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to provide notes or cash for the pay- , prices, of which the different influence ment of balances; for which purpose of different kinds of credit is an essenthe ordinary reserve of prudent bankers, tial part. one-third of their liabilities, will abundantly suffice. Now, if he had granted $ 7. There has been a great amount the extension of credit by means of an of discussion and argument on the quesissue of his own notes, he must equally tion whether several of these forms of have retained, in coin or Bank of credit, and in particular whether bank England notes, the usual reserve: so notes, ought to be considered as money.

that he can, as Mr. Fullarton says, give | The question is so purely verbal as to · every facility of credit by what may be be scarcely worth raising, and one

termed a cheque circulation, which he would have some difficulty in comprecould give by a note circulation. I hending why so much importance is

This extension of credit by entries in attached to it, if there were not some a banker's books, has all that superior authorities who, still adhering to the efficiency in acting on prices, which we doctrine of the infancy of society and ascribed to an extension by means of of political economy, that the quantity bank notes. As a bank note of 201., 1 of money, compared with that of compaid to any one, gives him 201. of pur- modities, determines general prices, chasing-power based on credit, over think it important to prove that bank and above whatever credit he had of notes and no other forms of credit are his own, so does a cheque paid to him money, in order to support the inferdo the same : for, although he may ence that bank notes and no other forms make no purchase with the cheque of credit influence prices. It is obvious, itself, he deposits it with his banker, however, that prices do not depend on and can draw against it. As this act money, but on purchases. Money left of drawing a cheque against another with a banker, and not drawn against, which has been exchanged and can or drawn against for other purposes celled, can be repeated as often as a than buying commodities, has no etỉect purchase with a bank note, it effects on prices, any more than credit which the game increase of purchasing power. is not used. Credit which is used to The original loan, or credit, given by purchase commodities, affects prices in the banker to his customer, is po- the same manner as money. Money tentially multiplied as a means of pur and credit are thus exactly on a par, chase, in the hands of the successive in their effect on prices; and whether persons to whom portions of the credit we choose to class bank notes with the are paid away, just as the purchasing one or the other, is in this respect enpower of a bank note is multiplied by | tirely immaterial. the number of persons through whose Since, however, this question of hands it passes before it is returned to nomenclature has been raised, it seems the issuer.

desirable that it should be answered. These considerations abate very The reason given for considering bank much from the importance of any notes as money, is, that by law and effect which can be produced in allay- usage they have the property, in coming the vicissitudes of commerce, by mon with metallic money, of finally 80 superficial a contrivance as the one closing the transactions in which they 80 much relied on of late, the restric- are employed : while no other mode tion of the issue of bank notes by an of paying one debt by transferring artificial rule. An examination of all another has that privilege. The first the consequences of that restriction, remark which here suggests itself is, and an estimate of the reasons for and that on this showing, the notes at against it, must be deferred until we least of private banks are not money; have treated of the foreign exchanges, for a creditor cannot be forced to accept and the international movements of them in payment of a debt. They cerbullion. At present we are only con- tainly close the transaction if he does cerned with the general theory of accept them; but so, on the same supposition, would a bale of cloth, or a l notes determines that of all the other pipe of wine; which are not for that forms of credit. If bank notes are reason regarded as money. It seems multiplied, there will, they seem to to be an essential part of the idea of think, be more bills, more payments money, that it be legal tender. An in- by cheque, and, I presume, more convertible paper which is legal tender book credits; and, by regulating and is universally admitted to be money ; | limiting the issue of bank notes, they in the French language the phrase think that all other forms of credit are, papier-monnaie actually means incon by an indirect consequence, brought vertibility, convertible notes being under a similar limitation. 'I believe merely billets à porteur. It is only in I have stated the opinion of these the case of Bank of England notes under authorities correctly, though I have the law of convertibility, that any diffi nowhere seen the grounds of it set culty arises; those notes not being a forth with such distinctness as to make legal tender from the Bank itself, me feel quite certain that I understand though a legal tender from all other them. It may be true, that according persons. Bank of England notes un as there are more or fewer bank notes, doubtedly do close transactions, so far there is also, in general (though not as respects the buyer. When he has | invariably), more or less of other deonce paid in Bank of England notes, scriptions of credit; for the same state he can in no case be required to pay of affairs which leads to an increase of over again. But I confess I cannot credit in one shape, leads to an increase see how the transaction can be deemed of it in other shapes. But I see no complete as regards the seller, when reason for believing that the one is the he will only be found to have received cause of the other. If indeed we begin the price of his commodity provided by assuming, as I suspect is tacitly the bank keeps its promise to pay. An done, that prices are regulated by coin instrument which would be deprived and bank notes, the proposition mainof all value by the insolvency of a cor tained will certainly follow : for, accordporation, cannot be money in any ing as prices are higher or lower, the sense in which money is opposed to same purchases will give rise to bills, credit. It either is not money, or it cheques, and book credits of a larger is money and credit too. It may be or a smaller amount. But the premise most suitably described as coined cre in this reasoning is the very proposidit. The other forms of credit may tion to be proved. Setting this assumpbe distinguished from it as credit in tion aside, I know not how the concluingots.

sion can be substantiated. The credit

given to any one by those with whom § 8. Some high authorities have he deals, does not depend on the quanclaimed for bank notes, as compared tity of bank notes or coin in circulation with other modes of credit, a greater at the time, but on their opinion of his distinction in respect to influence on solvency: if any consideration of a more price than we have seen reason to allow; general character enters into their cala difference, not in degree, but in kind. culation, it is only in a time of pressure They ground this distinction on the on the loan market, when they are not fact, that all bills and cheques, as well certain of being themselves able to obas all book-debts, are from the first intain the credit on which they have been tended to be, and actually are, ulti accustomed to rely; and even then, mately liquidated either in coin or in what they look to is the general state notes. The bank notes in circulation, of the loan market, and not (precon. jointly with the coin, are therefore, ceived theory apart) the amount of according to these authorities, the bank notes. So far, as to the willingbasis on which all the other expedients ness to give credit. And the willingof credit rest; and in proportion to ness of a dealer to use his credit, dethe basis will be the superstructure; pends on his expectations of gain, that insomuch that the quantity of bank | is, on his opinion of the probable future

price of his commodity; an opinion | inducement to be much of a restraint grounded either on the rise or fall in a period supposed to be one of rash adalready going on, or on his prospective venture, and upon persons so confident judgment respecting the supply and the of success as to involve themselves berate of consumption. When a dealer yond their certain means of extrication. extends his purchases beyond his im- And further, I apprehend that their conmediate means of payment, engaging fidence of being helped out in the event to pay at a specified time, he does so of ill-fortune, will mainly depend on in the expectation either that the trans- their opinion of their own individual action will have terminated favourably credit, with, perhaps, some considerabefore that time arrives, or that he tion, not of the quantity of the currency, shall then be in possession of sufficient but of the general state of the loan funds from the proceeds of his other market. They are aware that, in case transactions. The fulfilment of these of a commercial crisis, they shall have expectations depends upon prices, but difficulty in obtaining advances. But not specially upon the amount of bank if they thought it likely that a comnotes. He may, doubtless, also ask him-mercial crisis would occur before they self, in case he should be disappointed had realized, they would not speculate. in these expectations, to what quarter If no great contraction of general crehe can look for a temporary advance, dit occurs, they will feel no doubt of to enable him, at the worst, to keep obtaining any advances which they his engagements. But in the first absolutely require, provided the state place, this prospective reflection on the of their own affairs at the time affords somewhat more or less of difficulty in the estimation of lenders a sufficient which he may have in tiding over his prospect that those advances will be embarrassments, seems too slender an / repaid.



§ 1. AFTER experience had shown and consenting to receive it in payment that pieces of paper, of no intrinsic of the taxes. And such is the influence value, by merely bearing upon them of almost all established governments, the written profession of being equiva- i that they have generally succeeded in ient to a certain number of francs, dol. attaining this object: I believe I might lars, or pounds, could be made to circu- say they have always succeeded for a late as such, and to produce all the time, and the power has only been lost benefit to the issuers which could have to them after they had compromised it been produced by the coins which they by the most flagrant abuse. purported to represent; governments In the case supposed, the functions began to think that it would be a happy of money are performed by a thing device if they could appropriate to them- which derives its power of performing selves this benefit, free from the con them solely from convention, but condition to which individuals issuing such vention is quite sufficient to confer the paper substitutes for money were sub-power; since nothing more is needful ject, of giving, when required, for the to make a person accept anything as sign, the thing signified. They deter-money, and even at any arbitrary value, mined to try whether they could not than the persuasion that it will be emancipate themselves from this un- taken from him on the same terms by pleasant obligation, and make a piece others. The only question is, what deof paper issued by them pass for a termines the value of such a currency; pound, by merely calling it a pound, since it cannot be, as in the case of gold

and silver (or paper exchangeable for purposes, will somewhat reduce, for a them at pleasure), the cost of produc- time, the value of the article ; and as tion.

long as this is the case, even though We have seen, however, that even in paper has been issued to the original the case of a metallic currency, the im- amount of the metallic circulation, as mediate agency in determining its value much coin will remain in circulation is its quantity. If the quantity, in- along with it, as will keep the value of stead of depending on the ordinary mer- the currency down to the reduced value cantile motives of profit and loss, could of the metallic material; but the value be arbitrarily fixed by authority, the having fallen below the cost of producvalue would depend on the fiat of that tion, à stoppage or diminution of the authority, not on cost of production. supply from the mines will enable the The quantity of a paper currency not surplus to be carried off by the ordinary convertible into the metals at the option agents of destruction, after which, the of the holder, can; be arbitrarily fixed; metals and the currency will recover especially if the issuer is the sovereign their natural value. We are here suppower of the state. The value, there- posing, as we have supposed throughfore, of such a currency, is entirely out, that the country has mines of its arbitrary.

own, and no commercial intercourse Suppose that, in a country of which with other countries: for, in a country the currency is wholly metallic, a paper having foreign trade, the coin which is currency is suddenly issued, to the rendered superfluous by an issue of amount of half the metallic circulation: paper is carried off by a much prompter not by a banking establishment, or in method. the form of loans, but by the govern Up to this point, the effects of a ment, in payment of salaries and pur | paper currency are substantially the chase of commodities. The currency same, whether it is convertible into being suddenly increased by one-half, specie or not. It is when the metals all prices will rise, and among the have been completely superseded and rest, the prices of all things made of driven from circulation, that the diffegold and silver. An ounce of manu- rence between convertible and inconfactured gold will become more valu- vertible paper begins to be operative. able than an ounce of gold coin, by When the gold or silver has all gone more than that customary difference from circulation, and an equal quantity which compensates for the value of the of paper has taken its place, suppose workmanship; and it will be profitable that a still further issue is superadded. to melt the coin for the purpose of The same series of phenomena recombeing manufactured, until as much has mences : prices rise, among the rest been taken from the currency by the the prices of gold and silver articles, subtraction of gold, as had been added and it becomes an object as before to to it by the issue of paper. Then prices procure coin in order to convert it into will relapse to what they were at first. 1 bullion. There is no longer any coin and there will be nothing changed ex- in circulation; but if the paper curcept that a paper currency has been rency is convertible, coin may still be substituted for half of the metallic cur- obtained from the issuers, in exchange rency which existed before. Suppose, for notes. All additional notes, therenow, a second emission of paper; the fore, which are attempted to be forced same series of effects will be renewed; into circulation after the metals have and so on, until the whole of the me- been completely superseded, will return tallic money has disappeared: that is, upon the issuers in exchange for coin; if paper be issued of as low a denomi- and they will not be able to maintain nation as the lowest coin ; if not, as in circulation such a quantity of conmuch will remain, as convenience re- vertible paper, as to sink its value below quires for the smaller payments. The the metal which it represents. It is addition made to the anantity of gold I not so, however with an inconvertible addition made to und silver disposable for ornamental currency. To the increase of that (as

permitted by law) there is no check. , false, profession of intending to keep The issuers may add to it indefinitely, them at a value corresponding to that lowering its value and raising prices in of the coins. This is not impracticable, proportion; they may, in other words, even with an inconvertible paper. depreciate the currency without limit. There is not indeed the self-acting

Such a power, in whomsoever vested, check which convertibility brings with is an intolerable evil. All variations it. But there is a clear and unequiin the value of the circulating medium vocal indication by which to judge are mischievous: they disturb existing whether the currency is depreciated, contracts and expectations, and the and to what extent. That indication liability to such changes renders every is, the price of the precious metals. pecuniary engagement of long date When holders of paper cannot demand entirely precarious. The person who coin to be converted into bullion, and buys for himself, or gives to another, when there is none left in circulation, an annuity of 1001., does not know bullion rises and falls in price like other whether it will be equivalent to 2001. things; and if it is above the Mint or to 501. a few years hence. Great price, if an ounce of gold, which would as this evil would be if it depended be coined into the equivalent of only on accident, it is still greater 31. 178. 10 d., is sold for 41. or 5l. in when placed at the arbitrary disposal paper, the value of the currency has of an individual or a body of indi sunk just that much below what the viduals; who may have any kind or value of a metallic currency would be. degree of interest to be served by an If, therefore, the issue of inconvertible artificial fluctuation in fortunes; and paper were subjected to strict rules, who have at any rate a strong interest one rule being that whenever bullion in issuing as much as possible, each rose above the Mint price, the issues issue being in itself a source of profit. should be contracted until the market Not to add, that the issuers may have, price of bullion and the Mint price were and in the case of a government paper again in accordance, such a currency always have, a direct interest in lower would not be subject to any of the evils ing the value of the currency, because usually deemed inherent in an inconit is the medium in which their own vertible paper. debts are computed.

But also such a system of currency

would have no advantages sufficient to § 2. In order that the value of the recommend it to adoption. An inconcurrency may be secure from being vertible currency, regulated by the altered by design, and may be as little price of bullion, would conform exactly, as possible liable to fluctuation from in all its variations, to a convertible accident, the articles least liable of all one ; and the only advantage gained, known commodities to vary in their would be that of exemption from the value, the precious metals, have been necessity of keeping any reserve of the made in all civilized countries the precious metals; which is not a very standard of value for the circulating important consideration, especially as medium; and no paper currency ought a government, so long as its good faith to exist of which the value cannot be is not suspected, needs, not keep so made to conform to theirs. Nor has large a reserve as private issuers, being this fundamental maxim ever been en not so liable to great and sudden detirely lost sight of even by the govern mands, since there never can be any ments which have most abused the real doubt of its solvency. Against power of creating inconvertible paper. this small advantage is to be set, in the If they have not (as they generally first place, the possibility of fraudulent have) professed an intention of paying tampering with the price of bullion for in specie at some indefinite future time, the sake of acting on the currency; in they have at least, by giving to their the manner of the fictitious sales of paper issues the names of their coins, corn, to influence the averages, so made a virtual, though generally a much and so justly complained of while

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