upon Hamburg for 300 guilders and
upwards, should be paid in Bank money. John Law
says,* that the Bank of Sweden was instituted for
very much the same purpose. The money of Sweden
was at that time made of copper, and very inconvenient
to make pajntnents in. It was necessary to have a cart
to carry a moderate amount of it. To remedy this a
public bank of deposit was established, where the
merchants deposited their copper money, for which they
received promissory notes payable to bearer, on demand,
in which payments were made. Law says that this was
the earliest institution of the kind, and that the use of
them in Italy was subsequent to the bank of Sweden.
8. All these banks were in exact conformity with the
sense which we believe to be the genuine one of the
word Bank. They were a common fund formed by the
contributions of various individuals, and they all issued
Eromissory notes payable to bearer on demand, which
owever, did not exceed in quantity the bullion they were
substituted for.
9. All this time, the names of banks and bankers
were utterly unknown in England. The name of banker
w<i3 first introduced in England in the period of the
Conmionwealth. Up to the year 1640, the merchants used
* Momoiros snr les Banques. (EuYfes. p. 524. FdiL OuillaumiQ.
THEORY OF BAKKING. 281
to deposit their cash and bullion in the Mint in the
Tower for the sake of security. But in that year, Charles I.
suddenly seized it, and after that the merchants were
obliged to keep their bullion at home, under the care of
their own clerkis and apprentices. These clerks, however,
in many instances robbed their masters, and joined the
army. Others lent out their masters' money clandestine-
ly to the goldsmiths, at the rate of 4d. per cent, per
diem. The goldsmiths then began to receive deposits
at interest, and they gave their customers their deposits
at any moment they required them. These goldsmiths
then beean to trade with these deposits, and to discount
the bills of merchants. The convenience of persons
being able to deposit their money where they could have
it, along with the interest, at any moment they pleased,
instead of having to invest in real or personal security,
was so great that deposits rapidly flowed in upon them,
and they then came to be called Bankers, but their
houses or establishments were never called Banks.*
10. In return for the deposits lodged with them the
goldsmiths granted receipts, which were transferable
n'om hand to hand, and payable to bearer on demand,
like the notes of the difierent banks we have been con-
sidering. They were transferred by indorsement. But
more Uian that, when they discounted bills they did it
by giving their own promissory notes payable to bearer on
demand for them. No doubt, when they first began this
practice, people were not much accustomed to them,
and would frequently demand the money for them.
But in process of time, as confidence increased, demand
for payment would diminish, and they would pass
equally freely with money. In process of time, then,
the goldsmiths would discover that the actual quantity
of money demanded* in payment for their notes would
bear a pretty steady ratio to the number of them out,
* For a fhller account of the rise of Banking in England, see my
Theory and Practice of Banking. Chap. viii.
282 ELEMBKT8 OV POLITICAL SCONOMT.
and by carefully observing this proportion, and always
keeping an abundant surplus in case of any unusual
demand, they would learn how many bills they might
safely buy with their "promises to pay." These notes
were called goldsmiths' notes, and afterwards bankers'
notes.
11. Now, we must observe that while the notes of
the banks we have described were exactly limited to
the quantity of bullion t&ey represented, the notes of
the goldsmiths far exceeded tne quantity of bullion
deposited with them. But they charged exactly the
same price for their use, as if they had been actually
money, and while they circulatea they were in all
respects equivalent to money. Consequently the amount
of tnese notes in circulation over and above the quantity
of bullion in the coffers of the goldsmiths, which they
were obliged to keep to sustain the credit of the notes,
was exactly equivalent to so much additional money,
both as regarded the goldsmith and as regarded the public.
Each of them reaped as much profit from these notes,
as if they had been actual guineas. Now, these notes
were credit, and consequently we see in this instance
that credit was capital.
12. Some^time after this, in 1696, the Bank of Scotland
was founded with a capital of £100,000, of which a tenth
was paid up. This bank did not receive any deposits
from the public, but it was allowed to issue notes ad libitum.
For several vears it issued no notes below £5. Within
ten years after it was founded, its notes in circulation
were equal to five times the amount of bullion in its
coffers, and these notes were in all respects equivalent to
so much additional money to the nation.
13. The Bank of England was the first monetary
institution in England to which the name of bank was
applied. It was formed of a number of persons, who
subscribed £1,200,000 to carry on the war with France.
They were formed into a corporation, and they were
allowed to receive deposits from the public. Moreover,
THSOBT OF BANKIlfO. 283
they were allowed to issue promissory notes, payable to
bearer on demand, to the amount of £1,800,000, the sum
they lent to the government, and they received £100,000
a year as interest for the money they lent to government.
The corporation was allowed to deal in bills of exchange,
buy or sell bullion, lend money on the security of goods,
wares, and merchandize; but not to meddle with any
other description of trade.
14. Now, we observe this-- that the original capital
of the bank (£1,200,000) was lent to the government
to promote the war, and the company was allowed to
create an equal amount of notes to trade with ; the credit
of which was supported by the annuity they received
from government. The consequence of this manifestly
is, that these notes were over and above the previously
existing money in circulation, and were exactly equivalent
to the creation of so much money. And such was the
effect of the additional capital created by the credit of
the goldsmiths and of the bank, that the rate of interest,
which was previously 8 or 10 per cent., even in time of
peace, was reduced ailer five years of war to 3 per cent.
The bank not only got the benefit of the interest on the
original sum advanced to government, but they were
able to reap the mercantile profit on the equal sum in
notes^ which they were allowed to trade with.
15. Some subsequent enlargements of the capital of the
bank were made by fresh loans to government, and on
each occasion the bank was allowed to create additional
notes to the extent of their advances to government.
Hence, it is perfectly clear that on each of these occasions
a creation of so much additional money took place, over
and above the previously existing amount in circulation.
At length all limitations to its issues were removed ; and
it was allowed to issue any number of notes it pleased,
upon the indispensable condition that they should be
payable to bearer on demand. And no hmitation was
again imposed upon them till the Bank Act of 1844.
16. The essential feature of a '^ bank," then, at this
284 SLEMBNT8 OF POLITICAL ECONOMT.
period was to issue promissory notes payable to bearer
on demand, which were to circulate as money. That is,
to create currency. And the meaning of the word " to
bank," was to receive money and ^ve notes payable to
bearer on demand, in exchange for it, and to buy bills of
exchange with their promissory notes. Thus, John Law
says,* ^^ La ban(]^ue est un credit general." And that this
is the true meanmg, there is abundant proof.
17. When the Bank of England was established, it
received no monopoly in its favor, and very soon after-
wards parliament endeavoured to erect another bank,
called a Land Bank. The failure of the attempt to do
this seriously embarrassed the government, as the capital
of this second bank was to be advanced to government,
like that of the Bank of England, to assist the war. The
project, however, fortunately for the country, totally
railed, and the Bank of England having come rorward to
assist the state in this emergency, were able to prevail
upon parliament, to confer upon them a monopoly so
fiur as this, that no future bank should be erected or
countenanced by parliament during the continuance of the
charter. This, however, did not by any means prevent
any private banking company being established, with any
number of partners. Nor was there anything contrary to
common law that it should be a joint stock company, that
iSy with transferable shares. A few years before the
Bank of England was founded, the first joint stock com-
panies mania occurred in England. And there was no
reason why a joint stock bank should not be formed as
well as any other company. But it would seem that a
bank was considered so essentially an affair of state, that
no one for a long time thought of such a thing as estab-
lishing a private joint stock bank.
18. At length in 1708, a company called the Mine
Adventurers of England, commenced banking business by
issuing promissory notes payable to bearer on demand,
* Second Memoire sur les Banques. (EuTres, p. 543. Edit Ouillaumin.
THSOBY OF BAJSnaSQ. 285
there being nothing to prevent them from so doing. It
was, however, the intention of parliament that a real and
effectual monopoly should be created in favor of the Bank
of England, and accordingly they determined to put down
by law, the rivalry of any other company. In order to
effect this, a clause was inserted in the act of 1709, re-
newing the charter of the bank, in these words —
•' That during the continuance of the said corf)oiation of the
Governor and 0[)mpanY of the Bank of England, it shall not be
lawful for anv body politic or corporate whatsoever, erected or to
be erected (other tlian the said Governor and Company of the Bank
of England,) or for any other persons whatsoever united or to be
united in covenants or partnerstups, exceeding the number of six
persons, in that part of Great Britain called England, to borrow j
awe^ or tote up any sum or sums of money on thetr bills or notes
vayabh at demand^ or at any less time than six months from the
borrowing thereof."
19. This was the clause, which from that day to this,
forbade the formation of any private bank of more than
six persons ; and we observe that the word " bank " is not
even named in it. It does not say that no hank shall be
formed of more than six persons, but it describes banking
and forbids any partnership of more than six persons
carrying on the business of banking; Le.^ of issuing pro*
missory notes payable to bearer on demand. At that
period this was the well understood meaning of Banking,
and for a long time this clause was perfectly effectual
for its purpose, and it did prevent any other joint stock
bank being formed.
20. So matters continued for many years, until about
1742, several attempts were made to evade the words
of the clause of 1709, and set up banks. In order, therefore,
to stop up all loopholes in the act of 1709, and to be
still more clear and explicit, the act of 1742 contains
the following clause :
•'And to prevent any doubt that may arise concerning the
privilege or power given by former Acts of Parliament to the
said wvemor and Company of ftrcZtMtv^ ianim^r ; and also in regard
to erecting any other ba^k or banks by Parliament, or restraining
:286 £LEMfiKT8 O^ POLITICAL SCONOMT.
Other persons from banking, dnring the continiiance of the said
t^ivilege granted to the GoTemor and Company of the Bank of
England as before recited, it is hereby farther enacted and declar-
ed by the authority aforesaid, that it is the tme intent and meaning
of the Act, that no other Bank shall be erected, established, or
allowed by Parliament, and that it shall not be lawful for any body
politic or corporate whatsoever, erected or to be erected, or for
any other persons whatsoever, united or to be united, in covenants
or partnership, exceeding the number of six persons in that part of
Great Britain called England, to borrow ^ owe, or take up any sum
or sums of money on their bills, or notes j payable at demand ox at
any less time than six months &om the borrowing thereof, during the
continuance of such said privilege to the said Grovemor and Uom-
pany, who are hereby declared to be and remain a corporation,
with the privilege of exclusive banking, as before recited/'
21. Still we observe that the intention of Parliament
Vras to confer on the Bank of England, the exclusive
monopoly of Banking. And this privilege of banking
consisted in ^^ borrowings owing^ or taking up any sum
or sums of m,oney on their bills or notes payable at
demand^ Hence, we see that "Banking" meant the
creation and issuing of " currency,'* and to prohibit persons
from creating currency, was, in fact, to prohibit them
from doing banking business. These words were devised
with the utmost care, so as to prevent any other rival,
in the most comprehensive manner possible. It was
supposed that no legal ingenuity could devise an expedi-
ent to evade so extensive a prohibition. The form of
words adopted in this Act was devised in reference to
the methods of doing banking business at the time
they were framed, and they were successful in preventing
any rival bank being formed, so long as bankers
adhered to that particular method of doing business.
But about 30 years afterwards, bankers adopted a
change in the method of doing their business so simple,
and apparently so tmimportant, as scarcely to deserve
attention, which by a mere change in the form of
doing their business, cut away the ground from under
this Act, and was ultimately the means of destroying
the monopoly of the bank.
nafiotiT ot* BANmfa 287
22. Up till about tlie year 1772, bankers adhered
to the original method of issuing promissory notes,
payable to bearer, on demand. But about this time,
they changed the form of making the purchases of
bills. When their customers brought them bills to
discount, instead of giving them their promissory notes
payable to bearer on demand, they wrote down the
value of the bill to the credit of their customer e in
their books. They then gave them books containing
a number of printed forms. These forms were called
Cheques, ana were bills of exchange drawn upon
the banker payable to bearer on demand. But it is
usual for the drawer of a cheque to fill in the name of
some one to whom it is made first payable. And these
cheques may be put into circulation, exactly like
bank notes.
83. These cheques are nothing whatever but bills
of exchange upon the banker, payable to bearer on
demand. There is, however, one peculiarity about them
that must be noticed. In ordinary cases no man can be
compelled to accept a bill drawn upon him for a debt,
without his own consent, which is signified by his
writing his name upon it. But, in the case of cheques,
if this rule was enforced, it would have destroyed their
utility, and they could never have been substituted
for bank notes. A bank note bears on the face of
it the obligation of the banker to pay it, but an
unaccepted cheque, if it followed the usual law of bills
of exchange, would be no obligation to pay without
acceptance. Consequently, no man would have been
safe in taking a cheque before he knew whether the
banker would accept it or not. To obviate this difficulty,
and to make a cheque as like a bank note as possible,
it was established as a custom among* bankers, that
the possession of a customer's funds by a banker is
equivalent to acceptance. Consequently, if a banker
has funds of his customer in his hands, he is bound to
pay all that customer's cheques, to the amount of the
288 SLEHBMT8 OS* POLITICAL SCONOMT.
fundd in his hands, without notice and without accep-
tance, to the bearer on demand^ exactly as if it was
his own promissory note.
24. Hence, cheques are nothing but a substitute for
bank notes. A bank note, in fact, is a double obligation,
the one is an obligation to pay the customer, the origi-
nal creditor, and the second is to pay the bearer, i. e.,
any one to whom the original creditor may transfer the
obligation. Now, the modem practice splits these
obligations. The entry in the banker's books is the ob-
ligation to pay his customer, the permission to draw a
cheque payable to bearer on demand, is the oblieation
to pay any one the customer may transfer the debt to.
And the entry in the banker's books, together with
the cheque, make up the bank note.
26. Hence, we see that although "Banking" originally
consisted in issuing notes payable to bearer on demand,
yet bankers deyised a metnod of doing the yery same
thing under another form, and we must change the
form of expression accordingly, to meet the altered form
of doing business. Nor shall we haye the least di£Bculty
in finding an expression, which will include both forms.
For though the business of banking consisted in dis-
counting bills with their promissory notes payable to
bearer on demand, we may express it thus:— that it
consisted in buying debts with " promises to pay/' and
these "promises to pajr" may be of two forms; 1st.
Promissory notes payable to bearer on demand; 2dly.
Figures written down to the credit of the customers,
to be drawn against by cheques payable to bearer on
demand. Up to the period when cheques were introduced
the London bankers nad yery extensive issues of notes,
but the method of doin^ business by cheques was found
to haye so many practical advantages over that by way
of notes, that London bankers from that period uniyersally
discontinued the issue of notes, and adopted cheques.
26. The only practical difference between bank notes
and cheques is this, that the former were, on the face of
THEORY OF BANKING. 289
them, direct obligations of the banker to pay the money
stipulated ; the latter were not direct obligations of the
banker. The consequence is, that when cheques are
transferred from hand to hand, it is usual to require the
transferer to indorse them, so that if the banker refuses to
pay them, the liability of the transferer may be preserved.
In bank notes this is not usually done, because as the
holder may demand payment for them on the instant
from the bank, few persons expect that the bank will fail
before payment is demanded, and consequently bank notes
usually pass from hand to hand by simple delivery,
without indorsement.
27. Both bank notes and cheques are subject to the
general rule of law, which affects all instruments of credit,
that whoever takes one in payment of a debt tmthout
indorsement^ does so at his own peril, and has no remedy
against the person he receives it from, if it is not paid.
And the indorsement only preserves the liability for a
very short period ; in almost all cases not more than 24
hours. The law intends that all bank notes and cheques
should be presented for payment within 24 hours. If the
receiver of a bank note requires the transferer to en-
dorse it, which is by no means unfrequently done, and if,
on presenting it within reasonable time, he finds the
banker has failed, he has his remedy against the trans-
ferer, just exactly as if it was a cheque. On the other
hand, if he delays presenting it beyond a reasonable time,
and then finds the banker has failed, he has no remedy
against the transferer, either in the case of an indorsed
bank note or a cheque.
28. We see, then, that the modern system of banking,
by means of cheques, is exactly the same in principle as
the former method of bank notes, only it is rather varied
in form. In each case the business of banking consists in
creating liabilities. The different forms, however, of
these liabilities mislead writers extremely, who are not
familiar with the mode in which they are created, into
very erroneous ideas on the subject, and we will now
T
290 ELBBfENTS OF POUTIGAL ECOKOICT.
exhibit the mode in which each of them is stated. Let us
deal with small figures, as that will exhibit the principle
as well as larger ones. Leaving out of consideration the
banker's own property or capital, let us suppose that he
has deposits in cash from his customers A, B, C, D, &c.,
to the amount of £10,000. Then his accounts would
stand as follows,
LIABILITIES. ASSETS.
To balances on drawing I
accounts .... £ 10,000 j To cash in hand . .£10,000
Now, suppose that others of his customers, a, b, c, &c.,
bring him buls to discount, that is, offer him debts for sale,
to the amountof £5,000. For the sake of simplicity, let them
be twelve months' bills, and the rate of discount 5 per cent.
Then if he agrees to buy them, in the former method of
banking, he would give them £4,750 in his own promissory
notes, retaining the £250 as liis profit, and his accounts
would then stand thus : —
LIABILITIES. ASSETS.
To customen' balances . £10,000 I By cash in hand . . £10,000
To notes in circulation . 4,750 | By bills of exchange • 5,000
£14,750 £15,000
In the modem form, instead of givdng his own pro-
missory notes to the amount of £4,750, he would write
down £5,000 to the credit of his customers, and at the same
time write down £250 to their debit, and then his accounts
would stand thus : —
LIABILITIES. ASSETS.
To customerb' balances . £14,750
By cash in hand . £10,000
By bills of exchange . 5,000
£14,750 £15,000
29. Now, in examining these two forms of accounts,
though they are in reality only two different methods of
doing the same thing, a very striking diflference is ap-
parent. In the first it is apparent on the face of them,
tliat the banker has issued £4,750 of notes. That is, he
has created liabilities against himself to that amount, by
THSOBT OF BANKING. 291
buying bills of exdbange or debts. Now, he is equally
Uable to demands for unmediate payment, both from the
customers who have deposited cash with him, and from
those who hold his notes. Consequently he must be very
careful that he does not multiply his liabilities to so great
an extent, that more cash may be demanded from him than-
he possesses. And to what extent he may safely
multiply his liabilities, is a matter of pure experience
and judgment.
30. In the second form of making up the accounts, as
soon as the banker has agreed to buy the debts, and
placed the sums to his customers' credit, these figures be-
come ^^ balances on drawing accounts," and are his
promises to pay, equally with the figures which represent
actual deposits in cash, and are undistinguishable from
them. Both sets of customers. A, B, C, &c., and a, b, c,
&c., have an equal right to call upon him for instant pay-
ment of their "balances," or to draw cheques, and put
them in circulation like bank notes. Hence, as before, the
business of banking consists in creating liabilities, and the
extent of liabilities the banker may create, depends purely
on the amount of actual cash that he may expect to be
demanded from him.
81. Of late years, it has been the practice of joint
stock banks to publish their accounts ; but those who do
not know how banking accounts are made up, may draw
very erroneous conclusions from them. Thus, when the
accounts of the great London Joint Stock Banks are
published, shewing that they have balances or deposits of
£9,000,000, many persons might imagine that these
figures mean that they have nine millions of cash deposited
with them to trade with. But this would be a very
great mistake indeed, for a very large proportion of these
^^ balances on drawing accounts," consist merely of
fibres placed to the credit of their customers on the
discount of bills, which are exactly equivalent to bank
notes. Nor is it possible for any ingenuity to discover
what proportion consists of actual cash lodged by custo-
T 2
292 KLSMSNT8 OV POLITICAL tOOSOUT.
niers, and what propoitioii consists merely of credit*
But the stability of the bank depends upon a due proper*
tion being kept between them, and it might yery well
happen, that while the ^^ deposits '^ were ajqparently
mounting up, and might lead many persons to believe
that the actual quantity of cash was mcreased, it might
be notliing, perhaps, but a dangerous extension of credit.
And if this were carried to too great a length, the bank
might be in the most dan^rous position, just when it
was apparently most flourishing. A private banker on
a large scale often has an application to place £10,000^,
or more, to the credit of a customer; if he does this,
it immediately counts as a ^^ deposit" in banking accounts.
Again, it is a very posnble case, that a large railway
company might request their banker to place £100,000 to
their credit. Now, if the bank does this, such a transaction
goes to swell up the figures of ^^ deposits" in their
published accounts, which may lead to very erroneous
inferences by the public, who do not know the mode in
which banking accouuts are made up.
32. A consideration of this example also shows the
very great misconception that is likely to be produced
by an expression which is very often used regarding
bankers, that they are merely agents between persons
who want to lend, and those who want to borrow. This
is not true in the ordinary sense of the words lending and
borrowing, because in ordinary cases of lending and
borrowing the lender deprives himself of the use of the
capital he lends. But in ordinary banking, both parties
have the complete use of the capital. The customer
lends his money to the banker, and yet has the ft*ee
use of it — ^the banker employs that money in promoting
trade ; upon the strength of its being deposited with him
he buys debts with his ^^ promises to pay/' and the person
who sells the debt, has the free use of the very coin which
the lender has the same right to demand.
33. The common notion of banking is, tiiat it consists
in lending money upon the security of bills of exchange.
THEORY OF BANKING. 293
Such an idea, however, is profoundly erroneous, as it
consists in buying debts with *' promises to pay," or
creating liabilities. And the contingency is, that he
may be called upon to pay them; no doubt, theoreti-
cally speaking, he is liable to be called upon to pay
all those liabilities at a moment's notice, just in the
same way as it is theoretically possible that all the lives
insured in a life insurance company may drop at the
same moment; or it is theoretically possible, that all the
property insured in an office may be destroyed by fire
at the same moment ; but no one expects such a contin-
gency to happen. Banking is like insurance, the sum
in cash retained by the banker is what his experience
tells him is sufficient to ensure his being able to meet any
calls which are likely to be made upon him.
34. In order to add further proof if possible of tlie
utter fallacy of the common notion that discounting bills
is borrowing money, we may state that when a customer
has discounted a bill with his banker, he has parted with
all property in it, just as with any other article of sale.
The bill becomes the absolute property of the banker,
which he may sell again, or pledge, or deal with in any
manner that suits his own interests best. Now, if it
was a loan from the banker to his customer, it would
manifestly be the duty of the customer, to repay the
loan in due time, and get back his bills, which would
be merely deposited with the banker as security, and
should be restored when the loan was paid, and which
the banker would have no right to part with. But this
is not the case. The banker does not receive payment
from his customer, but from the acceptor of the bill,
and he has perfect right if he pleases, to sell the debt
to any one else. On the other hand, in some few in-
stances, a customer does sometimes borrow money on
the security of bills, and in these cases, the customer
repays the loan and receives back his bills. But such
cases are very rare, and to be distinguished from the
ordinary business of discounting bills.
294 ELEMENTS OF POLITICAL ECONOMT.
35. The mode, therefore, in which the modem form of
making up banking accounts leads to deceptive appear-
ances, is, that when persons who are not conversant with
the subject, see that a bank has so much in balances
on customers' accounts, they are apt to believe that the
bank has that quantity of money, actually to trade with.
But the fact is, that these balances arise from the bimk
having traded with its cash, and reared up a structure
of credit on its basis. We are persuaded that much of
the misconception that prevails upon this subject arises
from the belief that cheques are only drawn against
actual cash deposited with the banker, and that bank
notes are founded merely on his credit. Such a notion,
however, is perfectly delusive. Bankers invariably buy
bills of exchange with their " promises to pay,'* and not
with coin, and cheques drawn against their promise to
pay are as purely based upon the banker's credit as bank
notes are.
36. And it is exactlv in this that the distinction be-
tween a banker and a bill broker consists. A bill broker
buys bills of exchange with actual cash, and, therefore,
the quantity he buys can never exceed the quantity of
cash he has. On the contrary a banker always buys
bills with his "'promise to pay" cash, consequently
the only limit be need impose upon his business, is that
which his own judgment may suggest to him, to keep
himself in a condition to meet any demands that may be
made upon him.
37. It follows from these considerations that cheques
jwe merely another form of bank notes, and were intend-
ed as a substitute for them. In all cases where a cheque
is now used a bank note would have been necessary if
cheques had not been invented. But they are not exact-
ly equivalent, for in many cases where bank notes would
pass, cheques will not pass. Consequently, though in
every case where a cheque passes, bank notes would pass,
the converse is not true that in every case where bank
potes pass, cheques would pass, ^d tlie system of cheques
THE0B7 OF BAKKINO. 295
does not supersede coin to so great an extent as
bank notes do. Now, banks which issue bank notes are
named banks of issue, and it is sometimes supposed that
only these banks deal with their credit ; and that other
banks deal with actual cash. The preceding details
show how utterly erroneous such notions are. All banks
are ^^ banks of issue," in a scientific sense, at least all those
in this country which do banking business by purchasing
bills of exchange. And the supposition that the legis-
lature can prevent banks dealing in credit, by prohibiting
the issue of bank notes, is one of the merest delusions that
ever prevailed.
38. From the foregoing considerations we see that a
merchant deals with credit, and a banker deals in credit.
A merchant brings him debts payable some time after
date, for sale, and by a flourish of his pen, the banker
transmutes these into debts payable instantly, which have
precisely the same effect in commerce as so many sove-
reigns. He reaps exactiy tiie same profit by creating a
credit in favor of his customer, as if he gave him the
actual cash. From this it manifestly follows, that
BANKING CBEDn IS BANKING CAPITAL.
39. Now, in the preceding section we have proved
that mercantile credit is mercantile capital, and conse*
quentiy, as all credit is either banking or mercantile, we
arrive at this general conclusion, that CKEDIT IS
CAPITAL. .
40. The preceding details also show the prodigious
error of those who think that banking does not add to
capital, that it only distributes existing capital. It is
unquestionably true that no mode of banking can create
actual gold sovereigns. But if by means of their credit,
bankers can circulate their promises to pay, and if these
be voluntarily received and accepted by the community at
large, at exactly the same value as if they were actual
sovereigns, then just by so much as they exceed in
number the quantity of actual sovereigns in the banker's
possession, they are to all intents and purposes an addition
296 ELEMESTB OV FDUTICAI. XOOSQlfr.
to ezisdi^ captttaL Fcmt not onljr does he save the use of
the actual coin in an immense moltitnde of infltances
where it would be required if hanking did not exist, and
liberatea it. and cniaUes it to be applied to promote
commerce, which is in its practical effects identical with
an addition of actual coin to that extents but bv the
extra multiplication of his promises to pay OTer and above
that, he is «iablcd to nudie what is to all intents and
purposes a further addition to the moving power of
commerce to an enormous extent.
4L Banking is, therefore, the most potent engine
for the increase of the moving power of any given quan-
tity of actual capital that it is possible to devise, consis-
tently with keeping up the value of the currency at its
level with bullion. John Law says most justly, ^ The
introduction of credit by means of a bank, augments tiie
quantity of money more in one year, than a pro^i^rous
commerce could do in ten." * And just as banking
spreads more extensively, does it multiply the producing
power of the community. We have already noticed the
great economising power of railroads in diminishing the
ouantity of capital required to supply any given demand
ior commodities; now, an extension of banking acts
precisely in an analogous manner, but to a much greater
degree; for, not only does it economize the actual
substance to a very great extent, but it makes the
*' promise to pay" of equivalent value with the actual
payment. And it is just in this multiplying power of
capital that the principal danger of too rapid an extension
of banking couHists. The rate of discount always depends
upon the proportion between actual capital and the
demand for it, or oji the debts offered for sale. A sudden
change in the proportion of these, causes the most violent
fluctuations in the i*ate of discount. If an unusual
(luantity of capital is thrown too suddenly upon the market,
tlie only result must be a rapid and extreme fall in
^ Socond Momoire sur lea Banqiioa. (Euvres p. 609. Edit. Quillaumiq.
THEOBT OF BANKING. 297
the rate of discount. Now, a too rapid extension
of banking has precisely the same effects as throwing a
vast quantity of capital suddenly on the market.
For, not only do the actual operations of banking have all
the practical effects of adding to the existing capital, but
to that will be added all the evu effects of over- competition,
an unnaturally low rate of discount, thereby a depreciation
of the cuiTency ; an export of bullion ; a joint-stock bubble
mania, with all its rogueries; then a collapse, and
commercial ruin.
42. Great and inestimable, therefore^ as are the
blessings and advantages of banking, there is no de-
partment of trade which is likely to produce more
fatal consequences to the public by too rapid an
extension of it, and too rapid a multiplication of
banks. There is no mania which should be looked
to with a more jealous eye by the public, or more
carefully guarded against by the legislature, than a bank
mania, nor one which is more properly the subject
of regulation by law.
43. We have seen that the only limit to which the
banker must restrain his purchases of debts with his
" promises to pay," is to preserve a safe and sufficient
margin between the actual coin he keeps, and the number
of " promises to pay " he may be called upon to fulfil.
But, even supposing that his accounts are operated upon,
that his customers put into circulation orders upon him
to pay cash to tlie bearer on demand, still it does not
follow that he will have to pay these orders in actual cash.
He has several chances in his favor that he will not have
to do so. In order to save repetition, let us consider the
case not of a single bank, but of several banks transacting
business on the same principles, in the same locality.
Each of them will have a certain amount of deposits in
coin, and each of them will do business by buj ing debts
with their " promises to pay." Now, let us consider the
chances there are, that operations may be canied on
without any demand for the actual coin. First, the cus-
298 ELBMEirrs ov political econobct.
tomer of one bank may draw a cheque in favor of some
one else, who may also be a customer of the same bank,
and that customer may only pay it into his own account,
and the operation will be merely a transfer of figures
from one account to another, but yet will be equally
effectual as if the actual coin passed. Secondly, he
may pay a cheque to a customer of another bank, and
that customer may pay it into his account with his own
banker, and desire him to get payment of it. But the
same thing may probably happen to the first banker, one
of his customers may pay into his account a cheque
Hrawn upon the second banker. When these two bankers
meet, therefore, to balance accounts, they will set ofiT
these mutual claims one against the other^ and pay the
difference only in coin. But yet the operations are
equally effectual as if the actual coin passed ; and there
is no man who understands the right use of language and
reason, who can deny that these mutual claims are as
much circulating medium as if they were paid in coin.
The same manifestly holds good of any number of
bankers ; and the m*eat art in banking is taking all these
chances into consideration, observing, in the first place,
how many payments are actually demanded ; and, secondly,
if they be demanded, what proportion of them are settled
and cancelled by cross clamis and obligations on other
banks, so as to save the use of actual coin, that a banker
keeps himself in a state of propriety and safety. And
these^ and these only, are the considerations which limit
his power of buying debts with " promises to pay."
4A. Now, as we have shewn that these debts may all
be settled by the mere payment of differences between
the mutual claims, it might so happen that they might
all be equal, and no com at all pass. It is perfectly
possible, therefore, that any amount of business might
be settled without any coin at all. Consequently, we
observe that this is a very strong confirmation of what
we have already said, that the quantity of money neces-
sary in any country depends very much on the method
THEOBT OF BANKING. 299
of doing business, and has no relation to the quantity of
commodities. It is very common among some writers to
say that the prices of commodities depends upon the
quantity of money and the quantity of commodities; but
such ideas are mere visionary chimeras.
45. We may anticipate here an objection which per-
haps might appear more fitly to belong to the next
section, where we shall examine certain views which are
prevalent regarding bills of exchange. Many persons
say that bills of exchange are not currency, because they
require to be discharged in money. It is perfectly true
that all bills of exchange must be expressed to be payable
in money, but it is a very grievous mistake to suppose
that they are all paid in money. The immense majority
of commercial bills of exchange are not paid in money,
but by figures in bankers' books. Thus, most men in
commerce have debts due by them, z.e., acceptances, and
also debts due to them. These, of course, generally fall
due at difierent dates. Now, when a trader's acceptance
is filing due^ he takes some of the debts due to him to
his banker, and sells tliem to him. The banker buys
them, as we have already explained, by writing so many
figures to his credit. When his own acceptance falls due
and is presented to him for payment, he draws a cheque
upon his banker, and if the holder of the bill is a customer
of the same banker, the matter is settled by a mere trans-
fer in the banker's books ; if he is the customer of another
banker, the two bankers probably have an exchange of
debts^ arising out of similar transactions, on both their
parts, and the debts are settled with the payment of no
more coin than the difference. Now, this is the regular
practice of banking, this is the way in which the vast
majority of bills oi exchange in commerce are paid, and
consequently the wliole system may go on for an indefinite
time, and to indefinite extent, without a single coin being
required.
46. There is in London an office for the express pur-
pose of exchanging the mutual claims of those bankers
300 ELEMENTS OF POLITICAL EOONOBCT.
upon each other who are members of it, and we will now
describe the method of bankers settling their mutual
claims. This office is called the Clearing House.
47. Every bank in London which is not a member
of the clearing house, sends out^ the first thin^ in the
morning, to collect the obligations it holds oue from
all other banks. The Metropolis is portioned out into
certain " walks," and it is the duty of a particular clerk to
collect all the bills, cheques, &c., within his walk. As
clerks start from each bank simultaneously, every bank
must be prepared to meet the claims of every other bank
in the Metropolis. These are called bankers^ charges^ and
they are paid usually in bank notes, in some cases by
cheques drawn upon the Bank of England. The slightest
reflection will show the waste of Bank of England notes
caused by this barbarous and clumsy method of settling
bankers' charges. It is evident that a very large amount
of bank notes might be saved, if the bankers had some
method of balancing their claims against each other, and
settling only the difference in bank notes. What the
amount of bank notes which are positively wasted by
this method may be, is not very easy to tell. It was
stated in evidence before the Committee of the House of
Commons on one occasion, that one bank alone, the
London and Westminster, was obliged to keep £150,000
of notes for this very purpose, which by a better method
might have been set free, and would have, to all intents
and purposes, been so much additional trading capital.
Now, if this bank alone was obliged to keep this enormous
sum unprofitable, what must have been the total amount
wasted in this manner by all the bankers? We cannot
believe that we at all over-estimate it if we place it at
least at £1,000,000.
48. About 1775, the inconvenience of sending out
to collect these charges led a number of the city.baukers
to organize an exchange among themselves, on a similar
Elan to that already practised among the banks in Edin-
urgh. They met in a room, and exchanged their mutual
THEOBT OF BANKIKa. 301
claims against each other, and paid only tlie difference in
cash, or hank notes. It is stated in the Bullion Report,*
that in the year 1810, there were 46 bankers who cleared;
that the average amount of drafts, &c., passed through
the clearing house every day was about £4,700,000, and
that all the balances on tins account were settled by
about £220,000 in Bank notes. The clearing house was
merely an assemblage of privtite bankers ; ue Bank of
England was never admitted to it, and is not to this day.
When the joint stock banks were instituted in the city,
they were equally excluded until 1854, when the intole-
rable inconvenience caused to them by the large amount
of notes they hftd to keep idle to meet the ^^ charges," set
a question afloat of organizing another clearing house
among themselves. Moreover, it is said, that the private
bankers themselves felt the inconvenience of the heavy
"charges" of the joint stock banks. Partly owing to
these circumstances, and partly, we hope, owing to the
feeling against the joint stock banks having abated, most
of them have now been admitted into the clearing house.
At the present time there are twenty-five private bankers
and eight joint stock banks in the clearing house.
49. The mode of doing business is as follows. The
bills and cheques which each banker holds on the otiier
clearing banks, are sorted in separate parcels; and at
10*30, a clerk from each bank arrives at the clearing
house. He delivers to each of the other clerks the obli-
gations he has against his house, and receives from each
the obligations due from his own. When these obligations
are interchanged, each clerk returns to his own bank.
The same process is repeated at 2*30. Each bank has till
4*45 to decide whether it will honor the drafts upon it; if
it does not return any drafts upon it before that hour, it
is held to have made itself liable on them to the clearingf
house. At 4'45 the business closes, and the accounts
are made up; and so admirable is the system, that in
* Evidence of Mr. Thomas, p. 151.
302 ELEMENTS OF POLITICAL BCONOICY'.
settlement of the claims not a single Bank note or sove-
reign passes.
50. Each clearing bank keeps an account at the Bank
of England, and the Inspector of the clearing house also
keeps one. Printed lists of the clearing bam^s are made
out for each bank, with its own name at the head, with
the word "debtor" on the one side and "creditor" on the
other. The clerk of the clearing house then makes up
the accounts between each bank, and the difference only
is entered in the balance sheet, according as it is debtor or
creditor. A balance is then struck between the debtor
and creditor column, and the paper delivered to the clerk,
who takes it back to his own bank. The balance then is
not paid to or received from the other bankers, as formerly,
but It is settled with the clearing house, which keeps an
account itself with the Bank of England. The accounts
are settled by means of a species of cheque, appropriated
to the purpose, called transfer tickets. They are of two
colors, white and green ; the white when the bank has to
pay a balance to the clearing house, the green when it has
to receive a balance from it. By this beautifully organized
system the amount of several millions is settled daily,
without the intervention of a single bank note.
6 1 . The most surprising thing, however, about this sys-
tem is that only about one half of the city banks are in the
clearing house. None of the banks beyond the city walls
are members of it, and the Bank of England is not a mem-
ber of it. So that all these banks have to settle their
claims upon the other banks in the manner we have
described. Is not this a most extraordinary circumstance
to be the case in London in the middle of the nineteenth
century?
52. The two methods which London bankers have
of settling their mutual claims, which we have described,
by collecting the charges in the morning, and by the
clearing house, suggest several important reflections upon
the circulating medium, and the Act of 1844. That Act
fixed the sum of £14,000,000 as the limit below which the
TBSOBT OF BANKING. 303
requirements of business would probably not permit the
internal circulation to fall. But there is this objection to it,
that it was fixed with reference to a particular method of
doing business. If all the London bankers were admitted
to the clearing house^ there would immediately be at least
£1,000,000 of bank notes disengaged from business, and
they would either disappear from circulation altogether,
or else they might be employed as fresh capital in dis-
counting bills and making loans. On the other hand, let
us suppose the clearing house dissolved^ and the clearing
banks to revert to the barbarous method of settling their
mutual claims practised by the non-clearing banks, at
least one million, probably considerably more, of bank
notes would be required to settle their claims. We are
satisfied that between these two extreme methods of trans-
acting business — either there being no clearing house at
all, and all the banks demanding payment from each
other of their claims in bank notes, and^ on the other hand,
all the banks entering the clearing house, there would be
a difference of bank notes necessary to transact the same
amount of business of not less than £3,000,000. Now, it
is perfectly manifest, that if the clearing house were dis-
solved, the additional quantity of bank notes necessary
to transact business would not in any way affect prices
or business ; nor if all the banks were to enter it, could
the quantity of bank notes withdrawn from circulation
affect prices or business. Consequently, we observe,
that the quantity of bank notes requisite to transact
business, depends very much on the particular method of
settling claims.
63. The operations of the clearing house also enable
us to dispel a very prevalent error among those persons
who maintain that bills of exchange are not "currency"
or circulating medium, because they can only be dis-
charged by payment of money. Even if such an asser-
tion were* true, it would not affect the question in any
way, but the assertion itself is whoUy erroneous. It
is not true, that bills of exchange can only be discharged
304 ELEMENTS OF POLITICAL BCONOHT.
by payment in money. Bills of exchange to the amount
of £1,500,000 are daily discharged without any coin
whatever, just in the same manner as cheques are. A
bill of exchange, on the day it matures, becomes a
cheque; a cheque is nothing but a bill of exchange
payable to bearer on demand. Now, let us take the
case of a wholesale dealer who accepts bills to a manu-
facturer, and draws bills upon retail dealers. When he
opens a discount accotint with his banker, he brings the
bdls he draws upon his own customers, the retail dealers,
and sells them to his banker. He also makes the bills
drawn upon himself payable at his banker's, and the pro-
ceeds of the bills he sold are appropriated to the pay-
ment of the bills he has to meet. Now, he knows when
the bills he has accepted fall due, and he takes care to
sell some bills to his banker to meet them. The banker,
as usual, buys these bills, by merely writing so many
figures — so many "promises to pay" — to the credit of
his customer. Now, if this banker is a member of the
clearing house, and the banker who presents his cus-
tomer's acceptances for payment, is also a member of it,
they are presented through the clearing house, and fall
into the mighty mass of transactions which are settled by
its means, without any intervention of coin, or bank
notes.
54. Now, when we see that cheques are merely
substitutes for bank notes, that in every case where a
cheque now passes, bank notes would be required if
cheques had not existed ; when we also see that a bill of
exchange on the day it is payable becomes a cheque,
which is equivalent to a bank note, it follows very clearly
that all the obligations interchanged at the clearing house
form an integral part of the circulating medium. Their
being exchanged at the clearing house can make no
difference to what they would be if they were presented
and paid by each banker. For they have all done their
duty before they arrive at the clearing house, they have
caused commodities to circulate, perhaps many more
times than once before they come to be discharged.
THEOBT OF BANKING. 805
65. We see, then, how utterly futile it is to attempt
to form any estimate of the amount of paper currency
in this countiT. Returns may be made of the stamps
issued for bank notes, bills of exchange, and promissory
notes ; but how is it possible ever to discover the amount
of cheques in circulation? If this cannot be done, it is
useless to try to estimate the amount of the paper
currency ; and still more impossible is it to control tlie
issue of paper, while the power of drawing cheques is
unrestricted.
66. The ^eat and important portion of the
currency which consists of cheques has not been su£S-
ciently appreciated. The attention of speakers, writers,
and le^siators, on the paper currency^ has been almost
exclusively directed to bank notes ; whereas all the ideas
involved m bank notes are, with a small change in the
form of expression, applicable to cheques ; and there is
no operation whatever which a bank can promote by
means of bank notes which it cannot with equal efficacy
perform by means of cheques. If it wishes to advance a
speculation, instead of giving its customer so many of its
notes, it promises to honor his cheques to an equal
amount. In Scotland the system of bank notes chiefly
prevails; and cheques are of more recent introduction,
and more sparingly used than in England. In this
country, cheques have very greatly superseded bank
notes, and in many respects are far superior to them.
Among other reasons, they are not such ready weapons
against a bank in the hands of rivals and enemies. It
has been by no means an unheard-of measure of hostility
against a bank which issues notes, for its rivals to
buy them up in all directions, and, having accumu-
lated a considerable amount of them, to present them for
payment suddenly in a mass, in the hopes that the bank
may be unprepared to meet, on the instant, so great a
demand for gold, and be ruined. With cheques this
method of hostility is more difficult. It is not easy to
conceive that any person could go round to all the
u
306 ELEMEKTS OF POLITICAL BCOHOinr.
customers of a bank, and accumulate such an amount of
cheques, as to render a demand for payment of them m
gola formidable to the bank. At all events, it ^vrould
require a much more elaborate and deep-laid plot to
injure a bank by the method of cheques^ than of bank
notes.
57. We have already more than once noticed a reiy
inaccurate notion that is very common, that traders who
discount bills with their bankers, carry on business upon
borrowed money. We have shewn that it is nothing
but the sale of a debt, which grew out of a previous
transaction. When this is done, the original debtor
becomes the principal debtor to the banker, and the
trader only a security in case of non-payment Now, if
the trader deals with ten other traders, and sells their
debts to him to the bank, they become so many principal
debtors to the bank, and are of course bound to provide
funds to meet each his own debt. But as it is possible
that some of them may fail in doing so, the banker re-
quires his customer to keep a certain balance in his hands
to meet such contingencies. Now, it is evident that so
long as bills are generated by actual sales, they must be
limited by them. But a practice has sprung up of manu-
facturing sham debts, and selling them to bankers as
real debts, which has been the cause of many calamities.
It has sometimes been supposed that it is only tradesmen
in failing circumstances, who resort to this practice, but
unfortunately it is not so. If it were so, the evil might
be confined to a narrow compass, comparatively speaking.
It is in times of great commercial agitation, generally
speaking, that this takes place, to the most ruinous
extent, when speculation runs high. A clever trader gets
his friends to accommodate him with their names, he then
goes to his banker and discounts this paper with him as
real. Now, this is, in truth, borrowing money from the
bank. In such a case as this, the borrower is bound by
law to provide funds, to meet the bill when due, and the
acceptor would never have put his name to the bill, if
THBOBT OF BANKINO. 307
he really expected to have to pay it, and directly he is
called upon to do so, he has his remedy against the
drawer.
58. Nothing can be more dangerous than for a bank
to countenance a customer dealing in accommodation
paper. If it chooses to take a particular bill on a special
occasion, because it prefers to have a name as a security
for an advance in that form, that is a different matter.
But if such a thing goes on to any extent, it will almost
infallibly terminate in a disaster to the bank. A sanguine
projector gets his fnends to accommodate him with theu-
names upon bills which he discounts, undertaking, of
course, to provide funds to meet them. This goes on
well at first, the acceptances are punctually met, the bank
in the meantime being totally in the dark as to who it is
that finds the funds to meet the bills. The drawer having
met the first bills, and having got a good name by the
apparent punctuality of his bills, goes on deeper and
deeper, and widening the sphere of his operations, till at
last the returns fail to enable him to meet his friends'
engagements, and the bubble bursts.
59. It is easy to show how much more dangerous
it is for a bank to discount accommodation paper than real
paper. Suppose it has discounted B's accommodation
acceptance to A, then B, on the face of the instrument, is
the principal debtor to the bank, which will of course
make B pay, but as it is A's duty to provide the funds to
enable B to pay, if he fails to do so, B has his immediate
remedv over against A. So that if the bank presses B,
he will immediately press A, just as every other surety is
entitled to recover from his principal. But if A be not
in a condition to pay up immediately, and has other bills
current in the bank, the latter dare not press B, for fear
of ruining A, and inducing a greater catastrophe. Now,
if A gets ten of his fnends to accommodate him with their
names, and discounts these bills at his banker's, it is A's
duty to provide funds to meet every one of these bills at
maturity. If the bills were real, it would be the duty of
u2
308 ELEMEKTS OF POLITICAL ECONOMT*
the ten acceptors to provide fcinds to meet them, and the
bank would have ten real principal debtors, nor would the
bank hesitate to press any one of them who failed in his
engagement. As aU these accommodation acceptors were
most probably induced to lend their names to A on his
promise to provide funds to protect them, they in all pro-
oability took no pains to provide any funds to meet them,
as few persons would put their names on an accommoda-
tion bill if they really thought they would have to pay it,
and they are most probably ignorant of each other's trans*
actions. In the case of real bills, then^ the bank would
have ten persons who would each take care to be in a
position to meet his own engagement ; in the case of ac-
commodation paper, there is only one person to meet the
engagements of ten . Furthomiore if one of ten real accep-
tors fails in his engagement, the bank can safely press the
drawer, but if the drawer of the accommodation biUs fails to
meet any one of the ten acceptances, and the bank suddenly
discovers that it is an accommodation bill, and they are
under large advances to the drawer, they dare not for their
own safety press the acceptor, because he will of course
have immediate recourse against his debtor, and the whole
fabric will probably tumble down like a house of cards.
Hence, the chances of disaster are much greater when
there is only one person to meet so many engagements,
than when there are so many bound each to meet his own.
These considerations show how extremely dangerous it is
for any bank to offer facilities for discounting accommo-
dation paper,
60. We see, then, that the real danger to a bank in
being led into discounting accommodation paper, is that
the position of principal and surety is reversed. They
are deceived as to who the real debtor is, and who are the
real sureties; being precisely the reverse to what they
appear to be, which u)akes a very great difference in the
security to the holder of the hi J Is. To advance money
by way of cash credit, or by loan with security, is quite
a different affair, because then the bank knows exactly
THEORY OF BANKING. 309
what it is doing, and as soon as anything occurs amiss, it
knows the remedy to he adopted. Moreover, it never
Eermits the advance to exceed a certain definite limit,
ut it never can tell to Avhat length it may he inveigled
into discounting accommodation paper, until some com-
mercial reverse happens, when it may discover that its
customer has been carrying on some great speculative
operation, with capital borrowed from it alone.
61. The insurmountable objection, therefore, to this
class of paper is the dangerous and boundless facility it
affords for raising money for speculative purposes. And
there is much reason to fear that this pernicious system
prevails to a much greater extent than is generallv
supposed. All the great commercial catastrophes, which
have within recent times scattered such misery and
desolation throughout the country, have been preceded
and greatly caused by the abuses of this species of paper.
All me acts of the legislature to lay the issues of banks
under stringent restrictions are perfectly futile, unless
some effectual measures are taken to restrain the negocia-
tion of accommodation paper, which can flourish quite as
well under a metallic currency as under a paper one.
However, we cannot enter into the subject in greater
detail here, as it would be beyond the limits of this work,
and we must refer to what we have said at greater length
elsewhere.*
62. Seeing, then, that the nature of discounting bills of
exchange is buying debts, which are to be considered just
like any other articles of commerce, it follows that the same
laws govern their exchangeable relations, as those of any
other quantities. The first duty of a banker is to maintain
his own position, which he can only do by maintaining
certain proportions between his actual cash and hia
promises to pay, or his liabilities, and that proportion
must vary from time to time, according to circumstances.
In times of a general failure of credit, he must maintain
• Theory and Practice of Banking. Chap. v.
310 ELEMENTS OF POLITICAL EC0N0H7.
a very much larger portion of cash compared to liabilities,
than in times of general confidence. Under such circum-
stances his duty is to contract his liabilities, which he
must do either by refusing to buy debts altogether, or
else by giving a lower price for them, t. ^., raising the
rate of discount. And a general rise of the rate of
discount has a tendency to discourage the ofiering of
debts for sale, just as low price of anything else dis-
courages its being offered for sale, except by those who
positively require the cash.
63. On the other hand, this lowering of the price of
debts, t. «., this increase in the value of money, or the
raising of the rate of discount, has an inevitable tendency
to attract bullion from where it is more abundant, t. e. ,
where the rate of discount is lower. Wherever debts are
to be bought cheap, thither will bullion fly to buy them ;
wherever debts are sold dear, that is, wherever money is
to be bought cheap, thither will debts fly to be sold, and
and there will competitors be to buy money. Conse-
quently, it is an infallible law of nature, that whenever
tne price of debts differs in two markets by more than
sufficient to defray the expense of sending bullion^ it will
cause an immediate flow of bullion to that market where
debts are to be bought cheapest, t. e., where the rate of
discount is highest. That is to say, if the rate of
discount at Paris is greater than at London, by more
than sufficient to cover the expense of sending bullion,
debts will fly from Paris to London to buy bmlion, and
bullion will fly from London to Paris to buy debts. The
exchangeable relations of money and debts will obey
exactly the same laws as the exchangeable relations of
money and wheat. Consequently, if left free and
uncontrolled, the prices of debts have a natural tendency
towards equUibrium m different markets
OFDnOHS OH THE SUBJBCT OF CBSDIT. 811
THEOET OF CEEDIT.
SECTION m.
EXAMINATION OF THE OPINIONS OP MODERN POLITICAL
ECONOMISTS ON THE SUBJECT OF CBEIJIT.
1, We have in the two preceding sections confined
ourselves to giving an account of the actual details of the
great system of credit, and have avoided controversy as
much as possible. Any one, however, who is acquainted
with the writings of the principal political economists
from the days of Turgot to the present time, will see that
these sections contain the complete overthrow of the
established opinions on the subject. It becomes our duty,
therefore, to examine their views, and point out wherein
the fallacy lies, which is so extensively oifiused.
2. The modern doctrines of credit take their rise from
a writing of Turgors in 1749, when he was still at college,
and only twenty -two years of age. It is entitled a "Lettre
k M. PAbb^ de Cice sur le Papier suppli^ a la Monnaie,"
and was an attempt to point out and refute the fallacy
312 ELEMEirrS of political ECONOBfT.
of John Law's system. Unfortunately, however, Turgot
never perceived in what the peculiarity of Law's system
consisted, and his letter would have no claim to be noticed
here, but that it contains the expression which has been
the keynote of a fallacy which has been sedulously pro-
pagated from that day to this, by a long series of writers,
both in France and England. He says,* ^^ En un mot,
tout credit est un emprunt." " In a word, all credit is a
loan." This most unfortunate expression is the funda-
mental fallacy, which runs througn all the chief writers
on Political Economy, from that day to this — That credit
is merely a loan. The utter fallacy of such an idea has
been fully exliibited in the preceding sections.
3. Aaopting this most unhappy phrase of Turgot,
which is an entire misconception of the nature of credit,
J. B. Say has pushed the matter further, and has invented
another phrase, which is repeated over and over again, in
a Imost all the works on Political Economy in this country.
He says,f " On s'imagine quelquefois que le credit multiplie
les capitaux. Cette erreur qui se trouve fr^quemment
reproQuite dans une foule d'ouvrages, dont quelqu-uns
sont m^me Merits ex professo sur r^conomie politique,
suppose une ignorance absolue de la nature et des fonctions
des capitaux. Un capital est toujours une valeur tres-
r^elle et fix^e dans une mati^re ; car les produits imma-
teriels ne sont pas susceptibles d'accumulation, ou un
produit materiel ne saurait Stre en deux endroits it lafins^
et servir d deux personnes en mSme temps J^ He considers
credit to be a loan of some material product by one person
to another, and then says, how can this same value, t.«.,
the same material product^ be in two places at once?
And this sentence has become a standing piece of ridicule
to fling at those writers who maintam that credit is
• (Euvres de Turgot Vol. i. p 96. Edit. Guillaumin. I regret to
say that M. Eugene Daire, the author of the Historical notice of Turgot
in this edition, has completely misunderstood Law's system. Vide p. 19.
f Traits d'Economie Politique, p. 392. Edit. Guillaumin. See also
his Cours d'Ecouomie Politique.
OPINIONS ON THB SUBJECT OF CBEDIT. 313
capital. But who said that a thing could be in two places
at once? And what has this got to do with credit? An
operation on credit is where an operation is effected by
some instrument of credit, instead of by money. What
senselessjargonitis, to say that ^^ a thing cannot be in two
places at once," is an expression applicable to such a
transaction.
4. This erroneous notion of credit might be pardonable
in writers who considered capital to be confined to some
material product, such as land, beasts, com, or money.
But in a writer who expressly admits immaterial products
to be capital, such an error is not excusable, because
credit is manifestly a species of immaterial capital, and
one which we shall shew to be of enormous value.
5. We will now make an extract from Mr. Thornton's
Essay on Paper Credit, which shews some curious incon-
sistencies. He says,* " It may conduce to the prevention
of error in the subsequent discussions, to define in this
place what is meant by commercial capital. This consists,
first, in the goods (part of them in the course of manu-
fiEicture) which are in the hands of our manufacturers
and dealers, and are in their way to consumption. The
amount of these is necessarily larger or smaller in pro-
portion as the general expenditure is more or less con-
siderable, and m proportion also as commodities pass
more or less quickly into the hands of the consumers.
It further consists in the ships, buildings, machinery, and
other dead stock, maintained for the purpose of carrying
on our manufactures and commerce, under which head
may be included the gold found necessary for the pur-
poses of commerce, but at all times forming a very
small item in this great account. It cobiprehends also
THE DEBTS DUE TO OUR TRADERS for goods sold and deli-
vered by them on credit, debts finally to be discharged
by articles of value given in return.** Now, it is perfectly
manifest^ that if the " debt " is capital to the merchant
♦ p. 19.
314 ELEMENTS OF POLITICAL BCOHOMT.
who has sold the goods, it is equally true that the ^'credit"
is capital to the trader who bought them with it.
6. Mr. Thornton then proceeds —
'^ CSommercial Capital, let it then be underBtood, conaiats not i^
paper, and is not augmented by the multiplication of this medium
of payment. In one sense, indeed, it may be increased by paper;
I mean that the nominal value of the existing goods may oe en-
larged throuffh a reduction which is caused by paper in the value of
that standara by which all property is estimated. The paper itsdf
forms no part of the estimate.
^^ This mode of computing the amount of the natuzal capital
engaged in commerce is substantially the same with that in wnich
each commercial man estimates the value of his own property.
Paper constitutes, it is true, an article on the credit side of the dooks
of some men, but it forms an exactly equal item on the debit aide
of the books of others. It constitutes, therefore, on the whole,
neither a debit nor a credit. The banker toho issues £20,000 m
notesj and lends in consequence £20,000 to the merchants^ on ike
sscurUjf of bills accepted oy them^ states himself in his books to be
debtor to the various holders of his notes to the extent of the sum in
question, and states himself to be the creditor of the acceptors of the
tills in his possession^ to the same amount. His valuation^ therefore^
of his own property is the same as ifneitfter the bills nor the bank notes
had any existence.
7. We cannot help expressing our surprise that
the latter part of this extract, iu italics, should have ema-
nated from so able a person as Mr. Thornton. Nothing
can be more erroneous than to say, that when a banker
issues his own notes against mercantile securities, the debt
and the credit are equal. Suppose that a merchant brings
£20,000 of bills, (let them be 12 mouths' bills, for the
sake of simplicity,) to his banker, to be discounted at the
rate of 5 per cent. The banker does not give him £20,000
of his notes in exchange for the bills, he only gives
£19,000, so that if all these notes were immediately issued
the banker would only be debtor to the amount of £19,000,
and he would be creditor to the amount of £20,000, there-
by leaviug a clear sum of £1,000, which would be his own
property. The result of such an operation would be,
OPINIONS ON THB SUBJECT OF CREDIT. 315
that the banker's liability would be £19,000, his assets
£20,000, leaving a clear profit of £1^000 to himself.
8. Mr. Thornton proceeds —
'^ Again, the merchants in making their estimate of property
deduct the bills payable by themselves which are in the drawer ot
the banker, and add to their estimate the notes of the banker which
are in their own drawer, so that the valuation likewise of the capital
of the merchants is the same as if the paper had no existence.
The use of paper does not, therefore, introduce any principle of
delusion into that estimate of property which is made by individuals."
It is obvious that the error of this paragraph is ex-
actly the opposite of the one in the preceding extract.
And there is further, a much deeper error of principle.
If the valuation of the merchant's estate be taken imme-
diately after such a transaction with his banker, he is
creditor of his banker in £19,000, and he is not debtor to
his banker for the £20,000, but only collateral security
in case the bills are not paid, leaving a balance of £1,000
against him, which is the sum he has to pay to his
banker for the accommodation he receives. If Mr.
Thornton's idea was true, that the banker and the mer-
chant each valued their debts and credits as equal, it
would mean that the banker discounted the merchant's
bills for nothing, or issued his notes for the full amount
of the bills, and it is only in such a case that their mutual
debts and credits can be equal. But in fact, we see that
the relations between the parties have been wholly
misconceived.
9. But the fact is, that these paragraphs of Mr.
Thornton's, contain a much deeper error^ and one
which it is impossible that any one not acquainted
with the laws and nature of Bills of Exchange should
perceive. Mr. Thornton says, that " the banker who
issues £20,000 in notes, and lends in consequence
£20,000 to the merchants on the security of bills
accepted by them, states himself in his books to be
debtor to the various holders of his notes to the
extent of the sum in question, and states himself to
316 ELEMENTS OF POLITICAL ECOKOlOr.
be creditor of the acceptors of the bills in his posses-
sion to the same amount. His valuation therefore of
his own property is the same as if neither the bills
nor the bank notes had any existence." Passing over
the extraordinary error of supposing that a banker
issues notes to an equal amount to the bills he dis-
counts, there is yet another error of a subtle nature
which we must endeavour to point out. It is true,
that a banker states himself to be debtor to the
holders of his notes, but yet it is only a contingent
liability, it does not become an actual debt until pay-
ment IS demanded for the note. While it remains in
circulation it is exactly the sanie thing to the com-
munity as actual money, and the banker reaps the
same profit from issuing it, as if it were actual
money. And this is exactly in what banking consists;
it consists in the creation of liabilities, in the multipli-
cation of debts, which are to perform all the duties
of actual money, and which so long as tbey do so,
are in all respects equivalent to so much capital.
Banking, therefore, consists in the multiplication of
capital, that proposition so hard of digestion to our
political economists. And just as many times as the
quantity of liabilities he can maintain in circulation
exceeds the quantity of bullion he keeps idle, just
so much does his business consist in the extension
of capital.
10. While, therefore, the notes of the banker, so
long as they remain out, are exactly equivalent to
so much capital, the bills of the merchants he holds
are also saleable commodities, they do not go in
cancelment and extinction of his notes, but are
separate values, which he can dispose of and sell.
They are pledges of the merchant's future industry,
and have a separate value, just as the present value
of every debt payable at some future time is a
real, present, and actual value, over and above
existing commodities. But we now come to the
OFINIOKS ON THE SUBJECT OF CBEDIT. 817
next sentence. ^^ Again, the merchants, in making
their estimate of property, deduct the bills payable by
themselves, which are in the drawer of the banker,
and add to their estimate the notes of the banker
which are in their own drawer, so that the valua-
tion likewise of the capital of the merchants is the
same as if the paper had no existence."
In this sentence we have now got thoroughly to
the bottom of the whole fallacy. In the first place,
we mark the astounding confusion in it, Mr Thornton
says, the acceptors of the bills have the banker's
notes in their drawers. What an extraordinary error!
It is not the acceptor of a bill in commerce, who
discounts it, but the drawer of it. The acceptor of
the bill buys the commodities with the bill, and
gives it to the vendor of the goods, it is the vendor
of the goods who discounts the bill, and gets the
notes. The acceptor of the bill, in process of time,
may have some of the banker's notes in his possession,
but there is no reason why he should. But now
we come to the master fallacy of the whole subject.
Merchants, in making an estimate of their property,
do not deduct the bills payable by themselves. When
a man has bought goods with a three months' bill,
that bill is not a diminvtion of his actual property.
The property is as much his own, as if he had paid
for it with money. A trader wlio has accepted a
bill, is not considered in law or custom to be in
debt at all, until the day for payment of the bill
comes. And the fallacy lies in this, that the bill
is supposed to represent the goods; it does no such
thing; it is not a lien upon the goods, but upon
the trader's industry^ and the goods are only collateral
security in case his industry is unsuccessful. While
therefore the bills are supposed to be good, they
are a separate and additional value, over and above
commodities.
11. Hence, we see that when a banker buys bills of ex-
318 XLBMENTS 07 POLITICAL SCONOinr^
change by creating liabilities, it is not a cancelment of
debts, but the exchange of two separate values. It is
exactly the same thing, as if one man asked another to
give him change for a sovereign in silver. It is an ex-
change of values.
12. But some consider that a bill of exchange is not
a separate value^ because it is to be paid in money. Now,
this argument is somewhat specious, but it is utterly un-
sound. If it were true that a bill has no value until it is
paid, it would equally follow that money has no value until
something is bought with it, and that money has no sepa-
rate value from commodities. Money is only a species
of a more general bill of exchange. A sovereign is only
taken because it is a bill which every one will honor.
13. Now, the fallacy which is still so universally pre-
valent about bills of exchange, was equally prevalent
during the last century, among many very eminent writers
about money- namely, that money was only a sign of
value. That is to say, that money only represented
commodities because it was exchangeable for them. But
one of the greatest services done by the political econo-
mists of the last century was to utterly overthrow this
notion. Money is not a sign of value, or the represen-
tative of commodities, but it is a separate and indepen-
dent value of itself. We have shewn that industry is the
only method in which a man can earn property. A certain
part of a man's industry he must have in commodities,
such as necessaries, but that part of it which he does not
require immediately to expend in commodities, he may
store up for future use, as it were, in money. Conse-
quently the commodities a man has, are the fruits of one
part of his industry, and the money he has, is the remain-
der. Hence, money and commodities are separate,
distinct, and cumulative values. Hence, though a man
takes money for his labor, because he knows he can ex-
change it for commodities, yet that money is not the
representative of commodities, any more than if a shoe-
maker were to exchange some shoes for bread, with a
OFDtlOHS ON THS SUBJECT OF CREDIT. 319
baker, would it be correct to say that the shoes were the
representative of bread, and vice versd. On the contrary
they are separate values.
14. The extravagance and absurdity of the notion
that mone^ is a sign of commodities or values, is fully
exhibited m Montesquieu, and we would venture to re-
commend an attentive study of what he says upon the
subject, as it is necessary to understand the principles
established by the writers of the last century, as the very
foundation of Political Economy . Montesquieu says,* ^Mo-
ne^ is a sign whichrepresents the value of all commodities."
^^ in the same manner that money is a sign of a thing,
and represents it, ever}*thing is a sign of money, and
represents it ; and a state is in prosperity, whilst on one
side the money fairly represents all the things in it,
and on the other, all the things in it fairly represent the
money, and they are si^ns of each other, that is to say,
that in their relative values one might have one as soon
as the other." That is to say, Montesquieu gravely as-
serts that in a prosperous state, the money in it ought to
be equivalent in value to all the other values in it.
That the value of the money in it, ought to balance the
value of everythine else in it.
15. The incredible absurdity of this proposition leads
to consequences which every reader of reflection can per-
ceive. It was, however, the generally accepted notion
at the time, and the labors of the first political econo-
mists, meaning thereby the first writers who are worthy
of the name, were directed to overthrow it, and establish
the proposition that money is merchandize in itself, it is
a separate value^ and not the representative of other
values. And to master this truth is the first foundation
of the science of money.
16. But the very same fallacies which were prevalent
then upon the subject of money, are now prevalent upon
the subject of credit, and indeed were propagated by the
* De VEsprit dcs I^is. Book xxn. c. 2.
320 XLSHENT8 OF FOLITIOAL SCOHOinT.
very writers who successfully established the true doc-
trines of the nature of money. By exactly the same
process of reasoning which established that money is a
separate and independent value over and above commo-
dities, is it established that credit is a separate and inde-
Gndent value over and above money and commodities.
oney is exchanged for commodities, but does not repre-
sent it, so also credit, or debts, are exchanged for money
and commodities but do not represent them. There is
no argument wliatever which would appear to lead to
the conclusion that credit is not a separate value, which
cannot be shewn equally to prove that money is not a
separate value. There is no argument which establishes
the irrefragable truth that money is a separate value, that
does not equally prove that credit is also a separate
value, a value, however, which is liable to be destroyed.
17. The fallacy which pervades all modern writers on
the subject is that unhappy one originated by Turgot,
that credit is a loan. Credit is nothing of the kind.
Credit is a sale^ i. e., two things are exchanged, and tlie
property of each of them is interchanged ; and the dis-
tinguishing feature of credit is that one of the articles of
exchange is a debt, or a " promise to pay." The fallacy
of the doctrine of credit alove alluded to, is founded upon
the fallacious views of the origin, or source of value.
Value is supposed to spring from labor, and to be mea-
sured by the labor which produced it, whereas value is
the exchangeable power of a Quantity ; and if any quan-
tity whatever has exchangeable relations, that is, if it is
capable of being bought and sold, it is a real value.
Thus, if debts have exchangeable relations, tliat is, are
capable of being bought and sold, they are real values.
18. It is supposed that because a bank note costs
comparatively little to produce it, that it is of no value.
But it is not the labor that it costs to produce it that
gives it its value, but what it will exchange for. A bank
note has value, not because it costs a few pence to pro-
duce it, but because the holder knows or believes that he
OPINIONS ON TEE SUBJECT OF CBEDIT. 321
can at any time exchange it for five sovereigns, or for an
equivalent value in commodities, that it has the same ex-
changeable qualities as five sovereigns.
19. It may be said that persons only sell their goods
for a bill of exchange, because they know that on a certain
day that bill will be redeemed. But why do they sell
their goods for money? Because they know that they can
purchase otlier goods with them whenever they please,
and so redeem these bills, as it were* When a Scotch
laborer works for hire for some time, he knows well
enough that he will be paid in a £1 note. He takes that
£1 note voluntarily in payment of his labor, and he buys
ibod and clothes, and everything else with it just as
readily as if it were a gold sovereign. It is considered in
tliat country in all respects equivalent to a sovereign.
Who in tlieir senses can say that that £1 note has no
value f But that £1 note is credit. Who in their senses
can deny that it is capital? When a bank can create £l
notes which pass freely and voluntarily among the people,
and perform exactly the same functions in society as gold
sovereigns, who in their senses can deny that that bank
creates a value? There are many pans of the country
which might be improved by an outlay of capital. That
is, if a person were to come with a thousand sovereigns,
those sovemgns might be profitably expended in re-
claiming the land. A Scotch bank seeing this, opens a
branch there, and sends down a boxful of £1 notes,
which are credit Those £l notes are expended in cul-
tivating the land, and producing exactly the same effects
as if tliey were sovereigns. Who in their senses can den^
that they are Capital ? Who can deny that credit is
capital in this case. And this is no uncommon case in
Scotland.
20. It may be said, however, that these £1 notes have
no value beyond the limits of Scotland, that they have no
intrinsic value. But that is true of all values. All
values, as we have already pointed out, are local. I'o say
that a sovereign is a real value, and a £1 note is not, is
V
322 XLBMENTS OW POUTICAL XOONOHT.
only true so far, that a sovereign is a value through a
greater extent of country than a £1 note. But there are
many countries where a sovereign would be of no use
whatever, any more tlian a £1 note. Adam Smith says,
tluit the revenue of a person to whom a guinea is paid
does not properly consist in the piece of gold, as in what
he can get for it, or in what he can exchange it for. Jf U
could be exchanged for nothings it wouldj like a hiU
upan a bankrupt, be of no more value than the most
useless piece of paper. Wliich is unquestionably true.
And the converse proportion is also equally true, that if a
£ 1 note can be exchanged in any locality for exactly the
same number of things that a sovereign can, the £1 note
is, in that locality, of exactly equal value with the
sovereign, so long as it is received as of equal value with
the sovereign.
21. We must now examine what some modem writers
have said upon the subject. — Mr. John Stuart Mill
says:*
" The functions of credit have been a subject of much mis-
uuderstanding, and as much confusion of ideas, as any single topic
in Political Economy. • • ♦ • ♦
'* As a specimen of the confused notions entertained respecting
the nature of credit, we may advert to the exaggerated language so
often used respecting its national importance. Credit has a great,
but not, as many people seem to suppose, a magical power, it cfinnot
make aomethirtg out of nothing. How oucn is an extension of credit
talked of as equivalent to a crefition of capital^ or as if credit ac-
tually were CftvitaL It seems strange that there should be any ne^
to point out tnat credit being only permission to use the capital of
another person, the means of production cannot be increased by it
but only transferred. If the oorrower's means of production and of
employing labor are increased by the credit given him, the lender's
are as much diminished. The same sum cannot be used as capital
both by the owner, and also by the person to whom it is lent
" But though credit is never anything more thtm a transfer of
capital from hand to handy it is generally, and naturally, a transfer
to hands more competent to employ the capital efficiently in pro-
♦ rrinciples of Political Economy. Vol ii. B. in. c. xi p. 36. 2nd Edit.
OPINIOKS OF THB SUBJECT OF CBEDIT. 82S
daction. • • • Although, therefore^ the prodnctivtt
funds of the coiintry are not increased by credit, they are called into
a more complete state of productive activity. The principal in-
struments for this purpose are banks of deposit Where these do
not exist, a prudent person must keep a sufficient sum unemployed
in his own possession, to meet every demand which he has even a
slight reason for thinking himself liable to. When the practice,
however, has grown up of keeping this reserve, not in his own cus-
tody, but with a banker, many small sums previously lying idle,
become aggregated in the banker's hands; and the banker being
taught by experience what proportion of the amount is likely to be
wanted in a given time, and knowing that if one depositor happens
to require more than the average, another will require less, is able
to lend the remainder, that is, the far greater part, to producers and
dealers, thereby adding the amount, not indeed to the capital in
existence, but to that in employment, and making a corresponding
addition to the aggregate production of the community."
22. And Mr. M^CuUoch says : *
" It is plain that to whatever extent the power of the borrower
of a quantity of produce, or of a sum of money to extend his
business, may be increased, that of the lender must be equally
diminished. The same portion of capital cannot be employed by
two individuals at the same time.
" When produce is sold in the way now described, it is usual
for the buvers to give their bills to the sellers for the price, payable
at the period when the credit is to expire ; and it is in the effects
consequent to the negociation of such bills that much of that ma-
gical mfluence that has sometimes been ascribed to credit, is be-
lieved to consist. Suppose, to illustrate this, that a paper maker,
A, sells to a printer, B, a quantity of paper, and that he gets his
bill for the sum payable at twelve months alter date, B could not
have entered into the transaction had he been obliged to pay ready
money ; but A, notwithstanding he has occasion for the money, is
enabled by the facility of negotiating or discounting bills, to give
the requisite credit, without disabling himself from prosecuting his
business. In a case like this, both parties are said to be supported
by credit, and as cases of this sort are exceedingly common, it is
contended that half the business of the country is carried on by its
means. All, however, that such statements really amount to, is that
a large portion of those engaged in industrious undertakings do
♦ Commercial Dictionary. Art. Credit, p. 467. Edit. 1854.
v2
824 ELEMENTS OF POLITICAI. BCOlTOirr.
not employ their own capital^ but that of others. In the case in
question, the printer employs the capital of the p^per maker, and
THE LATT£R EMPLOYS THAT OF THE BANKER OR BROKER WHO DIS-
COUNTED THE BILL. This person had, most likely, the amount in
■pare cash lying beside him, which he might not well know what
to make of; but the individual into whose nands it has now come,
will immediately apply it to useful purposes, or to the purchase of
the materials, or the payment of the wages of the workmen em-
ployed in his establishment. It is next to certain, therefore, that
the transaction will have been advantageous, but still it is essential
to bear in mind that it will have been so, not because credit is of
itself a means of production, or becanne it can pive birth to eapiial
not already in existence^ but because, through its agency, calpital
finds its way into these channels, in which it has the best chance of
being profitably employed. The real advantage derived from the
use of bills and Bank notes as money consists, as has been already
shewn, in their substituiinff so clieap a medium of exchange as pctperj
in the place of one so expensive as gold. • • • • Qu
analysing any case of this kind we shall invariably find, that all
that the highest degree of credit and confidence can do, is merely to
chanae the distribution of capital — to transfer it from one class to
another."
23. The examination of these extracts will show that
tliey exhibit exactly the same inaccurate view of the
subject of credit, that we have already seen in J. B. Say.
But, in fact, to show Mr. Mill's error, we have only to call
himself as a witness. Tims, while at p. 36, he ridicules
those who think that credit is capital, and says tlmt
" credit is never anything more than a transfer of capital
from hand to hand,'' and again, *' the productive funds of
the country ai-e not increased by credit;" at p. 174 of
the same volume, he says, *' Tlie value saved to the
conmiunity by thus dispensing with metallic money is a
clear gain to those who provide the substitute. They
have the use of twenty millions of circulating medium,
which hnve cost them only the expense of an pngraver*s
])late. If fhvif miploif this accession to their fortunes as
productive capital^ the produce of the country is imreased^
and the community benefited as much as by any other
capital of equal amount.^^ What need have we further to
OPINIONS ON THE SUBJECT OP CREDIT. 325
point out the inaccuracy of Mr. Mill's views in the first
paragraph, when he has so effectually done so himself in
the second ?
24. Now, who can deny that the present value of
a debt, payable at some future period, is a separate and
independent value? It is a marketable commodity, it may
be bought and sold like a pound of sugar, and the money
that is paid for it does not represent it any more than tlie
money represents any commodity that is exchanged for it.
No one can tell where the money is that will ultimately
discharge the debt, but even if they could the present
debt is still an independent value to the money that will
ultimately pay it. Because, both that debt and that
money may pass through a hundred hands before the
appointed day when they will be exchanged for each
other. Now, what is a Bill of Exchange ? It is nothing
but a debt payable three months after date, say ; and that
debt has a present and separate value, quite independent
of the money that will ultimately pay it. Now, when we
affirm that credit is capital, we mean nothing more than
this, that operations take place where one or both sides of
the transaction are debts. That sales of goods and
services occur, where a "promise to pay" forms one
side of the transaction. A proposition, we presume,
which no one in his senses will deny. We make no
assertion involving the stupid blunder that the same
thing can be in two places at once.
25. Now the question at issue is no trifling one. The
property afloat in this country in bills of exchange, bank
notes, and bank credits alone, is upwards of £600,000,000,
and the question is, Whether this is a real and independent
value, or only a myth? All Political Economists, from
the days of Turgot, maintain that it is nothing, a mere
nonentity, that it is of no more value than the paj^er it is
written on. We, on the contrary, maintain in opposition
to the entire body of writers in France and England,
from Turgot to Mr. John S. Mill, that it is a real value,
that is a separate and independent value over and above,
S26 KLBMDrre oi foutigai. iCQiRiiir.
•nd perfectly distinct from money or commodities, and
we have the most perfect convictioii that we mre right.
26. We have shewn clearly, what indeed no one
who knows anything about the law or nature of
HILb of exchange will deny, that a bill does not
represent property at all, but represents a debti not
even any particular sum of money. At the present
moment in France, where a fever of speculation has
been raging, the most dangerous notions upon the
subject of credit are becoming prevalent, and are
fincQng their way into books otherwise able and
sensible. Thus, M. Joseph Gramier, in his work on
Political Economy,* discusses three definitions of credit.
The first is, that credit is the facility of borrowing,
which is due to personal confidence, which he dis-
approves of. Secondly, that credit is an anticipation
of the future, a definition which he still more disapproves
of. Thirdly, that credit is the transformation of fixed
and engaged capitals, into circulating or disengaged
capitals. This definition he adopts from M. Cieszkowski,
who has published a work, which seems to have
attained some circulation on the continent, to develop
this idea. The meaning of this is, that a bill of
exchange represents some particular money, and that it,
as well as Bank notes, &c., pass from hand to hand merely
for greater convenience than the money. Their idea
is that everything else may be mobilized in the same
manner, land and all sorts of property. Thus, they
confound bills of exchange with bills of lading, and
dock warrants. Pamphlets are publisliing with pro-
jects for founding Banks for the monetization of all
values. It is too early here to expose the fallacy
of these ideas, which are not new, and constituted
John Law's system of money. That will be done in
a future chai)ter.
27. We must now endeavour to trace the origin,
* Elements de rEconomie Politiquo. p. 341. 3rd. Edit. 1856.
opnnoNS ON thb subject of credit. 827
and ascertaiii the true meaning of the expression
^^ circulating medium/' and shew the changes of opinion
that have taken place regarding it. The actual expres-
sion itself we have not been able to trace earlier
than the last decade of the last century. It does not
occur in Adam Smith. It does not occur in a pamphlet
published in the year 1793, on the commercial crisis
of that year, in which it would naturally have been
employed, if it had been in common use. The first
instance we have been able to discover of its having
found its way into print, is in the year 1797, when
we find Mr. Fox complauiiiig that ^^ circulating medium"
was a novel term whose meaning was not very well
settled. After that it becomes common enough.
28. In the first place we must observe that the
verb to ^^circulate" has, like many other verbs in
English, a double meaning. It has both an active
and a neuter sense. Thus, I may circulate a report,
and I may circulate myself, t. e., itinerate or travel
about. So the verb ^^move" has similarly a double
meaning, I may move another thing, and I may
move myself. Kow, money both may circulate itself
and it may circulate other things. Adam Smith, with
that unfortunate want of precision which forms so
great a drawback to the merits of his work, con-
stantly uses it in both senses, in different places;
nay, even uses it in both senses in the same sentence .
Thus, he says of money :* "The great wheel of circulation
is altogether different from the goods which are cir-
culated by means of it. The revenue of the society
consists altogether in those goods, and not in the
wheel which circulates them.^' A little further on,
he speaks of the different sorts of paper money, but
he says the circulating notes of banks and bankers,
are the species whicii is best known. In these two
sentences the word circulate is used in two different
* Wealth of Nadons. On Metallic and Piper Currcrcj. B. u. C. 2.
328 ELEBCBNTS OF POLITICAL ECONOICT.
senses. In another place he says, ^^The oulj use of
money is to circulate goods." In the following sentence
both senses occur. ^^Let us suppose, for example, that
the whole circulating money of some particular
country, amounted at a particular time to one million '
sterling, that sum being then sufficient for circutatipg
the whole annual produce of their land and labor."
And so in this sentence, ^^When we compute the
quantity of industry which the circulating capital of
any society can employ, we must always have regard
to those parts of it only which consist in provisions,
materials, and finished work; the other, which consists
in money and i^vhich serves only to circulate those
three, must always be deducted." "What is the pro-
portion which the circulating money of any country
bears to the whole value of the annual produce
circulated by means of it, it is perhaps impossible
to determine." Hence, we observe that the word to
"circulate" was used in both senses by Adam Smith,
though he does not use the expression circulating
medium.
29. In the pamphlet of 1793, though we do not
find the words in actual conjunction so as to form one
expression, we yet have the idea. Thus, the writer
speaking of the enormous trade of Great Britain says,
"The medium by which this extensive trade has been
conducted is paper credit; a medium which alone is
equal to the emergencies of so quick and so remote
an intercourse." In a subsequent sentence he says,
"The enormous but unsubstantial capital by which the
productions of the world were so expeditiously trans--
ferred from region to region sinks in a moment to a
few hard guineas." Now, it is quite evident that
the expression ^''circulating medium^' is merely the
essence of these two sentences.
30. But the ordinary meaning of words in
scientific language leaves no possible doubt as to
which of the two senses of "circulate" is the true
OPINIONS ON THE SUBJECT OF CBEDIT. 329
one in the expression ^^circulating medium." A
medium in scientific language invariably means some
middle thing, by or through which something else
is done. Thus, we speak of a medium of communica-
tion, being some one, or some thing, through whom
or through which, something is communicated from some
one to some one else. So a circulating medium must
mean a medium of circulation, through or by means of
which something else is circulated. If we are to interpret
the word circulating as that which circulates itself, we
may substitute some other words of equivalent meaning
in tlie expression, and it comes to this that the circulating
medium means the ^^tra veiling middle," which reduces the
expression to absolute nonsense.
31. In a philosophical sense, then, it is perfectly certain
that the expression ^^ circulating medium " does not mean
the itinerating medium, or the medium which necessarily
circulates itself, but the medium that circulates com!iiO«
dities. And tliis was beyond all doubt the meaning
attributed to it, at the time it originated. We have
observed that Mr. Fox, in 1797, complained that the
expression was a novelty, whose meaning was not very
well settled. At the same time Mr Pitt said that, ^^ As
so much has been said on the matter of a circulating
medium, he thought it necessary to notice, that he did
not for his own part take it to be of that empirical kind,
which had been generally described. It appeared to him
to consist in anything that answered the great purposes
of trade and commerce, whether in specie, paper, or any
other terms that might be used."* Mr. Waiter Boyd, an
eminent merchant, says, *^ By the words * means of cir-
culation,' * circulating medium,' and 'currency,' which
are used almost as synonymous terms in this letter, I
understand always ready money, whether consisting of
bank notes or specie, in contradiction to bills of ex«
change, navy bills, exchequer bills, or any other negotiable
♦ Pari. Hist Vol. xxxui. p. 342.
330 xuQfKins or foutical bcohoht.
paper which form no part of the circulating medium, as
1 have always understood that term. The latter is the
circulator^ the former are merely objects of circukUionJ*^
Tlius, we see that, though Mr. Boyd excludes bills of
exchange from the term circulating medium, he expressly
says that it means the circulator^ or that which circulated
something else. Somewhat later than this we have
Mr. Kicardo, who commences his pamphlet on the high
price of bullion thus : ^^ The precious metals onployed ror
circulating the commodities of the world," &c. And in
the next page he says, ^^ The smaller quantity of money
would perform the functions of a circulating medium as
well as the larger." And we may quote Lord Liverpool
in 1819, when speaking on the currency bill of that year.
He was speaking of the circulating medium of Lancashire
being* composed of bills of exchange, and he says, ^^ That
the human ingenuity which had been so succeissful in
discovering other mechanical contrivances, had not been
less so in devising means for circulating the property of
the country in the most expeditious and profitable man-
ner." We might multiply authorities, but it is needless
to do so ; but having settled in this way that the meaning
of circulating medium is the medium which circulates
commodities, we have next to inquire what thin^ are
included in it. We have seen that Mr. Pitt includes all
forms of credit. Mr. Boyd excludes bills, but the slightest
consideration will shew that Mr. Boyd's own definition
condemns his own opinion. Mr. Thornton saysf imme-
diately afterwards, speaking of bills of exchange, ** They
evidently form in the strictest sense, a part of the circu-
lating medium of the country." And in a note on this
passage censures Mr. Boyd for propagating the same error
mto which many others had fallen, of considering bills as
* Letter to the Right Honorable Wm. Pitt on the InflueDoe of the
Stoppage of Issues in S[>ecie at the Bank of England on Prices ; by Walter
Boyd, Esq., M.P. p. 2. note. 1801.
f Essay upon the Nature and Effects of Paper Credit, p. 40. 1802.
0FINI0II8 ON THE SUBJECT OF CREDIT. 331
no part of the drculating medium. In 1819, Lord
Liverpool as we have seen, expressly called the bills of
exchange by wliich the business of Lancashire was carried
on, circulating medium. In 1823, in the debate on Mr.
Western's attack on the currency act of 1819, the Marquis
of Titchfield said, ^^ When it was considered to how great
an extent these contrivances, t.e., for economising money^
had been pniaised in the various modes of verbal, book,
and circulating credits, it was easy to see that the country
had received a great addition to its currency. This addi-
tion to the currency would of course have the same effect
as if gold had been increased from the mines." And up
to the Bank Charter Committee of 1832, we have no
liesitation in saying that the immense preponderance of
opinion held that bills of exchange formed part of the
circulating medium, for this very plain reason, that they
cause commodities to circulate.
32. In the committee of 1832, several of the witnesses
adopted the opposite view, and maintained that bills of
exchange were not circulating medium, or currency, these
expressions being used as identical. And this opinion
appeared with greater force still in the Bank Charter
Committee of 1840, and we must examine into the reasons
alleged by theJi in support of tliat opinion. Thus,
Mr. Cobden* said that there was a great distinction
between a bill of excliange and a bank note payable on
demand, as the former bears interest until it is due, as no
one would take it with three months to run, without
being allowed discount upon it ; and as the longer it is
kept the more interest it bears, there is not the same
motive for putting it into circulation as there is a note.
He also said that a bill follows the trading transaction,
and is merely a voucher for it in the shape of a transfer
of the debt.
33. Mr. J. B. Smith, President of the Manchester
• Beport of Committee on Banks of Issue. 18'iO. Evidence-— Ques-
tionB 569—578.
832 ELEMENTS OP FOUTIGAL SCOIIOM7.
Chamber of Commerce,* considered bills not to be cn^
rency, })ut only a debt; that the difference between a
bill and currency is, that the latter would dischai^ ft
debt, but the former would not; that the passing of a bill
is a mere transfer of debt, but a payment in currency
is a discharge of a debt. But countiy bank notes were
currency.
34. Mr. W. R. Woodf considered the metallic money
and bank notes of all sorts currency, but excluded bills
of exchanpfc from that name ; although he admitted that
they frequently performed the functions of currency in
making ])aymento, yet they always did so with certain
marked distinctions, inasnmch as, to pay a debt with a
bill must always be a matter of bargain, that such pay-
ment does not release from liability, and that a party
receiving payment of a debt would always prefer receiv-
ing it in bank notes to receiving it in a bill.
35. Mr. G. W. Norman J did not consider bills of
exchange as currency, but as banking expedients to
economise currency, and they do not possess fully the
qualities which he considered money to possess. He said
that the three most essential qualities which money should
})ossess, are, that it should be in universal demand by
everybody, in all times and in all places, that it should
possess a fixed value, and that it should be a perfect
numerator. Now, banking expedients of all sorts do not
possess tlicse (jualities fully, but only in a very low
degree. A bill of exchange was of no use to a man
unless it was indorsed to him ; he cannot go into a shop
with one nnd buy what he wants, nor can he pay his
lal)orers with a bill of exchange. So with bankers'
deposits ; he cannot do with tliem whatever he can do
with sovereigns and shillings.
.■5(5. Mr. S. J. Lloyd expressed exactly the same
opinion as Mr. Norman.§ He said: —
* Rop;)rt of Committee on Banks of Issue, 1840. Evidence
Questions, 70 — 99.
t Ibid. 591. } Ibid. 1694-6. § Ibid. 2663—4.
OPINIONS ON THE SUBJECT OF CREDIT. 333
'' The precious metals, converted into coin, constitute the money
of each country. That coin circulates sometimes in kind ; but in
highly advanced countries it is represented, to a certain extent, by
paper notes, promising to pay the coin to bearer on demand, these
notes being of such a nature in principle, that the increase of tliem
supplants coin to an equal amount.* When these notes are in use,
the metallic coin, together with these notes, constitutes the money,
or currency of that country. Now, this money is marked by cer-
tain distinguishing characteristics ; first of all, that its amount is
determined by the laws which apportion the precious metals to the
different countries of the world ; secondly, tliat it is in ever}' country
the common measure of the value of all other commodities, tiie
standard by reference to which the value of every other commo-
dity is ascertained, and every contract fulfilled; and thirdly, it
bea>mes the common medium of exchange for the adjustment of all
transactions equnUy at all times j between all persons^ and in all places.
It has, further, the quality of discharging tliose functions in endless
succession. Now, I conceive that neither deposits nor bills of
exchange in any way whatever possess these qualities. In the
first place, the amount of them is not determined by the laws which
determine the amount of the precious metals in each country. In
the second place, they will in no respect serve as a common mea-
sure of value, or a standard by reference to which we can measure
the relative valuos of all other thing ; and, in the next place, they
do not possess that power of universal exchangeability which
belongs to the money of the country."
37. The above witnesses all used the words "cur-
rency" and "circulating medium" as synonymous; find
we may now make a few observations upon their opinions
which will not detain us long. Mr. Cobden's distinction,
that a bill of exchange is only of use for the transfer of
a debt, is answered at once, because that is the verj/ defi^
nition we have endeavoured to establish of a curi'encv.
88. Mr. Smith's and Mr. Ward's opinion that |)ass-
ing a bill was a mere transfer of debt, that paying in cur-
rency was a discharge of it, and that a payment by bill
must always be a matter of bargain, and that such pay-
ment did not release from liability, are objections that are
* We have already shewn the error of asserting that bank notes
only displace an equal amount of coin ; on the contrary, they are capable
of bmng beneficially employed where coin never existed.
834 BLBMENT8 OF POLITICAL BCOKomr.
equally applicable to bank notes. Payment by country
bank notes is always a matter of bargain. No man can be
compelled to receive country bank notes in payment of a
debt^ any more than a bill of exchange. Bills and notes
payable to bearer on demand, i. e., cheques and bank notes,
are intended by law to be presented immediately for pay*
ment, either on the day of receipt, or at least on the day
after, precisely as a bill of exchange is intended to he
presented for payment on a fixed day. In both cases^ if the
receiver of the bill or note, has it indorsed and presents it
in proper time, the indorser is liable, in both cases, if he
fails to do so the indorser is discharged. There is not a
shade of difference in principle between the two cases, only
that one is payable immediately, and the other on a Aiture
day. Notes which are issued by bankers generally enjoy
better credit, and are more willingly received, insomecases,
than bills; but it is to the last degree unphilosophical
and incorrect, to consider them of a different nature^ be-
cause one is of a somewhat more eligible degree than the
other. It would be just as correct to say, that iron heated
to the temperature of 100**, was of a different natvre to
iron heated to 200**. One species of currency has a greater
degree of eligibility for circulation than another, but still
it is currency. Coal and wood in the furnace of a steam
en^ne have different degrees of evaporating power, but
still thay are both fuel.
89. It is not a little amusing to find the celebrated
phrase of the Roman Catholic Church, — Quod semper^
quod ubique^ quod ab omnibus^ starting up and meeting us
in a discussion on currency. In Mr. Lloyd's o])inion,
money and currency are identical, and include the coined
metallic money, and the paper notes promising to pay the
bearer coin on demand ; and he says that the characteristic
of their being money, is, that they are received equally at
" all times^ between all persons^ and in all places^ In
order to avoid prolixity, let us denote this phrase by the
symbol A* (from the three alls in it). He excludes bills
of exchange from the designation of currency, because
OFOnONB ON THS SUBJECT OF CREDIT. 335
^* they do not possess that power of universal exchange-
ability which belongs to the money of the country." It
is impossible to imagine a definition which could be more
suicidal to Mr. Lloyd's view than the one he has chosen.
In fact, if it be true, there is no stcch thing as money or
currency at all. In the first place it excludes the whole
of the issues of bank notes at one fell swoop. The
notes of a Bank in the remote district of Cumberland
would not be current in Cornwall, therefore they are
not A', therefore they are not currency. Again, the notes
of a bank in Cornwall would not be current in Cum*
berland, therefore they are not currency. Similarly, we
may almost say that there are no country bank notes
at all which have a general currency throughout England,
therefore no country bank notes are A'; therefore no
country bank notes are currency. Till within tlie last
thirty years, the notes of the Bank of England had
scarcely any currency beyond London and Lancashire;
in country districts a preference was universally given
to local notes, therefore Bank of England notes were
not A', they had not a power of '^ universal ex-
changeability; " therefore they were not currency. If,
therefore, the test of A* and " universal exchangeability ''
be applied, the claims of all bank notes to be considered
as currency, are annihilated at once. The acceptance of
a Baring or a Rothschild would be received in pnyment
of a debt by a far larger circle of persons than the notes
of an obscure and remote country bank. But Mr. Lloyd
further excludes bills from the term " currency," because
their amount is not determined by the laws which
determine the amount of the precious metals in each
country. But is the amount of bank notes determined ])y
these laws? He says that the increase of bank notes
only supplants coin to an equal amount; but this is a
most extraordinary assertion for a banker to make.
Where the issue of them is free, it is absolutely certain
that their amount will greatly exceed the amount of gold
and silver coin that ever would have existed.
386 ELEMBNTS OF POLITICAL ECONOlCr.
40. But the universality of Mr. Lloyd's assertion is
fatal to his argument in other ways. On the Continent
silver is the legal standard of value, in Great Britain
silver, like copper, is merely coined into small tokens,
called shillings, &c., which are made to pass current
above their intrinsic value, and are only legal tender for a
very trifling amount, hence it cannot be used in the adjust-
ment of all transactions, therefore it is not A', therefore
it is not currency. There are other countries where
fold is not a legal tender, therefore it fails to satisfy Mr.
.loyd's test, therefore it is not currency. If tlien, the
test proposed by Mr. Lloyd be considered as correct, it is
easy to see that there is no substance or material wliatever
that will not fail under it, and, therefore, there is no such
thing as currency.
41. The fact is, tliat the only difference between a
bill of exchange and a bank note, is, that the former is a
promise of a deferred payment, and the latter that of an
immediate one; and there is less risk in takings the
latter than the former. From these circumstances a bank
note possesses a greater degree of circulating power than
a bill of exchange. But in the midland counties of
England, it used to be quite common for the banks to issue
the bills of exchange they had discounted, with their own
indorsement upon them. In which respect they were in
every respect equivalent to bank notes ; moreover, there
is not the same inducement to put a bill into circulation
as a bank note, because the former increases in value as
the day of payment approaches. But it is unprofitable to
keep a note idle. But it is to the last degree unphilosophical
to maintain that these two obligations are of different
natures because they are adapted to circuhite in different
degrees.
48. The views of those who hold this opinion, cannot
be better represented than by Colonel Torrens, who
says,* " The terms, money and currency, have hitherto
• The Principles and Practical Operation of Sir Robert Peel's Act
of 1844, explained and defended, p. 79.
OPmONS OH THE SUBJECT OF CBEDIT. 337
been employed to denote those instruments of exchange,
which possess intrinsic or derivative value, and by which,
from law or cu^fom^ debts are discharged, and transactions
finally closed. Bank notes payable in specie on demand^
have been included under these terms as well as coin,
because by law and custom the acceptance of the notes of
a solvent bank, no less than the acceptance of coin,
liquidates debts and closes transactions; while bills of
exchange, bank credits, cheques, and other instruments
by which the use of money is economized, have not been
included under the tenns of money and currency, because
the acceptance of sucli instruments does not liquidate
debts, and finally close transactions."
43. It is upon these views that the opinions of all
the persons rest, who hold the doctrine that bills of
exchange are not currency or circulating medium, to
which the reply is short and simple, that even if the
allegations were true they are nothing to the purpose,
because they only go to shew that there are different
species of currency or circulating medium, some of more
eligible descriptions than others. But the allegations
contained in the preceding paragraph are not true. In
laying down legal doctrines, Colonel Torrens has ventured
beyond his depth, and the above statements would exdtf:
the surprise and ridicule of the pupil room of ftrery
^cial pleader in the Temple. We have already e:ipo^
their fallacy and absurdity, which we need nrA. \i(^>
repeat. Nevertheless, these were the doctrines a/ior,t^
by Sir Robert Peel in the third state of hw opinloV*. \n
which he carried his Banking Actrf \^M. -mV^J-s. nr^, <r.-i*.
more fully inquire into hereafter.
44. In order, if possible Xf$ hU^^iXijf^. </-*r v/- ^ or v\
may adduce the t^^stimonv *A ^a^, // i-^: rvvv^ < .rf y v .^r.oi\
living Political PUr/mofrii^.t*, »U um t^pp^-.j './;,av^.J,
the doctnneji ad</|iM by vAr y^j.^, y^^., ^,,,/ .,^v,..,. ^.
Michel Chevali^ U*, ^ ^^^ ,^^^, ,^ ,^^ ^.
and cntici7x-s luA ^>/ju<«w^. r.^ *>^, ^ >...^ ,^^;; ^
w '
338 ELEMENTS OF POLITICAL ECONOBCT.
almost the very same terms that we have done. And not
only does he condemn these doctrines, but he has
determined to adopt an extension of the French word
numeral rv to coincide with currency. He conclucles tlie
chapter thus,* " The English language has a generic word
which includes money, bank notes, inconvertible paper
money or assignats, and every other species of denomi-
nation which can be put into circulation, and which men
more or less generally accept; and that is the word
currency. Our language has no exact equivalent.
Nevertheless the term numeraire may be taken in the
same sense, and I shall use it so in the remainder of this
work." Surely the opinion of so distinguished a writer
as M. Chevalier will have some weight.
45. We will give a very analogous case to the mean-
ing which we have established ds the true one for the
expression "circulating medium," when applied to cur-
rency. A newspaper is also called a circulating medium.
Of what is it the circulating medium ? Of intelligence. And
it is not called the circulating medium of news because it
circulates itself, but because it circulates news. In the
indictment against Joseph Gerrald,t in one of the famous
trials for sedition, in 1794, he is charged with makin<if
seditious speeclies, the substance of whicli was "published
in a neWiSpaper, published at Edinburgh, entituled the
* Edinburgh Gazette,' and through that medium drcu-
lated among the lieges." Here we have the exact
analogy; What was the circulating medium? The news-
paper. Why was it called so? Because it was the
medium through which the seditious matter was circu-
lated among the lieges. Was it called so because it
circulated itself? Certainly not, because if the newspaper
had been posted up on a wall, and l>een read by people
standing still, it would still have circulated the intelli-
gence, without circulating itself. How it circulated the
• Cours d'Economie Politique. Vol. in. La Monnaic, p. 39-47.
-J- Howell's State Trials. Vol. xxni. p. 815.
OPINIONS OH THE SUBJECT 07 CSBDIT. 339
news was, therefore, a matter of secondary consideration,
though it often happens that newspapers do circulate
themselves as well. It is exactly the same with the
circulating medium of commodities. How it performs its
duty is a matter of secondary consideration. Hence, book
credits are equally circulating medium with money,
though after the debt has once moved from the pur-
chaser to the vendor, they do not themselves circulate
further.
46. Moreover, the law of continuity or the method of
gradation comes into play with decisive eflTect to prove
the entire fallacy of Lord Overstone's doctrine upon the
subject. He maintains that only promissory notes pay-
able on demand are currency. But would not notes
payable one minute after demand be currency? or one
hour? or two, or three, or four hours? Would not notes
payable one day aft;er demand be currency ? or two, or
three days ? Are not Bank post bills, which are payable
seven days after sight, currency ? Where is it possible to
draw the line ? But the same arguments apply to one
month, or two, or three months or any longer period*. The
answer to any one who is acquainted with the invariable
course of reasoning in Natural Philosophy is simple and
conclusive. They are all species of currency, though
differing in degree, and the distinction between them is
untenable.
47. But while we contend that Mr. Lloyd's criterion
of a currency is fatal to his own view, we are quite willing
to accept it. For what is it that exists in all places^ in all
times, and among almost all persons ? Debt, or Services
DUE. — And what is it that is universally required to mea-
sure, record, and transfer them? Some material. But
we see that all currencies are more or less local, none are
universal. The idea, or the want, alone is universal.
The notes of a country banker, only circulating in his
own neighbourhood, are like a country patois^ each dis«
♦ The reader will also think of Horace. Epis. n. i. 40.
w 2
340 £L£Bi£NT8 OY POUTICAL BCONOMT.
trict has its own. A national currency rises to the
dignity of a language. But even that is ouly local, on a
larger scale. The ideas only expressed in the language
are universal. We are, therefore, strengthened in our
conviction that die only true idea of a currency is, that it
is the Kei'ressktativs of Trai^sferable Debt ; and that
WHATEVER REPRESENTS TRANSFERABLE DeBT IS CURRENCT.
i
4«
CHAPTER IV.
TIEOBY OF TIE EXCHANGES.
I
I.
THKOBT OF THE EXCHANGES. 343
CHAPTER IV.
ON THE THEORY OF THE EXCHANGES.
HECESSmr FOR MONEY CHANGERS— DIFFERENCE BETWEEN MONEY CHANGING AND
BANKING— FOREIGN EXCHANGES— DETERIORATION OF THE CURRENCY CAUSES
A FALL IN THE FOREIGN EXCHANGES— THE MINT AND MARKET PRICE OF
GOLD BULLION— DESCRIPTION OF THE COMMERCIAL OPERATIONS OUT OF WHICH
THE EXCHANGES ORIGINATE.
1. Next to a universal language, it would be the
greatest commercial blessing to all nations, if they could
agree to use one uniform measure of value, and the same
weights and coins. No small part, nay, we might almost
say the chief part, of the intricacy and subtlety of the
subject of exchanges, arises from different nations using
different metals as the legal measure of value, and coins
of all different denominations and values. If all nations
could be brought to a uniformity on these subjects, there
would be no more difficulty in understanding the theory
of the exchanges between them than of those between
England and Scotland, The artificial intricacy of the
subject of exchanges gives rise to the employment of a
considerable amount of labor, which is unprofitable to
the community at large, exactly in the same way as a
superfluous amount of technicality in a system of law
gives rise to a large amount of unnecessary law business.
Every one who has travelled abroad knows how detrimen-
tal the different exchanges are to his purse , as he passes
344 ELElfENTS OF POLITICAL EOONOMT.
through the different states. If any one were to take a
quantity of money with him abroad, and pass through
several different states^ like those in Germany^ it womd
soon dwindle away to almost nothing by the repeated
operation of exchanging it for the current money of the
country he ha])pcned to be in at the moment. The profits
of the money-changei*s, as they do not arise out of
natural operations, but out of the artificial distinctioDs in
the different coinages, are wholly unprofitable to the com-
munity at large, because in this case it is true, what many
people think of real commerce, that the gains of one party
are wholly made up of the losses of a number of others,*
whereas the test of genuine commerce is that both parties
gain by the very nature of the transaction. It is clear
that the gains of the money-changers are no more addi-
tions to the wealth of the community, than the practice
of sweating sovereigns in a bag, where the apparent profit
is made up of the losses on each coin.
2. Banking first grew out of the operations of the
money changers, and was first practised by them, but yet
banking and money-changing are wholly difiTerent in their
nature. The latter produces no benefit to society, the
necessity for it only arises out of the artificial and un-
necessary defects of the commercial regulations of nations.
If these were put on a better footing, the whole trade of
money-changing would be swept away at a breath. As
the want of proper sanitary arrangements often breeds the
diseases which cause the necessity for medical men, so it
is the imperfection of the monetary systems of the world
that produces the necessity for money-changers. Bank-
ing on the contrary is wholly different in its nature ; it
is genuine commerce, and like all genuine commerce it
1)romotes the interests of both parties, it blesses him that
ends, and him that borrows, and augments the prosperity
and wealth of the community at large. The correction
* Montaigne has, we believe, the unenviable distinction of originating
this sentiment^ the fniitful parent of innumerable wars for several centuries.
THEOBT OF THE EXCHANQES. 345
of the Imperfect system which gives rise to the necessity
of money-changers, would be an unmitigated blessing to
every nation in the world ; the abolition of banking would
be the direst blow commerce could receive.
3 So long, however, as this imperfection in the mone-
tary system exists, and nations continue to act against
their own interests, the business of money-changing is
rendered necessary, and the theory of the exchanges
requires to be stuaied as an essential branch of Political
Economy.
4. When nations advanced beyond the stage of direct
barter, and began to use the precious metals as a common
measure to which the value of all other commodities was
referred, it was the weight of the pure metal which was
universally used as the index of value, and merchants
carried scales about with them, for the purpose of weighing
out the metal on each separate occasion. To make the
transaction complete they should also have assayed the
metal on each purchase, because fraudulent dealers might
adulterate it. However, assuming that the bullion was
always of proper fineness, values were estimated by the
weight of the metal. However, the necessity of carrying
about scales to weigh out the metal on each separate
occasion being felt to be tedious and irksome, the plan
was devised of cutting the bullion into pieces of a certain
definite weight by the public authority, and putting a
stamp upon them to certify to the community that they
were warranted to contain a certain weight of bullion of
a certain definite fineness. Values were then estimated
by the number of these pieces of bullion, which were
called coins, which were given for commodities, and thqn
they were said to be reckoned by tale. It is clear that
the sole object of coining was to save the trouble of
weighing, and that, though the prices of articles were
estimated in figures, it was essentially part of the under-
standing that these figures denote certain specific quantities
of pure metal.
5. We must beg our readers to brand this principle
346 ELEMENTS OF POLITICAL BGOlfOMT.
on their memories, that although the stamp gave the coin
currency, it was the weight of bullion alone in it which
gave it value, and which measured its value, i.e., the
quantity of services it could command at any given place
and time. This is the fundamental principle of the sub-
ject, which will enable the reader to steer his course
safely tlirough all the shoals and quicksands of monetary
controversies. It might almost excite a smile that we
so earnestly impress this. But an error on tliis point is
at the root of all the extravagancies on the subject, which
have so long vexed the public ear. They almost all arise
from confounding the name, or denomination, of a coin,
with its value ; its name with its purchasing power : and
supposing that if the legislature chose to call a shilling
a pounds that therefore a shilling would have the value
of a pound.
6. So long as these coins circulated in the country in
which they were issued, they might diminish considerably
in weight, without losing their value. People are so
accustomed to attach a certain value to the sight of a
particular coin, that (unless they be money dealers) tliey
will not stop to inquire too curiously whether it is exactly
of the proper weight or not; and, in fact, when a coinage
has been long in use, few people know what the legal
weights of the different coins are, many do not associate
the idea of a pound, for instance, with any particular
weight of bullion, still less have they usually the means of
detecting whether it is of the proper purity, and if every
one be willing to receive it, and give his commodities or
services for it at its nominal value, it makes little differ-
ence what its weight is. Shakespeare is an authority even
on the currency ;*
" *Twcen man and man they weigh not every stamp,
Though light, take pieces for the figure's sake."
When coin has been some time in circulation its true
value must necessarily fall below its nominal value, from
• Cymbeline. Act. V. Sc. iv.
THXOBT OF THE BXCHANGXS. 347
the wear and tear of circulation^ even if it be not subjected
to any bad practices, such as clipping or sweating, and
in states which cannot afford a frequent recoinage, this
deterioration often proceeds to great lengths. In many
instances in this countij, and so late as 1816, when the
last great reformation of the coinage took place, a large
portion of the circulating medium was nothing but a thin
wafer of silver, from which all traces of an impression
had long since vanished, and reduced to scarcely more
than half its proper and legal weight ; and the same is
the case with some of the continental states at this day,
especially in Italy.
7. When these coins, however, are carried to a foreign
country, they are of no value beyond their intrinsic
weig'ht as bullion. Though the natives of the country
it belonged to, from long habit and association of ideas,
see in it a certain denomination, and may receive it at its
nominal value long afler it has lost its legal weight, a
foreigner see43 in it nothing but so much bumon. When
a person takes the coin of one country and purchases the
coin of that country with it, he is said to exchange it.
Now, suppose that the coinage of two countries is of the
same metal, and that both of the coinages be of their full
legal weight and fineness ; then if either of them be taken
as a standard, which may be called A, then the number
of units, or parts of a unit, of the coinage of the other,
which may be called B, which contains precisely the same
quantity of pure bullion, is called the par of exchange
between the country A and the country B. Thus, if the
legal standard of France and England were gold, and the
pound be taken as the standard unit of England, the
number of the standard units of the French coinage which
contained precisely as much pure gold as the English
pound, would be the par of exchange between England
and France. The French standard is the franc, which is
a silver coin. The gold Napoleon is also legal tender,
which is twenty francs. Now, there is as nearly as possi-
ble one-fourth more pure gold in a sovereign than in a
348 ELEMENTS OF POLITICAL BCONOMT.
Napoleon, therefore, as the par of exchange is the ratio
between these two coins, we might say that 1.25 is the
par of exchange between England and France. But as it
IS invariably expressed in ^anc^, 1*25 Napoleons is equi-
valent to 25 francs, and hence we may, for the sake of
argument, call 25* the par of exchange. Hence, if an
English sovereign would exchange for 25 francs in Paris,
we should say tnat the exchange was at par.
8. Though a worn and depreciated coinage might
pass for its full nominal value in its own country, in a
foreign countiy it will evidently only exchange for its
actual weight m bullion ; hence, if the English coinage of
sovereigns became worn and clipped, or much diminished
in weight, they would not exchange for so many francs
as they would do if they were of full weight ; hence, an
English sovereign, if taken to Paris whilst the French
coinage maintained its full weight, in such a depreciated
state, might only exchange for 22 or 20 francs, and this
would be called ajhll in the /breign exchanges; or if an
English merchant were bound to pay his creditor in Paris
2,500 francs, he would have to give more than £100 En-
glish to purchase them, and the exchange would be said
to be so much per cent, against England^ by the amount
of that difference.
9. It is evident tliat this adverse state of the exchange
would continue so long as the English coinage remained
depreciated ; but that if it were restored to its legal stan-
dard, that restoration would be itself sufficient to restore
the exchange to its usual rate. Hence, we see that if any
foreign country maintain its coinage of full weight and
purity, that a depreciation of the coinage of England
necessarily produces an apparently adverse state of the
exchanges^ and that a reform of the English coinage is
sufficient by itself to restore them to their proper state.
10. It is also evident that a depreciation of the coin-
age by a debasement of its purity, will produce exactly
the same effects. It is also clear that if the coinages of
both countries were equally degraded, the rate of exchange
THBOBT OF THB EXCHANGES. 349
would not be altered between tbem ; and tbat tbe rate
would vary just in proportion as one was more or less
degraded than tbe otber.
11. It is also evident tbat tbere can be no true par
of excbange between two countries wbicb do not employ
tbe same metal as tbeir legal standard. We bave seen in
a former chapter tbe insuperable objections to employing
two metals as le^ standards in tbe same country. Up
to a comparatively recent period gold and silver were
equally used, and tbeir relative values were fixed by law.
This was tbeir legal par of excbange, but we also saw
that tbeir market values were constantly varying, and
from causes quite beyond tbe reach of any law^ and that
it was no more possible to have a fixed price of one in
terms of the other, than to have a fixed legal price for
com or any otber commodity. The very same rule must
clearly apply to two countries, one of which uses gold and
tbe other silver as tbeir measure of value. Hence, in
of tbe par of excbange between England and
speaking
France ai
ranee as 25-20, wbicb it usual^ is, or tbat £100=2,520
francs, it is only on tbe assumption tbat tbe relative
values of gold and silver are fixed, wbicb we know can
never occur between any two countries, any more than
between the same metals in the same country. Tbe only
correct mode of expressing it is therefore to say tbat such
is the usual rate of exchange between tbe two countries.
12. In the year 1797, when tbe Bank of England
stopped p^iyment, the House of Lords appointed a com-
mittee to investigate tbe whole subject. The committee^
among other things, wished to ascertain tbe par of
excbange between London and Hamburgh, ana they
examined several merchants upon tbe subject, but they
were quite unable to agree among themselves what was
the par of exchange between these two places ; and the
committee reported that they were unable to come to any
Satis&ctory conclusion on the subject, and in this they
were correct. And the very same reasons apply to any
other two countries wbicb use difierent pietals as measures
350 ELEMENTS OF POLITICAL BCOHOMT.
of value, as there is not in the nature of things any per-
maneiitly fixed relation between them. Hence, there
cannot l)e in the nature of things any fixed par of
exchange between England and any country that uses
exclusively a silver standard. The most that can be said
is, that there is a usual rate of exchange between them ;
hence, between such countries it is often totally im-
possible to decide certainly which way the exchange is,
unless the difference exceeds a certain limit. At the
time of the foundation of the Bank of England, in 1694,
the coinage of England was in such a disgraceful ' state
from the wear and tear of many years, and extensive
clipping, that the rate of exchange between London and
Hamburgh, owins; to this circumstance alone, was 25 per
cent, against England.
1 3. If the coinage of a country fall into a degraded
state from long wear and tear, and a new coinage of AiU
weight be issued, and allowed to circulate along with it,
one of two effects must inevitably follow : either tliose
persons who have commodities to sell will make a
difference in the nominal price of articles, according as
they are paid in the full- weighted, or the degraded coin,
that is, the degraded coin will be at a discount as com-
pared wath the heavy coin ; or, if there be a law to
prevent this, and to make botli pass at the same value,
the bullion dealers will immediately collect all the full-
weighted coins they can and melt them down into bullion ;
so that the new coinage will quickly disappear from
circulation.
14. If persons in selling their goods made a differ-
en(;e in the nominal prices of them, according as they
were paid in light or heavy coin, so as to secure a certain
weight of bullion in exchange for their goods, they would
of course require a larger number of the light pieces than
of the heavy ones, and so prices would apparently rise if
paid in light gold. This would be precisely analogous to
a rise in the rate of exchange against England, caused by
the depreciation of the coinage.
THSOBT OF THE SXCHANOES. 351
15. In such a state of things the prices of goods are
evidently fictitious— a number of light pieces are pre-
sumed to have the same value as the same number of
heavy pieces. Merchants raise the prices of their goods
to secure to themselves a certain weight of bullion, and
that weight of bullion is expressed in a greater number of
figures than it ought legally to be ; and yet, supposing no
discount is made for heavy pieces, the same number of
heavy pieces will purchase no more. This is as great an
anomaly in commerce as it would be in arithmetic to say
that three were equal to^ four. But the consequence is
very plain. If four pieces of coin will only purchase as
many commodities as three ought to do, no one will turn
buUion into coin at so great a disadvantage. On the
contrary, as bullion would diminish so much in value, it
would be sent to other countries, where it would purchase
a greater amount of commodities. Hence^ the infallible
efiects of a fall of the foreign exchanges, caused by the
depreciation of the currency, is not only to prevent
bullion being imported into it, but to drive out what
bullion there is already in it to foreign countries.
16. We may take an example. Let us suppose
that the coinages of England and France were so related
that twenty pieces of French coin contained precisely the
same amount of pure gold as sixteen pieces of English
coin. Now, suppose that while the French coin main-
tained its standard, the English coin became so degraded
that twenty pieces of it only contained as much gold as
sixteen ought to do; then the exchange would rise 25
per cent, against England. Now, if traders in England
were prohibited by law from making a difference in the
prices in their goods, according as they were paid in light
or heavy coins, it is clear that no one would bring bullion
from France to England when it would cost them twenty
pieces to buy the goods they ought to get for sixteen.
No one would bring his commodities to a market where
they were artificially depressed below their proper value,
any more than he would willingly purchase a loaf of
352 ELEMENTS OF FOLITICAL ECONOICT.
bread of short weight. So such a state of things would
effectually preclude any bullion from being brought into
the English market, and would, besides that, cause
any bullion that was already in the country to be
exported.
17. A g'eneral depreciation of the coinage there-
fore infallibly causes a fall in the forei^ exchanges, or^
in other words, causes the English coinage to &11 to a
discount : and this can be removed only by a sedulous
attention to preserve the coinage at its full weight, and to
cause all coins which are not of full weight to be with-
drawn from circulation. Or, if not, instead of forcibly
compelling people to receive light coins at the same value
as heavy ones, they ought to be encouraged to make a
difference between them, so as to remove the temptation
to tamper with the good coinage.
18. Precisely analogous to a rise of the foreign
exchanges advei*se to England, caused by the depreciation
of the coinage, is a difference betweeen the mint price and
the market price of gold. The term " mint price " has
somewhat changed its meaning since it first came into
use, a circumstance which has escaped the attention of
many writers, and, as it is not unusual to see many mis-
taken notions of it in print, it wiU be no loss of time to
dwell upon it somewhat minutely.
19. The word ''price," except in the single instance
we are now considering, is invariable used to denote the
quantity of one article used as a standard which is given
for another article of a diffirent nature; thus, we
say that the price of a bushel of corn is six shillings,
where the silver, the substance of which the shillings are
composed, is of a different nature to the com. During
the period when gold and silver were equally legal
tenders, we have seen that their relative values were fixed
by law, and a guinea was supposed to be equal to twenty-
one shillings in silver, at its market value ; and if tlie
bank wished to purchase gold with silver, they would
have to pay twenty-one shillings in silver for every
THEORY OF THE EXCHANOBS. 35S
quantity of gold equal to a guinea ; and if this could
always be done, twenty-one shillings would always be the
market price of a ^inea's weight of gold. Measured
by the relative values of the metals at the time the
standard was fixed in 1717, an ounce of gold was held to
be worth 778. lOcJd. in silver, and accordingly as every
twenty shillings was called a pound, £3 17s. lO^d. was
the market price of gold per ounce at that time. During
the course of the last century the relative values of gold
and silver did not vary very materially till the year 1794,
when gold became so much scarcer than usunl, in com-
E arisen with silver, that the market value of the two
ecame seriously different from the mint value, and the
price of gold rose to eighty -four shillings in silver, that
IS, the bank could not purchase an ounce of gold with a
Icss amount of silver than could be coined into eighty-
four shillings. While, therefore, gold bullion was pur-
chased with silver, the words market price and mint price
bore their usual meaning of purchasing one commodity
with another, and the attempt to^ the market price of
gold was just as absurd as an attempt to fix the market
price of com, or anything else.
20. When gold was nrst coined into money, the silver
penny was the only legal standard, and the relative
value of a pound of silver and of gold being supposed to be
ascertained, it was determined to have gold coins repre-
senting a certain number of shillings, and accordingly the
weight of bullion put into a gold coin, was conformable to
the supposed market value of the two metals. This
weight was altered several times, as may be seen in the
table subjoined to Chapter vi., and the last time it was
altered was in 1717, when the pound of gold was coined
in 44^ pieces of the value of 21s. each at the relative
value of the metals in those days. Since that time, first
custom, and then law, substituted gold instead of silver as
the legal measure of value, and mstead of altering the
weight of the gold coin to make it conform to itiJ market
value in silver, it was determined to adhere to the weight
X
354 ELEMENTS OF POLITICAL ECOHOMT.
of the gold coin as then existing, and make that weight of
gold, the standard unit of value. Now, if 44.^ pieces of
the value of twenty-one shillings were coined out of the
pound of gold, that is equivalent to £46 14s. 6d. in pieces
of twenty shillings. At tlie great re-coina^ in 1816, it
was determined to coin pieces of twenty shillings instead
of twenty- one shillings, and it was enacted that the pound
of gold should be coined in 46 equal parts with a piece
over, equal to 14^ twentieth parts of one of these equal
parts.
21. As the weight of every coin must be fixed by
law, it is just the same thing to say, that a given weight
of bullion must be coined into a certain number of pieces ;
now, by law a pound weight of bullion is coined into
pieces of equal weight, and each of these is called a
pound or sovereign, and for the convenience of account,
each sovereign is divided into twenty parts, which are
called shillings, but as it would not be convenient to coin
these shillings in gold, as they would be so very minute
as to be troublesome, coins in silver are struck to
represent them.
22. In speaking of the value of articles, the more
valuable it is, the smaller is the unit generally used in
estimating it. Thus, we reckon the price of coals by the
ion] of com by the quarter or bushel; of tea and sugar
by tlie pound] and in articles so valuable as gold aud
silver, we do not use a unit even so large as the pound.
If it were usual to do so, the confusion respectmg the
term. Mint price of gold, would not have arisen ; the unit
of value of gold and silver is the ounce^ and diamonds
and other precious stones, are reckoned by the carat.
The price of gold is reckoned by the ounce. Now, as a
pound of gold is coined hito £46, and 14^ twentieth
pai*ts of a pound, which are called shillings, we may say
that the price of a pound of gold is £46 14s. 6d., and the
price of an ounce of gold is one-twelfth part of that sum,
or £3 17s. lO^d. The simple meaning of this is, that the
law directs that out of every ounce of gold, there shall be
THEOBT OF THB EXCHANGES. 355
coined three pieces of equal weight, in such a manner,
that there shall remain over a quantity equal in weight to
17 twentieth parts, and 10^ two hundred and fortieth
parts of one of those three pieces.
23. In the expression that the Mint price of gold is
£3 17s. lO^d. per ounce, we see that the 17 does not
mean 17 shillings in ^7t;^; but only 17 twentieth parts
of a gold sovereign or pound. Taking bulUon to the
Mint and selling it there, is nothing more than exchanging
a certain quantity of uncoined metal for a similar amount
of coined metal ; and supposing that no charge is made
for the workmanship of coining it, it is perfectly clear that
a certain quantity of the metal in one form, can never
differ in value from the same quantity in another form, —
it is absurd on the face of it, to suppose that the value of
gold in coin can ever differ from the value of gold in
bullion, so long as the coins contain their full legal
weighty* and there are no extraneous circumstances, which
render it desirable for the owner of the metal to have it in
one form rather than the other, and there are no obstacles
to prevent him from converting it from one form into the
other at pleasure.
24. IJnder the old state of the law, which made it
illegal to export or melt the coin of the country, if bullion
was wanted for exportation, the value of the metal in coin
might often be diminished to the holder of it, simply from
the obstructive nature of the law, that is, bullion mi^ht
become slightly more valuable than coin, or the market
price of bullion would rise above the Mint price, and it
would do so in a certain proportion to cover the risk of
breaking the law; but in the present day, when these
barbarous ideas are happily exploded, and it is lawful to
* It is one of the absurditieB that Montesquieu is betrayed into by
the fundamental error of his conception of the nature of money, when he
says, "Le prince etablit une proportion entre une quantite d'argent
comme metal et la mdme quantite comme monnaie." Esprit des Lois.
Lib zxiL, c. 10. Just as if the prince could alter the naturally existing
pioportioQ of quantities.
x2
356 ELEMurrs ot political scovokt.
melt or export coin as freely as bullion, it is clear that
no diminution in the value of the coin, or rise in the
market price of bullion above its Mint price, can take
Elace on that account, and as any one may exchange his
ullion for coin at a moment's notice, by simply going to
the Bank of England and demanding notes for it^ it is
Suite clear thnt there can be no difference betweeB the
[int and the market price of gold, as long as the coin
contains the quantity of metal it professes to do. It
would be absurd to suppose that any one would give
48 sovereigns for a quantity of bullion, that they could
only have coined into £46 14s. 6d., if those 48 sovereigns
Were of their full nominal weight. Now, a pound of gold
bullion must always be equal in value to a pound of gold
bullion ; but it does not always follow, that £46 148. 6d.
of coins will always contain their full legal weisht of
metal ; in fact, we know that after a certain time, m the
ordinary course of things, tliey will not do so ; and when
the current ^old coin falls to a discount as compared with
buUion, or if the same thing be expressed in other words,
if the market price of gold exceeds the Mint price, it is
an infallible sign that this depreciation in the coinage has
taken place, and the difference between the Mint and the
market price is the exact amount of the depreciation.
25. The simple meaning of this is, that we know
that in one form the value or weight of the metal cannot
vary ; in the other we know, not only that it can, but is
extremely liable to do so, and requires great attention to
be paid to it to prevent it from so doing. Now, under a
system of law which imposes no obstruction to the conver-
sion of the metal from one form into another, nor imposes
any mercantile disadvantage on the metal in one shape,
rather than in the other, there can manifestly be no
difference, as long as the coins are of full weight, — as soon
as there is any difference, as it can only arise in one of
thiB quantities, we know that it has arisen, and we are
able to detect its amount. It is clearly to be understood
that when we speak of the mint price of gold bullion, we
TtfBOilY 09 THB EXfiHANGBSt ~ 357'
speak of its price when paid in gold coin, or what professes
to represent gold coin, namely, bank notes ; and when yr6
speak of silver bullion, it means the price paid in silver
coin. Thus, in the reign of William IH. the mint pric^
of silver was 5s- 2d. per oz., which meant that the law
at that time ordered that a pound of standard silver
should be coined into sixty-two shilling, but the silver*
coin was very much worn, and the market price of silver
rose to 6s. 3d., the plain meaning of which was, that in
the silver coin then generally current, there was only as
much silver in six shillings and three pence as there ought
to have been in five shillings and two pence, t. e., that
68. 3d. only weighed an ounce. The difference between
5s. 2d. and 6s. 3d. was evidently the measure of the
depreciation of the silver coinage, which was rathei^
more than 20 per cent. The great re-coinage of the
silver by Lord Halifax, restored the coinage to its
par value, or the market price became the same as the
mint price.
26. As the mint price of gold means the value of it
expressed in gold coin, and the mint price of silver means
the value of it expressed in Hlver coin, it is quite cleai*
that it can make no difference in the market price of
gold, whether gold be very abundant or very scarce. If
the law requires an ounce of gold to be coined into £4
17s. 10^ d- so long as the coin contains its full legal weight,
it can make no difference in the market price, whether
gold becomes as plentiful as iron, or as scarce as dia«
monds. For the sovereign must always continue of the
same weight, whatever be the quantity of the metal. The
value of gold may vary with respect to other things, it
may purchase more or less bread, or meat, or clothes, at
one time than another; but it is absolutely impossible
that its value in bullion can ever differ from its value iti
coin. Those who say that an ounce of gold can be more
or less valuable in bullion than in coin, maintain that
things that are equal to the same are not equal to each
other.
358 EL^BfEHTS OF POLITICAL XGOVOMT.
27. The mint price of gold, therefore, in its modem
meaning, is nothing more than a public declaration of the
weight of metal the law requires to be in the coin, which
accidental circumstances have caused to be considered as
tlie le^l measure of value in this country ; and an altera-
tion of the mint price of gold would be simply an altera-
tion in the standard weight of the coin, and would be the
same thing in principle as an alteration of the standard
yard measure. Those persons who ridicule the idea of
having the mint price of gold fixed, should, if they be
consistent, also ridicule the idea of having the standard
yard measure fixed. Those who wish to let the mint
price of gold follow the market price, should also contend
that every tradesman should have his yard measure of as
many inches as he pleases, because when the market
price of gold rises above the mint price, it is preciaely
analogous to curtailing so many inches of ue yard.
This fraudulent curtailment of the measure of value has
never been done since parliament has had the chief power
in the legislature. But it was constantly done in rormer
times when the Crown was more despotic than it is now,
so that the pound in the present day is curtailed of two-
thirds of what it was in William I.'s time.
28. An alteration of the standard is a direct fraud
upon debtors or creditors, according as it is raised or
lowered ; because the essence of every contract is, that
the debtor is to pay a certain weight of gold, and not so
many abstract ideas which are called pounds. Hence, if
while any contract is incomplete, an alteration takes place
in the weight of the coins, if when it is fulfilled the debtor
only looks to the number of the pieces, n^ecting their
weight, it is evidently a fraud u[>on the creditor. Suppose
a cloth manufacturer were under contract to deliver so
many yards of cloth, and before the delivery took place,
the law was to reduce the yard measure to 30 inches,
surely the purchaser of the cloth would not be satisfied
with * receivinsT the same number of these diminished
yards, simply because they were called •^yards'' as he
THBOBT OF THE XXC&ANOSS. 359
bargained for. On the contrary, he bargained for a certain
definite length of cloth, and if when the law diminished
the 3^rd to 30 inches, it is also declared that the doth
manufacturer had fulfilled his contract when he had de-
livered so many yards of this curtailed measure^ it would
be clearly a fraud upon the purchaser.
29. It is clear, however, that this fraud and injustice
would only extend to existing contracts. If the law
were to reduce the yard in that manner^ all contracts
made subsequently to that law would adapt themselves
to it, and the injustice would be just the more severe in
proportion to the number and amounts of contracts exist-
ing when the change took place. But suppose that while
the legal yard continued to be 36 inches, from the
inattention of government to send round proper inspec-
tors of measures, tradesmen had become so fraudulent
as to cut off gradually several inches from their yard
measure, and suppose that this was done so openly and
universally that numerous contracts were entered into,
in these measures, which were known by both parties to
be below their legal length, so that contracts were sub-
sisting that were made both in the proper measure and
in the diminished measure. Now, suppose that the
government being suddenly roused from its inattention,
determined to enforce the leg-al length of the yard mea-
sure, it might become a question of some peqilexity to
decide whether equity would be more satisfied by enforc-
ing a general return to the original legal standard, or by
lowering the legal standard to the average length of the
yard in use.
30. From the preceding considerations it evidently
follows that the Mint price of bullion regulates the foreign
exchanges, at least with tiiose countries where an absolute
standard of weight and purity is preserved. Though
with those countries which have a mixed currency, liable
to deterioration like our own, the state of their currency
compared to our own modifies the exchange. If the
market price rises above the Mint price, it must be imme^
360 £L£M8tfT8 OF ^POLITICAL BQOVMfT.
diately followed by a fall in the foreign exchanges, for the
very same reason, because if the coin be diminished in
weight, it will not purchase the amount of bullion it
ought to do either at home or abroad ; and it is also clear
that an alteration in the Mint price will be necessarily
followed by a corresponding change in the par of exchange
with every other country.
31. We may add a further illustration. Suppose a
bank to issue notes, which of course promise to pay the
bearer gold on demand. While the bank is in good
credit^ these notes will pass at their full value, but it* the
public have doubts of the solvency of the bank, they will
either return them immediately for pa3*ment to the bank^
or they would only receive them for part of the value
they professed to represent. They would become depre-
ciated or fall to a discount and that depreciation or dis-
count would be measured by the difference between the
nominal and the current value of the notes. It is just
the same with the coin. The note promises to pay so
many gold coins ; the gold coin purports to contain a cer-
tain amount of gold. The market value of the note is
the test of its depreciation, the market value of the coin,
or its power of purchasing the legal amount of bullion, is
the test of its depreciation, and the difference between the
market value and the nominal value is in each case the
measure of the depreciation. The words on the note are
•the guarantee of the banker that the holder of it can get
the specified amount of coin at will, the stamp on the coin
is the guarantee of the state that it contains a certain
weight of gold bullion. AVhen the paper currency does
not pass at its full value, it is said to fall to a discount,
so when the gold coinage will not purchase its full value
in bullion, it has fallen to a discount.
32. AVe see, then, under the system of free trade in
coin and bullion that we enjoy, it is in fact bringing the
foreign exchanges home to our own door, and it is a more
delicate test of the state of the coinage than the foreign
exchanges, because it is far more quick iu its action, and
• TH£OBY OF THE EXCHANGES. 361
the distance of place, and the time and expense required
for the transport of bullion from one country to another,
always permits oscillations of a certain magnitude to occur
without a remedy, whereas the test of the price of bullion
always acts instantaneously We may, tlierefore, recapitu-
late the principles which the foregoing observations are
intended to demonstrate. That so long as the coin main-
tains its full weight and purity the value of coin and bul-
lion must be identical, and if any cause arises to diminish
or enhance the value of bullion, the value of coin must
fall or rise with it ; and if any difference arises between
the two it must be from a depreciation of the coinage.
That an alteration of the Mint price of gold means an
alteration in the weight of the coin, and that the supposi-
tion that the value of gold in reference to any other com-
modity than itself is indicated by the expression ^^ Mint
price," or affected by the Mint price bemg fixed, is an
error arising from a misapprehension of the expression
Mint price.
33. So long as the market price of gold or silver ex-
ceeds the Mint price, it is evident that if any amount of
bullion be converted into coin its value will be diminished
in the same proportion, no one will convert bullion into
coin. During the degraded state of the coinage during
the last century, the market price of silver always con-
siderably exceeded tlie Mint price. Adam Smith says
that the market price of silver ranged from 5s. 4d. to
58. 8d. an ounce before the re-coinage. And we find it
stated in the second Report of the Lords' Committee of
Secrecy in 1797, p. 257 ; "But as the Mint price of silver
bullion has been during nearly the whole of the present
century, considerably less than the market price of this
precious metal^ the silver bullion imported could not be
converted into coin, but having left a quantity sufficient
for the use of our manufacturers, must have again been
exported, and did not contribute in the smallest degree to
augment the coin of this kingdon."
34. Gold coin can never be more valuable than bul-
362 ELEMENTS OP POLITICAL BGOVOifT.
lion, unless it were to contain a greater amount of metal
tbim it professed to do, except by a sum which represented
the interest due for the time a private person had to wait
while it was being coined. If coin were more valuable
than bullion, every one who had bullion would immediately
bring it to be coined, or demand notes for it.
35. If while the Bank of England were subject to
their present law of being compellable to pay notes in
exchange for bullion^ at their present rate, the market
price of bullion were to rise above the Mint price, it
would in a short time be fatal to the Bank; for while
their notes which represent coin would only buy a dimi-
nished quantity of bullion, they would be compellable to
pay full weight for them, a process which would evidently
exhaust their bullion, for nobody would be content to
have a bank note in his possession which would only pass
for 15s. in the open market, when he could compel the
bank to give him 20s. for it. Such a state of things
would therefore necessarily cause a run upon the Bank,
which would not stop while any of its notes remained out,
or until the value of the note was restored to par. It was
such a state of things, which we shall see compelled the
Bank to stop payment in 1697, three years after it was
founded. The Bank received all the worn and clipped
coins at their full nominal value, and gave their notes in
exchange for them, when the new coinage came out, they
were called upon to pay these notes in the new coinage,
which of course produced a great demand upon them,
which compelled them to stop. And the same state of
tilings was grievously felt about 1774, and is the true
explanation of the difficulties mentioned by Adam Smith,*
which he attributes to over-issues by the Bank.
36. During Sir Robert PeePs administration, in 1844,
the currency was beginning to exhibit symptoms of depre-
ciation from its wear and tear. Owing to the effective
measures taken by him, it is now almost universally of
• Wealth of Nations. Vol. n. p. 284. Wakefield's Edit.
THEOBY OF THE EXCHANGES. 363
full weight, and the deficiency in most cases is so slight^
that it is not observable in ordinary transactions. The
Bank of England, however, warned by experience, weighs
rigidly every single sovereign paid into it by its customers,
and does not credit them with more than its intrinsic
value as bullion. Other banks in London find it impos-
sible to maintain the same strictness with their customers,
so that if they pay tlie money they receive in the course
of their business into their account with the Bank of
England, they generally incur some loss.
37. Although when the currency is in a depreciated
state, the exchange will be apparently adverse with those
countries which maintain their currency in its standard
state, it is quite clear the exchange, as founded upon the
commercial operations of the two countries, may be
above, below, or at par, and it is a very simple matter
to discover its true state, that is, whether it is favorable
or the contrary, and the amount of its difference either
way. The rate of the exchange, which arises out of the
state of the currency, is called the Nominal Exchange,
the rate which arises out of the commercial reLitions of the
country is called the Real Exchange. Thus, if we sup-
pose that the exchange on Paris is 2,531 francs for £100
m ffold at the Mint price, or when the cuiTency is at its
full legal weight, then if we suppose tbat, in consequence
of the depreciation of the currency, the maiket price of
gold bullion to rise to £4 3s. per oz., then the market
price of £100 is £106 lis. 7^d. Now, suppose that the
exchange on Paris is 2880, or £100 will purchase 2,380
francs in Paris. Then, £106 lis. 7.^d. would be able to
purchase 2536*63 francs. But as the real par at the Mint
price is assumed to be 2521, it is evident that the diffe*
rence between these two sums is the extent to which the
real exchange is in favour of London. We can also see
the extent to which the exchange is depressed, because
£100 at the above exchange will purchase 2380 francs,
whereas they ought to purchase 2586*63 if they were of
lull weight; and the difference between these two sums
364 ELEMENTS OF FOUTICAL SGONOiCT.
shews the extent by which the nominal exchange is de*
pressed. Hence, we have the following rule, ^nd the
market price of the sum in London compared to the Mint
or money price, multiply the market price so found by the
rale of exchange, then if the result is equal to the par of
exchange, the exchange is at par, and if there be a diffi^
rence, the exchange is favourable or adverse according as
the difference is above or below the par, and the depression
of the exchange, caused by the depreciation of the cur^
rency is the difference between the sum so expressed in
the mint and market prices, multiplied by the rate c^
exchange. In the excellent state in which our currency
now is, the question of the nominal exchange is of littte
importance, but it is impossible to understand the history
of the currency in former times without it.
38. We must now consider the causes that affect the
real exchange, or the true commercial one, which arises out
of the transactions between this and other countries.
^s the British Islands do not produce the precious metals
to any extent worth considering^, they are only to be
obtained in this country by importation, and we must now
consider the various sources from which they come, and
the different causes that produce an influx or efliux of
them. They are to be treated in every other respect like
any other foreign commodity, and are obtained by the
same means as any other one that we require for domestic
consumption which is not a native production.
39. The trade in bullion may be divided into two
distinct branches : the one where it is carried on directly
with the countries in which gold and silver are native
productions, and the other with those countries which
do not produce it, but which, like our own, have no
means of supplying themselves with it except by foreign
commerce.
40. I. fVith bullion-producing countries. Before the
late discoveries in California and Australia, the chief
bullion-producing countries were Mexico and Peru. We
need not specify others, because the same principle
THB0B7 OF TBS BXCHAKOSff. 365
applies to them all, and to describe them all would rather
belong to a work on commerce generally. British mer-
chants have establishments, or correspondents, in these
countries, to whom they consign their goods, and their
agents exchange them for the bullion brought down by
the natives, and which is collected in large quantities,
and usually brought home by men-of-war for the sake
of security. Most of the men-of-war on the Pacific and
West India stations make a voyage along the coast before
tbey return home to collect bullion from the merchants,
and the captain receives a commission on the freight. In
these countries bullion is treated exactly like any other
commodity, such as tea, or wool, or wine, and the British
goods of all kinds are exported to them for the express
Eurpose of being exchanged for bullion to be remitted
ome. The limits of this exportation are precisely similar
to the limits of the exportation to any other country.
It is clear, that by the time the bullion reaches this
country, it ought to be sufficient to cover the original
price of the goods, and all the charges on them on their
way out, as weU as the agent's commission there, the
charges for freight, insurance, and commission for bringing
it home, and a fair mercantile profit over and above all
these expenses. Unless it does that, the commerce is
not profitable. If too many goods are exported to these
bullion-producing countries, their exchangeable value
with bullion falls, and thev will not purchase a sufficient
quantity of buUion to afford this profit, and the further
exportation of such goods to these markets must be
discontinued until the goods first sent out are consumed
and fresh ones required. The purchase of bullion, then,
in these countries, is a very simple affair, and requires
no further notice.
41. II. With countries which do not produce bullion.
The causes which produce an inflow or outflow of bullion,
between this and other countries like it which do not pro-
duce bullion, are much more intricate^ and have excited
long and keen controversies. Taking this country as
366 ELEMENTS OV POLITICAL XCOHOlCr.
the centre, we iiiay consider tliat the transmisrion of
bullion to or from it is influenced by the seven following
causes : —
1. The balance of payments to be made to or by it.
2. By the state of the foreign exchanges.
3. By the state of the currency.
4. By remittances made to this country, as the com*
mercial centre of Europe^ to meet payments due to
other countries.
5. By the political security of this and neighbouring
countries.
6. By the state of the money market, or the com-
parative rates of interest in this and neighbouring
countries.
7. By the free or prohibitive commercial tariffs of this
and foi*eign countries, as they permit or forbid our
manufactures to be imported into them.
There ai*e, then, seven different causes which act upon
the movements of bullion, and in any case it is necessary
to ascertain to which of these causes it is due. The
inveterate error of mercantile opinion for a long time
was^ that tlicre was only one cause which caused an
export of bullion, namely, a balance of payments to be
made.
42. We have already shewn that a degraded state
of the currency has the inevitable effect of driving away
bullion from here. As we may fairly hope that our
currency will never again be allowed to fall into such a
disgraceful condition as it was till 1816, we may con-
sider that this cause is not .likely to operate a^in on the
bullion market ; and we may now proceed to develop the
system of the Foreign Exchanges.
43. According to the crude ideas that were generally
received about a century ago, gold and silver were
almost universally considered to be nearly the only species
of wealth, and it was considered to be the true policy of
every country to encourage, by every means in its power,
the influx of bullion, and to discourage its export ; and
THEORY OF THE EXCHANGES* 367
most, if not all, of the European nations have gone so far,
at one time or another, as to prohibit its export. The
profit of foreign commerce was estimated solely by the
quantity of gold and silver it brought into the countr}- ;
and the theory of commerce seemed to be reduced to a
general scramble among all nations, to see which could
draw to itself most gold and silver from the others. Accord-
ing to this theory, the gain of one party was the loss of
the other ; every article produced in another country, and
imported into this one, was considered to be a direct loss
to the country. This was what was called the mercantile
or commercial system. According to this theory, the
leading maxim which governed the legislature was, to
make the exports to exceed the imports ; and the conclu-
sion drawn was, that the difference, or balance, must be
paid for in cash by the debtor nation. When two nations
traded with one another, the difference of debts between
them was called the "balance of trade," and when this
was in favour of England, the exchange was said to be
favourable, because bullion had to be paid to her ; on the
contrary, when, on the result of trade, payments had to
be made by her, the balance of trade was said to be
against her, and the exchange unfavorable, and then gold
was sent out of the country. According to this theory,
the prosperity, or the contrary, of the country, and the
pront, or loss, of forei^ commerce was exactly measured,
according as gold had to be received or paid, or as the
exchange was favorable or the reverse.
44. The admirable chapter of Adam Smith on the
Principle of Mercantile System is a masterly exposi-
tion of the fallacy of this tiieorjr, and is certainly one of
the soundest and best written m his whole work, from
the more than usual consistency of its ideas, and the
lucidity of its style. There are, however, some thmgs
relating to the subject which require further enforcement
and illustration.
45. So far from the principle of the mercantile
theory being true, that gold and silver are the most
368 SLEMfiNTS OF POLITICAL ECONOXT.
profitable and desirable objects of import, the direct
reverse is iinqiiestiomibly true, that gold and silver are of
all objects of commerce tlie most unprofitable; and it is
a certain axiom of commerce in a state of freedom, that
bullion will fwt be imported until it has become unpro*
fitnble to import any other article. There are no class of
traders who derive so little profit, in proportion to the
capital invested in their busmess, as denlers in bullion
and money of all sorts, whether they be bullion mer-
chants or bankers. Although the opinions we have
alluded to above were the prevalent ideas of the age,
there were not wanting a few sagacious thinkers^ who
discovered the truth of what we have last said, and main-
tained the unprofitable nature of gold and silver; but, like
others who are before their age, their voice was unheeded,
and the general object of commercial ambition and
legislation was to accumulate treasures of gold and silver.
46. There is no expression in commerce of more
frequent occurrence than the *^balance of trade ;" and it
may be as well to give the interpretation of it generally
received during the last century, and which is not yet
wholly extinguished. "The common mode of consider-
ing that question has been to set off* the value of the
imports, as stated in the public accounts, against the
value of the exports, and the diflPerence between the one
and the other has been considered the measure of the
increase or decrease of the national profit."* And Mr.
Hoare, a banker of eminence for twenty-two years, said,
"I consider the only proper means of bringing gold and
silver into this country to arise from the surplus of our
exports over our imports, and that ratio or proportion
which is not imported in goods must be paid for in
bullion. In the year 1796, the imports of this country
appear to be £19,788,923, and the exports appear to be
£33,454,583, which ought to have brought to this
• Mr. Irving, Inspector- General of Imports and Kxports. Evidence
before Commons Committee of Secrecj, 1797. 3rd Report, p. 1 1 1.
THSOBT OV THB BXCHAKOBS. 869
country bullion to the amount of that difference, or
£10,665,060."*
47. We have made these extracts because they
convey, in the fewest words possible, the whole ideas on
the subject, and they are made by persons of great com-
mercial eminence before the committee of the House of
Commons* It is true that Mr. Irving, who was Inspector-
General of the Exports and Imports of Great Britain and
the British Colonies, expressly states that the application
of this principle to the whole of the British trade would,
in his judgment, be extremely erroneous. We, therefore,
do not bring him forward as approving of the theory ;
but only as stating distinctly and authoritatively what it
was. But Mr. Uoare^ a banker of eminence and long
experience, adopted it ; and we believe that this theory of
the balance of trade still retains a hold on the min^ of
great numbers of persons, who do not give themselves
the trouble to sift it thoroughly. Nevertheless, there
never existed a more complete chimera and pernicious
delusion than this said doctrine of the balance of trade,
nor one which has exercised so disastrous an influence on
commercial legislation.
48. It appears that the simplest way of arriving at
an accurate conclusion on the subject, is, to consider that
the dealings between nation and nation are only made up
of the aggregate of dealings between individuals of the
nations, and we have only to consider the variety of
methods in which an individual merchant may trade, to
have an accurate and comprehensive idea of the commerce
of the nation. Instead of dealing with figures of vast
amount, which make no definite impression on the mind,
and which are produced by a number of complex causes,
we shall now proceed to consider in how many dif-
ferent ways an individual merchant may trade with
foreign countries, and we shall shew, by considering the
dealings of an individual^ how utterly eiToneous it is to
• Evidence before CommoDB Committee of Secrecy, 1797. 8rd
Report, p. 82.
Y
870 ELEMENTS OF POLITICAL SCONOlfr.
suppose that an influx of bullion is, ipsofacto^ a proof that
commerce is flourishing and profitable to the country, and
that whether it is so or not depends very much as to
where it conies from, as well as a number of other
circumstances.
49. With respect to those countries in wliich bullion
is a native production, and to which we trade for the
express pur])ose of obtaining it, we have already shown
that unless the quantity obttiined in exchange for our
goods exceeds a certain amount, the commerce is not a
profitable one, and that the simple fact of bullion being
remitted from them, and therefore, though the exchanges
with them must always be in our favor, it is no proof
whatever of prosperity or profit.
60. Next, with respect to countries which do not
produce bullion, it is easy to shew the extreme fallacy of
the opinion that our exports should exceed our imports,
and that tlie difference will be the profit of the country ;
in many cases the precise converse is true, that our
imports should exceed our exports, and the profits are
measured by tlie exact sum by which the imports exceed
the exports, or the excess of what we receive over what
we give.
51. To prove this, let us take a simple case. Sup-
pose a merchant in London sends out £1,000 of goods
to Bordeaux, by the time they arrive there, the mere
addition of freig^ht, msurance, and other charges, will
probably have increased their cost of production, or the
expense of placing them where they are, to £ 1 ,050, sup-
posing them to be sold without nny profit at all- ■ But, as
the merchant would never have sent them to that market
unless he expected to realize a good profit, we may
assume that the market is favorable, and that they sell
for £1,500, and he would probably draw against his a^nt
for £1,200. His coiTCspondent at Bordeaux instead of
remitting the money to England, would find it far more
profitable to invest the proceeds of the goods in some
native production, whicn would fetch a good price in
England. The chief native production of that country
THEOBT OF THE EXCHANGES. 37t
is tvinej so the agent would invest the proceeds of the
goods, after deducting all charges for frei^t, commission,
&c., in Bordeaux wine, and send it to England. This
wine would probably be sold at a considerable profit in
the English market, say it would fetch £2,000, and after
deductmg all the charges of every description, on the
cargoes both ways, the diflference would be the merchant's
profits. In this case it is quite clear that no bullion
would pass between the countries, and the merchant
would apparently import more than he exported, and it is
also clear that his profits are exactly estimated by the
excess of the value of the inward cargo above that of the
outward one, after deducting all the charges both ways,
and just as this difierence is the greater so his gain is
greater. In this case, as no bullion woidd pass from
either country to the other, there would be no question
of exchanges.
52. It is clear that the London merchant's agent at
Bordeaux, would be governed by several considerations
as to whether he would remit specie or wine to London,
and he would be chiefly governed by the state of the
wine markets, both at Bordeaux and London. For, sup-
posing the goods to be sold at a good profit at Bordeaux,
he must next consider the price of the wine at Bordeaux,
and also what it might be expected to fetch in London.
If some great disaster had happened to the vines so that
there was a failure of the crops, the price of wine at
Bordeaux might rule excessively high, but at the same
time there might be a large stock of wine in London, and
the price might not be unusually high ; so that if he were
to purchase wine at Bordeaux, and send it to London, it
might be a loss. In such a case as this, if there were no
other native production to send, he would find it most
advantageous to remit specie, whatever he could sell the
foods for, and then the exchange would be in favor of
london ; but before the London merchant could reckon
his profits he would have to deduct the fi-eight, insurance,
&c., on the specie.
y2
373 ELEIOENTS OV POLITICAL ECONOMT.
53. Wlietlier the transaction was profitable or not
to the London merchant would entirely depend on the
amount of specie he received after deducting all cliarges,
and if he had purchased the goods he sent out from
England cheap, and there was a scarcity of them at
Bordeaux, he might realize high prices there, which
might leave him a good profit. It would be very impro-
bable that he could realize so much profit on that single
operation, as in the double one of exporting goods and
importing wine. So that the import of the specie would
be less profitable to him and the nation at huge, than the
import of the wine.
54. The reasons which caused the export of specie
fVom Bordeaux, and the import of it into England, in
this case, are very plain, they were tlie scarcity and
deamess of the native productions at Bordeaux, and the
abundant supply of them already in the London market.
Hence, we gather that the scarcity and deamess of native
productions is an infallible cause of the export of specie
from a country; on the contrary, an already existing
abundant supply of foreign productions of all sorts, is a
certain cause of its import into a country. On the con-
trary, when native productions are cheap and abundant,
it will cause an importation of bullion, and when foreign
productions are scarce and dear, it will cause an export
of bullion.
55. We have before observed, that the exchan^ being
in favor of a country, means nothing more than that bul-
lion has to be remitted to it, in the case above described,
the exchange at Bordeaux would be in favor of London :
but this simple case is as good as a thousand to shew the
extreme and dangerous fallacy of drawing any conclusion,
as to the advantage of the trade to England, from tlie
simple fact of the exchange being favorable to her, and an
influx of bullion taking place.
56. The example given above is of the simplest
description, and a merchant of eminence, who had corre-
spondents in several different parts of the world, might
THE THEOBY OF THE EXCHANGES. 373
easily multiply these operations^ so as to visit many mar-
kets before the returns of his cargo were brought home.
Thus, instead of having the wine sent home from Bor-
deaux, his correspondent might find it more profitable to
send it to Buenos Ayres, and dispose of it there. The
chief native production of that place is hides, and we may
suppose that his correspondent there, might invest the
Eroceeds of the cargo of wine in hides, which there might
e a favorable opportunity of selling in the West Indies.
When the cargo arrived in the West Indies, instead of
remitting the proceeds directly home, it might very well
happen that owing to a scarcitv of com at home, it might
be very high there, and cheap m Canada, so he would in-
vest the proceeds of the hides in sugar, and despatch that
to Canada, where the merchant's correspondent there
would dispose of it, and purchase corn, which he would
send to England.
67. In the case just described, we observe that there
are five distinct operations, and as we may suppose that
there is a profit upon each of them, by the time the
returns for the goods, which originally cost £1,000, are
brought to England, it may very well be, that the com
which forms the ultimate payment of them, may be several
times as valuable as the original cargo ; and as we have
supposed the charges on each operation to be deducted
before investing the proceeds in other articles, it is clear
that the merchant's profit upon the whole, is exactly the
difference in value in England, between the articles last
purchased and sent home, and the original cargo, after
deducting all the expenses of sending home the last cargo,
and we also observe that no specie has been sent from one
country to the other in the whole course of the extended
operation.
58. This example is sufficient to demonstrate the
utter fallacy of the old idea, which is even yet not
extinguished, of the balance of trade. Nothing can be
more clear, that unless the value of the cargo which
comes into England, in payment of the cargo that was
374 ELEMEKTS OF POLITICAL EOORaitr.
sent out, is sufficient, not onlv to defray the cost of the
original cargo, as well as ail chaiges upon it and the
return cargo, and leave a profit besides, the commerce
could not be carried on. ri^o English merchant could
export goods unless he received in return others of much
greater value, and the obvious consideration that the more
he gets for what he sends out, the more profitable it is to
himself and the nation, is sufficient by itself to explode the
old fallacy of the balance of trade. One obvious source
of error is, that the value of the exports from this country
is estimated at the time of their leaving the country, and
before the charges for freight, &c., are incurred, which
must necessarily raise their selling price in the foreign
market, if they are not sold at a loss, and their value in
that market is expected to be considerably higher than
that. On the other hand, the value of die imports is
estimated, not according to their value when they left
the foreign country, but what it is upon their arrival here,
including all the charges upon them.
59. If we suppose that Bordeaux had but one native
production — wine, the chances of finding the markets,
both at Bordeaux and London, in a favourable state for
importing produce instead of specie, would be limited to
that single article. But if it had other products, such as
olive oU, the chances would be increased of finding
articles to suit the market, and the chances would evi-
dently be multiplied according to the number and variety
of its productions.
60. Let us take another example, and let New York
be the starting place. The staple productions of America
are breadstufts and provisions. A merchant of New York
sends a cargo of corn to Liverpool, and his correspondent
there will endeavour to invest the proceeds of that in
British goods, if he finds the state of the markets in
England and New York will make such an operation
proiitable. Suppose that the price of com is very high
here, and British goods are also very high here, and very
low in America, it is clear that nothing but specie will be
THSOBT OF THE BXCHANGSS. 375
sent* In cases when a great and unexpected dearth of
corn occurs in England, and its price rises enormously
high, the in&Uible result is to cause a great drain of
specie for the time being, because our necessity for food
is much more pressing and immediate than their neces-
sity or capability of consuming our cotton or woollen
goods. And the only way to arrest such a drain, is to
effect such a reduction in the prices of British goods as
shall make it more profitable to export goods than
specie.
61. In the cases we have been hitherto considering,
we have described the operations as if merchants were
left perfectly free to carry their goods whither they
pleased, and were not met and obstructed by artificial
obstacles purposely devised for interfering with their
business, by the laws of different nations. But there are
few nations, and our own among the rest, which have not
habitually discouraged the importation of foreign goods,
and imposed heavy duties for the specific purpose of
excluding them, as they conceived the extraordinary idea
that all foreign goods brought into the country were so
much loss to it. Thus, the statute of WUliam III.
(1688, c. 34,) says: — ^'It hath been found by long
experience that the importing of French commodities of
all sorts," (enumerating them) '^ hath much exhausted
the treasure of this nation, lessened the value of the
native commodities and the manufactures thereof, and
greatly impoverished the English artificers and handicrafts,
and caused great detriment to the kingdom in general."*
If we consider the effect of these laws in one place, it will
equally apply to every other; thus, in the first instance,
suppose that there are very high protecting duties at
Bordeaux against British goods, as the consumer must
ultimately pay all the expenses and charges on the
goods, it will have the effect of greatly raising the
• See also Craik's Brit. Commerce. Vol. ii., 92. 29 & 30 Car. ii.,
c. 1.1.30.
376 ELElfENTB OF FOUTICAI. BC0R01C7.
market price there, and diminishing the number of
persons who can afford to buy them, and hence, as the
market is so limited, a smaller quantity of goods
will overstock it than if it were much extended. This
will cause a much less quantity of goods to be sent
from London, and it will cause a much larger propor-
tion of specie to be remitted to pay for the productions
of Bordeaux. This example shows that the inevitable
effect of high protecting duties between country and
country, is to cause a much more frequent transmission of
bullion from one to the other than would be the case
in an unfettered state of commerce; unless, indeed, the
smuggler steps in, who is the corrector provided by
nature against this commercial insanity. The effect,
then, of prohibitive duties is to cause an influx of bullion ;
but we must carefully guard against supposing that this
influx is a favorable sign^ as it is certainly the least
profitable import a merchant can receive for his goods ;
and there is this very marked difference between an
influx of -bullion under the Protectionist system and
under a Free-trade system, that the former is accom-
panied with a great dearth of foreign commodities, but
the latter is an infallible sign of a great abundance
of them, as bullion is never imported when men are
allowed to follow their own interests, until our markets
are already so overstocked that every other article has
ceased to be profitable.
62. The foregoing cases comprehend the different
varieties of commercial transactions between this and any
other country, and we gather from them the following
results respecting the influx or efflux of bullion : —
I. The cause of bulKon being imported is eitlier
when the price of goods is so low in England, and so
high in the foreign market, as to tempt foreigners to send
here to buy goods, or the price of goods is so high in the
foreign market and so low in England, tliat nothing but
specie can be sent in payment of goods exported from
England.
^THBOBt OF THE EXCHAKQES. " 377
II. The cause of bullion being exported from Eng-
land is that there is some great and pressing demand for
some article in this country, and other commodities are
so scarce and dear that they cannot be exported with a
profit, or that the article is required in such great quanti-
ties that the foreigner cannot consume our goods which
we should prefer to send in payment fast enough, and so
specie must be sent, and the greater the difierence in
price the greater will be the drain of bullion ; or that
other markets are already overstocked with our produc-
tions, which are depressed below their usual market value
there. This is what is meant by overtrading, and from
this circumstance we see that overtrading is a surepre-
cusor of a drain of bullion from the country. When
there has been a great failure in the crops in this country,
so as to cause a famine price, the demand for com is so
immediate and urgent^ that it necessarily causes a great
drain of specie^ and it is then of the greatest possible
consequence, that the prices of other commodities should
be as low as possible, to enable them to be sent in pay-
ment of the necessary suppKes of food, and prevent such
a drain of bullion as may disturb the whole monetary
system of the country.*
63. Overtrading, and a failure of the cereal crops
of this country, are each of them sure causes of a drain
of bullion. The most disastrous event for the commerce
of this country is when both these circumstances happen
concurrently. It is like a spring tide of disaster. The
most terribly disastrous commercial crisis this country
ever experienced was preceded by some years of over-
trading, followed by successive failures in the staple
support of the people of England and Ireland. These
two adverse events together produced the calamities of
1847. We shall see that the intended effect of the Bank
Act of 1844 is to provide a remedy for such a state of
• See a striking example of this in Mr. Vansittart's speech, May
13tb, 1811. Pari. Debs. Vol. xx. p. 25.
378 ELBMENTS OF POLITICAL SOOKOWr*
things, by causing such a reduction in the price of home
commodities, in the event of a drain of specie taking
phice, as to render it more profitable to export them than
bullion, aud so stop the drain. Whether the act is effective
for this purpose is another question, which it is not the
proper place to discuss here.
64. There are some countries from which we draw
articles of great necessity, but to which, from different
circumstances, we do not expect to remit goods in pay-
ment Russia was the great source of our supply of
hemp, tallow, flax, and we used to import these products
to the value of £12,000,000 yearly, but owing to the
prohibitive character of her tariff, we were unable to send
our own productions in payment of these goods to any-
tlung like a similar amount in value. To such a country
the difference must be remitted in cash, to the mutual
loss of both parties, and unless there were other means of
equalizing the exchanges with different countries, the
exchange with Russia would always be unfavorable to
England. The chief export trade from Ireland to England
was in articles of food— pigs, cattle, oats, butter. Ureat
quantities of these came from Ireland, but the inhabitants
of that country were much too poor to be able to consume
an equivalent amount of English goods, in consequence
of which the difference had to be remitted in specie, and
so the exchanges between England and Ireland were
almost uniformly favorable to Ireland.* Now, if Ireland
had been sufficiently wealthy to have consumed English
goods instead of specie, it is evident that it would have
been far more advantageous for both countries ; for
English industry would have been promoted, and Ireland
would liave gained a more valuable import. These two
examples offer a further illustration of what we said before,
that the frequent transmission of bullion between countries
which do not produce it, is a symptom of a less profitable
trade than it would be if goods were transmitted.
* Fide Bcpoit of House of Commons ou Irish Currency. 1804.
THSOBT OF THE EXCHAKOES. 379
•
65. In the operation first described above^ we Lave
supposed it to originate with the English merchant who
remits his goods to his correspondent abroad, and who
reaps the profits, and the proceeds must be remitted to
him after deducting the freight, charges, and commission,
of the agent there. But it is also probable that there will
be native merchants at Bordeaux, who will send wine to
England on their own account, to their correspondents
here, and then the whole transaction will be reversed.
The English correspondent will endeavour to purchase
English goods as low as he can, and if he can get them
low enough to realize a profit in the Bordeaux market,
he will send goods out, but if the English goods are too
high for that purpose, he must send specie. It is also
evident that even if the goods be at no imusual height in
England, still if the market at Bordeaux be already
overstocked with them, or as it is called "glutted," it
would be useless to send more goods, to force the price
down still further, and the consequence must be that
nothing but specie will go.
66. From this we see that if specie be coming in from
a country, it is a proof that we have already got so many
of their goods, that it will not pay to import any more,
and if specie be going out to a country, it shows that we
have already sent out so many of our goods to that
market that it is already overstocked. The difierent
barbarous laws which every country has enacted under
the erroneous appellation of protection, by aggravating
the price, limit the markets in every country for the
productions of other countries, and cause much fewer
commodities to pass between nations than otherwise
would, and cause the markets of any country to be much
sooner overstocked than they would otherwise be. By
preventing this interchange of commodities which every
nation would naturally prefer, it necessitates payments in
specie to a much larger extent than would be the case if
commerce were free, to the common impoverishment of
all parties.
880 ELEMENTS OF POLITICAL ECOHOKT.
' 67. The foregoing considerations shew that it is
possible to carry on any amount of foreign trade without
the necessity of any remittances being made in specie.
In the instance above taken, the English merchant pur-
chases goods and sends them to his correspondent abroad,
who realizes them and invests the proceeds in that mar-
ket, and sends them to England, and the English mer-
chant disposes of them in England, and gains the profits
there, ana no specie is sent from one country to the other.
Similarly the foreign merchant sends his goods to his
correspondent in England, who disposes of them there,
and invests the proceeds of them in England in English
commodities, and sends them to his foreign correspondent,
who gains his profits, either by selling them in his own
country, or by sending them to some other market where
he may make a higher return, and, as in the former case,
no specie passes between the two. Nor is the result in
any way different, if the trade be conducted by the more
circuitous method of three or more transactions. Hence,
in a healthy state of the markets of difierent countries,
scarcely any specie will pass between them, and the very
fact of there being a necessity for making frequent and
large remittances of specie from one country to another,
is m itself a proof of there being something irregular
and unhealthy in the state of commerce in general, and
in the state of the markets of one comitry or the other,
eitlier that they are overstocked or understocked, or that
there is some legislative interference with the natiutd
course of trade between nation and nation. Nothing can
be more certain tlian that bullion is the least profitable of
any article of commerce, except from bullion-producing
countries, and that when merchants have recourse to it,
it is because some disturbance has taken place in the pro-
fitable relations between supply and demand of other
commodities.
68. Now, supposing commerce to be in that desi-
rable and healthy state in which no specie passes between
non bullion-producing countries, who could tell how
THEORY OF THB EXCHAKOES. 881
what is commonly called the balance of trade is in-
clined? Who can tell what the balance of trade
is? Each country would shew a favorable balance^
taking the values of the exports and the imports at their
market prices in each country. Each country would
shew that their imports exceeded their exports in value,
that is, each woula shew that they had gained by their
commerce, for the very simple reason that the value of
the article they received would be greater in their own
market than the value of the one they gave ; and unless
it was so it is manifest that trade could not be carried on,
because all the expenses and profits of trade are provided
for by the difference in value between what they give and
what they receive. Hence, unless both parties gain by
the transaction, commerce cannot be carried on. But,
this shews that the expression of the ^^ balance of trade '^
is a gigantic delusion, and it is greatly to be wished that
it should be for ever exploded and laid aside, as the
fountain and origin of incalculable mischief to the world,
in the suicidal efforts every nation has made to secure to
itself that great chimera — a favorable balance.
69. The mistake of imreflecting writers, who think
that the price of foreign goods sold in this country goes
into the pocket of the foreigner, consists in this, that the
probability is that the English merchant who imports
these goods has already purchased them with English
goods, so that their money price goes into the pocket of
the English merchant, and not that of the foreign one,
and is, probably, re-invested in English goods if there is
a prospect of a favorable opening for them.
70. The fundamental fallacy about the balance of
trade which seems to have taken possession of the legis-
lature, was, that the interests of the State were different
and opposite to the interests of individuals. They seem
to have entertained the idea that every merchant had
entered into a conspiracy to ruin the country, which he
tried to carry into effect by becoming as prosperous him-
self as he could. It seems most unaccountable how long
882 ELBMBNT8 07 POLITICAL BCOHOICT.
they missed the obvious truism, that the prosperily of the
State was made up of the prosperity of the inmviduals
composing it, and that every one was far keener in dis-
cemmg what conduced to his own prosperity than the
State could be, and that if private merchants found it to
be their individual advantage to import commodities
rather than bullion, it could not be beneficial to the State
to force trade into a contrary direction.
71. When our ships first traded with the South Sea
Islanders, they took out with them axes, beads, and other
trifles, which had very little value in this country, and
bartered them for all sorts of curiosities, shells, &c., which
were very valuable in England. A pair of fine shells from
the South Seas in many cases is worth ten guineas in
England, which perhaps an English Sailor obtained in
exchange for an axe worth 2s. 6d. The English sailors
thought the natives very simple to give away so many
valuable curiosities for such common things. We cannot
doubt that the natives had exactly the same opinion of
the English sailors ; they thought them great simpletons
to give away such valuable things as axes, beads, &c., for
so common things as a few shells. Each party, however,
exchanged what was common and cheap in his own
country for what was scarce and valuable. The axes
were infinitely more valuable in Feejee than the shells,
the shells were many times more valuable in London than
the axes. Thus, an English sailor by giving perhaps
2s. 6d., gained in exchange what was worth ten guineas,
and the difference was his profit. Now, this was the
genuine spirit of commerce. The coloured beads were
just as valuable to the poor untutored savages as diamonds
to civilized Europeans. The commerce between all na-
tions is exactly similar in principle to that between the
sailors and the savages. But according to the old doctrine
of the Balance of Trade, this difference between the values
of the axe and the shells in England, ought to have been
paid in bullion. This simple case is quite sufficient to
explode the whole fallacy.
THfiOBY OF ¥HS tXCBASQm. 383
72. Notwithstanding^ the prevalent idea that foreign
trade was profitable just in proportion to the money it
brougfht into the kingdom, and that this was indicated by
the so-called balance of trade, there were a few enlig^ht-
ened persons who saw through the fallacy and combated
it. In reference to a certain " balance '' which occurred
in the trade between Holland and England, and which
was a subject of much gratulation, Craik well observes,*
that it would be as irrational to suppose that the English
must necessarily be the chief gainers bv this trade, as it
would be to maintain that the productive laborer must
always be a greater gainer on the article he produces
than the capitalist who employs him. That the Dutch
were in the position of the capitalist, and the English of
the laborer, and that while the Dutch had the goods the
Eng-lish had the money; just as^ while the master has the
goods, the workman has his wages. But that the excess
of profit, or real advantag'e, should be with the laborer
rather than with the capitalist, may fairly be presumed to
be as unusual, and as little likely in the nature of things,
in the case of nations, as of individuals.
73. An attentive consideration of these various methods
of trading will shew what a complete phantasy the old,
and still too common, idea of the ^^ balance of trade " is ;
and as nothing more conduces to error and confusion in
any science than a nomenclature and technical phrases
which are founded upon misconceptions of the principles
of that science, so nothing has exercised a more malignant
influence upon legislation, and popular ideas generally,
than this phrase ; and it would be very desirable if some
means could be taken to discontinue its use altogether.
But as it docs occur in the course of trade that trans-
actions between nations have to be settled in specie,
we must now consider the operations of the foreign
exchanges.
74. The course of the foreign exchanges, then, en-
* History of British Commerco. Vol. ii., p. 155.
384 ELEMENTS OY POLITICAL ECONOKT.
tirely depends upon the fact of persons in one country
having to make payments to persons in another country,
from whatever causes these payments have to be made.
And there are but two causes which influence their rates :
first, the depreciation of one or both of the currencies
which have to be exchanged; secondly, the relative
amounts of money that have to be remitted from one
country to the other.
76, Between two cities, say London and Paris, whose
natural intercouse was not impeded and obstructed by
barbarous laws, it would probably happen that the debts
of the merchants of London to uiose of Paris would be
about equal to the debts of the merchants of Paris to
those of London, in an ordinary state of commerce. Thus,
if A of London is the creditor of B of Paris, and B^ of
Paris is the creditor of A^ of London, to equal amounts ;
then, instead of B of Paris sending the actual money to A
in London, he may go to B^ in Paris, and pay him t^e mo-
ney, and so purcliase from him the debt due to him by A* in
London, which he would send to A ; and A, on presenting
the bill to A\ would receive the money ; and so all the
debts would be settled without transmitting any bullion
between the two places. In such a case as this, as the
full value would be given for the bill, the exchange would
be said to be at par.
76. Supposing, however, tliat while the exchanges
were in this state of equilibrium, in which the demand
and supply of bills, both in London and Paris, were
exactly equal, tliat is that each of them would have to
send and receive the same sum, it should happen that
from any cause whatever, no matter what, there should
be a desire on any particular day to send more money
from one side than it had to receive. Let us suppose,
for instance, that on any particular day London should
vrish to remit to Paris £105, when it only had to receive
£100, it is evident that the demand in London for bills
would be £105, and tlie supply only £100. But as the
London merchant has to provide for bis debt in Paris,
TEBOSr OF TH£ BXCHANGSS. 385
and the cost of transmittiiig the bullion CeJIs upon him,
it is eyidentl J his interest to give a little more than the
£100, in order to save this expense of transmission ; and
it is very evident that this limit is the cost of sending the
money from one place to the other, or about 15s. Gonse*
quentlv, if the competition for bills increases, the price of
a bill m Paris will rise to that extent; but it will not go
beyond that limit, for then it becomes cheaper to send
bullion. It is clear, therefore, that those who are in time
to buy bills at that price will do so, and those who come
too late, when all the bills are sold, must send bullion.
In such a case as this, bills on Paris would be said to be
at a premium. On the other hand, if similar circum*^
stances took place at Paris, bills on London would be ata
premium.
77. In this case we have supposed the demand at
either place to exceed the supplv, or to increase from par
— but it is quite manifest that me reverse case may hap-
pen, and that the demand at either place may fall short of
the supply, and then the phenomena will be reversed.
For in such a case the Paris merchant wishes to sell his
debt on the London market, in order to avoid the expense
of transmitting bullion from Paris to London, but as the
expense of sending that is known, it is clear that he will
not sell his debt for any sum lower than the expense of
sending bullion, and consequently he will not sell hia
debt for a lower sum than £99 5s., and the competition
of merchants to sell their debts may lower the exchange
to that Umit, but not beyond, and those merchants
who cannot get any one to purchase their debts at
that price will be obliged to send bullion to discharge
them.
78. We thus see that the state of the exchanges
arising out of the cross remittances of money is a simple
example of the formula for prices in our second chapter,
with the exception that the variation in the rates of ex*
changes never can exceed a certain definite sum, namely
twice the cost of sending bullion frt>m one place to the
1
38^ ELEKARTS OF POLITICAL SOOaTOUr.
other ; thus, if London be taken as the standard, the tenge
of yariation of the exchang-e with Paris can never exceed
80s., either 15s, above par, or 15s. below par. For if the
state of demand and supply would have a tendency to
cause a greater variation than that, a transmission of bul-
lion immediately arises.
79. The exchange between the whole city of London
or England and the whole city of Paris or France is sim-
ply the sum of the transactions of each individual trans-
mitter of money,but as individuals would lose a considerable
time in going about discovering what other persons had to
receive remittances, or wished to transmit them, that is,
those who wished to buy or sell bills, there are persons
who make it their business to act as agents between the
purchasers and sellers of these bills. Thus, if any London
merchant has a debt to receive from Paris, he endeavours
to sell the bill on the Exchange, and if he has a debt to pay
in Paris he endeavours to buy a bill on the Exchange.
The competition between the buyers and sellers of buls
will act exactly in the same way in causing their prices to
rise and fall as the prices of other conmiodities, always
bearing in mind tliat the difference paid as a premium ror
bills will never exceed the cost and charges for remitting
the specie itself, and when all the bills against the country
whicu has the smallest amount of cash to send have been
set off against the bills upon that which has the largest
amount to send, the difference must be sent in specie.
And though any single merchant might have great difficulty
in ascertaining the proper rate of exchange between two
countries on any particular day, yet when all these debts
and credits are brought into one great focus, as the Ex-
change, which is the great debt mai'ket of Europe, their
market value is settled just in the same way as that of any
other commodity.
80. When one country, say London, as the repre^
sentative of England, has a sudden necessity to miake
purchases of a large amount in another, as, for instance^
to buy com in New York, owing to a failure of the crops
THBOBT Olf THB BXCHAHOSS/ 387
in England, before New York has had the time or neces-
sity of making an equal amount of purchases in London,
it is quite evident that a greater quantity of bullion must
be remitted to New York to settle accounts than vice
versa. Consequently bills on New York will be at a pre*
mium, and the exchange is said to be adverse to London,
which means that a higher price must be paid in London
for a bill on New York than it purports to represent, an4
if the premium rises beyond a certain amount, then bul«
lion begins to flow out. On the other hand, if Npiy
York suddenly commissions a quantity of goods fromi
London, before London can require an equal amount from
New York, it is evident bills on New York being in
excess of the demand^ the price of them will fall to 9 dis<-
count, and the exchange is said to be in favor of England,
because it requires a less sum of money in England to
purchase a bill on New York than it purj^orts to represent,
and as soon as the discoimt exceeds the cost of transmissio|i
of bullion, it will flow in.
81. When, therefore, the exchanges are unfavorable,
it shews that bullion has a tendency to leave the country,
and when they are favorable that it has a tendency to
flow in, but in neither case will it actually do so, until
the diflerence exceeds the cost of transmission of bullion.
82. When the exchanges are so adverse to England
as is described in the last section but one, if the English
debtors could purchase goods cheaply in England, which
would sell in the New York market for the amount of
their debts, they would of course prefer to send them,
but if commodities are too dear in England, or too cheap
in New York, from overabundance, it is clear that nothing
but bullion will be sent; and bullion will continue to be
sent, unless the prices of English goods can be so reduced
or the price in the foreign market raised. As it is wholly
out of the power of English laws to raise tlie prices in
foreign markets, we shall see hereafter that it is one of
the objects of the present banking laws of lingland to
compel such a reduction in the prices of home goods as
z 2
dd^^ ELEMEKT8 OF POLITICAL ^COKOKT.
gfaall enable them to be exported instead of Bpecie, under'
the circumstances we have been considering.
83. Such a state of things as this would not last
for any continuance of time between two coiinitries whose
intercourse was free ; and it would have a natural t«i«
dency to correct itself^ because the transmission of bullion
between two such places as London and New York is the
least profitable species of traffic that can be. Such a
violent and sudden disturbance of the usual course of ex-
change is usually caused by a great and sudden dearth of
some article of great and pressing necessity. Thus, the
terrible failures of the potato and grain crops in the United
Kingdom caused a sudden, and imperative, and immediate
demand of food for instant use. Such a deficien<^ as
this would require to be satisfied far quicker than any
demand that could arise from home goods would operate
to restOlPe* the exchanges, and the payment of such quan-
tities of'^eopn as wer^ required could only be made in
specie. Thus, New Yorx, which may be taken as the
centre of American trade, is the great market for com and
breadstufis. When the great failures in the British crops
took place, immense importations were rendered necessary^
but there could be no corresponding demand for En^ish
goods of equal rapidity, so that it became necessary to
pay inunediately for the corn with specie, and not with
goods. Consequently, the exchange became adverse, and
bullion flowed out in great quantities.
84. This state of things, however, had a natural
tendency to correct itself. 1 he Americans having a great
quantity of money poured in upon them for their corn,
liad a natural impulse to purchase, and in the course of
time they sent over large orders for English manufactures,
and the necessary consequence of food being at a high
price was, that manufactures were low, and so very liu^e
exports of our goods took place, larger in amount than
we required to be returned in corn, and so, after some
time, the Americans had to remit money for their pur^
i^hases in the English market^ and the exchanges again
THBOBT 09 TH£ SXCHANQB8. 389:
became favourable, and tbe specie which had lieen ex«*
ported in payment of the com was brought back again
to England in payment of the goods, and the former state,
of things was restored.
85. This violent disturbance of the usual state of
trade, and the abrupt oscillations of the exchanges, first
one way and then the other^ were unprofitable to both,
parties on account of the loss occasioned by the double
transmission of specie. Moreover the enormous efflux of
specie on several occasions caused serious alarm in the.
minds of statesmen of this country for the stability of our
paper currency, which all purports to be payable in coin
to bearer on demand, and we shall see the professed in-
tention of the Bank Act of 1844 is to enforce a diminu*.
tion in the quantity of Bank of England notes in the same
ratio as the specie in its coffers diminishes.
86. Some writers insist that an unfavourable state
of the exchanges is an encouragement to exportation.
Thus, if the exchanges between England and any place
are unfavorable to England, the bills upon that place
wiU seU at a premium in the London market, and if a
merchant sends goods there, and draws bills upon the
place, he can sell them at a trifling premium, and to tiiat
extent he can afford to purchase goods at a higher price
than if the exchanges were more favourable. But the
extent to which this can operate as an inducement to
export to any particular market must be so exceedingly
minute, that we much doubt that it can have any practi*
cal importance; and the terms used by some of these
UTiters seem to be somewhat wanting in clearness, as to
the cause of the state of the exchanges. Every merchant
who has a debt to pay to a foreign country, will always
endeavour to pay that debt in goods, rather than in^
specie, whatever be the state of the exchanges, if the state
of the prices in the two markets will let him do so at a
profit, and it is the state of the prices in the two markets
that governs the state of the exchanges, as we have seei^
in the operations previously described in this chapter, \^
390 ELSMxns OF rauncAL BOCMMicr.
is certainlv undeniable, thmt if a merchant can discover
goods which can be profitably remitted in an unfaTorable
state of the exchanges, he may derive a small additional
pn>fit upon that account : but it is very small, and a small
comparative increase in prices will annihilate it altogether.
"^ Is small margin does undoubtedly afford a slight addi-
lal inducement to export, but it is so very minute,
when at its greatest extent, that it can have no influence
in any great emergency : and we have already said that
the exchanges being un&vorable at all, is a proof that
this limit has been passed. The iact is that the exchanges
do not become unfavourable until after the merchants
have taken all these thins:s into their consideration. It
cannot be too carefully observed, that merchants will not
export specie except m the last resort. They will ex-
haust every other device before they come to that, and
the exchanges do not become unfavourable until they find
that there is no commodity which they can export to pay
their debts with« and there is no question of exchanges
until the necessity arises for transmitting specie. To say,
then, that an unfavourable state of the exchanges makes
it profitable to export, seems very like offering a cheap
bargain to a man who has no money to buy. So that we
may say that the state of the exchanges is the result of the
operations of exporting and importing, and the prices of
articles and the state of the exchanges are not the causes
of export and imports.
^*'' We have seen by the preceding considerations
that there are two separate circumstances that influence
the figures, which denote the state of the exchan^
between any two countries, at any particular time. The
first is the relative intrinsic condition of the currency of
each country* and secondly, the comparative remittances
from whatever cause arising, that have to be made from
one to the other. The" first is called the Nominajl
ExcHAKGK, and the second the Real Exchange. And
these two causes may alwavs operate in similar or con-
trary diivctions, and the actual result will be a modifica*
/ THSOBT OS* T9B BXCQANGSS-. .391
tion of thd two. Now, we have endeavoured to show that
the real exchange can never vary beyond certain limits,
which are always capable of bein^ ascertained to a very
great degree of accuracy. But tne first cause, or the
nominal exchange^ may vary to any extent whatever;
there is no limit to the depreciation which the national
currency may undergo — as, tor instance, under the issue
of assignats by the French revolutionary government —
and so the foreign exchanges may sink to any state of
depression. Now, if we observe the exchanges for any
continuance of time, and see that iixey continue depressed
to a greater extent than the real exchange, which is by
nature limited, will warrant, we arrive at the irresistabfe
conclusion, which is the great axiom that connects the
relations of the currency and the foreign exchanges-*^
TTiat if the foreign exchanges continue depressed for anjf
length of time bet/ondthe limits of the real exchange^ that
BXCESS IS THE PBOOF, AND THE MEASURE, OE THE DEFBECX-
ATION OF THE CUBRENCY.
88. It is, of course, scarcely necessary to observe
that this rule only applies to the exchanges with those
countries, which like Hamburg, Amsterdam, or Venice,
always guaranteed an absolute maintenance of the legal
standard, or like France, which ever since the restoration
of specie payments, after the abolition of the assignats, has
always maintained her currency at its full weight and
purity. With countries like Portugal, which allowed its
currency to become depreciated, the nominarexchange
with England would of course vary according to the
comparative depreciation of the two currencies.
89. This principle, connecting the currency and the
foreign exchanges, is evidently identical with the one
we have before considered respecting the mint an^
market price of bullion. The^ both simply arise from
placing the currency in a position where it will have no
estimation beyond its intrmsic value as bullion, and witli-
drawing it from one where it is influenced by the local
associations of popular opinion. The test of the home
392 ELBMXHtS OV lOUTiCAL MCOttOltX.
market of bullion is more satisfactory, because it is mom
rapid in its action, and the difierences that majr arise
from the advantage of haying the metal in one form or
the other are reduced to a much narrower limit than the
real exchange between any two countries, and are not so
liable to \upy. But though the necessary correctioii to
be applied is, somewhat more intricate in one case than
the other, the principle is identical; and we may now
recapitulate the incontrovertible axiom on the subject in
the following words : —
The rise of the market price above the mint price qf
gold, beyond a small quantity denoting the cost of change
tng the metal from one form to the other ^ and a Jail i^
the foreign exchanges beyond the limits of the real es^
change^ are the proof and the measube of the dbfbk-
CIATIONOF THE CUBBENCT.
90. This law which carries with it the most self
evident conviction to any one who is capable of under-
standing the reasoning upon which it is founded, was
a subject of great contention for about 20 years in the
b^imiing of this century. Some traces of it are dbco*
verable in earlier writings, but it never assumed practical
importance until the paper currency, or the issues of the
bank of England, were inconvertible and unlimited. In
accordance with what seems just, we shall call it Lord
Sana's law of the currency ; not because perhaps he was
the first to think of it, but he certainly bore the most con-
roicuous part in establishing it. It is the comer stone ci
the whole currency question, and must be carefully im*
pressed upon the memory. No doubt its utility is in
abeyance at present, but the time may come again, whenit
may be useful.
91. We may endeavour to enforce this expression by
another form. If the coin is depreciated below the
standard, the market price of bullion must rise above the
mint price, and the foreign exchanges must fidl, because
in the former case is expressed how many of the depre*
ciated pieces will be required to purchase a fixed amount
THIOBY OV THE BXOHAKQES. S93
t]f bulfion, and of course more 1>ad pieces are required than
good ones. In the latter is expressed the number of
good foreign pieces a fixed number of depreciated pieces
will purchase. In the one case it is what number of
pieces will be required to purchase a fixed amount of
bullion, in the other how much bullion will a fixed num-
ber of depreciated pieces purchase. Hence, it is clearly
seen that one must £Edl necessarily, by exactly as much
88 the other rises.
02. It has several times happened, that when the
nominal exchange was against England^ on account of
the depreciation of the currency, the real exchange was
in her favor. Thus, in 1694, the nominal exchange
between London and Amsterdam was 25 per cent, against
England on account of the depreciation of the currency ;
but the real exchange was in her fi&vor, and so diminished
the apparent depression.
93. Between countries in which there are no restraints
upon trade, the exchanges will never vary very much,
except on some sudden emergency; but there are
countries with which, owing to the prohibitive laws
which still infest their commercial codes, the exchanges
are permanently unfavorable, because they will take
nothing but bullion for their commodities. Kussia is one
of these countries, and hence, if not modified by other
circumstances, bills upon Russia would always be at a
premium ; but here again the efiect of trafficking steps
m, which always has a tendency to equalise prices. The
merchant (if we may call him so) who deals in bills, acts
upon the same principles as the dealer in any other com-
modities, he buys them where they are cheapest, and sells
them where the^ are dearest. Hence, he will try to buy
iqi Russian bills cheap in other exchanges, or debt
markets, and sell them in the London debt market. On
the other hand, from the course of trade between England
and Italy, the debt which Italy owes to England is usually
creater than the contrary ; hence, Italian bills will usually
fie at a discount, or cheap, in the London debt madiet
994 ELEMEinS OF POLITICAL XCONCMr.
So the bill merchant buys them up cheap here, and sendfl
them to some other market — Pans, for instance — where
they may be at a premium. By these means, the price
of bills IS raised where they are cheapest, and depressed
where they are dearest ; and the general result will be to
melt all the differences between separate countries into
one general result, so that the exchanges will not be
favorable with one country and adverse with another, but
they will be generally adverse or favorable with all the
rest of the world.
94. Supposing, however, a merchant has to remit
money to Paris while the exchange with Paris is un&vor-
able to England, he may possibly discover a more advan-
tageous way of remittmg it than by buying a bill on
Paris directly. Thus, for instance, while bills on Paris
are at a premium in London, those on Hamburg may be
at a discount, and bills on Paris may be at a discount in
Hamburg. So if the merchant buys a bill on Ham-
burg and sends it to liis agent there, and directs him to
purchase a bill on Paris with the proceeds, he may be
able to discharge his debt in Paris at a less sum than he
would have to pay for a Paris bill in London. This
circuitous way of settling his debt involves additional
charges for brokerage, commission, postage, &c., but the
effect of it is still further to equalise the exchanges
between London and all other countries. This circuitous
method is called the arbitration of exchanges^ and the
sum which is given in London for the ultimate price it
realises in Paris is called its arbitrated price. When only
three places arc used in the operation as above, it is
called simple arbitration. When more than three are
employed, it is called compound arbitration. The prac-
tical rules for working out these results are very simple,
and will be found in any technical book on the subject.
But it is very evident, that the quicker, safer, and cheaper
the communication between countries become, the less
room will there be for such operations, because the limits
of the variation of the real exchanges, which are the
THBOBT an Tfift fi^CHAKOSS. 305
margin which renders such transactions possible, will
constantly diminish.
95. When one country is indebted to another in a
very large sum of money, or when one country agrees to
lend a large sum to another, the method of transmitting
it to the best advantage to the remitting country is an
operation of considerable nicety and delicacy. If the
sums to be remitted were very large, the expense and
danger of the transit of the coin would have been very
considerable in former times ; but since the introduction
of railroads, and greater internal security, such con-
siderations would have little influence at the present day.
But an actual and sudden withdrawal of a very lar^
amount of bullion from a commercial country would
cause the most disastrous consequences, when so many
engagements had to be met at a fixed time. When such
necessities^ therefore, did arise during the last war, the
operation was effected by means of bills of exchange,
and the object to be obtained was, to prevent a sudden
vacuum being caused in the currency of one country;
but, by operating on all the different centi'es of payment
of Europe, to cause a gradual and equable flow from all
of them to the place of payment. We may give, as an
instance, the following, as narrated by Mr. Boyd, who
had the management of the operation. In the year 1794
the English Government a^eed to make a considerable
loan to the Emperor of (jermany, and the money was
required to be sent from London to Vienna, causing as
little disturbance as possible in the English money
market : —
" The remittance* of so large a sum as £4,600,000 I considered
as a matter of infinite difficulty and delicacy, so as to prevent its
producing any remarkable effects upon the course of exchange.
It was necessary to vary the modes of remittinff, and to make use
of the various means for that purpose, presented by all the different
exchanges of Europe. It was not necessary to remit bills upon
• Evidence of Mr. Boyd before the Committee of Secrecy of the House
of Lonls, 1797. p, 110.
396 BLEXXNTS OY FOLITICAL SCOHOW.
Hamburg onljTy becauae it fireqnentlj happened that it anaweied
better to remit to Hamburg upon other plaoeSi such as Madrid^
CadiX| Leghorn, Lisbon, Grenoai &c.. than to remit direct upon'
Hamburg ; and having constantly orders from Vienna with regard
to the rates of the different remittances to be made, our attention
was directed to the accomplishment of these orders, on the best
possible terms. In fine^ it was necessary to take bullion, bills direct
upon Hamburg, and bills upon other places, all into our means
ot remittance, and to make the most of these modes of remittance
without giving the decided preference to that mode which was the
most favorable, because any one mode invariably adhered to, would
soon have exhausted and destroyed that mode ; whereas by turning
occasionally to all the modes, and not sticking too long to anj one
particular mode, we had the good fortune to make upon the whole
very favorable remittances."
96. We may mention another instance of a snnilar
operation quoted by Mr. Me Cullocli :• —
^* In 1804, Spain was bound to pay to France m large subsidy,
and in order to do this, three distmct methods presented them-
selves. First, to send dollars to Paris by land ; second, to remit
bills of exchange directly to Paris ; thirdly, to authorise Paria to
draw directly on Spain. The first of these methods was tried, but
was found too slow and expensive; and the second and thud plans
were considered likely to turn the exchange against Spain. The
following method by the indirect, or circular, exchange was there-
fore adopted. A merchant, or banquier^ at Paris, was appointed to
manage the operation, which he thus conducted. He chose London,
Amsterdam, Hamburg, Cadiz, Madrid, and Paris, as the prinoapal
hinges on which the operation was to turn ; and he engaged corres-
pondents in each of these cities to support the circulation. Madrid
and Cadiz were the places in Spain from whence remittances were
to be made, and dollars were of course to be sent where they bore
the highest price, for which bills were to be procured on Paris, or
any other place that might be deemed more advantageous. The
pnnciple being thus established, it only remained to regulate the
extent of the operation, so as not to issue too much paper on Spain*
and to give the circulation as much support as possible from real
business. With this view, London was chosen as a place to which
the operation mieht be chiefly directed, as the price of dollars was
then nigh m England, a circumstance which rendered the propor-
tional exchange advantageous to Spain.
* Commercial Dictionary, p. 581. Edit. 1854.
THBOBt OF THS SXCHAVOSS. 897
'^ The business commenced at Paiisy where the negociation of
drafts issued on Hambois and Amsterdam^ served to answer ibe
immediate demands of ue state; and orders were transmitted to
these pkoes, to draw for the reimbursements on London. Madrid,
or Cadiz^ according as the course of exchan/re was most tavorable.
The proceedings were all conducted with judgment, and attended
with complete success.''
97. We have now to treat of a cause of the move-
ment of bullion which has acquired an importance in
modem times, far exceeding what it ever did before, in
teuitj it is now probably more important than any other,
viz., a difference in the rate of interest or discount be-
tween two countries. In former times when the com-
munication between different places was slow and ex-
pensive, before the days of railroads and steamers, a
considerable difference might exist in the rates of inter-
est in two places, without causing a movement of bullion
from one place to the other. But that is not possible now.
The communication between places is so rapid now that
directly the difference between the rates of interest in
any two places is more than sufficient to pay for the
expense of sending the bullion, an inunediate flow of
bullion commences from one place to the other. And
this is in exact accordance with the usual mercantile
Srinciple that operates in every other case, that if the
ifference of price of the same article in any two markets
is more than sufficient to repay the cost of sending it
from one to the other, it wiU be sent; and this movement
will continue as long as the difference in price continues.
Now, if the rate of discoimt in London is 4 per cent,
and that in Paris is 6 per cent, the simple meaning of
that is that gold may be bought for 4 per cent, in
London, and sold at 6 per cent, in Paris. But the
expense of sending it from one to the other does not
exceed ^ or J per cent., consequently it leaves IJ or 1^ per
cent, profit on the operation. The natural consequence
inunediately follows, gold flies from London to Pans, and
the drain will not cease until the rates of discount are
898 ELEMXfrrs op FOLrncA]:< KOONOinr.
equalized. It used to be the common delusion of mer-
cantile men tliat ^o^d was only sent to pay a balance
arising from tlic sale of goods, and tliat therefore it mast
cease of itself whenever these payments were made. But
tliis is a profound delusion. When the rates of discount
differ so nmch as is supposed above between London
and Paris, pei*sons in London fabricate bills upon their
correspondents in Paris for the express purpose of sell-
ing them in London for cash, which they then remit
to Paris, and whicli they can sell a^in for 6 per cent.
And it is quite evident that this dram will not cease so
long as the difference in the rates of discount is maintain-
ed. Moreover, merchants in Paris immediately send over
their bills to be discounted in London, and of course
have the cash remitted them. Now, the only way of
arresting such a drain is to equalize the rates of discount
of tlie two places. These simple facts are a perfectly
conclusive answer to those writers, and they are many,
who complain of the variations of the rate of discount by
the Bank of England, and suppose that it is possible to
maintain a uniform rate. Consequently, at the present
day it is the imperative duty of the Bank of England to
keep a steady watch upon the rates of discount of
neighbouring countries, and to follow these variations
so as to prevent its being profitable to export bullion
from this country.
98. As an immediate consequence of the preceding
principles, it follows that a political or monetary convul-
sion in any country will immediately turn the foreign
exchanges in favor of that country, if such an event is
not prevented by the issue of an inconvertible paper
cuiTcncy. Tlic reason is plain, any political or monetary
convulsion is attended by a great destruction of credit
Now, that credit while it existed performed the functions
of money, but as soon as it is destroyed there is an
intense demand for money to fill the void. Money
rises enormously in value. Multitudes of persons are
obliged to sell their goods at a sacrifice. The con*
THSOBT m tniB SXCHAHGSS; 399
sequence is that money having risen greatly in value, both
with respect to goods and debts, an immense quantity
will flow in from neighbouring countries. Inus, in
1801'>2 there was a great commercial crisis at Hamburg.
The rate of discount rose to 15 per cent. That imme-
diately drained the bullion from the Bank of England.
In 1825, there was a great commercial crisis in England.
For a considerable period the bank, by making extravagant
issues at a low rate of discoimt, had turned the foreign
exchanges against the country. But no sooner did the
crisis occur in December than the foreign exchanges
immediately turned in favor of it. Exactly the same
thing happened in 1847. No sooner had the crisis in
that year &irly set in than the exchanges turned in
favor of the county. In the French revolution in 1793^
and subsequent years^ immense quantities of inconver-
tible paper were issued, that kept all the French ex-
changes in a very depressed state. In 1796, this paper
currencrjr was annihilated^ and the exchanges immediately
turned in favor of France. The same thing was observed
in 1848. Things were to be had so cheap then that
multitudes of persons went over to buy.
99. The simplest way of stating the subject of the
exchanges, is, that the figures at the different markets
denote the value of the same sum of money at each of
them. Or what must be paid at one to place such a
sum at the other. Thus, for instance, if the state of the
exchanges were, for example, 25 at London and 22
at Paris, it would mean that the same sum of money was
wortii 25 francs in London, and 22 francs in Paris; just
as a quarter of wheat may be worth 45s. at one market,
and 40s. at another. In such a state the exchange would
be against Paris, and it would manifestiy be a great loss
to transport bullion from London to Paris, but a profit to
do the reverse, just the same as it would be a great loss to
transport wheat from a market where it was worth 45s.,
to one where it was worth only 40s. While the ex*
changes between London and Paris were in such a state,
400 ELSMBNTS OF FOUnCAL
the Revolutionary government conceived tfie sapient
project of ruining the British governments by buying
up all the bullion m England. This was as wise as if a
man were to try to ruin his enemy by buying up all his
money at the rate of 21s. in the pound. It is not very
difficult to see who would be ruined first. Sir Francis
Baring exposes the folly of the French government with
keen severity. But the English government outdid the
French if possible in folly, for it md every thing it could
to prevent this ; that is, it refused to sell its pounds for
21s. each. Sir Francis well points out that ike British
government should have done everything to fiunlitate
such operations.
100. The term par of exchange is also used in an-
other sense, than the one we have already described, as
applied to the exchange of one currency for another.
When goods are sent from one place to anothw, tl^
freight or carriage of them is charged in money, which
is always added to their price ; but when bankers remit
money, the charee is made by keeping it a certain number
of days in their hands, during wmch thev enjoy the inte*
rest of it, or if the money is to be paid immediately at
the place it is remitted to, the interest of it at the market
rate for a fixed number of days is deducted. The number
of days between two places has been fixed by long cus-
torn, and is called the par of exchange between them.
Thus, if a person pays m a sum of money into a bank in
Edinburgh, and wishes to receive a bill payable in London,
the Edinburgh banker will ^ve him a bill on his London
agent^ for the amoimt payame twenty days after date, and
the interest of the sum for that time, and also three days
of grace, defrays the banker*s charges for sending the
money from Edinburgh to London ; or if the transmitter
wishes to have a biU payable at sight in London, the
Edinburgh banker will deduct the interest at the market
rate for twenty three days, and give him a bill for the
remainder payable at sight. These twenty days are called
thenar of exchange between London and Edinburgh*
They are also called the usance.
THEORY OF THE EXCHANGES. 401
101* The different dates forming the par ofexcJuxnge
or usance^ between different places, have grown up by
custom, and were of course settled long before the modern
improvements in the speed and safety of locomotion, and
they certainly seem excessive at the present day. Until
the year 1825 the usance or par of exchange between
Edinburgh and London was fifty days. In that year an
Edinburgh banker offered to transmit money to London at a
usance of twenty days^ and the other banks were obliged
to follow his example. But in the present time, when
several express tndns run daily from one city to the other
in less than twelve hours, and the cost and danger of
transmission is so much reduced, a usance of twenty days
seems somewhat excessive. A usance of ten days woidd
probably be sufficient to cover all risks and charges, and
leave a profit besides. And the same observation applies
to most foreign cities as well.
102. We have seen that whenever English merchants
have payments to make to their correspondents, they will
always endeavour to discharge their debts by remitting
foods instead of specie, if the state of the home and
>reign markets will permit them. It is, therefore, of the
utmost importance to the country that its manufactures
should be the cheapest and best possible, and that they
should be producea in the greatest possible variety ; as
the greater the variety, the more will the merchant's
chances be multiplied of being able to avoid the necessity
of paying in bullion. But as there are a multitude of
commodities, both natural and manufactured, which are
not capable of being produced in this climate, it is evi-
dently a most desirable object to make this country the
great entrep6t for the productions of foreign commodi-
ties, so that not only may the English public be supplied
with any article they require at the shortest notice,
but the English merchants may have the greatest num-
ber of opportunities of paying their debts in commodities,
rather than in money, by exporting these foreign pro«>
ductions.
A A
402 ELEMENTS OF POLITICAL BCONOMT.
1 03. The revenue of this country, as well as every
other, has always been greatly if not chiefly raised by
duties levied on all foreign imports. This duty used
formerly to be levied on the merchant at the time of the
importation of the goods, so that he had to advance money
for duties long before he could reimburse himself froui
his customers. This, of course, led to great monopolies,
as only the rich merchant could afford to advance these
duties at once, and they required to increase the price of
the article to the consumers to repay themselves for the
loss of caf)ital and interest. Not only was the article
made dearer on this account, but it diminished importa-
tion very much, and so made foreign commodities much
scarcer than tliey would otherwise have been. And all
these causes encouraged smuggling, adulteration, and
frauds of all sorts. In the year 1732, Sir Robert Walpole
brought foi'ward a scheme by which tobacco and wme
mio'ht be deposited in public warehouses by the importers,
under proper security, until wanted for home consump-
tion, when the duty should be paid; and if they were
exported, then they should be free of duty. The immense
advantages of this plan were evident. By having the
various ])roducts of foreign countries brought here, and
kept in security at a small warehouse rent, it would have
caused foreigners to resort to this country to supply them-
selves with all sorts of commodities, and it would have
afforded the English merchants a much greater variety of
productions at their command, to select for payment of
their bills. This, however, was the chief feature of Sir
Robert Walpole's famous excise scheme ; and by the dis-
honest clamors of persons who were interested in main-
taining the abuses and knaveries of the old system, the
nation was driven into such a state of senseless phrenzy,
that it nearly caused a rebellion, and was obliged to be
abandoned, and was never brought forward again till
1803, when the first act for establishing a warehouse
j9ystem was passed.
104. The immense advantage of the warehousing
THEOBY OP THE EXCHANGES. 403
system in preventing the export of specie is apparent.
But it also operates with equal efficacy in causing the im-
port of specie, as whenever commodities are scarce and
dear in other markets, foreign merchants know that they
have only to come and buy them in England. By this
admirable system this country is made the market of the
whole world.
105. From the considerations detailed in the foregoing
chapter, we see upon how many complicated circum-
stances the ebb and flow of bullion depends, and how
necessary it is to consider the causes which influence its
transmission, before we can pronounce whether it is ad-
vantageous or the reverse to the country. We see what
an utter fallacy the old notion is, that an influx of bullion
is in itself, and without reference to its determining causes,
a sig^n of prosperity. There is one conclusion which may
be received with the greatest confidence, — tliat when it is
caused by the unnatural restrictions upon trade, and by
the arbitrary interference of laws with men's natural
instinct to trade in the way most conducive to their own
interests, it is decidedly the least advantageous article of
commerce. We see that we can no more assume that
trade is profitable to us because specie is remitted to this
country, than we can assume that money payments are
necessarily profitable to the tradesman or manufacturer.
On this subject, as it will be found, as well as on every
other commercial subject, we seem to have exhausted
eveiy modification of folly and absurdity, before we
finally arrived at the simple and cardinal rule which the
French merchants announced to Colbert more than a cen-
tury and a half ago — " Let things alone/' and the belief
that men have generally the intelligence to discover and
act for their own interests, far better than any government
can do for them.
. 106. We must now consider what the eflTect of an
inconvertible paper currency will be on the foreign ex-
changes, and the market price of bullion. So long as
paper is convertible, that is, the holder of it has the power.
A A 2
404 ELEMBMT8 07 POLITICAL XCONOMr.
to demand pajrment in gold for it at si^ht, it is very clear
that it cannot circulate at a discount, because if it fell to
a discount every person who held it would immediately
§o and demand gold for it. But if while it enjoys consi-
erable circulation, the power of convertibilitj' is suddenly
taken away, then it becomes in all respects equivalent to
a new standard just as much as gold or silver, and its
value will be affected by the same principles as these two,
viz., by the sole question of the qtuzntity of it in circala-
tion compared to the operations it represents.
107. Under the old system of making an attempt to
fix the value of silver and gold relatively to each other,
there was no power of convertibility of one into the other
similar to the convertibility of the note. If silver fell to
a discount, as compared with gold^ no persons could
demand as a right to have their silver exchanged for
gold, consequently the inevitable result of a considerable
change in the quantity of either metal was a change in
their market values. Thus, in 1794 gold rose to 84s. if
purchased with silver bullion ; now, if, speaking by analog,
the silver coin had been convertible mto gold, the diue-
rence never could have arisen, any more than a bank note
convertible at the will of the holder of it could circulate
at a discount. Now, paper, when issued as a substantive
standard of value, follows exactly the same rules; if
only the usual quantity of it be issued, i. e.^ no greater
quantity than would have been issued if it were con-
vertible into specie, it will continue to circulate at its
par value ; but if these issues be continued, and if it be
deprived of the natural corrector of an over-issue, vi«.,
payment on demand, it is maintained in circulation, and
exactly the same result follows as attends an excessive
issue of silver, — it falls to a discount. Now, the silver,
coin may fall to a discount from two circumstances, either
if silver be coined with too great profuseness the exces-
sive quantity of it will diminish its value^ even though
the coin be of full weight ; or, if the silver coin be suffered
to fall into a degraded state by clipping and wearing,
THBOBT OF THB SXGHASQB8. 405
80 that it does not contam the full l^al weight of bullioti|
it then becomes depreciated. The apparent result in
j^gures will be just tne same in either case, guineas wUl
rise to 24s. or 30s. But as silver has an intrinsic value
of its own, and is, from its qualities^ a recognised measure
of value, it is not correct to apply the term depreciation
to it as long as the coin contains its full legal weight of
bullion. But the case is different with paper ; it is only
received on account of bearing a promise to pay a certain
quantitv of bullion on the £ace of it, and if it is not able
to fulfil that promise, it is depreciated.
108. It is evident that a diminution in value of the
coin cannot be followed by any difference between the
market and the mint price of bullion. By the meaning
of the words " mint price," however plentiful or however
scarce gold may be, an ounce of it in coin must always
be equal in value to an ounce of it in bullion. On the
other hand, a depreciation of the coinage must inevitably
be attended by a rise in the market price above the mint
price of bullion, because, however plentiful or scarce
gold is, three-quarters-of-an-ounce of it in coin can never
e equal in value to one ounce of it in bullion. Or we
may state it shortly thus--6uineas may rise to 25s. either
from depreciation, or from the diminution in value of
silver ; either because the sUver coinage is depreciated, or
because it is super-abundant. What is the test? It is
the mint price. If the coinage is debased, the market
price of silver will rise above the mint price, if it is
diminished in value it will not.
. 109. Now, as the paper currency has no intrinsic
value of its own, and is a mere parasitical growth upon
the metallic currency, it is clear tnat it is an inaccurate
term to apply the expression diminution in value to it at
all. One absolute nothing cannot diminish in value.
The only accurate word to apply to it is Dbfbeciation.
Twenty shillings in silver do not profess to be able to
command any quantity of Kold ; but a bank note pro-
fesses to be able to command a certain quantity of gold,
and if it cannot fulfil its promise it is depreciated.
406 ELEMEKtS OF POLITICAL ECOKOMT.
110. Now, if for the public convenience it be
deemed advisable to issue an inconvertible paper cur-
rency, the only way of maintaining its currency at par is
by limiting its quantity. We do not mean by this,
limiting its quantity to an absolute fixed amount, but by
devising some means whereby a greater quantity of' it
shall not be issued than if it were convertible into gold.
If more than tliis be issued^ it will be followed by the
same result as attends an excessive issue of silver^ it will
fall to a discount, which in this case is depreciation^ and
the necessary consequences of a depreciated currency
will follow, viz., tlie market price (or paper price) of
bullion will rise above the mint price, and the foreign
exchanges will fall.
111. Now, if such a state of things happens, the
proper remedy is to diminish the quantity of the
paper in circulation until the market price of bullion
is reduced to the level of the mint price. If the direct
power of demanding five sovereigns be taken away from
the holder of a £5 note, still, if he can purchase bullion
witli it in the market to the amount of five sovereigns,
it is an infallible proof that the note is current at par ;
and the limitation need not proceed beyond that. But
if this be not done, the next best thing is to allow all
persons to receive the notes at whatever value they
choose to put upon them, and let them make a dilBference,
if they choose, between the prices of articles when paid
in gold, or in paper. If this be allowed, no very great
inconvenience will take place in the internal trade of the
country beyond a certain loss of prestige which must
happen to an institution whose paper circulates at a
discount.
112. But suppose the law, with more zeal for the
honor of the paper currency than discretion, declares it
to be a crime to make a difference between paper and
gold, and a punishable offence to give twenty sovereigns
in gold for twenty-one pounds in paper — what will be
the consequence? Exactly the same as we have seen
- THBOBT OF THE BXCHANGES. ' 407
happened, when the silver and gold coins were improperly
rated^ tlie one which was underrated disappeared from
circiUation. We have seen this happen both in the case
of the gold com and the silver com. Now, when the
inconvertible paper currency is issued in too great abund-
ance, and has a tendency to overflow the channels of cir<r
culation, its natural effect is to raise prices when paid in
it. If people were free in their transactions, they would
gradually make a difference in price between payments
m paper and payments in bullion ; but if the owners of
the coin are prevented by law from receiving more for it,
than the same nominal sum in paper, they will do exactly
the same thing, as is invariably done when in a metallic
currency, part is depreciated and part is of full weight,
— ^they will either hoard or export it. At all events it will
disappear from circulation. Now, as the gold gradually
disappears, and paper issues multiply, people begin to
estimate all prices by transferring their ideas from the
gold to the paper, and the paper ends by finally displacing
the entire gold coinage.
. 113. The stamp on the coin is similar to the banker's
^^ promise to pay" on a note. The stamp is the guaran*
tee of the State that the coin docs actually contain
a given amount of bullion; the "promise to pay" is
the banker's guarantee that he can pay so much coin if
required. The convertibility of the coin into the legal
amount of bulUon * is the test of the depreciation of the
metallic currency; so the convertibility of the note into
coin is the test of the depreciation of the note. If the
power of demanding coin be taken away by the State^
the power of commanding a certain quantity of bullion in
the market still equally remains as the only test of its
value. The Mini price of bullion is the price paid in
coins of the full legal weight, the market price means its
price paid m the current coins, and a difference between
the two is the proof and measure of the depreciation
of the current coin. When paper became the standard
currency, the market price of bullion meant the j)rice of
400 YltUMWWM OT FOUnCAL BOOPOHr.
h when paid in the paper cnrrency, or ihe p^ier priee
of it; and by a parity of reasoning, tf the paper pnoe of
gold bullion rose above the Mint price, it was the proof
and the measure of the depreciation of the paper curremnf*
114. Whenever the currency of a country becomes
redundant, that is to say, that prices rise so much higher
in one country than in its nei^bours, that the value of
money sensibly diminishes, the natural conrective for such
a thing \& to take a certain portion of it out of circulation,
so that by diminishing the quantity of it, its value may
be raised. When people find that the same quantity of
gold will not purchase an e^ual amount of commodities
m this countrv as they will m another, their own natural
instincts will lead them to purchase commodities abroad
where thev are cheap, and bring them for sale here where
they are dear. The natural instincts of trade will^ there-
fore, produce an equilibrium in value in the currency of
neighbouring countries.
115. Now when the currency of a country consists
partly of paper and partly of gold and silver, it is quite
clear that only the metallic portion of it can be exr
ported in payment of foreign commodities. The paper
portion of it which has no value abroad, must remain at
nome. If the issues of the paper be continued, so as to
prevent the currency from recovering its value, the pro-
cess of the exportation of the metallic portion will go on
until it is entirely exhausted. Kthis be the case, the only
method of restoring the currency to its former value is by
diminishing the quantity of the paper, until the drain is
stopped by the enhancement of the value of the whole
currency. There is, however, a School of Doctrines that
maintains that as the gold goes out, paper should be
issued to supply the vacuum imtil the gold comes back.
But it requires little sagacity to see that if that be done,
the gold never will come back again, and the drain will
not cease until it is totally exhausted, and the only way
to bring it back again is to raise its value at home, which
can be done only by removing the plethora of paper.
THBOBT OF THB BXCHANQES. 409
When the currency is in its healthy state, the oscillations
of the exchange may be compared to those of a tight,
staunch ship, which has always a natural tendency to
recover itsw ; but when there is an excessive quantity
of paper, it is like the same ship waterlogged, when she
once heels over she never can recover herself until the
water is pumped out*
/
GHAPTMR V.
ON SOME THEORIES OF GURBENCY.
I"
^^ On subjects concerning whicli qpeonlatiYe minds are still diyided, a
writer does but half his duty bj stating his own doctrineS| if he doea not
also examine, and to the best of his ability, judge those of other
thinkers.*'
J. B. MiLU Intern of Logic. 4di Edit. YoL L, p. 299.
OH SOlfB THEORIBS OF CUBBEKOT. 413
CHAPTER V.
ON SOME THEOBIES OF GUBBENCT.
EXPLANATION OF JOHN LAW'S THEORY OF MONET AND TTS FUNDAMENTAL
FALLACY.— ALL ATTEMPTS TO REDUCE LAW^ THEORY OF MONEY TO PRACnCE
MUST NECESSARILY TERMINATE IN RUIN— ALL THEORIES OF CURRENCY WHICH
ATTEMPT TO FOUND A CIRCULATINQ MEDIUM UPON COMMODITIES, ARE FORMS OF
LAWISM.— CAPITAL IS THE ONLY TRUE BASIS OF A CIRCULATINO MEDIUM— CAPITAL
AND CREDIT, PRESERVINO AN EQUALITY OF VALUE WTTH CAPITAL, ARE ITS ONLY
TRUE LIMITS— FALLACY OF THE BANK THEORY OF REGULATING THE PAPER
CURRENCY BY THE DISCOUNT OF MERCANTILE BILLS— THE RATE OF DISCOUNT IS
THE ONLY TRUE METHOD OF REGULATING THE PAPER CURRENCY— FALLACY OF A
PREVALENT DOCTRINE OF PAPER ISSUES.
1. It now becomes our essential and most important
duty to investigate some theories of currency, which
have acquired great celebrity, not only from their histo-
rical interest as having led to some of the most extraor-
dinary and heartrending public calamities on record, but
because they are still extensively believed in at the
{)resent day. It is of essential importance, not only to
ay the true foundations of monetary science, but also to
point out the fundamental fallacies upon which some
specious, but fatally delusive theories rest, which have
brought the most disastrous consequences upon those
nations which have adopted them, as will always be the
case when the eternal laws of nature are systematically
414 ELEMENTS 07 FOLIXICAL EC0V0M7.
2. The first of these theories we shall designate as
Lawism, not because John Law was the original deviser
of it, but because lie was the first who wrote the most
forni<al treatise on it, and he had the opportunity of
carrying it out on the most extensive scale. His name,
therefore, must always be most prominently associated
with it ; and it is one so specious, but so dangerous and
so Avidely prevalent at the present time, that it requires
to be branded with a distinctive name, and to be combated
with all the power of argument that can be brought
against it.
3. The question shortly stated is this. All persons
except those who advocate an inconvertible paper cur-
rency, agree that a paper currency must represent some
article of value, and bullion has been generally chosen
for that purpose. Now, the idea has occurred to a great
many persons — If it is only necessary that a paper cur-
rency should represent some article of value, why should
it not represent any or all articles of value, such as land,
corn, silk, or any other commodities, and, among others,
the public funds? And this has actually been tried in
several instances, yet they have universally failed, and
in many cases have been attended with the most dreadful
calamities. Now, as this has uniformly happened, and,
as we shall shew further on, it must happen, it necessa-
rily follows that there must be some radical error in
the principle, and that it must violate some great law of
nature. And this is beyond all comparison the most
momentous problem in Political Economy — Why is it
improper to issue a paper currency on any other l)asis
than that of bullion? All the most eminent British
Stati?snien have instinctively resisted such proposals,
although repeatedly pressed to do so. No doubt it has
been a most fortunate instinct for the country, but all
their reasonings on the subject, if only pursued to their
legitimate consequences, tend to that result. The Bank
Act of 1844 was the first occasion on which a small bit
of this theory was introduced, which if only followed out
oir SOME THEOBiES ojf oubbency; 415
to its legitimate conclusion, would reproduce in this
country the horrors of the Mississippi scheme in France.
But though the British parliament by a blind, unreason-
ing instinct has always, with the exception just named,
resisted such fatal advice, this will not satisfy the
demands of science. Science imperatively demands a
reason wht/ such a plan is wrong ; she will not be satisfied
with a simple dogmatic assertion that it is wrong, even
though that dogma may be right, but she must know the
reason why, and until a true scientific reason is given why
such plans are fatal, there will be a constant demand
for them.
4. It is, moreover, the thing which has brought the
name of Law into such unhappy notoriety. Law has in
many respects very great merit as a writer. In many
respects he had clearer and sounder views on monetary
science, he had infinitely more practical insight and
scientific knowledge of what he was writing about, than
the most eminent of modem political economists. In
his various writings is to be found the refutation of all
the absurd follies of the government and of the Bank of
England in 1811. But all this was marred by a single
defect. He was the great advocate of what is now the
popular cry— basing a paper currency upon any article
of value besides bullion. The only difference between
him and our greatest statesmen is that he carried out
their arguments to their legitimate conclusion. He had
the opportunity of carrying this theory into effect, and
the result has been to obscure all his other merits, and
brand him for ever as a charlatan. Wliat, then, ivas his
error?
5. Upon sifting his theory to discover his error, we
shall obtain one of the most beautiful triumphs of pure
reasoning to be found in any science. We shall find that
the plausible scheme which we shall designate by liis
name, is founded upon a direct contravention of the
fundamental conception of the nature of a currency
which we have established in this volume, and the pro-«
416 EURfBRB OP wauacMJL moaoHBa.
pomtion wliich directly flawed finom it, vis^ tkat wken
there U rut debt^ ttiere can be no cwrrenof. We shall find
that tliefie awful monetai^ cataclysms which haTeahakeo
nations to their foundations, prodncinK calamities move
fell than (amine, tempest, or the sword, hare heen hroogjhfc
about \rj attempting to cany into pnurtioe a philo-
sophical iaUacy wliich inrolves a contradictioo in tenns.
6. It is impossible to say who first indented the theory
wc are going to notice; in fiu^ it must have sprung up
indigenously among almost any people who began to fimn
theories of paper currency, fieveral peraons about the
same time seem to have hit upon it. The eaiiiest we
know of was a certain Mr. Asgill, a member of parliament,
who paid much attention to commercial questions. The
most notorious precursors of Law were Ih*. Hugh Cham-
berlain, who brought forward a rival scheme to the Bank
of England in 1693, and Mr. Briscoe, one of the chief
promoters of the Land Bank in 1696. Clhamberiain's
ideas will be noticed a little further on. He stnmsly
accused Law of having stolen his ideas fiiom him, whu^
Law strenuously repudiates, and points out the distinction
between them, and it must be allowed that Law's ideas
were not so extravagant as Chamberlain's. Law first
published his theory in a tract, called ^^ Money and Trade
considered," at Edinburgh, in 1705. He was the son of a
goldsmith, and of dissipated habits, but of an extremely
acute intellect; and up to a certain length, his views are
sagacious and correct— much more so, indeed, than those
of many writers at tlic present day. He observed the
cxtretnc poverty and barbarousness of Scotland, which
ho thouglit might bo cured by bringing an additional
quantity of money into the country; and as silver was
scarce, he attempted to devise a scheme for providing a
substitute for it.
7. lie begins by many very sound and acute remarks
on the value of commodities, and the causes of their
change of value, lie describes the qualities which fitted
silver to be used as money, above every otlier commodity*
OK SOlOS TBEOBISS OF CUBBENCTr 4l7
He attributes the very inconsiderable trade of Scotland
to the small quantity of money she possessed.* This is
the first fundamental fallacy, because the fact was, it was
just the reverse; Scotland had little money becatcse she
had little trade. He, however, perceived the fallacy of
lowering interest by law. He then goes on to consider
the various means which have been employed to increase
the quantity of money. He says that some countries have
raised money in the denomination; some have debased
it; some have prohibited its export under the severest
Eenalties; some have obliged traders to bring home
ullion in proportion to the goods they imported. But
he says that all these measures have been futile and vain,
and none of them have been found to increase, or pre-
serve money.f He then says, that the only effectual
method hitherto discovered for the increase of money,
was the erection of banks. He then describes various
banks. Some made it a principle to issue no more notes
than they had of actual bullion. He then mentions the
Bank of England, and the superiority of its notes over
those of the goldsmiths. He then describes the Bank of
Scotland, and says that it issued notes to four or five
times the value of the money in the Bank, which he very
justly says were equivalent to so much additional money.
He then points out the absurdity of supposing that raising
the denomination of the money, added to its value : that
if the shilling was raised to 18d., it paid debts by two-
thirds of what was due, but did not add to the money ;
^^for it is not the sound of the denomination, but the
value of the silver is considered." The wonderful philo-
sophers of 1811, no doubt, looked down with prodigious
disdain upon Law, but they might have studied him with
advantage. He then points out with much detail the
fraud and inutility of tampering with the currency. He
describes the additional effect which credit may give to
money; but says that credit which promises a payment
* Money and Trade considered, p. 34. Edit 1750. i Ibid. p. 68.
B B
Its KhEMBMTS OF POLITICAL BCOKOICT^^
of money, cannot well be extended beyond a certain pro-
]>ortion it ought to have with the money. Nothing can
be more judicious and sound than his remarks upon
credit— thnt it must nlwaj'S vary in proportion to the
metallic basis it is built upon; and up to this point, his
sftgacity and penetration are in advance of the doctrines
of a century later ; but here is the boundary, after which
he plunges into that fatal and delusive fallacy which is
the distinctive feature of what we denominate Lawism.
8. Thinking that monev was so scarce in Scotland,
that any credit that coul({ be built upon it would be
insignificant, he says :
'^ It remains to be considered; whether any other goods than silver
can be made money with the same safety and convenience.
^' From what has been said about the nature of money, it is
evident that any other goods which have the qualities necessary m
money J may be made money equal to their value with safety
and convenience. There was nothing of humor or fancy in making
silyer to be money; it was made money because it was thought best
qualified for that use.
*' I shall endeavour to prove that another money may be esta-
blished, with all the qualities necessary in money, in a greater degree
than silver."
9. He then proceeds to show at great length that
silver had some peculiarities that disqualified it from
being the })est substance to form money of; that it varied
in value ; that it had increased much faster in quantity
than the demand for it, and had, therefore, fallen much m
value. In fact, he tries to prove that silver had varied in
value more than any other kind of goods, within the last
two hundred years; that goods would always maintain a
uniformity of value, because they only increased in pro-
portion to the demand ; that land would always rise in
value, because tlie quantity would always remain the
same, but the demand would continually increase; but
that silver would always fall in value, as the quantity
increased iaster than the demand.
. 10. Law then proceeds to deny that he had taken
his ideas from Chamberlain, of which the latter had
QN SOMB THEORIES OF CUBBBNCT. US-
accused him ; and it must in candor be admitted, that his'
ideas were many degrees less mad than those of Cham*
berlain. Law asserts that he had formed his schemes
many years before he had seen any of Chamberlain's
{)apers.* "Land, indeed, is the value upon which he founds
lis proposal, and 'tis upon land that I found mine ; if for
tliat reason I have encroached upon his proposal, the
Bank of Scotland may be said to have done the same. .
There were banks in Europe long before the doctor's
proposal, and books have been written on the subject
before and since. The foundation I go upon has been
known so long as money has been lent on land, and so.
long as an heritable bond has been equal to a quantity
of land." J
11. The diflference between Chamberlain's theorv
and Law's was this. Chamberlain maintained that if
land was mortgaged for 100 years, it was a good security
for 100 times its annual value ; so that if a man had;
landed property worth £1,000 a-year, and if he mortgaged
it for 100 years to the State, the State might issue
notes to him to the amount of £100,000, which were
to be declared equal in value to silver, and made legal
tender for their nominal value. Now, if this theory be
true, there is no good reason why land should be pledged
for only 100 years; why not for one million years?
which would do the thing on a somewhat more magnifi-
cent scale. But what need of stopping there? Why
not pledge it to all eternity ? And then every inch of the
property might be covered with paper notes, and they
might be piled high enough to reach the Moon, where
the deviser of this scheme would probably find his lost
wits. Law properly points out that the fallacy of this
theory was, that Chamberlain assumed that the value of
£100 to be paid 100 years hence is still £100. He
says, " No anticipation is equal to what already is, a
year's rent now is worth fifteen year's rent fifty years
hence, because that money lent out at interest by
^ Money and Trade Considered, p. 153* : •
B B 2
490 sLiMsirrs oy political xooiroinr*
tiiat time will produce so much.'' But says Lord
Macaulay,* ^^ On this subject Chamberlain was proof to
ridicule, to argument, even to arithmetical demonstration.
He was reminded that the fee simple of land would not
sell for more than twenty years' purchase. To say, there^
fore, that a term of 100 years was worth five times as
much as a term of twenty years, was to say that a term
cf 100 years was worth five times the fee simple ; in other
words, that 100 was five times infinity. Those who
reasoned thus were refuted by being told they were
usurers; and it should seem that a large number of
country gentlemen thought the refutation complete.'*
12. Law's theory was to calculate the value of the
fee-simple of the land at twenty years' purchase and to
coin notes to the value of that amount, and advance them
to the owner of the knd. This plan, therefore, had a
limit, however absurd it was. It was bounded in the first
instance by the value of the land expressed in silver
money, but Chamberlain's had positively no limit at all
to carry it out to its full length ; the advance might be
made to infinity, consequently, in mathematical language
we should say that Chamberlain was infinitely more mad
tlian Law.
13. Law shewed that notes issued upon Chamberlain's
plan would immediately fall to a heavy discount; but
yet he says, that though £500 of these notes were only
equal to £100 in silver, yet the nation would have the
same advantage by that £500 in notes as if an addition of
£ 1 00 had been made to the silver money.
^^ So far as these bills fell under the value of the siher money^ m>
far icould exchange unth other countries be raised.^ And if goods
did not keep their price, i. e., if they did not sell for a greater
• Hist, of England. Vol. iv. p. 496.
f This is the first oocasian that we are aware o^ on which the great
principle, that a depreciation of the paper oiurrency would produce a fall
in the foreign exchanges, which was so ardently contested m 1811, and
subsequent years, is asserted. And it has all the more merit that it iff a
prediction^ and not an observation^
qnBjtAty of fliese VSia equal to the difitefence betwixt diem anft
8ilyer» goocLi exported would be undervalued, and goods imported
would be overvalued.
^' The landed man would have no advantage bj this propoeal
unlets he awed debt^ for though he received £50 of these bills for
the same quantity of victaal, he was in use to receive £10 silver
monej; yet that £50 would onljbe equal in value to £10 of silver,
aad purchase onlj die same quantity of home or foreign goods.
^* The landed man who had his rent paid him in money, would
be agreat loser, for by as much as these oiUs were under the value
of ^ver. he would receive so much less than before.
*^ The landed man who owed debt, would pay his debt with a
less value than was contracted for, but the creditor would lose what
the debtor gained.*
Oh! that the philosophers of 1811 had only pondered
over this extract from John Law !
14. Law then shews that,
'^ Notwithstanding any Act of Parliament to force these bills,
they would fall much under the value of silver ; but allowing that
thejr were at first eanal to silver, it is next to impossible that two
different species of money shall continue equal in value to one
another.
^* Everything receives a value from its use, and the value is
rated according to its qutdity, quanti^, and demand. Though
SK>ds of different kinds are equal in value now, yet they will change
eir value from any unequal change in their quality, quantity, or
demand.
" And as he leaves it to the choice of the debtor to nay in silver
money, or bills, he confines the value of the bills to the value of
the silver money, but cannot confine the value of the silver money
to the value of the bills, so that these bills must fall in value as
silver money falls, and may fall lower, may rise above the value of
these bills, but these bills cannot rise above tlie value of silver."
15. Law succeeds with great skill and acumen iu
exposing the wild insanity of Chamberlain's plan, and
truly predicts the results which would follow from it, or,
at least some of them, for there are many important ones
he has omitted. The exact consequences which he
predicted were manifested in Ireland and England a
century later, and the sentences we have quoted, if we
* Money and Trade Considertd. p. 151.
422 EliSlIEHTS OY FOLinOAL SCOHOBCT.^
did not know their origin, might have been supposed to
have been written to rebuke the folly of the directors of
the banks of Ireland and England, and the mercantile
witnesses of 1804 and 1810. But haying demolished
Chamberlain, he comes to his own proposal, which he
says is ^^ to make money of land equal to its value, and
that money to be eqiuxl in value to silver moneys and not
liable to fall in value as silver money /alls J^ He then says,
"Any goods that have the qualities necessary
in money, may be made money equal to their value.
Five ounces of gold is equal in value to £20, and may be
made money to that value; an acre of land, rented at
two bolls of victual, the victual at £8, and land at twenty
years' purchase, is equal to £20, and may be made money
equal to that value, for it has all the qunlities necessary
in money."
16. In this sentence is concentrated the whole essence
of that eternal delusion, so specious and plausible, and
so fatal, which we designate as LAWISM. It is indeed
nothing but the stupendous fallacy that money represents
commodities^ and that paper currency may he based upon
commodities. This delusion is deeply prevalent in the
5)ublic mind at the present day, and probably there are
ew persons except those who have studied the true
philosoi)hical principles of Political Economy whose
views are not deeply tainted with this infection. No
man who does not thoroughly understand the great
fundamental doctrine established by Turgot and others,
that money does not represent commodities, can ever
have sound ideas on this subject. Money does not
KEPRESEXT COMMODITIES AT ALL, BUT ONLY CAPITAL,
I'HE ACCUMULATION OF LABOR WHICH HAS NOT YET
BEEN GIVEN FOR COMMODITIES. NoW, the vicWS of
Law are much more extensively prevalent than is ge*
nerally supposed. All those who think that there is
any necessary connection between the quantity of money
in a country and the quantity of commodities in it are
influenced by th^m. Take the case of a private individu-
ON BOMS THK0RIE8 OV CURREKCT. 428
nl. Is there any necessary relation between the quantify
of money he retains and the quantity of commodities
he purchases? The quantity of money he has, is just
the quantity of capital— of services due to him — ^which he
has not yet parted with for something else. It is the
quantity of power of purchasing commodities he has over
and above what he has ah*eady expended. And the
quantity of money a nation possesses is simply the
quantity of accumulated industry it possesses over and
above all commodities, but they have no relation whatever
to each other. Now, money does not represent com-
modities, but it represents tliis portion of a man's in-
dustry which is preserved for future use. Whatever
a man earns is the fruit of his industiy, money included ;
and none of these se|)arate items represents anythmg
else, though it may be exchanged for other things.
Now, the value of money depends upon its relations
to what it represents, namely debt or capital, and not
to commodities. If money, or cuiTcncy, increases fast*
er than capital, it immediately causes a diminution of
its value. If capital increases faster than money or
currency, then the value of money is raised. The in-
fallible consequence, therefore, of an increase of currency,
without a corresponding increase of capital, is to change
the existing proportion between capital and currency,
and to cause a depreciation of the latter commensurate
to the changed proportion. The necessary and inevi-
table consequence, then, of issuing vast quantities of
paper currency on the assumed value of ])roperty, is
simply to cause a total subversion of the foundation of
all value and of all property, and to plunge every
creditor into irretrievable ruin.
17. In fact, a moment's consideration will shew that
the theory of basing a paper currency on commodities,
involves this palpable contradiction in terms, that one
CAN BUY COMMODITIES AND ALSO HAVE THE MONEY AS
WELL. When a man buys commodities with money, he
gives either a portion of his own industry represented
434 ELEMKirra of poutxgal bcokomt.
by that money, or a portion of some one else's industay
who gave him the money. But it is qoite dear thai he
cannot buy the commodities and keep his money as well.
It is exacUy the same with a nation. A nation cannot
buy commodities and have the money it bought them
with as well, which is the principle necessarily involved
in issuing paper currency as the representative of comr
modities. But the money of the nation is the mode and
form in which the accumulation of industry which has
not yet been spent in commodities is preserved ; and if a
nation wants other commodities besides what it has got,
it must pay for them either with money, or with the goods
it has already. The idea of basing paper currency upon
commodities is just as wild and absurd as if England
were to sell her cotton goods to America for coin, and
then demand back her cotton goods. The only result
of such an attempt carried out into practice must be the
most tremendous convulsions, and destruction of credit
and all monetary contracts.
18. Law, as we have seen, immediately saw tlux)u^h it,
and exposed the ridiculous absurdity of Chamberlain's
proposal. His own was that the value of all the land in
Scotland should be estimated at 20 years' purchase, and
that a parliamentary commission should be appointed
with power to issue an inconvertible paper currency to
that amount. He says, "The paper money proposed
will be equal in value to silver, for it will have a value
in land pledged equal to the same sum of silver money
that it is given out for. » * » This paper
money will not fall in value^ as silver money has fallen
or may faU."
19. We must, therefore, be careful to be just to Law.
He was no advocate of au unlimited inconvertible paper
currency. Quite the reverse. But seeing that a conver-
tible paper currency could only be based upon bullion to
A certain limited extent, preserving its equality in value
with bullion, his idea was to base a paper currency upon
some other m'ticlc of value. And lie thought that it
OH SOlfB THEOSDBS GW CUBBSNCT^ 425
mi^t preserve its equality in value to silver, on an
independent basis. His idea was, that it was only neoes-
sary to have it represent some article of value. But this
attempt was contrary to the nature of things. His paper
currency, though avowedly based upon thin^ of value,
had exactly the same practical effects as if it had been
based upon silver. It became redundant, and swamped
everythmg. And the reason is plain. It was a viola-
tion of that fundamental principle we have obtained* —
" Where there is no debt there can be no currency."
And the fresh quantities of currency issued on such a
principle only represent the previously existing amount
of debt, and then suffer a necessary diminution in value.
The necessary and inevitable consequence, then, of issu-
ing vast quantities of paper currency on the assumed
valae of property, is simply to cause a total subversion of
the foundation of all value, and of all property, and to
plunge every creditor into irretrievable ruin.
20. To give a full account of the banking career of
Law in France, would exceed our limits, and an imperfect
account would do little good; and there are so many
other sources where ample details of it can be had, that
we must content ourselves with referring to them. The
next conspicuous example and catastrophe— for they are
synonymous — of Lawism, was the Ayr Bank, in Scot-
land. We have stated elsewhere f that the Scotch
banks had got themselves into a very perilous position by
an undue expansion of credit, out of which they gradually
worked themselves by stringent measures. Thcn^ as
now, schemers thought it was the duty of the banks to
lend for as long a time, and to as great an extent, as
they might wish to borrow,^ and they were very indig-
nant when the banks declined to act accordingly. In the
midst of this clamor^ a new bank was formed for the
express purpose of accommodating the demands of every
• Chap. I. Section 14. f The. and Prac. of Banking. Chapter vii. § 87.
I Adam Smith. Wealth of Nations. Book ii., Chap. 2.
4SB ELEMENTS OF POLITICAL iteOKOlCT.
one who wished to borrow, and especially of promotin}
agricultural improvement. The Duke of Hamilton an<
other great noblemen and landed proprietors, were the
chief proprietors and promoters of it ; and it was set up
under the title of Douglas, Heron and Co., in Ayr. The
estates of the proprietors were worth several millions, and
because of this, they enteilained the fatal delusion, that
they might issue paper to any amount up to that value,
without its being depreciated. Accordingly, Adam
Smith says, that it made scarcely any distinction between
real and accommodation bills, but discounted them both
with indiscriminate profusion. " It was the avowed prin-
ciple of this bank to advance upon any reasonable secu-
rity, the whole capibil which was to be employed in those
improvements, of which the returns are most slow and
distant, such as the improvements of land. To promote
such improvements was even said to be the chief of the
public spirited purposes for which it was instituted."
We have seen it stated somewhere, that the bank was
insolvent within a fortnight after it opened. This enor-
mous increase of currency, compared to capital, had its
inevitable effect; its notes began to diminish in. value,
from excessive abundance, and they were returned on it
for payment. Their gold and silver was insufficient to
meet the demand for exchanging the notes, and they
adopted the plan of drawing upon London, and when the
bill became due, paying it, together with interest and
commission, by another draft upon the same place.
The enormous and known wealth of its proprietors helped
to sustain the credit of the notes for some time ; but the
bank was fairly in the Maelstrom, and at the end of two
years, stopped payment, with liabilities amounting to
£800,000. After several years, all the creditors were
paid in fall out of the assets of the shareholders. So ter-
minated the second practical example of Lawism. Never-
theless, this experiment was not without its residuum of
benefit. The greater part of the issues were made for the
special purpose of promoting agricultural improvements.
OS scniB iHBQRnss Cfw cussEVcr. 427
and ihey woe applied to that porpoce, and the prodi^ona
advance made by Ayrehire in agricaltanl improireinent«y
dates from that time. It is not, therrfore, tliat all ad'
vances for such poqioseg are to be condemned; but the
fatal and radical vice of Lawism is. that it extends ttie
limits to which such advances may V>e ma^le« to a degree
tsT beyond what is justified by the verv itstinm of nume^
tary science; and that as soon as this natural limit is
passed, the paper sufiers a rayid and unavoi^hible depre-
ciation. No one saw more clearly than Law, tliat ^^apital
and credit must increase and decrease together; but what
he failed to see was, that these paf>er issues were tuHhing
but creditj although he was deluded into the idea that
they were actual value.
21. The third great outburst of f^awism to^>k phu^
in the same country that witnessed his first ifxploits* In
preparation for it, Law's ^' Money and Tra<Je < 'ouHuU^ntd^
was translated into French in 178ff, as if all tU^t uutmnry
of the great catastrophe sixty-nine vi^ars SMhra hari
perished. The National Assembly ha/l cjmithi'AiU'A the
property of the Church, but instearj of yj^^Ming a revenue,
it cost the nation £2,fXH),fXK) a year more than it pro-
duced, and in a few years augmented the puMic debt
by £7,000,000.* The projierty seized was valued at
£80,(X)0,0()0. The expense of the management required
tliat it should l)e sold, but no purcliasers could be found;
for all persons in that terrible political earthquake wished
to have tJieir property in as portable a shape as possible,
and few were willing to trust to a revolutionary title.
In this dilemma, the municipalities agreed to purchase a
considerable portion of it in the first instance, and resell
it in smaller portions to individuals. But as there was
not specie enough to complete the sale, they issued their
promissory notes to the public creditor, to pass current
until the time of payment came ; but when they became
due, the municipalities had no means of discharging them.
• Alison's Hist of Europe. Vol. u. p. 147. 7tli Edition.
488 XLBMXSTS oy politigal xooHOicrr
To meet them, the Assembly, in the spring of 1790, aa«
thorized the issue of £16,000,000 of assignats on the
security of the kind. In September, further issues to the
unount of £32,000,000 were authorised. These addi-
tional issues were warmly opposed by Tallq^rand and
other leaders, who predicted their depreciation; but
Mirabeau strongly supported them, denying the possi-
bility of their depreciation, saying :
^ It is vain to assimilate assignats secured on the solid basis of
these domaiiis to an ordinary paper currency possessing a forced
circulation. They represent real property, the most secure of all
lions, the land on which we tread. Why is a metallic drcu-
ktion solid ? Because it is based on subjects of real and durable
value, as the land, which is directly or indirectly the soiuce of all
wealth. Paper money, wc are told, will become superabundant ; it
will drive the metallic out of circulation. Of what paper do you
speak ? If of a paper without a solid basis, undoubt^^; if of one
based on the firm foundation of landed property, never. There
may be a difference in the value of circulation of different kinds ;
but that arises as frequently from the one which bears the higher
value being run after, ajB from the one which stands the lower being
shunned — irom gold being in demand — not paper at a discount.
There cannot be a greater error than the terrors so generally pre-
valent as to the over-issue of assignats. It is thus alone you will
pay your debts, pav your troops, advance the revolution. Re-
absorbed progressively, in the purchase of the national domains, this
Eaper-money can never become redundant, any more than the
umidity of the atmosphere can become excessive, which descends
in rills, finds the rivers, and is at length lost in the mighty ocean."
22. Although these assignats bore 4 per cent, in-
terest, they had become depreciated in June, 1790; by
June, 1791, they had lost one- third of their value. In
September, 1792, further issues were decreed. The two
precediug AssembUes had authorised assignats to the
amount of 2,700,000,000 francs, equal to £130,000,000,
to be fabricated, of which only 200,000,000 franca re-
mained unspent. On the 11th of April, 1793, the Con-
vention decreed six years' imprisonment in chains to any-
one who bought or sold assignats for any sum in specie
different to their nominal value, m* made any difference
ON SOME THEOBIES OF CURKENCT. 429
between a money price and a paper price in payment of
goods. Vain effort ! In June the assignat had fallen to
one-third of its value, and in August to one-sixth. The
exchange with London fell exactly in a corre8]>ouding
ratio with the depreciation of the assignat at home. In
June, 1791, it fell to 23; in January, 1792, to 18; in
March, 1793, to 14; in June, 1793, to 10; on the 2nd of
August, it was as low as 4^; on the 18th of October, it
had risen to 8 ; but after that, it ceased to be quoted at
alL* Cambon, the Minister of Finance, proposed a fur-
ther immediate issue of 800,000,000 of francs, equivalent
to about £33,000,000, in addition to the quantity already
issued. The public domains he calculated at £350,000,000.
Hence, upon the Theory of Law and Mirabeau, there wa8
an ample mar^n, and the assignats should not have been
depreciated beE)w the value of silver; and, in fact, accord-
ing to them, it |was impossible they should. Wonderful
commentary upon the wisdom of the philosophers, who
maintain that if a paper currency only represents valu£^ it
cannot be depreciatea !
23. We must refrain from detailing the terrible misery
caused by the forcible issues of assignats, wljich were
legal tender at their nominal amount, the dc^Htruction
of debts, the famine from the scarcity of jirovihions,
the laws of the maximum, the penalty of deatli enm^tftd
against all who should keep back their pro^Juce from the
market. All specie disappeared from the connfry and
from circulation; those wlio possessefl any d«;emiii(( it
not secure from revolutionary violence, it%\H$rUti\ it tn
London, Hamburg, Amsterdam, and Oeneva. Hut many
persons stoutly maintained, in paniphhdH, that it wom not
the paper which was depreciated, but the n\HH'M whii^h
had risen.
24. Hie intolerable misery c&wwA by thiit Mlate nK
things caused the government which nnwMH\i%\ the lUn^i^n
* Report of Committee of Cammoni on Ib:«umiitiorj t4 Ciiib Vnjmtuin.
J819,p.M«. *
430 SLEIIKNTS OV POLITICAL ECONOMY.
of Terror to make an attempt to withdraw a portion of
the assignats from circulation, by demonetizing them ; that
is^ depriving them of their quality of money, and forcing
their holders to receive payment in land for them. But
when a man wanted to buy food to eat, what was the use
of giving him land? The report that a portion of the
assignats were going to be demonetized, sent down their
value still lower, and a decree against it was oblig;ed to
be passed, to appease their holders.* All sorts of plans
were devised to withdraw them from circulation ; lotteries^
tontines, a land bank, where they were to be lodged, and
bear 3 per cent, interest. But the constant issue of Uiem^
required for the necessary payments of the State, rendered
all such attempts useless.
25. In January, 1796, the assignats in circulation
amounted to forty -five milliards, or about £2,000,000,000,
and the paper money had fallen to one-thousandth part of
its nominal value. The Government then determined to
issue territorial mandates at the rate of 30 assignats to
one mandate, which were to be exchangeable directly for
land, at the will of the holder, on demand. The certainty
of obtaining land for them made them rise for a short
time to 80 per cent, of their nominal value ; but necessity
compelled the Government to issue £100,000,000 of these
mandates secured upon land supposed to be of that value.
This prodigious issue sent the mandates down to nearly
the same discount as the assignats were, and conse-
quently, as one mandate was equal to 30 assignats, the
latter had fallen to nearly the thirty-thousandth part of
their nominal value. At length, on the 16th of July^
1796, the whole system was demolished at a blow. A
decree was published, that eveiy one might transact
business in the money he chose, and that the mandates
should only be taken at their current value,f which,
should be published every day at the Treasury. Two
♦ Thiers. Hist, de la Revolution, Vol. vii., p. 255. Edit. 1832.
f Alison's Hist of Europe, Vol. vi., p. 76. 7th Edition.
ON SOME THEOBIES OF CUBRENCT* 431
days afterwards, it was desired that the national property
remaining undisposed of should be sold for mandates at
their current value. As a matter of course, the public
creditors received payment of their debts in the same
proportion.
26. No sooner, however, was this great blow struck
at the paper cuiTency, of making it pass at its current
value, than specie immediately re-appeared in circulation.
Immense hoards came forth from their hiding places;
Koods and commodities of all sorts being very cheap from
me anxiety of their owners to possess money, caused
immense sums to be imported from foreign countries.
The exchanges immediately turned in favor of France,
and in a short time, a metallic currency was permanently
restored. And during all the terrific wars of Napoleon,
the metallic standard was always maintained at its
full value.
27. One thing, however, we cannot help noticing.
When describing the history and effects of the assignats,
nothing can be more clear and coiTCct than the narrative
of Sir Archibald Alison. He sees clearly that a diffe-
rence in value between the assignat and specie was truly a
discount, or fall in the value of the paper. Thus, he says :•
'* They for some time maintained their value on a par with the
metallic currency. By degrees, however, the increasing issue of
paper produced its usual effects on public credit; the value of
money fell, while that of every other article rose in a high propor-
tion, and at length the excessive inundation of fictitious currency
caused a universal panic, and its value rapidly sank to a merely
nominal ratio. Even in June, 1 790, the depreciation had become
so considerable, as to excite serious panic."
Again, speaking of 1791 : f
*' Public and private credit had alike perished amidst the general
convulsions. opecie had disapj)earea from circulation. The
assignat had fallen to a third of its value, \ and occasioned such
* Hist, of Europe, Vol. ir., p. 219. 7th Edit. f Ibid., p. 305.
I This is not quite correct. At this time the assignat had lost one-
third of its v^due, not fallen to one-third of it.
432 E3LE1CBNTS 09 POLITICAL BCONOBIT.
ta amount of ruin to private fortunes, that numbers already wished
for a return to the ancient regime.
^^ While the unlimited issues of assiffnats, at whatever rate of
discount thej might pass, amply provided for all the present and
probable wants of the treasury. *
'^The vast and increasing expenditure of the Republic could
only^ amidst the total failure of the taxes, be supplied by the issue
of assignats ; and this of course, by rendering jMiper money redun-
dant, lowered its value in exchange with other oommodities, and
occasioned a constant and even frightfal rise of prices.t
" All the persons employed by Government, both in the civil and
military departments, were paid in the paper currency at par ; but
as it rapidly fell, from the enormous quantity in circulation, to a
tenth-part, and soon a twentieth of its real value, the pay received
was merely nominal, and those in receipt of the largest apparei^t
incomes, were in want of the common necessaries of life. Picnegm,
at the head of the army of the North, with a nominal pav of 4,000
francs a month, was in the actual receipt, on the Rhine m 1795, of
only two hundred francs, or £8 sterling of gold and silver. \
'^ The funds on which the enormous paper circulation was based,
embracing all the confiscated property m the kingdom, or land,
bouses, and moveables, were estimated at fifteen milliards of firancs,
above £600,000,000 sterling ; but in the distracted state of the
country few purchasers couM be found for such immense national
domains; ana therefore the security for all practical purposes was
merely nominaL The consequence was that the assignat fell to one-
twelfth of its real value; in other words, an assignat for 24 francs
was worth only two francs ; that is, a note for a pound was worth
only Is. 8d.§
" Foreign commerce having begun to revive with the cessation
of the Reign of Terror, sales being no longer forced, the assigruU
was brought info comparison with the currency of other countries^
and its enormous inferiority precipitated still further its &n.||
** By no possible measure of finance could paper money, worth
nothing in foreign states, from a distrust of its security, and redun-'
ilant at home from excessive i^u^, be maintained at anydiing like an
equality with gold and silver. The mandates were in truth a reduc-
tion of assignats to a thirtieth part of their value ; but, to be on a
par with the precious metals, uiey should have been issued at one-
• Alison's Hist, of Europe, Vol. in., p. 251.
+ Ibid., Vol. ni., p. 280. } Ibid., Vol. iv., p. 157.
§ Ibid. Vol. IV. p. 394. || Ibid. Vol. v. p. 109.
ON SOME THEOIWES OF CUBRBNCY. 433
thousandth part, being the rate of discount to which the original
paper had now fallen.*
The excessive fall of the paper at length made all classes per-
ceive that it was in vain to pursue the chimera of upholding its
value. On the 16th July, 1796, the measures, amounting to an
open confession of a bankruptcy which had long existed, were
adopted."
28. We have quoted these passages for the pur-
pose of showing how completely Sir Archibald Alison,
when he is speaking of the paper currency of France,
acknowledges the great principle, that the value of the
paper currency is only to be estimated at the value it
will purchase in specie, that the measure of that diffe-
rence between the real and the nominal value is
its depreciation^ and that a payment in coin at
tlie current value of the paper currency is a Na-
tional Bankruptcy. Yet such is the amazing inconsis-
tency of this writer, that when he comes to speak of the
paper currency of England which exhibited exactly the
same phenomena, only on a smaller scale, he resolutely
denies that it was depreciated. When the French assig^-
nat had lost one-third of its value compared to specie, in
1791, he acknowledges that it was depreciated; Avhen
the bank of England note in 1811 had lost one-fourth of
its value compared to specie, it was not the note which
had fallen, but gold that had risen ! 1 When assignats were
made legal tender in France at their nominal value, specie
disappeared from circulation. When Bank of England
notes Avere substantially legal tender in England, and had
lost a quarter of their nominal value, specie disappeared
from circulation. Sir Archibald Alison estimates the
depreciation of the assignat by the difference between the
curi'ent and the nominal value of the assignat ; but when
the Bullion Committee estimated the depreciation of the
Bank note by the difference between its nominal and its
current or market value, he reads a homily to them upon
their ignorance and folly, talks of the " general delusion
♦ Alison's Hist of Europe, Vol. vi. p, 73.
C C
434 ELEMENTS OF POLITICAL ECONOMY.
which SO h)ns; had prevailed upon the subject, when it is
recollected not only that the true principles of this appa-
fvntlv dillicult, but really simple, branch of national econo-
niv which are now generally admitted, were at the time
niost ably expounded by many men both in and out of
Parliament, but that in the examination of some of the
leading merchants of London before the Parliamentary
Couiniittee on the subject, the truth was told with a force
and precision, which it now appears surprising any one
could resist." This truth which was told with such
irresistible force and precision was, that twenty-seven
was equal to twenty-one ! He then acknowledges that it
was a national bankruptcy of the French government to
pay its notes with a less amount of specie than their
noiuinal value; but nothing can exceed the bitterness
of his invective against the Currency Act of 1819, which
provided that the Bank of England should pay its notes
at their full nominal value in specie. Just as if it was
less a bankruptcy to pay 16s. in the pound than to pay Is.
in the pound. He sees clearly that in France the paper
currency is to be estimated by the value of gold, but in
England he maintains that gold is to be estimated by the
value of the paper currency ! ! Just as if the eternal
truths of science are different, on different sides of the
channel, or that they are reversed according to the lan-
guage they are expressed in !
29. Nothing could be more amusing, if it did not
rather border upon the melancholy, tlian to observe the
amazing inconsistency of Sir Archibald Alison when he
speaks of the English and the French inconvertible paper
currency. He fully allows that any difference between
the nominal and the current value of the assignat was a
depreciation of the assignat. He never dreams of say-
ing that the paper assignat was the standard, and that the
coipi had risen in value. But in some remarkably wise
luoubrations upon the question of What is a pound? he
says,* /' In truth, a pound is an al)stract measure of
* HLstory of Europe, 1815 to 1852. Vol. rr. p. 379.
ON SOME THEORIES OF CURRENCY. 435
value just as a foot or a yard of length, and different
things have at different periods been taken to denote that
measure, according as the couveniency of men suggested.
It was originally a pound weight of silver, and that
metal was till the present century the standard in Eng-
land, as it still is in most other countries. When gold
was made the standard by the Hank being compelled by
the Act of 1819 to pay in that metal, the old word
denoting its original signification of the less valuable
metal was still retained. During the war when the
metallic currency disappeared, the pound was a Bank of
England pound note — the standard was the paper — ^for
gold was worth 28s. the pound from the demand for it on
the continent." It is scarcely necessaiy to point out the
ridiculous absurdity of this passage. The pound an
abstract thing indeed ! Our ancestors had very few ab-
stract ideas at all, and certainly an abstract idea of a
pound was not one of them. They meant nothing ab-
stract, but on the contrary, a very substantial pound
weight of silver bullion^ and nothing else. To say that a
paper pound was the standard during the war, is a gross
misrepresentation of thefact. Instead of a "promise to pay"
on demand, the Bank note during the war was a " promise
to pay specie six months after peace." It is not true that
gold during the war was worth 28s. paid in silver moneys
but only in depreciated bank notes. But Sir Archibald
Alison admits that an excessive issue of paper would have
depreciated the bank note, but he of course denies that
the issues were excessive. Now, as a depreciation from
an excessive issue could only be manifested by a con-
tinuous rise of gold above 28s. the pound, we should be
obliged to him to explain in his next edition where the
turning point would be at which the depreciation would
commence. At what figure should we have to reverse
our expression,— at what figure are we to say that gold has
ceased to rise, and paper begun to fall ?
30. Such is a plain statement founded upon incon-
trovertible facts of the results of the greatest experiment
CO 2
436 ELEMENTS OF POLITICAL ECONOMY.
the world ever saw of issuing a paper currency secured
upon commodities or property— the most complete
example of Law ism. When the issues of assignats were
at their height, they were certainly not anything equal to
the value of the fee-simple of France expressed in silver
money. And according to the predictions of Law and
Mirabeau, it was a matter of impossibility that they
should ever become depreciated, and what was tlie
result? Even though the experiment was not carried
out to its full extent, the value of the paper assignat sank
to one 30,000th part of its value in silver ! There were
2,400 millions of promises of mandate issued, against
property valued at 3,785 millions, and yet in July 1796,
the note for 1 00 livres was only 5 centimes !* Such was
the inevitable consequence of basing a paper currency
upon property or securities, and such it ever must be,
because, if such issues are once begun there is no legiti-
mate conclusion whatever until all the property in the
country is coined into notes. Pass the legitimate limits
of a circulating medium by one hair's breadth, and there
is no logical conclusion but in the French assignats.
31. The next example we shall cite is the Bank
of Norway, which Avas founded on the 1 4th June, 1816,
with its head office at Dronthiem, and branches in the
provincial towns.f Its capital was originally raised by
a forced loan or tax upon all landed property, and the
landholders became shareholders according to the
amounts of their respective payments. This Bank was
especially for the pur])ose of forwarding agricultural
improvements, and only discounted mercantile bills
and personal securities, as a secondary part of its business.
Its principal business consisted in advancing its own
notes, upon first securities over land, to any amount not
exceeding two-thirds of the value of the property accord-
ing to a general valuation taken in the year 1812. The
• Gamier Elements d'Economie Politique, p. 237.
f Laing's Norway, p. 184. Traveller's Library.
ON SOME THEORIES OF CURRENCY. 437
borrower paid half yearly to the Bank the interest of
the sum that may be at his debit, at the rate of 4 per cent,
per annum, and is bound also to pay off 5 per cent, yearly
of the principal, which is thus liquidated in twenty years.
Mr. Laing bestows great commendation upon this
institution, and describes it as well imagined and well
managed, and there cannot be a better example to test
the truth of Law's principles. We must bear in mind
that Law especially declares that on his principle his
paper currency would not fall below the value of silver.
Now, let us mark what took place with regard to the
Bank of Norway, which was founded purely on his princi-
ple. By the fundamental law of this bank it should
after a certain time have begun to pay its notes in
specie ;* but in 1822 its notes could only be exchanged
at Hamburg against silver, at the rate of 187^ dollars
in paper for 100 dollars in silver ! ! That is, in 6 years
the notes had fallen to about 45 per cent, discount!
Was there ever a more striking or conclusive example
of the entire fallacy of Law's predictions than this
bank? In 1822 the Storthing passed a law that the
bank should only be compelled to give 100 silver dol-
lars for every 190 paper dollars, but that the directors
might at their own discretion reduce the rate to 175
without a new law. In 1824 the value at Hamburg
rose to 145, in 1827 it rose to 125, and in 1835, when
Mr. Laing wrote, it stood at 112, which could only have
been done by a contraction of its issues. Now, it is
quite evident that if the bank had been called upon to
pay its notes at par at any moment it would infallibly
have been ruined. Tliis happened in Paris in 1803, when
the Land Bank stopped payment, and J. B. Say observes
that all banks founded upon this principle have uniformly
failed.f
32. Tlie last example we shall cite is the case of
♦ Laing's Norway, p. 298. Traveller's Library.
♦ Traitc d'Ecooomie Politique, p. 307.
438 ELEMENTS OP POLITICAL ECONOMY.
America. That country was unhappily deeply bitten
with the currency mania of basing issues of paper on
"securities.^' In most of the States the legislatures
passed acts permitting any individual, or any banking
associations, to issue notes to any amount upon deposit-
ing with a " public comptroller," securities of equivalent
value. These "securities" might be public stock, or
mortgages upon improved, productive, and unincumbered
lands.* Now, as these "securities" remained the pro-
perty of the vendors, and they might appropriate the
revenues from them as long as payment of the notes was
not demanded from the comptroller, people saw that they
might derive a profit from the security as well as from
the currency which represented its value. Tliere was
accordingly a prodigious rush to deposit securities— an
enormous issue of paper during the years 1834-5-6. The
prices of everything rose immensely. The people of the
Western States with their " pockets full of paper currency
gave very large orders for goods to the merchants of
New York, Boston, and Philadelphia, who duly executed
them. The bills given for the purchases were payable
in these eastern cities; and when the western debtors
went to their own bankers for bills of exchange on these
places in return for their own local currency, the bankers
discovered that their home customers had bought more
from the eastern cities than they had sold; that they had
already drawn on the east for every dollar which the
east was indebted to them, and could draw no more.
The Avestern merchants then sent their own currency,
notes to the eastern cities in payment, but, unfortunately
for them, the merchants there had already paid all they
owed to the west, and nobody in New York or Phila-
delphia wanted western notes for any purpose of use,
and nobody was disposed to travel 600 or 700 miles
♦ A very ^aphic account of tlie currency vagaries of the United
States is given in two articles of the '•'Scotsman " Nov. 21 and 24, 1855.
Bee also The Progress of America, by John Macgregor, Esq., M.P.
Vol. II. p. 1068.
ON SOME THEORIES OF CURRENCY. 439
to request the cashiers of the Western States to pay
their notes, or in those States in which security had been
given to require the comptroller to sell the pledged secu-
rities and pay them the money produce. Moreover, every
one knew that it was physically impossible in either case
to obtain the amount in money, for there was no cur-
rency in which the pledged property when sold could
have been paid, except Bank notes resting on securities,
or on the mere promise of the banker.'^* In the mean-
time, the usual effects followed, specie disappeared from
circulation. The extended paper issues led the Ameri-
cans to order immense quantities of goods from Europe,
and prices being very high from the bloated paper
currency, they could send no goods in return to pay for
them. For some time they sent over great quantities of
their stock, but this became superabundant, and at last
no one in Europe would buy it. It became necessary
then, for them to pay their debts in specie, but specie
there was none. In 1837, all the Banks in America,
without exception, stopped payment. The general sus-
pension began at New York on the 11th May, and spread
in every direction. In May, 1838, the New York banks
resumed specie payments, which were followed by all the
New England banks in August, 1838 ; this was followed
by the banks in Philadelphia, and on the 1st January,
1839, the banks throughout the Union professed to do so.
No sooner, however, were they set up again than they
resumed the same wild operations on credit, and on 9th
October, 1839, out of 850 banks in the Union, 343 sus-
pended payment entirely, and 62 partially. On this
occasion the New England banks were honorably dis-
tinguished, they liad gathered wisdom, and out of 198
banks in New York, only four stopped ; whereas, in the
Southern and Western States about two out of three
stopped. The United States Bank, >vith a paid-up capital
of £7,000,000, was found to be utterly insolvent; its
* The Scotsman, Nov. 21, 1855.
440 ELEMESIS OV PQUZICAI. SDQOKflfT.
diares, whicli were at 123 doUais on tiie 14tii August^
1838, were at 3 dollars in January, 1842. This was the
fifth grand experiment of Lawism, pore and onadul-
terated on the most magnificent scale, and such was the
result!
33. All ideas, therefore, of basing a paper corrency
upon property or commodities are ess^itiallj erroneous,
and can liave no other po6»ble termination, if only
carried out to their legitimate consequences, than what
happened in France in 1796, and America in 1837-9.
There is one species of property, however, which finom
its ))eing more nearly confounded with money in the
public ideas than any other, is supposed by many persons,
who would repudiate any imputation of being disciples
of Law, to be a sound basis for a paper currency. This
property is public stock. A very prevalent idea is, that
all banks of issue sliould give security by purchasing the
public funds, and then deposit the stock with a govern-
ment officer. But what is this but the wildest, rankest,
and most odious Lawism ? The rule that is good for
one is good for all. If the public funds are a proper basis
for £1,000 of paper currency, they must of necessity be
a good basis to their whole extent. If one bank or
banker is allowed to issue paper on the security of stock,
every other one must be permitted to do the same, until
the whole funded debt of Great Britain is coined into
pap(T notes. If £100 of public debt is coined into
£100 of notes, we must by an irresistible conclusion
have £800,000,000 of i)ublic debt coined into an equal
quantity of notes. The principles of basing a paper cur-
rency upon land, and upon the public funds, are abso-
lutely identical, and equally vicious. To permit a man
te apeud his money in buying part of the public debt,
and to have it as well in the form of notes, is as rank an
absurdity as to permit liim to spend it in land, and also
have it as notes. The only advantage one has over the
other is, that the funds are more easily convertible into
money than land is. The same is true of a nation as
ON 80BCE THBOBIES OF CUBRENCT. 441
an individual— that a nation can spend its money in
destroying its enemies and have it too as bank notes, or
" currency,'' is a wild and mischievous delusion.
34. The drift of these remarks is evident. The whole
constitution of the Bank of England is fundamentally
vicious. It is as complete an example of pure Lawism
as the French assignats, or the American banks. It gave
its original capital to government, and then was allowed
to have it in the form of notes. The first public debt
was Bank of England stock, and for several of the early
additions to its capital, i.e., the public debt^ it was allowed
to issi^e notes to the exact amount of its capital, and this
permission still continues. Now, if this system had been
carried out to its legitimate conclusion, the national debt
and the capital of the Bank of England would have been
the same thing, and the paper notes of the bank would
have been nearly £800,000,000. When it was founded
the nation thought they might spend £1,200,000 in de-
stroying the French, and have them too as bank notes.
But if this principle had been carried out much further it
would have ended in fatal and universal ruin.
35. The fundamental principle of the Bank of England
was, therefore, as erroneous as that of the Mississippi
scheme, the Ayr Bank, the French assignats, or American
banking; but, as in all these cases, the mischief is not
developed until the issues exceed a certain limit, the
radical vice of the Bank of England has been prevented
from producing its inevitable consequences by rigidly
restraining it to that single instance. But then, this vice
was kept down by a most unjustifiable monopoly, which
was the chief cause of those tremendous banking catas-
trophes which have desolated England, and which has,
until of late years, prevented a sound banking system
being founded.
36. We trust that the preceding remarks are abso-
lutely conclusive as to the fundamental fallacy of Lawism
of all forms and descriptions, by which we mean, the
theory of basing issues of paper on proi>erty, or commo-
4li ELEMENTS OF POLITICAL ECONOMY.
dities, whether the public funds, or land, or any move-
able goods. We must now examine a much more subtle
and plausible theory, which was the guiding principle
of the Bank of Ireland and the Bank of England during
the restriction, and which was adhered to by a large
majority of the commercial world ; nor are we aware of
any refutation of it on philosophical grounds, except the
one in the Bullion Report, which we shall quote and
comment upon. This theory waa first prominently
brought forward before the Committee on the Irish Cur-
rency, in 1804, and we have quoted it elsewhere.* The
Bullion Committee express it in the following words :
^' The bank dliectors, as well as some of the merchants who
have been examined, shewed a great anxiety to state to your Com-
mittee a doctrine of the tmth of which they professed themselyes to
be most thoroughly convinced — ^that there can be no possible excess
in the issue of Bank of England paper, so long as the advances in
which it is issued are made upon the principles which at present
guide the conduct of the directors; that is, so long as the discounts
of mercantile biUs are confined to paper of undoubted solidity,
arising out of real commercial transactions^ and payable at short ana
fixed periods."
37. The germ of this doctrine is to be found in
Adam Smith, who says, " When a bank discounts to a
merchant, a real bill of exchange, drawn by a real cre-
ditor upon a real debtor, and which as soon as it becomes
due, is really paid by that debtor, it onhr advances to
him^a part of the value, which he would otherwise be
obliged to keep by him unemployed, and in ready mone^
for answering occasional demands.'^f It was first promi-
nently brou^t forward as a practical rule by the Irish
Bank directors, in 1804. The Committee of that ^ear did
not attempt to deal with this theory; but the witnesses
examined before the Bullion Committee re-produced it,
and alleged that it was the principle by which the Bank
of England regulated its issues during the restriction.
♦ Theory and Practice of Banking. Vol. ii., p. 127.
t Wealth of Nations. Vol. il p. 289. WakcGeld's edition.
ON SOME THEORIES OF CUBRENCY. 443
The Directors of the Bank allowed that, before the res-
triction, they were compelled to regulate their issues by
a drain of gold on them for exportation; when that
check was removed, the controlling power was lost ; and,
indeed, one of the directors stated that, in his opinion,
that was one great merit of the restriction ; that they
were no longer obliged to adhere to their former rules.
The Bullion Committee, however, decidedly condemned
these opinions. They say, speaking of the consequences
of the restriction act 2
'^ By far the most important of these consequences is, that while
the convertibility into specie no longer exists, as a check to an
over-issue of paper, the Bank directors have not perceived that
the removal of tnat check rendered it possible that such an excess
might be issued by the discount of perfectly good bilk. So far from
perceiving this, your Committee have shewn that they maintain the
contraiy doctrine with the utmost confidence, however it may be
qualified occasionally by some of their expressions. That this doc-
trine is a very fallacious one, your Committee cannot entertain a
doubt. The {iallacy upon which it is founded, lies in not distin-
guishing between an advance of capital to merchants, and an addi-
tional supply of currency to the general mass of circulating medium.
If the advance of capital only is considered as made to those who
are ready to employ it in judicious and productive undertakings, it
is evident that tnere need be no other limit to the total amoimt of ad-
vances, than what the means of the lender and his prudence in the
selection of borrowers may impose. But in the present situation
of the bank, entrusted, as it is, with the function of supplying the
i>ublic with that paper currency which forms the basis of^ our circu-
ation, and at the same time, not subjected to the liability of con-
verting the paper into specie, every advance which it makes of
capital to the merchant in the shape of discount, becomes an addition
also to the mass of circulating mediiun. In the first instance, when
the advance is made by notes paid in discount of a bill, it is un-
doubtedly so much capital, so much power of making purchases,
placed in the hands of a merchant who receives the notes ; and if
these hands are safe, the operation is so for, and in this, its first
step, useful and productive to the public. But as soon as the por-
tion of circulating medium in which the advance was thus made,
performs in the hands of him to whom it was advanced, this, its
nrst operation as capital — as soon as the notes are exchanged by him
for some other article which is capital, they fall into the channel of
444 ELEMENTS OF FOUTIGAL ECONOMT.
circulation, as so much dicolating medimn, and form an addition to
the mass of currency. The necessaiy efiect of every such addition
to the mass is to diminish the relative value of any given portion
of that mass in exchange for commodities. If the addition were
made by notes convertible into specie, this diminution of the rela-
tive value of any riven portion of the whole mass would speedily
bring back upon the bank which issued the notes as much as was
excessive^ But if by law they are not so convertible, of course this
excess will not be brought back, but will remain in the channel of
circulation, until paid in again to the bank itself, in discharge of
the bills which were originally discounted. During the whole time
they remain out, they perform all the functions of circulating
medium, and before they come to be paid in discharge of those bills,
they have already been followed by a new issue of notes, in a similar
operation of discounting. Each successive advance repeats the same
process. If the whole sum of discounts continues outstanding at a
given amount, there will remain permanently out in circulation a
corresponding amount of paper ; and if the amount of discounts is
progressively increasing, the amount of paper which remains out in
circulation over and above what is wanted for the occasions of the
public, will progressively increase also ; and the money prices of
commodities wiU progressiveljr rise. This progress may be as inde-
finite as the range of speculation and adventure in a great commer-
cial country."
38. Such is the reasoning of the Bullion Report, to
shew the fallacy of the rule of the directors. We are not
aware of any other attempt to refute it, so elaborate as
the one given. The conclusions are perfectly just, but
the expressions are in some respects ambiguous, in some,
inaccurate ; and altogether, the reasoning is inadequate
to effect its purpose of demonstrating the fallacy of the
doctrine. In the first place, the expression " good bills "
is one which we shall shew is full of fallacy. The Report
has further been clouded by the false distinction between
'* capital " and " circulating medium." Again, it says the
necessary effect of every addition to the mass of the cur-
rency, is to diminish the value of the whole, which asser-
tion is entirely erroneous, because the value of the
currency is always proportionate to the work which it has
to do ; and it is only a change in the proportion betw^eeu
the currency and the work that it has to do, that causes
ON SOME THEORIES OF CURRENCT. 445
a change in its value. The committee were further in
great error, in supposing that so small an amount as could
be added to the circulating medium in so short a time as
during the currency of the bills that were discounted,
could have any general effect on prices.
39. We shall find that by starting from our funda-
mental definition of currency, as transferable debt, and
that the value of the currency depends upon the quantity
of transferable debt which it represents, the fallacy of
this theory can be demonstrated with great ease and sim-
plicity, and the mischievous consequences which followed
from it explained. When the merchant A, comes to the
bank to discount the acceptance of B, it is a sale of the
debt to the bank. The bank buys a debt payable at a
fixed time after date, with its notes, which are so many
small debts payable to bearer on demand, while the notes
are convertible. The transaction is simply an exchange
of debts. At the appointed time, it is B's duty to take a
Quantity of currency to the bank, and discharge his debt,
[e does this, either in coin, or in the bank's own notes.
If he pays his own debts by the bank's notes, it is simply
a re-exchange of debts between him and the bank ; he
extinguishes his own debt to the bank, and at the same
time an equal quantity of the bank's debt is taken out of
circulation, and extinguished ; consequently, the propor-
tion existing previously between the currency and the
quantity of debt it represents, remains unaltered. If the
merchant discharges his debt partly in coin, and partly in
bank notes, or wholly in coin, the same result follows ;
the notes which remain out in circulation still represent
the same amount of capital. But let us suppose that the
acceptor /ails to meet his engagement, and cannot pay his
debt. Then the debt due to the bank is lost and extin-
guished; but the debt against the bank remains; and
the bank, whilst the notes are payable to bearer on de-
mand, must pay this debt out of its remaining capital.
Still, however, though this is loss of capital to the bank, as
the notes are taken out of circulation, the value of the
446 ELEMENTS OF POLITICAL ECONOMY.
notes remaining in circulation will not be affected. But
now let us suppose the notes to be inconvertible^ then,
as before, if the acceptor pays the debt, the notes will be
taken out of circulation, and extinguished simultaneously
with the debt which they purchased, and the value of
those remaining in circulation will not be altered. But
suppose that the acceptor fails, and cannot pay his debt,
then that debt is extinguished, but the notes which pur-
chased it remain in circulation, and are a mere addition
to the circulating medium already existing, without any
corresponding addition to the debt or capital which it
represents. It would have exactly the same practical
eflTects as if for every good bill of £1,000, the bank were
to issue an excess of currency, say £1,500 for example,
and when the bill was paid only £1,000 would be taken
out of circulation, and the remainder, £500, would remain
in circulation. This residuum, as we may call it, would
;o in diminution of the value of the remainder, exactly in
le same way as a constant increase to the gold currency
would gradually cause a diminution in its value. Every
such operation, therefore, alters the proportion between
the currency and the capital, or the debt it represents ;
and though, no doubt, a few unsuccessful operations of
this sort would not have any sensible effect in changing
its value, yet a repeated succession of them must neces-
sarily do so ultimately, just as adding a drop to water in
a bucket may not perceptibly increase the height of the
water, yet a continued series of drops will at length cause
the water to overflow the bucket; so a continued series
of such operations under an inconvertible paper currency
must necessarily result in a serious diminution in the
value of the whole.
40. But it may happen, that even though the merchant
pays his debt, and no loss of capital ensues to the bank,
yet it may be a loss of capital to him. Thus, when he
bought the goods on credit, and gave his acceptance for
them, which was purchased by the bank, he meant to
employ those goods as capital^ that is, he bought them
ON SOME THE RIES OP CURRENCY. 447
merely for the purpose of selling them again, with a
profit. If he succeeds in this object, and sells them to
advantage, he pays his acceptance out of the proceeds
realised by the goods, and his capital is increased more
or less, according to the greater or less advantage he
sells them at. But if he has made a miscalculation, and
sells the goods at a loss, he must still make good his
debt to the bank out of his remaining capital ; and such
a transaction is a loss of capital to him. But every loss
of capital to an individual is a loss of capital to the whole
community.* And the great general result to the com-
munity is absolutely the same, whether the loss of capital
falls upon the individual or upon the bank. The capital
of the nation is diminished, but the currency remains the
same. Consequently, every unsuccessful operation in
trade alters the proportion between the quantity of the
currency and the quantity of the debt, or the capital it
represents; and, therefore, every unsuccessful operation
necessarily tends to diminish the value of the whole
currency, unless some means can be devised by which a
quantity of currency can be removed from circulation,
corresponding to the loss of capital. Now, the diminu-
tion in the value of the currency inevitably shews itself
in process of time, by a general rise in prices. It may do
so o^dually and imperceptibly at first — ^in the hourly
variations of prices, it may not, perhaps, be perceived at
first ; just as when the waves are breaking upon the shore,
it is impossible to tell whether the great tide is advancing
or receding; but if it continues for any length of time,
all traders begin to feel it instinctively. It is impossible,
perhaps, to point out the precise influence in any par-
ticular transaction ; but yet, it makes itself felt in com-
mercial operations, by a general rise in prices. The fact
is, that wnen the operation was done, and the production
* J. B. Say has also remarked this : '* Un manvais Bpeculatenr est
anssi fatal k la prosperite general qu'un dissipateur.'' Traite d'Economie
Politique, p. 445. Edit Guillanmin.
44$ ELSMSN1S OF PQUTICAL ECOKOHT.
ox)x>s<hI for sale, it was expected and calculated that a
corUiu portion of currency would be appropriated to its
purchase. But if people do not want the article, they
will not appropriate that portion of currency to its pur-
chase; tlie producer loses his capital, and the currency
remains in circulation. And the increased quantity of it
gradually entei's into the prices of other commodities,
aggravating them, and swelling them up. Now, when
this is the case, when the currency is made of a material
which has an universally acknowledged value, nature
herself provides the remedy. When commodities rise
in price in this country beyond tlieir prices in foreign
countries, besides the cost of transporting them here, they
will be imported, and the extra quantity thrown upon the
market diminishes their price, both by altering the ratio
of supply and demand^ as well as by removing the quantity
of currency necessary to pay for them, from circulation,
until the general equiUbnum is again restored between
prices, currency, and capital. But if the currency be
made of a material which has no value whatever, like
paper^ this great restoring process of nature cannot take
place. The quantity of currency remains the same, while
the capital it represents is diminished. The consequence
is, a general diminution in value of the whole currency —
all the portion of the currency which has intrinsic value
is driven out of circulation ; then follows a great rise in
the market price of bullion, and as a necessary conse-
quence, a fall in the foreign exchanges.
41. The foregoing considerations enable us to aflSx
a definite and specific meaning to a phrase which is now
in constant use, but which we have never yet seen any
attempt to explain. All discussions upon currency are full
of misty and vague expressions about " excessive issues,*'
" over-issues," but we have never seen any attempt to
define what an " over-issue" is. Now, " over-issues," in
general, must consist of specific instances of over-issue in
particular cases. Where is the use or the sense of casting
vague and indefinite accusations against the bank of
ON SOME THEORIES OF CURRENCY. 449
making " excessive issues," unless tlie person who makes
the charge is prepared to point out specifically which
issues are excessive, and which are not? Now, the
meaning which we aflSx to an " excessive issue," or an
" over issue," is an advance upon an unsuccessful opera-
tion, or the " purchase of a bad debt." Eveiy quantity of
currency advanced to promote an unsuccesstul operation,
or which purchases a bad debt, alters the proportion
between the currency and the debt, or the capital it repre-
sents. Each specific instance, then, of sucli an operation
is an "over-issue," and the expression "over-issue," or
" excessive-issue," has no other meaning.
42. The foregoing considerations also show the com-
plete fallacy of the theory we have been discussing of
issuing notes upon " good bills." In a banker's sense a
" good bill '' means simply a bill which is duly paid by the
proper party at maturity. It is not the smallest conse-
quence to him whether the transaction out of which the
bill originated is a profit or a loss to the person who
incurred the obligation, as long as he is paid. But if the
expression " good bill " be taken in a more extended and
philosophical sense to denote a bill upon which it is safe
to issue currency, it is a very different matter indeed, for
then a " good bill " can only mean one generated by a
successful operation.
43. It is not a little remarkable that Adam Smith is
the parent of both the theories of paper currency, whicli
have imposed so extensively on the banking and mercantile
world, and that within a very few pages of each other.
The one theory, that which the bank directors and mer-
chants adopted in 1810; the other, which is the huge
currency fallacy of the present day. The two^ theories
are utterly irreconcilable and inconsistent with each
other; the one necessarily leads to the most excessive
over-issues and depreciation of the paper currency, the
other, if carried out in all its integrity, would be utterly
destructive of the business of banking. These two theo-
ries thus springing up close to each other, and then
D D
450 KLEMENTS OF POLITICAL ECONOMY.
Eursuing diametrically opposite directions, are somethingf
ke tlie Rhine and tlie Rhone, which rise within a few
miles of each other and then separate, one flowing due
south and the other due north.
44. Wliat then is the only true foundation of a
paper currency ? Every consideration of sound reasoning
and science proves that the only true foundation of a
paper currency is that substance which is the legal or the
universally accepted representative of Debt, t. e., of ser-
vices due, or Capitat., whatever that substance be.
Now, among all civilized nations gold or silver bullion is
the acknowledged representative of debt, or capital. Con-
sequently, gold or silver bullion is the only true basis of
a paper currency. Among all civilized notions the
weight of bullion is the acknowledged measfire o/valtie^ and
consequently, bullion is the only true basis of the repre-
sentative of value. Many unthinking persons declaim
against the absurdity of founding a paper cuiTency upon
the commodify of gold bullion rather than any other com-
modity, such as wheat, or silk, or sugar. But it is not
as a commcdity that bullion is the basis of a paper cur-
rency, but as the substance which is the accepted repre-
sentative of debt^ or capital. It would be perfectly
possible to make a yard of broadcloth, or a Dutch cheese,
the representative of debt, and the measure of value ; then
broadcloth or Dutch cheeses would be the only true
basis of a paper currency, and to issue paper upon the
basis of bullion would, in such a case, be as improper
as to issue paper on the basis of broadcloth or Duteh
cheeses under existing circumstances. But all nations
are agreed that bullion is better fitted by nature for
such a purpose than broadcloth or Dutch cheeses; and,
consequently, as it seems to be the substance pointed
out by nature herself for representing debt, it is the
substance which forms the only true basis of a paper
currency.
45. Bullion, then, as the symbol of capital, is not
only the sole proper basis of a paper currency, but is the
ON SOME THEORIES OF CURRENCY. 451
only true regulator of its amount. As all paper cur-
rency is a " promise to pay " gold or silver bullion at
some definite time, it is quite evident that the " promises
to pay " floating in a nation must bear some proportion in
quantity to the actual quantity of the bullion. It is
quite impossible to fix any definite proportion, because
that depends upon a multitude of peculiar circumstances.
Experience is the only guide on the subject.
46. Capital and credit, or money and promises to
pay money, then, form the only true circulatmg medium
or currency, and they are its limits. If the limits of
capital and credit are once transgressed, we plunge at
once into the dread abyss of Lawism, and there is no lo-
gical goal till we arrive at the assignats of 1796, or the
issues m America in 1837; and even these did not reach
the full limits allowed by the theory. It is impossible to
exceed the boundaries of capital and credit by a single
iota, without involving this absurdity — that we can buy a
thing and keep the price of it as well.
47. Capital and credit, then, must always increase
and decrease together. If a man's real capital is reduced
from £1,000 to £100, it is quite clear that he cannot
safely keep in circulation as many '^ promises to pay " as
when he had £1,000, and if his real capital is leaving him,
he must reduce his liabilities in a similar proportion. If
he chooses to spend £500 in buying commodities, such as
corn, it is quite clear he cannot spend the money, buy
the commodity, and have the price as well. Now, what
is true of a single individual is equally true of a bank, or
of a nation. When an ordinary bank feels a drain upon
its bullion, it must reduce its liabilities, its "promises
to pay," or else the ruin of that bank is certain. Now,
some people think that though this must be true of a
private bank, yet it is the reverse of true applied to the
Bank of England, and that as its bullion decreases^ it
ought to increase its issues. Sir Archibald Alison fre-
quently reminds us of the truism that the same great
law i*egulates the fall of a pebble and the motion of
dd2
452 ELEMENTS OF POLITICAL ECONOMY.
the planets. So wc may say, tliat the same great law
regulates the relations between the credit and the capital
of the humblest individual, the smallest bank, the Bank
of England, and the British nation. Some people think
that as capital decreases credit should increase. What
makes the credit of Great Britain so great? Because
her capital is so great. Why is the credit of Russia so
low? Because her capital is so small.
48. The operation of reducing " issues " or " ad-
vances,'' is always one which will excite much complaint,
and requires to be done with much dehcacy ; and, indeed,
the gi'and problem in regulating the paper currency, is to
discover the true mode of acting upon it, so as on the one
hand to maintain always its uniformity in value with the
coin it represents, and on the other not to contract it too
suddenly and violently, and without giving the public
sufficient warning to enable them to reduce their liabilities
in proportion.
49. From the amazing confusion of language and
thought which pervades almost all treatises on monetary
science, the plain and obvious method of controlling the
paper cun^ency has almost entirely eluded observation.
No person who apprehended the true nature of banking,
and expressed it in simple language, could fail to see the
natural controller. The main business of commercial
banking is discounting mercantile bills — that is, buying
debts. Discounting a bill for a merchant is not lending
him money but buying a debt due to him; and the
price of such debts must follow exactly the same laws as
the price of corn, or any other article. If money is veiy
scarce, and wheat very abundant, the price of wheat must
fall ; if money is very abundant, the price of wheat will
rise. The price of debts obeys the same rules. If
capital becomes very scarce, the price of debts must fall,
i, e., the discount must rise. If capital becomes abundant,
the price of debts will rise, i. e.^ the discount wiU fall.
Tlic price of debts, then, must follow the same great
laws of nature that the price of wheat does. Now, does
ON SOME THEOBIES OF CUlUiENCY. 453
not every man of common sense know that it is the most
foolish and insane thing to try to control tlie price of
wheat? As we have shown in another place, it is not
the fluctuation of the price of wheat that is the evil, but
it is only the sign of the evil. The real evil is the
change in the proportion of the demand and supply, and
the fluctuation of the price is the grand natural corrector
of the evil. Does not every one know that a high price
of corn is the way to attract corn where it is deficient,
and a low price the way to repel it from where it is
already too abundant? Does not every one of common
sense know that it is the most fatal folly to force down
the price of wheat when there is a real scarcity, and to
sell it below the price it would naturally attain? Can
any course be more suicidal ?
50. Now, apply all the arguments wliich suggest
themselves so irresistibly m the case of wheat to the case
of credit, or the purchase of debts, and the same results
follow. The same great law of nature operates to pre-
serve the due proportion between capital and credit, and
any interference with this great law must necessarily be
attended with the same evil consequences, as an interfe-
rence with the natural price of wheat. And yet, almost
all legislation up to a very recent period, and almost all
writers on political economy, and too many of the com-
mercial world, are in a perverse combination to thwart
this great law of nature, and attempt to keep the rate of
discount, or the price of debts, fixed at a uniform scale !
51. While, therefore, the greater part of commer-
cial complaints are levelled against variations in the rate
of discount as the great evil, the truth is, it is only the
sign of the evil. The real evil is the altered proportion
between capital and credit, and a variation in the rate of
discount is the grand natural corrector of the evil. To
attempt to keep the rate of discount uniform, is to thwart
and contravene the laws of nature just the same as an
attempt to fix the price of wheat. Like all true laws of
nature, the simplicitly, beauty, and perfection of its action
454 ELEMENTS OF POLITICAL ECONOMT.
is marvellous, and it produces a multitude of results
which are not perhaps very obAnious at first. If capital is
leaving the country and becoming scarce compared to
credit, every principle of nature shews that the value of
money must rise, L e.^ the rate of discount must rise ; and
this has a tendency to prevent the outflow of bullion and
to attract it from abroad ; on the other hand, if capital be
flowing into the country and likely to become too abun-
dant compared to credit, a fall in its value, or a fall in the
rate of discount, repels it from the country. If a nation
be visited with a great failure of the crops, it can only
buy such food from foreign countries with its commodities
or its money, it cannot send its credit in payment abroad.
Now, if commodities are too dear, it must pay with
money, and credit in this country is the great produc-
ing power, and credit ^or a time is a great siistainer of
pnces by enabling people to withhold their commodities
from the market. Now, raising the rate of discount cur-
tails credit, forces sales, and thereby lowers the prices of
commodities, and makes it less profitable to export specie,
and more profitable to export goods. Moreover, this rise
in the value of money here, L e.^ the low price of debts
and commodities, tempts buyers from neighbouring coun-
tries to bring their money here. It thus causes an inflow
of bullion, and restores our cuiTcncy to an uniformity
of value with that of neighbouring countries. Again, if
this nation has to spend a great part of its money in
buying foreign com, it is quite clear that it has not got
so much to spend in purchasing goods ; an over-produc-
tion of goods, therefore, can only end in a disastrous fall
in prices. And here, too, the beautiful action of this
great law of nature is manifest. So enormous a propor-
tion of the commodities of this country are produced by
the credit system, that a rise in the rate of discount just
hits profits between wind and water, as we may say.
Consequently, a rise in the rate of discount retards and
curtails production in proportion to the diminished con-
3uming powers of the nation, and so prevents such ft
ON SOME THEOHIBS OF CURRENCY. 455
ruinous fall in price as would necessarily follow an undi-
minished production accompanied by a diminished power
of consumption.
52. In fact, when a commercial crisis occurs in a
country, it invariably means that more persons are
wishing to sell than there are persons to buy, or at least
at remunerative prices. A commercial crisis invariably
arises from a lack of purchasers, which is, in fact, over-
production. True prudence, therefore, shews that in all
commercial crises, production should be curbed. It is
much better not to produce at all, than to produce and
be obliged to sell at a loss. To produce and be obliged
to sell below the cost of production is loss of capital. It
is better, therefore, not to employ the capital at all, than
to lose it. Raising the rate of discount, therefore, acts
as a timely warning to producers to hold hard. It is
necessary to dispose of the stock already produced, before
producing more, and if the stream of sale is stopped
while production continues, it can only end in a more
aggravated fall at last.
53. Now, what is the necessary consequence of an
attempt to thwart this great law ot nature ? In time of
scarcity of food, and a necessary export of money to buy
it, if the rate of discount be kept unnaturally low, nothing
but money will go, commodities are too dear, they will
not go. Again, money being kept at an unnaturally low
rate here, no one will bring it here from neighbouring
countries, consequently, great quantities of money will go
out and none wul come in, till at last the circulating
medium will be nothing but " promises to pay," and no
money to pay them with. Then, at last, violent convul-
sions, total destruction of credit, every one wishing to sell,
and no one wishing or able to buy.
54. On the other hand, if when capital is flowing
in with too great abundance, it be not repelled by a due
diminution in the value of money, i. £?., a fall in the rate
of discounti it will continue to do so until it is so super-
abundant tliat a violent fall takes place. Persons who
4«50 £L£M£5T8 OF POLITICAL ECOXOMT.
are accustomed to depend on the incomes they derive
from theiotercf^t of money, suddenly find that their means
are seriously dimirjisbe<f;* then wild speculations find
favor in the public mind, promising higher profits, and
then the community goes through the cycle of bubble
K[>eculation, extravagant credit, ending in a commercial
catastrophe. We may feel quite certain that if during
the various crises this country has passed through, there
had l>ee!i more attention paid to obserre the natural rate
of discount, instead of thwarting the course of nature,
though the variations would have been more fi^uent,
they would have been less violent and extreme. If
capital is coming in with too great speed, it is good to
lower tlie nite of discount quickly to prevent it getting
lower ; if capital is going out too rapidly it is good to
raise the rate quickly to prevent its bemg higher.
55. Such, however, is the perversity of men that
many think that a uniform and invariable rate of discount
is the great thing to be preserved, no matter what nature
may say to the contrary, and their ingenuity is racked to
devise a plan for always keeping it so, just as if the pro-
vemor of the steam engine ought always to revolve with
uniform velocity. Now, the inevitable consequence of
taking these means to thwart nature will be, that when
capital is scarce, it will be repelled by a lower rate than
the natural one ; when it is already too abundant, it will
be still further attracted by a rate higher than the natural
one.
56. The extreme anxiety of persons to attain an
impossible object, always to have the power of selling
debts due to them at a uniform rate, has led to a very
prevalent theory, which seems very innocent and simple.
It being desirable always to maintain the currency at a
uniform amount, they propose that as gold goes out
paper should be issued to supply its place. This theory
• In the year 1824 there was such a plethora of capital in the
country tliat the Scotch banks gave no interest on deposits; after
1824 came 1825.
ON SOME THEORIES OF CURRENCY. 457
is adopted by Sir Arcliibald Alison, who says^ after con-
demniug the theory that gold and paper must vary
together,*
"The true system would be just the reverse. Proceeding on the
principle that the great object is to equalize the currency, and with
It prices and speculation, it would enlarge the paper currency when
the precious metals are withdrawn, and credit is threatened with a
stoppage, and proportionally contract it when the precious metal
returns, and the currency is becoming adequate without any con-
siderable addition to the paper.
57. There would be certainly something specious
in the idea of issuing Bank notes to supply the place of
the gold that went out, if unfortunately it had not been
tried over and over again, and been attended uniformly
with a catastrophe. When gold was leaving the country
in vast quantities in 1796, the Bank of England still main-
tained its issues, against its own will, it is true, but yet
ihefact illustrates the principle^ and the consequence was
the suspension of cash payments in 1797. When the
Bank had got right again in 1817, a drain for foreign
loans began, and the Bank extended its issues in 1818,
and the consequence was the second suspension of cash
payments in 1819. In 1824, when bullion was departing
from the country like a flood, the Bank extended its
issues; then when it saw itself right in the vortex of
bankruptcy, it suddenly altered its policy, and the result
of all this was the catastrophe ox 1825. In 1838-9, a
similar drain occurred, the !Bank with marvellous per-
versity maintained its rate of discount considerably below
the market rate, and the result was the monetary crisis
of 1839. In 1847, there was the same error and the same
result. Surely these instances are enough to destroy this
fatal delusion.
58. In fact, Sir Archibald and the great body of
public writei-s who share these sentiments, wholly mis-
take the object to be sought for in so delicate and artifi-
cial a machine as a paper currency. The object to be
• Hi»tory of Europe, 1815-1852. Vol. u. p. 391.
458 ELEMENTS OF POLITICAL ECONOMY.
aimed at is not to preserve a uniform rate of discount in
this country, but to maintain a uniformity in the value of
the British currency with that of other countries. If
money is made artificially cheap in this country, that is,
cheaper than it is in neighbouring' countries, persons in
this country will export it to where it is of greater value ;
they will buy foreign securities, they will import foreign
commodities. On the other hand, foreign nations will
flood this country with their securities— just as the Ame-
ricans did in 1839, when the Bank kept down the rate of
discount below its proper level— because they can sell
them at a better price here than in their own country. If
a man wishes to sell a horse, and my neighbour will only
give £90 for it and I will give £96, he of course will sell
the horse to me, and take away my cash. So when the
Americans wished to sell their debts, and found that in
their own country they could only get £90 per cent, for
them, whereas they could get £97 per cent, for them in
England, as a natural consequence they sent them to
England for sale, and took away the cash. The only
way for England to have stopped this would have been
to give no more for these securities than the Americans
would themselves; in other words, to maintain a uni-
formity in value between the currencies of the two
countries.
59. When the foreign exchanges are unfavorable to
this country, the simple meaning of that is, that it is pro-
fitable to export gold. Now, where is the gold got from
for exportation ? From the Bank of England. And how
is it got from there? By getting hold of the bank's
" promises to pay " gold on demand. Now, when the
Bank of England knows that a multitude of persons are
trying to get hold of its promises to pay, for the purpose
of demanding gold for them, to carry out of the countiy,
would it not be the height of folly in the bank to be
multiplying its '^ promises to pay '' in all directions, and
selling them cheap ? This would be exactly as wise, as
if the captain of a ship, directly he saw a storm coming
ON SOME THEORIES OF CURKEKCT. 459
on, were to set all his studding-sails and royals. When
the captain sees the tempest approaching, he must get
down his top-gallant masts and reef his topsails; so,
when a commercial tempest is threatened, it behoves those
who pilot the vessels of credit to contract their " promises
to pay.
60. The plan proposed by Sir Archibald and a multi-
tude of unthinking writers, is, that when gold is leaving
the country, commissioners should be appointed to issue
an equal amount of inconvertible paper, which is to be
withdrawn when gold comes back again. But what is to
be done with the convertible paper already in existence?
Is it to be declared inconvertible ? For, as long as the
rate of discount is depressed, there will be a constant
demand for gold in exchange of notes, and a corresponding
amount of inconvertible paper must be issued. Let this
wonderful theory be put in practice, and the drain will
not cease until every sovereign has left the country ; and
moreover, they never will come back again. For, as the
avowed intention is to keep down the rate of discount,
and to keep up prices, there is nothing to bring the
bullion back again. Nothing can bring it back again here,
except we can sell our commodities or debts cheaper than
other nations. But it is the avowed intention of these
issues to prevent that ; consequently, no bullion ever will
come back.
61. But, moreover, this wonderful panacea of all
monetary ills — ^issuing an inconvertible paper currency,
to supply the place of the gold that goes out — is just our
old mend Jonn Law's scheme over again, of issuing
paper currency based upon commodities. Those who
advocate this think that the nation can send its money
abroad to buy food, and have it as well in the form
of paper money. Just as if a man might go into a
shop, spend his money there in buying goods, and then
have it again in the form of a " promise to pay.*' When
will this stupendous delusion be eradicated from the
public mind? If I have a certfun quantity of money in
460 ELEMENTS OF POLITICAL ECONOMY.
my till, I may safely give a " promise to pay ; '' or, if I
know for certain that money is coming in to me on a cer-
tain day, I may give my " promise to pay " at a certain
date; but when I have actually spent my money, and it
is gone away from me for ever, to think that I can then
grant a "promise to pay" worth anything, is an idea
which savours little of sanity. In 1696-7, during the
re-coinage of the silver, the Bank of England might have
issued £1 notes with the greatest advantage and pro-
priety for a temporary purpose, because it knew that it
would shortly have the money to pay them with; but
when the money is gone from the bank to buy com
abroad, it would be the most dangerous folly possible, to
issue notes to supply the place of gold.
62. But there are several other considerations which
point out that the rate of discount is the true method
of acting upon the paper currency. As soon as the ex-
change becomes so unfavorable as to make it profitable to
export gold, an immense number of bills are fabricated
for the purpose of being sold for the sake of the premium;
and these will continue to be fabricated as long as the
rate of discount is kept below that of neighbouring
countries ; now, raising the rate of discount strangles afl
such operations in the birth. If only the numerical
amount of notes be looked to, and the rate of discount be
kept down, these speculators may get their bills passed,
while legitimate trade bills may be refused. A modeiTite
rise in the rate of discount will never inflict any real
injury on trade at all equal to the refusal to discount
trade bills altogether; and that is the result which has
always ensued from a perseverance in keeping down the
value of money below its natural level.
63. Moreover, when the nation is actually obliged
to spend its money in buying foreign corn, or on any
other object, such as war, it is quite impossible that it
can have so much money to spend upon other things ; its
consuming powers, therefore, are diminished; it must
economise in other things. Now, if the rate of discount
ON SOME THEORIES OF CURRENCY. 461
is kept below its natural level, it stimulates and encou-
rages production so much beyond the powers of con-
sumption, that it must necessarily terminate in an
aggravated fall in prices. A timely raising of the rate
of discount is, therefore, a warning to producer to
contract their operations gradually. But keeping it
unnaturally low, lulls them into false security; they
maintain their engagements on credit on an undiminished
scale^ till at last, the Bank, for its own safety, is obUged
to pull up on a sudden — to bring up all standing.
Then follows a total refusal to discount, commercial
panic, and ruin.
64. It is, then, an incontrovertible fundamental truth
in monetary science, that capital and credit form the
circulating medium, and that they must increase and
decrease together. An increase of currency, without an
increase of capital, has no effect but to diminish the
value of the currency. The same thing happens, if, when
capital is destroyed, currency is not destroyed with it.
If a metallic currency increases faster than capital, nature
provides a remedy; it is immediately exported. But
with an inconvertible paper currency, this cannot
happen, and when capital is destroyed, currency remains
in circulation ; when this goes on for any length of time,
or to any extent, the inevitable result is a depreciation of
the paper currency, which is shewn by the rise of the
market above the mint price of gold. This was eminently
exemplified in England in the years subsequent to 1810.
The extravagant speculations were foUowed by an
enormous destruction of capital ; but the currency which
was issued to represent it remained in circulation, and
soon manifested itself in a rapid fall of the value of paper.
It was impossible that paper ever should right itself,
unless this superfluous currency was destroyed. It is
recorded that an Irishman, once having taken a dislike to
a banker, in order to spite him, collected a number
of his notes and burned them. It would have been an
excellent thing for the country bankers of England in
462 ELEMENTS OF POLITICAL ECONOMY.
1814-15/ if some one had done the same kind office
for them. The quantity of paper currency was so
excessive, compared to capital, that nothing could restore
it to its par value, but the destruction of a large portion
of it ; and this wsls brougfht about by the destruction of the
issuers of it ; and virhen this was done, the value of the
remainder rose to par.
05. We have gone over most of the theories of
currency which have attained the greatest practical
importance. That there are others, is true; but they
have generally been confined to a small knot of fanatics.
There is said to be a Birmingham theory of currency, a
Currency Reform Association; but as they have never
promulgated their views in an authoritative exposition, we
believe that the general public has no definite idea of
what they are — no more than they have themselves.
60. Every one knows that it is recorded of the
ancient Spartans, that they used to make their helots
drunk, for the purpose of exhibiting to their rising youth
the disgusting practical' effects of intoxication. Even so
have other nations exhibited before the eyes of Great
Britain the hideous convulsions which are the infallible
consequence of adopting the insane theories of currency
we have been discussing in this chapter. And are we not
to profit by tliese terrible lessons ? Is the bitter experience
of other nations to be thrown away upon us? We hope
not. These things were written for our learning. And
yet, so deep-seated in human nature is this fatal delusion
— so utterly blind and insensible are a vast number of
public writers and speakers to the bitter lessons of ex-
perience, that there is a very general demand upon the
Government to embark in a career which, by an inevitable
law of nature — which the most terrific examples of experi-
ence shew can have but one goal — the dread abyss of
Universal Insolvency.
" Evertere domos totas optantibus ipsis
Di faciles!"'
67. In the year 1705, the Parliament of Scotland
ON SOME THEOBIES OP CUHRENCT. 463
turned a deaf ear to the delusive fallacies of John Law,
and sent him about his business, to play his financial
pranks in other countries, and the result was, the Missis-
sippi scheme ! In the year 1855, the representatives of
conmierce in the same city which rejected John Law
with ignominy 150 years before- namely, the Edin-
burgh Chamber of Commerce — set him up as their patron
and their model, and memorialized the Government, and
'^do most emphatically object to the plan of restricting
the security (upon which the paper currency is based) to
the possession of gold alone ;^' and we regret that they do
not stand alone in such sentiments. In fact, we swarm
with Laws, Chamberlaynes, and Briscoes at the present
day. Foolish men weary the compositors, and vex the
public ear with their crazy projects for issuing paper
currency based upon land or upon commodities, each
one thinking that it is some grand new discovery. Whereas
it is an old antiquated folly which has been repeatedly
tried and unifornily failed, and the idea that there is any
thing novel in these visionary chimeras is only founded
upon their entire ignorance of the subject.
68. Now, let it be clearly understood what these per-
sons require : — it is nothing less than a depreciation of the
currency. Every issue of paper currency not based upon
bullion, is nothing more than a depreciation of the existing
currency. In its practical effects, it is exactly equivalent
to making a ninepenny or sixpenny shilling, only it is
rather disguised, so as to escape the notice of persons who
do not understand the subject. All nations have had
recourse to this description of fraud when they were
pinched in their national expenditure, or by political cir-
cumstances. It is the resource and the sign of troubled
times, and of thievish kings. It was so at Athens, — at
Rome, — at Constantinople ; it was so in the perturbed era
of the middle ages at Florence, as we learn from the
pathetic apostrophe of the poet :*
• Dante. Purgatorio. Cant vi.
464 ELEMENTS OF POLITICAL ECONOMY.
" Fiorcnza mia ♦ ♦ ♦
• •••••
Quante volte nel tempo che rimcmbre
Leffge, MoNETA, ed uficio, e costume
Hai tu mutato."
It was SO in England — ^in Scotland — in France; and
under the flimsy disguise of letting the mint price of gold
conform to the market price, it is the prevailing cry of a
great number of persons at the present day — ^persons, too,
whose education should make them ashamed of being
deceived by so transparent a sophism. With such a dis-
tempered state of the public mind, there can be nothing
more desirable than that a discussion should be brought
on in Parliament, on the specific question of basing a
paper currency on anything else whatever than bullion,
m order that such folly and madness may receive its
quietus once and for ever.
CHAPTER TL
SKETCH OF THE HISTORY OP THE CUBRENCY OP EN6LMD.
EE
HISTORY OF THE CURRENCY. 467
CHAPTER VI.
SKETCH OF THE HISTORY OF THE CURRENCY OF
ENGLAND.
1. We propose in this chapter to give a very short
sketch of the most prominent historical facts connected
with the currency of England, from William I. Such
a knowledge is indispensably necessary to understand the
Political Economy of any country, and also to test the
truth of certain doctrines which were propounded by
government in the famous currency debates in 1811, and
are still believed in by a not inconsiderable number of
persons. So far as regards Political Economy, the cur-
rency is the binding force of society ; and a disorder in
the currency loosens the whole framework of the com-
munity. Lord Macaulay says with not greater point than
truth, " it may well be doubted whether all the misery
which had been inflicted on the English nation in a
quarter of a century, by bad kings, bad ministers, bad
parliaments, and bad judges, was equal to the misery
caused in a single year by bad crowns and bad shillings."*
Hist of England. Vol. it. p. 626.
E E 2
468 ELEMENTS OF POLITICAL ECONOMY.
2. At the time of William the Conqueror, the measure
of value was the pound of silver, Cologne weight of 5,400
grains, which had been introduced by the Saxons. It
was also called Tower weight, from the Mint being placed
in the Tower. The quality of the bullion was 11 oz. 2 dwts.
fine, and 18 dwts. alloy. This was called the " Old right
standard of England," and is that in use at the present
day, as it has been proved by experience to confer the
greatest amount of durability on the metal. This, how-
ever, was only money of account, there being no actual
coin of that weight. The only actual coin was the famous
silver penny. The Saxons also introduced another ima-
ginary coin for the purposes of account, which they called
scil or scilling^ supposed to be derived from the Anglo
Saxon scylan^ to divide. Tliis sum sometimes denoted
four, and sometimes five pennies. William I. established
the Saxon Shilling at four pennies, and the Norman at
twelve ; thus corresponding to the solidus^ into which the
French pound was divided, which has been corrupted
into the modern sou. The Norman shilling was still only
money of account, and never was reduced into an actual
coin before Henry VII.
3. About this time the term sterling came to be
applied to English money, by M^liich it was distinguished
on the continent, as it still is. There are a great many
different etymologies given for the word,* but the most
probable is, that it was derived from the festival of Easter,
when official examiners visited the Mint, and examine i
the coinage. The word Easter is derived from the Saxon
goddess Eastra, whose festival fell in April, and as that
nearly coincided with the great Christian festival, April
was usually called Easter monat (Easter month). The
word sterling was applied not only to the quality of the
coin, but was specifically appropriated as a name of
the English penny.
4. Pre\nous to the union of the different petty king-
* Kuding's Annals of the Coinage. Vol i. p. 7.
HISTOBY OF TUE CUBRENCT. 469
doms of the Saxons, each of the kings, archbishops, and
several of the bishops, exercised the right of having a
distinct coinage. This privilege was abolished by Athelstan,
with the advice and concuiTence of a grand council, who
decreed that there should be but one money throughout
the kingdom. But while all subjects were forbidden to
mint independently, many of them received grants from
the crown to mint on its behalf; and in early times there
were instances of royal, episcopal, and abbatical mints
existing at the same time in the same place, and this
privilege was not wholly abolished till the middle of the
16th century.*
5. In the reign of Henry I. spurious and false coinage
had proceeded to a great length, giving rise to great
inconvenience. In 1108 a new coinage was found
necessary, and the severest penalties of mutilation were
denounced against coiners. All these penalties were
ineffectual, and in 1123 a council at Rome denounced the
penalty of excommunication against all circulators of
fiEdse money. In 1125 the money had become so corrupt
that it would not pass in any market, and 94 persons
underwent mutilntion, and among them several of the
money ers themselves suffered, f
6. Stephen being immersed in a civil war, had
recourse to the expedient of debasing the coinage.
Fortresses and feudal castles every where sprang up
during these troubles, and every one had its mint, which
issued base money with only one-tenth of silver. There
were no less than 1,115 of these castles destroyed by
Henry II. in 1154, and their mints suppressed. Two
years afterwards he issued a new coinage, and twenty
years after that another new coinage was issued J
7. In 1205, John appointed an assize to put an end to
clipping and counterfeiting. All money which wanted
2s. 6d. in the pound was declared illegal, and ordered
• Report of the Royal Mint Commission, p. 5. (1849.)
f finding's Annals of the Coimige. Vol. i., p. 163. J Do. p. 167.
470 ELEMENTS O** POLTTICAlL ECONOMY.
to be destroyed. Trafficking in light coin, was forbidden,
and legal weights were delivered at the Mint office to all
applicants to test the weight of the coin. All coins
made after Christmas in the 6tli year of his reign, and
clipped, were to be bored through, and the holder treated
as a thief, and the severest penalties were enacted against
clippers. Thus, we see in this reign the utmost attention
was paid to the weight of the coin. *
8. In 1227, Henry III. held a council in London,
when it was ordered that the English groat should be
of a certain weight, with the effigy of the king on
one side, and on tlie other a cross as large as the groat,
to prevent clipping. In 1229, the Pope*s tithes were
levied with great severity, and many persons were obliged
to borrow money of the Cahorsini, who then for the first
time came over with the Pope's nuncio. It was the
remission of this tribute wliich, we have every reason to
believe, gave rise to the invention of bills of exchange,
which is often, but without any authority, attributed to
tlie Jews. In 1247, a proclamation was issued, that any
clipped penny should be bored through, and that all
money not of lawful weight should not be current.
Never had the coin been in so degraded state as in
the troubles of Henry III. ; it was clipped down to half
its weight. Prices rose enormously, and immense
quantities of foreign base coin were in circulation, f
9. In 1279, Edward I. issued a complete new coinage,
and proclamation was made against the currency of the
clipped coin. In the 8th year of his reign he ordered all
coins to be of the fineness of 11 oz. ; two easterlings, one
farthing fine ; and 17^d., one farthing alloy. The pound of
money ought to weigh 20 shillings and 3 pence. In the
28th year of his reign, the penny was reduced from
24 grains to 23.7073 grains Tower. In 1303, it was
enacted, that the penny was to weigh 32 grains of wheat
taken from the middle of the ear. An anonymous author
» Ruding 8 Annals of the Coinage. Vol. i., p. 178, + Do. p. 183.
HISTOBY OP THE CURRENCY. 471
says, " that he stamped leather money, which he used
in the building of Caernarvon, Beaumaris, and Conway
castles." *
10. In 1310, in the troubled reign of Edward IL, a
petition of the House of Commons stated that the money
was clipped down to one- half. In 1311, another procla-
mation against the importation of false money issued, but
with little success; and in 1319, the Barons of the
Exchequer were directed to order the Sheriffs of England
to make proclamation that no one should import foreign
clipped or counterfeit money, under very severe penalties,
and all such as had any should bore it through, and bring
it to the Mint to be re-coined. These proclamations,
though frequently renewed, were wholly ineffectual.f
11. This inveterate grievance of the depreciation of
the currency was one of the first abuses Edward III. was
called upon to remedy. In 1331, several proclamations
of the same tenor as the former ones, were issued ; one
provision was, that the black money which had been
commonly current^ should cease to be so one month after
that date. But good coin continued to be very scarce,
and it is asserted that the scarcity of coin caused a great
fall in prices in 1336.]; It is useless to multiply instances
of these proclamations. It is sufficient to state that the
state of the currency was a chronic disease, and that the
financiers of that age had not discovered the fundamental
principle of the currency, that good and bad coin cannot
circulate together.
12. The constant disappearance, however, of the good
coin, led to a solemn deliberation in Parliament upon the
currency question, who called in the advice of certain
merchants, goldsmiths, and moneyers, who were charged
to give their advice how good money might be prevented
from going out, and counterfeit money from being brought
in. A statute, containing several provisions regarding
• Ruding*8 Annals of the Coinage. Vol. i., p. 192.
f Do. p. 207. J Do. p. 211.
472 ELEMENTS OF POLITICAL ECONOMT.
the silver money, was passed as the result of these
deliberations. But as these persons had no real scientific
knowledge on the subject, we cannot be surprised that
tliev were of no avail. One very important measure,
however, was resolved on, namely, to introduce a gold
coinage to make up for the scarcity of silver. Henry III.
had previously made this attempt, but it failed. The
pennanent restoration of gold as a substance of currency,
took place in 1344, when the l^slature agreed that
three sorts of gold money should be issued; they were
called florins, maille florins, and farthing florins, and of
the value of 6s., 3s., and Is. 6d. respectively. They
were called florins from the famous coinage of Florence,
but instead of the Florentine lily, they bore as a device
the lions of England, termed leopards in heraldry. This
money was rated too high, and merchants refused to
receive it, and it was consequently recalled. A new
coinage was struck, called nobles, maille nobles, and
ferling nobles. The noble was 6s. 8d. They were
considered to be the most pure, valuable, and beautifully
executed coins of their day, indeed they were so extraor-
dinarily beautiful, that even men of sense so late as the
days of Elizabeth, were not ashamed to repeat that they
were produced by the famous charlatan and alchemist,
Kayniond Lully, in the Tower. * But this beautiful
coinage obeyed tlie great hitherto undiscovered law.
It was exported in large quantities, and false and
countci-feit coin of all sorts was imported, and the old
plan of issuing proclamations against such practices was
repeated, with their usual ineflScacy. f
13. The history of the currency for many years is
nothing but the same uniform story of chronic disarrange-
ment, and it is useless to enumerate the dates of these
repeated proclamations, as our purpose is sufficiently
answ^ered, wliich was to shew that the weight of bullion
• Camden's Remains. Art Money, p. 176. Edit. 1623.
-{■ Ruding's Annals of the Coinage. Vol. i., p. 225.
HISTORY OF THE CURRENCT. 473
ia the coin was always esteemed of the utmost conse-
quence. The next event which we need notice, was the
reduction of the old Saxon money of account, the shilling,
to an actual coin. This was done in 1503, the 18th
Henry VII. This contained 144 grains of pure silver, and
as a modern shilling contains 80.7 grains it was intrinsi-
cally worth l-9.408d. of our money. This year, in which
a great recoining was eflfected, was further remarkable
for the first coinage of the 20s. piece, called the sovereign.
Twenty-two and half of these pieces were coined out of
the pound tower, and they therefore contained 240 grains
of pure gold. We should express this in modem terms
by saying that the Mint price of gold was £22 10s. a
pound. A modem sovereign contams 113.12 grains of
gold, consequently the sovereign of Henry VII. was
intrinsically worth £2 2s. 5d. of our money.
14. Edward IV. reduced the penny to 12 grains
of silver. Henry VIII. stiU further reduced it to 10
grains by debasing the " old right standard of England "
to two ounces of alloy to ten of silver. The state of
the silver coinage being extremely bad, the value of the
gold coin of course appeared to rise, and it was according-
ly exported. In order to put a stop to this, the sovereign
was ordered to pass current for 22 shillings, and after-
wards for 22s. 6d. In the 18th year of his reign the
pound tower was abolished as the measure of weight,
and the pound troy, which is three quarters of an ounce
less, was substituted for it. Up to this time all the
different gold coins were made of a different alloy, which
caused great intricacy in settling accounts, but now the
standard that is now in use was established, viz. 22 carats
fine and 2 alloy. In the year 1545, the coins were
reduced to tiie greatest state of debasement that ever
disgraced the Enfflish mint, except a small quantity of
silver in Edward Vl.'s reign. The gold was reduced to
20 carats fine and 4 carats alloy, the silver to four ounces
fine and eight ounces alloy.* This caused much pubUc
• Ru(Uug*8 Annals of the Coinage. Vol. i. p. 310.
474 ELEMENTS OF POLITICAL EC0N01C7.
discontent, and Camden notices it among the calamities
of the latter part of his reign.
15. The state of the coinage was so intolerable that
it was at last determined by the council of Edward VI.
in 1551, to reform it. A proclamation was issued
stating the great debasement of the coinage, and the
advantage that would arise from the amendment of it,
and restoration to its former standard. In order to
promote this, the shillings and groats then current were
reduced to ninepence and three pence. The natural con-
sequence immediately followed, prices everywhere rose.
But in order to obtain bullion to reform the coinage
the somewhat singular plan was hit upon to debase it
still further, and a quantity was ordered to be issued of
3 ounces fine and 9 ounces alloy, to discharge debts.*
The people were in the utmost state of confusion at this
meddling with the value of the money. To put a stop
to this a very severe proclamation was issued forbidding
any one to talk of the debasement of the coin, on pain of
imprisonment or mutilation. Nevertheless, within a month
the coin was still further cried down. The writers
of the day notice the terrible sufferings of the poor, owing
to these repeated tamperings with the coin. And Cowper^
Bisliop of Winchester, says, "the richer sort partly by
friendship, understanding the thing before hand, did put
that kind of money away, partly knowing the baseness of
the coin, kept in store none but good gold and also silver,
that would not bring any loss." Thus, we see the ^oc^
noticed that in a depreciated state of the currency, all the
good coin vanishes from circulation, and is hoarded or
exported, although the time was not yet come when men
could see that the two circumstances were connected.
The derangement of the usual relations between the coin
and bullion was so great, that bullion rose to 1 2s. the
ounce, and tlie old angels which were coined to represent
Gs. 8d., rose to 21s. The evident meaning of which was,
* i\u(liiig's Aiinals of tlic Coinage. Vol i. p. 300.
mSTORY OF THE CtJRRBNCY. 475
that there was only an ounce of silver in 12s. of coin,
and that the money was so debased, that 21s. of the bad
money was only equal to 6s. 8d. of the good. These are
exactly the identical phenomena which afterwards ex-
cited so much controversy in the reign of William III.
and in the great currency controversies in 1811 and
subsequent years, when the Bank note exhibited exactly
the same phenomena of depreciation as the debased
currency in money. The relative values of the precious
metals were so little understood, that while silver was
rated at 12s. the ounce, gold was only valued at 60s. or
five times the value of pure silver, and at one time it
was further reduced to 48s.
16. But the council of Edward VI. was so thorough-
ly impressed with the frightful disorders caused by this
monetary anarchy, that they were taking serious
measures for an entire restoration of the coinage when
the sickly boy died, before the measure was completed.
In 1551 the standard of the silver had been brought
back to 11 oz. 1 dwt. fine and 19 dwts. of alloy, being
only 1 dwt. worse than the old standard. Silver was
rated at 3s. 5d. the ounce, and gold at 60s., being little
more than 11 to 1. During the brief reign of Mary the
usual proclamations were issued, and the usual complaints
were made that people bought up the good coins at
higher prices than they were rated at, and melted them
for exportation.* The gradual progress of the restoration
of the coinage seems to have been continued, but we
know that it must necessarily have failed while the bad
money remained in circulation.
17. No sooner had Queen Elizabeth ascended the
throne, than she turned lier attention to the state of the
currency, being moved thereto by the illustrious Gresham,
who has the great merit of being as far as we can discover,
the first who discerned the great fundamental law of the
* Ruding's Annals of the Coinivgc. Vol, i. p. 330.
476 ELEMENTS OV POLITICAL ECONOMT.
currency, that good and bad money cannot circulate
together. The fact had been repeatedly observed before,
as we have seen, but no one, that we are aware, had dis-
covered the necessary relation between the facts, before
Sir Thomas Gresham. As this is of fu* damental impor-
tance in Political Economy, it may perhaps interest our
readers to quote the first passage that we are aware of
in which it is noticed. It was during the great iiiisery
caused by thePeloponnesianwarat Athens, that a spurious
and debased gold coin was first issued, 407 B.C. The
old Attic currency, which was always distinguished for its
remarkable purity, immediately disappeared from circulap-
tion. And the fact is thus noticed by Aristophanes ;*
" The state has very often appeared to us to be placed in
the same position towards the good and noble citizens, as
it is with regard to the old currency and the new gold.
For we make no use at all of those which are not 'adulte-
rated, but the most beautiful of all money, as it would
seem, which are alone well coined and ring properly, both
among Greeks and foreigners, but of this bi«e c »pper
struck only yesterday, and recently, of a most villainous
stamp. And such of the citizens as we know to be well
bom and prudent, and honorable gentlemen, and educat-
ed in the palaestra, and chorus, and liberal knowledge, we
insult. But the impudent and foreigners, and the base
born, and the rascals, and the sous of mscals, and those
most recently come, we employ." This fact thus first noticed
by Aristophanes was, as we have already seen, repeat-
edly noticed by contemporary writei's in England. But
Sir Thomas Gresham was we believe the first to affirm
that one was the cause of the other. He? was presented
to the Queen only three days after her accession, by
Cecil, and she immediately employed him to negociate a
loan which was necessary in the exhausted state of the
Treasury left by Mary. Before leaving for Flanders, he
* Kana3. 665. Edit. Holck'n. Cainbrklge, 1848. Quoted in Lord
Macaulay's Hist, of Englaud. Vol. iv. Chap. 21.
HISTOUY OF THE CURRENCY. 477
wi'ote a letter of advice to the queen explaining how,
among other things, all the fine money had disappeared
from circulation. The cause of this he attributed to the
debasing of the coinage by Henry viii.* Now, as he was
the first to perceive that a bad and debased currency is
the catise of the disai)pearance of the good money, we are
only doing what is just, in calling this great fundamental
law of the currency by his name. We may call it
Gresham's law of the currency. He earnestly recom-
mended the queen to bring back the currency to its
former purity, and in accordance with this advice, the
queen soon carried through the work in earnest. On the
27th September, 1560, a proclamation was issued stating
the enormous evils of the debased currency, and the coins
were all reduced to their true value, and the holders of them
were desired to bring them to the mint, where they should
receive good coins in exchange. Soon aflerwarcls the old
national standard of silver was restored, and has con-
tinued to the present day. The weight of the silver penny,
which was 8 grains at the beginning of her reign, was
reduced to 7^ at the end of it.
18. Though the queen was as we have seen careful
to restore the currency of England to its proper purity,
she seems to have received a most extraordinary twist in
her judgment, when she began to think of Ireland. In
addition to the internal ills of that unhapp}^ country, the
English sovereigns had always been in the habit of adding
that of a purposely debased currency. The details are
much too long to be inserted here, but they wiU all be
found in that great mine of information regarding the cur-
rency, Ruding- s Annals of the Coinage. Nor had Queen
Elizabeth, though sound in her ideas respecting the
currency of England, been one whit behind her prede-
cessors in her absurdity regarding the currency of Ireland.
To shew the utter confusion of ideas that prevailed, we
would recommend to those who take an interest in this
• Life of Gresham. Knight's Weekly Volume p. 101.
478 ELEMENTS OF POLITICAL ECONOMY.
subject, to read " the case of mixed money in Ireland," in
the State trials,* where it was soleninly determined that
bad money was equal to good in Ireland, though it was
acknowledged tliat bad money was not equal to good in
England. This case is instructive to I'ead, as it turns on
the too common blunder even at the present day of
confounding the name or denomination of a com with its
value^ the name it is called by with its purchasinpj power,
or what it will exchange for. The decision in tliis case
is of equal wisdom with one which should decide that in
England four was equal to four, but that in Ireland, four
was equal to three !
19. We need not remark anything that occurred till the
reign of Charles II. when the old national coin of England,
the silver penny, ceased to be struck. In 1664 a splendid
fold coinage of £5, £2, and 20s. pieces was issued.
he latter were called guineas, because they were made
from the gold brought from Guinea, by the African com-
pany. The pound of crown gold was coined into 444
guineas, and continued to be so as long as guineas were
coined. However, no legal rate was imposed upon these
new couis, and they were allowed to find their own level
in commerce, the consequence of which was that they
soon were above their nominal value.
20. The old evils soon reappeared; clipping and
counterfeiting flourished. The coinage became continu-
ally more debased throughout the reign of James II., and
became rapidly worse after the revolution of 1688. The
usual old useless remedies were tried. Ads of parliament
were heaped upon one another, and multitudes of unfor-
tunate wretches expiated on the gallows their crimes of
clipping and forging ; without having the least eftect in
arresting the evil. The state of the silver coinage wa« so
bad, that in 1694, guineas had risen to 30s., and the
exchange was 25 per cent, against England. It was
alleged that the shillings contained scarcely 3d. of
silver.
* Vol. II. p. 114.
HISTORY OF THE CURRENCY. 479
21. This great evil at length attained such a height
that it was taken up by parliament, and on the 8th Ja-
nuary, 1695, a committee was appointed to consider the
subject. It is said* that the clipping and adulteration of
the coin " had increased so much of late by the combina-
tion of all people concerned in the receipt of money, and
so industriously promoted by the enemies of the Govern-
ment, that all pieces were so far diminished and debased,
that £5 in silver specie was scarce worth 40s. according
to the standard, besides an infinite deal of iron, brass, or
copper washed over or plated." The frightfiil disorder of
the silver currency at this time may be judged of by the
following facts. One writer says,f " upon trial I have
found that 5s. of milled money hath weighed 8s. of the
present current money, and 3s. of the 88. was not clipped,
only worn. Again, I have found 10s. in milled money to
weigh 21s. of the dipt money. Again, 20s. of milled
money to weigh 43s. of our new current money." He
also went to six of the principal goldsmiths in London
and got them to weigh out £100 each, and the total £600
weighed only what £310 ought to have done. The
money in the country was no better. Having got two
bags of £100 each weighed at Bristol, Cambridge,
Exeter, and Oxford, the £800 weighed only as much as
£431 should have done. In the months of May, June,
and July, 1695, 572 bags of silver coin, each of £100, were
brought into the Exchequer, whose aggregate weight
according to the standard ought to have been
18,451 lbs. 6oz. 16dwts. 8grns. ; their actual weight was
9,4801bs. lloz. 5dwts. making a deficiency of 8,9701bs.
7oz. lldwts. 8grns., shewing a depreciation of the cur-
rent coins in the ratio of 10 to 22. The exchange as we
have observed fell to 25 per cent, against England, and
would have been much more, only that the real commer-
• Parliamentary Hist. Vol. v. p. 955.
f An Essay for Regulating of the Coin, by A.V. Sept. 2, 1695. In
the Library of Eton College.
480 ELEMENTS OF FOUTICAL EGOKOMT.
cial exchange was in her favor. At the same time the
market price of silver rose to 7s. 2(1. the ounce.
22. Contemporary' writers were perfectly well aware
that the bad state of tiie coinage was the true cause of the
rise in the price of guineas, as it is usually called, though
it is much more correct to call it a fall in the value of
shillings. One of them writing in 1695, says :*
'' And so, by degrees, as the silver coin was diminished and debased
in itself, so it fell in the estimation of the people, and in proportion
gold advanced, and also bnllion, (that is not in itself, but in propor-
tion to the bad money,) not that bnlUon became worth 6s. 5cL an
oonce, or gold 30s. a guinea in good monej, that is in weigh^
standard monej, but in chpped and counterfeit money^ whereof 6s. 5a.
was not of the true or esteemed value of 5s. 2d. And as we our-
selves grew sensible of the want of value in money that passed, so
did foreigners likewise, and the forei^ exchanges soon altered
accordingly, so that it cannot properly be said that bullion is ad-
vanced much, or that gold is advanced much, or commodities are
advanced much, but the money that is exchanged for them, is
of much less value than it was, and the new coining of our money
will not, as I apprehend, alter the value of bullion, gold, &c.y but it
will bring silver in coin to its due value."
After enforcing and illustrating these views at con-
siderable length, he observes that Mr. Lowndes hoped that
the exchange with Holland, which was then 25 per cent,
against England, might be prevented falling lower ; and
says, page 16: —
" If guineas continue current at 30s. a piece, the exchange will
continue about the rate it does, except the common and ordinary
yariation, which many sudden drafts and remittances occasion ; and
if guineas fall, the exchange will rise in proportion, and if the silver
coin is redressed, guineas will fall ; and there are no other designs
whatsoever can effect any considerable alteration, for English standard
silver and standard gold will always be of the same value in
Holland, as the same standard silver and gold in England within
2, 3, 4, to 6 per cent, or thereabouts, and that difference happens
according to present occasions, and the charge of sending it from one
* Some Remarks on a Report containing an Essay for tho Amendment
of the Silver Coins, by Mr. W. Lowndes. London. 1695. p. 6.
HISTORY OF THE CURRENCY. 481
place to another, and the exchange to Holland and other places,
always governs accordingly."
Again, at page 19, he says: "It is not the exportation
of the silver which occasioned the fall in the exchange
between Holland and here, but the reason of that is the
badness of our silver coin.'' And again: " The balance
of trade is not the cause of the great fall of the exchange
for Holland, but the debasing of our coin." And he
repeatedly declares that the only way to set matters right
was to reform the coinage. In the above extracts we
see that the great principle that the real exchange could
never vary beyond the expense of transmitting bulHon,
was perfectly well known to the writer. John Law also
entirely attributes the disorder of the exchanges, and the
price of bullion, to the badness of the coin.*
23. Parliament met in November, 1695, and the king
in his speech called the attention of the House to the
state of the currency, and requested them to provide
a remedy. Then followed the first gi'eat parliamentary
debate on the currency question in modern times. Mr.
Montague, the Chancellor of the Exchequer, saidf that
the mischief would be fatal if a present remedy was not
found out, and applied. That by reason of the ill state
of the coin the change abroad was infinitely to the nation's
prejudice. That the supplies that were raised to maintain
the army would never attain their end, being so much
diminished and devoured by the unequal change and
exorbitant premiums before they reached the camp. That
this was the unhappy cause that the guineas advanced to
30s., and foreign gold in proportion. Notwithstanding
the opposition of the country party, who maintained that
that was not the season to undertake so perilous a work,
tlie House decided to call in and recoin the silver money.
Thia point having been carried, the next point was to
decide whether the several denominations of the new
* Memoire sur les Banqiies. p. 537. Edit. Guillaumin.
f Pari. Hist. Vol. v. p. 9G8.
F F
482 ELEMENTS OF POLITICAL ECONOMY.
money should have the same weight and fineness as the
old ; or whether the established standard should be raised.
This question produced many debates; those who were
for raising the standard argued tliat the price of an ounce
of silver l3ullion was advanced to Os. 3d., and therefore
the standard ouglit to be raised to an equality. That
the raising of the standard would prevent this exportation
of the coin, and tlie melting of it down, which of late
years had been much practised; and that it would en-
courage people to bring in their plate and bullion into
the mint.
24. The government replied,* "That the wortli of
money was relative, and to be rated by the measure
of such goods, labor, advice, skill, or other assistances,
af could be purcliased from another by our parting
with it. That the value of money among foreigners,
who lived under different municipal laws, was intrinsic,
and consisted in its weight and fineness. That com-
mon consent had given it this value for the common
conveniency of supplying one another's wants. That
the weight and fineness was the only worth, that other
nations regarded in our coin, as we in theirs; all mo-
ney beuig between subjects of difii?rent governments of
no greater value, exce])ting the workmanship, than so
many pieces of uncoined bullion. That, therefore, should
our standard be altered, we should still be on the same
foot with our neighbours, for if we were to pay them for
their goods, or exchange our money with theirs, whatever
denomination we gave our money, they would in their
charge ever reduce it to an equality with theirs, and pro-
portion the quantity and goodness of their commodities
to the weight and fineness of the money they were to
receive for them, so that in respect of our foreign com-
merce there was no reason to alter our standard. That
at home if the standard were raised, great confusions
would attend it^ the landlord would be defrauded of a
• Pftrl. Hist. Vol. V. p. 970.
HISTORY OP THE CURRENCY. 483
great part of his rents, and the creditor of his debts.
That the seaman and the soldier would be wronged in
their pay, and many the like injuries and inconve-
nience would happen. That it was no answer to say that
they might buy as much goods and conveniences of life
with this coin, raised above its standard, as they could
before, because by degrees the seller would infallibly
raise the price of his goods in proportion to tlie new
raised standard, and that of tliis there was an instance
before them, all commodities being raised in their prices,
while guineas were paid for 30s. That whereas it was
alleged that the price of bullion was risen to 6s. 3d. and
therefore the standard of the silver coin ought to be
raised likewise, it was replied, that it was a thing im-
possible that the price of silver could rise or fall in
respect of itself. That it was an unchangeable truth,
than which no mathematical demonstration could be
clearer, that an ounce of silver would ever be worth
another oimce of the same fineness, and no more, allowing
some inconsiderable disparity upon the account of the coin,
if one ounce be in coin, and the other in bullion. That
it was true, indeed, that the people commonly gave 6s. 3d.
for an ounce of bullion ; but that they gave only clipped
pieces, that had no more than the sound of shillings and
pence, but were by no means the thing themselves, that
is, they were not the standard shillings of due weight and
fineness, and were no more so in the just sense of the
word, than an ell is an ell, when the third part of it is
cut off. That the case was so plain, that when they
demanded of those who afiBlrmed an ounce of bullion to
be worth Os. 3d., whether they meant six milled shillings
and three pence, they know not what to reply. For this
alteration of tiie value of bullion was merely in relation
to diminished money, and to make it yet more evident, they
urged that it was matter of fact that with 5s. 2d.,
of new milled money, they could buy as much bullion as
they pleased, while those who bought it with clipped
pieces paid 6s. 3d.
F F 2
484 i:leme!cts of political economy.
25. The Chaiuvllor then moved a resolution, that in
CtMuiui: the now money, tlie House would not depiart
fn^U) the ancient standard, either in weight, fineness,
or donomination : and it was voted that the expense of
the nvoinajre should he borne by the public, and a fund
of £1/AHMKH> was voted for the purpose by laying a tax
upon windows.
'Ji». The Commons then addressed the Crown to
issue a pnvlaniation, to name a day when the currency
of the rlipjHHl money should absolutely cease. This
was acooi-dinixlv done on the 19th December, but
unfortunatelv the time was so short, that it threw all
trade into the utmost confusion. People refused to
receive the old money lest it should be left on their
hands. On the 2 1st January, 1690, a motion was
brought forward, that the House should take in con-
sideration the price of guineas, but it was negatived then.
But on the 10th of February, the question was again
brought forward and agi'ced to; and on the 13th the
House resolved itself into a Committee of the whole
House. On the 15tli, it was resolved by a majority of
164 to 129 that guineas should be lowered to 28s. On
the 28th of February, they were again lowered, by a
majority of 194 to 140, to 26s. and on the 26th of
March, they were lowered to 22s.* It was further
ordered that the dipt money should be received in
payment oi' tiixes till the 4th May, in advances to govern-
ment till the 1st July, and after the 1st February, 1697,
should cease to be current. At this time, although gold
and silver were legal tender, yet the silver coin was con-
sidered as the standard currency, and gold only subsidiary.
Debts were considered to be contracted in silver, and
when the great disarrangement of the relative value of
gold and silver took place it was considered as a great
public grievance. All the heavier pieces were culled
• An Account of the Proceedings in the House of Commons, in the
relation to the recoining the clipped Money, and falling the price of
Guineas. In the Library of Eton College.
HISTOBY OF THE CURRENCY. 485
out, and sent to Holland, where guineas and bullion
might be bought for 22s. which passed for 30s. in
England. The consequence was a steady drain of silver
from England and a constant influx of gold. Exactly
similar phenomena have recently manifested themselves
in France, from analogous causes,
27. But a new element had now been introduced into
the English currency, which was, henceforth, to exercise
a potent influence in controversy, namely, Bank Notes.
In 1694, the Bank of England had been founded. Its
purpose was totally difierent from that of the Bank of
Venice. We have seen that the purpose of the latter
bank was merely to remedy the badness of the coin, and
provide a uniform standard of payment to merchants.
Consequently, though it gave its notes in exchange for
clipped and light coin, it only gave them for the actual
amount of bullion in them. Consequently, if payment of
its notes was demanded, it was not liable to give more
bullion than it had received. But the Bank of England
had not had this providence, it gave its notes for the
dipt and light money for their full nominal value. It
had numerous enemies and rivals to contend with, who
were only too eager to ruin its credit.* While the dipt
coin was called in, scarcely any of the new was issued.
Evelyn says, " that there was not enough current money
to make tlie smallest purchases, even of daily necessaries,
but all was on trust." In this extremity the bank notes
were still payable to bearer on demand. On the 4th
May, 1696, its enemies made a combined run upon it,
which compelled it to adopt a partial suspension of
payments; they gave notice that they could only pay 10
per cent, on their notes, once a fortnight, and as the
demand continued, they were obliged to reduce that
to 3 per cent, every three months.
* Lord Macaulay's Hist, of England, Vol. iv., Chap. xxi. Theory
and Practice of Banking, Vol. ir.. Chap. vni.
486 ELEMESTS OF POLITICAL BCONOMT.
28. In consequence of this suspension of payments,
the notes soon fell to a heavv discount. On the 3rd of
August Evel\Ti tells us that they were at 14 or 15 per
cent, discount, and they continued their descent till tney
reached a discount of 20 per cent., in October. But by
this time the newlv coined monev had come forth in
sufficient abundance, and the exchanges were immediately
brought back to par. In a pamphlet, dated 22nd October,
1696Titsavs:
*' When onr coin was cormpt and base, all exchanse lOse upon
us, but now it is returned to its ancient standard, exchange returns
to its old course ; not that the standard of our money is always the
exact rule of our exchange, the balance of our trade often causes it
to alter, either to our aJvanta^ or to our loss, besides the charge of
management ; but this is little in comparison with the other. A
familiar inst;ince we have in the case ot Ireland, where, whilst our
coin was base, seventy pounds was worth one hundred pounds here,
which was in some measure proportionable with the value of pieces of
eight, which they took in Ireland by weight, to our dipt moneyi
and also to our guineas at 30s. apiece; ana how far this canied the
trade of England into that kingdom, the traders of the West Indies
have been too sensible, but since the error of our coin hath been
corrected, that very exchange is so much varied, that one hundred
pounds here is worth one hundred and fifteen j)0unds there.
" And since I have mentioned guineas, I cannot let them pass
without some observations. How eager was the contest (or keeping
them up to that exorbitant value! and how unwillingly did the
money chanjjcrs, and those whom they had deceived, yield to the
alteration, u hereas, it was well known that the occasion why
guineas were so high was the badness of our coin."
This is a conspicuous and decisive example of the truth
of the principles in the chapter on exchanges, that a
restoration of the coinage is alone sufficient to bring the
exchanges nearly to par. The exchanges were brought
to par in October, 1696, when bank notes were at a
discount of 20 per cent., and exchequer tiiUies of 40, 50,
and 60 per cent. Bank notes were still at a discount
in June, 1697.
HISTORY OF THE CUBBENCY. 487
29. The eflTect of these measures was that guineas
were at length brought to be current for the same
sum as they had been before the great disarrangement
of the coinage. They were restored to their former
value of 21s. 6d. and remained so until the year 1717,
when another alteration in the market value of ^old and
silver began to be sensibly felt. The want of adjustment
between the rating of the gold and silver coins, compared
with the market value of the two metals, immediately
made itself felt in the way we have previously noticed,
and as it always will do under similar circumstances, the
disappearance from circulation of the metal which is
underrated. At this time it was silver that was underrated,
and it was exported in such quantities as to cause a severe
scarcity of silver coin. On the 19th Dec, 1717, the
subject was brought before the House of Commons by
Mr. Aislabie, the Chancellor of the Exchequer. He said*
the great scarcity of the silverspecie was in all probability
occasioned by the exportation of the same, and the im-
portation of gold, and proposed that a speedy remedy
should be put to the growing evil by lowering the value of
the gold specie. Mr. Caswall seconded the motion of Mr.
Aislabie, and after discussing the various values which
gold and silver coins had borne with respect to each other,
argued that it was the over valuation of the gold which
had occasioned the exportation of great quantities of silver
specie. This had given rise to a great foreign trade,
which consisted in importing gold into this country in
exchange for silver, and the gold being coined produced a
profit of nearly 15 pence on each guinea. Nothing could
be clearer or sounder than this argument. If persons
can buy a greater quantity of gold abroad with silver
than they can here, they of course will export their silver,
and vice versd^ if persons abroad can buy more silver here
than they can in their own country with the same quantity
of gold, they will certainly send their gold here to buy up
• Pari. Hist. Vol. vu. p. 523.
488 ELEMSNTS OF FOLITICAL ECOKOMT.
all the silver they can, and if the state of the law be
pei-sisted in, which degraded silver below its real value, it
can end in only one way, viz., by the total disappearance
of silver from circulation.
.*iO. The increasing magnitude of the evil had already
occu]ned the attention of the govenmient, and they had, on
the 12th of August previously, desired Sir Isaac Newton,
the Master of the Mint, to investigate the subject generally
and to ivport to them upon it. He reported* that by the
market values of the two metals, the guinea was worth
but so much silver as would make 20s. 8d. instead of
21s. 6d. He showed this necessarily caused an exporta-
tion of silver. He calculated the different comparative
values of gold and silver in different countries of Europe,
according to the Mint regulations of their coinage, and
shewed that, owing to these, silver had a natural tendency
to leave England and Spain, and flow into Sweden. He
stated that hi China and Japan, gold was only nine
or ten times as valuable as silver, and in the East
Indies about twelve times; and that this great cheap-
ness of gold there, caused a drain of silver fron all
Europe to the East. "And it appears by experience as
well as by reason, that silver flows from tliose places
where its value is lowest in pro])oi'tion to gold, as from
Spain to all Euro])e, and from all Europe to the East
Inches, China, and ♦)a])an, and tlmt gold is most plentiful
ill tliose places in which its value is highest in proportion
to silver, as in Si)ain and England/' lie pointed out that
it was the ineciuaiity in the valuation of these two metals,
that caused so much transmission of one or the other from
pla(»(» to place, " and if gold were lowered only, so as to
have the same proportion to the silver money in England,
which it hath to silver in the rest of Europe, there would
be no temptation to export silver rather than gold to any
other ])art of Euroi)C. And to compass this last, there
seems nothing more requisite than to take oft' about lOd.
*rarl. Hist. Vol. vii. p. 556.
. HISTOBY OF TU£ CUBR£NCY. 489
or 12(1. from the guinea, so that gold may bear the same
proportion to the silver money in England, which it ought
to do by the course of trade and exchange in Europe ; but
if only 6d. were taken off at present, it would diminish
the temptation to export or melt down the silver coin ;
and by the effects would show hereafter better than can
appear at present, what further reduction would be most
convenient for the public." "If things be let alone till
silver money be a little scarcer, the gold will fall of itself,
for people are already backward to give silver for gold,
and will in a little time refuse to make payments in sdver
without a premium, as they do in Spain ; and this pre^
inium will be an abatement in the value of gold, and so
the question is, whether gold shall be lowered by the
Government or let alone till it falls of itself by the want
of silver money.*'
31. In conformity with this report, the House of
Commons addressed the Crown to issue a proclamation
to make guineas current at 21s. each, and so proportion-
ably for any greater or less pieces of coined gold, which
accordingly was done by proclamation, dated 22nd of
December, 1717. Both Houses of Parliament passed
resolutions that no alteration should be made in the
standard of the gold and silver coin of the realm in
fineness, weight, or denomination.
32. Considering that the true principle of a metallic
currency was not yet adopted, viz., to have but one stand-
ard of value, the next best thing was done to make the re-
lative values of the coins as nearly as possible conformable
to their market values, and this was the last change which
the valuation of gold underwent, and in the language of
the Mint, the Mint price of gold was then fixed at
£3 17s. lO^d. per ounce. But from Sir Isaac Newton's
own Report it appears that the full difference between
the Mint and market values was not abolished, and the
difference that was preserved has caused a very remark-
able change in the British currency, for whereas silver had
been the standard coinage of the country, and gold had
490 ELE3CS]rT8 Of POLITICAL BCOHOMT.
onl V been introduced as subsidiary to it, the great scarcity
of silver durinp: the last century, owing to the underrating
of the silver, and the neglected state of the coinage,
caused the merchants to prefer to discharge their bills in
gohK instead of silver, and this custom of paying in gold,
and considering all contracts to be made in reference to
g^ild, became so firmly established, tliat gold at length
supi^rseded silver as the standard currency of England,
and silver was degraded to the same rank as copper, and
is only used now for the purpose of coining tokens called
shillings, half crowns, &c., to serve as a small change for
sums below the gold unit.
33. Notwithstanding the repeated experience the
gi>vernment had received of tlie evils and inconvenience
of allowing the currency to fall into a degraded state, they
gjithered little wisdom fi'oni it, and the coinage continued
to deteriorate during the following reigns, till at the ac-
cession of George III., in 1760, it was in as bad a state as
ever. The market price of bullion rose greatly above the
Mint price, and the foreign exchanges fell, but nothing
was done to remedy it. The state of the law left open
one wide door of temptation to tamper with the coinage,
tliough it was issued at full weight from the Mint, there
was no care taken to preserve it at full weight, — there
was no limit declared, which if it fell below, it should
cease to be legal tender. The consequence was that a
thin wafer of metal was as much legal tender as a full
weighted coin. In former times when the clipping and
wearing of the coin had proceeded to extreme lengths
certain temporary proclamations wxre issued, declaring
coins below a certain weight not to be legal tender; but
it is a ivmarkable circumstance that, ever since the inven-
tion of coining, which was for the very puq)ose of certify-
ing that there was a cert:iin amount of metal in the coin,
no state seems to have provided that, if fi-om any circum-
stances the actual weiglit of the metal did not coirespond
to its certitiod amount, it should cease to be legal tender.
From this negligence an extravagant idea got abroad, that
HISTOBY OF THE CUBBENCY. 491
it was the mere appearance of a certain piece of metal, or
mere phantom, which was called a pound^ that was effica-
cious in commerce.
34. Owing to the inattention paid to it, the coinage in
1771 had fallen into a most disgraceiiil and alarming state.
The gold coins had never been so deficient ; three fourths
of the silver was base.* In this and the following year
the Mint prosecutions for offences against the coin in-
creased largely. In the next year an Act was passed
(Statue 1773, c. 71) which, stating in the preamble that
the preventing the currency of clipped and unlawfully di-
minished and counterfeit money was a more effectual
means to preserve the coin of the kingdom entire and
pure than the most rigorous laws for the punishment of
such as diminish or counterfeit the same ; and reciting
that by the known laws of the kingdom no person ought
to pay, or tender in payment, any counterfeit or unlaw-
fully diminished money ; and that all persons might not
only refuse the same, but might and were required by law
to destroy and deface the same, it was enacted that any
person to whom such unlawfully diminished or counterfeit
money should be tendered to deface or destroy it, and for-
bade it to be received in payment of Taxes.
35. A Committee of the whole House having taken
the bad state of the gold coinage into consideration,
reported, on the 10th of May, 1774,f that a quantity of
the gold coin, which had been received at the Bank at the
Mint price to an amount of the nominal value of nearly
three millions and a half, was deficient in weig'ht upon an
average 9 per cent. ; that part of the gold coin in circular
tion which was coined before 1763, was deficient 5 per
cent., and that what had been coined between 1763 and
1772. was deficient about 2^ per cent.; that, while pieces
of gold coin differing so greatly in weight were allowed
to be current under the same denomination, and at the
♦ Ruding's Annals of the Coinage, Vol. u., p. 83.
f Parliamentary History, Vol. xvii., p. 1327.
492 ELEMENTS OF POLITICAL ECONOMT«
same rate and value, the new and perfect pieces would
continue to be exported and melted down. To remedy
this they proposed that all guineas weighing less than
5 dwts. 8 grs.^ and smaller corns in proportion, should be
called in and recoined. They also resolved, "That the
only cflfectual method of preserving the gold coin fix>m
being unlawfully diminished, and of preventing the
mischiefs to which the pubUc is thereby exposed, is, that
the said coin should be current by weight as well as bj
tale ;" and, "That the most convenient method of nrmking
the gold coin so current is, that every person who shall
receive in payment any piece, or number of pieces, of
such coin deficient in weight, shall be entitled to receive
a compensation for the said deficiency from the person
tendering the said coin," at a certain rate. They also
proposed, "I'hat for a limited time the silver coin of the
kingdom be not allowed to be lelgal tender on the pay-
ment of any sum exceeding £50, but according to its
value by weight after the rate of 5s. 2d. per ounce."
36. In pursuance of these resolutions an Act
(Statute 1774. c. 42) was passed, by which it was enacted
that no tender in the payment of money made in the
silver coin of the realm, for any sum exceeding £25 at
any one time, should be legal tender for more than
according to its value by weight at the rate of 5s. 2d.
per ounce.
37. In this year, 1774, a great recoinage was carried
out, and the market price of gold bullion well illustrates
the principles so frequently enunciated in the course of
this work.
BEFORE THE RECOINAGE.
July, 1718
January, 1721
„ 1730
„ 1754
1761
1773
< *
Market
t price
of Gold.
3
19
10
3
19
10
3
18
11
3
18
5
3
18
10
4
1
0
HISTORY OF THE CURRENCY. 493
AFTER THE RECOINAGE.
January, 1782 - - 3 17 6
1790 . - 3 17 6
And it continued at this rate till September, 1797.
38. In 1796, immense quantities of gold specie were
sent abroad to subsidize foreign powers, at the same time
vast quantities of bank notes were locked up in advances
to government. Various political causes also combined
to create a great pressure on the Bank of England,* and
on Sunday, the 26th February, 1797, at a meeting of the
Cabinet, an order was sent to the Directors to suspend
payments in specie until the sense of parliament could be
taken on the subject.
39. The stoppage of cash payments had no effect on
the value of the bank note for three years. But in 1800,
the harvest was lamentably deficient. Wheat rose in
March, 1801, to 156s. a quarter, and a great series of
commercial disasters took place at Hamburg. Discount
there rose to 15 per cent. As a natural consequence,
bullion immediately flowed from London to Hamburg, and
in January, 1801, the exchange stood at 29*8, being up-
wards of 14 per cent, against England.
40. We have alreaay seen that in the great monetary
crisis of 1696-7, it was universally acknowledged by par-
liament and the most eminent merchants, that it was the
bad state of the coinage which produced the great rise in
the market price of bullion, and the heavy fall in the
foreign exchanges ; and we have seen that the restoration
of the coinage immediately rectified the exchange. At
that time bank notes were not a legal tender, and the
language invariably applied to them, when their current
value differed from their nominal value, was that they
were at a discount. When the men of that day saw that
• For a full account of the circumstances preceding the suspension of
cash payments, see Theory and Practice of Banking. Chap. viii.
494 SLEMEKTS OF POLITICAL BOOHOMT.
the bank notes were a promise to pay so many *^oiinds^^
on demand^ and when they saw that the persons who issued
them were unable to pay that number of pounds, and that
no one would give that number of pounds for them, they
never used any other expression r^arding these facts
than that tlie notes were at a discount. There is no
trace of any one having thought of saying that it was
the notes that denoted the pound sterling, and that bul-
lion had risen. When the reform of the coinage took
place, and the exchanges were simultaneously rectified,
it was said tliat the reform of the coinage caused the
restoration of the exchange, and numerous merchants
had written pamphlets to combat a delusion which was
rather prevalent among some persons, that bullion as a
commodity could have a different value to bullion as
coin, except on account of the depreciation of the
coinage.
41. Adam Smith had laid it down as a principle, that
any permanent difference between the market and the
mint-price of bullion must be necessarily caused by the
condition of the coinage itself; and Hume had observed
that the exchange never could vary but very little beyond
the cost of the transmission of specie ;* which principle,
indeed, as we have already seen, was perfectly well known
to tlie merchants, in 1696. All these fundamental truths,
which are as pure matters of demonstration as any pro-
{)osition in Euclid, had been discovered and established
ong before the period we are now speaking of.
42. Such were the truths established when a metallic
currency was the only one thought of, in estimating value.
But at this time a new principle was introduced — there
was what was substantially an inconvertible paper cur-
rency. At this period most men's ideas were transferred
from the metallic currency to the paper currency. Ever
since the issue of the £1 notes, people thought of them
when they spoke of prices as being so many pounds.
* Hume's Essay on Money.
HISTORY OP Tire CURRENCY. 495
When the guspension of cash pavments first took place,
there was a general expectation that the liank noU* would
be depreciated, but the general resolution of liaiikcrn and
merchants, to support the credit of the liank, the dift^rr-
mination of the goveininent to receive bank iKjtif^ in fiay-
ment of taxes at their par value, and the great caution
exercised by the directors during the first few years afUrr
the restriction, had removed all these apprehensions, and
for some years the bank notes circulateu at [mr.
43. At this time, however, phenomena occurrc5il which
directed the attention of many persons Up the HinUt oi the
paper currency. The market price of stan<lard gold up
to September, 1799, had continued at £S 1 7s. M. \Hfr
ounce, and the price of foreign gold in coin hful \Hum
somewhat higher, on account of its grc^ater use as iuAn
than as bullion. But in June, 1800, the [irice of fon?igri
gold experienced a sudden and extrar>rdinary rise ; it roM5
to £4 5s. per ounce; silver ros<5 to Oh. 7d. \Htr ouncm Mul
the foreign exchanges fell lielow )>an In January, I HO I,
gold and silver had each risen Is. \Htr ouncMf, and Uue
exchange at Hamburg was at 29s. 8<L, (>eing a depression
of 14 per cent, below par. Hut the itx]HmHii of transmit-
ting specie to Hamburg was estiniate<l not Up o.xcAml 7 \Hfr
cent., and consequently there renmineil a differeni'.^; i/f
7 per cent, to be accounted for.
44. It was at this time that the great and paipahUs
truth was discovered, that if a deU?ri(;ration of thi$
coinage produced a rise of the market pri<5<f of bullion
above the mint price, and a fall in the foreign exeliangirM
under a metallic currency, then that the opiHmit><5 pro-
position was also necessarily true. 'J'hat uutu'r a im^Hf
currency which was only the repres<;titotive of a nietnllic
currency, if the market price of bullion (ijf. the \fti\H'r
price) exceeded the mint prii;^^, and the forifijm e^vcharifres
fell beyond the cost of the transmission tfi^ H\HutU'^ that
excess could only arise from the iUfpnti'/mtisftt M' tli4*
representative of the meUillic cMrntiw.y^ and Ihin^iortt
that when these eircunihtances (fiuitirnul ruhY luifM
496 ELEMENTS OF POLITICAL ECONOMY.
LIBLY INDICATED THAT THE PAPER CURRENCY WAS DE-
PRECIATED.
45. We nre not certain to whom the merit of the
disco very of this great and important truth is due. If
he had not the actual merit of discovering it, Mr. Walter
Boyd was certainly one of the first to proclaim it, and
call public attention to it. It was enforced with much
greater ability and clearness by Lord King,* and with
not so much distinctness by Mr. Henry Thornton, in his
Inquin' into the Effects of Paper Credit. To these three
writers, however, as lar as we have been able to ascertain,
the merit is due of establishing this principle, which is as
important in the subject of currency, as the Newtonian
law of gravity is in astronomy.
46. The preliminaries of peace with France were
signed October, 1801, at London, and the definite treaty
at Amiens, on the 27th March, 1802. The restriction
on cash payments expired of itself six months after that
event, but though the bank declared that its coffers
were well supj)lied with specie, and that it was anxious
and ready to resume payments in cash, the Chancellor of
the Exchequer, Mr. Addington, brought in a bill on the
9th April, 1802, to continue the restriction till the 1st
March, 1803, which was passed. The arguments alleged
in favor of this measure, shew a wonderful decline in
financial knowledge in the government of 1802 compared
to 1696. At the latter period, the great reason alleged
for the reformation of the coinage, was the adverse con-
dition of the foreign exchanges, and the rise of the market
above the mint price, caused by the deprechition of the
currency. Notwithstanding the vehement opposition of
the enemies of the government, we have seen the
triumphant success of the re-coinage, which restored the
public credit and the exchange. The sagacity of a Mon-
tague would at once have seen that the adverse state of
the exchange and the high price of bullion were entirely
* Thoughts on the Effects of the Bank Restrictioti, 1803.
HISTORY OF THE CDRRENCY. 497
owing to the depreciated state of the currency, and that
the only method of restoring them to par, was the imme-
diate resumption of cash payments. So great, however,
was the ignorance upon the subject, that the fact of the
exchange being adverse was the very reason alleged
why cash payments should not be resumed ! Sir R. Peel
said the course of exchange was at this moment against
us all over Europe. Mr. Addington in bringing in the
bill, said,
** It cannot be necessary for me to inform the house that the rate
of exchange between this country and foreign parts is disadvanta-
geous to ourselves — that t^e export trade has been for some months
at a staud, that while the rate of exchange is disadvantageous io us
an augmentation of the circulating cash would create a trade highly
injurious to the commerce of this coimtry. For several months past
there has been a trade carrying on for purchase of guineas^ with a view
to exportation. It is on tncse grounds that I submit to the House
the expediency of continuing the restriction with regard to the cash
payments of the bank."
Why, these were the very reasons why a return to
cash payments should have been made without delay!
The reason why the trade of buying up guineas was
going on was just because of the redundant quantity
of paper; the paper '^promises to pay" were falling in
value as compared to the guineas, and as a necessary
consequence, guineas were exported, and so far from a
return to cash payments augmenting the circulating
medium, it would infallibly have considerably diminished
it by making the Bank reduce its paper issues. It was
because the prices of articles were so high in this
country that the export trade was unprotitable, and
a reduction of the Bank notes would infallibly have
compelled such a reduction in prices, as w^ould have
facilitated the export.
47. The result of this extraordinary amount of
financial error could have been easily predicted. The
circumstances of the country did not improve, as the
ministry had taken the most effectual measures to prevent
them doing so. In February, 1803, Mr. Addington
G G
498 SLKMBNT8 OF POLITICAL BCOITOMT.
had to come forward again to prolong the restriction;
He said that the reasons which suggested it were too
strong, and the necessity too urgent to be resisted.* The
restriction was continued last session, because the ex-
changes were adverse— the exchange with Hamburg
was then at par— that with Amsterdam adverse. Upon
these grounds, he said it was expedient to continue the
restriction, until the progressive advance of our com-
merce would produce such a steady inclination of the
exchange in our favour, as to render it safe to resume
cash payments. That the scarcity of the last three
years had made it necessary to exnprt twenty millions of
Ibullion in payment of com, and until that came back,
cash payments could not be resumed. Mr. Fox said that
such a mode of arguing went to establish it as a general
axiom tliat whenever the exchanges were adverse, cash
payments of the Bank ought to be suspended ; and then
he touched the right point. " Perhaps even it might
happen that the unfavourable turn of the exchange
against this country might be owing to the very restrict
Hon on the Bank.f And he said —
"In 1772 or 1773, when there was a great quantity of bad
money in the country, the course of exchauge was then also much
against us, but when in the room of this adulterated money good
gold WAS substituted, the consequence was that the exchanges
turned almost immediately in our favour. As long as our currency
continued bad, the exchange was against us, so it is now, because
paper is not much better tlian bad gold ; as it is attended with the
same inconveniences. May it not, therefore, be expected that as
in the former case, when our currency was ameliorated, the course
of exchange turned in our favour, so also if the Bank now resumed
its cash payments, the same favourable circumstances might attend
the change?"
48. The trace of truth thus hit upon was not
followed up. And the peace having come to an abrupt
end in 1803, the restriction was continued. We find it
stated J that the hoarding of guineas had been going on
• Pari. Hist. Vol. xxxiv. p. 1147. f Ihid p. 1161.
\ By Mr. Jekyl. Pari. Debs. Vol. i. p. 1572.
HISTORY O* THE CUBBENCT. 499
to such an extent, that it was with the utmost difficulty,
that they could be procured for the common purposes
of life. The Chancellor of the Exchequer talked of the
baseness of such a practice, which was inconsistent with
public spirit, and the duty of a good citizen. Precisely
the same language had been held by the revolutionary
leaders in the tribune of the French Convention regarding
assignats. The debate in the Lords produced some
excellent speeches. Lord Grenville, who had been of
the cabinet who proposed the suspension originally, now
gave very evident signs that his opinion was very much
altered, and severely censured the attacks of the Chan-
cellor of the Exchequer upon those who preferred to keep
their guineas at home. Lord King now gave the clearest
enunciation to the principles of a paper currency, which
had before been rather feebly hinted at. He said— •
** The nataral and ouly true limit of every paper currency wa«
the power of compelling payment in specie, at the will of the holder.
A paper currency not convertible into specie, had no rule or stand-
ara except the discretion of the persons bj whom it was issued.
To determine the quantity of currency necessary for circulation was
in all cases a difficult and delicate problem. A very strict attention
to the price of bulliony and the state of the foreign exchanaes^ was
alone capable of affording a just criterion by which the quantity could
he truly^ ascertained. Without a perpetual reference to these tests
it was impossible to maintain the mil value of the currency. That
the Bank directors had failed in the performance of this duty was
evident, from the enormous increase in the quantity of their notes,
and the great derangements which had taken place in the price of
silver ana the foreign exchanges since the period of the restriction.
He said that the excessive quantity of Bank notes, by raising tlie
market price of silver above the mint price, was one of the causes of
the present scarcity of the silver coin."
49. The facilities of communication with the me-
tropolis, even in that age which we are now accustomed
to consider as slow, as compared with our own, were
sufficient to prevent any depreciation of a local currency
in Great Britain, at least smce 1765, when the Scotch
^ Pari. Debs. Vol. i. p. 1S36.
0 G 2.
500 ELEMEirrs of political ECONO^Cr.
notes were depreciated, on account of certain conditions
they contained impeding their payment in gold on de-
mand. But Ireland, from the distance of the sea passage,
and the difficulty of access, might be considered as a
foreign country, which resemblance was further promot-
ed by its having a currency of its own, distinct from that
of Great Britain. The Irish shilling in those days con-
tained 13 pence, and as the pound, both English and
Irish, was 240 pence, a slight calculation will shew that
£100 English=£l08 6s. 8d. Irish. Hence, the par of
exchange between England and Ireland was called eight
and one-third.
50. Although there was no run upon the Bank of
Ireland, and the exchange with England was favorable,
and bullion was flowing in, the Bank of Ireland was
directed by Parliament to suspend its payments in cash
at the same time as the Bank of England, and an Act was
passed by the Irish Parliament containing analogous pro*
visions to the English Act.
51. Ever since the year 1794, the exchange at Dublin
on London had been uniformly in favor of Dublin,
standing usually about £7 10s. In the first three
months of 1797, it rose so high as £6 14s. 9d. ; and in the
second three months it rose to £6 7s. 2d. ; and in the
third period of three months, it attained the very great
height of £5 18s lOd ; the highest it stood at on any
day being £5 10s.* From that period it began steadily
to decline, and it continued to fiill progressively through
each year, until in January, 1804, it reached the extraor-
dinaiy depression of £18. No guineas were to be had
for Bank of Ireland notes, except at a premium of 2s. 4d.
or 2s. 6d. This enormous depression was noticed by
Lord Archibald Hamilton, on the 13th Feb. 1804, in the
debate on the Irish Bank Restriction Bill. He stated
that when the restriction Act passed, the issues of the
Bank of Ireland were £600,000, whereas now thev were
* Eeport on the Irish Currency, 1804. p. 153.
. HISTORY OF THE CURRENCY. 601
£2,700,000. He said that between Dublin and Belfast,
though not more than 100 miles apart, there was a differ-
ence in the exchange of 10 per cent.,* and that in the
exchange with London, it was sometimes as much as 20
per cent, against Dublin. That gold coin rose in value
j ust in proportion as paper was depreciated.
52. This great disorganization of the monetary
business between the two countries, at length excited the
serious attention of Parliament, and on the motion of Mr.
Foster, a conunittee was appointed "to inquire into the
cause of the present high rate of exchange between Great
Britain and Ireland, and the state of the currency in the
latter kingdom."
63. The circumstances which gave rise to the ap-
pointment of this committee and its report, are deserving
of great attention^ as they are the first regular investiga-
tion by parliament into the theory of the paper currencv,
and they were the antetype of what afterwards occurred m
England, and gave rise to the appointment of the bullion
committee.
64. The Bank of Ireland sent two of its directors
over to be examined as witnesses, Mr. Colville and Mr.
D'Olier. Mr. Colville stated that the issues of the Bank
notes at the time of the restriction were between £600,000
and £700,000, but they were now about £3,000,000; and
when asked the motives for such an extraordinary in-
crease, said that the exchange became extremely adverse
about two years after the restriction, the money of the
country was carried out of it, for the purpose of paying
the balances of remittances, and, consequently, as the
medium of gold decreased it became necessary to supply
its place with paper. He said that after the restriction,
it was necessary to supply notes for the payments that
would have been made in guineas, and this amount he
placed at £1,200,000. He admittedf that before the re-
striction, wlienever there was a drain of gold from the
♦Pari. Deba. Vol. i. p. 1083. -j- Beport on Irish Currency, p. 103.
502 ELEHESTS 07 POLITICAL BGOHOinr.
Bank^ tliey were in the habit of diminishing its issnes to
strengthen themselves against the contmuance of the
drain. That whenever the exchange was un&Torableii
the necessity for self-preservation compelled them to re*
duce their issues, and that this limitation was for thepor*
pose of lessening the drain of guineas. But he said that
it was generally thought that the extenmon of paper in
Ireland was the cause of the high exchange, but m his
opinion it was directly the reverse, inasmuch, as fiur as
the circulation of paper has supplied the circulating me-
dium, it enabled tne gold which before stood in its place
to be exported out of the country, and so far was a dear
and decided cause of preventing the exchange getting to
a higher pitch ; and he said that it must appear that his
opinion was that the circulation of Bank paper in Ireland
was in no shape the cause of the hig'h excnange. He said
that he clearly and decidedly considered the sole cause of
the high rate of exchanofe to be that Ireland owed a great
deal more money than she could pay. He considered the
true criterion of such balance of debt to be the state of ex-
chang-e between Dublin and London, and London and
Dublin. That when the exchange was considerably
above par, it was said to be against Ireland, and in that
case, certainly at that time, Ireland owes more money
than she is able to pay. Mr. Colville repeated these
opinions several times, more often than it is necessary to
quote. When pressed with the question whether the
rates of exchange might be influenced by the value
of the medium in the which the balance of debts was
paid, as, for instance, if it were paid in degraded or
adulterated coin^ he admitted that it might be so with
respect to coin^ but he denied that such views in any
way applied to the Bank of Ireland paper. Mr. D'Olier
coincided with these views, and attributed the state of
the exchanges to the same causes. When asked whether
it was possible,* in any case whatever, for there to be
* Report on Irish Currency, p. 136. Ibid, p 106.
HISTOBT OF TBB CUBBENCT. 503
such an augmentation of inconvertible Bank paper as to
diminish its value in exchange for goods, although the
confidence that they might be paid off at some remote and
indefinite period might be maintained, he said he thought
it possible, but not probable. He said, " I have heard it
stated that because gold is bought at a premium, that,
therefore, Bank of Ireland notes are by so much depre-
ciated and at an absolute discount as to the amount of
that premium. That was not the proper way to look at
the question. The circulation said to be depreciated
must first be proved to have become burdensome to the
holders, and bargains to have been made by unnecessary
purchasers to get rid of that which they found incon-
venient, or were apprehensive to hold. The mere buying
of gold at an advanced price beyond that of the mint, is
the efibct, and not the cause of the exchange, and, there-
fore, no proof of the depreciation of the paper itself." As
both these witnesses maintained that the exchanges
might be depressed to any extent by the mere fact of debts
being due by the country, it is much to be regretted that
the committee did not ask them if it were possible in their
opinion, for the exchange to be depressed beyond the
limit of the expense of the transmission of bullion, and, if
so, how it could be possible?
55. The description given by the witnesses of the
state of the metallic currency was most astonishing.*
Mr. D'Olier had some of it weighed. The base currency
took about 126s. to the pound weight; the mint silver
which was in circulation, was very scarce and very much
worn, contained 94s. 6d. to the pound weight, whereas,
wlien new from the mint, it contained 62s. to the pound
weight. Of the base shillings, the best did not contain
more than 6d., and the worst about dd. These base
pieces were coined and sold privately to agents who had
the means of circulating' them, at 28s. to d5s. the guinea.
Wlien such was the state of the metallic cun-ency in
» Report, p. 88.
504 ELEIdEEns OF POLITICAL ECONOMY.
Dublin, the provinces in the south were even worse off.
One witness stated that the silver currency had totallj
disappeared from the southern parts,* that the vacuum
was supplied by silver notes ; that these silver notes had
driven out the whole of the silver currency^ and from
their increased amount, as well as the increasing issues
of private bankers' notes of every other description, prices
had risen greatly. That the bad currency had been in-
creasing* most mischievously during* the last twelve
montlis, that there was still a very good supply of good
silver iu the south which was hoarded on account of
these silver notes, but if they were suppressed, it would
come into circulation again. He said all sorts of traders
as well as bankei*s^ issued notes for 3s. 9^d. and 6s.,
payable at twenty-one days after date. He tliought that
the increase of the paper circulation augmented the state
of exchange against Dublin. That the premium on
guineas was a proof of the depreciation of the Bank
notes; and that as the exchange rose the depreciation
continued. That the premium on guineas was then 7 or
8 per cent. He himself had bought large quantities of
guineas at a premium of 3s. 6d. each. In the north of
Ireland, however, all bills were payable in gold; they
would have nothing to do with any paper cuiTcncy, and
wliile the exchange on Dublin was 16(7 two-thirds below
par) the exchange on Belfast was 7 or 8 per cent, (one
third above par). He argued that since the exchange
in ^old was favourable to Ireland, the real excliange must
be in her favor, and that if any considerable quantity of
gold came into circulation, it would at once tend to
diminish the premium on guineas, and lower the rate of
exchange. However, he thought that the high state of
tlie exchange was a clear proot that the balance of pay-
ments was against Ireland annually. While no Bank
of Ireland or private bank notes could be exchanged for
guineas^ except on paying a premium of 2s. 6d. each,
* Evidence of Mr. Roach, p. 91.
HISTORY OP THB CURRBNCT. 605
Bank of England paper bore exactly the same premium
as guineas, and were received in every transaction as equi-
valent to guineas. And yet the directors of the Bank
of Ireland maintained that their notes were not de-
preciated !
66. In the north of Ireland, where nothing but gold
was current, and paper was tabooed, the exchange at
Belfast with London had always continued favourable to
Belfast^ and even while the exchange at Dublin was pro-
gressively sinking, the exchange at Belfast continued to
rise ; thus the state of the exchanges during the years 1803
and 1804, when the committee were appointed, was as
follows : — *
1803
Dublin.
Belfott.
Average of 1st quarter. . . .
2nd
£11
13
1 9
8 11
£7 12 6
8 8 8
3rd
16
17 0
7 12 6
4th
15
8 7
5 12 6
1604
January 27th ....
18
0 0
6 0 0
There was, therefore, at that time, a diflFerence of 12 per
cent, between the exchange at Dublin and at Belfast.
Consequently, if the opinions of the directors of the
Bank of Ireland were true, enormous payments were
being made from Dublin to London, and a balance of pay-
ments were due from London to Belfast. However, IMup,
Marshall, the Inspector-General of imports and exports,
at Belfast, held a very different opinion with respect to
Irish bank notes, for he appends to the table of exchanges
prepared by him, this note —
" It has certainly been heretofore held as a maxim of commerce,
that the balance of trade has in a great measure reflated the rate
of exchange ; and if specie was equally in circulation in England
and Ireland as formerly, the criteiion would no doubt still be tolera-
bly just. But the issue of paper in Ireland is so great as to make it
subject to a heavy discount^ whilst in England it circulates without
* Report p.p. 159, 183.
506 ELEMBHTS Of POLITICAL BCOHOlCr.
any depreciation at all. I imagine the rate of exthange between li
two countnei therefore^ ie very miicA influenced by the raU of diaofnm
on Irish bank notes."
57. It is scarcely necessary to observe that if th<
opinion of the directors of the Bank of Ireland was true
that the rate of exchange at Dublin on London was due
entirely to the heavy debts due from Ireland to England,
their townsmen must have been great simpletons to pur-
chase bills on London in Dublin, at such an enormous
sacrifice, when they could have got them at Belfast 10 to
12 per cent, cheaper. But it appeared that specie was at
a premium of 10 or 12 per cent, in Dublin, so that the
bills when paid for in ca^h were exactly itie same rate
in Dublin and Belfast.
58. In order to test the/aci that the rate of exchange
was due to the excess of payments owing by Ireland,
the committee had evidence on the subject, and it appear-
ed most decisively that so far from the balance of pay-
ments being against Ireland, there was a very large balance
in her favour. The witnesses* differed as to the precise
sum, but they agreed as to the fact of there being a large
sum due to Ireland, and consequently that the exchange
ought to be in her favour, which was precisely the case at
Belfast where payments were made in specie. With this
incontrovertible evidence before them, the committee did
not hesitate to express their conviction that the real
balance of pecuniary transactions was greatly in favour of
Ireland, and consequently the real exchange was and
ought to be under par, and that they felt themselves com-
pelled to seek in other causes than the balance of debts
for the unfavourable exchange then existing between them.
59. We have already seen that when in 1696 the
silver coinage was being recoined, a difference arose be-
tween Bank notes and specie of 20 per cent., and between
tallies and specie of 40 per cent., it was universally said
that Bank notes and tallies were at a discount of 20 and
♦ Mr. riiget, p. 213.— Mr. Marshall, p. 123.
HISTORY OF THE CT7RREKCT. 507
40 per cent. There is no trace of any other language
but that being applied to them. In the year 1804 Irish
Bank notes were exchanged for specie at a diflFerence of
10 per cent., so that with a guinea m specie, any one mi^ht
purchase a guinea note and 2s. or more in silver. The
merchants of 1696 would have expressed such a state of
things by saying that the note haa fallen to a discount of
10 per cent. But at this period a new mode of expressing
it was discovered, it was stoutly maintained that it was
not the paper which was depreciated, but the guinea
which had risen in value ! Thus, one witness being asked,
"Do you know that the Bank of Ireland paper is depreci-
ated ;" said, " I am not aware of it, bemuse I should not
say paper was depreciated, unless there was a forced issue
of it^ and that it was offered at a discount on all occa-
sions. I should rather now say that gold is increased in
value than the paper is depreciated." When asked,
" What do you consider to be the best criterion of the
depreciation of paper currency, an alteration of its value
compared with the general property of any country, or its
alteration compared with a given article^ viz.*, guineas ?"
He says, " I think the first the best criterion, because
guineas may be wanted, as in the present case, for special
purposes." It is somewhat surprising that the witness
did not remember that Bank notes are a "promise to P^y"
guineas, and they are not a promise to pay another kind
of property. When asked "Do you not conceive that
the fact of a premium existing on English Bank notes
in Ireland and exchanged for Irish bank notes, affords
some indication that it is Irish paper which is depreciated,
and not the price of gold which is locally raised ?"
" 1 do not."* Other witnesses agreed in these opinions.
When we consider the nature of an exchange, and the
state of facts proved with regard to the Irish coinage, at
that time, we might almost smile at these ideas, and attri-
bute them to the peculiar methods of thinking which are
* Evidenoe of Mr. Hannan, p. 43.
508 ELEMENTS OF POLITICAL ECOKOIiT.
sometimes prevalent on the western side of St. George'^
Channel. But we shall find that when a precisely similai
state of things took place in England, with regard to
the foreign exclianges, the very same doctrines were
long and stoutly asserted by a very numerous party in
this country, and w^ould probably be so again under
similar circumstances.
60. There was one witness, however, who held
very different opinions — Mr. Marshall, tlie Inspector
General of Import^s and Exports. He said that there
were shops in the piincipal streets of Dublin for buy-
ing and selling guineas, and that the retail price of a
guinea then was a paper guinea and 2s. 2d. He said
that at the end of December 1803, tlie price of a bill in
Dublin upon London for £100 British was £116 10s., if
bought with Irish Bank notes, but if purchased with
specie the price was only £100 10s. Irish. The same
thing was observable m all domestic transactions. The
man with a gold guinea in his pocket, going to market,
had the advantage of the same premium over the man
with the paper guinea, so he could go to a specie shop,
and with his gold guinea buy a paper guinea and the
premium ; then he had a paper guinea of the same value
as the other man, and the premium besides. Bank of
England notes w^ere exactly equivalent to guineas. From
all these facts, it appeared that the Irish Bank note
wanted 10 to 1 2 per cent, of the value of the specie. It was
contended that this was due to the rising in value of
specie, and not to the depreciation of notes ; but if specie
had risen so much in value, or which was the same tiling,
if conmiodities had fallen so low as 10 or 12 per cent.,
such a state of things could not have continued for any
length of time, because such a degree of cheapness would
have attracted specie from great Britain, where it had
not risen. Moreover, Bank notes had been issued at par
with specie, at its current value, whatever it was, and
they ought to have risen pari passu witli it, so as to be
exchangeable with it, and therefore whatever they wanted
HISTOBY OF THE CURRENCY. 509
of this exchangeable property must be considered as a
falling off from their original value, or a depreciation to
that extent. And, therefore, he was clearly of opinion
that the Irish paper currency was depreciated.
61. After shewing that the balance of payments
had been for a long series of years favourable to Ireland,
but that the exchange had never ceased to be greatly
depressed, he was asked — *
"Do you also mean on the whole of your evidence to give it as
your decided opinion, that there is and has been a depreciation in
the paper of currency of Ireland, and that the high rates of ex*
change, which have prevailed and still prevail, have arisen from
that depreciation?"
"I doj the high exchange in Dublin which has now con-
tinued for some years must, no doubt, have arisen, like all
OTHER PERMANENTLY HIGH EXCHANGES WHICH HAVE EVER EX-
ISTED, FROM THE DEPRECIATED STATE OP THE CURRENCY WITH
WHICH BILLS OF EXCHANGE ARE PURCHASED, and the Same
remedy might perhaps be resorted to with success in the present
case, which has never failed to be effectual on all former occasions,
namely, a removal of the depreciation."
These are the ideas of the men of 1696; we shall
find a long dreary period elapse before their truth was
again generally recognised in this country. The amazing
absurcuty of supposing that the exchange could have
fallen to 118, on account of the balance of payments
alone, can be easily shown. We cannot suppose tliat the
cost of transmitting the specie from Dublin to London
could have been more than £3 at most. Consequently
as £108 6s. 8d. was the par of exchamge, if the rate of
exchange fell below £110 6s. 8d. it would have been
cheaper to send the specie itself. Surely, the Irish
would never liave been so foolish as to pay £118 in
Dublin to purchase a debt in London of £100, when they
could place the cash itself on the spot for £110 6s. 8d.
62. The Directors of the Bank of Ireland had admitted
that before the Restriction Act, they were obliged to re-
gulate their issues of paper by the price of guineas, and
* Report, p. 122.
510 ELEMENTS OF POLITICAL EGONOMT.
the exchange with London. Whenever they had an
unusual demand for guineas, and the exchange was ad-
verse, they liad been o1)liged to diminish their issues to
prevent the continuance of the demand for guineas. As
soon, however, as they were released from paying in cash,
they no longer thought themselves bound to follow the
same rules, and we have seen how prodigiously they liad
extended their issues. They admitted, however, that it
was a possible case, that their issues might be too great,
and a new theory was now advanced which we discussed
at some length in a former chapter, but we notice it now
because this appears to have been the first occasion it was
propounded by mercantile men. Mr. Irving, being asked
if in his opinion, Irish Bank notes were depreciated,
said that he did not think so, although guineas were
selling at a premium.
^'Explain your reasons."
''I am of opinion that a bank managed with pmdence would
only issue notes in proportion to the demand whicli may be made
for those notes, in exchan^ for good and convertible securities, such
as mercantile bills of exchange payable at specific periods, of un-
doubted respectability, founded upon real mercantile transactions,
upon government securities such as exchequer bills, in the purchase
01 Spanish dollars, or other bullion, and the circumstances of the
bank notes of Ireland being demanded for such good and converti-
ble securities, I am of opinion, is a proof that they are not too large
in amount, and that their value is not depreciated. '
We shall see afterwards that this theory was adopted
by the directors of the Bank of England. It is one
quite opposed to that by whicli the Irish directors ac-
knowledged themselves obliged to follow whilst they were
liable to pay their notes in gold. Hence, if it was correct
it inevitably followed that the issues of a bank should be
governed on totally different principles under a convertible
and an inconvertiole paper currency.
63. After accumulating a considerable body of evi-
dence upon the subject, and examining witnesses of
all sorts, of various opinions, and various professions, the
HISTORY OF TBE CUBRENCT. 511
committee reported that the real exchange was in favour
of Ireland, and that the difference between the real and
nominal exchange arose from the depreciation of the
Irish paper. They pointed out the absurdity of supposing
that the value of gold had risen, and not that the paper
was depreciated.* They said that the difference between
the rate of exchange could never vary more than the cost
of transmitting specie from one to the other, and that any
excess above that could only arise from other causes.
They then noticed the enormous increase of the paper
currency that had taken place, since the only check
against over-issue was removed, namely, convertibility
into gold at the will of the holder,— the great quantity of
base and counterfeit coin fabricated and forced into circu-
lation,— and shewed that under an unfavourable state of
the exchange, the paper currency had always been dimi-
nished. "If prudence had not dictated such a course,
necessity would have compelled a diminution of issues, by
diminishing the stock of specie, which could only be
replaced at a loss proportionate to the existing rise of
exchange, and your committee observe that in fact as well
as in theoiy, the result of such practice always was and
must be the redress of the unfevourable exchange.'^ f
Since the Restriction Act, however, the Directors had
acted exactly upon the opposite principle; when the
exchange was unfavourable, they had greatly increased
their issues. Excessive issues of paper produce a pro-
portionate rise in the rates of the exchange, for these
are obviously influenced by the value of the medium
in which the payments are made^ and the quantity of
that medium necessary to effect a given payment must
be increased as the value of the medium diminishes,
no matter whether the payments be made in a degraded
and adulterated coin, or in a depreciated paper.J If
paper by depreciation comes to represent a less quantity
of money than it professes to do, it must make the
♦ Report, p. 4. f Ibid, p. 7. } Ibid, p. 1.
512 ELEMENTS OF POLITICAL EGONOHT.
exchange which it is to pay, appear unfavourable, in the
same niauner as coin in which it were to be paid would
have done, if by degradation it should cease to contain
the same portion of gold which it used to do; and the
removal of the degradation in the one case, and of the
depreciation in the other, would have the same effect in
bringing the exchange to par, or whatever might be
its real state.
64. After recommending several minor remedies, the
committee said, ^^ But all the benefits proposed by this
mode of remedies would be of little avail, and of very
limited dumtion, if it did not promise at the same time to
cure the dei)reciation of paper in Ireland by diminishing
its over-issue. ♦ ♦ ♦ ^jij your committee
do, in express terms, declare their clear opinion, that it
is incumbent on the directors of the Bank of Ireland,
and their indispensable duty, to limit their paper at all
times of an unfavourable exchange during the continuance
of the restriction, exactly- on the same principle as
thev would and must have done, in case tlie restriction
did not exist, and that all the evils of a hi^h and
fluctuating exchange must be imputable to them if they
fail to do so."
65. They then noticed the miserable state of the
silver coinage, or rather the base metal, and notes, and
I O. U's substituted in its place, which they said was
clearly to be traced to the unfavourable exchange. As
long as the exchange continued in that unfavorable state,
all the genuine silver coin transfeired itself to England,
and the place of the genuine silver coin was supplied by
these small silver notes in the country districts, and in
Dublin, where they were not issuable, by an extremely
base silver coinage, which was privately fabricated iii
gi'eat quantities, all of which evils could only be cured by
the restoration of the exchanges to their true state, and
the issue of a genuine silver coinage.
66. The committee contented themselves with de-
claring in the most emphatic terms, that the Bank of
HISTORY OF THE CURRENCY. 513
Ireland ought to regulate its issues by the state of the
exchanges, but it did not discuss the new theory pro-
pounded, that the paper currency should be regulated by
the mercantile bills of exchange offered for discount.
No one who has paid any attention to the principles
of the subject, and carefully considered the facts produced
before the committee can fail to acquiesce in their
judgment, and we cannot fail to remark that none
of the professional witnesses, i. e., the directors of the
Bank of Ireland, or the other bankers examined, had
attained the smallest glimpse of the principles which
governed their own business, and by wliich they should
ave directed their policy. Its true principles wei-e
clearly seen and announced solely by the extra-profes-
sional witnesses, and laid down by the statesmen who
formed the committee. We may suppose that fear of
giving offence to their customers, and so diminishing
their business and profits, may have somewhat dimmed
their perception.
67. As it was evident that as long as the different
currencies between the countries continued, there must
be an exchange from the want of a common medium
of payment, the committee strongly recommended that
the monies of circulation and account should be assimi-
lated, and that Bank of Ireland notes should be payable in
Bank of England paper, and that the Bank of Ireland
should establish a fund at their credit in London for that
purpose, and that all bills should be payable at a fixed
date, which measures had been founa to reduce the
Scotch exchanges to par, and maintain them so ever
since the year 1763, through all the political and com-
mercial convulsion of the period.
68. The presentation of this Report does not seem
to have excited any discussion in the House till many
years afterwards. In 1809, Mr. Parnell moved that the
currencies of England and Ireland should be assimilated
in accordance with the recommendation of the committee,
H H
514 ELEMENTS OF POLITICAL ECONOMY.
which was rejected without a division.* The Report
does not seem to have been printed for public circula^on
till 1826 ; but it was probably communicated to the Bank,
and produced some effect upon their policy. A feet was
stated by Mr. Foster, in the House, f that in the months
of May, June, and July, 1804, the directors diminished
their issues from three to two millions and a half, and
the exchange rose ; in August they increased them again,
and the exchange fell. The Chancellor of the Exchequer
(AdcUngton) declared that it was a perversion of terms
to infer that the depreciation of paper had any real effect
on the exchange. The excessive issue of paper might
produce a depreciation, but each country had a different
circulating medium, and the depreciation of either could
only have a nominal effect on the course of exchange.
Mr. Addinglon wholly overlooked the fact that payments
were made in Bank of Ireland paper, and the course of
exchange referred to that paper. If payments had been
made in silver coin of full weight, then it would have
been true that the exchange would not have been dis-
turbed by the depreciation of the paper. But the course
of exchange always relates to the medium in which the
payment is actually made, and a depreciation of that
medium necessarily causes an adverse state, in whatever
state the other parts of the currency may be, which are
not the medium of payment. Of this we have seen a
conspicuous instance in 1696, when the restoration of
the silver coinage immediately rectified the exchange,
although Bank paper continued to be depreciated lon^
afterwards. Mr. Fox, with premature exultation, said^
that he was glad to hear that the Chancellor of the
Exchequer allowed that an excessive issue caused a
depreciation, and that the House was never again to
hear the fantastical opinion that the paper was not
* Pari. Debs. Vol. xiv., p. 75. f Ibid. Vol. iv. p. 69.
} Pari. Debs. Vol. r^., p. 70.
H18T0BT OF THE CUBBSNGT. 515
depreciated^ but the value of gold raised. Had Mr. Fox
been able to look forward only six years, he would have
found that this fantastical opinion not only re-appeared,
but was maintained with more stubbornness and pertina*
city than ever.
69. Such was the occasion of the first declaration by
a parliamentary committee, of the principle that the
issues of the bank should be regulated by the foreign ex-
changes, a committee comprehending almost all the great
names of the different parties of all opinions. As it was
not then the custom to publish the lists of the divisions
in committees, we are not able to say whether they were
unanimous on the subject; but from the exceedingly
strong and decisive language of the Report, we may fairly
infer that the opinion of the committee was equally
strong and decided, and that if a minority differed from
the resolutions of the majority, it must have been a very
small one.
70. Atler the temporary disarrangement of the market
or paper price of gold in 1801, it gradually became better,
as the circumstances out of which it arose passed away.
And for several years the bank note did not vary much
from par. But about the year 1809, one of those great
phrenzies of commercial speculation which occurred in
1694 and 1720, again seized the nation.* The Bank of
England extended its accommodation to persons of noto-
riously insufficient capital, to most imprudent lengths.
Immense multitudes of country banks started up in all
directions, fanning speculation, and inundating the country
with their notes, exactly as they had done before 1793.
In 1797 they were reduced to 270; in 1808 they had
increased to 600; and in 1810, when the bullion committee
were appointed, they amounted to 721; and the quantity
of paper they had in circulation was supposed to amount
to £30,000,000. At the same time the Bank of England
increased its issues to £21,000,000.
* For fuller details, see Theory apd Practice of Banldag. Chap. ix.
HH2
• ■ •
• • • •
• • •
Price of
Ez^ang*
with
B. a.
8. d.
5 4
....35 6
5 5 ,
33 9
5 3 .
....34 9
5 3 .
...31 0
5 5 .
...29 6
5 7 .
> • • • ^o 6
516 ELEMENTS OF POLITICAL ECONOHT.
71. Concurrently with these extravaffant speculations
and issues of notes, the price of gold bumon rose rapidly,
and the foreign exchanges fell with equal rapidity, exactly
the same symptoms as had been manifested in Lt^land in
1804. And it was observed that the gold currency
disappeared suddenly from circulation. The following
figures taken at inteiTals are sufficient to shew the rapid
rise of the price of bullion and the fall in the foreign
exchange :
Prioe of StaiMUrd
Gold.
£ s. d.
Jan. 1805 4 0 0
Oct. 1805 4 0 0
July 1808 .... no quotation ....
Feb. 1809 .... 4 10 0
May 1809 .... 4 11 0
Jan. 1810 4 13 0
72. Under these circumstances, Mr. Homer, on the
1st February, 1810, moved for several accoimts relating
to currency and exchanges. Mr. Baring stated that
guineas then brought 26s. or 27s. A few days afterwards
tlie bullion committee were appointed.
73. After the full and minute account we have given
of the derangement of the Irish currency in 1804, we
need not go into any details of the bullion report.* It is
sufficient to say that the committee declared that this
great rise in tlie market or paper price of gold, was owing
to the depreciation of the home cun-ency from inordinate
increase, that, in fact, bank notes were at a heavy dis-
count. That the Bank of England should regulate its
issues by the foreign exchanges exactly as it had done
before the restriction, and tliat to restore the bank note
to ]>ar there was no effectual method but to compel the
l)ank to resume payments in cash.
• A full analysis of the Bullion Report is given in my Theory and
Tract ice of Banking. Chap. ix.
HISTOKY OF THE CURRENCY. 517
74. As on this occasion, a division of opinion manifested
itself on these financial questions, which seems to be as
permanent and deep seated as the divisions on political
questions, it may be of advantage to state shortly and
precisely the points upon which the respective parties
were at issue. The facts of course were easily ascertain-
ed and agreed upon. They were as follows :
I. That the mint price of gold bullion or the legal
standard of the coin was £3 17s. lO^d. per oz.
II. That the market price of gold bullion was then
£4 10s. per oz.
III. That the foreign exchanges had fallen to an enor-
mous extent; that with Hamburg 9 per cent.,
that with Paris 14 per cent.
IV. That the increase of bank notes had been very
great during the last few years, and was rapidly
augmenting.
V. That specie had disappeared from circulation.
75. Upon this acknowledged state of facts the
opposite issues maintained by the two parties, were as
follows :
The one party maintained —
I. (a) That the Bank notes were depreciated.
(A) That the diflFerence between the market price
and the mint price of gold bullion, was the mea-
sure of the depreciation.
II. (a) That the extreme limit to which the foreign
exchanges could by the nature of things fall, in
any case, was defined and easily ascertained, and
consisted of the expense of freight, insurance, and
some other minute causes.
(A) That in the then state of the exchanges
there was a very large excess of depression over
and above that limit, which was not attributable to
any of these causes.
(c) That this residual depression of the foreign
exchanges, and the rise of the market price above
518 ELSMENTB OF POLITICAL BCONOICT.
the mint price, was caused by the excessive issues
of bank notes in circulation.
III. ^That a diminution in the quantity of bank
notes would increase the value of the domestic
currency — would cause the foreign exchanges to
rise to par — and the market price of gold to fidl
to the mint price.
IV. That the Directors of the Bank of England
ought to follow the same rules in the extent of
their issues during the restriction of cash pay-
ments, as they were obliged to do before, viz.,
by regulating them by the foreign exchanges.
When the exchanges were favourable, and bul-
lion flowing in, they might enlarge them; when
the exchanges were adverse they must contract them.
76. In opposition to these principles, the other party
maintained, —
I. (a) That it was not the Bank notes that were de-
preciated, but the price of specie that had risen.
(b) That there was no difference between the price
of bullion, whether paid in notes or specie.
II. That the depression of the foreign exchanges
was ill no way wliatever attributable to the de-
preciation of the curi'ency, but was entirely caused
by the adverse balance of payments to be made by
Great Britain, the remittances to the arm\', the con-
tinental measures of Napoleon, and other political
measures.
ni. That no diminution or increase of the issues by
the Bank would have any effect whatever upon
the foreign exchanges, either in raising or depressing
them, or on the market price of bullion.
IV. Tliat since the restriction, there was no necessity
for observing the same rules in issuing their notes
by discounts, as before, i. e.^ by observing the course
of the foreign exchanges, but that tlie public demand
was the sole criterion, and so long as they adhered
to these rules, there could be no over-issue.
HISTOBT 07 THE CUBRENCT. 519
77. The Report gave some statistics regarding the
quantity of notes in circulation at diflFerent periods since
the restriction. However, they said that the actual
numerical amount of notes in circulation at any given
time was no criterion whatever, as to whether it was
excessive or not. DiflTerent states of trade, and different
extents of commercial operations, would require different
amounts of notes. When public credit was good, a
smaller amount would be required than when public
alarm was felt, and people had recourse to hoarding.
Moreover, the different methods of doing business, and
economising the use of the currency, much influenced
the amount which might be proper and necessary at any
period. The improved methods of business, the policy of
the Bank, the increased issues of country bankers, had
all tended to diminish the quantity of bank notes neces-
sary for commerce. Consequently, the numerical amount
alone was no criterion whatever; a surer test must
be applied, and that sure criterion was only to be
found in the state of the exchanges, and the price
of gold bullion.
78. The experience of the crisis of 1793 had proved
that an enlarged accommodation was the true remedy for
the failure of confidence in country districts, such as the
system of paper credit was occasionally exposed to. That
it was true the bank had refused the enlarged accommo-
dation in 1793. But the issue of exchequer bills was
exactly the same in principle, and the good effects that
followed that issue proved the truth of the principle, that
if the Bank had had the courage to extend its accommoda-
tion in 1797, instead of contracting it as they did, the
catastrophe which followed might probably have been
avoided. Some persons thought so at that time, and
many of the directors, since the experience of 1797, w^ere
now quite satisfied that the course adopted by the Bank
in that year increased the public distress, in which opinion
the committee fully concurred.
79. A very important distinction, however, was to be
520 ELEMENTS OF POLITICAL ECOHOMT.
observed between a demand for gold for domestic purposes,
sometimes great and sudden, and caused by a temporary
failure of confidence, and a drain arising from the un-
favourable state of the foreign exchanges, that a jtuticioui
increase of acco7mnodation was the proper remedy for the
former phenomenon^ hut a diminution of its issues the
correct course to adopt in the latter.
80. The Report was presented by Mr. Homer on the
9th June, 1810, but was not fonnally taken into conside-
ration till 6th May, 1811. Mr. Homer addressed the
House for upwards of three hours, in a speech which
obtained the admiration of all who heard it; he ended by
moving a series of sixteen resolutions. The first seven
related to the legal standard of value in this country, with
reference to which all contracts were made in this country.
8. That the promissory notes of the Bank were stipula-
tions to pay on demand, the number of pounds sterling
specified upon them. 9. That when Parliament passed
the Restriction Act, it had no intention that the value of
these notes should be altered. 1 0. That, nevertheless,
they had for a considerable time been below their legal
value, (11) which was caused by the excessive issues
of them, both by the Bank of England and the country
banks. 12. 13. That the extraordinary depression of
the foreign exchanges was in great part owing to the
depreciation of tlie currency of this country, relatively to
that of other countries. 14. That during the suspension,
the directors of the bank ought to regulate their issues
by the price of bullion and the foreign exchanges. 15.
That the only method of preserving the paper currency
at its proper value, was to make it payable on demand in
the legal coin of the realm. 16. That cash payments
ought to be resumed at the period of two years from
that time.
81. Mr. Vansittart, who moved the counter-resolu-
tions to Mr. Homer, controverted, at great length, the
principles of the report. He asserted that the only mode
m which a metallic currency could have a favourable effect
HISTORY OF THE CURRENCY. 521
on the exchanges was by exportation^ and that if exporta-
tion was prohibited by law, no effect could be produced.
This assertion, however, was sober good sense compared
to the lengths of wild extravagance into which he subse-
quently plunged. He said that the first seven resolutions
argued on the supposition that the standard was some-
thing visible and tangible. ^^ I affirm that a standard in
the sense used by these gentlemen, namely, a fixed and
invariable weight of the precious metals as a measure of
value, never existed in this country ! ! "* He ridiculed
the idea of the resolution that the weight at which any
such money is authorised to pass current is fixed ! 1
These extraordinary ideas he attempted to support by
reference to the degraded state coin had been in at differ-
ent periods, but which were yet legal tender, and which
he contended, proved that the coin was not any definite
weight of bullion. It was upon this point, he said, that
the question of depreciation depended. " Now, I do not
consider myself boimd either to admit or deny that
Bank notes have lost a value which they never possessed,
and which the legal coin of the country never possessed,
namely, a value estimated by a fixed weight of gold or
silver bullion. They never had any other than current
value founded on the public confidence in the Bank, and
this value, I firmly believe, and have distinctly stated in
my third proposition, that they possess as much as ever."
When the whole of the rest of his speech was a mere
repetition and development of such crazy ideas^ it is
mere waste of time to give any more details of it. There
is one more specimen, however, which we cannot refrain
from extracting. He says,* "it appears, then, that a dimi-
nution of the value of currency may have the effect of
improving the exchange, but cannot by possibility depress
it ! ! " Which means, that the more debased and worth-
less the currency of a country is, the more favorable
should be the foreign exchanges, or the higher should
foreigners estimate it.
* Pari. Debs. Vol. xvi. p. 925.
622 ELEMENTS OF POLITICAL ECONOMY.
So that while the French assignats were daily falling
lower and lower at home, the more should foreigners
have given for them ; so that while the French themselves
gave one livre in coin, for 1200 in assignats, the English
and other foreigners ought to have given their fiill nomi-
nal value in com, and even more than that according to
Mr. Vansittart. He then made several triumphant obser-
vations about there being no difference in transactions be-
tween bank notes and coin. Ue admitted that he had
been a member of the Irish Committee of 1804, and had
concurred in the opinion that Irish Bank notes were de-
preciated, but he said that the two cases were not
parallel; for it appeared not only that the current coin
was openly sold at a premium, but that an established
difference of price existed between payments in coin and
Irish paper, while Bank of England paper passed as
equivalent to guineas. This depreciation, however, he
denied had proceeded from excessive issues^ but from the
political circumstances of the period.
82. Such were the leading arguments against the
conclusions of the committee, which though somewhat
varied in expression, were constantly repeated. After
the exposition given in the preceding sections of this
chapter, of the various states of our coins at different
periods, it would be waste of time to attempt seriously
to disprove the outrageous folly of the proposition, that
the coins of Great Britain never were intended to contain
any fixed or certain quantity of gold or silver bullion in
them. If this had been true, what was the need of having
any gold or silver in them at all ; if it was not to regulate
their value?
83. Mr. Sharp, a member of the Bullion Committee,
adduced further facts to prove that the Bank notes were
depreciated ; he said it had been usual to send over specie
to Guernsey to pay the troops there. Each guinea had
lately been paid to the soldiers at 2'6s.; one regiment,
however, had refused to receive them at that rate. In
another case he knew of a person who had received a
HI8T0BY OF THE CITBHENC7. 523
legacy of 1,000 guineas which was paid in specie, he
went to invest it in the funds, and on asking the price of
the 3 per cent, was told 64^. But on asking what the
price would be if paid in real money, he was told, after
some consideration, he might have it at 60, which was
the price actually paid. So that while the government
were arguing at Westminster that guineas were of the
same value as Bank notes, they were at the same time
dishonest enough to pay them away to the soldiers at
23s. Sir Francis Burdett also statea that he had been
oflFered goods at far diflferent prices, according as he
should pay for them in specie, or in Bank notes.
84. When we read the arguments and evidence,
which seem to be so perfectly satisfactory, according to
all the usual principles that command assent, we feel
some curiosity to know what was the opposing theory
set up against them, and it was simply this, that the
pound sterling was nothing tangible at all ! It was an
imaginary vision ! a vague idea ! an airy nothing ! which
never had any existence in nature at all, and that accor-
dingly, everything, money and bullion included, might
vary in endless changes round this ideal centre. It had
even less substantiality than a whiff of smoke ! It was " a
sense of value" communicated in some mysterious way
from one person to another. And this is the view main-
tained by a numerous party up to the present day. Mr.
Canning pursued the author of this insensate folly with
unsparing ridicule in his speech. He also ably pointed
out the consequence of not allowing guineas to circulate
at their market value, which had been followed by their
total disappearance, whereas, dollars, which were begin-
ning to disappear, when they were bound down to the
value of the depreciated Bank paper, were immediately
restored to circulation, when they were allowed to pass
current at their intrinsic value. However, thoug'h he
fully agreed in all the principles and reasonings of the
Bullion Report, he did not think it expedient that the
Bank should be called upon to resume cash payments
524 ELEMENTS 07 POLITICAL ECONOMY.
in SO short a period as two years. The House of Com-
mons then came to a solemn vote, that a £1 Bank note and
seven shillings, was equal to a guinea, or 21 shillings. Or
that 21 was equal to 27. Or that a £1 Bank note which
professed to represent 20 shillings, was equal to 14s.
Among those who came to this sage decision, was the
name of Robert Peel.
85. The principles of the hullion report having
been decisively rejected by parliament, and pronounced to
be fallacious, by the resolutions which declared 21 to be
equal to 27, the Bank took no measures to bring their
notes to a nearer conformity to their nominal value.
When the committee were appointed the paper price of
gold bullion was £4 13s., the true meaning of which is
that the £1 note was worth about 16s. 8d. The market
or paper price continued to rise till in November, 1813,
it stood at £5 10s., the greatest height it ever reached^
which gives the real value of the note as 14s. 2d. The
long continuance of high prices partly caused by a con-
tinued series of deficient harvests, and partly by the depre-
ciation of the paper in which they were paid, gave rise to
the belief that they would continue permanent. Immense
speculations began in land-jobbing, vast tracts of waste
and fen land were reclaimed. It was, at this time, that
the immense agricultural improvements in Lincolnshire
were effected. Rents in most cases rose to treble what
they were in 1792; all the new agricultural engagements
entered into at this period were formed on the basis of
these extravagant prices ; landlords and tenants increased
their expenditure in a like proportion, family settlements
were made on a commensurate scale. As a natural con-
sequence, country banks greatly multiplied. In 1811,
they were 728, in 1815, they had risen to 940, and the
amount of their issues was supposed, on the most mode-
rate estimate, to be about £25,000,000. After the disas-
ters of the French in the Russian campaign of 1812, and
the battle of Leipsic, the ports of Russia and Northern
Germany were thrown open to British commerce. This
HISTOBT OF THE CUBBENCY. 625
naturally gave rise to enormous speculative exports and
overtrading.
86. The harvest of 1813 was prodigiously abun-
dant, so that the price of corn, which in August, 1812,
had been 155s. and had receded gradually from that point
till August, 1813, fell with great rapidity, and in July,
1814, was only 68s. The exporting speculations were at
their height in the spring of 1814, and the prices of all such
commodities rose to a very unusual height, in many cases
to double and triple of what they had been before.*
Every branch of industry was by the preceding causes
affected, and the natural and inevitable consequences soon
followed. A violent revtdsion and general depression of
prices of all sorts of property, which entailed such general
and universal losses and failures among the agricultural,
commercial, manufacturing, mining, shipping, and build-
ing interests, as had never before been paralleled. As is
always the case, the consequences of the wild speculations
and engagements persons had entered into during the con-
tinuance of the fever continued to be felt for some years
after. The disasters commenced in the autumn of 1814,
continued with increasing severity during 1815, and
reached their height in 1816-7. During these years 89
country bankers became bankrupts, and the reduction of
the issues of country paper was such, that in 1816 its
amount was of little more than half what it had been in
1814.
87. This general discredit of country Bank paper
resembling what had previously occurred in 1793 and
1797, caused a demand for additional issues from the
Bank of England to help to maintain public credit, and
though this caused an extension of the Bank paper by
upwards of three millions, so great was the abstraction
01 country Bank paper from circulation, (to certainly
three times the amount of the Bank of England issues)
that the value of the whole currency rapidly rose, so that
♦ Tooke's Hist, of Prices, Vol. i. p. 347.
526 SLEMBHTS OV POLITICAL XCONOlfT.
while in May 1816, the market or paper price of gold was
£5 6s. the exchange in Hamburg 28.2, and that on
Paris 19, in October 1816, the paper price of gold had
rapidly faUen to £3 18s. 6d., the exchange with Hamburg
was 38, and that on Paris 26.10, and they remained
with little variation at these prices till July, 1817.*
88. Hence, at length was manifested the most com-
?lete triumph of the principles of the Bullion Report
lie great plethora of this worthless quantity of paper
currency being removed, the value of the whole currency
was raised almost to par, so near, in fact, that the smallest
care and attention would have brought it quite to par,
and if means could have been taken to prevent the growth
of the rank luxuriance of country bank notes, cash pay-
ments would have been resumed at this period, with
the utmost possible facility, and without exciting any
disturbances.
89. The partial resumption of cash payments was
attended with perfect success ; it caused no very great
demand for gold, which continued to accumulate in the
bank till October, 1817, when it reached its maximum,
being £11,914,000. In that month the bank gave notice
that it would pay olF in cash all the notes dated before
Ist January, 1817, or renew them at the option of the
holders. In the course of 1817 a veiy large amount of
foreign loans were contracted for; Prussia, Austria,
and other continental states of lesser importance, were
endeavouring to replace their depreciated paper by a
metallic currency, and as money was abundant in England,
a very large portion of these loans was taken up here.
The effect ot this began to manifest itself in April, 1817,
when the exchanges with Hamburg and Paris began to
give way, and the market price of gold to rise. These
phenomena increased gradually throughout 1818, until in
January, 1819, the price of gold was £4 3s., the exchange
on Hamburg 33*8, and that on Paris 23'60. In July,
* Commons Report on the Resumption of Cash Payments, 1819. p. 309.
HISTORY OP THB CUBRBNCY. 527
1817, tbe new gold coinage began to be issued from the
Mint in large quantities. Tbe consequence was a steady
demand for gold set in upon the bank, and in pursuance
of its notices the sum of £6,756,000* was drawn out of it
in gold. Just at this time the British Government re-
duced the rate of interest upon Exchequer bills. The
much higher rate of interest offered by continental govern-
ments caused a great demand for gold for exportation,
and in the beginning of 1818 a very decided drain set in.
The Bank directors, however, determined to set all the
principles of the Bullion Report ostentatiously at defiance.
While this great drain was going on, they increased their
advances to government from £20,000,000 to £28,000,000,
and. though they knew perfectly well that the demand of
gold was for exportation, they took no measures whatever
to reduce their issues for tne purpose of checking the
export. At the same time the issues of country banks
had increased by two-thirds since 1816.
90. Tliis demand for gold became more intense during
1818 and 1819^ and it became evident that the bank
would soon be exhausted if legislative interference did
not take place. Accordingly on the 3rd February, 1819,
both Houses appointed committees to inquire mto the
state of the bank ; and on the 5th April they reported
that it was expedient to pass an Act immediately to
restrain the bank from paying cash in terms of its notices
of 1816-7. An Act for that purpose was passed in two
days' time. It was stated in the report of the Commons
that in the first six months of 1818, 125 millions of francs
had been coined at the French Mint, three-fourths of
which had been derived from the gold coin of this
coimtry-t The ActJ forbade the Bank to make any pay-
ments m gold whatever, either for fractional sums under
£5, or any of their notes, during that session of parliament.
• Eeport of Commons' Committee, p. 4.
t Pari. Debe. Vol. xxxix. p. 1400. t Statute, 1819, c. 23*
528 ELENCBNTS OF POLITICAL SCOKOMT.
The Act, therefore, totally closed the Bank for payments
in cash.
91. Both Houses of Parliament immediately appointod
committees to inquire into the subject. The one in the
Commons was presided over by Sir R. (then Mr.) Peel.
The entire and unanimous strain of evidence of the
mercantile world was now completely in favor of the
opinion of the Bullion Committee, which had been so igno-
miniously rejected eight years before. And the current
of commercial opinion converted the chairman, who
introduced the bill into the House, directing that the Bank
should resume specie payments at the mint price of gold,
on the first of May, 1823. However, the Bank was
afterwards permitted to commence paying in specie on
the 1st May, 1821.
92. Immediately aft;er the cessation of the war, the
government had taken in hand the great work of a
complete re-coinag'e, when the great principle, first
discovered by Locke, was at length adopted, of having
only one standard of value. During the course of the
preceding century, merchants had become accustomed to
consider all contracts to be made in gold, and this was
now declared to be the sole legal tender. At the end of
the 18tli century, the relative value of gold and silver had
undergone a perceptible change in the markets of the
world. Consequently, the adjustment that had been
made in 1717, no longer corresponded to the market
value of the two metals ; and if a silver coinage had been
issued at the former denomination and weight, the very
same effects would have followed, which had been ex-
perienced so often before ; it would have immediately
disappeared from circulation. In order to guard against
this the power of private persons to have silver coined was
taken away, and the pound weight of silver was ordered
to be coined into 66, instead of 62 sliillings; but of these,
4 were kept back for the expenses of coinage, and
consequently only 62 were issued. The result of which
is, that the present shillings pass current for rather more
HISTOBT OF THE CURRENCY. 529
than 6 per cent, above their intrinsic value. In order to
prevent any injustice to individuals from this depreciation
of the coinage^ it was enacted that no tender of payment
in silver above 40s. at any one time should be legal,
either by tale or by weight. This arrangement of the
English coinage has this great merit, that it allows a very
considerable change to take place in the market value of
gold and silver, without causing any disturbance in the
currency. In France, where silver is the legal tender of
the state, gold and silver are coined accordmg to their
relative market value, the consequence has been that
silver has nearly disappeared from circulation. The fact
seems placed beyond all question, that the prodigious
additions recently made to the quantity of gold, have
caused an alteration in the relative values of gold and
silver. Gold has almost superseded silver in France, for
exactly the same reasons as it did in England in the days
of William III., and during the 18th century, namely,
that gold was overrated in comparison to silver. This
occurred notoriously in France during the autumn of 1856.
It cannot take place in England until the difference in
their relative values exceeds the artificial difference in
the English coinage.
93. We have seen that when guineas were first coined,
they were intended to represent 20s., and that it was
owing to an error in the rating that they came to pass for
21s. On the first of July, 1817, a new gold coin was made
current by proclamation, of the value of 20s., which was
ordered to be called a sovereign, in imitation of the coin
of that name, first issued by Henry VII. It was ordered
to be of the weight of 5 dwts. 3.274 grns. of standard
gold. And thus it became the British pound. When
persons ask. What is a pound? The answer is very
simple, it is 5 dwts. 3.274 grains of gold, 22 carats fine,
and 2 carats alloy. And any bank note that promises to
pay so many pounds, is a promise to pay so many
multiples of that unit, and nothing else. The last coinage
of guineas took place in 1813. Since this last reformation
1 1
530 ELEMENTS OF POLITICAL ECONOMY.
of the coinage, no alteration that requires notice has been
introduced, except the striking of 2s. pieces, called florins,
to pave the way for the decimal division of the currency.
But a change of this magnitude, however beneficial it
might ultimately be, involving as it does a temporary
derangement in afiairs of such stupendous magnitude,
will not easily be efiected in this country.
TABLE 8HKW1N0 THE DIF9ESBNT VALUES FOB WHICH THE POtJlTO
WBtQHT OP SILTEB ASD GOLD WEBB OBOBBED TO PASS CDBBEHT,
BY VARIOUS HINT :NDESTUHES FBOM 1841 TO 1817.
(Fnm Ae Rtporl of Ihe O'laausaumem apiiiulaJto inqidn into ihe CoiutitiUioii, ffc.
Iff Iht Rayat Mint P. 35, 1M9.J
SILVER.
GOLD.
SILVER.
GOLD.
DalaAJJ,
CnrrentVttlue
CnmMiiValna
Date A.D.
Current VnluB
CnrronlVrinc
onib.or
of lib. or
of lib, or
of lib. DT
MiBt Price.
MintPric*.
Mint Price.
Mint Price
£ >. d.
£ ,. d.
£ >. d.
£ .. i
13U
1 S 9
IS 0 0
1553
1345
1 1 S
13 3 4
6 inden.
3 0 0
36 0 0
1340
1 3 4
jl 3 3
13 3 4
1573
1347
1577
1582
3 0 3
36 1 101
. 1 3 6
1593
1347
1350
.■.'Zi
14 0 0
1593
r 36 to 0
13S1
^ IK H»tniB01
1601
3 3 0
133 10 0
1353
1604
4 3 6
13 indon-
I, . n
1605
40 10 0
, . 0
IS 0 0
1611
44 It 0
1459
1
1613
3 3 0
(44 10 0
1413
t40 18 4
9 indea-
161T
3 3 0
40 IB 4
1 10 0
16 13 4
(44 10 0
1459
1633
3 3 0
t41 0 0
14ei
3 0 0
16 13 4
1635
3 3 0
41 0 0
1464
1 17 6
30 IS B
1626
3 5 6
(44 10 0
1465
163S
3 2 0
(4. 0 0
ia iDilen-
I 17 6
33 10 0
1649
J3 3 0
41 0 0
1509
1536
3 5 0
(37 0 0
(35 3 6
1670
I6SB
44 ID 0
1533
3 5 0
35 3 6
1543
3 8 0
3S 16 0
'
1547
30 0 0
i7ie
1
to
U 3 0
46 14 6
1549
4 IS 0
34 0 0
1817
1
1650
19 16 0
181T
1
(1 16 0
Now in
3 6 0
46 14 6
1553
U 0 0
force.
(
ii8
Toils «AmtM^ the diirf variatmu m tht market price tf gotdbvOionfrom
1790 to 1819, md the true value iff Ae Bank <f England £1 note
during the Seitriclion.
Morkel price of Gold
Be«l Value of Ibe
BuUioD.
Bank Noitt
JU1IUU7, 1790
£ .. rf.
£ M. d.
10
3 17 8
AagoBt as, 1797
Bepumber 1, 1797
3 17 10)
1 0 0
Ociuber 19. 1798
Ociobei se, nud
3 17 9
t 0 0
8q>lUDberl3, 1799
No qnoUtion.
April 6. ISM
April 13. 1804
4 0 0
0 19 fl
Ottoba IS. 180S
October 93, ISOA
Octol>cra,18IO
OcloberS, 1810
4 S 0
0 IS 4-3
Febroaiy 13, 1811
4 13 0
0 16 U-4
Match 26, 1811
4 10 0
0 16 3
Ociobcra9,l8ll
4 18 0
0 IS 11
Octobers. 181 a
6 7 0
0 14 5
Janniiry S3, 18l3
6 4 0
0 IS 0
August 6, 181 a
S 10 0
0 14 3
February, 1814
0 14 4-3
April 13, 1814
Uaj 31, 1814
6 6 0
0 14 e
3 3 0
0 IB 1-7
Juno, 7, 1814
5 0 0
0 15 7 3
Juno 28. 1814
4 10 0
0 17 4
4 0 0
0 18 1-6
NoTember 16, 18U
4 8 0
0 17 B'7
April 4, 1B15
6 7 0
0 14 6
JUDC9. 1B1G
6 S 0
0 14 10
June 30, 1819
S 0 0
0 16 73
July 7, iSlB
4 14 n
0 10 7-3
Augosl 4. IS IB
4 10 0
0 17 4
StplemberlS, 1815
4 9 0
0 17 63
OctolorlS, laiS
4 3 0
0 18 8-S
Janunrj- 2. 1818
4 8 0
0 19 OS
AprU9, 1816
4 1 0
0 19 31
April 33, 1916
4 0 0
0 19 e
JulvS. 1816
3 13 0
0 19 8-7
October B,1B16 1
3 IS 6
0 10 10-a
April 4, 1817 [
April 18, 1B17
0 19 8-7
July IB. 1817
0 19 6
JbdubitSS. 1B18
4 I 0
0 19 9-1
Febnimyia, 1818
4 8 6
0 IS 11
October 6, 1818
0 IS 03
Juinary33, 1810
4 3 0
0 18 96
CHAPTER Vn.
ON TEE BEGUimON 0? A PAPER CTJRBENCT.
BEGULATION OP A PAPEB CUBBENCT. 585
CHAPTER Vn.
ON THE REGULATION OF A PAPER CURRENCY.
IMPORTANCE OF THE SUBJECT.— POLICY OF THE BANK IN 1783 -IN 1793— IN n97— IN
1818— IN 1825-IN 1838.— ALL THEORIES OF PAPER CURRENCY MAY BE REDUCED TO
THREE VARIETIES— LORD OVERSTONE'S DOGMA ON THE "CURRENCY PRINCIPLE."—
SIR ROBERT PEEL'S THREE STATES OF OPINION ON THE CURRENCY QUESTION.— THE
BANK ACT OF 1844.— FTS INCONSISTENCY WITH THE THEORY OF ITS FRAMEBS—
POLICY OF THE BANK IN 1847— IN 1866— IN 1867.— CONCLUSION.
1. We have in the preceding parts of this work, en-
deavoured to establish it as one of the most important
doctrines of Political Economy, that instruments of credit,
such as Bills of Exchange, Bank notes, Bank credits, &c.,
are separate and independent values, wholly distinct from
money and commodities, and they do not represent
money, as Bills of Lading represent goods. However,
they only maintain their value through the belief and
confidence that they can be exchanged for money, and
if that belief or confidence fails, their whole value vanishes
into air. When we consider the colossal amount of
this property, which exists in modern times, consisting of
hundreds of millions, the destruction of which is in every
respect equivalent to the destruction of any other species
of tangible property, we can at once see the amazing
importance of the question, as to the best method of
maintaining the value of this property, and guarding
536 ELEMENTS OF POLITICAL ECONOMY.
against its liability to destruction. When we consider
that the value of property in this country, which consists
of credit, is at least £600,000,000 and that the cash is not
supposed to exceed £70,000,000, we see that the value
of the credit is somewhat, what physicists would call, in
a position of unstable equilibrium. This wonderful mass
of property may, if mismanaged, come to resemble what is
said has taken place upon opening the tombs of some
Etrurian kings. There appeared to be the form of man
reposing and arrayed in his royal robes, but upon the
slightest vibration disturbing the atmosphere, it imme-
diately sunk into a few spoonfuls of dust I
2. The proper regulation, then, of the paper currency,
is not only by far the most important problem m
Political Economy, but one of the most important in
human affairs. It sums up within itself the whole science
of Political Economy. To settle it on truly scientific
principles, to arrive at the true method of controlling it,
demands the investigation and settlement of the mean-
ing of every single term in the science. Hume says, that
the whole end of civil government is for the adminis-
tration of justice between man and man, so we may say,
that the whole end of Political Economy is to regulate
the cun'ency.
3. We shall, then, shortly state the principles which
the Bank of England has stated to have guided it, in
various monetary crises, their results, and the principles
upon which the Bank Act of 1844 is intended to be
founded ; by which we mean the specific theory of cur-
rency adopted by its framers, and also examine whether
it does carry out those principles, and also how the Bank
has managed itself in the crises which have occurred since
its passing.
4. The first crisis of which we have a distinct account
took place in 1782, when the unhappy war with America
was fortunately terminated, and immediately a prodigious
extension of the foreign commerce, which had been pre-
viously unusually restricted, took place. The enormous
BBGULATION OF A PAPBB CURRENCY. 537
markets thrown open to the merchants, led to the most
extravagant overtrading, which was greatly fostered
by the most incautious issues by the Bank,* and a
very alarming drain of specie from the Bank, which pro-
duced a crisis threatening to compel them to stop pay-
ment. The directors, however, considered that if they
could only restrain their issues for a short period, the
returns in specie in payment of the exports would soon
set in in a more rapid manner than they went out. They
determined, therefore, to make no conununication to
the government, but for the present to contract their
issues, until the exchanges turned in their favour. The
alarm felt by the Bank was greatest in the month of May,
1783. They then refused to make any advances to
government on the loan of that year, but they did not
make any demand for payment of the other advances to
government, which were then between nine and ten mil-
lions. They continued this policy up to October, when
at length the drain had ceased from the country, and
money began to flow in from abroad. At length, in the
autumn, when the favourable signs began to appear, they
advanced freely to government on the loan, although at
that time, the cash in the Bank was actually lower than
at the time when they felt the greatest apprehensions.f
5. The doctrine then stated by Mr. Bosanquet that
guided the directors was this : That while a drain of
specie is going on, their issues should be contracted as
much as possible, but that as soon as the tide had given
signs of ceasing and turning the other way, it was then
safe to extend their issues freely. This was the policy
they acted upon, and it was entirely successful, and the
credit of the Bank was saved.
*Evidence of Mr. Tooke — Committee on Bank of England Charter,
1832, p. 269.
f The evidence of Mr. Bosanquet before the Lords' Committee of
Secrecy, 1797, p. 31 ; and before Commons' Committee, p. 26. It was
reduced to £473,000. Evidence of Mr. Tooke before Committee on
Bank of England Charter, 1832.
538 ELEMENTS OF POLITICAL BCONOMT.
6. At this period, as is well known, an immense
extension took place in the industry of the nation.
From being one of the most backward of European
nations in this respect, it suddenly became one of the
most active. Burke says, that wnen he first came to
England in 1750, there were not 12 bankers out of
London.* These ])rodigious mdustrial works that then
commenced, demanded a very much enlarged currency
to carry them on. The Bank of England would not
establish any branches in the provinces, and its mono-
poly prevented any other banks of large and solid capital
being formed. The consequence was that multitudes
of small shopkeepers of all sorts started as "bankers,"
L e., issuers of paper currenc}^, in all directions. By
1793, there were nearly 400 country bankers inundating
the country with their notes. There was at this period,
and had been for some time previously, an enormous
and undue extension of commercial speculation all over
Europe and America. In the autumn of 1792 general
failures began, and became very serious in January,
1793, and in February, when war was declared, a gene-
ral crash came. Three hundred country banks were
very much shaken, and upwards of 100 stopped payment.
7. This great pressure extended to the London
bankers as well as the country ones. One of them says
that the extraordinary state of credit had obliged every
person connected with trade and money transactions, to
gather in and husband every resource to meet all de-
mands. That for six weeks back every man of money
and resources had been straining every nerve to support
himself and immediate friends, and could not give that
support to others which they would have been disposed
to do. All these circumstances naturally produced a
demand on the Bank of England for support and discounts.
But the Bank being thorouo-hly alarmed, resolved to con-
tract its issues. Bankruptcies multiplied with frightful
* Letters on a Kegicidc Peace. Works Vol. ii. p. 292.
BBGULATION OF A PAPBB CURBBNCY. 539
rapidity. The government urged the Bank to come for-
ward and support credit, but they resolutely declined.
8. Sir Francis Baring* greatly blames the directors
for their conduct on this occasion. He says that they
at first accommodated themselves to the crisis, but '^their
nerves could not support the daily demand for guineas,
and for the purpose of checking that demand, they cur-
tailed their discounts to a point never before experienced ;
and that if they determined to reduce their issues, it
should have been gradual. Their determination, and the
extent to which it was carried, came like an electric
shock.
9. He says that there are three diflferent causes for a
great demand for guineas, f
1. For Export.
2. For the purpose of hoarding, from want of confi-
dence in the government, and in the circulating paper.
3. To enable country banks to discharge their de-
mands, whilst confidence in the government and in the
bank remained entire.
That every measure ought to be taken to prevent and
mitigate the first cause, except prohibition or bankruptcy.
We may reserve the second till we come to 1797. That
the third ought to be viewed, not with indifference, but
with a disposition to spend almost their last guinea. He
shews, from the state of the exchanges, that it was quite
impossible the guineas could have left the country, as
the loss on exporting them to Amsterdam was £3 6s. 3d.,
and to Hamburg, £4 2s. 6d. per cent., and it was
notorious that large quantities of gold and silver were
coming in from France. The cause of this was the con-
tinued depreciation of the assignats. Under these cir-
cumstances, he says that the directors acted quite
wrongly, they ought to have seen that the gxiineas would
have very soon come back to them, and that they ought,
in fact, to have followed tlie precedent of 1783, which had
been so successlul.
• Observatiomj, &c. p. 21. t Ibid. p. 23.
510 SLEMENTS OF POLITICAL ECONOMY.
10. When the Bank adopted this perverse course,
universal failure seemed imminent. Sir John Sinclair
remembered the precedent of 1697, when Montague had
sustained public credit by an issue of Exchequer bills,
and thought that a similar plan might be followed in this
crisis. The minister desired him to propose a scheme for
the purpose, which he presented on the 16th April.* A
committee of the House of Commons was immediately
appointed. In the meantime, a director of the Royal
Bank of Scotland came up with the most alarming news
from Scotland. The public banks were wholly unable,
with due regard to their own safety, to furnish the
accommodation necessary to support commercial houses,
and the country bankers. That unless they received
immediate assistance from government, general failure
would ensue. Numerous houses, who were perfectly
solvent, must fall, unless they could obtain temporaiy
relief. Mr. Macdowall, M.P. for Glasgow, stated that
the commercial houses and manufactories there were in
the greatest distress from the total destruction of credit.
That this distress arose from the refusal of the Glasgow,
Paisley, and Greenock banks to discount, as their notes
were poured in upon them for gold.
11. The committee reportedf that the general em-
barrassment of commercial credit was so notorious as to
call for an immediate remedy, without much examination.
That the failures which had taken place, had begun with
a run on those houses that issued circulating paper with-
out sufficient capital, but had extended so as to aflfect
many houses of great solidity, and possessed of funds
ultimately much more than sufficient to answer all de-
mands upon them, but which could not convert those
funds into money in time to meet the pressure. That the
sudden discredit of so large an amount of bankers' notes
• Sinclair's Hist, of the Public Revenue, Vol. ii. p. 289.
f Pari. Hist. Vol. xxx. p. 740.
BBGULATIOK OF A PAPER CURRENCT. 541
had produced a most inconvenient deficiency of the cir-
culating medium. These circumstances had caused
bankers to hoard to a great extent. That unless a circu-
lating medium was provided, a general stoppage must
take place. That they had requested a number of the
most eminent merchants to meet and consider a plan of
issuing Exchequer bills to a certain amount, under
proper regulations, who had unanimously agreed in the
propriety of such a course, as the best remedy that could
be devised.
12. The committee recommended that Exchequer
bills to the amount of £5,000,000 should be issued
under the directions of a board of commissioners appoint-
ed for that purpose, in sums of £100, £50, and £20, and
under proper regulation.* After considerable doubts
were expressed by Mr. Fox and Mr. Grey, as to the
policy of this extraordinary measure, which was unknown
to the constitution and might subvert our liberties, the
bill passed.
13. No sooner was the Act passed than the committee
set to work. A large sum of money, £70,000, was sent
down to Manchester and Glasgow on the strength of the
Exchequer bills, which were not yet issued. This
unexpected supply coming so much earlier than was
expected, operated like magic, and had a greater effect in
restoring credit than ten times the sum could have had
at a later period.f
14. When the whole business was concluded, a
report was presented to the Treasury .J It stated the
knowledge that the loans might be had, operated, in many
instances, to prevent them being required. The whole
number of applications was 338, and the sum applied for
£3,855,624, of which 238 were granted, amounting to
£2,202,000; 45 for sums to the amount of £1,215,100
were withdrawn, and 49 rejected. The whole sum ad-
• Sinclair — Hist, of Revenue, Vol. n. p. 298.
f Ibid. p. 754. X 1**^^« Hist. Vol. xxx. p. 754.
542 ELEMENTS OF POLITICAL ECONOMY.
vanced was repaid; two only of the parties assisted
became bankrupt, all the others were ultimately solvent,
and in many instances possessed of great property. A
considerable part of the sum was repaid before it was due,
and all the rest with the utmost punctuality. So much
scrupulous care was taken to preserve secrecy as to the
names of the applicants, that they were not known to that
hour except to the commissioners and their own sureties.
After all expenses were paid, the transaction left a clear
profit to the government of £4,348.
15. Whatever were the prognostications of its ftitility
and danger before it was done, its success was perfect
and complete. The contemporary writers all bear witness
to the extraordinary effects produced. Macpherson says,
that the very intimation of the intention of the legislature
to support the merchants, operated like a charm all over
the country, and in a great degree superseded the neces-
sity of the relief, by an almost instantaneous restoration
of confidence.* Sir Francis Baring concurs in this view,
and adduces the remarkable success of the measure as an
argument to shew the mistaken policy of the bank.
The panic was at length happily staid. The failures
up to July had been 932, in the remaining five months
they were reduced to 372. The gold continued to
flow in, and in the last six months of 1793, and during
the two following years, money became as plentiful
as in time of peace, f and 4 per cent, interest could
scarcely be got.
16. All contemporary writera bear witness to the
wonderful success of this expedient. After careful deli-
beration the Bullion Report warmly approved of it,
censured the proceedings of the Bank of England, and
especially cite it as an illustration of a principle which
they laid down, that an enlarged accommodation is the
true remedy for that occasional failure of confidence
♦ Annals of Commerce. Vol, iv., p. 269.
f Sir F. Baring — Observations, &c., p. 46.
REGULATION OF A PAPER CURRENCY. 543
in the country districts to which our system of paper
credit is unavoidably exposed.
17. In the same year Mr. Pitt had obtained an Act of
Parliament, removing all restrictions on the powers of the
bank advancing to government,* and he proceeded to
draw on them to an unparalleled extent. At the same
time enormous subsidies were sent abroad. These pro-
ceedings began to alarm the directors in December, 1794,
and throughout 1795, they made repeated, though una-
vailing efforts, to curb Mr. Pitt. These perpetually
increasing issues of paper turned the exchanges against
the country in May 1795, nevertheless, they continued
to be increased. In the autumn the drain oecame still
more serious ; the market price of gold rose to £4 4s. the
ounce. In December, 1795, they found that they must
take the most stringent measures to save themselves, and
resolved to fix beforehand the amount of advance they
could make day by day, and gave notice that if the
application on any day exceeded the sum so resolved
to be advanced, a pro rata proportion of each applicant's
bills should be returned without regard to the solidity
of the bills.
18. During the first three months of 1796, the im-
mense foreign loans^ and the extravagant issues of the
Bank, kept the foreign exchanges adverse. But after
that, the severe restrictive measures it adopted turned
the exchanges in favor of the country, and gold began
to flow in in the autunm. However, the Bank did
not relax its stringency to the merchants, but Mr. Pitt
was constantly drawing upon them. At the end of
1796, and beginning of 1797, a severe drain set in upon
the Bank for internal purposes, the country banks fore-
seeing that the storm would burst upon them first, as it
had done in 1793.
19. Although there was no danger of a discredit of the
note, and the drain was merely to serve internal purposes,
♦ Theory and Practice of Bankmg. Vol. ii., p. 78.
544 ELEMENTS OP POLITICAL BCONOMT.
the directors increased the stringency of their measures.
The exchanges were decidedly favourable, but the Bank
pursued such a severe policy, that in five weeks its issues
were contracted by nearly £2,000,000. On the 21st
January, they stood at £10,550,000; and on the 25th
February, they were reduced to £8,640,250. The
private bankers, of course, were obliged to follow a similar
course. On the 25th the pressure upon the Bank was so
severe, that an order in council was sent to them to
suspend payment on Monday the 27 th. It had then
£1,086,170 in cash.
20. The relief produced by this measure was immense*
It immediately enlarged its discounts. Within one week
it increased its accommodation by nearly two millions.
22. In the enquiry that ensued the most competent
witnesses entirely condemned the policy of the Bank, and
attributed the immense depreciation from the forced sales
of stock, to the excessive rigor of the contraction.* In
the year 1810 the governor of the Bank being examined
before the bullion committee, stated that, after the ex*
perience of their policy of restriction, many of the directors
repented of the measure; and the bullion committee
explicitly condemned the policy of the Bank, both in 1793
and 1797. And this opinion seems perfectly correct.
Nothing could be more unhappy than their regulations
of the amoimt of their issues. When the exchanges were
violently adverse, so that it was enormously profitable to
export gold, they enlarg^ed them to an extra vagrant extent ;
and when the exchanges were extremely favorable, so
that gold was sure to flow in, they restricted them with
merciless severity. The issues, which were £14,000,000
when the exchange was against the country, were re-
duced to £8,640,000 when they had been for several
months eminently favorable. W-e thus see how totally
the directors had forgotten the principles which were so
successful in 1783.
• Theory and Practice of Banking. Vol. ii. p. 96.
BEQULATION OF A PAPER CURfiENCT. 545
2 2 . The long* continuance of the bank restriction, and the
substitution of the paper promises of the Bank of England
for solid bullion, had completely debauched the minds of
the far larofer portion of the commercial world, and the
majority of parliament. They wholly lost sight of the true
principles of the currency, and ostentatiously maintained
the opinion that the pound was an absolute nothing*, and
might be as well represented by a bit of paper, as well as
by bullion. They came to the solemn resolution, that a
Bank of England pound note and Is., which would only
exchange for 15s., was the same thing as a golden gninea
which would exchan^ for 21s. With the examples of
the French assignats before them, they strenuously main-
tained that the issues of notes could have no effect upon
the exchanges. These ideas were not very long in agfain
being* put to the test, after the Bank had, substantially
speaking, resumed cash payments in 1817.
23. In October, 1817, the Bank had very nearly
£12,000,000 of bullion, and it gave notice that it was
Srepared to pay off all its notes dated before the 1st
anuary of that year. At that time very large loans for
foreign countries were being contracted for, which were
trying to replace their depreciated paper currencv by a
metallic one, and as money was abundant in England, a
large portion was taken up here. In consequence of these
the exchanges began to give way, and the market price
of gold to rise. These phenomena increased gradually
throughout 1818, until in January, 1819, the paper or
market price of gold was £4 3s., the exchange on Ham-
burg 33-8, and that on Paris 23*50. In July, 1817, the
new gold coinage began to be issued in large quantities.
The consequence was that a demand for gold set in upon
the Bank, and in pursuance of its notices, £6,756,000 was
drawn out of it in gold, and this continued during 1818.
The Bank directors, however, determined to set all the
principles of the Bullion Report ostentatiously at defiance,
while this great drain was going on, they increased their
advances to government from £20,000,000 to £28^000,000,
K K
046 ELEMENTS OF POLITICAJL ECONOMT.
and though they knew perfectly well that the demand for
g'old was for exportation, they took no means to check
it, by diminishing" their issues. At the same time the
issues of the country banks had increased by two-thirds
since 1816.
24. It soon became evident that the Bank would be
entirely drained if a suspension of cash payments were
not resorted to. On the 7th of April an Act was passed
to prohibit the Bank from making* any payments in cash
in terms of its notice. Committees of both houses were
then appointed, with Mr. Peel as chairman of that of the
Commons.
25. The chief points of interest in these reports
regarding our present subject are the opinions held by
the witnesses respecting the great doctrines of the bullion
report. The report of neitlier House entered into the
question of the theory of the currency. They were con-
nned to recommending a certain course of action, but
they examined a number of witnesses of the first eminence
on the subject, and the result of their evidence is most
extraordinary. It will be remembered that both in 1804
and 1810, the immense preponderance of commercial
testimony was entirely adverse to the doctrine that the is-
sues of paper currency had any effect upon the exchanges
or the price of bullion, or should be regulated by them.
Nevertheless, the reports of both committees were entirely
in the teeth of the mercantile evidence. The Bullion
Report had now been before the country for nine years,
and had caused more public discussion, both in parlia-
ment and in the press, than almost any subject whatever;
and it is perfectly manifest that if its piinciples were
erroneous, the commercial world would only have been
further strengthened in tlieir opposition to them. But what
was the result now ? The overwhelming mass of com-
mercial evidence was entirely in their favour. The current
of mercantile opinion was now just as strong on their side
as it had formerly been against them. What could be
more triumphant than this ? What could be more
REGULATION OP A PAPER CURRENCY. 547
splendid testimony to their accuracy and soundness
than the fact that they had converted the immense hostile
majority of the commercial world?
26. The resolutions in the Commons were introduced
by Mr. Peel, on the 24th May,* who freely owned that
in consequence of the evidence he had heard and the
discussions upon it, his opinions had undergone a ma-
terial change. He acknowledged without shame or re-
morse, that his opinions were very different now to what
they were when he voted against Mr. Horner's resolution
in 1811. Having determined to dismiss from his mind
all former impressions, and the memory of the vote he
had formerly given, and to give the question his un-
prejudiced and undivided attention, he had now come to
the conclusion that Mr. Homer's resolutions represented
the true nature and laws of our monetary system. Every
sound writer agreed that the true standard of value con-
sisted of a definite quantity of gold bullion, a certain
weight of which with an impression on it, denoting it to
be of that certain weight and fineness, constituted the only
true intelligible and adequate standard of value. No
doubt the Bank was perfectly solvent, but did it follow
from that, that there could be no over-issue of its paper ?
If solvency alone was a sufificient proof that there was no
excess of circulation, the theory of Mr, Law was just,
and the land as well as the funds might be safely con-
verted into a circulating medium. There was, in fact, no
test of excess or deficiency but a comparison with the
price of gold. As the Bank had so entirely repudiated
the principles of the Bullion Report, they could not be
expected to act upon them ; it might therefore appear ne-
cessary to prescribe such a limitation of their issues as
would secure the power of the Bank over the foreign ex-
changes. He himself thought this a very unwise plan,
because it depended so much on circumstances, whether or
not there was an excess of circulation. There were occa-
sions when what wa^ called a run on the Bank might be
arrested in its injurious consequences by an increase of its
• Par. Debs. Vol. xl. p. 676.
KK 2
548 KLBMEKTS OF POLITICAL ECONOlfr.
issues. There were other occasions when such a state of
things demanded a curtailment. In the year 1797, when
a run was made on the Bank, hut when the exchanges
were favorable, and the price of gold had not risen, it was
proved that an extension of issues might, by restoring
confidence, have rendered the original restrictions unneces-
sary. On the other hand, if the run was the effect of un-
favourable exchanges and the consequent rise in the price
of gold, the alarm must be met by a reduction of the
issues. It was^ therefore^ impassible to prescribe any
specific limitation of issues to be brought into operation
at any period however remote. The quantity of circu-
lation which was demanded in a time of confidence varied
so materially from the amount which a period of despon-
dency required, that it was an absolute impossibility
to jix any circumscribed amount. He said that the time
was come when the connection that existed between
the government and the Bank must be dissolved, and
it must revert to its original principle of business.
The obstinate opinions of the directors of the Bank
shewed that they were unfit to be trusted with the
management of the pecuniary interests of the British
community. The House must resume its powers which
it had abdicated too long. There could be no inconveni-
ence in compelling the Bank to pay in specie at the mint
price. They had done so from 1776 to 1797, and the
price of gold never rose above £3 17s. 6d. But it was
said that it had since risen to £5 2s. and that the standard
was variable. The fact was, we had since then introduced
a substitute for gold, and its price was considered in rela-
tion to that substitute. Let not the House be led away
hy any calculation to mistake the price for the value.
When people talked of gold rising in price^ were they
prepared it show that it had risen in intrinsic value f
Let them not talk of its price in paper, but in any other
commodity of a real and fixed value. So far from
gold having risen in value, since the last fifty years,
it had actually fallen in value, partly from the greater
REGCJLiLTIONS OF A PAPER CUBRENOY. 549
abundance of the metal itself, and partly from the
substitutes that were used for it. A very prevalent
theory was, that instead of regulating paper by the value
of gold— gold should be regulated by the value of paper.
This was nothing less than a fraud upon the public cre-
ditor. It was vain to think that foreign nations could be
imposed upon by such a deception. The only result would
be that after the public creditor had been cheated, the
coin would be debased. The only course was to revert to
the ancient standard of the realm, and to beware of argu-
ments which w ere not only fraudulent, but would not
accomplish their own objects, while they would ag^a*
vate present difficulties. Every deviation from the ancient
practice would be quoted as a precedent for a more ex-
tended departure from that practice. Under future diffi-
culties the conduct of their ancestors would be pane-
gyrised by the advocates of the suspension of cash pay-
ments, and conclude because the price of gold had risen
still further in its relation to paper, that the principle
by analogy ought to be extended. The restoration of the
value of our currency had always been a striking politi-
cal feature in the history of the country, and an object of
the most earnest solicitude of our most distinguished
statesmen. Three periods were especially memorable
for great reforms in the coinage-^in the reigns of Edward
I., Queen Elizabeth, and Wuliam IIL These periods
must ever be regarded with pride and satisfaction. They
were of much greater difficulty than the present. On
Queen Elizabeth's accession, the coin was reduced to ^ of
its nominal value* Under Burleigh's advice she resolved
to restore the value. Plenty of persons dissuaded her
from that idea, alleging the difficulties of the attempt.
But Burleigh maintained that those very difficulties
should constitute the motives for perseverance, as they
must raise and establish the character of the country, and
inspire its enemies with respect. The Queen had nobl v
persevered, and in her monumental inscription, above all
her titles to distinction^ this one shone preeminent,
550 ELEMENTS OF POLITICAL ECONOMT.
"MONETA IN JUSTUM YALOREM BEDUCTA.'* He then
detailed the restoration of the coinage by William III.
The arguments against it in those times were identical
with those used against it at the present time. However,
fortunately, the firmness of King William and Mr.
Montague triumphed over prejudices in theory, miscon-
ception in reasoning, and the greatest financial and
political difficulties. The idea that this country owed its
glory and military honours to an inconvertible paper cur-
rency was ridiculous ; we had abundance of prosperity
and military gloir before 1797, before we were blessed
with an inconvertible paper currency. The true reason
of her diflTerence from other states was that she had
always kept her faith inviolate. It was this that cheered
the country under all dangers, and caused her to exult
in victory. It was this feeling that carried the country
through the dismal voyage she had just accomplished,
and now that they had reached the other shore in safety,
let them not abandon the great principle which had
supported them. Every consideration of policy, good
faith, and justice, called upon them to restore the ancient
and permanent standard of value. He allowed that he
had once entertained views different from those he now
held, but he had given his mind candidly to a re-inves-
tigation of the whole subject, and he felt himself bound
to state honestly, that he was now a convert to the doc-
trines regarding our currency he had once opposed.
27. We must beg the especial attention of our
readers to the preceding abstract of Sir Robert PeePs
speech on this occasion. It will be seen that he was
now in the Secoito state of his opinions on the currency
question, and we shall see whether they correspond with
his ultimate state when he carried his Bank Act of 1844.
The Bank ultimately resumed payment, on the 1st May,
1821.
28. The overwhelming preponderance of mercantile
opinion in 1819, adhered to the doctrines of the Bullion
Report. One body alone obstinately refused to be
REGULATION OF A PAPER CURRENCY. 651
convinced — the majority of the Court of Directors of the
Bank of England. Notwithstanding that the governor
and deputy-governor, and several other directors of the
Bank, had given in their adherence to tliese doctrines, the
majority of the court still persisted in the old opinions,
and on the occasion of some questions having been sent
for their consideration by the committee of the House of
Commons, took the opportunity of recording publicly
their disapproval of the doctrines which were now in the
ascendant. Oh the 25th March they resolved —
'* That this court cannot refrain from adverting to an"] opinion >
strongly insisted upon by some, that the Bank has only to*reauce its
issues, to obtain a favourable turn in the exchanges, and . a conse-
Juent influx of the precious metals ; the court conceives it to be its
uty to declare that it is unable to discover any solid foundation for
such a sentiment."*
It took eight years longer for the light to penetrate the
Bank parlor. At length in 1827, the Bank was at last
obliged to strike its colors, and the resolution was
solemnly expunged from their books.
29. The next great occasion on which the truth of the
principles of the Bullion Report was manifested, was in
the great crisis of 1825. From various circumstances
which we have fully detailed elsewhere,! capital had
accumulated so rapidly in 1823, that interest was driven
down to an unusually low rate. The Scotch Banks gave
no interest on deposits. This generated an enormous
speculative fever. A great drain of bullion began early
in 1824. Between January and October, the bullion sank
from fourteen to eleven millions. The exchange on Paris
had been falling ever since the close of 1823. The last
time it was above par was in June 1824, and since then
the fall was continuous. The decrease in bullion had been
steady, uniform, and rapid, ever since March. Now,
when it was known that immense sums were leaving the
* Commons' Eeport, p. 263.
■J- Theory and Practice of Banking. Vol. ii. p. 241. et seq.
552 ELEMENTS OF POLlttCAL ECONOMT.
country, and the exchange falling, what was the policy of
the Bank ? It increased its issues. During the month
of October 1824, they were increased £2,300,000. In
April 1825, their issues were 3^ millions higher when
they had only 6^ millions, than when they had 14
millions.
30. In the middle of 1825, the coming storm began to
5ortend. The Bank at last iawoke to its folly in May.
'he country bankers had followed in the specuLfttive steps
of the Bank, and foreseeing the danger b^an to provide
for it. The Bank then b^an violently to contract its
issues. This sudden change of policy only aggravated
the general feeling of discredit. As the autumn went on
the surrounding gloom became deeper and deeper ; at last
the storm fairly began on the 29th November, by the fall
of several large country banks. On the 8rd December,
the panic began in London. On the 12th December,
one of the greatest city bankers stopped. A general
run took place, and several more came down, dragging
with them a multitude of country connections. That
was the great week of the panic.
31. The papers and the public had fully anticipated
that the Bank would maintain a policy of the most rigid
severity, and let the evil work its own cure, by the fall of
the houses who had been imprudent in their speculations.
And the Bank fully acted upon this policy up to Wed-
nesday, the 14th December. The ministers decidedly
refused to sanction a restriction Act, and the Bank resolv-
ed to pay away its last sovereign. The mint was kept
constantly at work, but it could not supply coin with
sufficient rapidity, and it kept constantly diminishing.
But this policy would not do. And on the 14th the
Bank totally changed its policy, and discounted with the
utmost profiiseness. They made enormous advances
upon Exchequer Bills, and securities of all sorts. Mr.
Harmau said, " We lent it by every possible means, and
in modes we had never adopted before ; we took in stock
fts security, we purchasea exchequer bills, we made
BSGULATIOlff OF A PAPER CURBENCT. 563
advances on exchequer bills, we not only discounted out-
rights but we made advances on deposits of bills of
exchange to an immense amount, in short, by every pos-
sible means consistent with the safety of the &tnk, and we
were not on some occasions over nice ; seeing the dreadful
state in which the public were, we rendered every assis-
tance in our power." Between Wednesday and Saturday,
the Bank issued £5,000,000 of notes, and this audacious
policy was crowned with the most complete success ; the
panic was almost instantly stayed! By Saturday, the
17th, the panic in London was stayed, and during^ the
following week by despatching a large supply of Bank
£1 notes, which were opportunely found, to the country
districts, the panic was allayed there.
32. The circumstances of this famous crisis are the
most complete and triumphant examples of the truth
of the principles of the Bullion Report, and of Sir Francis
Baring, already quoted. When the drain of treasure
from the Bank was severe and unceasing, and notoriously
for exportation on account of foreign loans, the Bank,
with infatuated obstinacy, had increased their issues,
instead of contracting them, in defiance of the clearest
warnings of the Bullion Report. When after six months
continuance in this fatal policy they at last reversed their
course, and contracted their issues. In the course of the
autunm, the drain for exportation ceased, but continued
for internal purposes, the demand for gold was entirely to
support the tottering credit of the country bank notes.
Now, as the country bankers were only too glad to with-
draw their own notes, and substitute gold for them, there
was not the slightest danger of an increase of Bank of
England notes adding to the general amount of the curren-
cy of the country, but just the reverse. Consequently, it
was just the precise case in which Sir Francis Baring and
the Bullion Committee said that it was the duty of the Bank
of England to extend its issues to support general credit.
There was not the smallest danger tnat an extension of
issues would, under such circumstances, turn the foreign
554 BLBMENTS OF POtltlCAL BCONOlTr.
exchanges against the country. The character of the
demand was declared in the most unmistakable manner.
On Thursday the 15th, a meeting of merchants took place,
when it was shewn that Pole and Co, had a surplus of
£170,000, after the payment of all claims upon them,
besides large landed and other property of the partners.
Another great house had enougn to pay 408, in the
pound. Now, if the course that had been adopted on the
Wednesday had been adopted on the Monday, these
tremendous catastrophes might have been avoided. One
of the principal country bankers wrote to them to point
this out to them.
He said :
*^ My opinion was, that the crisis at that time was brought on by
excessive issues ; but when the panic came, country bank paper was
brought in for Bank of England, and, therefore, all that was
immediately wanted was an Exchange op Paper. I stated in a
letter I wrote upon the subject to the Bank, on the 14th December,
1825| that they would not have to increase the sum total of circula-
tion, but all they would have to do was to exchange A. for B.,
and in my letter I recommended them to issue a million a day.
which they did, for otherwise most of the Banks in London, as well
as the countiy, must have stopped."
And accordingly they did issue, and all contemporary
evidence proves that it was this profuse issue of
£5,000,000 of paper in a few days, that stayed the panic.
If they had persevered in the restrictive policy for three
days loug'er the total and entire destruction of commercial
credit would infallibly have ensued. In short, if they had
followed the precedents of 1793 and 1797, so strongly
condemned by the Bullion Report, all credit would have
been destroyed. They followed the principles laid down
in the Bullion Report, and the country was saved.
33. Sir Robert Peel at this time was as we have
seen, an entire convert to the principles of the Bullion
Report, and the next occasion when we have him de-
livering his opinion on the subject, was at tlie renewal
of the Bank Charter in 1833, when Bank notes were lirst
REGULATION OF A PAPER CURRENCY. 555
declared to be legal tender, except by the Bank itself.
He said "that it was expedient for the public interest that
there should be but one Bank of Issue in the metropolis,
in order that it might be enabled to exercise an undivided
control over the issue of paper, and give facilities to
commerce in times of difficulty and alarm^ which it
could not give with the same effect, if it were subject to
the rivalry of another establishment."* He resisted at
great length, the proposition of making Bank Notes legal
tender, as a departure from the principle of the Act of
1819, and the true principles of a paper currency . He
also strongly doubted the policy of giving the IBank of
England a monopoly of the paper currency.
34. A most important change about this time began
to take place in the opinions of many mercantile men as
to the meaning of the word "currency" or "circulating
medium." We have seen that the immense preponderance
of opinion before this included Bills of Exchange under
the title of circulating medium. At this period the
majority of commercial witnesses excluded them from
that name, which they exclusively confined to money and
Bank notes payable to bearer on demand. We have in
a previous chapter examined and refuted this opinion.
But at this time a more extraordinary dogma still became
prominent, which was this; ^^That when Bank notes
are permitted to be issued the number in circulation
should always be exactly equal to the coin which would
be in circulation if they did not exist.^^ This principle
is contained in the evidence of Mr. Loyd, which we have
already quoted at p. 333. And this principle, its advo*
cates have denominated the "Currency Principle.''
Now, as Lord Overstone gave no reason for this principle,
but announces it dogmatically, we shall call it Lord
Overstone's dogma, because he is the most distinguished
advocate of it.
35. It is well known that one of the points which
• Hansard. Third Series. Vol. xviu. p. 1336.
556 SLEMSNTS OF POLITICAL ECONOMY.
Bacon most strenuously insists upon, is extreme caution
in arriving at the liigliest general principles, of flying too
soon at the highest generalizations. This dogma of
Lord Overstone's is a specimen of the worst species of
this error. He gives no reason whatever for such an
opinion, it is a mere naked dogma, resting on no foun-
dation whatever, and it is one of the greatest delusions
ever palmed off on the credulity of mankind, and never
could have emanated from or been believed in by any
one who had the slightest knowledge of Banking accounts.
36. At the hazard of some repetition, but tor the sake
of clearness, we will bring the various points of the
question togfether before the reader : —
All theories of paper currency, however numerous and
perplexed they may appear to be, may be reduced to three
varieties :
1. To issue paper based upon bullion.
2. To issue paper based upon land, the public funds,
or upon commodities.
3. To issue an inconvertible paper currency.
Of these, the second is John Law's theoryi which we
have elaborately refuted ; the third is confined to a very
small knot of persons, and is not worth arguing about.
We may confine our attention to the first alone, which
makes bullion the only proper basis of a paper currency.
37. But the advocates of this theory are divided into
two sects. The one maintains that if bank notes are
permitted to be issued, they ought to be exactly equal in
quantity to the coin they displace. This is what we have
said is called in modern times the *' currency principle."
The other party maintains that this limitation is un-
necessary, and that it is too severe. They say that if the
notes are made payable on demand, and are, practically
speaking, convertible at the will of the holder, that the
extent of these issues may safely very greatly exceed the
amount of specie that would be in circulation under a
purely metallic cuiTcncy. They say that the true test of
RItQULATION OF A PAPBE CURBBNCT. 557
the proper Quantity of paper that may he safely issued
is to he found in the market price of g'old hullion, and the
state of the foreign exchangees.
38. Of these two principles the first is that which was
adopted when a paper currency was first invented. And
of this the Bank of Venice was the first example ; which
we may take as the type of them. This hank, as we have
seen at pag-e 279, merely exchanged its notes for bullion,
which it kept in its vaults until demanded again in ex-
change for notes. Consequently, the notes in circulation
were always exactly equal to the bullion they were sub-
stituted for. The bank never did any business on its own
account, it was a mere office for exchanging notes for
bullion, and bullion for notes. This, then, was the cur-
rency principle pure and simple.
39. As a type of the banks constructed on the second
principle, we may instance the Bank of Scotland. It was
organized as follows : A number of adventurers paid in
a certain quantity of cash to a common fund, and they
were allowed to issue as many notes as they pleased upon
this basis, on the simple condition that they should always
be payable to bearer on demand. This bank did business
upon its own account. It discounted bills of exchange
with its own notes. For ten years after its foundation it
received no deposits from the public. It was, in fact,
endowed with the power of creating money by issuing its
own notes, which were equivalent in fact to an anticipa-
tion of deposits from the public. Within a few years of
its foundation its notes in circulation were five times the
amount of specie it held, which were equivalent to so
much additional money to the nation. We see, therefore,
that these two banks were constructed on very difierent
principles, and that the credit of a paper currency could
be supported on a metallic basis of one fifth.
40. The Bank of England was constructed on a principle
difierent to either of these. It was, in fact, intermediate
between them. For while it was not rigidly restrained to
exchanging paper for bullion like that of Venice, it was
558 KLSBdmiTS OF POLITICAL ECONOMY.
not allowed to issue paper ad libitum like that of Scotland.
Its whole capital, £1,200,000, was lent to g-overnment,
and it was allowed to issue notes to the same extent^ the
credit of which was supported by the annuity payable by
government for the loan of its capital. Now, it is quite
manifest that as the original £1,200,000 raised in specie
from the contributors to the Bank was lent to government,
and was spent in caiTying on the war, and the Bank was
permitted to manufacture and issue notes to an equal
extent^ for the purposes o^ commerce, that the nation had
the benefit of the money twice over, and that the amount
of notes issued were exactly that quantity in excess of
the existing metallic currency. The Bank also made a
double profit, because it had the 8 per cent, paid by the
government on the original loan, and also the commercial
profits on the use of the notes. Hence, we see that to the
extent of £1,200,000 the Bank was founded on a violation
of the currency principle.
41. Some other additions were made to the capital of
the Bank on a similar principle, until at last all restrictions
were taken away, and it was allowed to make unlimited
issues on their being payable to bearer on demand. But
a large number of London bankers were at the same time
making unlimited issue of tlieir own promissory notes, so
that we see at this period the " currency principle " was
not even thought of. And until the Bank Restriction Act
of 1797, this paper was always convertible at will.
42. We have already detailed the establishment of the
principle, that during the restriction, and the inconverti-
bility of the note, that the depreciation of the note was to
be estimated by the market price of gold bullion and the
foreign exchanges. And all the advocates of this princi-
ple declared that that was the sole test of an excessive
quantity of paper. In the year 1810, the Bullion Com-
mittee adopted this principle. All the speakers in
Parliament who adopted the buUionist side of the question
maintained the same views. They all maintained that
the more paper there was, the better^ so long as it was
REGULATION OF A PAPER CURRENCY. 659
4
payable to bearer on demand, and the state of the foreign
exchanges carefully watched. No countenance or favor
was shewn by any one to the doctrine of the currency
principle ; not that it was unknown, it was perfectly well
known and condemned. Mr. Thornton, one of the most
eminent of the party who was one of the framers of the
bullion report, says of it in his Inquiry into the Nature
and Effects of Paper Credit, " Some political persons
have assumed it to be a principle that in proportion as the
gold of the Bank lessens, its paper, or as is sometimes
said, its loans, (for the amount of the one has been
confounded with that of the other) ought to be reduced.
It HAS BEEN ALREADY SHEWN THAT A MAXIM OF THIS
SORT, IF STRICTLY FOLLOWED, WOULD LEAD TO UNI-
VERSAL FAILURE." Here we have a direct and
explicit condemnation of the cuiTcncy principle, by a
writer who was thoroughly familiar with the practical
part of the question, and was acknowledged to be one of
the most eminent authorities of his day.
43. The principles of the Bullion Report were adopted
by Parliament and Sir Robert Peel, in 1819, and all the
speakers. Sir Robert Peel included, maintained that it
was impossible to limit the issues of the Bank, and
adopted the test of the market price of bullion and the
foreign exchanges as the only guide on the subject, as we
have fully shewn before. And this was the second state
of Sir Robert Peels opinions on the Currency question,
and all this time there was not a syllable breathed in
favor of the currency principle. On the contrary, it was
expressly repudiated. This we must beg our readers
carefully to bear in mind, that in 1819 the currency
PRINCIPLE WAS totally REPUDIATED BY THE AUTHORS
OF THE Act of 1819.
44. Time, however, wore on. The Bank rejected the
principles of the Bullion Report, both in theory and
practice, and brought on the crisis of 1825. We have
seen that they attempted measures of the most extreme
severity in the panic, and were obliged to abandon them,
560 ELEMBNTS OF POLITICAL SCOKOHnr.
and saved themselves and the country by so doing. In
1833, Sir Robert Peel again gave it as his opinion that it
was imprudent to encourage the formation of another
Bank in the metropolis, because it would not so well
be able to give facilities to commerce in times of difficulty ;
another distinct reptidicUion of the Currency principle.
And up to this time there was no advocate of the cur-
rency principle.
45. The Bank in 1838 was ^ceeJiSy mismanaged, and
brought on the crisis of 1839, and it was at this time that
the Currency principle^ which had been so long rejected,
came into fashion under the leadership of Mr. Jones
Loyd, now Lord Overstone, and several other writers of
note. These opinions being advocated by men of great
ability, converted Sir Robert Peel, who now entered
upon the THIRD state of his opinions upon the currency
question.
^' Sic volvenda »tas commutat tempora remm,
Qaod ftiit in pretio, fit nullo denique honore,
Porro aliud succedit, et e contemptibos exit,
Inque dies magis appetitar, floretque repertum
Laudibus, et miro st mortaleis inter honore.'*
46. The Bank Act of 1844 is a formal and deliberate
attempt to carry into effect the currency principle. On
the 6tn May, 1844, Sir Robert Peel moved a resolution
of the House, that it was expedient to continue for a
limited time certain of the privileges then enjoyed by the
Bank of England, subject to any conditions that might be
passed by any act for that purpose.* In brin^g this
resolution forward, he gave a preliminary sketch of the
evils of the paper currency as it then stood, and the
methods he proposed for placing it on a sounder footing.
After dwelling on the importance of a metallic standara,
and exposing the absurdity of the theories which were so
prevalent during the Restriction Act, and the advantage
of having a single standard of value, he addressed himself
• Hansard. Third Series, Vol. lxxiv. p. 720.
REGULATION OF A PAPER CURRENCY. 561
to the more immediate subject for consideration — ^tlie
state of the paper circulation of the country, and the prin-
ciples which ought to regulate it. —
" I must state at the outset^ that in using the word money, I mean
to designate by that word the coin of the realm, and promissory
notes payable to bearer on demand. In using the words paper cur-
rency, 1 mean only such promissory notes. 1 do not include m these
terms bills of exchange, or drafts on bankers, or other forms of paper
credit There is a natural distinction, in my opinion, between the
character of a promissory note payable to bearer on demand and
other forms of paper crccut, and oetween the eflFects which they re-
spectively produce upon the prices of commodities, and upon the ex-
cnanges. The one answers all the purposes of money, passes from
hand to hand without endorsement, without examination, if there be
no suspicion of forgery ; and it is in fact what its designation impUes
it to be, currency or circulating medium. ♦ ♦ ♦ I think expe-
rience shews that the paper currency, that is, the promissory notes
payable to bearer on demand, stands in a certain relation to the
gold coin and the foreign exchange, in which other forms of paper
credit do not stand. There are striking examples of this adauced
in the Report of the Bullion Committee of 1810, in the case both of
the Bank of JSngland, and of the Irish and Scotch banks. In the
case of the Bank of England shortly after its establishment, there
was a material depreciation of paper in consequence of its excessive
issue. The notes of the Bank of England were at a discount of 17
per cent. After trying various expedients, it was at length deter-
mined to reduce the amount of Bank notes outstanding. The con-
sequence was, an immediate increase in the value of those which re-
mained in circulation, the restoration of them to par, and a corres-
ponding improvement in the foreign exchanges. In the case of Ire-
land in 1804, the exchange with England was extremely unfavour-
able. A committee was appointed to consider the causes. It was
denied by most of the witnesses from Ireland that they were at all
connected with excessive issues of Irish notes. * * * In the
spring of 1804 the exchange of Ireland with England was so unfa-
vourable that it required £118 10s. of the notes of the Bank of Ire-
land to purchase £100 of the notes of the Bank of England.
Between the year 1804 and 1806, the notes of the Bank of Ireland
were reduced from £3,000,000 to £2,410,000, and the effect of this,
taken in conjunction with an increase of the English circulation,
was to restore the relative value of Irish paper and the exchange
with England to par. In the same manner an unfavoiurable state of
the exchange between England and Scotland has been more than
L L
562 BLEMBNTS OF POLITICAL ECONOMY.
once corrected by a contraction of the paper circulation of Scotland.
In all these cases the action has been on tnat part of the paper credit
of the country which has consisted of promissory notes payable to
bearer on demand. There has been no mterference with other forms
of paper credit, nor was it contended then, as it is now contended
by some, that promissory notes are identical in their nature with
bills of exchange, and with checks on bankers, and with deposits,
and that they cannot be dealt with on any separate principle. '
47. Now, every one of Sir Robert Peel's statements
in this speech are utterly erroneous ! In the first place,
he was now infected with the heresy that Bills of Ex-
change are not currency, or circulating medium. The
entire fallacy of the examples he quoted, we have amply
demonstrated elsewhere,* and the assertion, that at those
periods promissory notes were not held to be identical
m their nature with Bills of Exchange, is utterly
erroneous, because we have abundantly shewn that the
best authorities did maintain that Bills of Exchange
were circulating medium, and it was only in 1840, that
the opposite opinion prevailed !
48. It was impossible for Sir Robert Peel not to^see
the inconsistency of his measure of 1844, with his ex-
pressed sentiments in 1810 and 1833, that it was inex-
pedient to limit the issues of the Bank to any J* fixed
amount, because there were times of commercial difficulty,
when an increased issue of notes might be the proper
remedy. There is no doctrine more strenuously insisted
on by the Bullion Report, by the statesmen of 1819,
as well as by the Government in 1833, and Sir Robert
Peel himselii at both these periods, than that it was
impossible to fetter the discretion of the Bank in its
issues. Sir Robert Peel knew that he was now taking
away this power fi'om the Bank altogether, and accor-
dingly he was obliged to meet this objection. He said :
^^ It is said that the Bank of England will not have the means,
which it has heretofore had, of supporting public credit, and of
affording assistance to the mercantile world in times of commercial
♦ Theory and Practice of Banking. Chaps. \'mi. and ix.
REGULATION OF A PAPER CURRENCY. 563
difficulty. Now, in the first place, the means of supporting credit
are not means exclusively possessed by banks. All who are pos-
sessed of unemployed capital, whether bankers or not, and who can
gain an adequate return by the advance of capital, arc enabled to
afiorJ, and do afford that aid which it is supposed by some that
bsmks alone arc enabled to afford. In the second place, it may be
a question, whether there beany permanent advantage in the main-
tenance of public or private credit, unless the means of maintaining
it are derived from the bona fide advance of capital, and not from a
temporary increase of promissory notes, issued for a special pur-
pose. Some apprehended that the proposed restriction upon issues
will diminish tne power of the Bank to act with energy at the
period of monetary crisis and commercial alarm and derangement.
jSut the object ot the measure is to prevknt (so far as legislation
can prevent) the recurrence of those evils from which we suffered
in 1826, 1836, and 1839. It is better to prevent the paroxysm
than to excite it, and trust to desperate remedies for the means of
recovery."
Sir Robert Peel, therefore, deliberately took aw.iy
the power of the Bank to act in extreme occasions, under
the impression that this Act would prevent these extreme
occasions from arising. We shall see how this hope was
fulfilled.
49. We shall now state the mode in which the cur-
rency principle was attempted to be carried out. It was
calculated that the commerce of the country would never
require less than £14,000,000 in any event, to carry it
on with. The Bank was allowed to issue notes to that
amount, based upon government securities, and all above
that amount solely on the basis of bullion deposited witli
the Bank. So that for every five sovereiffiis deposited
with the Bank it might issue a £5 note, lor every five
sovereigns taken away from the Bank a £5 note must be
cancelled.
50. It was supposed that this plan carried the currency
principle into exact eflfect, and that by its means the paper
notes in circulation would be exactly equal in amount to
what a metallic currency would have been without them.
It was also alleged that the " currency principle *' being
carried into efifect, banking business could not be too free,
L L 2
564 ELEMENTS OP POLITICAL ECONOMY.
and a great distinction was drawn between ^^ banking
principles" and " currency principles."
61. The slightest reflection will shew the singular
error counnitted by the framers of the Act. Because it
is quite evident that the £14,000,000 of bank notes are
an addition to the metallic currency. These are issued
against public securities. But how were the public secu-
rities obtained by the Bank? By purchasing them with
gold. And as the gold that purchased them is in circu-
mtion, and the £14,000,000 of bank notes are also in
circulation, it is quite evident that the notes are just so
much in excess of the existing metallic currency, just
exactly as the original £1,200,000 notes issued to repre-
sent its first capital was in excess of the existing metallic
currency.
52. But this is not the only error of the theory of
the framers of the Act. They talked a great deal of the
distinction between *^ currency principles " and " banking
principles,^' and Sir Robert Peel said that bankers should
only make advances out of bond fide capital and not by
creating promissory notes. Now, it is perfectly manifest
that neither Sir Robert Peel, nor any of his advisers^ had
the remotest conception of what baulking consists. We
have shewn over and over again that banking consists in
the creation of currency. That it does so now, as much
as it ever did^ only that the form is changed, and that
the distinction between currency principles and banking
principles could only proceed from persons who were
totally ignorant of the routine business of banking ! The
ordinary business of banking in London consists in the
creation of millions of promises to pay 1! And these are
estimated at nothing by the framers of this wonderful
Bank Act !
53. The famous Bank Act, then, of 1844 is framed on
this theory, that " Twice fourteen millions is eqtcal to
fourteen millions^ and an indefinite number of millions are
equal to nothing!! The world has not yet done laughing
at the vote of the House of Commons, that 21 was equal
REGULATION OF A PAPER CURRENCY. 565
to 27. What will it say of the theory of the Bank Act
of 1844?
54. The first trial of the Act took place in the spring
of 1847. In consequence of the enormous failure of the
potatoe crops in these islands, immense quantities of grain
had to be imported, which had to be paid for in money.
In the middle of September, 1846, a steady and continuous
drain of bullion set in, but the Bank made no alteration
in the rate of discount till January, 1847, when, having
lost nearly three millions of bullion it raised its rate from
3 to 3^. Tliis, however, had no effect in checking the
drain, which proceeded with accelerated rate, and by April
the Bank had lost 3^ millions more, but the notes held
by the public had scarcely diminished at all. Tlie whole
of the reduction took place in the reserve of notes held by
the Bank! In August, 1846, the bullion in the Bank
was £16,366,000, the notes held by the public were
£20,426,000, and the notes in reserve were £9,450,000;
in April, 1847, the bullion was £9,867,000, the notes
held by the public £20,243,000, and the notes held by
the Bank £2,558,000; consequently, though the bullion
lield by the Bank had diminished by 6^ millions, the notes
in circulation had only diminished £200,000 ! So much
for the Act of 1844. When the public saw that the whole
banking resources of the Bank were reduced to £2,550,000,
a complete panic seized them. During some days it was
impossible to get bills discounted at all. The rate, even
for the best bills, rose to 9, 10, and 12 per cent.
55. Tliis severe monetary pressure produced its
natural effect. The exchanges turned in favor of the
country. On the 24th April, bullion began to flow in.
The conduct of the Bank on this occasion duruig the
winter of 1846-7 while the exchanges were adverse, wjis
the exact counterpart of what it had done on so many
previous occasions. For a long period it pei'sisted in
keeping its rate of discount below the market rate, so that
a rush for discounts was made upon it, and no sooner were
these obtainerK than the holders of the notes went to the
issue depailment, and demanded gold for them.
566 ELEMEirrs of poutical economy.
56. During the spring, wlieat had touched the price
of 131s. a quarter. Immense importations were ordered
at this price, which were so abundant, and the reports of
the potatoe crop being very favourable, the price of
wljcat fell to 49s. 6d. in September. Then began the
terrible catalogue of failures. House after house, and
bank ai'ter bank, came down. On the 2nd of October,
the directors began to be alarmed for their own safety,
and adopted the most stringent measures. And now, was
tested the theory of the framers of the Bank Act, who
maintained the currency principle.
o7. The continued and ever-increasing severity of
the crisis caused deputation after deputation to be sent
to the Government, to obtain a relaxation of the Act, and
on Saturday, the 2yrd of October, the final determination
of the ministry to authorise the Bank to issue notes
beyond tlie limits prescribed by the Act, was taken, and
communicated to the Bank, who immediately acted upon
it, and discounted freely at 9 per cent. The letter itself
was not actually sent till Monday, the 26th. It stated
that the Government had expected that the pressure
which had existed for some weeks would have passed
away, like the one in April had done, by the operation of
natural causes; that being disap])ointed in this hope, they
liad come to the conclusion, that the time had come, when
they ought to attempt, by some extraordinary and tem-
porary measure, to restore confidence to the mercantile
community. That for this purpose, they Recommended the
directors of the Bank of England, in the emergency, to
enlarge the amount of their discounts and advances upon
approved security; but that, in order to restrain this
operation within reasonable limits, a high rate of interest
should be charged, which under the circumstances,
sliould not, they thought, be less than 8 per cent. That
if such a course should lead to any infringement of the
hiAV, they would be prepared to propose to Parliament,
on its meeting, a Bill of Indemnity. This letter was made
public about 1 o'clock on Monday, the 25th, and no
sooner was it done so, than the panic vanished like a
REGULATION OF A PAPER CURRENCY. 567
dream ! Mr. Gumey stated that it produced its effects in
ten minutes ! No sooner was it known that notes might
be had, than the want of them ceased ! Not only did no
infringement of the Act take place, but the whole issue
of notes, in consequence of this letter, was only £400,000 ;
so that while at one moment, the whole credit of Great
Britain was in eminent danger of total destruction,
within one hour it was saved by the issue of £400,000.
68. So much for the wonderful Bank Act! Never
was a more complete demonstration of the wisdom of
tlie Bullion Report, and the great writers on Currency
of that period. Mr. Thornton's prophetic words would
have infallibly proved true. If the Bank Act had not
been suspended, universal failure weuld infallibly have
occurred. The Bank was obliged to follow the principles
of the Bullion Report, and the country was saved. What
an admirable commentary upon the wisdom of Sir Robert
PeePs advisers, who had seduced him from his opinions of
1819!
59 Time passed on, and things resumed their usual
course. Nothing particular occurred till the autumn of
1855, when another very severe drain of bullion took
place. On the 28th of June, the bullion stood at
£17,429,435, when a severe and unexampled drain took
place. On the 18th October, it was reduced to
£11,205,855. But happily different counsels now pre-
vailed in the management of the Bank. The rate of
discount was rapidly raised, and though of course there
was some pressure, yet by this wise conduct on the part
of the Bank, no panic took place, and everything passed off
smoothly.
60. Ever since that time money has been unusually
dear, but there was no panic, and the advocates of the
Bank Charter Act have taken immense credit to it for
that fact. They have uniformly asserted that it was
owing to the Act. Bat this assertion cannot be tolcmted
for a moment. It is owing entirely to the good manage-
ment of the Bank, which has at length learned that the
568 ELEBfBNTS OF POLITICAL ECONOMY.
rate of discount is the true method of controlling the
paper currency. In order to make good the assertion
that the quietness of the country was owing to the Bank
Act, it is necessary for them to establish the fact that
the Bank would have misconducted itself without the AcL
Unless they can prove that it was owing* to the Act that
the Bank conducted itself on the principles of common
sense, their assertion is absurd*
61. The fact is, that the framers of the Act of 1844,
were not only totally ignorant of the routine business of
Banking, but they had not the remotest glimpse of the
true principles of monetary science. The consequence is
that tliey made such an extraordinary compound of an
Act, that there is no man of common intelligence, who
bestows the necessary attention to study its details, who
would not be amazed at its absurdity. The plan of
basing a paper currency on the fiinds and the currency
principle are directly contradictory to each other. They
attempted to carry out a theory in defiance of all au-
thority and all experience, a theory which had been
repeatedly tried before and had invariably failed. A
theory which had once before brought the Bank to a
suspension of cash payments, and would have done so
a second time if it had not been abandoned just in time.
And there cannot be a doubt that it would have done so
in 1847, if it had not been abandoned then.
62. And as we are writing these very words it has
again broken down disgracefully, and we believe finally.
American banking is purely based upon John Law's
Theory of Money, which we have demonstrated to be
erroneous in a preceding chapter ; we have there shewn
that it must end in ruin, and our words have just received
a terrible confirmation. All America is now one vast
scene of desolation, ruin, and bankruptcy, entirely owing
to a false theory of currency. Discount has risen to 36
per cent. Instantly this caused a great flow of bullion
to America, as we have shewn must be the case. The
BEGULATION OF A PAPER CUBRBNCY. 569
Bank acted with commendable vigor. The rate of dig-
count was raised with unprecedented speed. But if
discount is 36 per cent in America, it is vam to think that
10 per cent, in England can arrest the flow. In the
meantime ahnost all the great American houses in this
country have come down. Three banks of the first
magnitude have faUen, and for the first time in history, a
banking panic has seized the people of Scotland. Some
millions of gold have been sent to Ireland and Scotland,
and by the Act of 1844, an exactly equal quantity of
notes nave been cancelled. In the meantime, while ruin
was rapidly overspreading Europe, the advocates of the
Bank Act were cr^dng out on no account to violate the
Act. Whatever went, the Bank Act was to remain
inviolate.
'^ Si fractus illabatur orbis
Impavidum ferient ruinse.''
ft3. While the advocates of the Act were calling upon
every man of honor to adhere to the Act, the panic began
to spread to London. A bill broker with liabiHties said
to exceed three millions, stopped, and a run was com-
mencing on the Joint Stock Banks, when on Thursday,
the 12th November, the government sent a letter to the
Bank authorising them to issue notes to an unlimited ex-
tent on approved securities, at a discount not less than
10 per cent. Thus, on the second occasion when the
season of trial came, the Act was suspended!! And
there can be no possible doubt, that if it had not been
suspended not only every mercantile house in Great
Britain would have stopped, but the Bank itself would
have stopped, as happened in 1797. Thus, is this absurd
theory of the currency principle blown for ever to atoms.
64. The framers of the Act take credit that it pre-
served the convertibility of the note in 1847; but this
must be received with a very important Qualification.
There never was any question of the convertibility of the
note then— so far from the note being discredited, it was
570 ELEMENTS OF POLITICAL ECONOMY.
Bank notes that every one was so eager to get. If the
note had been discredited, if there had been a run for
gold in exchange for notes, we very much doubt that the
Act would have preserved the convertibility of the note.
For, if the note had really been put in danger, the only
way it could have been saved, would have been by the
sale of public securities. But it is extremely doubtful
whether the Bank could have sold public securities
for gold in the great pressures of 1 847, without causing
such a ruinous depression of them, as would have been
most injurious to the public interests. We believe that
the mode of expression more nearly applicable to the state
of the case was, that if the Bank note had been dis-
credited, there was a greater stock of gold to meet the
run, than there would have been without it.
65. The fatal blot, then, of the Act of 1844 is, that
it leaves the door open for exactly the same mismanage-
ment which had brought on so many calamities before.
Not only does it fail in preventing —contrary to the ex-
pressed anticipation of its framers— commercial and mone-
tary panics ; but when they occur, it adopts the method
most certain to aggravate their violence and intensity.
For, when the resources of the Bank arc akeady brought
too low, it brings on them a demand for notes far greater
than the wants of commerce require. People wish to get
notes simply for the sake of self-preservation ; then they
hoard them, and keep them out of circulation. The
most eminent witnesses said that between £4,000,000 and
£5,000,000 of notes were hoarded, through the panic in
October, 1847 ; but when everybody knew that they might
get them, even at a very high rate of discount, the panic
passed away, and an issue of £400,000 was sufficient to
satisfy the public necessity. No man in business would
not rather pay 20 per cent, discount for a supply of notes
in some great emergency, than not have them at all.
Now, as all the greatest statesmen protested against fixing
a nurnerical limit on the issues of the Bank, because it
imposed a prevention on the Bank acting in certain great
BE6ULATI0N OF A PAPEB CURRENCY. 571
emergencies; and 843 Sir Robert Peel only justified his
imposing a numerical limit on its issues, because he
anticipated that the self-acting working of the Act would
prevent those emergencies arising; and seeing that the
expectation was wholly falsified, it follows, as a necessary
consequence, that the whole machinery of the law should
be altered. Moreover, the ministry themselves gave
the preference to determining the rate of discount, rather
than the numerical amount, in the great crisis of 1847.
For those who urged them to relax the Act suggested
that the limit should be placed upon the quantity of
notes issued; but the Government most wisely, and
acting upon the fundamental principles of the science,
left the numerical amount free, but limited the rate
of discount; and what was the consequence? £400,000
of notes stayed the panic ! Now, we venture to affirm,
that if they had adopted the other alternative proposed to
them, and if the commercial world had seen that the total
relief was limited to a paltry £2,000,000, it would have a
very small effect in allaying the demand. The probability
is, that they would have been soon absorbed. The same
course was adopted in the crisis just passing away; as
the bank notes were rapidly diminishing, everybody
rushed to get them, nobody would part with them.
Consequently, everything was just on the eve of a dead-
lock, wlien the Government letter appeared, authorizing
unlimited issues^ but at a very high rate of discount. The
happiest consequences immediately followed, the panic
was arrested y and confidence was restored. Hence we
*' conclude that reason, evidence, and experience combine
to demonstrate that " it is a false and dangerous principle
to fix the numerical amount of paper issues, and that
THJB ONLY TUUE METHOD OF REGULATING THE TAPER
CURRENCY IS BY A PROPER ADJUSTMENT OF THE RATE
OF DISCOUNT.
(56. The fact is, that the currency principle is utterly
absurd. No doubt countries may flourish, and attain to
wealth where it was enforced, just as they did before the
572 ELEICEKTS OF POLITICAL ECOKOMT.
days of steam engines. But nobody would now dream
of putting down steam engines, although sometimes they
do burst and destroy people. Now, banking is to com-
merce, precisely what the steam engine is to machinery.
To carry out the currency principle in all its integrity, it
is absolutely necessary to aboUsh banking. Not bank
notes only, but cheques must be abolished. To wish to
carry out the currency principle shews the most utter
want of acquaintance with monetary science ; to suppose
that the Bank Act of 1844 does carry it out, shews the
most entire misconception of the ordinary business of
banking ; and actually to carry it out, would immediately
destroy one-half of the commerce of Great Britain. To
carry out the currency principle in all its integrity would
be as rational as an attempt to put down steam engines.
67. The time has now come when the whole question
must be solemnly and deliberately reinvestigated by parlia-
ment. It remains to be seen whether it will be done in a
lar^e, unbiassed, and philosophical spirit, or whether they
wiU allow themselves to be beguiled by a knot of persons
who have utterly corrupted the language of Political
Economy — who have landed them in an Act, founded
upon principles of law which would excite the ridicule of
the pupil room of every special pleader in the Temple, and
on an ignorance of the routine business of banking which
would raise the laughter of a club of bankers' clerks!
Who by the unnatural union of the dangerous fallacy of
John Law with a principle which has been expressly
condemned by all the great authorities of former times,
have produced a hybrid, a monetary monster, which will
be the amazement, the wonder, and the ridicule of all
future ages ! We at least have done our duty. Watch-
men on the lonely tower, we have proclaimed the danger
and the absurdity of these incongruous elements. What
the result will be remains to be seen. One thing at least
we fervently trust — That parliament will immediately
exterminate the desperate madness of Lawism- of the
principle of basing paper currency upon the public funds,
REGULATION OF A PAPER CX7RRBNCT. 573
•
from our monetary system. Let it not countenance the
doctrine that a man can buy a thing and have the price
of it as well. Let it not lend the name^ the sanction, and
the authority of England to the smallest fragment of that
insane delusion, the effects of which carried out to its
legitimate conclusion, are now causing the civilized world
to reel to its foundations.
THE END.
KiHO A Co, Panrms, 68, Qussw Stbbbt, CitTi Lovdox.
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