Sect. V.—: How Paper is substituted for Coins, and its value maintained.

In all advanced societies, pecuniary engagements are usually reduced to writing. This secures alike the debtors and creditors; and obviates most part of the differences which are so very apt to arise when the terms of contracts are not distinctly specified. But it is an obvious resource for such individuals as happen to possess the written obligations or bonds of others, to transfer them when occasion requires to their debtors. And it is probable that no very lengthened period would elapse after they had been employed in this way till persons in whose wealth and discretion the public had confidence, would begin to issue their notes to pay certain sums in such a form that they might readily pass from hand to hand in ordinary pecuniary dealings. But as these notes or promises, though they cost the issuers next to nothing, must be paid when presented, or at some specified date, they would not be issued, or given away, except to those who engaged to repay them with a premium or interest, the amount of which would, of course, belong to and be a source of profit to the issuers.

Suppose, for example, that a capitalist issues a promissory note for £1000. This he does by advancing it to an individual in whose solvency he has confidence, or who has given him security for its repayment with interest. In point of fact, therefore, the issuer has exchanged his promissory note to pay £1000 for an obligation of equal amount, bearing the current rate of interest; and so long as the note, the intrinsic worth of which cannot well exceed a sixpence, remains in circulation, he will, supposing interest to be 5 per cent., receive from it a revenue of £50 a year. The business of bankers who issue notes is conducted on this principle. They could make no profit were they obliged to keep dead stock or bullion in their coffers equal to the amount of their notes in circulation. But if they be in good credit, a fourth or a fifth part of this sum will perhaps be sufficient. And their profits, after the expenses of their establishments, including the manufacture of their notes, are deducted, will be measured by the excess of the profit derived from their notes in circulation, over what they might derive from the employment of the stock kept in their coffers to meet the demands of the public.

All descriptions of notes, whether they are issued by individuals, or corporations, that are made payable in coin on demand, or at fixed periods, cease to circulate as soon as a suspicion begins to be generally entertained of the solvency of the issuers, or of their ability to make good their engagements. But paper-money, meaning thereby notes not payable on demand, but which are, notwithstanding, legal tender, is not affected by a want of credit. It may be depreciated through excess, but by nothing else. It has no intrinsic worth, and is not the representative of anything in particular. Its value, as already shown, is entirely dependent on the extent to which it is issued. From 1797 down to 1821, Bank of England notes, though not payable in gold, were de facto legal tender, and their value was determined by the principle now stated, and by it only.

It has, however, been contended, that there is a material difference between the inconvertible paper issued by governments in payment of their debts, and that which is issued by a company like the Bank of England, in discount of approved bills. In regard to the former, it is admitted on all hands that its value may be depreciated from excess. But in regard to the latter, it has been argued, that this is impracticable; that its supply is limited by the legitimate wants of the public; and that being issued only in proportion to the demand in exchange for good and convertible securities, payable at specific and not very distant dates, it can neither be in excess nor depreciated. The apologists of the Restriction Act of 1797 endeavoured to show, by reasonings founded on assertions like these, that Bank of England notes were not depreciated during the suspension of cash payments. But though their fallacy, which is sufficiently obvious, was demonstrated over and over again by the authors of the Bullion Report, by Messrs. Ricardo, Blake, Huskisson, and others, and has been acknowledged by the legislature and the public, such is the vitality of error, or the inveteracy of prejudice, that we have these assertions repeated in 1857 as if their accuracy neither had been nor could be questioned. And such being the case, it may be right shortly to re-state principles which have been frequently stated before, and which we had supposed might have been safely taken for granted.

It may be premised on entering on this discussion, that the demand for money is not like the demand for other things. A man may have enough of beef, of beer, of cloth, and of a great many articles; but of money he never can have what he would consider enough. An increase of money means an increase of riches, that is, of power and consideration, and the desire for these is altogether illimitable. Whether money consist of paper, or gold, or both, the demand for it will be alike great; and will wholly depend on the price or interest charged for loans, and not on the value of the money lent.

These statements are so obviously well-founded as hardly to require illustration. If an individual can borrow £1000, £10,000, or any greater sum, at 3, 4, or 5 per cent. interest, and if he can invest it so as to yield 4, 5, or 6 per cent. it is plainly for his advantage, and for that of every other person who may be similarly situated to borrow to an unlimited extent. And a company that issued inconvertible paper, and was consequently relieved from the necessity of keeping any unproductive stock or bullion in its coffers, might issue notes at a very low rate of interest, and if so, the demand for them would be proportionally great.

During the period from 1809 to 1815, both inclusive, the issues of Bank of England and the provincial banks were much greater than they had ever previously been, and their paper was at a heavy discount as compared with bullion. But owing to the interest charged by the banks (5 per cent.) being less than the market rate at the time, the parties applying for fresh discounts were constantly on the increase. It is in truth quite immaterial to such parties whether the issuers have, by issuing notes in excess, depressed their value as compared with gold, or have limited their supply, so as to keep them on a level with that metal. These circumstances are of primary importance to those whose incomes do not vary with variations in the value of money; but as prices rise and fall with its increase or diminution, they have little or no influence over merchants and tradesmen, who are the principal applicants for discounts. A, who presents a bill for £500 or £1000 to a bank for discount, has received it, if it have grown out of a real mercantile transaction, in payment of goods which were worth £500 or £1000 money of the day; and it is this sum which he wishes to obtain by discounting the bill. Had the value of money been different, the price of the goods, and consequently, the sum in the bill, would have differed proportionally. Its market value at the moment is the only thing attended to in these transactions. And it is quite the same when the bills are for accommodation purposes. It matters not whether the notes given for them are worth 10s. or 20s. In the one case the bills would be nominally twice as great as in the other, but there would be no real difference between them. So long as the rate of interest charged for discounts or loans is under the market rate, the demands for money can never be supplied. In such case million after million may be issued. The value of the currency, if it consist of inconvertible paper, may be so reduced as to require £1 or £5 to purchase a quartern loaf; but the circumstance of its value being diminished in proportion to the increase of its quantity would render the demand for additional supplies as great as ever.

It is plainly, therefore, the merest drivelling to talk about the demands for money being limited by the wants of the public. These wants, like the avarice of the miser, or the thirst of the dropsical patient, are altogether boundless. They have no possible limit, and would be as great after 100 or 1000 millions of notes or sovereigns had been issued as after an issue of 10 or 20 millions.

But when a currency consists of gold, or partly of gold and partly of paper immediately convertible into gold, it contains within itself a principle by which its over-issue is corrected. In that case, the issue of 100,000 or 1,000,000 sovereigns, and of 100,000 and 1,000,000 £1 notes, has precisely the same effect. Paper is not depreciated as compared with gold, for the latter may at pleasure be obtained for the former; but the whole currency, gold as well as paper, becomes redundant, or is depreciated, as compared with that of other countries in which there has been no over-issue. And as gold is everywhere in demand, and the expense of its conveyance from one state to another seldom exceeds one or two per cent., it follows, that if the currency be depreciated by over-issue to any greater extent than this, the exchange will become unfavourable, and gold will begin to be exported. And if, in such circumstances, the issuers of paper do not, by withdrawing a portion of their notes from circulation, raise the value of the currency and restore the exchange to par, the drain for bullion will undoubtedly continue till they have been deprived of their last sovereign, and are compelled to stop payments.

The currency may become redundant from various causes exclusive of the over-issue of paper, such as the greater economy of its issue by means of improved banking, the occurrence of bad harvests, the prevalence of discredit or the scarcity of money in countries with which we are commercially connected, and so forth. But however it may originate, the fact of the exchange being unfavourable, and an efflux of gold taking place, shows that the currency is in excess, and should be diminished.

We are aware that this conclusion has been denied in the case of an unfavourable exchange occasioned by a bad harvest. But, there is no room or ground for any such denial. The fact that a harvest is bad, that is, that the produce to be circulated by the intervention of money is diminished by rendering the latter redundant and reducing its value, makes it be exported to countries where its value is greater. And its exportation, by raising its value here, and reducing that of other articles, is the surest means of increasing their exportation and reducing the foreign demand for bullion to a minimum.

Though consistent with the soundest theory, this is not mere theoretical reasoning. The issues of the Bank of England were for about a century previously to 1797, limited in the way now explained; and though, during that lengthened period, the occasional efflux of gold showed that the currency was in excess, there was no discrepancy between the value of gold and paper. Since 1821, the issues of the bank have been limited on the same principle. And it will be afterwards seen, that by neglecting to attend in 1825, and other occasions, to the unerring evidence afforded by the fall of the exchange of the currency being in excess, and requiring to be reduced, the bank was brought into the most serious difficulties.

But there is no such check over the issues of inconvertible paper. It is legal tender only in the country in which it is issued. Abroad it has no such privilege, and is, consequently, worth nothing. Hence, if it be issued in excess, the surplus cannot, as in the case of gold, be removed or lessened by exportation. It is confined to the country of its birth; and there is nothing to sustain its value but the discretion of the issuers. And all experience shows that no dependence can be placed on a restraint of this sort. Even in England, where all matters connected with money are supposed to be comparatively well understood, the inconvertible paper of the bank was over-issued, so as to be, in 1814, at a discount as compared with gold, of no less than 25 per cent. And it is probable that, but for the destruction of country bank paper, caused by the political events of the period, the over-issue and depreciation of bank-notes would have been carried still further. The fact is, that the power to issue inconvertible paper has never been conceded to any man, or set of men, without being abused, that is, without its being issued in excess. The re-enactment of the restriction Act of 1797, and making it perpetual, would have no influence over the value of paper, provided its quantity were not at the same time increased. But who can doubt that it would be increased? Such a measure would enable the Bank of England to exchange bits of engraved paper, not worth, perhaps, 5s. a quire, for as many, or the value of as many, hundreds of thousands of pounds. And is it to be supposed that the directors and proprietors should not avail themselves of such an opportunity to amass wealth and riches. If government enable a private gentleman to exchange a scrap of paper for an estate, will he be deterred from doing so by any considerations about its effect on the value of the currency? In Utopia we might, perhaps, meet with an individual influenced by such scruples; but if we expect to find him in England, we shall most likely be disappointed.

It thus appears to be essential that all notes, how much soever they may differ in other respects, should be payable in specie on demand. But it is not enough to enact a law of this sort. It is indispensable that effective measures should, at the same time, be adopted to ensure its being carried out; that is, to make certain that its provisions shall not be defeated by fraud, mismanagement, or any sort of contingency; but that coins shall always be obtainable at the pleasure of the holders of the notes which circulate in their stead.