The High Price of Bullion
David Ricardo
The High Price of Bullion, a Proof of the Depreciation of Bank Notes.
by David Ricardo
London: Printed for John Murray, 32, Fleet-Street;
And Sold by Every Other Bookseller in Town and Country
1810
Introduction
The writer of the following pages has already submitted some reflections to the attention of
the public, on the subject of paper-currency, through the medium of the Morning Chronicle.
He has thought proper to republish his sentiments on this question in a form more calculated
to bring it to fair discussion; and his reasons for so doing, are, that he has seen, with the
greatest alarm, the progressive depreciation of the paper-currency. His fears have been
augmented by observing, that by a great part of the public this depreciation is altogether
denied, and that by others, who admit the fact, it is imputed to any cause but that which
to him appears the real one. Before any remedy can be successfully applied to an evil of
such magnitude, it is essential that there should be no doubt as to its cause. The writer
proposes, from the admitted principles of political economy, to advance reasons, which, in
his opinion, prove, that the paper-currency of this county has long been, and now is, at a
considerable discount, proceeding from a superabundance in its quantity, and not from any
want of confidence in the Bank of England, or from any doubts of their ability to fulfil their
engagements. He does this without reluctance, being fully persuaded that the country is yet
in possession of the means of restoring the paper-currency to its professed value, viz. the
value of the coins, for the payment of which it purports to be a pledge.
He is aware that he can add but little to the arguments which have been so ably urged by
Lord King, and which ought long before this to have carried conviction to every mind; but
he trusts, that as the evil has become more glaring, the public wil1 not continue to view,
without interest, a subject which yields to no other in importance, and in which the general
welfare is so materially concerned.
Dec. 1, 1809.
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High Price of Bullion, a Proof of the Depreciation of Bank Notes
The precious metals employed for circulating the commodities of the world, previously to
the establishment of banks, have been supposed by the most approved writers on political
economy to have been divided into certain proportions among the different civilized nations
of the earth, according to the state of their commerce and wealth, and therefore according to
the number and frequency of the payments which they had to perform. While so divided they
preserved every where the same value, and as each country had an equal necessity for the
quantity actually in use, there could be no temptation offered to either for their importation
or exportation.
Gold and silver, like other commodities, have an intrinsic value, which is not arbitrary, but
is dependent on their scarcity, the quantity of labour bestowed in procuring them, and the
value of the capital employed in the mines which produce them.
"The quality of utility, beauty, and scarcity," says Dr Smith, "are the original foundation of
the high price of those metals, or of the great quantity of other goods for which they can
every where be exchanged. This value was antecedent to, and independent of their being
employed as coin, and was the quality which fitted them for that employment."
If the quantity of gold and silver in the world employed as money were exceedingly small,
or abundantly great, it would not in the least affect the proportions in which they would be
divided among the different nations - the variation in their quantity would have produced
no other effect than to make the commodities for which they were exchanged comparatively
dear or cheap. The smaller quantity of money would perform the functions of a circulating
medium, as well as the larger. Ten millions would be as effectual for that purpose as one
hundred millions. Dr Smith observes, "that the most abundant mines of the precious metals
would add little to the wealth of the world. A produce of which the value is principally
derived from its scarcity is necessarily degraded by its abundance."
If in the progress towards wealth, one nation advanced more rapidly than the others, that
nation would require and obtain a greater proportion of the money of the world. Its com-
merce, its commodities, and its payments, would increase, and the general currency of the
world would be divided according to the new proportions. All countries therefore would
contribute their share to this effectual demand.
In the same manner if any nation wasted part of its wealth, or lost part of its trade, it
could not retain the same quantity of circulating medium which it before possessed. A part
would be exported, and divided among the other nations till the usual proportions were
re-established.
While the relative situation of counties continued unaltered, they might have abundant
commerce with each other, but their exports and imports would on the whole be equal.
England might possibly import more goods from, than she would export to, France, but she
4
would in consequence export more to some other country, and France would import more
from that country; so that the exports and imports of all countries would balance each other;
bills of exchange would make the necessary payments, but no money would pass, because it
would have the same value in all countries.
If a mine of gold were discovered in either of these countries, the currency of that country
would be lowered in value in consequence of the increased quantity of the precious metals
brought into circulation, and would therefore no longer be of the same value as that of other
countries. Gold and silver, whether in coin or in bullion, obeying the law which regulates all
other commodities, would immediately become articles of exportation; they would leave the
county where they were cheap, for those countries where they were dear, and would continue
to do so, as long as the mine should prove productive, and till the proportion existing
between capital and money in each country before the discovery of the mine, were again
established, and gold and silver restored every where to one value. In return for the gold
exported, commodities would be imported; and though what is usually termed the balance
of trade would be against the country exporting money or bullion, it would be evident that
she was carrying on a most advantageous trade, exporting that which was no way useful to
her, for commodities which might be employed in the extension of her manufactures, and
the increase of her wealth.
If instead of a mine being discovered in any country, a bank were established, such as the
Bank of England, with the power of issuing its notes for a circulating medium; after a large
amount had been issued either by way of loan to merchants, or by advances to government,
thereby adding considerably to the sum of the currency, the same effect would follow as in
the case of the mine. The circulating medium would be lowered in value, and goods would
experience a proportionate rise. The equilibrium between that and other nations would only
be restored by the exportation of part of the coin.
The establishment of the bank and the consequent issue of its notes therefore, as well as
the discovery of the mine, operate as an inducement to the exportation either of bullion or
of coin, and are beneficial only in as far as that object may be accomplished. The bank
substitutes a currency of no value for one most costly, and enables us to turn the precious
metals (which, though a very necessary part of our capital, yield no revenue,) into a capital
which will yield one. Dr A. Smith compares the advantages attending the establishment
of a bank to those which would be obtained by converting our highways into pastures and
corn-fields, and procuring a road through the air. The highways, like the coin, are highly
useful, but neither yield any revenue. Some people might be alarmed at the specie leaving
the country, and might consider that as a disadvantageous trade which required us to part
with it; indeed the law so considers it by its enactments against the exportation of specie;
but a very little reflection will convince us that it is our choice, and not our necessity, that
sends it abroad; and that it is highly beneficial to us to exchange that commodity which is
superfluous, for others which may be made productive.
The exportation of the specie may at all times be safely left to the discretion of individuals;
it will not be exported more than any other commodity, unless its exportation should be
5
advantageous to the county. If it be advantageous to export it, no laws can effectually
prevent its exportation. Happily in this case, as well as in most others in commerce where
there is free competition, the interests of the individual and that of the community are never
at variance.
Were it possible to carry the law against melting or exporting of coin into strict execution,
at the same time that the exportation of gold bullion was freely allowed, no advantage could
accrue from it, but great injury must arise to those who might have to pay, possibly, two
ounces or more of coined gold for one of uncoined gold. This would be a real depreciation
of our currency, raising the prices of all other commodities in the same proportion as it
increased that of gold bullion. The owner of money would in this case suffer an injury equal
to what a proprietor of corn would suffer, were a law to be passed prohibiting him from
selling his corn for more than half its market value. The law against the exportation of the
coin has this tendency, but is so easily evaded, that gold in bullion has always been nearly
of the same value as gold in coin.
Thus then it appears that the currency of one country can never for any length of time be
much more valuable, as far as equal quantities of the precious metals are concerned, than that
of another; that excess of currency is but a relative term; that if the circulation of England
were ten millions, that of France five millions, that of Holland four millions, etc. etc. whilst
they kept their proportions, though the currency of each country were doubled or trebled,
neither country would be conscious of an excess of currency. The prices of commodities would
every where rise, on account of the increase of currency, but there would be no exportation
of money from either. But if these proportions be destroyed by England alone doubling her
currency, while that of France, Holland, etc. etc. continued as before, we should then be
conscious of an excess in our currency, and for the same reason the other countries would
feel a deficiency in theirs, and part of our excess would be exported till the proportions of
ten, five, four, etc. were again established.
If in France an ounce of gold were more valuable than in England, and would therefore in
France purchase more of any commodity common to both countries, gold would immediately
quit England for such purpose, and we should send gold in preference to any thing else,
because it would be the cheapest exchangeable commodity in the English market; for if gold
be dearer in France than in England, goods must be cheaper; we should not therefore send
them from the dear to the cheap market, but, on the contrary, they would come from the
cheap to the dear market, and would be exchanged for our gold.
The Bank might continue to issue their notes, and the specie be exported with advantage to
the country, while their notes were payable in specie on demand, because they could never
issue more notes than the value of the coin which would have circulated had there been no
bank.(1*)
If they attempted to exceed this amount, the excess would be immediately returned to them
for specie; because our currency, being thereby diminished in value, could be advantageously
6
exported, and could not be retained in our circulation. These are the means, as I have
already explained, by which our currency endeavours to equalize itself with the currencies of
other counties. As soon as this equality was attained, all advantage arising from exportation
would cease; but if the Bank assuming, that because a given quantity of circulating medium
had been necessary last year, therefore the same quantity must be necessary this, or for
any other reason, continued to re-issue the returned notes, the stimulus which a redundant
currency first gave to the exportation of the coin would be again renewed with similar effects;
gold would be again demanded, the exchange would become unfavourable, and gold bullion
would rise, in a small degree, above its mint price, because it is legal to export bullion, but
illegal to export the coin, and the difference would be about equal to the fair compensation
for the risk.
In this manner if the Bank persisted in returning their notes into circulation, every guinea
might be drawn out of their coffers.
If to supply the deficiency of their stock of gold they were to purchase gold bullion at the
advanced price, and have it coined into guineas, this would not remedy the evil, guineas would
be still demanded, but instead of being exported would be melted and sold to the Bank as
bullion at the advanced price. "The operations of the Bank," observed Dr Smith, alluding
to an analogous case, "were upon this account somewhat like the web of Penelope, the work
that was done in the day was undone in the night." The same sentiment is expressed by Mr
Thornton: - "Finding the guineas in their coffers to lessen every day, they must naturally be
supposed to be desirous of replacing them by all effectual and not extravagantly expensive
means. They will be disposed, to a certain degree, to buy gold, though at a losing price,
and to coin it into new guineas; but they will have to do this at the very moment when
many are privately melting what is coined. The one party will be melting and selling while
the other is buying and coining. And each of these two contending businesses will now be
carried on, not on account of an actual exportation of each melted guinea to Hamburgh, but
the operation or at least a great part of it will be confined to London; the coiners and the
melters living on the same spot, and giving constant employment to each other.
"The Bank," continues Mr Thornton, "if we suppose it, as we now do, to carry on this sort of
contest with the melters, is obviously waging a very unequal war; and even though it should
not be tired early, it will be likely to be tired sooner than its adversaries."
The Bank would be obliged therefore ultimately to adopt the only remedy in their power
to put a stop to the demand for guineas. They would withdraw part of their notes from
circulation, till they should have increased the value of the remainder to that of gold bullion,
and consequently to the value of the currencies of other countries. All advantage from the
exportation of gold bullion would then cease, and there would be no temptation to exchange
bank-notes for guineas.
In this view of the subject, then, it appears, that the temptation to export money in exchange
for goods, or what is termed an unfavourable balance of trade, never arises but from a
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redundant currency. But Mr Thornton, who has considered this subject very much at large,
supposes that a very unfavourable balance of trade may be occasioned to this country by a
bad harvest, and the consequent importation of corn; and that there may be at the same
time an unwillingness in the country, to which we are indebted, to receive our goods in
payment; the balance due to the foreign country must therefore be paid out of that part
of our currency, consisting of coin, and that hence arises the demand for gold bullion and
its increased price. He considers the Bank as affording considerable accommodation to the
merchants, by supplying with their notes the void occasioned by the exportation of the
specie.
As it is acknowledged by Mr Thornton, in many parts of his work, that the price of gold
bullion is rated in gold coin; and as it is also acknowledged by him, that the law against
melting gold coin into bullion and exporting it is easily evaded, it follows, that no demand
for gold bullion, arising from this or any other cause, can raise the money price of that
commodity. The error of this reasoning proceeds from not distinguishing between an increase
in the value of gold, and an increase in its money price.
If there were a great demand for corn its money price would advance; because, in comparing
corn with money, we in fact compare it with another commodity; and for the same reason,
when there is a great demand for gold its corn price will increase; but in neither case will a
bushel of corn be worth more than a bushel of corn, or an ounce of gold more than an ounce
of gold. An ounce of gold bullion could not, whatever the demand might be, whilst its price
was rated in gold coin, be of more value than an ounce of coined gold, or 3 l. 17s. 10 1/2d.
If this argument should not be considered as conclusive, I should urge, that a void in the
currency, as here supposed, can only be occasioned by the annihilation or limitation of paper
currency, and then it would speedily be filled by importations of bullion, which its increased
value, in consequence of the diminution of circulating medium, would infallibly attract to
the advantageous market. However great the scarcity of corn might be, the exportation of
money would be limited by its increasing scarcity. Money is in such general demand, and in
the present state of civilization is so essential to commercial transactions, that it can never
be exported to excess; even in a war such as the present, when our enemy endeavours to
interdict all commerce with us, the value which the currency would bear, from its increasing
scarcity, would prevent the exportation of it from being carried so far as to occasion a void
in the circulation.
Mr Thornton has not explained to us, why any unwillingness should exist in the foreign
country to receive our goods in exchange for their corn; and it would be necessary for him
to show, that if such an unwillingness were to exist, we should agree to indulge it so far as
to consent to part with our coin.
If we consent to give coin in exchange for goods, it must be from choice, not necessity. We
should not import more goods than we export, unless we had a redundancy of currency,
which it therefore suits us to make a part of our exports. The exportation of the coin is
8
caused by its cheapness, and is not the effect, but the cause of an unfavourable balance; we
should not export it, if we did not send it to a better market, or if we had any commodity
which we could export more profitably. It is a salutary remedy for a redundant currency;
and as I have already endeavoured to prove, that redundancy or excess is only a relative
term, it follows, that the demand for it abroad arises only from the comparative deficiency
of the currency of the importing country, which there causes its superior value.
It resolves itself entirely into a question of interest. If the sellers of the corn to England, to
the amount I will suppose of a million, could import goods which cost a million in England,
but would produce, when sold abroad, more than if the million had been sent in money,
goods would be preferred; if otherwise, money would be demanded.
It is only after a comparison of the value in their markets and in our own, of gold and
other commodities, and because gold is cheaper in the London market than in theirs, that
foreigners prefer gold in exchange for their corn. If we diminish the quantity of currency,
we give an additional value to it: this will induce them to alter their election, and prefer
the commodities. If I owed a debt in Hamburgh of 100 l. I should endeavour to find out
the cheapest mode of paying it. If I send money, the expence attending its transportation
being I will suppose 5 l. to discharge my debt will cost me 105 l. If I purchase cloth here,
which, with the expences attending its exportation, will cost me 106 l. and which will, in
Hamburgh, sell for 100 l. it is evidently more to my advantage to send the money. If the
purchase and expences of sending hardware to pay my debt, will take 107 l. I should prefer
sending cloth to hardware, but I would send neither in preference to money, because money
would be the cheapest exportable commodity in the London market. The same reasons
would operate with the exporter of the corn, if the transaction were on his own account. But
if the Bank, "fearful for the safety of their establishment," and knowing that the requisite
number of guineas would be withdrawn from their coffers at the mint price, should think it
necessary to diminish the amount of their notes in circulation, the proportion between the
value of the money, of the cloth, and of the hardware, would no longer be as 105, 106, and
107; but the money would become the most valuable of the three, and therefore would be
less advantageously employed in discharging the foreign debts.
If, which is a much stronger case, we agreed to pay a subsidy to a foreign power, money
would not be exported whilst there were any goods which could more cheaply discharge the
payment. The interest of individuals would render the exportation of the money unneces-
sary.(2*)
Thus then specie will be sent abroad to discharge a debt only when it is superabundant; only
when it is the cheapest exportable commodity. If the Bank were at such a time paying their
notes in specie, gold would be demanded for that purpose. It would be obtained there at its
mint price, whereas its price as bullion would be something above its value as coin, because
bullion could, and coin could not, be legally exported.
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It is evident, then, that a depreciation of the circulating medium is the necessary consequence
of its redundance; and that in the common state of the national currency this depreciation
is counteracted by the exportation of the precious metals. (3*)
Such, then, appear to me to be the laws that regulate the distribution of the precious
metals throughout the world, and which cause and limit their circulation from one county
to another, by regulating their value in each. But before I proceed to examine on these
principles the main object of my enquiry, it is necessary that I should shew what is the
standard measure of value in this country, and of which, therefore, our paper currency ought
to be the representative, because it can only be by a comparison to this standard that its
regularity, or its depreciation, may be estimated.
No permanent (4*) measure of value can be said to exist in any nation while the circulating
medium consists of two metals, because they are constantly subject to vary in value with
respect to each other. However exact the conductors of the mint may be, in proportioning
the relative value of gold to silver in the coins, at the time when they fix the ratio, they
cannot prevent one of these metals from rising, while the other remains stationary, or falls in
value. Whenever this happens, one of the coins will be melted to be sold for the other. Mr
Locke, Lord Liverpool, and many other writers, have ably considered this subject, and have
all agreed, that the only remedy for the evils in the currency proceeding from this source,
is the making one of the metals only the standard measure of value. Mr Locke considered
silver as the most proper metal for this purpose, and proposed that gold coins should be left
to find their own value, and pass for a greater or lesser number of shillings, as the market
price of gold might vary with respect to silver.
Lord Liverpool, on the contrary, maintained that gold was not only the most proper metal
for a general measure of value in this country, but that, by the common consent of the
people, it had become so, was so considered by foreigners, and that it was best suited to the
increased commerce and wealth of England.
He, therefore, proposed, that gold coin only should be a legal tender for sums exceeding one
guinea, and silver coins for sums not exceeding that amount. As the law now stands, gold
coin is a legal tender for all sums; but it was enacted in the year 1774, "That no tender in
payment of money made in the silver coin of this realm, of any sum exceeding the sum of
twenty-five pounds at any one time, shall be reputed in law, or allowed to be legal tender
within Great-Britain or Ireland, for more than according to its value by weight, after the
rate of 5s. 2d. for each ounce of silver." The same regulation was revived in 1798, and is
now in force.
For many reasons given by Lord Liverpool, it appears proved beyond dispute, that gold
coin has been for near a century the principal measure of value, but this is, I think, to be
attributed to the inaccurate determination of the mint proportions. Gold has been valued
too high; no silver, therefore, can remain in circulation which is of its standard weight.
10
If a new regulation were to take place, and silver to be valued too high, or (which is the
same thing) if the market proportions between the prices of gold and silver were to become
greater than those of the mint, gold would then disappear, and silver become the standard
currency.
This may require further explanation. The relative value of gold and silver in the coins is
as 15 9/124 to 1. An ounce of gold which is coined into 3 l. 17s. 10 1/2d. of gold coin,
is worth, according to the mint regulation, 15 9/124 ounces of silver,because that weight of
silver is also coined into 3 l. 17s. 10 1/2d. of silver coin. Whilst the relative value of gold to
silver is in the market under 15 to 1, which it has been for a great number of years till lately,
gold coin would necessarily be the standard measure of value, because neither the Bank, nor
3 any individual, would send 15 9/124 ozs. of silver to the mint to be coined into 3 l. 17s.
10 1/2d. when they could sell that quantity o silver in the market for more than 3 l. 17s.
10 1/2d. in gold coin, and this they could do by the supposition, that less than 15 ounces
of silver would purchase an ounce of gold.
But if the relative value of gold to silver be more than the mint proportion of 15 9/124 to 1,
no gold would then be sent to the mint to be coined, because as either of the metals are a
legal tender to any amount, the possessor of an ounce of gold would not send it to the mint
to be coined into 3 l. 17s. 10 1/2d. of gold coin, whilst he could sell it, which he could do
in such case, for more than 3 l. 17s. 10 1/2d. of silver coin. Not only would not gold be
carried to the mint to be coined, but the illicit trader would melt the gold coin, and sell it as
bullion for more than its nominal value in the silver coin. Thus then gold would disappear
from circulation, and silver coin become the standard measure of value. As gold has lately
experienced a considerable rise compared with silver, (an ounce of standard gold, which, on
an average of many years, was of equal value to 14 3/4 ozs. of standard silver, being now
in the market of the same value as 15 1/2 oz.) this would be the case now were the Bank
Restriction-bill repealed, and the coinage of silver freely allowed at the mint, in the same
manner as that of gold; but in an act of parliament of 39 Geo. III is the following clause: ­
"Whereas inconvenience may arise from any coinage of silver until such regulations may be
formed as shall appear necessary; and whereas from the present low price of silver bullion,
owing to temporary circumstances, a small quantity of silver bullion has been brought to
the mint to be coined, and there is reason to suppose that a still further quantity may be
brought; and it is therefore necessary to suspend the coining of silver for the present; be
it therefore enacted, That from and after the passing of this act, no silver bullion shall be
coined at the mint, nor shall any silver coin that may have been coined there be delivered,
any law to the contrary notwithstanding."
This law is now in force. It would appear, therefore, to have been the intention of the
legislature to establish gold as the standard of currency in this country. Whilst this law is in
force, silver coin must be confined to small payments only, the quantity in circulation being
barely sufficient for that purpose. It might be for the interest of a debtor to pay his large
debts in silver coin if he could get silver bullion coined into money; but being prevented by
11
the above law from doing so, he is necessarily obliged to discharge his debt with gold coin,
which he could obtain at the mint with gold bullion to any amount. Whilst this law is in
force, gold must always continue to be the standard of currency.
Were the market value of an ounce of gold to become equal to thirty ounces of silver, gold
would nevertheless be the measure of value, whilst this prohibition continued in force. It
would be of no avail, that the possessor of 30 ounces of silver should know that he once could
have discharged a debt of 3 l. 17s. 10 1/2d. by procuring 15 9/124 ounces of silver to be
coined at the mint, as he would in this case have no other means of discharging his debt but
by selling his 30 oz. of silver at the market value, that is to say, for one ounce of gold, or 3
l. 17s. 10 1/2d. of gold coin.
The public has sustained, at different times, very serious loss from the depreciation of the
circulating medium, arising from the unlawful practice of clipping the coins.
In proportion as they become debased, so the prices of every commodity for which they are
exchangeable rise in nominal value, not excepting gold and silver bullion: accordingly we
find, that before the re-coinage in the reign of King William the Third, the silver currency
had become so degraded, that an ounce of silver, which ought to be contained in sixty-two
pence, sold for seventy-seven pence; and a guinea, which was valued at the mint at twenty
shillings, passed in all contracts for thirty shillings. This evil was then remedied by the
recoinage. Similar effects followed from the debasement of the gold currency, which were
again corrected in 1774 by the same means.
Our gold coins have, since 1774, continued nearly at their standard purity; but our silver
currency has again become debased. By an assay at the mint in 1798, it appears that our
shillings were found to be twenty-four per cent, and our sixpences thirty-eight per cent.
under their mint value; and I am informed, that by a late experiment they were found
considerably more deficient. They do not, therefore, contain as much pure silver as they did
in the reign of King William. This debasement, however, did not operate previously to 1798,
as on the former occasion. At that time both gold and silver bullion rose in proportion to
the debasement of the silver coin. All foreign exchanges were against us full twenty per cent.,
and many of them still more. But although the debasement of the silver coin had continued
for many years, it had neither, previously to 1798, raised the price of gold nor silver, nor
had it produced any effect on the exchanges. This is a convincing proof, that gold coin was,
during that period, considered as the standard measure of value. Any debasement of the
gold coin would then have produced the same effects on the prices of gold and silver bullion,
and on the foreign exchanges, which were formerly caused by the debasement of the silver
coins (5*).
While the currency of different countries consists of the precious metals, or of a paper money
which is at all times exchangeable for them; and while the metallic currency is not debased
by wearing, or clipping, a comparison of the weight, and degree of fineness of their coins,
will enable us to ascertain their pit of exchange. Thus the par of exchange between Holland
12
and England is stated to be about eleven florins, because the pure silver contained in eleven
florins is equal to the pure silver contained in twenty standard shillings.
This par is not, nor can it be, absolutely fixed; because, gold coin being the standard of
commerce in England, and silver coin in Holland, a pound sterling, or 20/21 of a guinea,
may at different times be more or less valuable than twenty standard shillings, and therefore
more or less valuable than its equivalent of eleven florins. Estimating the par either by silver
or by gold will be sufficiently exact for our purpose.
If I owe a debt in Holland; by knowing the par of exchange, I also know the quantity of our
money which will be necessity to discharge it.
If my debt amount to 1100 florins, and gold have not varied in value, 100 l. in our pure gold
coin will purchase as much Dutch currency as is necessary to pay my debt. By exporting the
100 l. therefore in coin, or (which is the same thing) paying a bullion merchant the 100 l. in
coin, and allowing him the expences attending its transportation, such as freight, insurance,
and his profit, he will sell me a bill which will discharge my debt; at the same time he will
export the bullion, to enable his correspondent to pay the bill when it shall become due.
These expences then are the utmost limits of an unfavourable exchange. However great my
debt may be, though it equalled the largest subsidy ever given by this county to an ally; while
I could pay the bullion-merchant in coin of standard value, he would be glad to export it,
and to sell me bills. But if I pay him for his bill in a debased coin, or in a depreciated paper
money, he will not be willing to sell me his bill at this rate; because if the coin be debased,
it does not contain the quantity of pure gold or silver which ought to be contained in 100
l., and he must therefore export an additional number of such debased pieces of money, to
enable him to pay my debt of 100 l., or its equivalent, 1100 florins. If I pay him in paper
money; as he cannot send it abroad, he will consider whether it will purchase as much gold
or silver bullion as is contained in the coin for which it is a substitute; if it will do this, paper
will be as acceptable to him as coin; but if it will not, he will expect a further premium for
his bill, equal to the depreciation of the paper.
While the circulating medium consists, therefore, of coin undebased, or of paper-money
immediately exchangeable for undebased coin, the exchange can never be more above, or
more below, par, than the expences attending the transportation of the precious metals.
But when it consists of a depreciated paper-money, it necessarily will fall according to the
degree of the depreciation.
The exchange will, therefore, be a tolerably accurate criterion by which we may judge of
the debasement of the currency, proceeding either from a clipped coinage, or a depreciated
paper-money.
It is observed by Sir James Stuart, "That if the foot measure was altered at once over all
England, by adding to it, or taking from it, any proportional part of its standard length, the
13
alteration would be best discovered, by comparing the new foot with that of Paris, or of any
other country, which had suffered no alteration.
"Just so, if the pound sterling, which is the English unit, shall be found any how changed;
and if the variation it has met with be difficult to ascertain, because of a complication of
circumstances; the best way to discover it will be to compare the former and the present
value of it, with the money of other nations which has suffered no variation. This the
exchange will perform with the greatest exactness." The Edinburgh reviewers, in speaking of
Lord King's pamphlet, observe, that "it does not follow because our imports always consist
partly of bullion, that the balance of trade is therefore permanently in our favour. Bullion,"
they say, "is a commodity, for which, as for every other, there is a varying demand; and
which, exactly like any other, may enter the catalogue either of imports or exports; and this
exportation or importation of bullion will not affect the course of exchange in a different way
from the exportation or importation of any other commodities."
No person ever exports or imports bullion without first considering the rate of exchange. It
is by the rate of exchange that he discovers the relative value of bullion in the two countries
between which it is estimated. It is therefore consulted by the bullion-merchant in the same
manner as the price-current is by other merchants, before they determine on the exportation
or importation of other commodities. If eleven florins in Holland contain an equal quantity
of pure silver as twenty standard shillings, silver bullion, equal in weight to twenty standard
shillings, can never be exported from London to Amsterdam whilst the exchange is at par, or
unfavourable to Holland. Some expence and risk must attend its exportation, and the very
term par expresses that a quantity of silver bullion, equal to that weight and purity, is to be
obtained in Holland by the purchase of a bill of exchange, free of all expence. Who would
send bullion to Holland at an expence of three or four per cent. when, by the purchase of
a bill at par, he in fact obtains an order for the delivery to his correspondent in Holland of
the same weight of bullion which he was about to export?
It would be as reasonable to contend, that when the price of corn is higher in England than
on the Continent, corn would be sent, notwithstanding all the charges on its exportation, to
be sold in the cheaper market.
Having already noticed the disorders to which a metallic currency is exposed, I will proceed
to consider those which, though not caused by the debased state of either the gold or silver
coins, are nevertheless more serious in their ultimate consequences.
Our circulating medium is almost wholly composed of paper, and it behoves us to guard
against the depreciation of the paper currency with at least as much vigilance as against
that of the coins.
This we have neglected to do.
Parliament, by restricting the Bank from paying in specie, have enabled the conductors of
that concern to increase or decrease at pleasure the quantity and amount of their notes; and
14
the previously existing checks against an over-issue having been thereby removed, those con-
ductors have acquired the power of increasing or decreasing the value of the paper currency.
In tracing the present evils to their source, and proving their existence by an appeal to the
two unerring tests I have before mentioned, namely, the rate of exchange and the price of
bullion, I shall avail myself of the account given by Mr Thornton of the conduct of the Bank
before the restriction, to shew how clearly they acted on the principle which he has expressly
acknowledged, viz. that the value of their notes is dependent on their amount, and that they
ascertained the variation in their value by the tests I have just referred to.
Mr Thornton tells us, "That if at any time the exchanges of the country became so un-
favourable as to produce a material excess of the market above the mint price of gold, the
directors of the Bank, as appears by the evidence of some of their body, given to parliament,
were disposed to resort to a reduction of their paper, as a means of diminishing or removing
the excess, and of thus providing for the security of their establishment. They moreover have
at all times," he says, "been accustomed to observe some limit as to the quantity of their
notes for the same prudential reasons. " And in another place: " When the price which our
coin will fetch in foreign countries is such as to tempt it out of the kingdom, the directors of
the Bank naturally diminish, in some degree, the quantity of their paper through an anxiety
for the safety of their establishment. By diminishing their paper, they raise its value; and in
rising its value, they raise also the value in England of the current coin which is exchanged
for it. Thus the value of our gold coin conforms itself to the value of the current paper, and
the current paper is rendered by the Bank-directors, of that value which it is necessary that
it should bear in order to prevent large exportations;-a value sometimes rising a little above,
and sometimes falling a little below, the price which our coin bears abroad."
The necessity which the Bank felt itself under to guard the safety of its establishment,
therefore, always prevented, before the restriction from paying in specie, a too lavish issue
of paper money.
Thus we find that, for a period of twenty-three years previously to the suspension of cash
payments in 1797, the average price of gold bullion was 3 l. 17s. 7 3/4d. per oz. about
2 3/4d. under the mint price; and for sixteen years previously to 1774, it never was much
above 4 l. per oz. It should be remembered that during these sixteen years our gold coin
was debased by wearing, and it is therefore probable that 4 l. of such debased money did
not weigh as much as the ounce of gold for which it was exchanged.
Dr A. Smith considers every permanent excess of the market above the mint price of gold,
as referrible to the state of the coins. While the coin was of its standard weight and purity,
the market price of gold bullion, he thought, could not greatly exceed the mint price.
Mr Thornton contends that this cannot be the only cause. "We have," he says, "lately expe-
rienced fluctuations in our exchanges, and correspondent variations in the market, compared
with the mint price of gold, amounting to no less than eight or ten per cent; the state of our
15
coinage continuing in all respects the same." Mr Thornton should have reflected that at the
time he wrote, specie could not be demanded at the Bank in exchange for notes; that this was
a cause for the depreciation of the currency which Dr Smith could never have anticipated.
If Mr Thornton had proved that there had been a fluctuation of ten per cent. in the price
of gold, while the Bank paid their notes in specie, and the coin was undebased, he would
then have convicted Dr Smith of " having treated this important subject in a defective and
unsatisfactory manner." (6*)
But as all checks against the over-issues of the Bank are now removed by the act of parlia-
ment, which restricts them from paying their notes in specie, they are no longer bound by
"fears for the safety of their establishment," to limit the quantity of their notes to that sum
which shall keep them of the same value as the coin which they represent. Accordingly we
find that gold bullion has risen from 3 l. 17s. 7 3/4d. the average price previously 1 to 1797,
to 4 l. 10s. and has been lately as high as 4 l. 13s. per oz.
We may therefore fairly conclude that this difference in the relative value, or, in other words,
that this depreciation in the actual value of bank-notes has been caused by the too abundant
quantity which the Bank has sent into circulation. The same cause which has produced a
difference of from fifteen to twenty per cent. in bank-notes when compared with gold bullion,
may increase it to fifty per cent. There can be no limit to the depreciation which may arise
from a constantly increasing quantity of paper. The stimulus which a redundant currency
gives to the exportation of the coin has acquired new force, but cannot, as formerly, relieve
itself. We have paper money only in circulation, which is necessarily confined to ourselves.
Every increase in its quantity degrades it below the value of gold and silver bullion, below
the value of the currencies of other counties.
The effect is the same as that which would have been produced from clipping our coins.
If one-fifth were taken off from every guinea, the market price of gold bullion would rise one-
fifth above the mint price. Forty-four guineas and a half (the number of guineas weighing
a pound, and therefore called the mint price), would no longer weigh a pound, therefore a
fifth more than that quantity, or about 56 l. would be the price of a pound of gold, and the
difference between the market and the mint price, between 56 l. and 46 l. 14s. 6d. would
measure the depreciation.
If such debased coin were to continue to be called by the name of guineas, and if the value of
gold bullion and all other commodities were rated in the debased coin, a guinea fresh from
the mint would be said to be worth 1 l. 5s. and that sum would be given for it by the illicit
trader; but it would not be the value of the new guinea which had increased, but that of
the debased guineas which had fallen. This would immediately be evident, if a proclamation
were issued, prohibiting the debased guineas from being current but by weight at the mint
price of 3 l. 17s. 10 1/2d.; this would be constituting the new and heavy guineas, the
standard measure of value, in lieu of the clipped and debased guineas. The latter would
then pass at their true value, and be called 17 or 18 shilling-pieces. So if a proclamation to
16
the same effect were now enforced, banknotes would not be less current, but would pass only
for the value of the gold bullion which they would purchase. A guinea would then no longer
be said to be worth 1 l. 4s. but a pound note would be current only for 16 or 17 shillings. At
present gold coin is only a commodity, and bank-notes are the standard measure of value,
but in that case gold coin would be that measure, and bank-notes would be the marketable
commodity.
" It is," says Mr Thornton, " the maintenance of our general exchanges, or, in other words,
it is the agreement of the mint price with the bullion price of gold, which seems to be the
true proof that the circulating paper is not depreciated." When the motive for exporting
gold occurs, while the Bank do not pay in specie, and gold cannot therefore be obtained
at its mint price, the small quantity that can be procured will be collected for exportation,
and bank-notes will be sold at a discount for gold in proportion to their excess. In saying
however that gold is at a high price, we are mistaken; it is not gold, it is paper which has
changed its value. Compare an ounce of gold, or 3 l. 17s. 10 1/2d. to commodities, it bears
the same proportion to them which it has before done; and if it do not, it is referrible to
increased taxation, or to some of those causes which are so constantly operating on its value.
But if we compare the substitute of an ounce of gold, 3 l. 17s. 10 1/2d. in banknotes, with
commodities, we shall then discover the depreciation of the bank-notes. In every market of
the world I am obliged to part with 4 l. 10s. in bank-notes to purchase the same quantity
of commodities which I can obtain for the gold that is in 3 l. 17s. 10 1/2d. of coin.
It is often asserted, that a guinea is worth at Hamburgh 26 or 28 shillings; but we should be
very much deceived if we should therefore conclude that a guinea could be sold at Hamburgh
for as much silver as is contained in 26 or 28 shillings. Before the alteration in the relative
value of gold and silver, a guinea would not sell at Hamburgh for as much silver coin as
is contained in 21 standard shillings; it will at the present market price sell for a sum of
silver currency, which, if imported and carried to our mint to be coined, will produce in our
standard silver coin 21s. 5d. (7*)
It is nevertheless true, that the same quantity of silver will, at Hamburgh, purchase a bill
payable in London, in banknotes, for 26 or 28 shillings. Can there be a more satisfactory
proof of the depreciation of our circulating medium?
It is said, that, if the Restriction-bill were not in force, every guinea would leave the coun-
try.(8*)
This is, no doubt, true; but if the Bank were to diminish the quantity of their notes until they
had increased their value fifteen per cent., the restriction might be safely removed, as there
would then be no temptation to export specie. However long it may be deferred, however
great may be the discount on their notes, the Bank can never resume their payments in
specie, until they first reduce the amount of their notes in circulation to these limits.
The law is allowed by all writers on political economy to be a useless barrier against the
exportation of guineas: it is so easily evaded, that it is doubted whether it has had the effect
17
of keeping a single guinea more in England than there would have been without such law.
Mr Locke, Sir J. Stuart, Dr A. Smith, Lord Liverpool, and Mr Thornton, all agree on this
subject. The latter gentleman observes, "That the state of the British law unquestionably
serves to discourage and limit, though not effectually to hinder, that exportation of guineas
which is encouraged by an unfavourable balance of trade, and perhaps scarcely lessens it
when the profit on exportation becomes very great." Yet after every guinea that can in the
present state of things be procured by the illicit trader has been melted and exported, he
will hesitate before he openly buys guineas with bank-notes at a premium, because, though
considerable profit may attend such speculation, he will thereby render himself an object of
suspicion. He may be watched, and prevented from effecting his object. As the penalties
of the law are severe, and the temptation to informers great, secrecy is essential to his
operations. When guineas can be procured by merely sending a bank-note for them to the
Bank, the law will be easily evaded; but when it is necessary to collect them openly and from
a widely diffused circulation, consisting almost wholly of paper, the advantage attending it
must be very considerable before any one will encounter the risk of being detected.
When we reflect that above sixty millions sterling have been coined into guineas during his
present Majesty's reign, we may form some idea of the extent to which the exportation of
gold must have been carried. - But repeal the law against the exportation of guineas, permit
them to be openly sent out of the county, and what can prevent an ounce of standard gold in
guineas from selling at as good a price for bank-notes, as an ounce of Portugueze gold coin,
or standard gold in bars, when it is known to be equal to them in fineness? And if an ounce
of standard gold in guineas would sell in the market, as standard bars do now, at 4 l. 10s.
per oz., or as they have lately done at 4l. 13s. per oz., what shopkeeper would sell his goods
at the same price either for gold or bank-notes indifferently? If the price of a coat were 3 l.
17s. 10 1/2d. or an ounce of gold, and if at the same time an ounce of gold would sell for
4 l. 13s., is it conceivable that it would be a matter of indifference to the tailor whether he
were paid in gold or in bank-notes?
It is only because a guinea will not purchase more than a pound-note and a shilling, that many
hesitate to allow that bank-notes are at a discount. The Edinburgh Review supports the
same opinion; but if my reasoning be correct, I have shewn such objections to be groundless.
Mr Thornton has told us that an unfavourable trade will account for an unfavourable ex-
change; but we have already seen that an unfavourable trade, if such be an accurate term, is
limited in its effects on the exchange. That limit is probably four or five per cent. This will
not account for a depreciation of fifteen or twenty per cent. Moreover Mr Thornton has told
us, and I entirely agree with him, "That it may be laid down as a general truth, that the
commercial exports and imports of a state naturally proportion themselves in some degree
to each other, and that the balance of trade therefore cannot continue for a very long time
to be either highly favourable or highly unfavourable to a county." Now the low exchange,
so far from being temporary, existed before Mr Thornton wrote in 1802, and has since been
progressively increasing, and is now from fifteen to twenty per cent. against us. Mr Thorn-
ton must therefore, according to his own principles, attribute it to some more permanent
18
cause than an unfavourable balance of trade, and will, I doubt not, whatever his opinion
may formerly have been, now agree that it is to be accounted for only by the depreciation
of the circulating medium.
It can, I think, no longer be disputed that bank-notes are at a discount. While the price of
gold bullion is 4 l. 10s. per oz., or in other words, while any man will consent to give that
which professes to be an obligation to pay nearly an ounce, and a sixth of an ounce of gold,
for an ounce, it cannot be contended that 4 l. 10s. in notes and 4 l. 10s. in gold coin are of
the same value.
An ounce of gold is coined into 3 l. 17s. 10 1/2d.; by possessing that sum therefore I have an
ounce of gold, and would not give 4 l. 10s. in gold coin, or notes which I could immediately
exchange for 4 l. 10s., for an ounce of gold.
It is contrary to common sense to suppose that such could be the market value, unless the
price were estimated in a depreciated medium.
If the price of gold were estimated in silver indeed, the price might rise to 4 l., 5 l., or 10 l.
an ounce, and it would, of itself, be no proof of the depreciation of paper currency, but of an
alteration in the relative value of gold and silver. I have, however, I think proved, that silver
is not the standard measure of value, and therefore not the medium in which the value of
gold is estimated. But if it were; as an ounce of gold is only worth in the market 15 1/2 oz.
of silver, and as 15 1/2 ounces of silver is precisely equal in weight, and is therefore coined
into 80 shillings, an ounce of gold ought not to sell for more than 4 l.
Those then who maintain that silver is the measure of value cannot prove that any demand
for gold which may have taken place, from whatever cause it may have proceeded, can have
raised its price above 4l. per oz. All above that price must, on their own principles, be called
a depreciation in the value of bank-notes. It therefore follows, that if bank-notes be the
representative of silver coin, then an ounce of gold, selling as it now does for 4 l. 10s. sells
for an amount of notes which represent 17 1/2 ounces of silver, whereas in the bullion market
it can only be exchanged for 15 1/2 ounces. Fifteen ounces and a half of silver bullion are
therefore of equal value with an engagement of the Bank to pay to bearer seventeen ounces
and a half.
The market price of silver is at the present time 5s. 9 1/2d. per oz. estimated in bank-notes,
the mint price being only 5s. 2d., consequently the standard silver in 100 l. is worth more
than 112 l. in bank-notes.
But bank-notes, it may be said, are the representatives of our debased silver coin, and not of
our standard silver. This is not true, because the law which I have already quoted declares
silver to be a legal tender for sums only not exceeding 25 l. except by weight. If the Bank
insisted on paying the holder of a bank-note of 1000 l. in silver coin, they would be bound
either to give him standard silver of full weight, or debased silver of an equal value, with the
19
exception of 25 l. which they might pay him in debased coin. But the 1000 l. so consisting
of 975 l. pure money, and 25 l. debased, is worth more than 1112 l. at the present market
value of silver bullion.
It is said that the amount of bank-notes has not increased in a greater proportion than the
augmentation of our trade required, and therefore cannot be excessive. This assertion would
be difficult to prove, and if true, no argument but what is delusive could be founded on it.
In the first place, the daily improvements which we are making in the art of economizing
the use of circulating medium, by improved methods of banking, would render the same
amount of notes excessive now, which were necessary for the same state of commerce at a
former period. Secondly, there is a constant competition between the Bank of England and
the country-banks to establish their notes, to the exclusion of those of their rivals, in every
district where the country banks are established.
As the latter have more than doubled in number within very few years, is it not probable
that their activity may have been crowned with success, in displacing with their own notes
many of those of the Bank of England?
If this have happened, the same amount of Bank of England notes would now be excessive;
which, with a less extended commerce, was before barely sufficient to keep our currency on a
level with that of other counties. No just conclusion can therefore be drawn from the actual
amount of bank-notes in circulation, though the fact, if examined, would, I have no doubt,
be found to be, that the increase in the amount of banknotes, and the high price of gold,
have usually accompanied each other.
It is doubted, whether two or three millions of Bank-notes (the sum which the Bank is
supposed to have added to the circulation, over and above the amount which it will easily
bear,) could have had such effects as are ascribed to them; but it should be recollected, that
the Bank regulate the amount of the circulation of all the country banks, and it is probable,
that if the Bank increase their issues three millions, they enable the country banks to add
more than three millions to the general circulation of England.
The money of a particular county is divided amongst its different provinces by the same rules
as the money of the world is divided amongst the different nations of which it is composed.
Each district will retain in its circulation such a proportionate share of the currency of the
country, as its trade, and consequently its payments, may require, compared to the trade of
the whole; and no increase can take place in the circulating medium of one district, without
being generally diffused, or calling forth a proportionable quantity in every other district.
It is this which keeps a country bank note always of the same value as a Bank of England
note. If in London, where Bank of England notes only are current, one million be added to
the amount in circulation, the currency will become cheaper there than elsewhere, or goods
will become dearer. Goods will, therefore, be sent from the country to the London market,
to be sold at the high prices, or which is much more probable, the country banks will take
advantage of the relative deficiency in the country currency, and increase the amount of
20
their notes in the same proportion as the Bank of England had done; prices would then be
generally, and not partially affected.
In the same manner, if Bank of England notes be diminished one million, the comparative
value of the currency of London will be increased, and the prices of goods diminished. A
Bank of England note will then be more valuable than a country bank note, because it will
be wanted to purchase goods in the cheap market; and as the country banks are obliged to
give Bank of England notes for their own when demanded, they would be called upon for
them till the quantity of country paper should be reduced to the same proportion which it
before bore to the London paper, producing a corresponding fall in the prices of all goods
for which it was exchangeable.
The country banks could never increase the amount of their notes, unless to fill up a relative
deficiency in the country currency, caused by the increased issues of the Bank of England.(9*)
If they attempted it, the same check which compelled the Bank of England to withdraw part
of their notes from circulation when they used to pay them on demand in specie, would
oblige the country banks to adopt the same course. Their notes would, on account of the
increased quantity, be rendered of less value than the Bank of England notes, in the same
manner as Bank of England notes were rendered of less value than the guineas which they
represented. They would therefore be exchanged for Bank of England notes until they were
of the same value.
The Bank of England is the great regulator of the country paper. When they increase
or decrease the amount of their notes, the country banks do the same; and in no case
can country banks add to the general circulation, unless the Bank of England shall have
previously increased the amount of their notes.
It is contended, that the rate of interest, and not the price of gold or silver bullion, is the
criterion by which we may, that if it were always judge of the abundance of paper-money too
abundant, interest would fall, and if not sufficiently so, interest would rise. It can, I think,
be made manifest, that the rate of interest is not regulated by the abundance or scarcity of
money, but by the abundance or scarcity of that part of capital, not consisting of money.
"Money," observes Dr A. Smith, "the great wheel of circulation, the great instrument of
commerce, like all other instruments of trade, though it makes a part, and a very valuable
part of the capital, makes no part of the revenue of the society to which it belongs; and
though the metal pieces of which it is composed, in the course of their annual circulation,
distribute to every man the revenue which properly belongs to him, they make themselves
no part of that revenue.
"When we compute the quantity of industry which the circulating capital of any society can
employ, we must always have regard to those parts of it only which consist in provisions,
materials, and finished work: the other, which consists in money, and which serves only
to circulate those three, must always be deducted. In order to put industry into motion,
21
three things are requisite: - materials to work upon, tools to work with, and the wages or
recompense for the sake of which the work is done. Money is neither a material to work
upon, nor a tool to work with; and though the wages of the workman are commonly paid
to him in money, his real revenue, like that of all other men, consists not in money, but in
money's worth; not in the metal pieces, but what can be got for them."
And in other parts of his work, it is maintained, that the discovery of the mines in America,
which so greatly increased the quantity of money, did not lessen the interest for the use of
it: the rate of interest being regulated by the profits on the employment of capital, and not
by the number or quality of the pieces of metal, which are used to circulate its produce.
Mr Hume has supported the same opinion. The value of the circulating medium of every
country bears some proportion to the value of the commodities which it circulates. In some
countries this proportion is much greater than in others, and varies, on some occasions, in
the same country. It depends upon the rapidity of circulation, upon the degree of confidence
and credit existing between traders, and above all, on the judicious operations of banking.
In England so many means of economizing the use of circulating medium have been adopted,
that its value, compared with the value of the commodities which it circulates, is probably
(during a period of confidence (10*)) reduced to as small a proportion as is practicable.
What that proportion may be has been variously estimated. No increase or decrease of its
quantity, whether consisting of gold, silver, or paper-money, can increase or decrease its value
above or below this proportion. If the mines cease to supply the annual consumption of the
precious metals, money will become more valuable, and a smaller quantity will be employed
as a circulating medium. The diminution in the quantity will be proportioned to the increase
of its value. In like manner, if new mines be discovered, the value of the precious metals
will be reduced, and an increased quantity used in the circulation; so that in either case the
relative value of money, to the commodities which it circulates, will continue as before.
If, whilst the Bank paid their notes on demand in specie, they were to increase their quantity,
they would produce little permanent effect on the value of the currency, because nearly an
equal quantity of the coin would be withdrawn from circulation and exported.
If the Bank were restricted from paying their notes in specie, and all the coin had been
exported, any excess of their notes would depreciate the value of the circulating medium
in proportion to the excess. If twenty millions had been the circulation of England before
the restriction, and four millions were added to it, the twenty-four millions would be of no
more value than the twenty were before, provided commodities had remained the same, and
there had been no corresponding exportation of coins; and if the Bank were successively to
increase it to fifty, or a hundred millions, the increased quantity would be all absorbed in
the circulation of England, but would be, in all cases, depreciated to the value of the twenty
millions.
I do not dispute, that if the Bank were to bring a large additional sum of notes into the
market, and offer them on loan, but that they would for a time affect the rate of interest.
22
The same effects would follow from the discovery of a hidden treasure of gold or silver coin.
If the amount were large, the Bank, or the owner of the treasure, might not be able to lend
the notes or the money at four, nor perhaps, above three per cent.; but having done so,
neither the notes, nor the money, would be retained unemployed by the borrowers; they
would be sent into every market, and would every where raise the prices of commodities, till
they were absorbed in the general circulation. It is only during the interval of the issues of
the Bank, and their effect on prices, that we should be sensible of an abundance of money,
interest would, during that interval, be under its natural level; but as soon as the additional
sum of notes or of money became absorbed in the general circulation, the rate of interest
would be as high, and new loans would be demanded with as much eagerness as before the
additional issues.
The circulation can never be over-full. If it be one of gold and silver, any increase in its
quantity will be spread over the world. If it be one of paper, it will diffuse itself only in the
country where it is issued. Its effects on prices will then be only local and nominal, as a
compensation by means of the exchange will be made to foreign purchasers.
To suppose that any increased issues of the Bank can have the effect of permanently lowering
the rate of interest, and satisfying the demands of all borrowers, so that there will be none
to apply for new loans, or that a productive gold or silver mine can have such an effect, is to
attribute a power to the circulating medium which it can never possess. Banks would, if this
were possible, become powerful engines indeed. By creating paper money, and lending it at
three or two per cent. under the present market rate of interest, the Bank would reduce the
profits on trade in the same proportion; and if they were sufficiently patriotic to lend their
notes at an interest no higher than necessary to pay the expences of their establishment,
profits would be still further reduced; no nation, but by similar means, could enter into
competition with us, we should engross the trade of the world. To what absurdities would
not such a theory lead us! Profits can only be lowered by a competition of capitals not
consisting of circulating medium. As the increase of Bank-notes does not add to this species
of capital, as it neither increases our exportable commodities, our machinery, or our raw
materials, it cannot add to our profits nor lower interest. (11*)
When any one borrows money for the purpose of entering into trade, he borrows it as a
medium by which he can possess himself of " materials, provisions, etc." to carry on that
trade; and it can be of little consequence to him, provided he obtain the quantity of materials,
etc. necessary, whether he be obliged to borrow a thousand, or ten thousand pieces of money.
If he borrow ten thousand, the produce of his manufacture will be ten times the nominal
value of what it would have been, had one thousand been sufficient for the same purpose. The
capital actually employed in the county is necessarily limited to the amount of the "materials,
provisions, etc." and might be made equally productive, though not with equal facility, if
trade were carried on wholly by barter. The successive possessors of the circulating medium
have the command over this capital: but however abundant may be the quantity of money
or of bank-notes; though it may increase the nominal prices of commodities; though it may
distribute the productive capital in different proportions; though the Bank, by increasing
23
the quantity of their notes, may enable A to carry on part of the business formerly engrossed
by B and C, nothing will be added to the real revenue and wealth of the country. B and C
may be injured, and A and the Bank may be gainers, but they will gain exactly what B and
C lose. There will be a violent and an unjust transfer of property, but no benefit whatever
will be gained by the community.
For these reasons I am of opinion that the funds are not indebted for their high price to the
depreciation of our currency. Their price must be regulated by the general rate of interest
given for money. If before the depreciation I gave thirty years' purchase for land, and
twenty-five for an annuity in the stocks, I can after the depreciation give a larger sum for
the purchase of land, without giving more years' purchase, because the produce of the land
will sell for a greater nominal value in consequence of the depreciation; but as the annuity
in the funds is paid in the depreciated medium, there can be no reason why I should give a
greater nominal value for it after than before the depreciation.
If guineas were degraded by clipping to half their present value, every commodity as well as
land would rise to double its present nominal value; but as the interest of the stocks would
be paid in the degraded guineas, they would, on that account, experience no rise.
The remedy which I propose for all the evils in our currency, is that the Bank should gradually
decrease the amount of their notes in circulation until they shall have rendered the reminder
of equal value with the coins which they represent, or, in other words, till the prices of gold
and silver bullion shall be brought down to their mint price. I am well aware that the total
failure of paper credit would be attended with the most disastrous consequences to the trade
and commerce of the county, and even its sudden limitation would occasion so much ruin and
distress, that it would be highly inexpedient to have recourse to it as the means of restoring
our currency to its just and equitable value.
If the Bank were possessed of more guineas than they had notes in circulation, they could
not, without great injury to the country, pay their notes in specie, while the price of gold
bullion continued greatly above the mint price, and the foreign exchanges unfavourable to
us. The excess of our currency would be exchanged for guineas at the Bank and exported,
and would be suddenly withdrawn from circulation. Before therefore they can safely pay in
specie, the excess of notes must be gradually withdrawn from circulation. If gradually done,
little inconvenience would be felt; so that the principle were fairly admitted, it would be for
future consideration whether the object should be accomplished in one year or in five. I am
fully persuaded that we shall never restore our currency to its equitable state, but by this
preliminary step, or by the total overthrow of our paper credit.
If the Bank directors had kept the amount of their notes within reasonable bounds; if they
had acted up to the principle which they have avowed to have been that which regulated
their issues when they were obliged to pay their notes in specie, namely, to limit their notes
to that amount which should prevent the excess of the market above the mint price of gold,
we should not have been now exposed to all the evils of a depreciated, and perpetually
varying currency.
24
Though the Bank derive considerable advantage from the present system, though the price
of their capital stock has nearly doubled since 1797, and their dividends have proportionally
increased, I am ready to admit with Mr Thornton, that the directors, as monied men, sustain
losses in common with others by a depreciation of the currency, much more serious to them
than any advantages which they may reap from it as proprietors of Bank stock. I do therefore
acquit them of being influenced by interested motives, but their mistakes, if they are such,
are in their effects quite as pernicious to the community.
The extraordinary powers with which they are entrusted enable them to regulate at their
pleasure the price at which those who are possessed of a particular kind of property, called
money, shall dispose of it. The Bank directors have imposed upon these holders of money
all the evils of a maximum. To-day it is their pleasure that 4 l. 10s. shall pass for 3 l. 17s.
10 1/2d., to-morrow they may degrade 4 l. 15s. to the same value, and in another year 10
l. may not be worth more. By what an insecure tenure is property consisting of money or
annuities paid in money held! What security has the public creditor that the interest on the
public debt, which is now paid in a medium depreciated fifteen per cent, may not hereafter
be paid in one degraded fifty per cent? The injury to private creditors is not less serious. A
debt contracted in 1797 may now be paid with eighty-five per cent. of its amount, and who
shall say that the depreciation will go no further?
The following observations of Dr Smith on this subject are so important, that I cannot but
recommend them to the serious attention of all thinking men.
"The raising the denomination of the coin has been the most usual expedient by which a real
public bankruptcy has been disguised under the appearance of a pretended payment. If a
sixpence, for example, should either by act of parliament or royal proclamation be raised to
the denomination of a shilling, and twenty sixpences to that of a pound sterling, the person
who under the old denomination had borrowed twenty shillings, or near four ounces of silver,
would, under the new, pay with twenty sixpences, or with something less than two ounces. A
national debt of about a hundred and twenty millions, nearly the capital of the funded debt
of Great Britain, might in this manner be paid with about sixty-four millions of our present
money. It would indeed be a pretended payment only, and the creditors of the public would
be defrauded of ten shillings in the pound of what was due to them. The calamity too would
extend much further than to the creditors of the public, and those of every private person
would suffer a proportionable loss; and this without any advantage, but in most cases with a
great additional loss, to the creditors of the public. If the creditors of the public indeed were
generally much in debt to other people, they might in some measure compensate their loss
by paying their creditors in the same coin in which the public had paid them. But in most
countries the creditors of the public are the greater part of them wealthy people, who stand
more in the relation of creditors than in that of debtors towards the rest of their fellow-
citizens. A pretended payment of this kind, therefore, instead of alleviating, aggravates in
most cases the loss of the creditors of the public; and without any advantage to the public,
extends the calamity to a great number of other innocent people. It occasions a general and
most pernicious subversion of the fortunes of private people; enriching in most cases the idle
25
and profuse debtor at the expence of the industrious and frugal creditor, and transporting
a great part of the national capital from the hands which are likely to increase and improve
it, to those which are likely to dissipate and destroy it. When it becomes necessary for a
state to declare itself bankrupt, in the same manner as when it becomes necessary for an
individual to do so, a fair, open, and avowed bankruptcy is always the measure which is both
least dishonourable to the debtor, and least hurtful to the creditor. The honour of a state is
surely very poorly provided for, when in order to cover the disgrace of a real bankruptcy, it
has recourse to a juggling trick of this kind, so easily seen through, and at the same time so
extremely pernicious."
These observations of Dr Smith on a debased money are equally applicable to a depreciated
paper currency. He has enumerated but a few of the disastrous consequences which attend
the debasement of the circulating medium, but he has sufficiently warned us against trying
such dangerous experiments. It will be a circumstance ever to be lamented, if this great
country, having before its eyes the consequences of a forced paper circulation in America
and France, should persevere in a system pregnant with so much disaster. Let us hope
that she will be more wise. It is said indeed that the cases are dissimilar: that the Bank
of England is independent of government. If this were true, the evils of a superabundant
circulation would not be less felt; but it may be questioned whether a Bank lending many
millions more to government than its capital and savings can be called independent of that
government.
When the order of council for suspending the cash payments became necessary in 1797, the
run upon the Bank was, in my opinion, caused by political alarm alone, and not by a super-
abundant, or a deficient quantity (as some have supposed) of their notes in circulation.(12*)
This is a danger to which the Bank, from the nature of its institution, is at all times liable.
No prudence on the part of the directors could perhaps have averted it: but if their loans
to government had been more limited; if the same amount of notes had been issued to the
public through the medium of discounts; they would have been able, in all probability, to
have continued their payments till the alarm had subsided. At any rate, as the debtors to
the Bank would have been obliged to discharge their debts in the space of sixty days, that
being the longest period for which any bill discounted by the Bank has to run, the directors
would in that time, if necessary, have been enabled to redeem every note in circulation. It
was then owing to the too intimate connection between the Bank and government that the
restriction became necessary; it is to that cause too that we owe its continuance.
To prevent the evil consequences which may attend the perseverance in this system, we must
keep our eyes steadily fixed on the repeal of the Restriction-bill.
The only legitimate security which the public can possess against the indiscretion of the
Bank is to oblige them to pay their notes on demand in specie; and this can only be effected
by diminishing the amount of bank-notes in circulation till the nominal price of gold be
lowered to the mint price.
26
Here I will conclude; happy if my feeble efforts should awaken the public attention to a due
consideration of the state of our circulating medium. I am well aware that I have not added
to the stock of information with which the public has been enlightened by many able writers
on the same important subject. I have had no such ambition. My aim has been to introduce
a calm and dispassionate enquiry into a question of great importance to the state, and the
neglect of which may be attended with consequences which every friend of his country would
deplore.
NOTES:
1. They might, strictly speaking, rather exceed that quantity, because as the Bank would
add to the currency of the world, England would retain its share of the increase.
2. This is strongly corroborated, by the statement of Mr Rose, in the House of Commons, that
our exports exceeded our imports by (I believe) sixteen millions. In return for those exports
no bullion could have been imported, because it is well known, that the price of bullion
having been during the whole year higher abroad than in this country, a large quantity of
our gold coin has been exported. To the value of the balance of exports, therefore, must be
added the value of the bullion exported. A part of the amount may be due to us from foreign
nations, but the reminder must be precisely equal to our foreign expenditure, consisting of
subsidies to our allies, and the maintenance of our fleets and armies on foreign stations.
3. It has been observed, in a work of great and deserved repute, the Edinburgh Review, that
an increase in the paper currency will only occasion a rise in the paper or currency price of
commodities, but will not cause an increase in their bullion price. This would be true at a
time when the currency consisted wholly of paper not convertible into specie, but not while
specie formed any part of the circulation. In the latter case the effect of an increased issue of
paper would be to throw out of circulation an equal amount of specie; but this could not be
done without adding to the quantity of bullion in the market, and thereby lowering its value,
or in other words, increasing the bullion price of commodities. It is only in consequence of
this fall in the value of the metallic currency, and of bullion, that the temptation to export
them arises; and the penalties on melting the coin is the sole cause of a small difference
between the value of the coin and of bullion, or a small excess of the market above the mint
price. But exporting of bullion is synonymous with an unfavourable balance of trade. From
whatever cause an exportation of bullion, in exchange for commodities, may proceed, it is
called (I think very incorrectly) an unfavourable balance of trade. When the circulation
consists wholly of paper, any increase in its quantity will raise the money price of bullion
without lowering its value, in the same manner, and in the same proportion, as it will raise
the prices of other commodities, and for the same reason will lower the foreign exchanges;
but this will only be a nominal, not a real fall, and will not occasion the exportation of
bullion, because the real value of bullion will not be diminished, as there will be no increase
to the quantity in the market.
27
4. Strictly speaking, there can be no permanent measure of value. A measure of value should
itself be invariable; but this is not the case with either gold or silver, they being subject to
fluctuations as well as other commodities. Experience has indeed taught us, that though
the variations in the value of gold or silver may be considerable, on a comparison of distant
periods, yet for short spaces of time their value is tolerably fixed. It is this property, among
their other excellencies, which fits them better than any other commodity for the uses of
money. Either gold or silver may therefore, in the point of view in which we are considering
them, be called a measure of value.
5. When the gold coin was debased, previously to the re-coinage in 1774, gold and silver
bullion rose above their mint prices, and fell immediately on the gold coin attaining its
present perfection. The exchanges were, owing to the same causes, from being unfavourable
rendered favourable.
6. An excess in the market above the mint price of gold or silver bullion, may, whilst the
coins of both metals are legal tender, and there is no prohibition against the coinage of
either metal, be caused by a variation in the relative value of those metals; but an excess of
the market above the mint price prodding from this cause will be at once perceived by its
affecting only the price of one of the metals. Thus gold would be at or below, while silver
was above, its mint price, or silver at or below its mint price, whilst gold was above. In the
latter end of 1795, when the Bank had considerably more notes in circulation than either the
preceding or the subsequent year, when their embarrassments had already commenced, when
they appear to have resigned all prudence in the management of their concerns, and to have
constituted Mr Pitt sole director, the price of gold bullion did for a short time rise to 4 l. 3s.
or 4 l. 4s. per oz.; but the directors were not without their fears for the consequences. In a
remonstrance sent by them to Mr Pitt, dated October 1795, after stating, "that the demand
for gold not appearing likely soon to cease," and "that it had excited great apprehension in
the court of directors," they observe, "The present price of gold being 4 l. 3s. to 4 l. 4s. [It
is difficult to determine on what authority the directors made this assertion, as by a return
lately made to parliament it appears that during the year 1795 they did not purchase gold
bullion at a price higher than 3 l. 17s. 6d.] per ounce, and our guineas being to be purchased
at 3 l. 17s. 10 1/2d., clearly demonstrates the grounds of our fears; it being only necessary
to state those facts to the Chancellor of the Exchequer " It is remarkable that no price of
gold above the mint price is quoted during the whole year in Wetenhall's list. In December
it is there marked 3 l. 17s. 6d.
7. The relative value of gold and silver is on the Continent nearly the same as in London.
8. It must be meant that every guinea in the Bank would leave the country, the temptation
of fifteen per cent is amply sufficient to send those out which can be collected from the
circulation.
9. They might, on some occasion, displace Bank of England notes, but that consideration
does not affect the question which we are not discussing.
28
10. In the following observations, I wish it to be understood, as supposing always the same
degree of confidence and credit to exist.
11. I have already allowed that the Bank, as far as they enable us to turn our coin into
"materials, provisions, etc." have produced a national benefit, as they have thereby increased
the quantity of productive capital; but I am here speaking of an excess of their notes, of that
quantity which adds to our circulation without effecting any corresponding exportation of
coin, and which, therefore, degrades the notes below the value of the bullion contained in
the coin which they represent.
12. At that period the price of gold kept steadily under its mint price.
29
APPENDIX
The public having called for a new edition of this pamphlet, I avail myself of the occasion
to consider the observations which the Edinburgh Reviewers, in the last number of their
publication, have done me the honour to make on some of the passages contained in it. I am
induced to do this from the conviction that discussion on every point connected with this
important subject will hasten the remedy against the existing abuse, and will tend to secure
us against the risk of its recurrence in future.
In the article on the depreciation of money, the Reviewers observe, "The great fault of
Mr Ricardo's performance is the partial view which he takes of the causes which operate
upon the course of exchange. He attibutes," they say, "a favourable or an unfavourable
exchange exclusively to a redundant or deficient currency, and overlooks the varying desires
and wants of different societies, as an original cause of a temporary excess of imports above
exports, or exports above imports." They then comment on the passage in which I have
maintained, that a bad harvest will not occasion the export of money , unless money is
relatively cheap in the exporting country, and conclude their observations by giving it as
their decided opinion, that the exportation of money in the supposed case of a bad harvest,
"is not occasioned by its cheapness. It is not, as Mr. Ricardo endeavours to persuade us, the
cause of the unfavourable balance, instead of the effect. It is not merely a salutary remedy
for a redundant currency: but it is owing precisely to the cause mentioned by Mr Thornton
- the unwillingness of the creditor nation to receive a great additional quantity of goods not
wanted for immediate consumption, without being bribed to it by excessive cheapness; and
its willingness to receive bullion - the currency of the commercial world - without any such
bribe. It is unquestionably true, as stated by Mr Ricardo, that no nation will pay a debt in
the precious metals, if it can do it cheaper by commodities; but the prices of commodities
are liable to great depressions from a glut in the market; whereas the precious metals, on
account of their having been constituted by the universal consent of society, the general
medium of exchange, and instument of commerce, will pay a debt of the largest amount
at its nominal estimation, according to the quantity of bullion contained in the respective
currencies of the counties in question, and, whatever variations between the quantity of
currency and commodities may be stated to take place subsequent to the commencement of
these transactions, it cannot be for a moment doubted that the cause of them is to be found
in the wants and desires of one of the two nations, and not in any original redundancy or
deficiency of currency in either of them."
They agree with me," that no nation will pay a debt in the precious metals, if it can do
it cheaper by commodities, but the prices of commodities," they say, "are liable to great
depressions from a glut in the market.'" of course they must mean in the foreign market,
and then the words express the opinion which they are endeavouring to controvert, viz. that
when goods cannot be sent out so advantageously as money, money will be exported, - which
is another way of saying that money will never be exported, unless it is relatively redundant
with commodities, as compared with other counties. Yet immediately after they contend,
that the exportation of the "precious metals is the effect of a balance of trade, originating
30
in causes which may exist without any relation whatever to redundancy or deficiency of
currency." These opinions appear to me directly contradictory. If however the precious
metals can be exported from a country in exchange for commodities, although they should
be as dear in the exporting as in the importing country, what are the effects which will follow
from such improvident exportation?
"A comparative deficiency in one country, and redundancy in the other," say the Reviewers,
p. 343. "and this state of things could not fail to have a speedy effect in changing the direction
of the balance of payments, and in restoring that equilibrium of the precious metals, which
had been for a time disturbed by the naturally unequal wants and necessities of the counties
which tade with each other." Now it would have been well if the Reviewers had told us at
what point this re-action would commence, - as at the first view it appears that the same
law which will permit money to be exported from a country, when it is no cheaper than in
the importing country, may also allow it to be exported when it is actually dearer. It is
self-interest which regulates all the speculations of trade, and where that can be clearly and
satisfactorily ascertined, we should not know where to stop if we admitted any other rule of
action. They should have explained to us therefore, why, if the demand for the commodity
imported should continue, the country importing might not be entirely exhausted of its coin
and bullion. What is under such circumstances to check the exportation of the currency? The
Reviewers say, because "a country with a diminished quantity of bullion would evidently soon
be limited in its powers of paying with the precious metals." Why soon? Is it not admitted
"that excess and deficiency of currency are only relative terms; that the circulation of a county
can never be superabundant," (and therefore can never be deficient,) "except in relation to
other countries." Does it not follow from these admissions, that if the balance of trade may
become unfavourable to a country, though its currency be not relatively superabundant, that
there is no check against the exportation of its coin, whilst any amount of money remains
in circulation; as the diminished sum, (by acquiring a new value,) will as readily and as
effectually make the required payments as the larger sum did before? A succession of bad
harvests might, on this principle, drin a country of its money, whatever might be its amount,
although it consisted exclusively of the precious metals. The observation that its diminished
value in the importing county, and its increasing value in the exporting country, would make
it revert again to the old channel, does not answer the objection. When will this happen?
and in exchange for what will it be returned? The answer is obvious - for commodities. The
ultimate result then of all this exportation and importation of money, is that one county
will have imported one commodity in exchange for another, and the coin and bullion will in
both countries have regined their natural level. Is it to be contended that these results would
not be foreseen, and the expence and trouble attending these needless operations effectually
prevented, in a country where capital is abundant, where every possible economy in tade
is practised, and where competition is pushed to its utmost limits? Is it conceivable that
money should be sent abroad for the purpose merely of rendering it dear in this country and
cheap in another, and by such means to ensure its return to us?
It is particularly worthy of observation that so deep-rooted is the prejudice which considers
coin and bullion as things essentially differing in all their operations from other commodities,
31
that writers greatly enlightened upon the general truth of political economy seldom fail,
after having requested their readers to consider money and bullion merely as commodities
subject to "the same general principle of supply and demand which are unquestionably the
foundation on which the whole superstucture of political economy is built;" to forget this
recommendation themselves, and to argue upon the subject of money, and the laws which
regulate its export and import, as quite distinct and different from those which regulate the
export and import of other commodities. Thus the Reviewers, if they had been speaking of
coffee or of sugar, would have denied the possibility of those articles being exported from
England to the continent, unless they were dearer there than here. It would have been in
vain to have urged to them, that our harvest had been bad, and that we were in want of corn;
they would confidently and undeniably have proved that to whatever degree the scarcity of
corn might have existed, it would not have been possible for England to send, or for France
(for example) to be willing to receive, coffee or sugar in return for corn, whilst coffee or
sugar cost more money in England than in France. What! they would have said, do you
believe it possible for us to send a parcel of coffee to France to sell there for 100 l. when that
coffee cost here 105 l. - when by sending 100 l. of the 105 l. we should equally discharge
the debt contracted for the imported corn? And, I say, do you believe it possible that we
shall agree to send, or France agree to receive (if the transaction is on her account) 100 l.
in money, when 95 l. invested in coffee and exported will be equally valuable as the 100 l.
when it arrives in France? But coffee is not wanted in France, there is a glut of it; - allowed,
but money is wanted still less, and the proof is, that a hundred pounds worth of coffee will
sell for more than a hundred pounds worth of money. The only proof which we can possess
of the relative cheapness of money in two places, is by comparing it with commodities.
Commodities measure the value of money in the same manner as money measures the value
of commodities. If then commodities will purchase more money in England than in France,
we may justly say that money is cheaper in England, and that it is exported to find its level,
not to destroy it. After comparing the relative value of coffee, sugar, ivory, indigo, and all
other exportable commodities in the two markets, if I persist in sending money, what further
proof can be required of money being actually the cheapest of all these commodities in the
English market, in relation to the foreign markets, and therefore the most profitable to be
exported? What further evidence is necessary of the relative redundance and cheapness of
money between France and England, than that in France it will purchase more corn, more
indigo, more coffee, more sugar, more of every exportable commodity than in England?
I may, indeed, be told that the Reviewer's supposition is not that coffee, sugar, indigo,
ivory, etc. etc. are cheaper than money, but that these commodities and money are equally
cheap in both countries, that is to say, that one hundred pounds sent in money, or invested
in coffee, sugar, indigo, ivory, etc. etc. will be of equal value in France. If the value of
all these commodities were so nicely poised, what would determine an exporter to send
the one in preference to the other, in exchange for corn; in relation to which they are all
cheaper in England? If he sends money, and thereby destroys the natural level, we are
told by the Reviewers that money would on account of its increasing quantity in France,
and its decreasing quantity in England, become cheaper in France than in England, and
would be re-imported in exchange for goods till the level were restored. But would not the
32
same effects take place if coffee or any of the other commodities were exported, whilst they
were equally valuable in relation to money in both countries? Would not the equilibrium
between supply and demand be destroyed, and would not the diminished value of coffee,
etc. in consequence of their increased quantity in France, and their increased value in
England, from their diminished quantity, produce their re-importation into England? Any
of these commodities might be exported without producing much inconvenience from their
enhanced price; whereas money, which circulates all other commodities, and the increase or
diminution of which, even in a moderate proportion, raises or falls prices in an extravagant
degree, could not be exported without the most serious consequences. Here then we see the
defective principle of the Reviewers. On my system, however, there would be no difficulty
in determining the mode in which, in a case so extremely improbable, as that of an equal
value in both countries, for all commodities, money included, and corn alone excepted, the
returns would be made so as to preserve the relative amount and the relative value of their
respective currencies.
If the circulating medium of England consisted wholly of the precious metals, and were a
fiftieth part of the value of the commodities which it circulated, the whole amount of money
which would under the circumstances supposed be exported in exchange for corn, would be
a fiftieth part of the value of such corn: for the rest we should export commodities, and
thus would the proportion between money and commodities be equally preserved in both
countries. England, in consequence of a bad harvest, would come under the case mentioned
at page [53] of this work, of a country having been deprived of a part of its commodities,
and therefore requiring a diminished amount of circulating medium. The currency which
was before equal to her payments would now become superabundant and relatively cheap,
in the proportion of one fiftieth part of her diminished production; the exportation of this
sum, therefore, would restore the value of her currency to the value of the currencies of other
countries. Thus it appears to be satisfactorily proved that a bad harvest operates on the
exchange in no other way than by causing the currency which was before at its just level to
become redundant, and thus is the principle that an unfavourable exchange may always be
traced to a relatively redundant currency most fully exemplified.
If we can suppose that after an unfavourable harvest, when England has occasion for an
unusual importation of corn, another nation is possessed of a superabundance of that article,
"but has no wants for any commodity whatever," it would unquestionably follow that such
nation would not export its corn in exchange for commodities: but neither would it export
corn for money, as that is a commodity which no nation ever wants absolutely, but relatively,
as is expressly admitted by the Reviewers. The case is, however, impossible, because a
nation possessed of every commodity necessary for the consumption and enjoyment of all its
inhabitants who have wherewithal to purchase them, will not let the corn which it has over
and above what it can consume rot in its granaries. Whilst the desire of accumulation is not
extinguished in the breast of man, he will be desirous to realise the excess of his productions,
above his own consumption, into the form of capital. This he can only do by employing,
himself, or by loans to others, enabling them to employ, an additional number of labourers,
as it is by labour only that revenue is realized into capital. If his revenue be corn, he will
33
be disposed to exchange it for fuel, meat, butter, cheese, and other commodities in which
the wages of labour are usually expended, or, which is the same thing, he will sell his corn
for money, pay the wages of his labourers in money, and thereby create a demand for those
commodities which may be obtained from other countries in exchange for the superfluous
corn. Thus will be reproduced to him articles more valuable, which he may again employ in
the same manner, adding to his own riches, and augmenting the wealth and resources of his
country.
No mistake can be greater than to suppose that a nation can ever be without wants for
commodities of some sort. It may possess too much of one or more commodities for which
it may not find a market at home. It may have more sugar, coffee, tallow, than it can either
consume or dispose of, but no county ever possessed a general glut of all commodities. It is
evidently impossible. If a county possesses every thing necessary for the maintenance and
comfort of man, and these articles be divided in the proportions in which they are usually
consumed, they are sure, however abundant, to find a market to take them off. It follows
therefore, that whilst a county is in possession of a commodity for which there is no demand
at home, it will be desirous of exchanging it for other commodities in the proportion in which
they are consumed.
No nation grows corn, or any other commodity, with a view to realise its value in money,
(the case supposed, or involved in the case supposed, by the Reviewers), as this would be the
most unprofitable object to which the labour of man could be devoted. Money is precisely
that article which till it is re-exchanged never adds to the wealth of a county: accordingly
we find, that to increase its amount is never the voluntary act of any county any more than
it is that of any individual. Money is forced upon them only in consequence of the relatively
less value which it possesses in those counties with which they have intercourse.
Whilst a country employs the precious metals for money, and has no mines of its own, it is
a conceivable case that it may greatly augment the amount of the productions of its land
and labour without adding to its wealth, because at the same time those counties which are
in possessIon of the mines may possibly have obtained so enormous a supply of the precious
metals as to have forced an increase of currency on the industious county, equal in value to
the whole of its increased productions. But by so doing the augmented currency, added to
that which was before employed, will be of no more real value than the original amount of
currency. Thus then will this industrious nation become tributary to those nations which
are in possession of the mines, and will carry on a trade in which it gains nothing and loses
every thing.
That the exchange is in a constant state of fluctuation with all counties I am not disposed
to deny, but it does not generally vary to those limits at which remittances can be more
advantageously made by means of bullion than by the purchase of bills. Whilst this is the
case, it cannot be disputed that imports are balanced by exports. The varying demands of
all countries may be supplied, and the exchanges of all deviate in some degree from par, if
the currency of any one of them is either redundant or deficient, as compared with the rest.
34
Suppose England to send goods to Holland, and not to find there any commodities which
suit the English market; or, which is the same thing, suppose that we can purchase those
commodities cheaper in France. In this case we confine our operation to the sale of goods
in Holland, and the purchase of other goods in France. The currency of England is not
disturbed by either transaction, as we shall pay France by a bill on Holland, and there will
neither be an excess of imports nor of exports. The exchange may, however, be favourable to
us with Holland, and unfavourable with France; and will be so, if the account be not balanced
by the importation into France of goods from Holland, or from some country indebted to
Holland. If there be no such importation, it can arise only from a relative redundancy of
the circulation of Holland, as compared with that of France, and in payment of the bill it
will suit both those counties that bullion should be transmitted. If the balance be settled
by the transmission of goods, the exchange between all the three countries will be at par. If
by bullion, the exchange between Holland and England will be as much above par, as that
between France and England will be below the par, and the difference will be equal to the
expenses attending the passage of bullion from Holland to France. It will make no difference
in the result, if every nation of the world were concerned in the transaction. England having
bought goods from France and sold goods to Holland, France might have purchased to the
same amount from Italy; Italy may have done the same from Russia, Russia from Germany,
and Germany within 100,000 l. of the same amount from Holland; Germany might require
this amount of bullion either to supply a deficient currency, or for the fabrication of plate.
All these various tansactions would be settled by bills of exchange, with the exception of the
100,000 l. which would be either transmitted from an existing redundancy of coin or bullion
in Holland, or it would be collected by Holland from the different currencies of Europe. It
is not contended, as the Reviewers infer, "that a bad harvest, or the necessity of paying a
subsidy in one county, should be immediately and invariably accompanied by an unusual
demand for muslins, hardware, and colonial produce," as the same effects would be produced
if the country paying the subsidy, or suffering from a bad harvest, were to import less of
other commodities than it had before been accustomed to do.
The Reviewers observe, page 345, "The same kind of error which we have here noticed
pervades other parts of Mr Ricardo's pamphlet, particularly the opening of his subject. He
seems to think that when once the precious metals have been divided among the different
countries of the earth, according to their relative wealth and commerce, that each having
an equal necessity for the quantity actually in use, no temptation would be offered for their
importation or exportation, till either a new mine or a new bank was opened; or till some
marked change had taken place in their relative prosperity." And afterwards at page 361,
"We have already adverted to the error (confined, however, principally to Mr Ricardo, and
from which the Report is entirely free) of denying the existence of a balance of trade or of
payments not connected with some original redundancy or deficiency of currency." "But there
is another point in which almost all the writers on this side of the question concur, where,
notwithstanding, we cannot agree with them, and feel more inclined to the mercantile view
of the subject. Though they acknowledge that bullion occasionally passes from one county
to another from causes connected with the exchange, yet they represent these transactions
as quite inconsiderable in degree. Mr Huskisson observes 'that the operations in the trade
35
of bullion originate almost entirely in the fresh supplies which are yearly poured in from
the mines of the New World, and are chiefly confined to the distribution of those supplies
through the different parts of Europe. If this supply were to cease altogether, the dealings in
gold and silver, as objects of foreign trade, would be very few, and those of short duration.'"
"Mr Ricardo, in his reply to Mr Bosanquet, refers to this passage with particular approba-
tion." Now I am at a loss to discover in what this opinion of Mr Huskisson differs from that
which I had before given, and on which the Reviewers had been commenting.
The passages are in substance precisely the same, and must stand or fall together. If "we
acknowledge that bullion occasionally passes from one county to another, from causes con-
nected with the exchange," we do not acknowledge that it would so pass till the exchange had
fallen to such limits as would make the exportation of bullion profitable, and I am of opinion
that if it should so fall, it is in consequence of the cheapness and redundance of currency,
which "would originate almost entirely in the fresh supplies which are yearly poured in from
the mines of the New World." This, then, is not another point in which the Reviewers differ
with me, but the same.
If "it is well known that most states, in their usual relations of commercial intercourse, have
an almost constantly favourable exchange with some countries, and an almost constantly
unfavourable one with the others," to what cause can it be ascribed but to that mentioned
by Mr Huskisson? "The fresh supplies of bullion which are yewly poured in, (and in newly
the same direction) from the mines of the New World." Dr A. Smith does not seem to
have been sufficiently aware of the powerful and uniform effects which this stream of bullion
had on the foreign exchanges, and he was inclined much to overrate the uses of bullion in
carrying on the various roundabout foreign tades which a county finds it necessary to engage
in. In the ewly and rude transactions of commerce between nations, as in the early and rude
transactions between individuals, there is little economy in the use of money and bullion;
it is only in consequence of civilization and refinement that paper is made to perform the
same office between the commonwealth of nations, as it so advantageously performs between
individuals of the same country. The Reviewers do not appear to me to be sufficiently aware
of the extent to which the principle of economy in the use of the precious metals is extended
between nations, indeed they do not seem to acknowledge its force even when confined to a
single nation, as from a passage in page 346, their readers would be induced to suppose their
opinion to be, that there are frequent transfers of currency between the distant provinces
of the same country, for they tell us that "there have been and ever will be a quantity of
the precious metals in use destined to perform the same part with regard to the different
nations connected with each other by commerce, which the currency of a particular country
performs with regard to its distant provinces." Now what part does the currency of a country
perform with regard to the distant provinces?
I am well persuaded that in all the multiplicity of commercial transactions which take place
between the distant provinces of this kingdom, the currency performs a very inferior part,
imports being almost always balanced by exports*, and the proof is, that the local currency
36
of the provinces (and they have no other) is seldom circulated at any considerable distance
from the place where it is issued.
It appears to me that the Reviewers were induced to admit the erroneous doctrine of the
merchants, that money might be exported in exchange for commodities, although money
were no cheaper in the exporting country, because they could in no other way account for
the rise of the exchange having, on some occasions, accompanied the increased amount of
Bank notes, as stated by Mr Pearse, the late deputy-governor and now governor of the Bank,
in a paper delivered by him to the Bullion Committee. They say, "according to this view
of the subject, it certainly is not easy to explain an improving exchange under an obviously
increasing issue of notes: an event that not unfrequently happens, and was much insisted
upon by the deputy-governor of the Bank, as a proof that our foreign exchanges had no
connexion with the state of our currency."
These are circumstances, however, which are not absolutely irreconcileable. Mr Pearse, as
well as the Edinburgh Reviewer, appears to have wholly mistaken the principle advanced by
those who are desirous of the repeal of the restriction bill. They do not contend, as they
are understood to do, that the increase of bank notes will permanently lower the exchange,
but that such an effect will proceed from a redundant currency. It remains, therefore, to be
considered whether an increase of bank notes is necessarily, at all times, accompanied with
a permanently increased currency, as if I can make it appear that it is not, there will be no
difficulty in accounting for a rise in the exchange, with an increased amount of bank-notes.
It will be readily admitted, that whilst there is any great portion of coin in circulation, every
increase of bank-notes, though it will for a short time lower the value of the whole currency,
paper as well as gold, yet that such depression will not be permanent, because the redundant
and cheap currency will lower the exchange and will occasion the exportation of a portion
of the coin, which will cease as soon as the remainder of the currency shall have regained its
value, and restored the exchange to par. The increase of small notes, then, will ultimately
be a substitution of one currency for another, of a paper for a metallic currency, and will not
operate in the same way as an actual and permanent increase of circulation*. We are not,
however, without a criterion by which we may determine the relative amount of currency
at different periods, as distinguished from bank-notes, on which though we cannot infallibly
rely, it will probably be a sufficiently accurate test to determine the question which we are
now discussing. This criterion is the amount of notes of 5l. and upwards in circulation,
which we may reasonably calculate always bear some tolerably regular proportion to the
whole circulation. Thus, if since 1797 the bank-notes of this description have increased from
twelve to sixteen millions, we may infer that the whole circulation has increased one-third, if
the districts in which bank-notes circulate have neither been enlarged nor contracted. The
notes under 5l. will be issued in proportion as the metallic currency is withdrawn from
circulation, and will be further augmented, if there be also an augmentation of notes of a
higher denomination.
If I am correct in this view of the subject, that the increase in the amount of our currency
is to be inferred from the increased amount of bank-notes of 5 l. and upwards, and can by
37
no means be proved by an increase of 1 l. and 2 l. notes which have been substituted in the
place of the exported or hoarded guineas, I must wholly reject the calculations of Mr Pearse,
because they are made on the supposition that every increase of this description of notes is
an increase of currency to that amount. When it is considered that in 1797 there were no
notes of 1 l. and 2 l. in circulation, but that their place was wholly filled with guineas; and
that since that period there have been no less than seven millions issued, partly to supply the
place of our exported and hoarded guineas, and partly to keep up the proportion between the
circulation for the larger and for the smaller payments, we shall observe to what errors such
reasoning may lead. I can consider the paper in question of no authority whatever as opposed
to the opinion which I have ventured to give, namely, that an unfavourable balance of trade,
and a consequently low exchange, may in all cases be traced to a relatively redundant and
cheap currency. * But if the reasoning of Mr Pearse were not incorrect as his facts are, he is
no way warranted in the conclusions which he has drawn from them.
Mr Pearse states the increase of bank-notes from January, 1808, to Christmas, 1809, to have
been from 17 1/2 to 18 millions, or 500,000 l., the exchange with Hamburgh during the same
period having fallen from 34s. 9g. to 28s. 6g. an increase in the amount of notes of less than
three per cent, and a fall in the exchange of more than eighteen per cent. But from whence
did Mr Pearse obtain this information, of 18 millions of bank-notes only being in circulation
at Christmas in 1809? After looking at every return, with which I have been able to meet, of
the amount of bank-notes in circulation at the end of 1809, I cannot but conclude that Mr
Pearse's statement is incorrect. Mr Mushet in his tables gives four returns of bank-notes in
the year. In the last, for the year 1809, he has stated the amount of bank-notes in circulation
at 19,742,998.
In the Appendix to the Bullion Report, and in returns lately made to the House of Com-
mons, the amount of bank-notes in circulation appears to have been on December 12, 1809
19,727,520
On the 1st January, 1810 2,669,320
On the 7th January, 1810 19,528,030
For many months previously to December it was not lower. When I first discovered this
inaccuracy I thought Mr Pearse might have omitted the bank post bills in both estimates,
although they did not in December, 1809, exceed 880,880 l.; but on looking at the return of
bank-notes in circulation, including bank post bills, in January, 1808, I find Mr Pearse has
stated it larger than I can any where find it: indeed his estimate exceeds the return made by
the Bank for the 1st of January, 1808, by nearly 900,000 l., so that from the 1st of January,
1808, to the 12th of December, 1809, the increase was from 16,619,240 to 19,727,520, a
difference of more than three millions, instead of 500,000, as stated by Mr Pearse, and of
two millions if Mr Pearse's statement for any time in January, 1808, be correct.
Mr Pearse's statement too, that from January 1803, to the end of 1807, the amount of
bank-notes had increased from 16 and a half to eighteen millions, an increase of a million
38
and a half appears to me to exceed the fact by half a million. The increase of notes of 5
l. and upwards, including bank post bills, did not, during that period, exceed 150,000 l. It
is material that these errors should be pointed out, that those who may, in spite of what
I have urged, agree in principle with Mr Pearse, may see that the facts of the case do not
warrant the conclusions which that gentleman has drawn from them, and, indeed, that all
calculations founded on the particular amount of banknotes for a day, or for a week, when
the general average has been for some time before, or some time after, greater or less, will be
of little avail in overturning a theory which has every other proof of its tuth. Such I consider
the theory which asserts that the unlimited multiplication of a currency which is referrible to
no fixed standard may and must produce a permanent depression of the exchange, estimated
with a country whose currency is founded on such standard.
Having considered the weight which ought to be attached to Mr Pearse's paper, I beg the
reader's attention to the table which I have drawn out from the statements in tbe Bullion
Report, and from the papers which have since been presented to the House of Commons. I
request him to compare the amount of the circulation of the larger notes with the variations
in the exchange, and I trust he will find no difficulty in reconciling the principle maintained
by me with the actual facts of the case, particularly if he considers that the operations of an
increased currency are not instantaneous, but require some interval of time to produce their
full effect, - that a rise or fal1 in the price of silver, as compared with gold, alters the relative
value of the currencies of England and Hamburgh, and therefore makes the currency of one
or other relatively redundant and cheap;-that the same effect is produced, as I have already
stated, by an abundant or deficient harvest, either in this country or in those countries with
which we trade, or by any other addition or diminution to their real wealth, which by altering
the relative proportion between commodities and money alters the value of the circulating
medium. With these corrections, I have no fear but that it will be found that Mr Pearse's
objections may be refuted without having recourse to the abandonment of a principle, which,
if yielded, will establish the mercantile theory of exchange, and may be made to account for
a drain of circulating medium, so great, that it can only be counteracted by locking up our
money in the bank, and absolving the directors from the obligation of paying their notes in
specie.
Mr Pearse's statement, as presented to the Bullion Committee: Total of Bank Notes, Mil-
lions; Rate of Hambro' Exchange
17th February, 1797; 8 1/2; 35s 6g Rose Gradually in 1797 and 1798 to; 13; 38s 0g March
1799; 13 1/2; 37s 7g After this period, great commercial distress, large importation of corn,
heavy subsidies, and the Hambro' Exchange continued falling, and on the 2d January, 1801
wasas low as; ­ ; 29s 8g Between the end of the year 1799 to the end of 1802, an increased
quantity of 1 l. and 2 l. notes were issued, swelling the sum total to all notes to; 13 1/2 to
16 1/2; Fluctuation from 33s 3g to 29s 8g From January, 1803, to the end of 1807; 16 1/2
to 18; Fluctuation from 32s 10g to 35s 10g From January, 1808, to Christmas 1809; 17 1/2
to 18; Fall from 34s 9g to 28s 6g
The rate of the Hambro' Exchange is taken from Lloyd's list.
39
I have omitted as much of Mr Pearse's paper as regarded the amount of bank notes in
circulation before the restriction on bank payments, because whilst the public possessed the
power of obtaining specie for their notes, the exchange could not put be momentarily lowered
by the amount of the bank issues.
The average amount of bank notes from the year 1797 to 1809 inclusive, in the following
table, is copied from the Report of the Bullion Committee. The rates of exchange are
extracted from a list presented by the mint to parliament. There have been three returns
made to parliament by the Bank, of the amount of their notes in circulation in the year
1810; the first for the 7th and 12th of each month; the second a weekly return from the 19th
January, 1810, to 28th December; and the third also a weekly account from the 3d March
to 29th December, 1810. The average amount of notes above 5 l. including bank post bills,
according to the first account is
15,706,226 of notes under 5 l. 6,560,674
Second 16,192,110 6,758,895
Third 16,358,230 6,614,721
3) 48,256,566 19,934,290
General average 16,085,522 6,644,763
In the years marked thus * the value of silver as compared with gold exceeded the mint
valuation,-this was the case particularly in the year 1801, when less than 14 oz. of silver
could purchase an ounce of gold, - the mint valuation is as 1 to 15.07; the present market
value is as 1 to 16 nearly.
Average amount of Bank of England Notes in circulation in each of the following years:
Notes of 5 l. and upwards, including Bank Post Bills; Notes under 5 l.; Total; Highest rate
of Exchange with Hamburgh; Lowest rate of Exchange with Hamburgh
1798 11,527,250 1,807,502 13,334,752 38.2 Jan. 37.4 Dec.
1799 12,408,522 1,653,805 14,062,327 37.7 Jan. 31.6 Oct.
1800 13,598,666 2,243,266 15,841,932 32.5 May 31.0 Feb.
1801 13,454,367 2,715,182 16,169,594 31.8 Oct. 29.8 Jan.
1802 13,917,977 3,136,477 17,054,454 34.0 Dec. 32.0 Feb.
1803 12,983,477 3,864,045 16,847,511 35.0 Dec. 34.0 Jan.
1804 12,621,348 4,723,672 17,345,020 36.0 Dec. 34.8 Feb.
1805 12,697,352 4,544,580 17,241,932 35.8 March 32.8 Feb.
1806 12,844,170 4,291,230 17,135,400 34.8 Dec. 33.3 Jan.
1807 13,221,988 4,183,013 17,405,001 34.1 March 34.2 Sep.
1808 13,402,160 4,132,420 17,534,580 35.3 July 32.4 Dec.
1809 14,133,615 4,868,275 19,001,890 31.3 Jan. 28.6 Nov.
1810 16,085,522 6,644,763 22,730,285 31.2 June 28.6 Dec.
1811 26.6 Jan. 24.0 March
40
The Bank have made a return of the amount of their notes for eighteen days in this present
year 1811. The average amount of notes of 5 l. and upwards in circulation for those eigh-
teen days, including bank post bills, is 16,286,950 And of those under 5 l. 7,260,575 Total
23,547,525
"If," say the Reviewers, "considerable portions of the currency were taken from the idle, and
those who live upon fixed incomes, and transferred to farmers, manufacturers, and merchants,
- the proportion between capital and revenue would be greatly altered to the advantage of
capital; and in a short time the produce of the country would be greatly augmented." It is
no doubt true " that it is not the quantity" of circulating medium which adds to the national
wealth, "but the different distribution of it." If, therefore, we could be fully assured that the
effects of the abundance, and the consequent depreciation of the currency, would diminish the
powers of consumption in the idle and unproductive class, whilst it increased the number
of the industrious and productive class, the effect would undoubtedly be to augment the
national wealth, as it would realize into capital that which was before expended as revenue.
But the question is, will it so operate? Will not a thousand pounds saved by the stockholder
from his income and lent to the farmer, be equally productive as if it had been saved by
the farmer himself? The Reviewers observe, "On every fresh issue of notes, not only is
the quantity of the circulating medium increased, but the distribution of the whole mass is
altered. A large proportion falls into the hands of those who consume and produce, and a
smaller proportion into the hands of those who only consume." But is this necessarily so?
They appear to take it for granted, that those who live on fixed incomes must consume the
whole of their income, and that no part of it can be saved and annually added to capital. But
this is very far from being the true state of the case, and I would ask, Do not the stockholders
give as great a stimulus to the growth of the national wealth by saving half their incomes
and investing it in the stocks, thereby liberating a capital which will ultimately be employed
by those who consume and produce, as would be done if their incomes were depreciated 50
per cent by the issues of bank-notes, and the power of saving were in consequence entirely
taken from them, although the Bank should lend to an industrious man an amount of notes
equal in value to the diminished income of the stockholder? The difference, and the only
difference appears to me to be this, that in the one case the interest on the money lent
would be paid to the real owner of the property, in the other it would ultimately be paid in
the shape ofincreased dividends or bonuses to the bank proprietors, who had been enabled
unjustly to possess themselves of it. If the creditor of the Bank employed his loan in less
profitable speculations than the employer of the savings of the stockholders would have done,
there would result a real loss to the country; so that a depreciation of currency may, as far
as it is considered as a stimulus to production, be beneficial or otherwise.
I see no reason why it should diminish the idle, and add to the productive class of society. At
any rate the evil is certain. It must be accompanied with a degree of injustice to individuals
which requires only to be understood to excite the censure and indignation of all those who
are not wholly insensible to every honourable feeling.
41
With the sentiments of the remainder of the article I most cordially agree, and trust the efforts
of the Reviewers will powerfully contribute to overturn the mass of error and prejudice which
pervades the public mind on this most important subject.
It is often objected to the recommendation of the Bullion Committee, namely that the Bank
should be required to pay their notes in specie in twO years, that, if adopted, the Bank would
be exposed to considerable difficulty in providing themselves with the requisite amount of
bullion for such purpose; and it cannot be denied, that before the Restriction Bill can be
repealed, the Bank would be in prudence bound to make ample provision for every demand
which might by possibility be made on them. It is observed by the Bullion Committee, that
the average amount of Bank notes in circulation, including Bank Post Bills, in the year 1809,
was 19 millions. During the same period the average price of gold was 4 l. 10s. exceeding its
mint price by nearly 17 per cent, and proving a depreciation of the currency of nearly 15 per
cent. A diminution therefore of 15 per cent in the amount of the Bank circulation in 1809,
should, on the principles of the Committee, raise it to par, and reduce the market price of
gold to 3 l. 17s. 10 1/2d.; and till such reduction take place, there would be imminent danger
to the Bank as well as to the public, that the Restriction Bill should cease to operate. Now,
admitting (which we are far from doing) the truth of your principles, say the advocates for
the Bank, admitting that after such a reduction in the amount of Bank notes, the value of
the reminder would be so rised, that it would not be the interest of any person to demand
specie at the Bank in exchange for notes, because no profit could be made by the exportation
of bullion; what security would the Bank have that caprice or ill-will might not render the
practice general of discontinuing the use of small notes altogether, and demanding guineas
of the Bank in lieu of them? Not only then must the Bank reduce their circulation 15 per
cent. on their issues of 19 millions, - not only must they provide bullion for 4 millions of 1
l. and 2 l. notes which would remain in circulation, but they must also furnish themselves
with the means of meeting the demands which may be made on them to pay the small notes
of all the country banks in the kingdom, - and all this within the short period of two years.
It must be confessed, that whether these apprehensions are likely or not likely to be realized,
the Bank could not but make some provision for the worst that might happen; and though
it is a situation in which their own indiscretion has involved them, it would be desirable, if
possible, to protect them against the consequences of it.
If the same benefits to the public,-the same security against the depreciation of the currency,
can be obtained by more gentle means, it is to be hoped that all parties, who agree in
principle, will concur in the expediency of adopting them. Let the Bank of England be
required by Parliament to pay (if demanded) all notes above 2ol.-and no other, at their
option, either in specie, in gold standard bars, or in foreign coin (allowance being made for
the difference in its purity) at the English mint value of gold bullion, viz. 3 l. 17s. 10 1/2d.
per oz., such payments to commence at the period recommended by the Committee.
This privilege of paying their notes as above described might be extended to the Bank
for three or four years after such payments commenced, and if found advantageous, might
be continued as a permanent measure. Under such a system the currency could never be
42
depreciated below its standard price, as an ounce of gold and 3 l. 17s. 10 1/2d. would be
uniformly of the same value. By such regulations we should effectually prevent the amount
of small notes necessary for the smaller payments from being withdrawn from circulation,
as no one who did not possess to the amount of 20 l. at least of such small notes could
exchange them at the Bank, and even then bullion, and not specie, could be obtained for
them. Guineas might indeed be procured at the Mint for such bullion, but not till after
the delay of some weeks or months, the loss of interest for which time would be considered
as an actual expence; an expence which no one would incur, whilst the small notes could
purchase as much of every commodity as the guineas which they represented. Another
advantage attending the establishment of this plan would be to prevent the useless labour,
which, under our system previously to 1797, was so unprofitably expended on the coinage
of guineas, which on every occasion of an unfavourable exchange (we will not enquire by
what caused) were consigned to the melting pot, and in spite of all prohibitions exported as
bullion. It is agreed by all parties that such prohibitions were ineffectual, and that whatever
obstacles were opposed to the exportation of the coin they were with facility evaded.
An unfavourable exchange can ultimately be corrected only by an exportation of goods, -
by the transmission of bullion,or by a reduction in the amount of the paper circulaiion. The
facility therefore with which bullion would be obtined at the Bank cannot be urged as an
objection to this plan, because an equal degree of facility actually existed before 1797, and
must exist under any system of Bank payments. Neither ought it to be urged, because it is
now no longer questioned by all those who have given the subject of currency much of their
consideration, that not only is the law against the exportation of bullion, whether in coin or
in any other form, ineffectual, but that it is also impolitic and unjust; injurious to ourselves
only, and advantageous to the rest of the world.
The plan here proposed appears to me to unite all the advantages of every system of banking
which has been hitherto adopted in Europe. It is in some of its features similar to the banks
of deposit of Amsterdam and Hamburgh. In those establishments bullion is always to be
purchased from the Bank at a fixed invariable price. The same thing is proposed for the Bank
of England; but in the foreign banks of deposit, they have actually in their coffers, as much
bullion, as there are credits for bank money in their books; accordingly there is an inactive
capital as great as the whole amount of the commercial circulation. In our Bank, however,
there would be an amount of bank money, under the name of bank-notes, as great as the
demands of commerce could require, at the same time there would not be more inactive
capital in the bank coffers than that fund which the Bank should think it necessary to keep
in bullion, to answer those demands which might occasionally be made on them. It should
always be remembered too, that the Bank would be enabled by contracting their issues of
paper to diminish such demands at pleasure. In imitation of the Bank of Hamburgh, who
purchase silver at a fixed price, it would be necessary for the Bank to fix a price very little
below the mint price, at which they would at all times purchase, with their notes, such gold
bullion as might be offered to them.
The perfection of banking is to enable a country by means of a paper currency (always
retaining its standard value) to carry on its circulation with the least possible quantity of
43
coin or bullion. This is what this plan would effect. And with a silver coinage, on just
principles, we should possess the most economical and the most invariable currency in the
world. The variations in the price of bullion, whatever demand there might be for it on
the continent, or whatever supply might be poured in from the mines in America, would be
confined within the prices at which the Bank bought bullion, and the mint price at which
they sold it. The amount of the circulation would be adjusted to the wants of commerce
with the greatest precision; and if the Bank were for a moment so indiscreet as to overcharge
the circulation, the check which the public would possess would speedily admonish them of
their error. As for the country Banks, they must, as now, pay their notes when demanded
in Bank of England notes. This would be a sufficient security against the possibility of their
being able too much to augment the paper circulation. There would be no temptation to
melt the coin, and consequently the labour which has been so uselessly bestowed by one
party in recoining what another party found it their interest to melt into bullion, would be
effectually saved. The currency could neither be clipped nor deteriorated, and would possess
a value as invariable as gold itself, the great object which the Dutch had in view, and which
they most successfully accomplished by a system very like that which is here recommended.
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