Guest Lecturer: David Ricardo talks about gold at $700+!

May 14, 2006

For some strange reason, David Ricardo, the great early-19^th century British economist, is remembered primarily for his arguments about free trade. Weird. Because Ricardo's writings are primarily about money. Why? Britain had left the gold standard in 1797 as a result of a financial crisis related to the Napoleonic Wars. (There was a rumor that French soldiers had landed on the shore of Britain, which was true. The small landing party promptly surrendered to a distant group of women tending cows, which they mistook for British soldiers.) In 1809, the pound had been a floating currency (mostly sinking) for over a decade. Ricardo began writing letters to the Morning Chronicle, which turned into the essay we are reading today. Ricardo had made his fortune as a speculator, and in his middle years, devoted himself to putting Britain back on a gold standard. (You can think of him as an early George Soros type.) In 1817 he published a much more detailed work of economic theory, the Principles of Political Economy and Taxation, which remains, in my opinion, one of the most insightful works on the basics of monetary theory ever written. (He makes a few good points about trade as well.) He became a Minister of Parliament in 1819, and led the political process of reestablishing the gold standard in Britain, which was accomplished in 1821. He died in 1823. Mission accomplished!

This essay is very long, but we will reproduce all of it here, since there is plenty more to talk about in coming weeks.

* * *

The High Price of Bullion

by David Ricardo

1810

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.

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 commerce, 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 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

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

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

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 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

unnecessary.(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.

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.

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 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

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

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

the previously existing checks against an over-issue having been

thereby removed, those conductors 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 unfavourable 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 experienced 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 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 parliament, 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 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 country.(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

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 exchange; 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 Thornton must therefore, according to his

own principles, attribute it to some more permanent 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 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 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, 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. 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 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.

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 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

superabundant, 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.

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

with