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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 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 12002., which was locked up in his business, had contrived to buy 4000 chests, value above 80,0002., the loss upon which was about 1 (3,0002.

"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 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 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 years, 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 oh the official returns of bill stamps issued. The following are the results:—


"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. 20. 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 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 have * On the Regulation of Currencies, p. 41.

to provido 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 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 tho 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 tho 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 tc 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 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 finallyclosing 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 hero 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 ; hut so, on the same gupposition, 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 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. Ine 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. K 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 o( 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 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

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 ill-fortune, 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.



§ 1. After experience had shown j that pieces of paper, of no intrinsic I value, by merely bearing upon them j 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,


I and consenting to receive it in payment I of the taxes. And such is the influence j of almost all established governments, that they have generally succeeded in attaining this object: I believe 1 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 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 bo 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

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