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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 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 other forms 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 supposition, 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 papiermonnaie actually means inconvertibility, convertible notes being merely billets a 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 forms of credit. If bank notes are multiplied, there will, they seem to think, be more bills, more payments by cheque, and, I presume, more 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.1 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

1 [This and the preceding sentence replaced in the 4th ed. (1857) the following sentence of the original text: "I can see no reason for the doctrine, that according as there are more or fewer bank notes, there will be more or less of other descriptions of credit."]

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 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 especially 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 inducement to be much of a restraint in a period supposed to be one of rash adventure, 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 illfortune, will mainly depend on their opinion of their own individual credit, with, perhaps, some consideration, 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 commercial 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 equivalent 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 for performing them solely from convention; but convention 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. 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 government, in payment of salaries and purchase of commodities. The currency being suddenly increased by one-half, all prices will rise, and among the rest, the prices of all things made of gold and silver. An ounce of manufactured gold will become more valuable than an ounce of gold coin, by more than that customary difference which compensates for the value of the workmanship; and it will be profitable to melt the coin for the purpose of being manufactured, until as much has been taken from the currency by the subtraction of gold, as had been added to it by the issue of paper. Then prices will relapse to what they were at first, and there will be nothing changed except 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 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 production, 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.

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