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his extensive speculations, was, as it appeared by the subsequent examination of his affairs, possessed of a capital not exceeding 50001., but being successful in the outset, and favoured by circumstances in the progress of his operations, he contrived to make purchases to such an extent, that when he stopped payment his engagements were found to amount to between 500,0001. and 600,0001. Other instances might be cited of parties without any capital at all, who, by 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 purchases 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 periods an increase does take place in the 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 expired, 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 expecta: tion 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 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 years, an artificial

* The most approved estimate is that of Mr. Leatham, grounded on the official returns of bill stamps issued. The following are the results :

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“Mr. Leatham,” says Mr. Tooke, "gives the 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. Neumarch (Appendix No. 39 to Report of the Committee on the Bank Acts in 1857, and History of Prices, vol. vi. p. 687) 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

limitation of the issue of bank notes has been regarded by many political economnists, and by a great portion of the public, as an expedient 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 point, however, which our inquiries have 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 transactions, by cheques on bankers, and tranfers 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 bank, 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

* On the Regulation of Currencies, p. 41.

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 very 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 therefore more cheques drawn on him, will also have more cheques on other bankers paid to him, and will only have 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 noté 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 201., 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 deposits 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 inovements of bullion. At present we are only concerned with the general theory of prices, of which the different in fluence 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, that the quantity of money, compared with that of commodities, determines general prices, think it iinportant to prove that bank notes and no other forms of credit are money, in order to support the inference that bank notes and no other forms of credit influence prices. It is obvious, however, that prices, do not depend on moneỹ, 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,


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