England, that of all the country banks. If to the present suspension of cash payments at the Bank of England, another law were added, relieving the country banks from the obligation. of converting their notes into those of the Bank of England; there would no longer exist any check to the emission of country paper; and there would be no bounds to the excess in which every banker might indulge, so long as his credit and solvency were unimpaired. Even in such an extreme case, however, the country paper would not possess a more extensive license than that which the paper of the Bank of England enjoys at present; and the effectual salutary limitation to which the country paper is at present subjected, is founded exactly upon the same principle with that which formerly controuled the Bank of England, under the obligation of converting its notes into specie. From the moment that the unwise law of 1797 discharged the Bank from this most necessary obligation; nothing remained to controul its discretion, or to impose any boundary to the extent of its paper circulation. The directors of this company are at all times susceptible of the same temptations, to which other traders are exposed; they have been known sometimes to yield to these, even under the checks and controuls of the ancient system; and now that all these are removed, it would be in the highest degree credulous and absurd to expect, that they will decline the opportunity of increasing the profits of their stock. These profits, it is well known, arise principally from the circulation of their notes. It is from the operation of gold and silver, in confining paper within its proper bounds, that the constant and immediate convertibility of notes into specie, is rendered an indispensable condition, in every sound system of currency. This is a principle in the theory of money, which has hitherto been very imperfectly understood; even by those, who, in other respects, have explained it most fully. To the deficiency of all our systematic writers upon this point, we are inclined to ascribe the opposite extremes of error, which, with equal confidence, and equal loudness, are maintained, respecting the present state of our circulating medium. In the provinces, among our landed proprietors, and from that description of our parliamentary representatives, we still, as of old, hear most ignorant declamations against country banks, and all paper currency. In the great commercial cities, and especially in the metropolis, opinions are gravely avowed, by persons who ought to be acquainted at least with the details of the money trade, that the precious metals are alN n together VOL. II. NO. 4. See our First Volume, p. 190. together unnecessary, even as a part of circulation; and that the provisional law of 1797 should be established as a permanent system. If the former sentiment may be classed among the expiring prejudices of the vulgar, this visionary scheme betrays no less ignorance of political economy, and in its practical tendency is much more pernicious. It is not, however, to be treated as a doctrine entirely new, or as for the first time suggested by the existing circumstances of this country. If authority could yield any support to so palpable an error, the sanction might be found of other names, than it will probably be able to produce in the present day. An idea of this sort runs through the Querist of Bishop Berkeley, not the least remarkable production of that acute genius; from whose fame it cannot be considered a derogation, that among many original and valuable views upon a science then almost uncultivated, some errors are to be found, from which we are not completely guarded by all the discoveries and experience of subsequent times. He appears to have conceived *, that all circulation is alike a circulation of credit, whether metal or paper be employed as the medium; and that as coined metals were, in the progress of mankind from barbarism, substituted for barter, so, in a farther stage of improvement, a paper medium is to be substituted for coin. If the question were solely, whether it may be stated in the abstract as at all practicable, to carry on the business of internal commerce by a medium of circulation merely conventional, neither possessing intrinsic value itself, nor immediately convertible into a commodity of intrinsic value; we should answer this question in the affirmative. The practicability is sufficiently proved, by the experiment which has been made in this country; and there existed no reason, à priori, to doubt its possibility. But the real and important question is a very different one; how far this practicable scheme, is, by motives of expediency, and after a full view of its operation, recommended to be actually carried into practice? To this, we have no less hesitation in pronouncing a negative, upon the principle which has already been explained. A perfect system of currency must be composed both of specie and paper. The introduction of paper money, the most refined, perhaps, of all the expedients to which the relations of society have given birth, was not only an immense step in the progress of commerce, but may be considered as having marked an epoch in the history of mankind. But the essential benefit of the invention does * See Numbers 426. 439. 441. & 445, of the Querist, a work originally published in 1735. does not consist, as Berkeley supposed, in forming an entire substitution for metallic currency; but, in saving a certain portion of so costly an article, and, what is of far greater consequence, in facilitating exchanges between places remote from each other, and economizing the time and the labour of large payments. Specie, however, as possessing intrinsic value, must still be considered as the ultimate element into which the currency of the country may at all times be resolved; and is the true basis upon which the fabric of paper circulation must be solidly reared. If the whole currency is merely conventional, no check operates against an excessive issue, and consequently no security exists for the permanent value of the medium of exchange. That permanency can only be secured, by making the conventional representative of value constantly and readily convertible into real value; constantly and readily convertible into gold and silver; because these preserve, more steadily than other commodities, an uniform value. Upon the principle, which we have endeavoured to explain, the excess of paper circulation would be converted into whatever commodity the paper was made convertible, provided that commodity was of intrinsic value. But it cannot be rendered convertible into some commodities, with the same convenience, as into others; nor would the restraint upon excessive issue operate, in every case, with the same degree of efficacy and regularity. As the precious metals form the most convenient measure of value and medium of exchange, when the whole circulation is effected by a medium of intrinsic value; for the same reasons, they are better fitted than any other commodity to be the basis of a conventional currency, and to form that real value into which every portion of it may at all times be immediately converted. Permanency of value, from age to age, is the point of first importance in the medium of circulation. And while the currency of a nation consists, either wholly of the precious metals, or of a paper system founded on, and secured by the principle of convertibility, its value cannot be considerably depreciated, except, along with the currency of the whole commercial world, by the discovery of new mines of extreme fertility: an event so rare, as to have occurred only once within the period of historical memory, and that the epoch when the two hemispheres of the earth were first revealed to each other. The preceding observations are sufficient, we trust, to shew, that when a national Bank, whose notes form the chief branch of currency, is relieved from the obligation of payments in cash, the only controul is then removed which limits the issue of paper to what is actually required by trade. That with such an opportunity, and such a license, no bank will ever long resist the temptation temptation of high profits and extraordinary gains, there are very obvious reasons to presume; yet, it is a matter of some nicety to make out, in a particular instance, a distinct proof of the fact of undue issue. It is a case of that sort which scarcely admits of direct evidence. Even when we can obtain faithful documents of the amount of notes in circulation during a series of successive periods, we are not fully entitled to consider a progressive increase of amount as conclusive, unless that increase be very great indeed because the quantity of currency required by the trade of a country varies with the rate of circulation, that rate of circulation differs with the different kinds of currency, and in each kind is liable to be accelerated or retarded by the various fluctuations of demand and of credit. Nor does a high and growing state of prices afford any more satisfactory proof of an undue excess in the quantity of circulating medium; because the state of prices is a very complex subject, and is known to us very vaguely; and because the same increase, which an excess of currency would occasion, may be produced by many other causes, such as a failure of produce or supply, or an accumulation of taxes, the operation of all which is so complicated together, that it is difficult to assign to any one its proper portion of the whole joint effect. Fortunately, however, there are two very simple and satisfactory tests, by which the fact of an excessive currency may be ascertained. The nature of these, we took an opportunity of explaining in a former article of this Review*, at a time when we did not yet think that sufficient evidence was laid before the public to apply the inference, with conclusive certainty, to the conduct of the Bank of England. When the circulating medium of a country has suffered a depreciation, whether it proceeds from the debasement of a metallic currency, or from the discredit, or from the excess of a paper currency, the currency price of gold and silver bullion must rise, at the same time with that of all other commodities. This fact is usually expressed, by saying, that the market price of bullion exceeds its mint price. When the market price of bullion comes to exceed its mint price, in consequence of a depreciation of currency, the rate of foreign exchange will suffer a nominal and apparent fall. The domestic currency has sunk in its bullion value, while foreign currencies remain unaltered: the proportion, therefore, of the bullion value of the former, to that of the latter, is changed. But though this proportion is changed, the ancient numbers, expressing it, are still adhered to by merchants. There will thus be a great difference between the computed rate of exchange, and its real rate; and whether *Vol. I. p. 184. & p. 200. the the actual difference be in favour of, or against, the country whose currency is depreciated, the apparent rate will always be computed so much more against it, or so much less in its favour, in proportion to the degree of that depreciation. The use of these two tests, in ascertaining the fact of a depreciated currency, may be explained by several remarkable instances. Before the refor mation of the silver coin in King William's time, we are informed by Dr Smith, the exchange between England and Holland, computed according to the standard of their respective mints, was 25 per cent. against England; but the value of the current coin of England was, at that time, rather more than 25 per cent. below its standard value *. Before the reformation of our gold coin in 1772, the market price of bullion exceeded the mint price, and the rate of foreign exchange was depressed; even the exchange with France was 2 or 3 per cent. against England. It is understood, that, at that time, the French coin, though worn, was not so degraded as the English, and was, perhaps, 2 or 3 per cent. nearer its standard. Very soon after the recoinage in 1772, the market price of bullion fell to the mint price, and there was a corresponding improvement in the course of exchange; the difference turned immediately in favour of England, and against France +. The issue of assignats, during the Revolution, depreciated the currency of France in a greater degree, than was ever known in any other instance. In the course of little more than two years, accordingly, the exchange between London and Paris fell between 60 and 70 per cent. to the disadvantage of the latter place; and would probably have fallen still more, by the operation of new issues of assignats, if the war had not interrupted the commercial intercourse of the two countries . It is not, indeed, from every rise in the market price of bullion above its mint price, or from every fall in the course of foreign exchange, that we are entitled to infer a depreciation of currency. A temporary excess of the market price of bullion above its mint price may be produced, without any peculiarity in the state of currency, by a failure in the supply of bullion from the mines, by a great demand for it either at home or from abroad, and, above all, by what is called an unfavourable balance of trade. The high market price, which these circumstances occasionally for a short time produce, may be farther augmented and prolonged, if the expences of foreign warfare, and the remittance of foreign subsidies, are aggravated by a fail Wealth of Nations, II. 215. + Id. I. 62. and II. 215. Lord King, p. 37. ure |