British Currency

As has been mentioned in part I, Great Britain had had an irredeemable paper currency ever since 1797; but before 1808 this currency had only in particular years shown any great deviations from its par value. The quotations for gold do not appear to have been very reliable at the time, but the rates of exchange on Hamburg and Paris, both of which, characteristically enough, were quoted in London without intermission during the whole course of the last Napoleonic war, make the matter sufficiently clear. In 1808, however, a great change set in. Especially from 1809 the exchanges began to show a very remarkable fall, i.e., the amount of foreign money to be obtained for £1 sterling declined heavily. The average depreciation for 1809 is given by Mr. Hawtrey as 21 and 23.3 per cent. as compared with Hamburg and Paris, respectively. This gave rise to a great controversy—which offers a number of points of contact with the discussion during the recent war—concerning the connexion between the changes in the value of gold and the rates of exchange, on the one hand, and the decline in the value of the British paper currency, on the other hand, and also concerning the true cause of the latter phenomenon. The first important contributions to this controversy were made by Ricardo in the late summer and autumn of 1809 in the form of three articles published in the Morning Chronicle, which were followed up in December by a celebrated pamphlet, the title of which, The High Price of Bullion a Proof of the Depreciation of Bank Notes, sufficiently expresses his point of view. In this pamphlet, Ricardo, who at that time was known only as a successful and highly respected broker on the Stock Exchange, laid down what is called the quantity theory of money and laid the foundation of his still unpresaged fame as the most acute of economic theorists. In order to test the question, the House of Commons in February 1810 appointed a committee, known as the Bullion Committee, whose report, framed entirely in the spirit of Ricardo, was announced in June but did not come before Parliament until the following spring. The discussion was carried on with great zeal outside Parliament as well, simultaneously with an almost continuous rise in the price of gold. According to the computations of Mr. Hawtrey, that rise was 36.4 per cent. in 1813 (that of silver being 36.7 per cent.), while the fall in the exchanges had already culminated in 1811 with 39.1 per cent. and 44 per cent. on Paris and Hamburg, respectively. During these long discussions there also arose the question of the cause of the export of gold and its connexion with payments on the Continent; and it may be said that in the course of this discussion the connexion was made clear in all essentials, especially by Ricardo.

As a starting-point in this discussion Ricardo took the case where a country, owing to failure of the harvest, has to embark upon unusually large imports of corn; but he maintained that the payment of subsidies to a foreign power formed a still more marked instance of the same thing. Now, if the country in question, that is to say, Great Britain, had a metallic system of money and no 'redundant currency', that is, not a greater quantity of money in relation to the quantity of commodities than other countries, there was, in his opinion, no occasion for the export of precious metals. In that case, corn, like the subsidies, would be paid for by exports of commodities in the usual way, as has been explained at length above. If, on the other hand, there prevailed a 'superabundant circulation', that is, a greater quantity of money in the subsidy-paying country than in the country to which the subsidies were paid, it meant that the value of money was lower or the price-level of commodities higher in the former place than in the latter, in which case the precious metals flowed to the place where their value was highest; in other words, an export of gold took place. Or, as also explained by him, if money or gold was exported instead of commodities, this was due to the fact that the transaction could be settled more cheaply in this way. In that case gold or money was what stood relatively lowest in value in the paying country (Great Britain), as compared with its value in the other country, and consequently people fulfilled their obligations at a smaller sacrifice if they paid with money or gold than if they paid with commodities. Otherwise, if the value of money was the same in both countries, the export of gold would never be worth while, but the payment must take the form of commodities. Ricardo did not dispute absolutely, it is true, that the transmission of gold could take place in all events; he considered it highly improbable, however, because in that case the gold would have gone to a country where its purchasing power was less, or at least not greater, than in the country from which it came. But both he and his opponents were agreed that in that case the gold must soon flow back to the former country; and even if this factor played a larger part than Ricardo supposed, it could never explain that one-sided movement of precious metal from Great Britain to the Continent that exhausted the gold reserves of the Bank of England and therefore gave rise to such great anxiety.

The outflow of gold was thus an evidence that money had a lower value in Great Britain than on the Continent. But if Great Britain, like the Continent, had been on a metallic basis, this dissimilarity would have been removed by the outflow, inasmuch as the quantity of money would have been diminished in the former place and augmented in the latter. As it was, Great Britain had a paper currency which stood far below its nominal value in gold; and in that case the export of gold could continue for any length of time without restoring equilibrium, because the vacuum was constantly being filled with new notes. Thus it was not the payment of subsidies or any extraordinary export of corn that caused the outflow of gold, but 'the superabundant circulation', or, in other words, the lower value of money in Great Britain.

This account, which goes to the root of the matter, can be regarded as conclusive in all essentials and needs to be supplemented only in one or two points, which are also touched upon by Ricardo. If the country in question has a mixed paper and gold circulation, as was the case with Great Britain, not only the paper money but also the metallic money declines in value within the country. In other words, prices rise in whichever currency they are quoted, inasmuch as they are both legal tender and their combined quantity has been increased. It is precisely this circumstance that drives out the 'better', that is, the metallic money, because people get more goods for that in other countries.

If, then, it was the case, on the whole, that the export of gold had its root in the depreciation of British currency, it should nevertheless be added, in common fairness, that a payment of subsidies in itself, regarded as an isolated phenomenon and without any connexion with the depreciation of the currency, would also set going a definitive export of gold from the subsidy-paying country, inasmuch as it would diminish its stock of commodities; and an unchanged relation between the quantity of money and the quantity of commodities—in other words, an unchanged comparative price-level—would thus require a corresponding diminution on the other side of the equation. But the quantity of goods is exposed to so many changes in different directions that this matter is probably of no practical interest whatever.

The argument brought forward against all this by Ricardo's opponents, especially by Malthus in the Edinburgh Review, in February 1811, was that a great export of corn, or claims to subsidies on the part of the continental states, need not evoke among them a greatly increased demand for 'muslins, hardware, and colonial produce', and that, therefore, it might be necessary for Great Britain to pay instead with money, which was always welcome. Applied to the payment of subsidies, however, this argument was particularly unfortunate, as the function of the subsidies was quite obviously that of procuring goods for the work undertaken by the continental powers, as has been explained at length above; and consequently for our purpose the objection can be dismissed without further ado. For the sake of completeness, however, it may be added that the same conditions prevail in other cases. No country sells corn except to get something else instead; and no country has so much of all commodities that it cannot use more. The origin of these commodities is a matter of no importance, as we have already seen; and the limitation, in Malthus's instance, to the articles of British trade itself is consequently quite unjustifiable. The only exception, which is scarcely treated by Ricardo, but which is discussed in detail, from a somewhat different standpoint, in the report of the Bullion Committee, would be if a country had some special reason to increase its stock of precious metals, e.g., to form a war fund or to pass from a paper to a metallic currency. The Bullion Committee here showed the untenability of the supposition that the Continent had any such increased need of gold as could explain the course of development in Great Britain.

The gist of all this is, therefore, that the export of gold from Great Britain can be regarded neither as a necessary condition nor a necessary consequence of the payment of subsidies to the Continent, but had its essential cause in the deterioration of the currency. From this, two conclusions follow. In the first place, the British government could have prevented, not only the export of gold, but also the permanent fall in the rate of exchange (to be carefully distinguished from the temporary dislocation occasioned by especially large payments on the Continent) by raising the value of money. Whether in that case the remedy would have been less harmful than the disease, after the depreciation had gone so far, it is not easy to say; but that matter need not be discussed in this place, as it is at all events clear that the Continental System, as such, was not the cause of the situation, or at any rate not one of its principal causes.

In the second place, from the standpoint of the payment of subsidies, it cannot even be regarded as having been necessary to let the export of gold or silver continue when the British government had once ceased to keep the currency at par with gold. From a purely formal point of view, it had obtained the possibility of independence in this respect by the Bank Restriction Act, that is to say, by making bank notes irredeemable; nor was there any insuperable obstacle in the way of this expedient in actual fact. Strictly speaking, the Continent needed no importation of either gold or silver; and it is far from the case, of course, that all the payments of the British government on the Continent were effected by the export of precious metal. For the moment it is not possible to state the relation between the total foreign payments and the transference of coin on behalf of the government except for the two years 1808 and 1809; but even the figures for those two years show how casual the proportion was. In 1808 the foreign payments of the government (here, as elsewhere, the figures refer to all countries outside the British Isles, and not merely the Continent of Europe) amounted to £10,235,000, while the exports of precious metal on public account amounted to at least £3,905,000, or, if we include that sum which was paid for the purchase of silver dollars (without our being able to see whether they were purchased inside or outside the country) to £4,543,000, or over 44 per cent. of the whole. The principal part in this matter was played by over twenty remittances, principally silver, to the Iberian peninsula to a total of more than £2,666,000, and also £855,000 in silver to Gothenburg, sums which the British government could not contrive to provide in a more convenient fashion. In the year 1809, on the other hand, when the total payments abroad were larger than in the previous year (amounting to £12,372,000), the exports of precious metal on account of the government reached only £1,206,000, according to the lower calculation, and £1,290,000, according to the higher calculation; that is to say, at the most only 12 ¼ per cent. of the total payments. Now if it was regarded as necessary, out of regard for British 'prestige' or for any other cause, not to let so much metal go out of the country as actually did, these mere figures make it clear (and the idea is confirmed by the experiences of the recent war) that it would have been quite possible to avoid sending out gold or silver. Even if one had not been able to come to this conclusion by theoretical methods, it follows from the practical experience gained by Rothschild's rearrangement of the system of foreign payments in 1813, that these payments did not involve any inevitable need for the export of gold or silver; and for other purposes such export was, considering the general position of currency policy, a somewhat purposeless means of limiting the fall in value of British currency to a negligible extent, without restricting the circulation of bank notes.