position, would a bale of cloth, or a pipe of wine; which are not for that reason regarded as money. It seems to be an essential part of the idea of money, that it be legal tender. An inconvertible paper which is legal tender is universally admitted to be money; in the French language the phrase papier-monnaie actually means inconvertibility, convertible notes being merely billets à porteur. It is only in the case of Bank of England notes under the law of convertibility, that any difficulty arises; those notes not being a legal tender from the Bank itself, though a legal tender from all other persons. Bank of England notes undoubtedly do close transactions, so far as respects the buyer. When he has once paid in Bank of England notes, he can in no case be required to pay over again. But I confess I cannot see how the transaction can be deemed complete as regards the seller, when he will only be found to have received the price of his commodity provided the bank keeps its promise to pay. An instrument which would be deprived of all value by the insolvency of a corporation, cannot be money in any sense in which money is opposed to credit. It either is not money, or it is money and credit too. It may be most suitably described as coined credit. The other forms of credit may be distinguished from it as credit in ingots. § 8. Some high authorities have claimed for bank notes, as compared with other modes of credit, a greater distinction in respect to influence on price than we have seen reason to allow; a difference, not in degree, but in kind. They ground this distinction on the fact, that all bills and cheques, as well as all book-debts, are from the first intended to be, and actually are, ultimately liquidated either in coin or in notes. The bank notes in circulation, jointly with the coin, are therefore, according to these authorities, the basis on which all the other expedients of credit rest; and in proportion to the basis will be the superstructure; insomuch that the quantity of bank | notes determines that of all the other more forms of credit. If bank notes are multiplied, there will, they seem to think, be more bills, more payments by cheque, and, I presume, book credits; and, by regulating and limiting the issue of bank notes, they think that all other forms of credit are, by an indirect consequence,_brought under a similar limitation. I believe I have stated the opinion of these authorities correctly, though I have nowhere seen the grounds of it set forth with such distinctness as to make me feel quite certain that I understand them. It may be true, that according as there are more or fewer bank notes, there is also, in general (though not invariably), more or less of other descriptions of credit; for the same state of affairs which leads to an increase of credit in one shape, leads to an increase of it in other shapes. But I see no reason for believing that the one is the cause of the other. If indeed we begin by assuming, as I suspect is tacitly done, that prices are regulated by coin and bank notes, the proposition maintained will certainly follow: for, according as prices are higher or lower, the same purchases will give rise to bills, cheques, and book credits of a larger or a smaller amount. But the premise in this reasoning is the very proposition to be proved. Setting this assumption aside, I know not how the conclusion can be substantiated. The credit given to any one by those with whom he deals, does not depend on the quantity of bank notes or coin in circulation at the time, but on their opinion of his solvency: if any consideration of a more general character enters into their calculation, it is only in a time of pressure on the loan market, when they are not certain of being themselves able to obtain the credit on which they have been accustomed to rely; and even then, what they look to is the general state of the loan market, and not (preconceived theory apart) the amount of bank notes. So far, as to the willingness to give credit. And the willingness of a dealer to use his credit, depends on his expectations of gain, that is, on his opinion of the probable future price of his commodity; an opinion | inducement to be much of a restraint grounded either on the rise or fall already going on, or on his prospective judgment respecting the supply and the rate of consumption. When a dealer extends his purchases beyond his immediate means of payment, engaging to pay at a specified time, he does so in the expectation either that the transaction will have terminated favourably before that time arrives, or that he shall then be in possession of sufficient funds from the proceeds of his other transactions. The fulfilment of these expectations depends upon prices, but not specially upon the amount of bank notes. He may, doubtless, also ask himself. in case he should be disappointed in these expectations, to what quarter he can look for a temporary advance, to enable him, at the worst, to keep his engagements. But in the first place, this prospective reflection on the somewhat more or less of difficulty which he may have in tiding over his embarrassments, seems too slender an in a period supposed to be one of rashadventure, and upon persons so confident of success as to involve themselves beyond their certain means of extrication. And further, I apprehend that their confidence of being helped out in the event of ill-fortune, will mainly depend on their opinion of their own individual credit, with, perhaps, some considera- tion, not of the quantity of the currency, but of the general state of the loan. market. They are aware that, in case of a commercial crisis, they shall have difficulty in obtaining advances. But if they thought it likely that a com mercial crisis would occur before they had realized, they would not speculate. If no great contraction of general credit occurs, they will feel no doubt of obtaining any advances which they absolutely require, provided the state of their own affairs at the time affords in the estimation of lenders a sufficient prospect that those advances will be repaid. CHAPTER XIII. OF AN INCONVERTIBLE PAPER CURRENCY. § 1. AFTER experience had shown that pieces of paper, of no intrinsic value, by merely bearing upon them the written profession of being equivaient to a certain number of francs, dollars, or pounds, could be made to circulate as such, and to produce all the benefit to the issuers which could have been produced by the coins which they purported to represent; governments began to think that it would be a happy device if they could appropriate to themselves this benefit, free from the condition to which individuals issuing such paper substitutes for money were subject, of giving, when required, for the sign, the thing signified. They determined to try whether they could not emancipate themselves from this unpleasant obligation, and make a piece of paper issued by them pass for a pound, by merely calling it a pound, and consenting to receive it in payment of the taxes. And such is the influence of almost all established governments, that they have generally succeeded in attaining this object: I believe I might say they have always succeeded for a time, and the power has only been lost to them after they had compromised it by the most flagrant abuse. In the case supposed, the functions of money are performed by a thing which derives its power of performingthem solely from convention; but canvention is quite sufficient to confer the power; since nothing more is needful to make a person accept anything as money, and even at any arbitrary value, than the persuasion that it will be taken from him on the same terms by others. The only question is, what determines the value of such a currency since it cannot be, as in the case of gold and silver (or paper exchangeable for them at pleasure), the cost of production. We have seen, however, that even in the case of a metallic currency, the immediate agency in determining its value is its quantity. If the quantity, instead of depending on the ordinary mercantile motives of profit and loss, could be arbitrarily fixed by authority, the value would depend on the fiat of that authority, not on cost of production. The quantity of a paper currency not convertible into the metals at the option of the holder, can be arbitrarily fixed; especially if the issuer is the sovereign power of the state. The value, therefore, of such a currency, is entirely arbitrary. purposes, will somewhat reduce, for a time, the value of the article; and as long as this is the case, even though paper has been issued to the original amount of the metallic circulation, as much coin will remain in circulation along with it, as will keep the value of the currency down to the reduced value of the metallic material; but the value having fallen below the cost of produc tion, a stoppage or diminution of the supply from the mines will enable the surplus to be carried off by the ordinary agents of destruction, after which, the metals and the currency will recover their natural value. We are here supposing, as we have supposed throughout, that the country has mines of its own, and no commercial intercourse with other countries: for, in a country having foreign trade, the coin which is rendered superfluous by an issue of paper is carried off by a much prompter method. Suppose that, in a country of which the currency is wholly metallic, a paper currency is suddenly issued, to the amount of half the metallic circulation: not by a banking establishment, or in the form of loans, but by the govern- Up to this point, the effects of a ment, in payment of salaries and pur- paper currency are substantially the chase of commodities. The currency same, whether it is convertible into being suddenly increased by one-half, specie or not. It is when the metals all prices will rise, and among the have been completely superseded and rest, the prices of all things made of driven from circulation, that the diffegold and silver. An ounce of manu- rence between convertible and inconfactured gold will become more valu- vertible paper begins to be operative. able than an ounce of gold coin, by When the gold or silver has all gone more than that customary difference from circulation, and an equal quantity which compensates for the value of the of paper has taken its place, suppose workmanship; and it will be profitable that a still further issue is superadded. to melt the coin for the purpose of The same series of phenomena recombeing manufactured, until as much has mences: prices rise, among the rest been taken from the currency by the the prices of gold and silver articles, subtraction of gold, as had been added and it becomes an object as before to to it by the issue of paper. Then prices procure coin in order to convert it into will relapse to what they were at first, bullion. There is no longer any coin and there will be nothing changed ex-in circulation; but if the paper curcept that a paper currency has been substituted for half of the metallic currency which existed before. Suppose, now, a second emission of paper; the same series of effects will be renewed; and so on, until the whole of the metallic money has disappeared: that is, if paper be issued of as low a denomination as the lowest coin; if not, as much will remain, as convenience requires for the smaller payments. The addition made to the quantity of gold and silver disposable for ornamental rency is convertible, coin may still be obtained from the issuers, in exchange for notes. All additional notes, therefore, which are attempted to be forced into circulation after the metals have been completely superseded, will return upon the issuers in exchange for coin; and they will not be able to maintain in circulation such a quantity of convertible paper, as to sink its value below the metal which it represents. It is not so, however, with an inconvertible currency. To the increase of that (as permitted by law) there is no check. The issuers may add to it indefinitely, lowering its value and raising prices in proportion; they may, in other words, depreciate the currency without limit. Such a power, in whomsoever vested, is an intolerable evil. All variations in the value of the circulating medium are mischievous: they disturb existing contracts and expectations, and the liability to such changes renders every pecuniary engagement of long date entirely precarious. The person who buys for himself, or gives to another, an annuity of 100l., does not know whether it will be equivalent to 2007. or to 50l. a few years hence. Great as this evil would be if it depended only on accident, it is still greater when placed at the arbitrary disposal of an individual or a body of individuals; who may have any kind or degree of interest to be served by an artificial fluctuation in fortunes; and who have at any rate a strong interest in issuing as much as possible, each issue being in itself a source of profit. Not to add, that the issuers may have, and in the case of a government paper always have, a direct interest in lowering the value of the currency, because it is the medium in which their own debts are computed. false, profession of intending to keep them at a value corresponding to that of the coins. This is not impracticable, even with an inconvertible paper. There is not indeed the self-acting check which convertibility brings with it. But there is a clear and unequi vocal indication by which to judge whether the currency is depreciated, and to what extent. That indication is, the price of the precious metals. When holders of paper cannot demand coin to be converted into bullion, and when there is none left in circulation, bullion rises and falls in price like other things; and if it is above the Mint price, if an ounce of gold, which would be coined into the equivalent of 3l. 178. 101d., is sold for 4l. or 5l, in paper, the value of the currency has sunk just that much below what the value of a metallic currency would be. If, therefore, the issue of inconvertible paper were subjected to strict rules, one rule being that whenever bullion rose above the Mint price, 'the issues should be contracted until the market price of bullion and the Mint price were again in accordance, such a currency would not be subject to any of the evils usually deemed inherent in an inconvertible paper. But also such a system of currency would have no advantages sufficient to § 2. In order that the value of the recommend it to adoption. An inconcurrency may be secure from being vertible currency, regulated by the altered by design, and may be as little price of bullion, would conform exactly, as possible liable to fluctuation from in all its variations, to a convertible accident, the articles least liable of all one; and the only advantage gained, known commodities to vary in their would be that of exemption from the value, the precious metals, have been necessity of keeping any reserve of the made in all civilized countries the precious metals; which is not a very standard of value for the circulating important consideration, especially as medium; and no paper currency ought a government, so long as its good faith to exist of which the value cannot be is not suspected, needs not keep so made to conform to theirs. Nor has large a reserve as private issuers, being this fundamental maxim ever been en- not so liable to great and sudden detirely lost sight of even by the govern-mands, since there never can be any ments which have most abused the power of creating inconvertible paper. If they have not (as they generally have) professed an intention of paying in specie at some indefinite future time, they have at least, by giving to their paper issues the names of their coins, mmade a virtual, though generally a real doubt of its solvency. Against this small advantage is to be set, in the first place, the possibility of fraudulent tampering with the price of bullion for the sake of acting on the currency; in the manner of the fictitious sales of corn, to influence the averages, 80 much and so justly complained of while the corn laws were in force. But a | still stronger consideration is the importance of adhering to a simple principle, intelligible to the most untaught capacity. Everybody can understand convertibility; every one sees that what can be at any moment exchanged for five pounds, is worth five pounds. Regulation by the price of bullion is a more complex idea, and does not recommend itself through the same familiar associations. There would be nothing like the same confidence, by the public generally, in an inconver, tible currency so regulated, as in a convertible one: and the most instructed person might reasonably doubt whether such a rule would be as likely to be inflexibly adhered to. The grounds of the rule not being so well understood by the public, opinion would probably not enforce it with as much rigidity, and, in any circumstances of difficulty, would be likely to turn against it, while to the government itself a sus pension of convertibility would appear a much stronger and more extreme measure, than a relaxation of what might possibly be considered a somewhat artificial rule. There is therefore a great preponderance of reasons in favour of a convertible, in preference to even the best regulated inconvertible currency. The temptation to overissue, in certain financial emergencies, is so strong, that nothing is admissible which can tend, in however slight a degree, to weaken the barriers that restrain it. §3. Although no doctrine in political economy rests on more obvious grounds than the mischief of a paper currency not maintained at the same value with a metallic, either by convertibility, or by some principle of limitation equivalent to it; and although, accordingly, this doctrine has, though not till after the discussions of many years, been tolerably effectually drummed into the public mind; yet dissentients are still numerous, and projectors every now and then start up, with plans for curing all the economical evils of society by means of an unlimited issue of inconvertible paper. There is, in truth, a great charm in the idea. To be able to pay off the national debt, defray the expenses of government without taxation, and in fine, to make the fortunes of the whole community, is a brilliant prospect, when once a man is capable of believing that printing a few characters on bits of paper will do it. The philosopher's stone could not be expected to do more. As these projects, however often slain, always resuscitate, it is not superfluous to examine one or two of the fallacies by which the schemers impose upon themselves. One of the commonest is, that a paper currency cannot be issued in excess so long as every note issued represents property, or has a foundation of actual property to rest on. These phrases, of representing and resting, seldom convey any distinct or well-defined idea: when they do, their meaning is no more than this-that the issuers of the paper must have property, either of their own or entrusted to them, to the value of all the notes they issue; though for what purpose does not very clearly appear; for if the property cannot be claimed in exchange for the notes, it is difficult to divine in what manner its mere existence can serve to uphold their value. I presume, however, it is intended as a guarantee that the holders would be finally reimbursed, in case any untoward event should cause the whole concern to be wound up. On this theory there have been many schemes for "coining the whole land of the country into money" and the like. In so far as this notion has any connexion at all with reason, it seems to originate in confounding two entirely distinct evils, to which a paper currency is liable. One is, the insolvency of the issuers; which, if the paper is grounded on their credit-if it makes any promise of payment in cash, either on demand or at any future time-of course deprives the paper of any value which it derives from the promise. To this evil paper credit is equally liable, however moderately used; and against it, a proviso that all issues should be "founded on property," as for instance |