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It appears, therefore, that bank notes are a more powerful instrument for raising prices than bills, and bills than book credit. It does not, indeed, follow that credit will be more used because it can be. When the state of trade holds out no particular temptation to make large purchases on credit, dealers will use only a small portion of the credit-power, and it will depend only on convenience whether the portion which they use will be taken in one form or in another. . It is not until the circumstances of the markets, and the state of the mercantile mind, render many persons desirous of stretching their credit to an unusual extent, that the distinctive properties of the different forms of credit display themselves. the utmost in the form of book debts, would be susceptible of a great addi

tional extension by means of bills, and of a still greater by means of bank

notes. The first, because each dealer,

in addition to his own credit, would be

enabled to create a further purchasing

ower out of the credit which he had mself given to others: the second,

because the banker's credit with the ublic at large, coined into notes, as ullion is coined into to make it portable and divisible, is so much purchasing power superadded,

in the hands of every successive holder,

to that which he may derive from his own credit. To state the matter otherwise; one single exertion of the creditpower in the form of book credit, is only the foundation of a single purchase: but if a bill is drawn, that

same portion of credit may serve for purchases as the number of

as Inlan times o bill changes hands: while every bank note issued, , renders the credit of the banker a purchasing power to that amount in the hands of all the successive holders, without im

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times it changes hands, so also does | 1

Credit already stretched to

o of money,

credit; and credit transferable from hand to hand is in that proportion more potent than credit which only performs one purchase.

§ 5. All this purchasing power, however, is operative upon prices, only according to the proportion of it which is used: and the effect, therefore, is only felt in a state of circumstances calculated to lead to an unusually extended use of credit. In such a state of circumstances, that is, in speculative times, it cannot, I think, be denied, that prices are likely to rise higher if the speculative purchases are made with bank notes, than when they are made with bills, and when made by bills than when made by book-credits. This, however, is of far less practical importance than might at first be imagined; because, in point of fact, speculative purchases are not in the great majority of cases, made either with bank notes or with bills, but are made almost exclusively on book credits. “Applications to the Bank for extended discount,” says the highest authority on such subjects,” (and the same thing must be true of applications to other banks) “occur rarely if ever in the origin or progress of extensive speculations in commodities. These are entered into, for the most part if not entirely, in the first instance, on credit for the length of term usual in the several trades; thus entailing on the parties no immediate necessity for bor-, rowing so much as may be wanted for: the purpose beyond their own available capital. This applies particularly to, speculative o of commodities on the spot, with a view to resale. But these generally form the smaller proportion of engagements on credit. By far the largest of those entered into on the prospect of a rise of prices, are: such as have in view importations from, abroad. The same remark, too, is applicable to the export of commodities, when a large proportion is on the credit of the shippers or their o: As out the

long as circumstances hol

prospect of a favourable result, the * Tooke's History of Prices, vol. iv. pp. 25–6,

credit of the parties is generally sustained. If some of them wish to realize, there are others with capital and credit ready to replace them; and if the events fully justify the grounds on which the speculative transactions were entered into (thus admitting of sales for consumption in time to replace the capital embarked) there is no unusual demand for borrowed capital to sustain them. It is only when by the vicissitudes of political events, or of the seasons, or other adventitious circumstances, the forthcoming supplies are found to exceed the computed rate of consumption, and a fall of prices ensues, that an increased demand for capital takes place; the market rate of interest then rises, and increased applications are made to the Bank of England for discount.” So that the multiplication of bank notes and other transferable paper does not, for the most part, accompany and facilitate the speculation; but comes into play chiefly when the tide is turning, and difficulties begin to be felt. Qf the extraordinary height to which speculative transactions can be carried upon mere book credits, without the smallest addition to what is commonly called the currency, very few persons are at all aware. “The power of purchase,” says Mr. Tooke,” “by persons having capital and credit, is much beyond anything that those who are unacquainted practically with speculative markets have any idea of . . . A person having the reputation of capital enough for his regular business, and enjoying good credit in his trade, if he takes a sanguine view of the prospect of a rise of price of the article in which he deals, and is favoured by circumstances in the outset and progress of his speculation, may effect purchases to an extent perfectly enormous, #. with his capital.” Mr. Tooke confirms this statement by some remarkable instances, exemplifying the immense purchasing power which may be exercised, and rise of price which may be produced, by credit not repre

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sented by either bank notes or bills of

exchange. “Amongst the earlier speculators for an advance in the price of tea, in consequence of our dispute with China in 1839, were several retail grocers and tea-dealers. There was a general disposition among the trade to get into stock: that is, to lay in at once a quantity which would meet the probable demand from their customers for several months to come. Some, however, among them, more sanguine and ad. venturous than the rest, availed themselves of their credit with the importers and wholesale dealers, for purchasing uantities much beyond the estimated i. in their own business. As the purchases were made in the first instance ostensibly, and perhaps really, for the legitimate purposes and within the limits of their regular business, the parties were enabled to buy without the condition of any deposit; whereas speculators, known to be such, are required to pay 2l. per chest, to cover any probable difference of price which might arise before the expiration of the prompt, which, for this article, is three months. Without, therefore, the outlay of a single farthing of actual capital or currency in any shape, they made purchases to a considerable extent; and with the profit realized on the resale of a part of these purchases, they were enabled to pay the deposit on further quantities when required, as was the case when the extent of the purchases attracted attention. In this way, the speculation went on at advancing prices (100 per cent and upwards) till nearly the expiration of the prompt, and if at that time circumstances had been such as to justify the apprehension which at one time prevailed, that all future supplies would be cut off, the prices might have still further advanced, and at any rate not have retrograded. In this case, the speculators might have realized, if not all the profit they had anticipated, a very handsome sum, upon which they might have been enabled to extend their business greatly, or to retire from it altogether, with a reputation for great sagacity in thus making o fortuna.

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But, instead of this favourable result, it so happened that two or three cargoes of tea which had been transhipped were admitted, contrary to expectation, to entry on their arrival here, and it was found that further indirect shipments were in progress. Thus the cupply was increased beyond the calculation of the speculators: and at the same time, the consumption had been diminished by the high price. There was, consequently, a violent reaction on the market; the speculators were unable to sell without such a sacrifice as disabled them from fulfilling their engagements, and several of them consequently failed. Among these, one was mentioned, who having a capital not exceeding 1200l., which was locked up in his business, had contrived to buy 4000 chests, value above 80,000l., the loss upon which was about 10,000l. “The other example which I have to give, is that of the operation on the corn market between 1838 and 1842. There was an instance of a person who, when he entered on his extensive speculations, was, as it appeared by the subsequent examination of his affairs, possessed of a capital not exceeding 5000l., but being successful in the outset, and favoured by circumstances in the progress of his operations, he contrived to make o to such an extent, that when he stopped payment his engagements were found to amount to between 500,000l. and 600,000l. Other instances might be cited , of arties without any capital at all, who, ł. dint of mere credit, were enabled, while the aspect of the market favoured their views, to make purchases to a very great extent. “And be it observed, that these speculations, involving enormous purj. on little or no capital, were carried on in 1839 and 1840, when the money market was in its most contracted state; or when, according to modern phraseology, there was the greatest scarcity of money.” But though the great instrument of speculative purchases is book credits, it cannot be contested that in speculative eriods an increase does take place in he quantity both of bills of exchange

and of bank notes. This increase, indeed, so far as bank notes are concerned, hardly ever takes place in the earliest stage of the speculations; advances from bankers (as Mr. Tooke observes) not being applied for in order to purchase, but in order to hold on without selling, when the usual term of credit has . and the high price which was calculated on has not arrived. But the tea speculators mentioned by Mr. Tooke could not have carried their speculations beyond the three months which are the usual term of credit in their trade, unless they had been able to obtain advances from bankers, which, if the expectation of a rise of price had still continued, they probably could have done.

Since, then, credit in the form of bank notes is a more potent instrument for raising prices than book credits, an unrestrained power of resorting to this instrument may contribute to prolong and heighten the speculative rise of prices, and hence to aggravate the subsequent recoil. But in what degree? and , what importance ought we to ascribe to this possibility? It may help us to form some judgment on this point, if we consider the proportion which the utmost increase of bank notes in a period of speculation, bears, I do not say to the whole mass of credit in the country, but to the bills of exchange alone. The average amount of bills in existence at any one time is supposed greatly to exceed a hundred millions sterling.* The bank note circulation of Great Britain and Ireland seldom exceeds forty millions, and the increase in speculative periods at most two or three. And even this, as we have seen, hardly ever comes into play until that advanced period of the speculation at which the tide shows signs of turning, and the dealers generally are rather thinking of the means of fulfilling their existing engagements, than meditating an extension of them: while the quantity of bills in existence is largely increased from the very commencement of the speculations.

§ 6. It is well known that of late * The most approved estimate is that of ears, an artificial limitation of the issue of bank notes has been regarded by many political economists, and by a great portion of the public, as an exedient of supreme efficacy for preventing, and when it cannot prevent, for moderating, the fever of speculation; and this opinion received the recognition and sanction of the legislature by the Currency Act of 1844. . At the E. however, which our inquiries ave reached, though we have conceded to bank notes a greater power over prices than is possessed by bills or book credits, we have not found reason to think that this superior efficacy has much share in producing the rise of prices which accompanies a period of speculation, nor consequently that any restraint applied to this one instrument, can be efficacious to the degree which is often supposed, in moderating either that rise, or the recoil which follows it. We shall be still less inclined to think so, when we consider that there is a fourth form of credit Mr. Leatham, grounded on the official

returns of bill stamps issued. The following are the results:—

Bills created in Great Britain and Ireland, Ayerage amount Year. founded on re- | * circulation turns of Bill at one time in Stamps issued each year. from the Stamp Office. 1832 || 3:356,153,409 2689,038,352 1833 383,659,585 95,914,896 1834 379,155,052 94,788,763 1835 405,403,051 101,350,762 1836 485,943,473 121,485,868 1837 455,084,445 113,771,111 1838 465,504,041 116,376,010 1839 528,493,842 132,123,460

“Mr. Leatham,” says Mr. Tooke, “gives ..he process by which, upon the data furnished by the returns of stamps, he arrives at these results; and I am disposed to think that they are as near an approximation to the truth as the nature of the materials admits of arriving at.”—Inquiry into the Currency Principle, p. 26. Mr. Newmarch (Appendix No. 39 to Report of the Committee on the Bank Acts in 1857, and History of Prices, vol. vi. p. 587) shows grounds for the opinion that the total bill circulation in 1857 was not much less than 180 millions sterling, and that it sometimes rises to 200 millions.

transactions, by cheques on bankers, and transfers in a banker's books, which is exactly parallel in every respect to bank notes, giving equal facilities to an extension of credit, and capable of acting on prices quite as powerfully. In the words of Mr. Fullarton,” “there is not a single object at present attained through the agency of Bank of England notes, which might not be as effectually accomplished by each individual keeping an account with the bank, and transacting all his payments of five pounds and upwards by cheque.” A. .. instead of lending its notes to a merchant or dealer, might open an account with him, and credit the account with the sum it had agreed to advance: on an understanding that he should not draw out that sum in any other mode than by drawing cheques against it in favour of those to whom he had occasion to make payments. These cheques might possibly even pass from hand to hand like bank notes; more commonly however the receiver would pay, them into the hands of his own banker, and when he wanted the money, would draw a fresh cheque against it: and hence an objector may urge that as the original cheque would very soon be presented for payment, when it must be paid either in notes or in coin, notes or coin to an equal amount must be provided as the ultimate means of liquidation. It is not so, however. The person to whom the cheque is transferred, may perhaps deal with the same banker, and the cheque may return to the yery bank on which it was drawn: this is very often the case in country districts; if so, no payment will be called for, but a simple transfer in the banker's books will settle the transaction. If the cheque is paid into a different bank, it will not be presented for payment, but liquidated by set-off against other cheques; and in a state of circumstances favourable to a general extension of banking credits, a banker who has granted more credit, and has there: fore more cheques drawn on him, will also have more cheques on other bankers paid to him, and will only have * On the Regulation of Currencies, p. 41.

to provide notes or cash for the payment of balances; for which purpose the ordinary reserve of prudent bankers, one-third of their liabilities, will abundantly suffice. Now, if he had granted the extension of credit by means of an issue of his own notes, he must equally have retained, in coin or Bank of England notes, the usual reserve: , so that he can, as Mr. Fullarton says, give every facility of credit by what may be termed a cheque circulation, which he could give by a note circulation. This extension of credit by entries in a banker's books, has all that superior efficiency in acting on prices, which we ascribed to an extension by means of bank notes. As a bank note of 20l., paid to any one, gives him 201. of purchasing-power based on credit, over and above whatever credit he had of his own, so does a cheque paid to him do the same: for, although he may make no purchase with the cheque itself, he }. it with his banker, and can draw against it. As this act of drawing a cheque against another which has been exchanged and cancelled, can be repeated as often as a purchase with a bank note, it effects the same increase of purchasing power. The original loan, or credit, given by the banker to his customer, is potentially multiplied as a means of purchase, in the hands of the successive persons to whom portions of the credit are paid away, just as the purchasing power of a bank note is multiplied by the number of persons through whose hands it passes before it is returned to the issuer. These considerations abate very much from the importance of any effect which can be produced in allaying the vicissitudes of commerce, by so superficial a contrivance as the one so much relied on of late, the restriction of the issue of bank notes by an artificial rule. An examination of all the consequences of that restriction, and an estimate of the reasons for and against it, must be deferred until we have treated of the foreign exchanges, and the international movements of bullion. At present we are only concerned with the general theory of

prices, of which the different influence of different kinds of credit is an essential part.

§ 7. There has been a great amount of discussion and argument on the question whether several of these forms of credit, and in particular whether bank notes, ought to be considered as money. The question is so purely verbal as to be scarcely worth raising, and one would have some difficulty in comprehending why so much importance is attached to it, if there were not some authorities who, still adhering to the doctrine of the infancy of society and of political economy, †: the quantity of money, compared with that of commodities, determines general prices, think it important to prove that bank notes and no other forms of credit are money, in order to support the inference that bank notes and no otherforms of credit influence prices. It is obvious, however, that prices do not depend on money, but on purchases. Money left with a banker, and not drawn against, or drawn against for other purposes than buying commodities, has no effect on prices, any more than credit which is not used. Credit which is used to purchase commodities, affects prices in the same manner as money. Money and credit are thus exactly on a par, in their effect on prices; and whether we choose to class bank notes with the one or the other, is in this respect entirely immaterial.

Since, however, this question of nomenclature has been raised, it seems desirable that it should be answered. The reason given for considering bank notes as money, is, that by law and usage they have the property, in common with metallic money, of finally closing the transactions in which they are employed: while no other mode of paying one debt by transferring another has that privilege. The first remark which here suggests itself is, that on this showing, the notes at least of private banks are not money; for a creditor cannot be forced to accept them in payment of a debt. They certainly close the transaction if he does accept them; but so, on the same sup

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