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credit transactions generally. If bank notes, lor instance, or bills, have a greater effect on prices than book credits, it is not by any difference in the transactions themselves, which are essentially the same, whether taking place in the one way or in the other: it must be that there are likely to be more of them. If credit is likely to be more extensively used as a purchasing power when bank notes or bills are the instruments used, than when the credit is given by mere entries in an account, to that extent and no more there is ground for ascribing to the former a greater power over the markets than belongs to the latter.

Now it appears that there is some such distinction. As far as respects the particular transaction, it makes no difference in the effect on price whether A buys goods of B on simple credit, or gives a bill for them, or pays for them with bank notes lent to him by a banker C. The difference is in a subsequent stage. If A has bought the goods on a book credit, there is no obvious or convenient mode by which B can make A's debt to him a means of extending his own credit. Whatever credit he has, will be due to the general opinion entertained of his solvency: he cannot specifically pledge A's debt to a third person, as a security for money lent or goods bought. But if A has given him a bill for the amount, he can get this discounted, which is the same thing as borrowing money on the joint credit of A and himself: or he may pay away the bill in exchange for goods, which is obtaining goods on the same joint credit. In either case, here is a second credit transaction, grounded on the first, and which would not have taken place if the first had been transacted without the intervention of a bill. Nor need the transactions end here. The bill may be again discounted, or again paid away for goods, several times before it is itself presented for payment. Nor would it be correct to say that these successive holders, if they had not had the bill, might have attained their purpose by purchasing goods on their own credit with the dealers.

They may not all of them be persons of credit, or they may already have stretched their credit as far as it will go. And at all events, either money or goods are more readily obtained on the credit of two persons than of one. Nobody will pretend that it is as easy a thing for a merchant to borrow a thousand pounds on his own credit, as to get a bill discounted to the same amount, when the drawee is of known solvency. If we now suppose that A, instead of giving a bill, obtains a loan of bank notes from a banker C, and with them pays B for his goods, we shall find the difference to be still greater. B is now independent even of a discounter: A's bill would have been taken in payment only by those who were acquainted with his reputation for solvency, but a banker is a person who has credit with the public generally, and whose notes are taken in payment by every one, at least in his own neighbourhood: insomuch that, by a custom which has grown into law, payment in bank notes is a complete acquittance to the payer, whereas if he has paid by a bill, he still remains liable to the debt, if the person on whom the bill is drawn fails to pay it when due. B therefore can expend the whole of the bank notes without at all involving his own credit: and whatever power he had before of obtaining goods on book credit, remains to him unimpaired, in addition to the purchasing power he derives from the possession of the notes. The same remark applies to every person in succession, into whose hands the notes may come. It is only A, the first holder, (who used his credit to obtain the notes as a loan from the issuer,) who can possibly find the credit he possesses in other quarters abated by it; and even in his case that result is not probable; for though, in reason, and if all his circumstances were known, every draft already made upon his credit ought to diminish by so much his power of obtaining more, yet in

Eractice the reverse more frequently appens, and his having been trusted by one person is supposed to be evidence that he may safely be trusted by others alse.

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. Credit already stretched to the utmost in the form of book debts, would be susceptible of a great additional 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 power out of the credit which he had himself given to others: the second, because the banker's credit with the public at large, coined into notes, as bullion is coined into pieces of money 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 as many purchases as the number of times the 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 impairing any power they may possess of effecting purchases on their own credit. Credit, in short, has exactly the same purchasing power with money; and as money tells upon prices not simply in proportion to its amount, but to its amount multiplied by the number of times it changes hands, so also does

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 borrowing so much as may be wanted for the purpose beyond their own available capital. This applies particularly to speculative purchases 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 consignees. As long as circumstances hold out the prospect of a favourable result, the

* Tooke's History of Frtca, vol. iv. pp. 125—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 folly 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.

Of the extraordinary height to which speculative transactions can be earned 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, compared 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

* Inquiry into the Currency Principle, pp. 79 and 13*—8.

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 adventurous than the rest, availed themselves of their credit with the importers and wholesale dealers, for purchasing quantities much beyond the estimated demand 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 21. 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 euabled 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 their fortune. But, instead of this favourable result, it Bo 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 supply 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 12001., which was locked up in his business, had contrived to buy 4000 chests, value above 80,0002., the loss upon which was about 16,0001.

"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 50002., 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 500,0002. and 600,0002. 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 hills of exchange

and of bank notes. This increase, iadeed, 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 withoun 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 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 tank 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 ofyears, 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 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

Mr. Leatham, grounded on the official returns of bill stamps issued. The following are the results:—


"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. Newmarch (Appendix No. 39 to Report of the Committee on the Sank Acta 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 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 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 hava * On the Regulation of Currencies, p. 41.

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