The Bullion Report, The Questions at Issue.

The state of things above described attracted public attention, and in January, 1810, Mr. Horner moved for a committee “to inquire into the high price of gold bullion and to take into consideration the state of the circulating medium, and of the exchanges between Great Britain and foreign parts.” The report of this committee was published in August, 1810, but did not come up for discussion in the House until May, 1811.

As soon as the witnesses began to be examined, it appeared that there was a widespread belief that it was not the paper which had depreciated, but the gold which had advanced—a notion which has been advanced in other periods of paper money. The witnesses were bankers, merchants, and bullion brokers, and included the Governor and Deputy-Governor of the Bank of England. The first question to which the committee ad dressed itself was, therefore, this: Is the banknote depreciated in value? Is that the cause of the premium on gold, or is there some other? To us such a question may seem idle, but it certainly was not so when the Governor and Deputy-Governor of the Bank of England, and the Chancellor of the Exchequer, took the negative. As there was no public quotation of bullion, transactions being illegal, and men handled “guineas” and “shillings” in paper in ordinary trade, it is not so surprising that such a notion might at any rate be popular. It was assisted further by the great dislike to admitting that Bank of England notes were “depreciated” like the paper money on the continent.

There were facts also tending to show that disturbances in the value of the precious metals were taking place. Gold was growing dearer from obstructions in the supply, from hoarding, and from demand for war expenditures.

Tooke (“Prices,” 1.130) infers that “there must have been a greatly increased demand for the precious metals and a consequently increased value of them during the war, more than sufficient to compensate for the utmost quantity spared from circulation as coin in this country, or even for the utmost rate of annual increase from the mines,” that is, that the enhancement of the value of gold equalled the depreciation of paper. J. S. Mill thinks that this is proved, but Chevalier (Ec. Pol. III. 454) puts the matter in the right light. If gold had risen there ought to have been less of it, and prices should have been lower. The bank paper, therefore, even if not absolutely increased, was in excess relatively to what it ought to have been and would have been under specie payments. Prices, if not bellow old specie figures, were relatively inflated.

I abstain from pursuing this suggestion, but regard it as the key to a correct solution of the contradictions in which many of the best authorities on this subject have been involved.

The second question which the committee had to consider, was: Why are the exchanges 18 or 20 per cent, against England?

The importance of this inquiry for us may not be at once apparent. We have very wisely separated the quotations of exchange from those of gold. We quote exchange in gold, and thus the fluctuations of the two are kept separate and presented independently. But when there was no quotation of gold, evidently the exchange rates were the indicator on which the variations between paper and bullion were marked.

But this is not all. The witnesses, almost without exception (and the exceptions were not clear and precise in their opinions), maintained that the adverse exchange was due to an adverse balance of trade or of payments. The question involved was, therefore, this: Is an adverse balance of trade the explanation of an outflow of gold?—or: Is a favorable balance of trade the force to which we must look to bring an influx of gold? There is no question in finance which now demands our study so imperatively as this one. The false notions of the balance of trade infest almost every discussion of our present circumstances which one reads or hears. It is assumed that the movement of the precious metals from country to country is caused by the balance of trade one way or the other, and, as the movement of the metals is a phenomenon of the first importance in any question of resumption, the reasoning which starts with this doctrine is all fallacious. The balance of trade was exploded by Quesnay and his followers a century ago, and was gibbeted in the Bullion Report, but it stalks the money market and the national treasury to-day, an uneasy ghost, which it seems impossible to lay.

It is a vexatious task, and one which always makes a scientific man feel ridiculous, to set vigorously to work to demolish an old error which no well-informed man any longer holds, but, in our present situation, and under our political system, popular errors are of the utmost importance, and no pains should be spared in patiently exposing them. The fallacy here is in the word “balance.” If it means equilibrium, it may be used correctly to denote the equality of exports and imports, but then it regulates itself, and no power can control it. If it means remainder, and suggests analogies of book-keeping, it is a mere myth to which no fact corresponds, and is to be entirely rejected. This question will be noticed further when we come to speak of the debate on the report.

The third question which the committee had to consider was offered by the conduct of the Bank. It is to be noticed that the English inconvertible paper was a bank issue of no fixed amount, while our present paper money was issued to an arbitrary limit at which it was established. The question, therefore, was: How shall the Bank know when it has given the country just the amount which it requires, and when it passes the limit so that its issues become excessive? Under a convertible system they found out, of course, by a demand on them for gold for exportation (clandestine or open, as the case might be). They could not, generally speaking, press notes on the public beyond the requirement, though with a usury law and a law against export this would be possible to some extent.

They therefore went on during the specie times, to discount all good bills, at short date, for real transactions, at five per cent, and never troubled themselves about gold or the exchanges. They pursued the same course under the Restriction, and the question before the committee was: Whether these conditions were sufficient, in the absence of convertibility, to guard against inflation, or whether the Bank might inflate while observing this rule?

This question has the highest importance for us, if we are to have “free banking” on paper.

The report of this committee is perhaps the most important document in financial literature. Its doctrines have been tested both ways, by disbelief and by belief, by experiment of their opposites and by experiment of themselves. They are no longer disputable. They are not matter of opinion or theory, but of demonstration. They are ratified and established as the basis of finance. They may be denied, as the roundness of the earth was denied even five years ago, and as Newton's theory of the solar system was denied until within twenty-five years, but they have passed the stage where the scientific financier is bound to discuss them.