r v 7] f^ ^P ^ IMAGE EVALUATION TEST TARGET (MT-3) 1.0 I.I us |28 |25 2.2 12.0 I. 1 1 IISI 1.4 .,,.6 , lw i ' i » 'l PAOI ver, of . . lOO . lOI . 102 ide, so . 102 • 103 Errors Ted . 104 TRADE. — eading recious s false loS • • se this lOS • • he old 107 lies of • • foreign • • 107 loS ogmas. 108 ilances entical 109 * • no • III tenhim , III tton . 112 . 112 point . "3 SVNOPSffi OF THE WORK. CHAPTER XIII. MONEY, CURRENCY, LOANS, AND CHECKS. - TRUE ,;^g, FALSE PRINCIPLES. ■'nr;srtj^:s"''"«'— ^-"^•-• Necessary to differentiate the principles' and' proc'esses involved in the loan business . . Processes 4- Wherein Adam Smith failed of a clear and nr^r.c' • ' nt »i,. tu- ... " "' " ciLar ana precise view of the thmgs dealt in, in the loan market . f„r'i"°' ^""''''' how goods are made to "finance" for the.r own production and distribution . 6. What IS the loan market? , • • . 7. The "money market "not the loan marke't '. ' ' ». The demand for money, or currency, not regulated bv population, but by industries . ^«:fi"'ated by 9- No connection between currency and loan's '. ' ' ^dtrntr-'^^^ ^""""^- '^- - "^-pp'y "' "" t"herate"1hf , °''"^ "'^"" ""^ ^'"^^'^ P^^P" -"-y oi ., T, .u , . i ' ^'""'' ''^ "''=y '•o metallic . . 12. Both kinds of money perform identical services ' ' 13. "Vested Interests" impede monetary principles . ] ■M: AND PAGS 114 "S 116 116 "7 117 118 118 119 120 120 121 121 CHAPTER XIV. MONEY, CURRENCY, AND BANKING, AND THE ECONOMY OP PAPER MONEY CONSIDERED. I. Fallacies respecting the advantages of delegating the issue of paper money to banks . ^ a. Errors of Professor Bonamy Price on the'subject .' ' 3. The question Who is entitled to the profi s of Upe; money. - the nation, or the banks ? . ^^ ^ vl!lf"'°-''"T'""P*''=''"S'''*='«'''>^»"d'capit'al ini vested in mming, bullion, and money, and in peS.hable 5. Greater economy of a' state ove; other issuers .' '. ' 6. The Professor mconsistent with himself . 122 123 124 I2S li' XVi SYNOPSIS OF THE WORK. rAH. PAua 7. The substitution of paper for metallic money one of con- venience, and the amount must be left to the regulation of supply and demand 126 8. The present system of supplying paper money by the liank of England Issue Department one of great ex- travagance of metal 127 9. The circulation of the United States .... 127 10. Estimate of actual net gain of the note issue in Great liritain 127 11. The theory that paper money should be primarily con- sidered as a financial expedient, discarded . . . 128 12. Comparison between issue of paper money in Great Brit- ain and the United States 129 CHAPTER XV. BANKS OF ISSUE, DEPOSIT, AND DISCOUNT. — THEIR ORI- GIN. — THE ISSUE OF PAPER MONEY NOT LEGITIMATE BANKING. — CANNOT PROPERLY BE DELEGATED TO BANKS. 1. The great importance of the subject discussed in this chapter. What is legitimate banking ? . . 2. Clearly and distinctly stated by Professor Price . . 3. The chief business of a bank is to utilize the market value of goods in course of production, etc. . 4. The distinction between banks of deposit and discount, and banks of issue 5. A banker the borrower and lender of other folks' capital and trading power 133 6. When he lends his own notes, he simply trades on his own credit. His notes do not represent goods . 7. The distinction between a man's trading on his own credit and other people's goods The difference between ancient and modern banking The Bank of England the first bank of deposit and issue established in England (1694). The name of banker unknown in England in the time of Charles the First Started, and continued ever since, on false principles 11. The epochs of manias for paper money .... 12. The original banks of issue neither borrowed nor lent capital. Notes issued only on metal .... 137 8. 9- 10. 130 •30 '3> »32 133 134 13s 136 136 '36 EIR I ORI- }ITIMATE TED TO this 130 «30 irket '3' }unt, »3« pital 133 his 133 redit 134 »3S and le of sthe • 136 . 136 • 136 lent • m SYNOPSIS OF THE WORK. xvU MR. 13. I he note issue no advantage to Bank of England . . 138 14. Profits of issue not a primary object of paper money, but to create a more convenient tool , ,„ 15. The absorption by the Hank of England of ihe whole issue of the kingdom will be calamitous, under present policy of the bank ,._ CHAPTER XVI. BANKS OF DEPOSIT AND DISCOUNT, OR LEGITIMATE BANK- ING, versus banks of issue and clearing-houses. I. How a bank of deposit and discount should be organized. Must have an adequate cash reserve . . . .140 a. The banker debits himself with his own and his custom- ers' capital, and credits himself with the cish he holds, and bills, and other securities lield for loans . . .141 3. What capital a banker trades on, — money treated only as capital 4. The check, the talisman that sets the whole in motion, and makes trading capital available, where money plays /'"P"' .14a 5. A bank of deposit, pure and simple, as defined by Mr. T. B. McCuUoch , 143 6. Such a bank an immense utilizer of money . . .143 7. Other descriptions of business of bankers ... 144 8. The clearing-house a mighty agent for settling balances of traders, domestic and foreign iaa 9. The common fund on which a banker trades made up of all kinds of unused capital held by him, awaiting more permanent investments , ., 10. The Bank of England an exception to the rule. A clear- ing-house bank suggested , ., n. The issue of notes adds nothing to the successful conduct of a bank. American financiers i^g 12. The views of the late John E. Williams on the issue of notes by banks j g 13. Views of F. A. Spinner, late United States Trcalurer] respecting the issue of paper money . . . .147 14. Mr. E. G. Spaulding's contributions to the stock of knowl- edge on banking » , . 147 xvm SYNOPSIS OF THE WORK. CHAPTER XVII. "THE FRIMARY OBJECT OF PAPER MONEY IS TO SUFPLY A DETTER TOOL OF INDUSTRY THAN METALLIC MONEY. — INCIDENTALLY ONLY CAN IT BE PROPERLY TREATED AS TRADING POWER, OR RESOURCES" (POSTULATE 49). '*«• PACB I. This postulate opposed to the hitherto accepted doctrines respecting the issue and uses of paper money. This theory wrong i<|8 3. The original baniounds result- find in banks . . ted by at the iney of narket paper , mere silver 149 ISO IS' 152 152 ^53 '53 1 54 '5S . 156 . 156 »57 CHAPTER XVIII. 8i;00ESTlONS FOR STATE ISSUE DEPARTMENTS IN GREAT IIRITAIN AND THE UNITED STATES, AND CONSIDERA- TIONS CONNECTED THEREWITH. PAR. 1. The elements for constructing such departments already exist, and only need consolidation 157 2. May be called the " Money," or " Currency Department," 15S 3. The change to the new system nearly imperceptible to the public o 4. Specification of chief duties ! I m 5. The question of using a part of the cash received for notes to retire a portion of the public debt considered . 159 6. Question of compensation to issuing-banks discussed . 160 7. How to maintain equilibrium of currency during change of system ,g, 8. The American system more difficult to deal with. The Government bound to uphold the banks, and furnish all the cash ,g, 9. Objections to selling coin reserve to any considerable amount . . . ^ jg^ la If such sales were confined to a part or the whole of the increased annual demand for currency, no great harm could ensue jg n. The public should have the choice of small notes or sil- ver, as wfl! as of other coins jg, CHAPTER XIX. SIR ROBERT PEEL'S POSITION ON THE NOTE ISSUE. — MR. GLADSTONE CLAIMS THAT IT BELONGS TO THE STATE. WHEREIN THE ACT OF 1 844 HAS FAILED. 1. The Act of 1844 and the Acts of Congress authorizing the issue of treasury notes a great step in advance, but fall short of the requirements of a perfect system . 164 2. The American Acts passed solely to create resources . 165 3. Sir Robert Peel's Act fell short of his knowledge and convictions. His remarks on the subject . , .165 4. Causes which led to the passage of the Act. Total cir- culation of the kingdom at the time .... 166 S- The Act provides for the ultimate absorption of the entire note circulation of the kingdom ... 167 B SYNOPSIS OF TUF. WORK. fMb pAoa 6. Sir Robert Peel's apology for perpetuating the Issue by the bunk through a separate dc|)artnicnt . . . i6S 7. His motives and policy (juitc different in the matter of passing the Act repealing the Corn Laws . . . idS 8. Mr. Gladstone's opinions on the note issue . . . 169 9. Monetary science no longer rests on mere opinions of men, however eminent ifig 10. It was an error of the Act of 1844 to leave it discretionary with the bank to issue, to itself, the whole of the fiduci- ary notes to be used as cash reserve .... 170 11. The absorption, or concession, of all the country banks' issue will cause greater evils than any hitherto arising from the issue of notes on public securities . . . 171 CHAPTER XX. BANKING AND CURRENCY IN THE UNITED STATES. — EVILS OF A SYSTEM OF UNLIMITED ISSUE OF NOTES. — CEN- TENNIAL ADDRESS. — ONE HUNDRED YEARS OF BANKING IN THE UNITED STATES. 1. Fi«c jrade in hank notes and " protection to domestic industry " the rule in America 171 2. Epochs of over-issues concurrent in the United States with similar periods in Great Britain . . . .172 3. Before the civil war, the chartering of banks of issue claimed to be a state right only 173 4. How banks were organi^ed, and conducted their business. Notes of banks without capital circulated for want of sound currency i^-j 5. The civil war annihilated state rights in respect to bank- ing and slavery 17^ 6. Charles Dickens's account of American currency in 1842. A people without money 17^ 7. The period of " Wild Cat and Wolverine Money." From Jackson to Lincoln, and the era of the national banks . 175 8. Under the national bank system, the United States Gov- ernment acts as trustee for all the banks. The anom- aly of the system 177 9. A bureau established for the purpose of aiding in the management of the system 177 10. The difference between treasury and bank notes . . 177 11. Mr. E. G. Spaulding's centennial address. , . .178 e Imuc by . i6S matter of . . i6S . . 169 )Inioiis of . 169 cretionary the (iduci- . 170 try banks' to arising . 171 ITES. — EVILS mtmmmiii» SYNOPSIS OF THE WORK. »y|l^ ates madb :rests. FAGB science the pro the cur- he other issue to itely set- d as the must be :he prac- ers com- iwer and imerican tin cause s princi- ect issue '93 '93 '94 '95 196 196 198 200 5 BANK OF I France of paper to repre- ties, and 201 203 rAK. rAGB 3. After the assignats and commandats came hard money, and finally, in 1800, the Bank of France . . . 203 4. Its prudent management and large profits . . . 203 5. How the German indemnity was paid in trading power instead of metal 203 6. The " Stay Law," or law to extend the time for paying bills held by the bank for a year. Its good effect sug- gestive to other countries 204 7. Reasons for the sound system of management by the Bank of France. Always keeps an ample reserve of metal 204 8. Much of its success as a bank of issue due to the cir- cumstance that it has a monopoly in the supply of notes, showing the advantage of the state being the only issuer 205 9. The Treasury Issue Department at Washington a well- managed office 205 10. The only important question in France seems to be whether the state, or the bank proprietors, shall have the large profits of the issue 206 1 1. The inconvenience of not having small notes in France. Such notes would greatly diminish the amount of capi- tal invested in gold 206 CHAPTER XXIV. HOW THE VOLUME OF CURRENCY AND OTHER THINGS AFFECT THE MARKET OR EXCHANGE VALUE OF COM- MODITIES. — PRESENT INFLATED CONDITION OF THE CURRENCY AND BANK DISCOUNTS IN THE UNITED STATES (march, 1879), AND WHAT IT PORTENDS. — NICHOLAS BIDDLE ON CURRENCY. 1. The postulates relating to currency 207 2. Their application to money and other things . . . 208 3. Money cannot be claimed to be exceptional . . . 208 4. It is only one of .-nany factors in the sum of things influ- encing values 209 5. How to determine whether money has fallen, or commodi- ties have risen, in value 210 6. When money and goods have increased concurrently, their exchange or market values will not be altered . 210 v' ._J' Ij I i i . ... 4 jadv VA«. SYNOPSIS OF THE WORK. FAO* 7. The latioa of production have been wonderfulily main- tained for the last thirty years 8. But for the increased production of goods since the mines of the United States and Australia were discovered, gold and silver must have risen 9. Money and the trading power of goods together deter- mine market values 10. The part played by paper money and bank discounts 11. What a magazine of combustibles exists . . . . 12. The currency the most important matter before Congress. Paper money only proper as a substitute for metal 13. Nicholas Biddle on currency and banking. 14. Cash reserve of national banks too small .... 211 211 212 213 214 215 216 218 15. A period of inflation setting in 218 CHAPTER XXV. GENERAL SUMMARY OF THE ARGUMENT. — THE MONEY PROBLEM TO BE SOLVED BY A UNIVERSAL MONETARY SYSTEM. — PLAN FOR SUCH A SYSTEM SUGGESTED. — GREAT BRITAIN AND AMERICA TO COMBINE WITH THE LATIN NATIONS AS THE INITIATION OF THE SYSTEM. 1. The question must be taken out of the regions of empiri- cism and dogmatic assertion 220 2. The theory of paper money very imperfect . . . 220 3. The idea of using such money for financial ends solely, must be got rid of. Its issue must, like coin, be made automatic 221 4. What progress has been made 221 5. Fundamental principles always kept in view . . . 222 6. The proposed new plan may be introduced without de- ranging the present basis of industry .... 222 7. Governments must not become bankers .... 222 8. The automatic method stated 223 9-1 1. Suggestions for a scientific and universal system of metallic and paper money 224, 225 t2. General statement of the plan itself . . . . . 227 13. The introduction of the plan presents no serious difficul- ties 228 14. Table showing the new coinage to be adopted . . . 229 15. How it will affect present coinage 229 12. FAOB 211 nines ered, 211 ieter- 212 i 213 214 jress. 2IS 2l6 2l8 2l8 Z MONEY ONETARY ESTED. — VITH THE YSTEM. npiri- . 220 . 220 olely, made • 221 . 221 • 222 It de- • 222 » • 222 . 223 m of 224 ,22s . 227 fficul- . 228 . 229 • • 229 SYNOPSIS OF THE WORK. XXV '^ PACB 16. Present coins very closely approximate new ones . . 230 17. Silver dollars will not circulate so long as one and two dollar notes are issued j.,! 18. Silver coins to be treated as metallic notes, payable in g°'d 231 19. What shall the new coins be called 231 20. Secretary of the Treasury Sherman's views on an inter- national monetary system 232 CHAPTER XXVI. THE PROPOSED UNIVERSAL MONETARY SYSTEM FURTHER CONSIDERED. — SUBSIDIARY COINS TO BE CONVER- TIBLE. 1. National issues of money, metallic and paper, the only method of separating money from finance and prevent- ing frequent stoppages of specie payments . . .233 2. Subsidiary coinage to be regulated by supply and demand, under a system of convertibility 234 3. Such coin, being sold for its face in gold, like paper will never be in too little or too great supply . . .234 4. How the universal monetary system will regulate for- eign exchanges in the same manner as domestic , . 235 5. The motive for using coin as merchandise will be dimin- ished J,. 6. Unreliability of statistics as the basis of economic sci- ence 236 7. The distribution of money, under the proposed interna- tional system, must be left to the natural laws . . 237 8. The formulation of a national law, or treaty, among na- tions not difficult 237 9. Practical men admit the abuses and great evils of the present system, but still cling to it .... 238 10. The deplorable evils resulting from relying too much on statistics as a basis for legislation and trade . . . 238 11. All theories thus founded and acted on crude and mis- leading, such as regulating currency per ca/ifa . . 239 12. The issue of small notes should be regulated by supply and demand, and not arbitrarily 240 XXVI SYNOPSIS OF THE WORK. CHAPTER XXVII. PAR. PACB SOME MORE ECONOMIC FALLACIES. — SEIGNIORAGE A TAX ON MONEY. — GREAT ADVANTAGES OF COIN OVER PAPER MONEY. > 1. Errors respecting the term " Common Measure of Value," 241 2. Object gained by combining the scale of denominations with the measure of value, in the coin .... 242 3. Fallacy respecting money being the only "medium of exchange." Distribution more correct .... 243 4. Misconception about the necessity of money containing metal value. Metal necessary only to give steadiness to money 244 5. The standard and the measure of value separable . . 244 6. Other functions, set up by Professor Jevons and others, for money, merely fanciful 245 7-12. The question of the costliness of money considered, and the fallacy overthrown. Paper money costs the public the same as metal, and only benefits a handful of bankers 245-249 13. The question of seigniorage considered .... 249 14. Money, of all the tools of industry, should be freed from taxation, and state and bank interferences, and be left to the sole action of the natural laws .... 250 15. The supply and demand of and for the precious metals has little effect on money 250 12. INI I. CHAPfER XXVIII. INDUSTRIAL CRISES. — THEIR CAUSES AND EFFECTS. I, 2. Divisions of the subject and term defined. The Latin nations comparatively free from them .... 251 3. Panics not the cause, only symptoms of more remote causes 252 4. Caused by long-continued violations of natural laws of industry, of which panic is only an effect . . . 253 5. The issue forth from bank. It is the oflfice of economic science to find the causes 254 6. Due to the systems of banking, and the issue by banks of paper money 254 13. ^ i iVtfiW'.3»*-J-.i--'i i X!^UU I UJtll» i »mU'i«ili'' ■ l»-MW4l l 4U t* M l tt«-J«'-IWMiW W * l lt i Jll'«'t« I N I i ll^ S\'NOPSIS OF THE WORK. XXVll 2SS How banks inflate values and superinduce speculation . American system of banlcs offers a bonus to invest and speculate in bank stocks and trade in paper money . 256 Banks first inflate, then violently contract, their currency and discounts 257 The cycle of years including a crisis described . • 258 The British panic of 1866 due to long-continued causes, and not the result of " unreasoning panic" . . . 258 The disturbing causes of industry in Great Britain are due to the mischievous policy of the Bank of England, 259 CHAPTER XXIX. INDUSTRIAL CRISES CONTINUED. — THEIR EFFECTS AND REMEDIES. 1. Term used in popular senses, of a continued depression in industrial pursuits 260 2. Diagnosis of the malady recommended .... 260 3. Mr. E. G. Spaulding's description of the crises of 1837- 43. First contraction, then expansion, of currency and discounts 261 4. How bills, discounted, are multiplied .... 261 5. Suspension of all the banks in the United States . . 262 6. Crisis of 1857 from same causes 262 7. Crisis of 1873-78 the most depressing the United States ever passed through 262 8. Experiences in Great Britain. Panic and crisis of 1825- 29. Great increase of banks of issue, and unbounded speculation 263 9. Afford evidences of the truism "like cause produce like effects" 265 10. The extent of the evU grows out of the general practice ' of nearly all classes trading on margins of ten, twenty, or thirty per cent 265 11. Great falls in the market value of goods destroy margins, 266 12. The remedy to be sought in abolishing banks of issue, and establishing scientific issue departments for coin and paper 266 13. 14. French finance and currency the best examples of such issues 267 w ( ill i ! XXVm SYNOPSIS OF THE WORK. CHAPTER XXX. INDUSTRIAL CRISES CONTINUED. — HOW "PROTECTION TO DOMESTIC INDUSTRY " COUNTERACTS THE NATURAL ORDER OF THINGS, — FIRST CAUSING EXTREMELY HIGH PRICES AND OVER-SUPPLY ; THEN, BY RE-ACTION, EX- TREMELY LOW PRICES : THUS SUPERINDUCING AND INTENSIFYING CRISES. PAR. FAGB 268 269 1. What protection aims at and effects . • • . . 2. Who are benefited and who injured by it . . 3. It draws capital and labor from industries not affected by its operation into others to be built up . . . 269 4. Protection a mere excuse for cne class to rob another . 270 5. A revenue tariff inures to the advantage of the nation, protection to a small class only 271 6. An example given in proof 271 7. Protection drew both capital and labor away from farm- ing, prior to the crisis of 1873 273 8. This gave an immense stimulus to protected industries, which led to over-supplies of them, and to undue specu- lation, and, finally, to crisis 273 9. Thus the natural order of things was destroyed . . 274 10. Great Britain less affected by crises 275 11. Over-consumption, or excessive demand, considered . 27^ 12. A better knowledge of economic principles the best remedy 276 13. Protection causes violent oscillations in tlie general indus- tries, and in supply and demand 276 14. France and the United States have prospered in spite of, and not because of, protection 277 rAi 3. ' S- 6. 7- 8. 9- la II. 13. »3- 2. ' 3-! CHAPTER XXXI. INDUSTRIAL CRISES. — THEIR CAUSES AND REMEDIES FUR- THER CONSIDERED. — THE CONCLUSION. 1. Industrial influences and considerations not yet consid- ered 277 2. The part played in industrial phenomena by the wealth and capital saved 378 ig itJiitmummim m BBW 4.1 SYNOPSIS OF THE WORK. XXIX :tion to SIATURAL :ly high ion, EX- NG AND VAOI 368 269 :cted 269 270 tion, 271 271 arm- 273 Ties, )ecu- 273 274 27s 27s best 276 idus- 276 s of, 277 lES FUR- 279 280 280 281 281 282 nsid- ;alth 277 »78 '"* PACl 3, 4. The effect of the accumulation of uninvested capital on the rate of interest, and how it has enabled England and the United States to fund their debts at lower rates of interest 5. Where will the limit of productive enterprises end ? Not reached yet by present processes 6. The tendency to accumulate wealth in a few hands. Ought it to be prevented by taxation? .... 7. Aristotle's views about public tables supplied by the state 8. The question involves the whole fundamental principles of taxation and the function of government . . 9. The faults of the American system of government. Every office in effect put up for sale. 10. Was well enough at the start, but unequal to equitable government now 282 11. Bearing of this subject on industry 283 12. The duty of government to protect the weak against the strong, the poor against the rich 283 13. Methods for directing the investment of surplus capital in more permanent undertakings 284 NOTES. 1. The market value of inconvertible legal-tender paper money in the inverse ratio of its volume. May be held at, or raised above, the par of gold coin by limiting its amount. This proposition disregarded by statesmen and legislatures 28 s 2. The difference between money and other kinds of trading power very distinguishable 286 3. Supply and demand being the only, theoretically and practically, true regulator of interest, all artificial restric- tions and methods are fundamentally wrong, and inju- rious to industry. No pretext for claiming that the trade in bullion is different in its effects from the trade in other commodities 287 4. The balance of trade explained by an old and experienced merchant .... 288 XXX SYNOPSIS OF THE WORK. APPENDIX I. rAK. rAoa 1. Views of M. M. Chevalier on the state prerogative to issue notes, in a letter to the author .... 291 2. A second letter from M. M. Chevalier on the same subject, 293 3. The State Issue Department for India. Letter from Lord George Hamilton, Under Secretary for India, by direction of the Marquis of Salisbury, Chief Secretary. Success of the India note issue 294 4. Denominations of notes issued and amount of paper circulation 295 5. Views of Gen. Spinner, late United States Treasurer, on the currency question in America. His plan for regu- lating the volume of paper money 296 6. Second letter from Gen. Spinner. Bigotry of the press against the national issue of paper money . . . 297 7, 8. Remarks on Gen. Spinner's plan for regulating the natural laws of trade, and an extract from a pamphlet issued by the author in London, in 1874, pointing out the fallacy of the " interconvertible " plan . . . 298 a( APPENDIX II. VIEWS OF EMIKENT AMERICAN STATESMEN AND ECONO- MISTS ON THE ISSUE OF PAPER CURRENCY. 1. Mr. Jefferson 299 2. Mr. Calhoun ' . . 300 3. Daniel Webster 305 4. Mr. Madison 308 i 1 rAoa e to . 291 jject, 393 from a, by itary. . 294 >aper . 29s ;r, on regu- . 296 press • 297 5 the phlet S out . 298 3 ECONO- Y. 299 300 308 MEMOIR OF THE AUTHOR. The author of the accompanying work was by birth a Canadian, the son of a distinguished parliamentarian. His father, the late Hon. John Willson of Saltfleet, Ont., was born of English parentage, in the State of New Jersey, in August, 1 7 76. There were two brothers, Hugh and John, who after the death of their father, and accom- panied by their guardian, in the year 1 790 removed to Canada, and took up their abode at Niagara, where they remained until the majority of John, the younger, in 1797. They then chose the beautiful shore of Lake Ontai'io for a home, settling the district of Saltfleet, where they resided with their families and the friends they had gathered about them, until their deaths, the elder in 1858, the latter in i860. They were men of master minds, rarely fitted by na- ture for the life-work before them ; vigorous intellects, an intense thirst for knowledge, and indefatigable perse- verance, coupled with keen sense of justice, and innate refinement of character. They could not do otherwise than take prominent parts in the country they settled, becoming the champions of both civil and religious lib- XXXI xxxn MEMOIR OK THE AUTHOR. erty ; and while the elder brother toiled for the good of the church, which was so dear to his heart, the ambi- tion of the younger, naturally expanding with the growth and development of the country of his adoption, drifted into, and fought stanchly through a lifetime for, political principles. As early as 1808, so prominently had his superior abilities asserted themselves, he was called to represent, not his own borough in Parliament, but one at some distance from his home, — the West Riding of York (or, as it was afterwards known, llalton), and, biiing duly elected, took his seat accordingly, for the fifth Parliament of Upper Canada. He afterwards represented his own district for a great number of years, both in the House of Assembly and also the Legislative Council, being speaker for a long time, and exercising an influence second to none in the provin> f*. To him is Canada indebted for its common-school Act. He was its originator, and kept it steadily before him for a series of years, until, with untiring perseverance, he succeeded in accomplishing the cherished work of his life, by casting the vote through which it became a law. He was at the time speaker ; there was a tie-vote. He promptly placed a brother member in his chair, and descending to the floor, so closely was the batde foyght, gave the vote which made it a success. He warmly supported all public improvements with the entire spirit and energy of his noble nature, thereby greatly assisting in the development of the resources of his country. He was a man so sound in principles, so pure in action, so -^ ' m good of le ambi- e growth 1, drifted political superior epresent, at some 'ork (or, ing duly arliament his own e House il, being influence hool Act. ! him for ■ance, he rk of his le a law. ote. He hair, and e foyght, 2 warmly tire spirit r assisting itry. He action, so MEMOIR OF THE AirriioR. xxxiii true in allegiance, and so upriyht in character, that though he lived through a rebelliun, and parted with the friends of his early political life in the contest, — at one time fighting almost single handed, in the Legislative Council, the crafty Lord Sydenham in the Act for the Union of the Provinces, which, as a member of the Assembly, he had defeated seventeen years previously, and which he had a/ways opposed on the grounds of difference in laws, religion, language, and institutions, — the faintest taint of political corruption na>er reached his name. He carried to his grave the boast that he was the recipient of no favor from his government that he had not earned at the hands of his fellow-countrymen at the hustings, and which had not been accorded to him by acclamation. Rising as he did by his personal ambition and exer- tions to the zenith of pover and place, his name can never be disassociated from his country, but must always shine out in its history through forty years of parliamen- tary life as that of one of the most remarkable men, as well as one of the most distinguished statesman of his age. Of such a father was born, in the early autumn of 1813, the writer of this work, at the old homestead built in 1797 on the pleasant shores of Lake Ontario. He was the second son, and perhaps of all the numerous family the one who most nearly resembled his father in intel- lectual ability. At all events, the path in life selected secured to him more time for scholarly attainment, and a larger development of his natural tastes and powers, than any of his brothers. XXXlV MEMOIR OF THE AUTHOR. I 1 After receiving tlie best education which his country afforclcil, he chose the law as a profession. Instead of seeking preferment througli tiie power and influence of his fatlicr, then in the zenith of his fame, he went man- fully to work, to hew out unaided, as his Hither had done before him, a name and a place for himself. He pos- sessed an element of character which he did not inherit from his father, — the disposition to compare mankind, not only through the medium of books, nor within the circumscribed limits afforded his father in a life-long resi- dence in one country, but an ambition, through travel, to widen the scope of vision, whilst enlarging and strengthening his powers of mind. He was a close ob- server, a deep thinker, and a logical rcasoner. He used all his God-endowed gifts for the benefit of his fellow creatures. He commenced the study of law at the Law Society of Upper Canada, Osgoode Hall, in 1836; was called to the bar at the Easter term in 1842, and began the prac- tice of law as a barrister. But his health becoming enfeebled through a severe attack of inflammatory rheu- matism, the result of exposure in a terrible storm, forced him almost in the outset of his professional life to relin- quish his work, and seek for a time relief in a milder clime. He went to the West Indies, and for nearly two years lived the greater part of the time in his yacht upon the southern ocean, visiting all the islands, and amusing himself by writing descriptions of all that he saw. Those letters were given to the public through the medium of "The New York Albion," — attracting considerable at- MKMOIR 01' THE AUTHOR. XXXV I country isteacl of uence of cnt man- iiad (lone He pos- ot inherit mankind, vithin the long resi- gh travel, •ging and close ob- He used his fellow Society of called to the prac- beconiing itory rheu- rm, forced e to relin- \ a milder nearly two ^acht upon d amusing ,w. Those nedium of derable at- tention, — and to that journal he was for many years afterwards a constant contributor. Upon his return to his native land, he resumed his profession, taking soon a prominent position in the town of Hamilton, which place he had ciiosen for his residence. He became closely identified with it, and worked zeal- ously for it, even to the close of his life. He purchased a large tract of land contiguous to the city, which was afterwards incorporated within its limits, which he laid out with great taste, and embellished with avenues of fine trees, blocks of fine dwellings, etc. He was the main- spring of all improvement, a public benefactor, giving his time, his means, and his labor without stint to the work. He was one of the originators of the (ircat Western Railway of Canada, and did more than any other man to make it a success, working persistently for municipal aid, which formed the nucleus of the fund with which it was subsequently constructed. Through his instrumentality was built the first larg lotel h-la American. Water- works for the city were projected and public libraries. The second daily newspaper in Canada owed its life to his energy. He held unmistakably "the pen of a ready writer," and it was ever prompt in the cause of humanity. He organized in 1 846 the first conservative journal west of Toronto, in the semi-weekly " Spectator " of Hamilton, edited by the late Robert R. Smiley of that city, giving him at all times his influence and aid, and, when the editor was in failing health, taking entire charge of it for some months before his death. He was chosen by his fellow-townsmen, in conjunction i i 1 1 i It! XXXVi MEMOIR OF THE AUTHOR. with Mr. Tiffany, a prominent lawyer of that place with whom he was associated, to proceed to Washington in the winter of 1847 and 1848, to place before Congress the Reciprocity Treaty. During that winter, through the courtesy of the English Minister, he was presented to the lady who afterwards became his wife. He was suc- cessful with his treaty, which many yeais afterwards, at the period of his death, he was earnestly seeking to re- new, with increased advantages to his countrymen, as the letter which appeared in "The New York Herald," a few days previous to his death, will testify ; for, whilst he lay ill, his home was besieged by reporters of the va- rious New York journals, seeking information from the dying man, who was no longer able to give them items, the matter having been placed by him in the hands of the honorable members of Congress, Fernando Wood and S. S. Cox of this city, for legislation in that body. He placed in the English and other European markets the bonds and debentures of many of the largest under- takings, not only of Canada, but of the north-western States' railroads ; and his work unconsciously, as it were, connecting itself with great enterprises, for which his powers seemed peculiarly adapted, it came to pass unin- tentionally that his professional life passed unobservedly from him, being superseded by that which the exigency , of the times and the development of his country required from the fine perception and indefatigable perseverance of a leader in the cause of science, advancement, and political economy. He went frequently abroad, in fact, and resided there ^*i.li:: v«S.W»;i. MEMOIR OF THE AUTHOR. xxxvn )lace with lington in Congress irough the ;sented to e was suc- erwards, at :ing to re- trymen, as ■s. Herald," for, whilst of the va- n from the hem items, lands of the Wood and jdy. ;an markets :gest under- orth-westem y, as it were, r which his :opass unin- nobservedly the exigency , itry required jerseverance icement, and resided there often for lengthened periods, doing the work that less advanced minds would have found it impossible to ac- complish, but always with a modesty and single-hearted- ness most remarkable. He was appointed by the Canadian Government one of their Commissioners to the Universal Exposition of Paris in 1855. During one of his prolonged sojourns in London he published a work on the " Science of Ship- building," which was most favorably mentioned by the English Press, and brought him prominently into the notice of the Royal Society of Naval Architecture, from which body he received an invitation to deliver before them a series of lectures, which pleasant duty he ac- cepted, as it was greatly in accordance with his taste, it having been with him for many years a favorite study. The ships of the well-known "White Star Line" are built largely after his models and designs, as given in those lectures to the English public. His pen was never idle : he watched with great interest the changes taking place from time to time in his own country, and wrote extensively for "The Quebec Chroni- cle" and other journals on the trade of the country, among other things a series of letters on the " Military Defences of Canada," which was afterwards published in pamphlet form. Soon after the close of the American Rebellion, he made, at the request of the governor of North Carolina, a most interesting and exhaustive report on the wild lands of that State, with a view to their development, through Swiss colonization, to take the place of the old-time slave labor. For many years he XXXVIU MEMOIR OF THE AUTHOR. had been a member of the American Institute, and da- hvered from time to time before them lectures upon the issues of the day most prominent and interesting to the public. The lectures and plans of one season's labor were embodied in a work entided " High Speed River Steamers." Another in March, 1870, " A Plea for Uncle Sam's Money," or " Greenbacks versus Bank Notes ; " in October, 1874, " Money versus Capitrxl and Loans j " and again, at the request of the Congressional Committee on the depression in labor and business in 1879, a work entided " Industrial Crises, their Causes and Remedies," printed at governmental cost. He was a thoroughly well-read man, an accomplished scholar, and a genial gentleman. He was in constant correspondence with the prominent men of the age, not "only in America, but Europe, and through this interesting medium kept himself thoroughly informed upon all the great events of the times. He was a man of feeble health, having suffered the greater part of his life from an organic disease of the heart ; and it was only by the greatest prudence, and carefully hoarded and judiciously used powers of mind and body, that he was enabled to accomplish so much. The last year of his life was given almost exclusively to the writing of the accompanying work. In home life he was most lovable, a kind, indul- gent, affectionate Christian, having been a member of the church of England since his early manhood. He passed from us after an illness of five days of pleuro-pneumonia, on the 29th of April, 1880, and in accordance with a request, oft repeated, to be interred ii MEMOIR OF THE AUTHOR. XXXIX te, and de- s upon the 5ting to the son's labor peed River 1 for Uncle Notes;" in aans j " and mmittee on 79, a work Remedies," near his father, was laid reverently to rest by his brother Masons, beside his honored parent in the country church- yard at Grimsby, Ont., near the place of his birth. ..." Sustained and soothed By an unfaltering trust, approached the grave Like one who draws the drapery of his couch About him, and hes down to pleasant dreams." HUGH R. WILLSON. :complished in constant the age, not s interesting ipon all the in of feeble lis life from only by the I judiciously } enabled to fe was given :companying kind, indul- ember of the five days of [880, and in ) be interred :.::~^:m INTRODUCTION. EVILS RESULTING FROM THE INDEFINITENESS OF TERMS USED BY MOST WRITERS ON POLITICAL ECONOMY. I HAVE endeavored in this work to so qualify and limit the meaning of terms, as to prevent the possibility of mis- conception. The habit of using the same term " indis- criminately," as Mr. Mill deliberately does, or in several different senses, as Mr. Bageat has. done, through confus- ion of thought, in reference to money, greatly detracts from the writings of a majority of received authorities. \rchbishop Whately observes on this subject, " The great defect of Adam Smith, and our economists in general, is the want of definiteness. . . . The terms of this science being drawn frovn common discourse, and seldom care- fully defined by the writen who employ them, hardly one of them has any settled and determined meaning ; and their ambiguities are perpetually overlooked." Mr. Henry Dunning McLeod, whose use of expres- sions and bad logic I have had occasion to criticise, after quoting the above paragraph, severely, but not too much so, remarks, — " Cobbett wrote an English grammar, in which all the solecisms and blunders were drawn from the speeches of peers, and members of Parliament : so we might under- take to write a complete treatise on logic, and every example of logical fallacy should be drawn from the published opinions, either spoken or written, of Mr. ^ll 2 CURRENCY. ' Ricardo, Mr. McCuUoch, Mr. John Stuart Mill, Mr. Sam- uel Jones Loyd (Lord Overstone), Col. Torrens, Sir Robert Peel, and Sir Archibald Allison, on the subject of currency." It would be difficult to find so stupendous a blunder or so complete a misapplication of a term as to treat bills of exchange, or any interest-bearing security, or bankers' checks, as currency. Trading or purchasing power they are j but in no sense of the words, and by no perversion of principles, are such securities money, or currency, — the latter embracing the former. Nevertheless, Mr. McLeod and a host of others have broadly claimed for them the function of currency. Bills of exchange are simple obli- gations set down in writing to specify something to be paid or received ; and, when " discounted," the proceeds are capital, trading or purchasing power. "Trading Power " is tlie term I have adopted ; as that also covers money, currency, and deposits of all kinds with bankers, made available by checks. McLeod, again, after defin- ing " price " to mean the amount agreed to be paid and accepted on a bargain for the purchase and sale of an article or quantity of articles, and " value " as the aver- age of such bargains, continually uses the terms indis- criminately. There is no class of -Arriters who so continually abuse economic terms, or who beget so much confusion of thought, and do so much injury to science and legislation, as the writers of " money articles " for the press. These gentlemen invariably mix up, in the most indiscriminate manner, " currency," " money," and " loans." They per- sistently confound the " money market " with the " loan market," and " capital " with " money," when they speak of the rate of interest on money instead of on capital or trading power. The idea that when a man makes a loan he borrows capital, not money, never occurs to them. ' ■ ^Mmm^ ' INTRODUCTION. 3 r. Sam- ;ns, Sir iject of blunder eat bills )ankers' irer they rversion y, — the ^cLeod lem the )le obli- g to be iroceeds Trading ) covers bankers, ;r defin- laid and le of an he aver- ts indis- lly abuse ision of jislation, These :riminate hey per- le "loan ey speak apital or :s a loan hem. The late Mr. Bageat, the banker, and proprietor of "The London Economist," Professor Price says, used the word " money " in six different senses. The word " in- trinsic," as applied to value, is another prolific instance of the misconception of terms. It is continually used for market value, which is what economists have chiefly to do with. " Intrinsic " refers to quality, or the fitness of a commodity for any particular use or uses. It is what Adam Smith defines, " value in use." But this sort of value does not determine " market value." The market value of diamonds and other jewels is many times that of gold, but gold is vastly more valuable in use. The same is true of steel and iron as compared with gold. The latter is several thousand times more valuable, in the estimate of the market, than steel ; but the latter is infinitely more valuable intrinsically. The one kind of value relates to quality, and is innate ; the other to the price in the markets. The intrinsic value of gold con- sists in its peculiar adaptation for money and jewelry. In Chap. II. I have treated specially of some of the terms, and the principles defined by them, and hope that I have in all cases avoided the habit of using the same word to convey distinctly separate meanings, meant to be conveyed. V^^.' jttj i ^ g fr w '*>* ■' Kn CURRENCY. CHAPTER I. PRINCIPLES AND POSTULATES OF MONETARY SaENCE. 1. Money is any thing possessing market value, which all the members of a community, by common consent, are willing to accept in payment for their labor, goods, lands, etc. 2. All civilized nations, by such common consent, have fabricated their money, or the chief part of it, out of gold and silver, or one of these metals, because of their peculiar fitness for coinage and use. 3. Money is a commodity, and possesses a market value of its own, independent of the material of which it is made ; and, like such material, its market value is gov- erned by its volume, or supply and demand. 4. The value of money, or of any other commodity, is in the inverse ratio of its volume (Chaps. IV XXIV.). 5. By combining the two values, that is, the value of the material (in the case of the precious metals) in a coin, and making the coin and the bullion interconvertible, without charge for coinage, or limiting such charge to the cost of coinage, the value of the coin and the metal will always tend to equilibrium. 6. Money, by its trading or exchange value, distributes 5 4' "^ ^ 9^^M'] . i I f CURRENCY. goods from producers to consumers, and abolishes barter, or the exchange of commodities in specific quantities. 7. Money, being made legal tender for debts by the state, and universally accepted as the measure of the value of all other things, serves to differentiate the value of labor, and all other things having market value in respect to each other (Chap. XXVII.). 8. The stamp of the mint or state serves only to estab- lish the fineness and denomination of the coins, and the legal value set on it by law, but adds nothing to its market value. 9. The denominations so stamped on the various corns, constitute a scale for measuring and differentiating the value of other things, similar in principle to the scales used in measuring length, capacity, and weight. 10. A shilling cannot be made to cir'julate or exchange for a sovereign or half-eagle by transferring the stamp of the mint from the latter coins to the former; nor can a sovereign be held in circulation as a shilling by bemg stamped as a shilling. The "legal-tender" iron money of Sparta passed for its market value as iron. 11. Trading (usually termed purchasing) Power con- sists of the market value of the products of labor in course of preparation, and transmission from producers to con- sumers, and is utilized and dealt in, in the loan market, by means of bills of exchange, and other securities repre- senting the value of goods, and money, which forms a part of Trading Power. 12. Paper Money, if sold for its nominal or face value" in metallic money, to banks and the public, will never depreciate, or be in excess of the requirements of the people, so long as an adequate amount of metallic money, to be determined by experience, is held to insure its convertibility under all circumstances. 13. Inconvertible Paper Money, whether legal tender 1i PRINCIPLES AND POSTUUTES OF MONrfARY SCIENCE. 7 or not, is regulated in its market value wholly by supply and demand, or by limitation of its volume (Chap. V. pars '4. IS)- 14. Inconvertible Paper Money, or Debased or Over- valued Metallic Money, when made Legal Tender, and issued in full supply of the recjuirements of industry, in- variably drives a superior or properly valued currency oul of circulation. This is known as the Gresham Law from the fact that it was first proclaimed by Sir Thomas Gresham. 15. Whenever an inconvertible paper currency has come to fill all the channels of circulation, its Trading Power becomes unstable, and subject to fluctuations in its market value. 16. When the market value of such a currency has fallen below the standard of metallic money, its Trading Power will ; e in the inverse ratio of its volume. 1 7. By withdrawing from circulation a percentage of its volume equal to the percentage of its depreciation, the remainder will return to par. 18. A state issue and sale of notes for gold, at par, all other issues being prohibited, will prevent an over-supply, and avert depreciation (postulate 12). 19. A State Issue Department, by purchasing for coin or notes, all the bullion or metal used as a standard of value offered to it, and coining the same, will be an auto- matic regulator of both kinds of money, metallic and paper, under the action of supply and demand (Chaps. XVII., XVIII.). 20. When a state refuses to receive its own inconverti- ble notes in payment of any part of the taxes levied on the public, it discredits and lowers the value of its obliga- tions /w tanto (Chap. XXI. p. 4). 21. When a superior currency has been driven out of circulation by an inferior legal-tender currency, it will CURRENCY. always be quoted at a premium. When the inferior cur- rency is not legal tender, the reverse will happen, as in the case of California, where the i)cople, by universal agreement, refused to buy or sell by the paper standard. 3 2. When the gap between the two currencies has not become too wide through the redundancy of paper issues, the trading power of the paper, if the volume is held sta- tionary, will be gradually raised to par by the natural laws of industry, or the increaseil demand for currency, caused by the growth and development of business. This is what has recenUy happened in the United States. 23. When the total amount of currency actually re- quired by the people to conduct their industries, as indi- cated by the natural laws, consists partly of gold coin of full weight and fineness, and pardy silver coin, overvalued, and partly of inconvertible paper, held at par of gold, by limitation of issue (which condition of things has existed for some years in France), the three kinds of currency will circulate on the same level of market value, and will possess equal trading power. 24. If either the overvalued silver, or the legal-tender paper, or the two together, be so increased as to make in themselves a full supply for industrial purposes, the prop- erly valued gold currency will be driven out of circulation in conformity with the so-called "Gresham Law," and gold coin will be dealt in as bullion. If the irredeem- able paper be still further increased in volume, as in the United States in 1862, so as to ovenun the demands of industry for currency, the silver coin will folio*/ the gold, and be dealt in at its bullion value, under the action of the natural laws. 25. The first indication of an excess of irredeemable paper currency becomes apparent by a rise in the foreign exchanges and a corresponding premium in gold. 26. Theory and Practice coincide in demonstrating PRINCIPLES AND l-OSltJIAriuS OF MONKTARY SCUINCE. 9 that gold in the most convenient and the best known metal, siiitcil to coinage, for tlie purposes of b, standard measure of value (Chap. V.). ay. In like manner silver has been demonstrated to be the best metal out of which to fabricate the chief part of subsidiary coins, and copper and nickel for those of still lower values. 28. An inconvertible paper currency depends wholly on its volume for its market value, and is deficient in the most important element of a sound currency, namely, the utmost attainable stability. 29. The ratio betwcn the market values of gold and silver, or any other two products of labor, or commodi- ties, where there is no limitation of production, or, in the case of the precious metals, of coinage, cannot be established by law of Parliament, or of all nations ; be- cause the natural laws in the long run assert their ascend- ency over human laws. 30. All legislative attempts to set an arbitrary and ficti- tious value on money or commodities have ultimately failed in free communities, for the people cannot be compelled to part with their labor or goods without ade- quate value. 31. When a depreciated currency has been brought up to the par of gold by the methods of contraction mentioned in former postulates, the superior or natural currency will be drawn back to the country, and, together with new coinage, will enter into circulation along with the paper.' 32. The quantity of money, metallic and paper, under a well-regulated monetary system, used in conducting the ' The large importations of American gold coin (which was sent abroad dur- ing the late war to purchase goods and supplies) during the year 1879, amounting to over seventy millions of dollars, including bullion, notwithstanding a homo production of that metal of fully thirty-five million more and an equal value of lilver, proves this postulate. uj»tJM«idw:ieifiGi^M^d'^%Mflkia^^%fet'<« lO CURRENCY. Ill industries of the people, can only be properly regulated by giving the utmost freedom to the action of the great natural law of supply and demand ; and its volume does not, in a commercial country, vary much from three to five per cent of the gross sum of trading powef, of which it forms a part. 33. The money market, the stock market, the loan market, and the coin, produce, and all other markets or places where any thing is sold and bought, are separate and distinct from each other, both in practice and prin- ciple, and should always be so treated by writers and speakers (Chap. XIII. pars. 6, 7). 34. The prerogative or right to coin money and regu- late its legal denominations, and to issue paper money, belongs to the state, and rests on the same authority and necessity as the right of the state to regulate measures of weight, length, and capacity (Chap. XXI.).' 35. Commodities in transit from producers to con- sumers, or uhimate purchasers, represented by bills of exchange, bills of lading, warehousemen's receipts, bank credits, checks, and other devices invented by bankers and merchants to facilitate the transfer of debts and credits or property, constitute the bulk of the floating capital, or trading power, dealt in, in the loan (improp- erly called the money) market. 36. Floating or trading power, other than that speci- fied in the last postulate, consists of money and capital 1 Daniel Webster, the eminent American sUitesman, in his speech on the cur- rency delivered in the United States Senate, 28th September, 1837, postulated this proposition in the following striking words: — " It is the constitutional duty of government to see that a proper currency, suitable to the circumstances of the times and to the wants of trade and business as well as to the payment of the debts due to the government, be mamtamed and preserved, - a currency of general credit, and capable of aiding the operations of government so far as those operations may be conducted by means of the crcu- Utiilg medium; and that these are duUes, therefore, devolvmg on Congress, m «lation to currency, beyond the mere regulatbn of the gold and sUver coins. PRINC accumi income investet factorie panics' petuate not des 37.' is com houses, forms a or capi seeking constiti ishing ( 38.' terest, < demanc 39- i the rati wages, the nat and res 40. i opposir consum labor a machin investm 41.^ party to is both 42.^ on betw country trade). ed ;at les to ch tan or ate in- md gu- ley, ind of on- of ank leers and ting rop- teci- pital e cur- id this rency, siness, :d and ons of circu- ess, in B." PRINCIPLES AND POSTULATES OF MONETARY SCIENCE. 11 accumulated from the savings of labor, the surplus of income over expenditure, and all other sources not yet invested in more permanent things, such as lands, houses, factories, steamships, and all manner of joint-stock com- panies' shares, or continuing undertakings, which per- petuate themselves under prudent management, or are not destroyed in use. 37. The floating capital specified in the last postulate is commonly held by banks, loan companies, discount houses, and merchants receiving deposits, and hence forms a part of the great fund or ocean of trading power, or capital, called the loan market, and is continually seeking more permanent forms of investment ; and these constitute the "safety valve" of that market, by dimin- ishing over-speculation (note III.). 38. The true and natural regulator of the rate of in- terest, or price paid for capital, is the law of supply and demand. 39. All artificial or legislative methods intended to fix the rate of interest, or regulate the price of capital, or wages, or hours of labor, or its products, are violations of the natural laws of industry, and fundamentally vnmng, and result from ignorance (Chap. XIII. par. lo). 40. Supply and demand in monetary science are the opposing sides of the equation between production and consumption. Supply may be stated as representing labor and capital, aided and set in motion by skill and machinery ; and demand as representing consumption or investment (Chap. IV., on value) . 41. There can be no selling without buying ; and each party to a bargain for the exchange of things having value, is both buyer ana seller. 42. The domestic trade of a country is a trade carried on between the individual, corporations, and firms of such country, amongst themselves (Chap. XII., on balance of trade). la CURRENCY. PRINCl SAtl 43. Foreign trade is a trade carried on between the individuals, corporations, and firms of one country with those of other countries. 44. All trade continually tends to balance itself, or to equilibrium; hence, the so-called "balance of trade" between nations is merely a matter of account between trading firms, individuals, and corporations, which always balances itself, with the same accuracy as the two sides of a merchant's or banker's ledger. Hence, the assump- tion that the foreign trade of a country can be perma- nently in favor of, or against it, is a fundamental error and a delusion (Chap. XII.). 45. All taxes and restrictions imposed by law, or by corporations possessed of large financial power, on one or more classes of foreign commodities, for the advantage and encouragement of those engaged in their production at home, are violations of the natural laws of industry ; and the laws imposing such taxes and restrictions are mere usurpations, by the crafty and powerful, of the natural and inalienable rights of man. 46. The true, fundamental, and self-evident principles of trade are to buy and bonow in the cheapest, and sell and lend in the dearest markets, domestic or foreign, — all other things, such as the character of the pay a::d the security, being equal. The laws of nature, like the laws of nature's God, know no boundaries. 47. All sound trade is founded on the theory of mutual and reciprocal profit and advantage to the parties con- cerned (Chap. XII.). 48. Every thing dealt in, in the domestic and foreign markets, exerts an influence on the price of capital, labor, and commodities (the "precious metals" included), in the exact ratios of their gross market values respectively, or, in the proportion that their respective gross market values bear to the sum total of value as estimated by the measure of money (Chap. XL). 49- T supply tl available XIII. pa 50. Sc derived f only as it the state, or indivi( fundamei 51. Wl of corpoi currency ' market r bodies ^ o leaving it violates tli of equal i 52. Th< cannot pn properly 1 against lial 53' The by operati committee the bank, I three-quarl in public si of such ir metal, whi to issue, a (chapters ( land). 54. The only a few PRINCIPLES AND POSTULATES OF MONETARY SCIENCE. 1 3 49. The primary object and end of paper money is to supply the people with a better and more convenient and available tool of industrj- than metallic money (Chap. XIII. par. 12, Chap. XV. par. 13, and Chap. XVII.). 50. Sound practice and theory demand that the profit derived from the issue of paper money shall be regarded only as incidentaUii<\ secondary; and the delegating, by the state, the right to issue paper money to corporations or individuals, without payment in full to the nation, is fundamentally wrong (Chap. XV. par. 13). 51. When the state delegates its prerogative to a class of corporations to issue paper money, or lends "national currency" to such corporations, at a price below the market r">e of capital, and permits such corporate bodies .0 .. ''ate the volume of such issues, instead of leaving it ; , .^ atural regulator, supply and demand, it violates th, ■ .. . important of the natural laws, the law of equal rights (Chap. XIII. par. 11). 52. The notes of a state or bank, not issued on gold cannot property be made legal tender; and no notes can property be treated by the issuer as good cash reserve against liabilities. a. The Issue Department of the Bank of England is by operation of law. a state department managed by a committee of directors of that bank, on its premises ; and the bank, by a bargain made with the state a century and three-quarters ago, has all its proprietary capital invested m public securities, and is enabled to own the face value of such investment, in paper money, not covered by metal, which it is most obviously improperly allowed to issue, and which constitutes its trading "reserve" (chapters on Theory and Practice of the Bank of Ene- land). ^ 54- The national banks of the United States have, with only a few exceptions, the whole or greater part of their «4 CURRENCY. li. capital invested in government securities, and are enabled to own ninety per cent of the face of such securU.es m Iney or "national currency." which compels them to "ly on depositors, or other folks' capital, for cash re^ se^e ; which is an absurdity, and leads to over-issues and '"trThe plan of allowing banks to issue paper money on securities, is one whereby a man can PO^^es^ h^™jf of a valuable investment, and at the same Ume have i,^ value in money; which is absurd f .s known a^ « Lawism," after its most distinguished advocate, the eminent Scotch financier, John Law. 56. Metallic money represents and ^^"'^'^'^f''^^^^ \ 7 Cc-.i-ible paper money represents meUlhc money. c8 Inconvertible legal-tender paper money represents no hing but the necessities of the people for currency from which it derives its ability to circulate (..^. Mr. J. B Mcculloch's notes on the Wealth of Nations). cTails of exchange and other like securities repre- sentee value of labor performed, or goods and property sold (postulate 35, Chap. III. pars. 14, iS)- r,o The issuing of paper money is not a part of bank ing ;Jrt Itinlny 'mL. connected with the p^per and legitimate business of a banker (Chaps. XV., XVI., "^el: C-'ioney can only safely and properly be in- trus d to the issue and management of the state through ad partmentmade independent of the treasury and of party and business influences other than supp y and Temand, and should be issued only in payment of metal offered for coinage (Chap. XVIII. par. 9) • 62. How much, if any, of the accumulation of rnetal or metallic money, received in payment ^^ -^-; ^^ ^t safely used for governmental purposes, such as the pay ^Int of the pubUc debt, gan only be determined by PRINCIPLES AND POSTULATES OF MONETARY SCIENCE. 15 ■y If ire as lie nts cy, J. ire- ;rty nk- )per VI., observation and experience on the part of the managers (Chap. XIV. par. 13, also Chaps. XIX., XXVI.). 63. Currency is only a term used to indicate money in some form, and ought always to be limited and defined in its use or meaning ; and in no case can it be properly held to cover bills of exchange or any interest-bearing security (Chap. XIII.). 64. Banks and bankers are intermediary agents, or brokers, between producers and consumers (Professor Price on Banking, and Chap. III. par. 13). 65. The principal business of a banker is to turn the market value of goods, in course of production and dis- tribution, into trading power, by " discounting " bills and other securities founded on goods or growing out of industry; and receiving and /ending the accumulated savings of past industries (Chap. III. par. 13, Chap. XIV. par. 3, and Chap. XV.). 66. Nearly all the advantages inuring to society from banking have proceeded from banks of deposit and dis- count ; while nearly all the evils inflicted on mankind by banks are directly traceable to banks of issue, and the over-issues of paper money, and excessive loans (Chap. XV. par. 3). 67. Market value is determined and governed by sup- ply and demand ; which is the resultant or combined effect of competition among productive laborers, aided by capital, skill, and machinery on the one hand, and competition among buyers for consumption on the other hand (Chap. XVI.). 68. Labor, goods, and all other things offered for sale, are continually seeking trading power, or capital; and trading power, on the other hand, is continually seeking labor, etc., for the purpose of being exchanged (Chap. XI. pars. 8-10). 69. Bullion is never used to settle, either domestic or i6 CURRENCY. foreign exchange balances, so long as any other com- modity will afford a profit. It differs in no way, in scientific or practical effect, from other commodities, as an article of trade (chapter on Balance of Trade). 70. In the general trade of the world, bullion, as a rule, affords the smallest profit of any commodity to dealers: hence comparatively few make the business a specialty. "71. There is a most obvious distinction between cur- rency and finance ; the one being a tool of industry, the other a method, or process for conducting businecs opera- tions of nations, states, corporations, private firms, and individuals. Hence, as a logical corollary, the issue of notes should be placed beyond the influences of those who manage finance, which aims at creating and using resources (Chap. XXV.). CHAPTER II. LABOR, CAPTTAL, WEALTH, SKILL, AND MACHINERY. I. These terms and the conceptions they embody may be said to form the chief staples of all works on Politi- cal Economy. They occur in almost every page, if not paragraph, of such treatises*. As material elements they constitute the great forces which, by long and systematic action, have built up the whole material, if not moral, structure of civilized society. The application of these forces to this end — that is, to securing to mankind the largest amount of material comfort and moral culture, which are the foundation of true happiness and content- ment—may be assumed to mark the line between civil- ized and uncivilized man. The science of Political Economy, which instructs us in the best methods of em- LABOR, CAPITAL, WEALTH, SKILL, AND MACHINERY. 1 7 ploying and governing these mighty forces, is one of the very highest import, and ought to form a part of the sys- tem of education in all schools, public and private, high and low, and of all stud ;s whose capacities are equal to comprehension of such _ .cs embraces. There is, I regret to be obliged to say, one jus obstacle in the way of " general diffusion of knowledge " on this most important branch of education. It is the want of a well- arranged and compact system, so compiled as to embody in simple self-evident propositions, or postulates, gener- ally accepted and demonstrated truths. The want of such an authoritative work still leaves us ut the mercy of numerous speculative writers and instructors, who cling with untiring pertinacity to theories exploded and over- thrown a hundred years ago by Adam Smith, in his great work " The Wealth of Nations." On the one hand, we have the old "mercantile theory," which held, that the chief aim of a nation should be to maintain by legisla- tive enactments, controlling the private rights and indus- tries of individuals and communities, such an industrial system as will attract the largest possible amount of the precious metals to its shores. The exchanges, according to this class of philosophers, must be so " acted upon " by the Bank of England, or the Bank of France, or the Treasury or National Banks, of this, that, or the other country, as to override and control the natural laws of trade and industry, and thus retain in or attract to their vaults a certain quantity of gold as a tangible evidence of wealth. On this subject I shall have more to say hereafter. On the other hand, we have another set of philosophers, who propose to cut loose from metal alto- gether, and have only stamped pieces of paper, having no inherent value, to measure values generally, and circu- late and distribute all the valuable commodities of the world, — a currency, in fact, depending wholly for its market value on its volume. i8 CURRENCY. .;»!' 2. With these few general remaiks I set out upon the consideration of the terms set at the head of this chap- ter, and the forces they embody, so far as they bear on the subject of monetary science, as a starting-point ; and, to mark the importance of the subject-matter of this chapter, I submit the following formula or proposition as fundamental : "The civilization of a country is always in the exact ratio of the quantity of labor, capital, and machinery employed in the production of wealth, and the degree of skill, and freedom from artificial and legislative restraints, imposed on their ' employment.' " 3. In respect to these great elements, or forces of civ- ilization, a full and completely reasoned-out system, founded on accurate analysis, would give us just what is so much needed to perfect the labors of Adam Smith, and others who have since his time endeavored to finish what he so well began. Here let me disclaim any pur- pose to attempt such an undertaking. I only aim in these pages to apply certain general principles, which I have postulated for convenience of application and refer- ence, to the present defective monetary systems of two or three of the leading commercial nations of the world. In doing so, I shall use such powers as I possess in ana- lyzing these systems, and pointing out remedies which seem to me to lie on the very surface, and are capable of application without disturbing the industries of any one of the commu.iities in question, and bearing as lightly as possible on mere ignorant prejudices. I shall insist : ist. That we must get absolutely rid of all artificial inter- ferences with the natural law of demand and supply, whether they emanate from banks, combinations of capi- tal of any kind, or the sUte. 2d, That gold is the best material out of which to fabricate our money so far as it is used as a standard of value. 3d, That the state right- fully reserves to itself the power or prerogative to supply tABOR, CAPITAL, WEALTH, SKILI^ AND MACHINERY. 1 9 h le ly t: r- y. »i- :st it »t- all the metallic money needed. 4th, That paper money, being only a more convenient tool of commerce and in- dustry, shall, for the same reasons, be also supplied by the state, and be issued directly to the people in pay- ment of metal for coinage. 5 th, That the state shall create a department clothed witii adecjuate powers, and supplied with abundant resources, to maintain the con- vertibility of all paper money thus issued to the public on presentation to such department, or its agencies, in case any of the metal received for paper shall be sold. 6th, That neither banks nor commercial houses of any kind shall be employed as agents of the state for the issue and redemption of such paper money as the public shall require. 7th, That such state department shall not be under the control or influence of the minister or sec- retary of finance. 8th, That the money department shall be the custodian of ull taxes and loans raised by the state, which shall be paid in by the officers or agents collecting or raising the same, and shall be checked out, under authority of law, by the departments, as at present or as may be provided for. 9th, That all banks now authorized to receive and issue for their own account and advantage treasury or state notes, shall be equitably com- pensated, and their c rculation withdrawn, and the chan- nels of such circulation be filled, pari passu, with state notes supplied direcdy to the public in payments of metal, according to the demand for them. 4. The arguments in support of this briefly stated out- line of a more perfectly constructed monetary system will form the greater part of this work. I turn now to the meaning I shall attach to the several terms used to express the industrial forces of society which head this chapter. First, unless otherwise limited or expressed, I shall use the term labor in the sense of manual labor, uf which there are two grand divisions, usually termed 90 CURRENCY. "skilled" and "unskilled," both of which are more or less governed by mere habitual routine. But the word hiis a far more extensive application. Tlie human race, with the exception of an extremely limited number who may be called the drones, or useless members of society, labor in some form or other with their hands or their brains, their body, their mind, or both. These are un- questionably tlie natural and healthy conditions of both men and women, and none should envy the lot of purely idle people. 5. Caphal and wealth, if not identical in their largest senses, are so nearly allied, or so nearly cover the same ground in the field of Political Economy, as to make it difficult to mark out separate and distinguishing bounda- ries between them. I speak of the terms in an abstract sense. Tt is easy to limit or extend the meaning of either term. I cannot undertake to collate the various defini- tions, for instance, applied to the word "capital" by au- thorities of high standing on economic science. One says, "it consists of the general surplus income over outgo ; " another, that "it is the savings and accumula- tions of labor ; " another, of trade ; others again make an arbitrary distinction between capital and wealth, and insist that " only such things can be called capital as are used in producing and distributing ■ jmmodities." 6. A late writer, Mr. Thomson Hankey, in his work on " Banking and Currency," at p. 44 defines capital to be " any and every kind of accumulation of useful and ex- changeable property." This might be accepted by read- ers of his book as a very good and comprehensive definition ; but Mr. Hankey himself, in the very next paragraph, spoils the sense of it by a new and totally different definition of the word, or of the sense given it in his first description of what he means. He says, " Now, it should always be borne in mind, that no fresh capital MBOl can be T'hich all of incom Accon labor, aid and macl products property, sess mark 7. Fro ing, Mr. a primiti' sumes in labor, th( extracts s rate and I perceptio used tern not true capital in mediately the simpli self, that ' or exchai truth is, ( independ( over expe the discos iron, copi like thingi commodil according nition, as over expe pendent ( LABOR, CAPITAI,, WEALTH, SKILL, AND MACHLNERY. 21 an be ;x- id- ive iXt ■iiy it )W, ital can be obtained, excepting from the same source from vhich all capital is originally derived ; namely, the excess of income or production over expenditure," According to the first definition, the gross prorrt of so-calli and mone as a rule, by the o there is market " i 11. Fk or trading term, is w into moni steamship sessing nr railway, o a very sn: to the Ge paid in nr bankers a paid by t If the wri and agree they mea proper w( power," t world. I that " mo be, whicl of charla UIIOR, CAI'ITAl,, WtlAL'ni, SKIU., AND MACIIINRRV. aj ipi- )ver my. laps any The srty. Iiing )ltal. alth. 2 of redit d as (vhen x>ds, know or l)clicve that the goods will be honestly disposed of to meet such obligation. In reality, then, it must be conceded that the goods themselves constitute the ca|)l- tal employed in their distribution. This imi)()rtant princi- ple is clearly expressed in postulate 35, Chap. I. 10. Before considering the more restricted or limited application and uses of the term cAprrAi,, I wish to speak of the great confusion of ideas prevailing among writers of so-called " money articles " on the subject of capital and money. A knowledge of Political Economy is not, as a rule, among the qualifications of gentlemen employed by the owners and managers of newspapers. Hence, there is all but a universal use of the term " money market " instead of loan market. 11. Floating capital, of which I shall presently speak, or trading power, which is a better and more expressive term, is what is really dealt in. This, though convertible into money, is not money, any more than a railway or steamship share, a house, a horse, or any thing else pos- sessing market value, is money. Neither government, railway, or any other loans are paid in money, except to a very small extent. The great French indemnity paid to the Germans, except seven or eight per cent, was not paid in money, but in bills, which were settled through bankers and the clearing-houses, and ultimately will be paid by the products and savings of French industry. If the writers of such articles would hold a conference, and agree never to speak of the " money market " when they mean the loan market, nor of money when the proper word is floating capita', or, better still, " trading power," they would do an inconceivable service to tlie world. It would at once dispel the monster of delusions that " money is scarce " or " abundant," as thn asc may be, which has on all occasions developed a vast crop of charlatan currency doctors who confound the tool \ i " money " with the tool " capital," which differ from each other as much as a spade differs from a plough, or a steam- engine from the ship it propels. It must come to such a compact, if ever we are to cure incipient statesmen or rank-and-file legislators of the extraordinary delusion that capital, or trading power, which everybody seeks to ac- quire, can be made "cheap," by simply manufacturmg stamped or engraved " denominations " on pieces of paper, and designating pounds or dollars. CHAPTER III. CAPITAL AND "TRADING POWER" FURTHER CONSIDERED, rrs TRANSFER FROM ONE FORM TO ANOTHER. I. Floating cuttal, trading capital, and fdced capi- tal are terms in constant use among economists and mer- chants. To these I have added "trading power" as being a comprehensive and valuable expression, defining accurately what bankers and brokers mostly deal in (see postulates 35 and 36). I have pointed out, in the latter part of the last chapter, the absurdity of calling the thmgs dealt in, in the loan market, money, and of treating money and capital, or trading power, as the same thing. It is very obvious, that, though money is capital, capital is not money, except when it is invested in actual money, which forms only an infinitesimal part of the huge sums meas- ured by money, and which may be, though they seldom are, converted into money. I have defined capital gen- erally, as signifying whatever possesses market value, or will exchange for things possessing such value, in a ratio measured by money. But the various inventions of merchants and bankers for utilizing capital render it desirable, as well as convenient, in discussing questions of mone which C2 people. 2. Fu on analy goods in tribution industry, discount ledgers ( money ; specified give a vc proportic ing pow( make up ment wo economis namely, I dealt in, goods th( and is th sumers. motive p plicated 3. Fix The terir and not I chase, wi postulate there exi ing, exce lands or goods, b< It seems CAPITAL AND TRADING POWER. 25 lPI- er- as ing see tter ngs ney t is not lich eas- lom of monetary science, to define the particular forms in which capital exists, and is used in the industries of the people. 2. Floating capital, as stated in postulates 35 and 36, on analysis, resolves itself into the simple elements of goods in the course of production, manufacture and dis- tribution to consumers ; and the accumulated savings of industry, which exist mostly in deposits with bankers and discount houses, and are credited to the owners in the ledgers of bankers and those keeping such funds and money; or in obligations payable on demand, or at a specified time. It would not be difficult for bankers to give a very accurate statement from their books, of tlie proportions of the two kinds of floating capital, or trad- ing power, held by them at any particular time, or to make up averages for specified periods. Such a state- ment would be pregnant with interest to the scientific economist. It would show what I have postulated; namely, that the greater part, by far, of the trading power dealt in, in the loan or discount market, consists of the goods themselves, which is turned into capital by bankers, and is thus used to produce and transfer them to con- sumers. This trading power, then, constitutes the chief motive power or force which propels the vast and com- plicated machinery of the industrial world. 3. Fixed capital comes next in order of consideration. The term obviously applies only to the things themselves, and not to the trading power used in effecting their pur- chase, which existed originally in the fonns indicated in postulates 35 and 36. I submit, that, in a scientific sense, there exists no such thing as fixed capital strictly speak- ing, except in estates held under entail, inasmuch as the lands or other things of an imperishable nature may, like goods, be used in the loan market by means of mortgages. It seems to me, that the correct and logical method of I i i^th- ■",1 96. CURRENCY. regarding fixed capital is to refer and rigidly confine the idea of it to such things as, in themselves, possess the essential elements of perpetuity, or power of continued existence. Under this category may be classed lands, houses, factories, mines, shares in joint-stock compames, and the tools of industry, which, though perishable, pos- sess the bleraents of renewal out of profits. It is very desirable that writers on economic science should have some better general understanding in respect to the meaning of capital, so as to discriminate between the position occupied, and the force exerted by each kind. 4. Cash capftal, commercially speaking, consists of money, or what can instantaneously be converted into money. No further definition of the term need be given ; and it ranks as a postulate. This proposition wiU receive great consideration when I come to treat of the Bank of England, and its traditional policy of trading on its own share of the note issue, and treating such notes as good " cash reserve," because the Bank can get cash for them, when it ought only to get the securities they are issued on. ,. , 5 The term "cash," properly speakmg, applies only to'. . aey, a certain quantity of which should always be at tne command of bankers and other traders. If it is intended to give it a wider signification, care should always be taken to specify the exact limitation intended to be set upon it. When I use the word, I shall use it in the commercial sense, as defined in the last paragraph. When I use the word money, I mean by it the metallic money made legal tender, and the measure and standard of ^■alue ; and circulating notes used as currency, I desig- as " paper money." 6. While treating of capital, I will now only remark, that when it is invested in money of any kind, it is in- vested in the least profiuble form. Hence, all business men seek something in hand yi tion of m factured, i A certain coinage ai unemploy( bly overth " mercanti be so coni of the pre 7. It cc tal, to ver in its char ever form power or ( lings, pen( the yard, ( value, it These funi no more b sub-divisic the stick c the money we use th quantities by weight, sticks, or serve the ] supply, if purpose, as much capacity t< change. . CAPITAL AND TRADING POWER. »7 rk, in- ess men seek to part with money as soon as they can find something that will yield a profit ; as money in the till or in hand yields nothing. As a general rule, the importa- tion of money, or the bullion out of which it is manu- factured, is an indication of an unhealthy state of trade. A certain quantity of the precious metals is necessary for coinage and use as money. All beyond that represents unemployed capital. This is fundamental, and demonstra- bly overthrows the specious arguments in favor of the " mercantile theory " of trade, which held that trade must be so controlled by the state as to force the importation of the precious metals. 7. It comes properly enough, under the head of capi- tal, to very fully illustrate the boundaries between money in its character of a tool, used to measure value in what- ever form it exists, and things which constitute trading power or capital. In its denominations of pounds, shil- lings, pence, or dollars, or francs, it acts as the scale on the yard, or other measure of length ; while, by its market value, it exchanges for every thing possessing value. These functions, though distinguishable in principle, can no more be separated from each other than the inches or sub-divisions of the yard-measure can be separated from the stick or metal on which they are inscribed. We use the money-scale to measure out capital, a good deal as we use the peck or bushel measure to estimate certain quantities of grain, or the quintal, when we buy or sell by weight. In these cases we only need as many yard- sticks, or bushel measures, or quintal weights, as will serve the purpose. We do not invest capital in a large supply, if a comparatively small number will serve our purpose. Just so is it with money : people will only buy as much of it as is needed to be used in its trading capacity to make small purchases, pay for labor, and give change. As a measure its presence is not needed. This .i. ,1 ; 28 CURRENCY. ■i t ! is equally true in respect to paper money. Its use is mainly limited to its convenience, and, as a saving to the state, to the extent to which the state can safely use the gold it has received in payment for such paper money as the public has purchased. This question will be very fully discussed when I come to consider the right of the state to be the only issuer of such money. 8. While treating generally of capital, it may be ob- served, that in wealthy and wealth-producing countries, where the surplus savings, or profits of industry and invested capital, accumulate rapidly, and tend to a pleth- ora of trading power in the loan markets, it is most desirable that a well-regulated and prudent development of private and public enterprises at home and abroad should be fostered and encouraged, — not, however, by subsidies or bonuses, but by wise legislation, giving the utmost freedom of action and protection against fraud. The plethora of unemployed capital always tends to over-trading and speculation ; and these lead by logical sequence to panics and crises, so destructive to industrial interests and capital. To prevent the accumulation of too much floating capital, it is most desirable to find profitable fields of investment of the more permanent kinds. 9. Perhaps the future development and perfecting of a wisely conceived plan of co-operative associations may lead to a more healthy adjustment of demand to supply, of capital for productive permanent undertakings, and lead to a more smootlily working industrial system. This is a question for those who devote themselves to social and political science, as well as the political economist, to consider. Society now seems to need a safety valve, or, more properly speaking, a governor, to do for it what both these do for the steam-engine ; namely, to regulate the force and the motion of the machine. For this pur- pose, (1& thing. A joint-stoc or unemp thing to fessional common 1 exercise the numei trading la ing sound to some < special off railway co might be { that fraud impunity. can be e: freedom ol clear and ( the state instead of then proc( "goes unvi 10. Ano isted also Rome, is comparativ question w servative n dency is tl communisn order to re lation of p£ wealth and CAPfTAL AND TRADING POWER. 29 ; of may and rhis )cial nist, live, what ilate pur- pose, freedom of action to the natural laws is the best thing. At present the origination and management of the joint-stock companies, which mostly absorb the surplus, or unemployed capital, or capital that pays scarcely any thing to the owner, is left largely in the hands of pro- fessional jobbers, who are too often hardly better than common swindlers. People do not, and perhaps cannot, exercise ordinary prudence in investigating for themselves the numerous schemes presented for the purpose of ex- tracting large profits and commissions, rather than foster- ing sound commercial undertakings. Government has, to some extent, assumed the right to exercise, through special officials, a supervision over banks, insurance and railway companies at home. Possibly such supervision might be extended to foreign investments so far as to see that fraudulent practices shall not be perpetrated with impunity. " Prevention is better than cure " where it can be exercisi-d without infringing the utmost lawful freedom of action on the part of tiie citizen. Where a clear and evident intent to commit a fraud is unearthed, the state may surely exercise its power to prevent it' instead of waiting for the commission of the act, and then proceeding to punish the offender, who too often "goes unwhipped of justice." 10. Another of the evils of modern society, which ex- isted also in ancient times, and especially in ancient Rome, is the tendency of capital to accumulate in a comparatively few hands or families. This, too, is a question well worthy the careful consideration of con- servative men and social-science reformers. This ten- dency is the chief instigation to the other extreme of communism, whi-h seeks the overthrow of society in order to revel in the wreck of wealth and the accumu- lation of past industrial savings. Great accumulations of wealth and capital on the one hand, and extreme pov- erty and deficient employment on the other hand, are the predominating evils in the chief industrial countries of the modem world, as much or more than they were of ancient times. . II. The application of labor to the production of the necessaries and luxuries of life, unaided by capital, is only to be found in the rudest condition of society. The happy medium, it would seem, should be when skilled labor, aided by capital invested in houses, factories, farms, steamships, railways, and all the numerous appliances of modern inventions, is directed by experience and ability. There are no natural reasons for a conflict between capi- tal and labor. They should always act like reciprocating engines on each other; and it is th, main intent of the science of political economy, or of industry, as I have suggested as a more appropriate and expressive term, to differentiate and clearly develop the true methods of applying these forces to the advantage of society. Ben- tham's proposition of "the greatest good to the greatest number" falls short of expressing what economic sci- ence should aim to accomplish. That science should aim to perfect an industrial system that shall provide employment, and the means of comfortable subsistence and homes, for each and all the members of society. All legislation designed to foster monopolies, whatever the pretext, is an assault on the rights of labor, and cer- tainly, in the end, tends to make " the rich richer, and the poor poorer." The protective legislation of the United States has caused the most wide-spread distress amongst the industrial and laboring classes. The Na- tional and the Sutes' Governments have long been sub- ject to the corrupting influences of great capitalists, who seek to control all the avenues to industrial independ- ence. Hence we see the cloven foot of communism treading like a spectre in the rich man's tracks. Such a conditio! part of the 12. But ciples and money me; the loan m dred, or a money; w designate, debtor to c or carried sents, and j currency. must also h value can ( possess sim 13. It wi ing money i of a banker power, whic mental, not goods in o eifect of thi power of go ters of a ce commercial vast system mercial and and other sh river, and st turn, they he into existenc (postulate 6i 14. Profes clear up the e is le d s, )f y- »i- lie ve to of :n- est ci- x\d ide ice All the :er- ind the ress Nfa- iub- Yho ind- lism iuch CAPITAL AND TRADING POWER, 31 a condition of things calls for careful invesUgation on the part of those who are tracing causes from effects. 12. But to proceed with the consideration of the prin- ciples and functions of capital. I have shown how money measures value, and how it metes out capital in the loan market. To instance, we speak of ten, a hun- dred, or a thousand pounds or dollars, as of so much money; when, in truth, it is only capital we wish to designate, and to transfer from buyer to seller, or from debtor to creditor. But the sum specified in the check, or carried to the credit of the borrower, actually repre- sents, and is an equivalent in value to, so much gold or currency. It is a substantial, not a mythical value. It must also be kept in mind that things possessing market value can only be properly measured by such things as possess similar value. 13- It will now be seen, by what has been said respect- mg money and capital, or trading power, that the business of a banker is trading in loans of such capital, or trading power, which, to a very large extent, he has been instru- mental, not exactly in creating, but in evolving out of goods m course of production and distribution. The effect of this wonderful method of utilizing the trading power of goods has given rise, during the last three-quar- ters of a century, to enormous creation of wealth and commercial energy and activity. Without such aid, the vast system of railways now existing in the chief com- mercial and industrial countries, and the numerous steam and other ships traversing every sea, lake and navigable nver, and supported by the carriage of goods, which, in turn, they help to produce, could not have been brought into existence at all, or, at least, not for centuries to come (postulate 64). 14. Professor Bonamy Price, who has done so muth to clear up the question of banking and what a banker does. 32 CURRENCY. has shown that he is, in effect, only a broker between producers and consumers, or dealers in goods. The banker Ukes from the hands of a seller of an invoice of goods the bill of exchange which he (the seller) has ac- cepted in payment, and puts it in his drawer ; and, " presto change," it becomes equal to its face in gold, less a small charge for interest, which he deducts or "discounts" for his profit. He thus becomes the broker between the buyer and seller. When a banker in one country draws on a banker in another country, the same result has been effected. The banker in one countiy represents or acts as broker for a seller ; and in the other country the drawee, banker, or merchant, as the case may be, becomes the broker of the buyer or consumer. This is legitimate banking, with which the issue of paper money has nothing whatever to do, and hence forms no part of sound legitimate banking. Professor Price is right when he analyzes the business of a banker, and finds him to be a broker. , , , • i 15. But for the quickening power of banking ana bankers, by far the greater part of the capital now in active circulation would remain dormant. Goods could not furnish the means for their reproduction and distri- bution, as they now do, or, at most, to a very small extent. The power-loom and spinning-jenny, the forge, the anvil, and the numerous great labor-savinj inventions, would have been deprived of a large proportion of their producing powers, without the aid of the banker. His magic touch turns the products of these auxiliaries to labor into trading power, more efficacious and far less costly than gold. , , u 16. Those who will take the trouble, and have the capacity, to master these important truths, will see how absurd the cry for "more money" is, when it is not money at all that propels the great and complex mdus- tiial systen iiiapprecial capital. I damental ] system of especially i lar the Banl I. No t< to more cor trinsic " va founded wii tinction bet with market and I alwa} on'? can a( Then, we 1 value," and attended tc relate to wl ing Adam S " It is the ulate the p been said, tl 2. A littl may for a ti Then, there alone sets tli cite a passa portance of ing a demot VALUE. 33 ;en ^he of ac- :sto nail for the aws een acts vee, the nate ling und he be a s not tjial system, except in so limited a degree as to be almost inappreciable in the vast ocean of trading power, or capital. I shall go on, step by step, to apply these fun- damental i)rinciples, ami to show wherein the monetary system of the world fails to meet their requirements, especially in the matter of banks of issue, and in particu- lar the Bank of England, and National Banks of America. CHAPTER IV. VALUE. I. No term used by economic writers has given rise to more confusion and bad logic than that of value. " In- trinsic " value and market value are continually con- founded with each other. I have pointed out the dis- tinction between the two terms in the introduction. It is with market value we have to deal in monetary science ; and I always speak of it as " market value," so that no ov. can accuse me of using them "indiscriminately.". Then, we have the contention about "the measure of value," and " common measure of value," which will be attended to in due time. But the great controversies relate to what regulates market value. Ricardo, follow- ing Adam Smith and others, says, — " It is the cost of production that must ultimately reg- ulate the price of -.ommodities, and not, as has often been said, the proportion between supply and demand." 2. A little farther on he says, " supply and demand may for a time affect the market Vc^Hie of a commodity." Then, there is another school who assert that demana alone sets the market value of cominodities. But I shall cite a passage from John Stuart Mill, to show the im- portance of the term, and likewise the desirability of hav- ing a demonstrated scientific definition of it. liiU CURRENCV. 3. Mr. Mill devotes several chapters to the subject; and in his opening one he says, — " The subject on which we are about to enter fills so important and conspicuous a position in Political Kcon- omy, that, in the apprehension of many thinkers, its boundaries confound themselves with the science itself." He further observes, that some eminent economists have even proposed " to call political economy the science of values." I would suggest " the science of industry " as more appropriate and comprehensive for the larger study, and " science of values " as quite expressive of the scope of what is usually termed " monetary science." 4, It would occupy by far too much space to ttempt to cite the arguments of numerous writers, who stand nearly equally divided in numbers between the two prop- ositions stated by Mr. Ricardo. It seems to me that those who claim that the market value of commodities is regulated alone by the quantity or cost of the labor expended in their production, are met at the very thresh- old of their argument by an unanswerable rebuttal of the claim. Labor itself must be admitted to be strictly un- der subordination to supply and demand. But, not to anticipate my argument, I will only here say, that it would be absurd to argue that the productions of labor should be excluded from the ruling principles of labor. If the market value of labor is regulated by supply and demand, the productions of labor necessarily are. The product must be governed by the same principles as those wliich govern the labor of the producer. Then, there are numer- ous auxiliaries to production, such as capital, skill, and machinery, to be taken into the account, which, equally with mere manual labor, are admitted on all hands to be governed by supply and demand. It must be also ad- mitted, that labor, capital, skill, and machinery cannot set a market value for themselves. 5. I use goods are and price 1 a sale, h speak of " changeable as " ungrai I will now those who ca[)ital aloi " In so f is concern fluctuatioii! The cost o of labor, ( duction. variation ir in the prici the wages of labor, ^ quantity ol we are noi market valt that volum value of c£ l''x , or 1; tributes as Mr. McCul confounds market vah 6. Mr. \ tive of th( asserts dog "It is d gives value VAU/E. 35 e f IS )e Pt id P- at is or h- he Ti- to lid lid he id, iCt ich er- .nd illy be ad- set 5. I use "market value " as the average price at whirh goods are sold in an open niaik't at any panic nlur lime, and price as the incident of a single bargain resulting in a sale. Adam Smith and most other great authorities speak of " exdumge value," or, as the former has it, "ex- changeable value," \vhi( ii latter term Mr. Mill discards as " ungrammatical." I prefer the term "market value." I will now let Mr. J. 15. McCuliocli state the case for those who assert that the cost of production in labor and ca[)ital alone regulates market value. " In so far," he observes, " as the cost of commodities is concerned, it is plain it cannot be affected by the fluctuatioris in the rate of wages or in the rate of profit. The cost of commodities depends wholly on the quantity of labor, or the sweat and toil required for their pro- duction. But a variation in the rate of wages is not a variation in the quantity of labor, but merely a variation in the price paid for that labor." It is, quite true that the wages of labor, or the market value of the products of labor, do not increase or diminish tiie amount or quantity of labor required to produce an article. But we are not dealing with the quantity of labor, but the market value and the products of labor. Mu one denies that volume, or supply and demand, sets the market value of capital ; and yet capital is only the savings of I'V , or labor and capital together ; and capital con- tributes as much to the cost of an article as labor itself. Mr. McCuUoch evidently misconceives the question, and confounds quantity of labor with cost of labor, or its market value. 6. Mr. Henry Dunning McLeod is a good representa- tive of the opposite equally unsupported theory. He asserts dogmatically, — " It is demand or consumption, and not labor, that gives value to production." Neither of these proposi- s« OIRRENCY. tions, taken by itself, is true ; ami yet ncitlier is wholly untrue, or capable of accounting for the phenomenon of market value. Without st()pi)ing to inciuirc minutely into actual first cansm which underlie produ. lion and con- sumption, I will pro.x>e puichase, — put it eilhcrway. The very term "market" implies this. One of these represents supply, and the other demand, Tm-: A(.<;kr;(;.vTi(j.v of nARUAiNs, KKsuLiiNfj i.v SAI.KS OR I'URCHASKS, AT STIfUIATKn I'RICFS, SKIS IIIK MAKKKr VAi.uic ov ANY oivKN TUi.Nc, wIiLllier it be lahor, land, a commodity, or any of the long list of articles dealt in in the various njarkets. Though buying and selling are proximate causes, or the results of more re- mote causes, they convey to the mint! the conviction of the truth of the i)rinciples which give and regulate market value. The primary or more remote causes must be sought in competition, or motives for competition, among those who produce, on the one hand, and those who consume, on the other. The necessities, tastes, and passions of men underlie both classes, and stimulate to action. 9. The consideration of the forces supply and demand leads irresistibly to the conclusion that they are equally concerned in producing the result which we are consid- ering, namely, markrf va/ue. In respect to consumption, we must not confme its meaning to actual' destruction, or annihilation, to which by far the greater part of the products of labor are destined, but extend it and its effects to the 7i'///t^//-d!7i/rt/ of things purchased, from com- petition in the markets. When we reach the point where we find that competition, which is the result of numbers, whose ambitious tastes and desires prompt them to action, we shall be carried back to original and first principles, 10, Production emanates from the necessity which impels men to I.ibor, as well as the desire to acquire property and wealth; and supply is the result. Con- sumption also emanates from similar motives. Hence we have the expression of an equation of forces, termed \ I rf—^ .3 s y( 38 CURRENCY. in economic science "the law of supply and demand, which I have before said is a proximate, or secondary, rather than a primary cause. Perhaps it would be more correct to say that the law itself, as so expressed, is m fact the last link in a chain of more remote causes, end- ing in the accurate adjustment of the market value of every thing having such value. Another and very ex- pressive way of defining and postulating the effect of the law of supply and demand would be to designate it as "the natural law of adjustment of values." There is a perpetual struggle going on between the producers and consumers of commodities; and the general markets may be regarded as an immense automatic machine, or system, forever at work adjusting the market value of goods, and establishing the ratio between production and consumption, and distributing labor and its products (postulate 40). o -^u II Though the proposition stated by Adam bmith, that "die quantity of labor expended in production is the ultimate regulator of exchange value," has been accepted by the greater part of economic writers, there seems no more reason for accepting it as a fundamental truth than there is for accepting the opposite theory of McLeod, that "demand alone" produces the phenom- enon in question. I might leave the solution of the ques- tion to stand on the ground I have reasoned out, but for the very dogitiatic assumption of both parties, who have, as before remarked, really "jumped to a conclusion" by simply begging the question. Mr. McCulloch, after citing Adam Smith's doctrine, quotes M. Garnier, a French economist, in favor of its truth, and then pro- ceeds to frame a sort of algebraical formula, to show that production is the only force that sets market value as follows : " Suppose that the commodities A, B, and <^ exchange for each other. If A suddenly rise in value, as compared supposing that some A, or to porary an the reasoi if A conti pared wit either thi duction h for the pr The infer fore, that as it has things. . , tical." 12. Th nothing, to knock forces, wh being brc in order t we shall Some of I tions for > duction a transport ; fashions i ing influe tends to < 13. M:f braical, fo formulate! of every tl who wani 1 s I. is n ■e al >f ti- !S- 6r 'e, i" :er a •o- lat as C as VALUE. 39 compared with the others, the presumption might be, supposing that we were ignorant of the circumstance, that something had occurred to increase tlie demand for A, or to lessen the supply of both. But these are tem- porary and accidental causes of variation, and must, for the reasons stated above, speedily disappear. And hence, if A continued to maintain its increased value, as com- pared with B, C, etc., it would be a conclusive proof, either that the quantity of labor required for its pro- duction had been increased, or that the quantity required for the production of the others had been diminished." The inference he then draws is, that " it is labor, there- fore, that is the true and only measure of the cost, or, as it has sometimes been termed, the real value, of all things. . . . Their exchangeable value and cost are iden- tical." 12. This method of reasoning, it seems to me, proves nothing. It is merely setting up a man of straw in order to knock him down again. If we consider how many forces, which are neither " temporary iior accidental," are being brought to bear on production and consumption, in order to diminish or increase prices, or market value, we shall see how worthless all such illustrations are. Some of these may be mentioned, — such as new inven- tions for diminishing labor ; improved processes of pro- duction and manufacture ; new markets ; cheapening of transport ; discoveries of mines ; and, finally, changes of fashions and tastes. These are, more or less, continu- ing influences on supply and demand, which perpetually tends to equilibrium in its action on values. 13. Mr. McCulioch, as if distrusting his own alge- braical, formula, next quotes a very misty illustration, formulated by Adam Smith, wiio says, "The real price of every thing, — what every thing really costs to the man who wants to acquire it, — is the toil and trouble of 40 CURRENCY. acquiring it. What every thing is worth to the man who has acquired it, and wants to dispose of it, or exchange it for something else, is the toil and trouble which it can impose on other people." There seems to me to be some confusion of thought in this passage, such as is not often met with in the great work, " The Wealth of Nations." To talk of the " price," or " cost," of a thing to the man who only " wants to acquire it," is, by itself, devoid of meaning ; and the next sentence is scarcely less obscure. The most intelligible explanation of these sentences seems to be (construing them in conformity with the doctrine set up), that the worth, or value, of a thing, to him who owns or has acquired it, is measured by the " toil and labor " he would have been compelled to expend in producing the article he desires to ex- change it for, if he had himself to produce or manufac- ture it, but which he is now able to impose on another. Suppose the thing he owns be a horse, which he desires to sell, or exchange for a carriage : the horse is worth to him " the toil and trouble " it would occasion him to construct the carriage himself, but which the ownership of the horse enables him " to impose on other people." But how this proposition proves that the cost of rearing the horse or constructing the carriage sets the exchange or market value of either, is by no means made clear by any interpretation that can be given to the language in question. 14. The contest between the two classes of disputants over these mere dogmas is well exemplified by the fable of the two knights who met on opposite sides of the shield which they found placed in the highway, and quarrelled and fought about the metal, and devices in- scribed thereon, because they had both neglected to examine the opposite side, — a step that would have disclosed to each the important fact that he had been in possession of only half the truth. econom question and den as being supplier money ( terms ar soning n of even feel it ini say some they hav taken to of provii logic of t to his p other sid of the St) was "on dent triu must adi dentonsir 16. N( of a stam tain all t circumsta theories ] into print ject shou suited to task shou ligibly an^ defined n VALUE. 41 15. The late Professor Cairnes, in his work on political economy, seems to have had very misty ideas on the question of value, and especially as to the law of supply and demand. He treats the two sides of the equation as being one and the same thing. He argues that the supplier of goods is at the same time a demander of money or something else. Hence he argues that the terms are convertible. This is what may be called " rea- soning round a circle," and is an exhibition of the fatuity of even learned professors of universities, when they feel it incumbent on their official positions to attempt to say something new, and to publish treatises on a science they have never mastered, but which they have under- taken to teach to others. The late professor's method of proving his new doctrine is exactly on a par with the logic of the Oxford student who successfully demonstrated to his proctor that they were really standing on "the other side of the river." Pointing to the opposite side of the stream, he desired the proctor to admit that that was "one side the river," which, being done, the stu- dent triumphantly cried out, " I have you now ; for you must admit that this is the 'other side,' Quod erat deM07isifandum" 16. Nothing so clearly demonstrates the desirability of a standard work on political economy, that shall con- tain all the established principles of the sciem e, as the circumstance that the world is being flooded with crude theories published by professors who feel bound to rush into print, and engage public attention. The whole su!, ject should be condensed into a moderate-sized volume suited to colleges and schools. Whoever undertakes the task should keep in view the desirability of writing intel- ligibly and for popular instruction, and of having clearly defined meanings attached to terms in common use. ill I i ■11'! iriFi 4a CURRENCY. CHAPTER V. HOW THE VALUE OF MONEY IS SET AND REGULATED, AND HOW IT DIFFERENTIATES OTHER VALUES. I, Money, being a commodiiy, has its market value, without reference to the material it is made of, set by supply and demand ; or, in other words, by the increase or diminution of its volume. When it is made of a material largely used, and acted on by this natural regu- lator, it will be seen the raw material and the manu- factured article will continually tend to differ from each other in their market values. The only method, there- fore, to maintain between the two commodities, money and bullion, a close equilibrium of market values, is easy interconvertibility. Metal only becomes money after it has undergone the process of coinage. It is, conse- quently, necessary to reach a clear perception of what is effected by coinage. The first result is the division of the metal into convenient pieces for handling and weigh- ing in small or large amounts. The next is the legal verification of weight and fineness. But a main element in money is, that it is made by law legal tender for debts. 2. With regard to inconvertible paper money, we know by ample experience that it? market value, or trading power, can be maintained on an equality with gold or silver, or raised above their value, by limitation of vol- ume, or by keeping the amount in circulation below the demands of the people for currency. But experience has also amply demonstrated the impossibility of artifi- cially regulating supply to demand, when such money has been forced on society by governments. Hence man- kind instinctively, as well as from the exercise of reason, have chosen one or both of the precious metals for coin- H ing tlieir the mark( convertib 3. The measuring modities fitness an These coi mere eng money, a politicians ficient in as needfi and metal will nevei afford a n version. 4. The governed, coin as s] limitation tions of i have show tity of coil tries of t market va In excess as bullion stopped, a 5. The principles, of the woi reached, duction, c now substi HOW THE VALUE OF MONEY IS REGUIJVTED, 43 ing tlieir money. Metal, then, becomes the regulator of the market value of money, through easy and cheap inter- convertibility. 3. There is nothing in gold and silver, in respect to measuring and differentiating the market value of com- modities peculiar to those metals, except their superior fitness and convenience for coinaj^e and practical use. These considerations most clearly show the unfitness of mere engraved denominations of dollars or pounds, for money, as proposed by a large number of American politicians and others in other cor^itries. They are de- ficient in the great principle of a convenient governor, as needful for money as for the steam-engine. Coin and metal, when interconvertible in manner before stated, will never vary in market value more than enough to afford a minimum profit, or motive of some kind for con- version. 4. The market value of money, it has been seen, is governed, ist, by the quantity of metal contained in the coin as specified by its denominations ; and, 2d, by the limitation of the amount of all of the various denomina- tions of such coins issued and made legal tender. I have shown, that if such amount is held below the quan- tity of coin, or money, required for conducting the indus- tries of the people, it will necessarily rise above the market value of the metal ; and, if such coin is issued In excess of such demand, the excess will be exported as bullion, and the supply of metal for coinage will be stopped, and an equilibrium of values will ensue. 5. The practice akeady very generally conic rms to principles. Under the regulations of most of the mints of the world, the nearest approach to free trade has been reached. No nation now attempts to " protect " the pro- duction, or manufacture into money, of gold, which is now substantially the measure of value of all other com- i 44 CURRENCY. modities, labor, etc., in most countries. Hence the owners of gold can everywhere take their gold bullion to these money factories and exchange it fo; its mar- ket value in coin, or money, less a small charge, or agio, to cover the cost of coinage (Chap. XXVI., on Seigniorage). 6. In the working of the mints we have a very clear illustration of the advantages of free trade. The law of supply and demand rules omnipotent, and vilhout let or hinderance. All that is needed to approximate a per- fect self-regulating monetary system is to make it uni- versal, and include the issue of paper money (Chap. XXV.). But, as such a system may be far in the future, we must consider monetary principles from our preseiic stand-point, and each nation as a unit, looking only to present exigencies. 7. When, from any cause, there occurs such a diminu- tion in the demand for money as to leave a profit to the bullion broker, or dealer, to resort to the melting-pot, he buys up the coined money so long as it affords him a profit. If, on the other hand, there arises such a demand for money as to leave a profit to the dealer in bullion, he takes his ingots to the mint, and has them coined, or sells them for money. I shall hereafter, in Chap. XL, point out more specifically the scientific distinction be- tween bullion, the raw material, and money, the manu- factured article. 8. Paper money issued for its full face in gold, and the coin being held for its conversion on demand, is governed bv the srne general principles as the metallic money into 'hich it is so made convertible; and, as already sta^ d, there can T)e r 1 redundancy of such money, as ' issued in excess of the pubhc demands — which will seldom occur — will return to the issuer for conversion, and the coin will be exported. HO 9. No I lished, or experience money so than is ac simple re: and cams The old a will buy, c well as in 10. In senseless i: free minta of money, after some of a coun trading ani haste to g crises stop capital. 11. Wh( paper cun only creati processes ( that the gi culation, tl value. It try, but or fancy they and goods standard 1( also deludi labor, acco chants, lab each and HOW THE VALUE OF MONEY IS REGULATED. 45 9. No principles of monetary science are better estab* lished, or more demonstrably proved by long practical experience, than that no more metallic money or paper money so issued, and payable, can be held in circulation than is actually needed for industrial purposes, for the simple reason that capital invested in money lies idle, and cams no profit, so long as it is held in that form. The old adage that "money is only useful for what it will buy, or when it is spent," holds good in practice as well as in theory. 10. In view of these great fundamental truths, how senseless is the clamor for " more money." With nearly free mintage, there will always be an adequate supply of money. The cry for more capital, or trading power, after some long-continuing depression in the industries of a country, in times of crises, brought on by over- trading and speculation, or by the whole people " making haste to get rich," would be more logical ; because such crises stop production, and thus diminish the supply of capital. 11. When the cry is for more of an inconvertible paper currency, instead of for more capital, which is only created by the production of goods and the slow processes of industry, it is simply idiotic, for the reason that the greater the volume of such currency put in cir- culation, the less becomes its trading power, or market value. It adds nothing to the actual capital of a coun- try, but only creates " a fool's paradise " for those who fancy they are growing rich because their houses, lands, and goods are measured by a yardstick of only half the standard length. The laboring man and mechanic are also deluded by the higher prices they receive for their labor, according to this delusive measure. But all mer- chants, laborers, farmers, shortly find that whatever they each and all have to buy has risen in equal proportion to what they each and all have to sell, and none are the richer for " marking up their goods." 12. The market value of an irredeemable legal-tender paper currency is regulated only by the limitation set on its issue. Not having any other regulator, it is not pos- sible for those who supply it, especially where the power and prerogative of the State have been delegated to sev- eral thousand competing banks, greedy of making profit in haste, to regulate its volume properly. Hence it is deficient in the main end and purpose of money. 13. In respect to the effect of limitation in the volume of irredeemable paper money, Mr. J. B. McCulloch has truly remarked, in one of his notes to the " Wealth of Nations," which will be again referred to, that such cur- rency being legal tender, taken in connection with the circumstance that "the people must have a circulating medium," will always make its market value depend on the limitation set on the quantity emitted. 14. With such clear and well-defined principles, in re- spect to the circumstances which govern the market value of an irredeemable paper currency, as those I have pos- tulated, and more fully explained in this and Chap. XXIV., the folly and ignorance of both British and Amer- ican legislators, in "fixing days for resumption," and making preparation," will become manifest. The so- called " Gresham Law," that " an inferior currency will drive a superior currency out of circulation," requires this slight addition : " such inferior currency being issued in excess of the demands of industry." With this amend- ment, the remedy of the evil, or the method for resuming specie payments, becomes too obvious to require argu- ment. Take back the excess of supply over demand, or wait till the growth of industry shall act as a contrac- tion, by increase of demand, and the market value of the outstanding notes will come up to par of gold, and — ';ytTn'S'i;iii«t I H( gold will side with lished fac IS- Th shown, ui Britain, m Report o: the Unite provide f while it re by sale indefinite called "J of the wi Chancellc was about and see v 16. Sci controver gold, mus mon mea system a money fa by the n of natior nearly so the publii coin. Tl ment, hai on the r safe and paid for for its fu paper mi the pleas HOW THE VALUE OF MONEY IS REGULATED. 47 gold will immediately step forward, and circulate side by side with the paper, and resumption becomes an estab- lished fact by a perfectly natural process. 15. The statesmen of France, as will hereafter be shown, understood this law better than those of Great Britain, when the latter refused to act on the Bullion Report of Mr. Homer from 1810 to 1821, or those of the United States in 1874, when they passed the law to provide for the resumption of specie payments, which, while it requires the purchase of gold in immense amounts by sale of bonds bearing interest, also provides for the indefinite increase of national bank notes. This so- called " Resumption Act " is one of the best illustrations of the wisdom of the words addressed by the Swedish Chancellor Oxensticrn to his son, when the young man was about to visit the courts of Europe : " Go, my son, and see with how little wisdom mankind is governed." 16. Science and experience combine to show, beyond controversy, that some valuable and suitable metal like gold, must be made the standard, or governor, and com- mon measure of value, and the basis of any monetary system approximating perfection; and ulso that the money fabricated out of such metal, must be supplied by the nation through a department independent alike of national or other financial operations, and free, or nearly so, of cost for coinage. Under these conditions the public will always supply the metal in exchange for coin. The same considerations prove that such a depart- ment, having no discretion of its own, but bound to act on the natural law of supply and demand, is the only safe and proper issuer of paper money, which must be paid for by banks, as it now is by the people at large, for its full face value in gold; tiius making gold and paper money, like gold and bullion, interconvertible at the pleasure of the holders thereof. 'I ! li ! ■iiU 17. In the matter of taxation to support the state, and provirlf for the adn 'listratiDn of jusi re iind the educa- tion of the jK'oplc, each individual should 1 ■ required to contribute, pro rata, according to his means or in- come, from whatever source. Beyond this necessary interference with natural riuhts, the Legislature should not go. The value of labor, of lands and houses, of stocks, or shares in public and private companies, of all the jjroducts of ' ibor, and of money, metallic and paper, should be k 11 to the regulation of the forces embodied in or expressed by the equation of supply and demand. The observance or violation of tlie laws of industry and of society, which rule and govern men in their social relations, marks the distinction between right and wrong, good and evil. Hence it is the duty of the legislator, the student of divinity, of law, of medicine, and the laborer in all branches of industry, to search out and asff'tain, by anal; sis and logical reasoning, what are the bws of nature in respect to society, which are the laws of G(,d, aud are superior in their inlluences and tendencies to those of man, which so often violate and contemn the superior organic laws. Let all such remember that mere dogmatic teaching will never advance the cause of truth one step. 18. " Standard of value " and " measure of value " are expressions which have distinctive meanings, though con- tinually used as synonymous. The former relates to the kind and fineness of the metal made legal tender by the state ; ard the latter to the scale of denominations, such as pounds or dollars, stamped on the coins. The terms also apply, in like mnnner, to other corporeal things, such as relate to capacity, length, and weight. All these are proper subjects for legislative determination. The Legislature only makes uniform scales, but the laws of industry determine the market values of the tilings NOM measured thing, na find out value of ( other arti indicating money, is denomin; this scak stick to \ grain. 1 mark val tained th eral artic estimate for such i "noi 1. Th being m; without made to market < tained ii face of found if some le; its fallac unanswe written ' I NOMISMA, OK I.F.CAL TENDER, AND M-METAI.ISM. 49 measured. It is thus easy, when we have made one thing, namely, gold, a common measure of value, to find out the ratio that exists at any tune between the value of one article, or class of articles, and another, or other articles or classes. The scale of denominations, indicating the (juantity and fineness of metal in money, is both a "common measure " and a". 1 denominator" of the values of other things. \ this scale very much as we use tlie scale on tl stick to parcel off so much cloth, or the bushel st- 1 n grain, lioth measures are indispensable, — the one to mark value, the other quantity. When we have ascer- tained the value of a given amount or (juantity of sev- eral articles, by the common measurer, we carj readily estimate how much of one must be given in exchange for such given quantity of any other. CHAPTER VI.' " NOMISMA," OR LEGAL TENDER, AND BI-METAUSM. I. The theory that gold and silver money, or coin, by being made by the State legal tender, and both supplied without limitation of their respective volumes, can be made to circulate on the same level of value, or that the market or actual value of the two metals can be main- tained in equilibrium by law of parliament, is, on the face of it, an absurdity. Nevertheless, this theory has found innumerable advocates in the present day. Even some leading bankers and economists in France, where its fallacy has been demonstrated in practice and by unansweral)le logic, have lately put forth vast efforts and written volumes to maintain its practicability as well as > This chapter was written two years after the rest of the work. -•» 1 JO CURRENCY. desirability; and, in the United States, the two Houses of C:ongros3 have stultified ihemsclves by passing a law, over the ['resident's veto, asserting an impossibility, by providing for a fixed and permanent ratio of market ■value, — for that is the only value governing money. To cap the climax of absurdity, the law made it obligatory on the President to invite a congress of nations to make the saiiic universal, — the better to override the great natural law. The " Silver Congress " having accordingly met at Paris, it was found that none of the dilegatea but those from the United States supported the absurd proposition; and the proceedings will ever stand as a protest against the renewal of the proposition. 2. The advocates of this law have for a time laid aside the agitation in favor of an inconvertible paper currency, to be issued in such quantities as " to meet the demands of industry," in order to pass the law "to remonetize silver," by declaring that a dollar containing 41 2^ grains of silver shall p\s and ' e made interchangeable with a gold dollar, woiti- in v..e market at the time the law passed 440, and 1 ow, January, 1879, 460, grains of silver. Nearly all i c speakers, in both branches of Congress, in favor of this law insisted on the example of the French currency, as affording evidence that what they proposed was correct in theory and sustained by practice. But the example quoted is not founded in fact. France has not such a bi-metallic coin circulation as these parties assert. The' bi-metalism of France is a very different thing from the bi-metalism of Congress. The theory that inspired the authors and promoters of this measure is to issue an overvalued silver dollar in order to make a profit to the nation by making it take the place of the lower and more nearly correctly valued gold dollar. This motive was avowed by ncariy all the speakers. The law as passed simply proposes that the nation shall purchase sf^^eisipse ^^^i^^^ms^^i^^ r .%.^r,%, V] uch a satisfy lunder- eek to noney. reatest [uoted, ; value mean- J says, iture." sntion, /^e say re, but by law, ' nomos,' and because it is in our power to change it, and render it useless." The meaning of these pas- sages is simply tiiat the law of the Legislature makes whatever we call money " legal tender ; " and, by changing the legal-tender quality to something else, the former money loses its value as money. Aristotle never asserted that the market value of a metal used as money was the result of "law," other than the natural law. I have already pointed out in the last chapter the scientific and practical fact, that legal-tender money has a market value of its own, created by supply and demand for it, as money, distinct from that of the material out of which it is made ; and this " value " is caused by its uses as a tool of indus- try, and is most clearly what the Greek philosopher meant. " The law " only gives it value as money, not as metal. This is a substantial distinction. I beg to direct the attention of M. Cemuschi, the French banker and economist, to this explanation ; as it is to him I am in- debted for these and other valuable quotations from high authorities which will follow. He is, I think, too good a reasoner to allow his judgment to be warped by the mere opinions of othe-s, which he evidently has miscon- ceived. 9. I copy the following admirable explanation of the origin and principles of money made by Justinian from M. Cemuschi's " brochure " on Bi-Metalism, issued in America to influence congressional legislation on the silver question. The great Roman jurist and economist says, "The origin of buying and selling began with exchange (bar- ter). Formerly money was unknown, and there existed no terms to differentiate merchandise and price ; but every one, according to the wants of the time, and cir- cumstances, exchanged things which were useful : for it happens frequently that one is in need of what another I 54 CURRENCY. has in excess. But as it seldom coincided that what one possessed the other wanted, and conversely, a material was ' elected,' whose legal and perpetual value remedied by its homogeneity the difficulties of barter. This mate- rial being officially (or, as Aristotle would have said, law- fully) coined, circulates and holds its power, not so much from its substance as its quantity. Since then each of the two things exchanged is no longer called merchandise, but only one ; the other is called price." I have shown that money in fact abolishes exchange altogether, by being a common measure of value, which value is set by the price for wliich goods are bargained for in the market (postulate 6). 10. This pithy explanation of the origin and function of money is worth all the long and ingenious theses that have been penned by speculative writers on the subject. Justinian evidently perceived the scientific fact that money indicated the " price " or value of the thing given in exchange. In other words, he perceived how money measures market value, just as a yardstick measures length and breadth, not, however, by mere denomina- tions, but by the actual market value of the coin, as fully explained in last chapter. Hence all well-regulated mon- etary systems provide an adequate supply by intercon- vertibility of the metallic money used as a standard of value, to meet all demands for it by those who possess the raw material, or metal. Locke has adopted almost the same precise ideas respecting the origin and func- tions of money, as shown in an extract from his writings heretofore quoted, when he says that " Men do not sell their goods for mere sounds," or denominations, but for the actual metal contained in the coin, or for some mate- rial, substance, or trading power measured by such coin, the coin and the metal being readily interconvertible. 11. I wiih I could give M. Cemuschi credit for equally NOMISMA, OR LEGAL TENDER, AND BI-METALISM. 55 lat one naterial tnedied 1 mate- id, law- ) much I of the andise, shown ler, by f is set in the inction es that iubject. :t that J given money easures omina- is fully i mon- tercon- ard of possess almost 1 func- mtings lot sell but for I mate- 1 coin, le. equally clear perceptions as those he has enabled me to cite. He says, " all gold and silver produced are money : they are dollars coming from under ground." This is not even metaphorically true ; because the law, or " common con- sent," creates the denomination called "a dollar," and authorizes the fabrication of the coin, and gives it the finishing stroke by making it legal tender. 12. M. Cemuschi also quotes Newton, and evidently misconceives his meaning when he applies his language to support his theory, that money is nothing but the creation of the state, or has no other value except its legal value. Newton says, " It appears from experience, as well as from reason, that silver flows /ww those places where its value (he must mean legal value) is lowest in proportion to gold, as from Spain to all Europe, and from all Europe to the East Indies, China, and Japan ; and that gold is most plentiful in those places in which its (legal) value is highest in proportion to silver, as in Spain and England." In other words, the overvalued metal (overvalued by law) drives the other (rightly or under valued metal) to countries where it is undervalued, or where its value is set by the natural laws. 13. Newton then points out how to remedy this evil, which is to make the legal valuation to coincide with the natural value of the metals. By this method, however, only a temporary equilibrium of value can be established, because of the influence of the natural laws, which con- tinually cause the ratio of the market value between the two metals to vary and fluctuate, just as in the case of otiier and more perishable commodities, — silver itself having fluctuated twenty-five per cent in half a dozen years. 14. But why, in the name of common sense, and monetary and industrial science, should such a system be adopted, or, where it exists, be continued, when the » I 1 I| M>. » 56 CURRENCY. simple remedy has long ag( been found, and is being carried out with perfect suci ess in so many of the com- mercial countries of the world? That remedy consists in making gold the legal measure of the market value of silver and all commodities, labor, lands, etc., or, in other words, making the legal (or coin) and tl.o natural value of gold to coincide by interconvertibility, and using silver and other less valuable metals to supply just enough subsidiary coins to meet demand. (The best method to regulate such coins will be found in Chap. XXIV.) This is the only bi-metalism admissible by demonstrated principles of science, and is in perfect accord with the practical experience of commercial nations. 15. The new law of Congress, if not repealed, cannot fail to produce infinite mischief. In the first place, by seeking to pay old debts with a depreciated or over- valued metal, it casts an ineffaceable stigma on the honor and honesty of the nation. In the next place, if the law should remain on the statute-books of the nation for a few years, the overvalued silver will do exactly what Newton says of it : it will drive gold out of circulation, and the United States will have a currency like that of India, China, and Japan, wholly of silver, or paper con- vertible into silver. The inconvenience of such a cur- rency, both in conducting home trade and industry, and in settlement of foreign exchanges, cannot be readily estimated. Merchants and bankers, as well as exchange brokers, will have to keep a pair of horses and a lock-up van to transport their metal daily from their counters to places of deposit. A lady going a-shopping with five i hundred dollars will require to have a porter or a foot- man to carry thirty pounds avoirdupois weight of silver dollars ; or, if she has only the modest sum of a hundred dollars, she will have to carry the weight of an ordinary fc ■iOTiLitiiiTt'**™ f "''"'^""''•' " 1 being 2 com- :onsists t value or, in natural y, and ply just lie best 1 Chap, ible by perfect mercial cannot lace, by >r over- e honor the law )n for a ly what :ulation, that of >d7- con- i a cur- try, and readily xchange lock-up nters to irith five • a foot- of silver hundred ordinary NOMISMA, OR LEGAL TENDER, AND ni-METAUSM. 57 brick in this inconvenient metal. Then, again, think of the unfortunate traveller, who has to carry more or less cash with him! What is he to do ? Mr. McKay should rewrite his book on popular delusions, in order to chroni- cle and do justice to this " silver craze." It will certainly come to be recorded as one of the wildest of delusions. 1 6. We shall, no doubt, be told by the silver-men that the practical inconvenience of a silver standard and currency will be averted by the adoption of a greenback or legal-tender national paper currency, convertible into the new, overvalued, silver coins. But this would only partially meet the question of convenience, and not at all the evils of a metallic standard that has fluctuated twenty-five per cent in four or five years. Only that long ago an ounce of silver was worth sixty-one pence in London. In less than three years it fell to forty-seven pence per cunce, and has since then oscillated between those figures ; which shows a total variation in price, as measured by gold, the more stable metal, of over twenty- five per cent. This is much worse than the fluctuations in greenbacks during the last five years. 17. As to the question of economy in adopting a cheaper metal, that, too, is a delusion. It is a more costly metal, when its ratio of value is considered, than gold. It takes fifteen times (more or less) the quantity to make it equivalent in value to gold, and fifteen times the cost to manufacture to transport and handle ; and, of course, it is subject to fifteen times the risk and wear and tear arising from use. 18. On the question of morality, the overvaluing of silver coin is exactly on a par with the alleged practices of the Jews, during the long period of the "Middle Ages," of "sweating," "clipping," and "filing" of coins, for profit, and that of many despots, who issued coins of half their former legal weight, and compelled their M! ;l : '! b8 CURRENCY. subjects to accept them at their old denominational weights. This infamy now stamps every man who voted for tlie silver bill in the American Congress, unless he can plead ignorance. 19. M. Cemuschi is a representative bi-metallist, who argues that the law can set and maintain a fixed and unchangeable ratio between the two precious metals. At pp. 27 and 28 of his published evidence before the Con- gressional Commission on the silver question, issued in 1877, under the title, " Nomisma, or Legal Tender," he says, " // the relative value of gold and silver has always been determined by the conflict of the several legisla- tions, how can we deny, that, when the legislations shall be everywhere and forever the same, the relative value of the metals will always remain the same ? " He then goes on to show, in order to avoid utter stultification, that there exists what is purely an imaginary distinction between the principles which govern the market value of imperishable and perishable commodities. He says, " to fix by law a relative value between sugar and coffee, between two perishable commodities, or a legal tender and a commodity, would be a ridiculous attempt." But " nothing," he observes, " is easier than to fix by law the relative value between two everlasting legal tenders, gold and silver." Having in view the principles I have postu- lated, I could not find words so well selected arj those quoted from M. Cemuschi, to push his own theory to the argumentum ad absurdtim, 20. Even if the production of both these "everlast- ing" metals was stopped, the demand alone for con- sumption, in all its numerous ways, would continually change and fluctuate. Taste, fashion, and the cunning of workmen, in designing new and pleasing ornaments and works of art out of these metals, would keep their market value continually fluctuating or oscillating up and :X. ~—m.nmfl>^- iHonal I voted ess he ;t, who d and Is. At e Con- ued in :r," he always legisla- s shall ! value [e then cation, inction : value e says, coffee, tender • But law the s, gold postu- i those :ory to /erlast- r con- inually unning Eiments p their up and NOMISMA, OR LEGAL TENDK.R, AND In-MI•:I•ALIS^^ 59 down. The laws of nature are more " unchangeable " than those of the " Mcdcs and Persians," and do not admit of such exceptions as M. Cx>mus<.hi thus boldly proclaims. His assertion is a mere brutuin /ulmeti, on a par with the " Tope's bull against the comet." 21. I fail to see one single advantage established, even if the arguments of those who favor the proposed bi-metallic currency were logical and true, that is not better attained by a gold standard of value. On the other hand, I see dishonor, disgrace, folly, and vast pub- lic and private inconvenience as certain to arise from the carrying out of the new law of Congress as that the sun will continue to rise and set. 22. The following fluctuations in the market value of silver, indicating its trading power at various periods since the discovery of the silver mines of Potosi in 1545, have kindly been furnished me by Mr. Henry Kemp of Brooklyn, a Scotch gentleman well versed in correct economic principles. "Silver fell in price," says Mr. Kemp, "after the opening of the Potosi mines, from 1545 to 1697, 29.4 per cent; then rose in value, as compared with gold, from 1697 to 1776, 5.52 per cent; then it fell in price, from 1776 to 1848, 6.9 per cent; then rose again, from 1849 to 1859, 4.25 ; from 1859 to July, 1876, it fell 25.5 per cent; and from July, 1876, to 8th August, 1877, it once more rose 16 per cent." I add, since then to April i, 1879, it has fallen 10 per cent ; and this is the metal that the law of Congress in a few years will substitute for gold as the American standard of value. 23. The following extract from a letter addressed by M. Cemuschi, from Paris, to his friend, Mr. B. F. Nourse of Boston, during the agitation of the silver bill in Con- gress, is given in justice to him, and as sustaining my statement respecting bi-metalism in France and the effect of the American law : — Nil 6o CURRENCY. " It appears that the United States Government has mailc some engagement with the syntlitatc of the 4 per ccntn, and possibly the President will veto a bill rc-opcning the mint to the free coinage of silver. 13ut let us suppose that the Congress resists the veto, and that the ( ' 1 silver dollar is rehabilitated in full. What the conse- quenccs ? "All the new silver of Nevada and the old silver of Clcrmany would be brought to the American mini for coinage, and ;ill gold would be exported from America to Europe. Against this asser- tion 'The Cincinnati Commercial' quotes France, «lierc silver and gold circulate side by side, and fimn where gdd is not ex- ported. That is true j but why is gold not cxportcil from France ? Hecausc silver is not coined, and consctiuently no silver is intro- duced into France. Should France re-open her mint to silver, she would absorb the American and German silver, and lose her gold. Hut, with the United States coining silver at the ratio 16, France cannot rc-opcn her mint for coining five-franc pieces, whicli are at the ratio 15J; and then the United States will sell at a premium all their gold dollars against silver. In fact, the United States will become a silver monometallic country, just the same as Eng- lish India. " llerc it is asked, what will then be the relative v.iluc of silver and gold on the general market, csijccially in London ? I answer, a/ithiys fliictiiatiiig. While America has gold to give in e.xchange for silver, the value of silver can be high. When the American gold shall be exhausted, the value of silver will be weak. Various foreseen and unforeseen circumstances will later determine con- tinuous changes in the respective value of gold and silver. With- out a bi-mctallic law fixing the same legal ratio in the principal countries, the relative value of gold and silver cannot be more stable than the relative value of sugar and coffee." 24. One of the chief arguments urged by the bi-metal- h'sts is, that their theory, if forced into effect by the arbi- trary power of a combination of national governments, regardless of the natural laws of industry, would create an artificial market for silver. According to these gentle- men, the depreciation of silver would thus be arrested. They propose to compel the people of the whole civilized world to use a tool that is not the best, and which they refuse to use if they are allowed to choose for themselves. NOMISMA, OR I.F.OAI, TF.NDER, AND DI-META^IS^t. 6 1 The public needs a moderate supply of these tools for special uses, — fur change, or fractional currency, for small purchases, and car and oninilnis fares. liiit tho bi-nictalli.it says, " You nuist take more. You must em- ploy a servant or a cart to carry your money, if needful." The plan overthrows the theory of making the two kinds of metallic money interconvertible, ami leaving it to the choice of the jieople to decide how much of each kind they will have, which is the true one, founded on natu- ral laws. 25. All laws made to force on the people the use and consumption of commodities they do not tlesire is the same as laws to compel tiicm to part with their labor and goods at prices to be arbitrarily set by the state. The true theory of bi-metalism is to let the people decide how much of each kind of coins they reciuire. The reader will find this more fully set forth in chapters XXV., XXVI., and XXVII. ; and M. Cemuschi and other bi- metallists are respectfully requested to study those chap- ters, and indeed the whole of this work, before attempt- ing to answer the rea; ans offered in this chapter against the correctness of their theory. When they come to comprehend the excessive absurdity of making any but the fittest metal the standard and meib^ire of value, they will perceive the ecpial absurdity of attempting to en- hance the market value of another metal, unsuitcd for any but a small supply of subsidiary coins, by giving to it, by law, a fictitious value. The fallacy of the theory is so glaring, so at variance with common sense, and so mischievous in it.; principle and practice, that the terra " silver lunatics " can hardly be regarded as too severe a characterization of its advocates. i 69 CURRENCY. CHAPTER VII. THE ORGANIZATION OF THE BANK OF ENGLAND. — THE LAW, THE FACT, AND THE SCIENCE OF THE CASE. 1. The coi spicuous position which the Bank of Eng- land occupies in the monetary and financial affairs of the world, and the vast influence and prestige cf the bank itself, render it indispensable to consider very fully the principles involved in the plan of its organization, and the policy of its managers, which has become traditional. This chapter will be devoted to the former, and to show- ing that the policy and practice are at variance with the true intent and scope of the law, and with the principles of sound banking. 2. I have examined, with great patience, many of the works that have been written on this prolix subject since the passage of the Act of 1844, known as Sir Robert Peel's Act, which gave rise to the policy ever since carried out without change, and which seems to have made of the bank a mere automaton, so far as the issue and circulation of notes are concerned. What I propose to show is, that the Bank Act of 1844 leaves to the bank a large scope of discretionary power in respect to the issue and use of notes, which it has never exercised ; and that to this circumstance is mainly due the chief evils of the British monetary and financial system. 3. Let us first see what the /aia says, and next what are the /acis in respect to its interpretation, and the prac- tice under the law ; and finally what science suggests as the true policy. The law says, "That from and after the thirty-first day of August, 1844, the issue of promissory notes of the Governor and Company of the Bank of England, payable on demand, shall be separated and g Mir<« w « iH > »w >» r ii >*aK»! •PW" n !i ' f ' "HE LAW, of Eng- •s of the he bank fully the ion, and iditional. to show- with the irinciples ly of the set since r Robert 'er since to have the issue [ propose the bank ct to the sed ; and hief evils next what the prac- iggests as after the roraissory Bank of ated and THE ORGANIZATION OF THF, BANK OF ENGIAND. 63 thenceforth kept wholly distinct from the general banking business of the said Governor and Company ; and the business of and relating to such issue shall be thence- forth conducted and carried on by said Governor and Company in a separate department, to be called the Issue Department of the Bank of England, subject to the rules and regulations hereinafter contained." The Act then specifies that the " Court of Directors may, if they think fit, appoint a committee or committees of Directors, for the conduct and management of such Issue Department." The second clause provides that "there shall be trans- ferred, apportioned, and set apart by the said Governor and Company, to the Issue Department of the Bank of England, securities of the value of fourteen million pounds, whereof the debt due by the public to the said Governor and Company shall be and be deemed a part ; there shall also, at the same time, be transferred, appropriated, and set apart by the said Governor and Company, to the said Issue Department, so much of the gold and silver bullion then held by the Bank of England as shall not be reqinred by the Banking Department thereof." I have italicized the last words, as they will be made to explain wherein the bank has failed to meet the spirit of the law, and to demonstrate the fundamental error of the practice of the bank. 4. The Act next provides that the Issue Department shall deliver to the Banking Department a gross amount of notes, including those in circulation and in hand, equal to the ^,^14,000,000 of securities which the Bank- ing Department has handed over to the Issue side, along with "so much gold and silver bullion" as the bank did not require for its business. 5. It will be observed that the law is mandatory ; the word " shall " being used in respect to the first step in organizing, and fixes the amount of notes and securities 64 CURRENCV. at ;^i 4,000,000 ; and the first statement issued under it on the first day of September, 1844, sets out with the maximum. But the next provision shows, that, after the organization on the distinct basis specified, the bank directors, as managers of the Issue Department, were at liberty to diminish the note issue to the bank pari passu, with the amount of securities held or deposited with the Issue Department. The Act says of the notes so to be delivered to the Banking Department, they "shall be deemed to be issued on securities, coin, and bullion, so appropriated and set apart to said Issue Department " (that, of course, means the entire notes issued) ; and it further makes this important provision, which the man- agers liave totally ignored, and treated as a dead letter. " It shall be lawful for said Governor and Company to diminish the amount of such securities, and again to increase the same to any sum not exceeding, in the whole, the sum of fourteen million pounds, and so from time to time as they shall see occasion." 6. T!ie points I propose to make may as well be stated here. They are, that by inference, if not by the express words of the law, the bank possesses full and discre- tionary power in respect to the amount of " gold and silver coin and bullion " to be held for the conduct of its banking business ; and also might increase and diminish its note circulation within the specified limita- tion of ;^i4,ooo,ooo (now increased to ;^i5,ooo,ooo by the lapsing of country bank circulation provided for by the Act), and thus control the outgo and inflow of notes according to the indications of supply and demand. I shall also show, that, by not observing and acting on such indications, and by treating its own notes issued on securities, which, like all the note issue, are not legal tender at its own counter, as good cash reserve, the bank trades on too small a margin of actual •*t V '' < 'P* ,, > «; T' * wjahMin a wjnmAjw^6(< ? THE ORGANIZATION OF THE BANK OF ENGLAND. 67 10. In the face of the clear and precise language of the Act, which authorizes the bank to lower and raise the amount of securities in the Issue Department, and, as a matter of course, to make similar changes in the amount of notes issued thereon, the following extract from the treatise of Mr. Thomson Hankey, a former Governor of the bank, reads somewhat strangely: "It must always be borne in mind, that, since the Act of 1844, the directors have had no control over that part of the currency which consists of bank notes ; that is, they have had nothing whatever to do with the amount at any time in circulation in the country." 11. This assertion, which lies at the foundation of the error of the bank, is true neither in fact nor in principle. The notes held in the Banking Department are in circu- lation the moment they leave the Issue Department, just as much as when they pass into the hands of other banks and the people at large, and are only evidences of the bank's indebtedness. They are in no sense cash in the hands of the bank. How, then, can they be so treated ? True it is, by a legal fiction, the bank ceased to be a bank of issue after the passage of the Act of 1844 ; but in fact, and in logical sequence, it is a bank of issue as much as ever, as to the notes issued on securities. The bank is, in fact, liable for all the notes it gives out. The only effect of the Act is to compel the directors, in their capacity as managers o*" the Issue Department, to hold the " securities, coin, and bullion," on which the law has "deemed" the notes to be issued, as sacred for their redemption. The law cannot change the scientific and actual fact that the bank has all its capital, and the "rest" fund besides, invested in the securities in ques- tion. 12. Mr. Leonard Courtney, M.P., author of the excel- lent article in the " Enyclopaedia Britannica," ninth edi- )• ' f iBiiiiiiipgfB 68 CURRENCY. tion, on Banking, takes the same view in effect on this subject ; namely, that the reserve of notes held in the Banking Department "are just as much in circulation as if they were in the pockets and tills of the people." To have followed this clear and important admission to its logical result, would have forced Mr. Courtney to the conclusion I have reached and presented, respecting the impolicy of the bank treating any notes it may hold up to the statutory /imitation the same as actual cash. Whatever it may occasionally hold, above that limitation, may, in effect, be so treated, because such excess of notes has gold behind it in the Issue Department. 13. Mr. Courtney, not having a clear perception of the operation of the Bank Act, but seeing the confusion of ideas resulting from its interpretation by the managers and the city, suggests a removal of the note issue to some other locality as desirable, in order to change the practice of bankers. He says, "the purely mechanical act of removing the issue of notes from Threadneedle Street would make the facts of the situation plain, and would bring about an alteration of conduct among London bankers, so that it should conform to the facts thus per- ceived." If the present system of issuing notes, and calling them " Bank of England Notes," and holding the bank legally liable for them, is to be continued, Mr. Courtney's sug- gestion seems to me impracticable without a complete change of the law and practice. But allowing it to be susceptible of execution, — that is, "the mechanical act of removing the issue of notes from Threadneedle Street," — we will suppose to Whitehall, — the bank itself would be the first to perceive the error of its present system of treating the evidences of its own instant or present liabil- ities as good trading reserve. The bank cannot, on any principle of legal fiction or commercial casuistry, treat m'l.wwwjanjjbuu i wjw infj a p ^ gwiwar" on this in tlie :ulation )eople." >sion to r to tlie ing the lold up 1 cash. itation, :ess of 1 of the iion of anagers :o some jractice act of I Street , would London us per- ig them legally ^'s sug- jmplete t to be ical act Street," f would tem of t liabil- on any y, treat THE ORGANIZATION OF THE BANK OF ENGLAND. 69 a security for its own indebtedness as reserve. As to the securities held by the Issue against the Banking Depart- ment, they are, pro tan'to, a guaranty of the note circula- tion ; and so many of the notes, in amount, as are issued on securities, must be held to be only Bank of England obligations in effect and in principle. 14. As to the claim of Mr. Hankey, "that, since the Act of 1844, the directors have had no control over that part of the currency which consists of bank notes," that is only true as to those issued on metal. The law sets no limit to the amount of notes issuable on gold and silver coin and bullion. The issue on gold coin, or for gold bullion for coinage, is, in fact, the only true and scientific method of issuing notes ; as I shall fully demon- strate. I cannot agree with those who point with satis- faction to periods when a large part of the bank's share of the notes are lying idle, on the ground that the " ratio between reserve and liabilities " is thus increased ; nor can I share the alarm which these gentlemen affect to feel when a sudden demand from abroad, or the country, for, say, ten of the twenty-five or thirty millions of metal held in the Issue Department, lowers the ratio of note reserve to " the danger level," when the managers make spasmodic efforts "to stop the drain," and bring back the fugitive metal by raising tlie rate. The working of this plan will be vividly perceptible by going a step farther in the direction of a coming panic, which has been hastened, if not originated, by this sudden and sharp rise in the bank rate above the market rate. It is then that people rush in for discounts to meet possible future requirements for capital, which otherwise might not occur. Depositors call for notes and coin to be able to meet apprehended calls on them. Thus the reserve melts away "like the baseless fabric of a dream." It needs no argument to prove that this is neither science nor good practical bank- ti n %^\ »»iig'i a s' n^ l aMiMm»iJ>A > M !y'' -n^' i* w»wiw^ *^s^sKJE3Er-5??"*^n»3P^s/sr-? THE ORGANIZATION OF THE DANK OK ENGl^ND. 7» nistaken nk man- t, of the agers of ig notes I to sell he coin, t by the erchants and out 'ith such by mer- If would Govern- f a few :s. The Depart- id when m share loan to jle from ' goods, from its lause of itaining, sue and rds, the 5 should ccept in t to be consti- nd con- says, — "The first clearly admitted duty of every deposit banker is always to retain at his command, /'/( cash, a certain amount of his deposits. When this amount has been kept at about one-third of the whole [liahilities, he should have added), and the remainder of the deposits invested in what are ordinarily good banking securi- ties, . . , no banker need apprehend difficulty." Again, he says, "The mercantile and banking community must be undeceived in the idea \\\-3.\. promises to pay at a future date can be converted into immediate payment without a supply of ready money." 17. The point I make against Mr. Hankey and the bank theorists generally, is, that, because the law does not discriminate between notes issued on securities and notes issued on metal, tiie bank treats the whole issue as if it were made on metal. In this particular the law, as well as the practice of the bank, is at fliult. It is my pur- pose to show conclusively, however, that the bank has it in its power, by diminishing the amount of notes issued on securities, and holding a larger amount of metallic money in its Business Department, to obviate much of the sensitiveness it now perpetually engenders in indus- trial circles by its efforts to regulate the trade in bullion by raising and lowering the rate. The best thing to be done is to sell all its securities, and bank on cash. That is the only true remedy for the evils in question. 18. To sum up the arguments on which I rest the con- clusions I have arrivetl at respecting the treating of notes founded on securities as good trading reserve, — I St, The treating all the notes as " issued on securities and gold and silver coin and bullion," as if they were issued only on metal, is inadmissible, both as a practical and logical conclusion, and is a fundamental error on the part of the bank. 2d, Notes issued on securities are no better, for a trading reserve, than the securities themselves, which are always lowest in market value when the reserve is most needed, and when their sale in large amounts would greatly lower their itiarket value. ssr5s*iT?4S5?¥^^w-a*** 7» CURRENCY. i 3d, If the plan of investing all the trading capital of a bank in government securities is a safe and good one for it, it is equally safe and good for all business houses, and, as before observed, for all other banks. 4th, This inevitable conclusion involves the absurdity of everybody investing their entire trading capital in such, or equally safe, securities, and conducting their business on borrowed means, as the Bank of England and the national banks of the United States do. 1 9. Those who accept the dogmas of the Bank of Eng- land as infallible, like Mr. Hubbard, who, in a speech in Parliament, said, " the practice of the bank is perfect," and that the evils of the British industrial system " are wholly due to bad trade," will treat these logical con- clusions widi scorn, simply because they are logical and unanswerable. But there are many excellent and successful business men, who amass a million or more in city trade, who can no more comprehend, either the process or the result of a mathematical demonstration than they can Hebrew or Sanscrit. I am not writing with the slightest hope of making converts of such. I do, however, hope to obtain from some one of this class a reply to one ques- tion ; to wit, " What would be the conduct of the bank, in respect to its trading reserve, if the issue of notes were transferred to Whitehall, and the bank's share of notes, issued on securities, were alone delivered to it, and the metal on which the others were issued was held by the Issue Department for redemption only of the notes issued on meta! ? " I am, of course, presuming that the bank is bound to find the cash for redeeming its quota of notes, just as the United States national banks must do under specie payments. This remark will show the decided superiority of the American over the British system, both of which are fundamentally wrong, and must sooner or later be changed. I furthermore invite all who dissent ilKSfr;?- r^i-^i^ivm T PROFESSOR BONAMY PRICE ON THE BANK CHARTFR. 73 pital of od one houses, jsurdity in such, }usiness ind the of Eng- eech in erfect," m " are al con- cal and ccessful y trade, 1 or the icy can ■lightest :r, hope le ques- e bank, es were f notes, ind the by the 3 issued bank is f notes, 3 under decided m, both oner or dissent from the position taken in this chapter, to read the next two chapters, if not the whole work. Tiicy will then be able to compare the present system with one dcmon- st.ated to be theoretically perfect. CHAFFER VIII. PROFESSOR nONAMY PRICE ON THE BANK CHARTER. 1. Profe-ssor Price, in his work on "Currency and Banking" (Henry S. King & Co., London, 1876), it will be seen, by reference to pp. 62 to 68, has (iiUen into several serious errors, like nearly all writers on the Bank Act, two of which I will notice. At p. 62 he states emphatically, that " In the Issue Department the bank directors have no more authority or right to speak or act than any other person in the kingdom." But I reply, these same directors, or a committee of them, constitute the managers of this same " Issue Department," and by the express terms of the Act, cited at the end of para- graph five of the foregoing chapter, have power "to diminish the amount of such securities" (^^ 15,000,000), " and again to increase the same ... as they shall see occasion." 2. At p. 67 he has fallen into an equally palpable and mischievous error, where he claims that the notes pre- sented to the bank for payment are not the notes issued on securities. Here is what he says : — "There has never been, since 1844, the slightest ten- dency of a run upon the bank for the payment of a single one of the fifteen millions of notes." The notes " shall be deemed to be issued on securities, coin, and bullion ;^^ so runs the language of the Act. It there- fore follows, in a legal point of view, there is no distinc- T 74 CURRENCY. li I f I is tion between notes issued on seeurities, eoiH, and iul^ lion. They are all notes of the Hank of Kngland ; and tlie bank directors, acting as managers of the Issue Depart- ment, have perfect and unciuehtioned power to diminish and increase tlie amount of notes within tlic statutory limit of (at present) ^15,000,000. Hence, as a logical and incontrovertible economic fact as well as principle, the first notes, in times of panic, or, indeed, on all oc- casions, presented for payment are noXc^ founded on secu- rities. In other words, they are the notes growing out of the business of the bank, not of the Issue Department, Mr. Price seems to have overlooked the fact, stated by Sir John Lubbock in his speech in the House of Com- mons in 1873, that the Bank of Kngland, as a bank, is liable for every note issued from the Issue Office. It is the height of absurdity to claim that the fiction of having a separate issue office has done any of the acts imputed to it ; or that, because this office stores the securities and metal, the Jiank of England does not deal or speculate in both securities and metal. If the fluctuations in the gross volume of notes were not within the limits of the amount of notes issued to the bank on securities, the bank would not be so sensitive about the loss of a few millions, or even the whole of the metal occasionally ; and if the directors ever come to understand the true principles of banking, and cease to treat their own share of the notes issued on securities as good reserve, they will at once perceive the gross fundamental error on which they now act. At p. 66 Professor Price correctly says, " The gold stored and kept in the Government Office, the Issue Department, in no sense belongs to the Bank of England. It is no part of its reserve ; and it is a great misfortune that the framers of the Act of 1844 should have made the exceedingly unintelligent blunder of mix- ing up together, in the weekly reports of the bullion at the b g A n b is ai n< 01 ai F V( til P' ci h( tli th C( Wi ta of d( nc bi lo, G( ev wi th , T ul hul' ind the [ )epart- iminiiih aiutory logical inciple, all oc- n secii- ing out rttnent. ited by f Com- ank, is It is having nputecl ies and cculate in the of the le bank lillions, 1 if the inciples of the will at :h they , "The ce, the Dik of a great should )f mix- 1 at the ; PROrFSSOR nONAMY PRICE OV THE BANK CHARTER. 75 bank, two al)solutcly tlisMinil.ir and diitinct things, — the gold stored away by one ofiice to face the bank-l otrs, and the golil belonging to the Hank of Kn{,'l;uul as a banker." This is expressed " excellently well." 3. The latter part of the last sentence is wiiat tlu; late Artcmus Ward would call "a little mixed." The Act is not responsible for the " mixing up together." but the bank directors, who, like the I'rofessor, treat the notes issued to the bank (the ^15,000,000) as issued on gold, and those held in the Issue Dejjartment as the veritable notes issued on securities. There should be no dodging or hocus-pocussing in a matter entirely within the limits and scope of scientific demonstration. The facts are : First, the bank has all its share capital and " rest " in- vested in government securities. Second, it has, at all times, an eijual amount (^15,000,000) of notes charged by the Issue Department against it, — the lianking De- partment,— on account of the securities so held and credited l)y the said Issue Department. The notes so held by the bank, and used as trading reserve, must, therefore, " be deemed to be issued on securities alone;" though the total issues are declared to be on " securities, coin, and bullion." If this is not the clear logical as well as legal construction of the Act, " its framers " cer- tainly did commit " the exceedingly unintelligent blunder of mixing up " the entire business. I claim they did not do so, but that the bank directors are in error, and do not comprehend the spirit or intent of the Act, or the business of modern banking. 4. But how can Professor Price's declaration, which is logical and true, that " the gold stored and kept in the Government (the) Issue Department in no sense what- ever belongs to the Bank of England," be reconciled with his assertion, on the next page of his work (67), that, "there has never been, since 1844, the slightest L n m -g CURRENv^Y. tendency of a run upon the bank for a single one of the Xis 000,000 of notes," — meaning, of course, those always charged against the bank on account of securi- ties? He might as well have said, "the notes held by the Bank of England, as a banker, are notes issued on metal, which the Issue Department holds in trust for the bank; and the ;£i5,ooo,ooo of securities, corresponding in amount with the notes delivered to the bank m addi- tion to those delivered to the bank on coin and bullion, always remain in the Issue Office, and are there held as assets when all the metal is gone." The Professor (as well as the directors of the bank, who are ex officio managers of the Issue Office) must accept one horn or the other of the dilemma. Let them choose which they h^- v..cf If the notes held by "the Bank of England, as a banker," are notes issued on metal, " stored and kept in the Government Office," it is a breach of trust, and a fraud on the public, to treat them as "reserve," and demand gold for them. On the other hand, if the /-1 5 000,000 so held are "to be deemed (as logically they must be) to be " the notes covered by the securi- ties of which the bank, and not the public, is the owner, then the Bank of England commits an equal fraud by drawin,: metal for them to meet calls on the bank itself for such metal. 5. The present theory and practice of the bank is only a bungling juggle that ought to deceive nobody. I repeat, though the entire issue of notes is expressly de- clared by law to be " deemed to be issued on securities, coin, and bullion," the bank treats those it holds, and which it gets by reason of securities deposited, as trading reserve, as though they were issued on metal alone. So far as the Issue Department is concerned, this is not admissible. Much less is it admissible on the part of the bank, which is bound by law to pay metal for all the faaff-s^K'sjas-i: •~^tts^K»!mfmiMsf0ei»stsfX:4iiasmm^^^mi!0S^ e of the :, those f securi- held by isued on t for the spending in addi- [ bulUon, : held as essor (as ex officio '. horn or liich they England, ored and 1 of trust, ' reserve," ind, if the 3 logically he securi- he owner, fraud by ank itself e bank is lobody. I pressly de- securities, holds, and , as trading alone. So this is not be part of for all the PROFESSOR BONAMY PRICE ON THE BANK CHARTER. 77 notes. It is not permissible in a banker to " blow hot and cold " at the same time. 6. At p. 68 Professor Price declares, that, " in respect of the supposed aims of its promoters, the Bank Act must be pronounced a failure." In this view and in much of what follows I cordially agree, because t!ie facts and the principles arc scientifically correct. But I cannot see the enormous advantages, stated on the same page, as resulting from "a saving to the nation," as the Professor erroneously calls it, of the paltry sum of ;^ts,ooo,ooo, by issuing to the bank that amount, uncovered by metal. I shall show conclusively hereafter (Chap. XXVII.) that gold is the cheapest money, and that paper founded on the same, pound for pound, is the best paper money in the world. I will show that the entire metallic money of the kingdom only costs about one and threepence a head per annum of the whole population, and is as one to fifteen hundred of the annual productions of labor. The saving of ^15,000,000, all told, is just ten shillings a head on thirty millions of people ; and the interest at four per cent is ;^6oo,ooo, equal to four and sixpence, — four and six-tenths of a penny per head of the popula- tion. The Scotch are said to have made fourpence a head by selling their king. Besides, Great Britain thinks nothing of spending twice ;^i 5,000,000 on a negro war in the wilds of Africa. I wish I could quote all the Professor has said, so well, in favor of small notes issued on gold. But I have tried elsewhere to do justice to this subject in my own way. • 7- At p. 74 the Professor suggests an amendment to the Act to ren.'ove the Issue Department away from the bank's premises, to Somerset House or Whitehall, and requiring the weekly statement of the issue of notes and quantity of metal to be publislied separately from that of the bank's affairs. He should have gone farther, and in- -■Wi^a^a^^fegtiSatSt S te'-'i"- T V 1 1 -8 CURRENCY. sisted on the notes being made payable by the United Kingdom of Great Britain and Ireland, and to require the bank to buy what notes it requires, for gold coin or bullion, for coinage, pound for pound, as all others in the kingdom now do. In this case the state notes will be good banking reserve, — " as good as gold." 8. I hope that Professor Price, and those who, like him, are willing to tolerate the present British system, with the slight change of removing the issue of the notes to some other locality, will come to agree with me that the bank note is at the bottom of all currency disturbances. Whether the High Court of Judicature, if the case were brought before it, would decide that the notes to the amount of ;£i 5,000,000 used to the bank for its own business purposes, are issued on account of public secu- rities, for which the Issue Department ought not to pay out gold, or whether the bank, like any other holder, could properly demand to be paid in metal, matters not. The issue I make with the system is, that the conduct of the bank, and of all bankers and merchants, so far as such conduct is influenced by the present system, would be very different, if the "surgical operation" I insist on were made. The bank then will recoup its capital now invested in these public securities, and will hold metal in their place for its reserve. A true scientific monetary system will turn over the trade in metal to merchants and bullion dealers, the same as in case of all other com- modities, and effect a complete separation of money from finance. 9. I have now only further to ask from the Professor, or some of those who argue as he does, for a reconcilia- tion of the two following passages, one of which has before been quoted, but is again reproduced for com- parison. These passages occur in paragraphs 4 and 5, pp. 66 and 67, of his work, " Currency and Banking." w SSiESS United require coin or rs in the will be ike him, with the to some he iattk irbances. ase were s to the its own lie secu- t to pay r holder, ;ters not. nduct of so far as m, would insist on pital now metal in monetary hants and her com- )ney from Professor^ econeilia- vhich has for com- 4 and 5, dking." THEORY AND PRACTICE OF THE BANK OF ENGLAND, 79 1st, "The gold stored and kept in the Government Office, the Issue Department, in no sense whatever be- longs to the Bank of England. It is no part of the reserve." 2d, "Gold, no doubt, is constantly asked for at the counters of the bank; but what does the bank do? It sends the notes" (notes, mind, which constitute a part of lis trading "reserve ") "over to the State Office, and ^ets gold for them at once." If the gold "in no sense whatner belongs to the bank," how dare the bank "send the notes over to tiie State Office and get gold for them?" Wliy don't some plucky Englishman liave the managers of the Issue De- partment indicted for giving the fellows across the hall gold mstead of securities ? The case is a serious one It IS hardly better than stealing. It is a penitentiary offence to use trust-funds ; and here it goes on daily, and on a huge scale. " Ignorantia non excusat legem." The directors are warned of their peril. CHAPTER IX. THEORY AND PRACTICE OF THE BANK OF ENGLAND FUR- THER CONSIDERED. I. I WISH to remind the reader that I am discussing analyzing, and applying ascertained principles to tlie practical business of supplying and regulating the amount of money, metallic and paper, to the demands of indus- try. The Bank of England, by reason of its great capital and the prestige which it enjoys and in part derives from' the sort of partnership it has with the state, has become the centre of the whole monetary, if not financial, system of the kingdom, and, in a manner, of the world. After 8o CURRENCY. the breaking up of the East India and Hudson Bay com- panies, and the numerous industrial monopolies fostered for ages by state protection, we have the conspicuous exceptional example of this one great bank, sustained by law, and often by the direct interposition of the Gov- ernment, carrying out a policy utterly at variance with sound scientific and business principles and with the doctrines of free trade. 2. A careful analysis of the theory and practice of the bank in the conduct of its business will show the truth of these propositions. An extreme sensitiveness, and lia- bility to a panicky condition of trade, has become a chronic disease in the British industrial system ; and very clear evidence exists that it has its origin in the practice of the bank, in respect to its efforts to control the trade in bullion and in the note issue. This phenomenon is nearly unknown in France, whose great National Bank, with a much smaller proprietors' stock, holds a vasdy larger ratio of actual cash capital to its instant liabilities. This circumstance of itself affords very strong evidence that the policy of continually " acting on the exchanges," in order to control the bullion trade, is as wrong in theory as it is disastrous in practice. The theory itself is so much discussed by business inen, and is so well under- stood from long observation of its working, that the great leading houses, bankers and others, endeavor to predict what the bank will do to-morrow, next day, or in a week, by the export and import of bullion. All are watching with the utmost care the increasing or diminishing tons of ingots held in the vaults of the bank, because these constitute the barometer to the exchanges ; and all specu- late in their minds on the possibilities and probabilities of the immediate future. I firmly beUeve, from the actual facts I have mentioned, that the only cure of this diseased state of the monetary and financial system of Bay com- i fostered nspicuous sustained the Gov- ance with with the ice of the the truth 3S, and lia- become a ; and very e practice the trade Dnienon is )nal Bank, Is a vastly Habilities. y evidence xchanges," g in theory itself is so veil under- it the great to predict in a week, e watching ishing tons :ause these d all specu- Drobabilities ;, from the ;ure of this I system of THEORY AND PRACHCE OP THE BANK OF ENGUVND. Si the country is a surgical operation which will sever the present relations of the bank from national financial con- nection, and the issue of notes on coined money alone whether th.s latter be done by the bank on the bank premises, or by the State at Whitehall. As I observed in he last chapter, this will leave the trade in bullion to hose wlio make a specialty of it ; and it will then sink to the level m importance with the trade in other great com„,od.t.es, such as cotton and com: and people at large will not grow nervous over it. 3- Let us again examine the facts of the case with a Ut^le more exphc.tness, without going into historical de- to he government, amounting to some £u,ooo,ooo, for whch the government pays the usual rate of iJerest and ha. granted to the bank the right to issue, or, more correctly speaking, to receive from the Issue Department, a full equivalent in notes. By lodging an additional amount of government securities, now making a total of .■^15,000,000 it is entitled to receive that amount of •notes; and the portion of this sum not actually passed beyond the walls of the bank constitute its reserve ex- cept a small amount held in coin, seldom kept up 'to a million. This plan of founding a note issue on seen -i- ties uncovered by gold or silver is at the bottom of the whole of the evils of the British and American monetary systems. When there comes a call for bullion for ship- ment, or coin for the provinces, the portion of tlie e unemployed notes held as reserve is drawn upon and presented for payment in gold, and the store of gold diminishes pari passu with the reduction in the volume of such reserve With the influx of gold into the vaults of the baiik, the reverse of this happens. The ratio of reserve to liabilities increases; and a certain, not exactly «, J«I1.*« f 'A^^BLudnii It CURRENCY. defined, ratio between the reserve of notes and the bank's liabilities is considered healtliy. When the ratio is low- ered suddenly and considerably, people grow alarmed, and become panicky, because it foreshadows a rise in the rate of discount. When it rises above the usual, or, what is considered by the managers, normal condition (if any such condition can be considered normal in a machine subject to continual artificial regulation and change), then low rates of interest prevail. There is in such cases a plethora of unemployed capital, which by and by engenders speculative trading and careless and generally bad investments. These are the conditions resulting from the present theory and practice of the bank. 4. By way of illustration, we have only to consider what its policy would be if the bank were compelled by law to act on a different theory in respect to its business. Let us suppose that the Bank Act has been amended so as* to embrace a clause like the following, the rest of the Act being made consistent therewith : " The notes issued on public securities shall not be legal tender in payment of public or private debts, and shall be made distin- guishable by color and form from those issued in pay- ment of coin ; and the notes issued on government securities shall be held to be notes of the said Governor and Company of the Bank of England ; and those issued in payment of coin shall be held to be notes issued by the State, and shall be made payable by the United Kingdom of Great Britain and Ireland, on demand, in lawful gold or silver coin, according to the requirements of the holder, and shall be legal tender everywhere in said United Kingdom, except by the Issue Department and its agencies." 5. The notes issued by the state, or the bank directors as a board of issue for the state, would then be good VI ' *'" ;j-;4!,9jiviiWJtt i w.»lJ.'ii-f"fetWfefaMaa^^ le bank's is low- alarmed, a rise in usual, or, ;ondition mal in a tion and ere is in ivhich by jless and onditions e of the consider pelled by business, lended so est of the tes issued 1 payment le distin- i in pay- •vemment Governor ose issued issued by le United =mand, in [uirements ywhere in epartment c directors I be good THEORY AND PRACTICE OF THE HANK OF ENGI^ND. 8^ cash reserve for the Bank of England, or any banker or merchant, to hold ; but it would, in sucli case, be equally clear that tlic bank's notes issued on securities would not, m the bank's own hands, bo so considered by Mr Hankey or any other authority on banking or trade What the bank would be compelled to do in this situ- ation would be to sell its notes for coin ; and if the coin refused to stay, and its notes came back for conversion too quickly, it would have to contract the issue, and sell a portion of the i:is,ooo,ooo of public securities to provide adequate reserve. By this method the public would plainly perceive the true position of the paper- money circulation, and the managers themselves would know the exact relations of the two principles involved m the issue, to wit, that of issuing notes on securities and on metal. Such a plan would be equivalent to a mechanical and geographical or local separation of the issue from the business of the bank. The illustration seems to make the question intelligible enough for the most ordinary business man to comprehend. 6. Equally clear would it become, under such an alter- ation of the law, that the holding of a million of coin or cash gold and silver, would not be a safe amount for a bank to hold against thirty cr forty million pounds of instant or comparatively short liabilities, of which its own notes would form a part, when in the hands of the pub- lic Such "a separation" would be very different from the present statutory separation. The « mechanical sepa- ration " of the two departments, suggested by Mr. Leon- ard Courtney, M.P., in his article in the "Encyclopedia Britannica," with a clause in the Act such as I have quoted, would not be necessary to influence the con- duct of other bankers and city men. The Bank of Eng- land might still manage the Issue Department without leading to confusion of thought respecting the separa- !' <^imS!S»&&!^^^S0t^^-&*'i'^^' 84 CURRFNCY. lu ill ,;l!. tion, and with decided advantage to business interests, as compared with tlie present plan; though this is not the plan I would suggest. 7. The analysis of the principles involved in the pres- ent system of issuing notes and treating them as good banking reserve by the bank, and the illustration I have given of a system that forbids, on business principles, the regarding and treating of such portion of the notes as reserve, seem to me to be demonstrative of the errors that underlie the whole monetary system of the nation. The fundamental error may be traced to the misconcep- tion, by the managers, of the power they possess of con- trolling the volume of notes, and of diminishing and increasing them in amount, within the statutory limit, — at present ;^is,ooo,ooo, — "as occasion may require," or, as I would express it, according to the law of sup- ply and demand, or the requirements of industry. Mr. Hankey truly says that " the more the conduct of the Bank of England is made to assimilate to the conduct of every other well-managed bank in the United King- dom, the better for the bank, and the better for the pub- lic at large." 8. Much has been said about the prudent and safe method by which the Bank of England is governed in the conduct of its business, and the handsome profits which result from such prudence. But these are merits in no way superior to those to which a large number of im- portant joint-stock and private banking concerns, as well as merchants, are equally entitled to lay claim ; and in the matter of profit to the proprietors, there are scores of such banks and houses which i)ay far larger dividends on the capital invested. When it is considered that the Bank pays nothing on the large government balances it holds, averaging over ^^5 ,000,000, and the trading bal- ances of joint-stock and numerous mercantile and private I! .( iterests, > is not \e pres- is good I I have )les, the lotes as ; errors nation, concep- of con- ing and limit, — equire," of sup- y. Mr. t of the conduct d King- the pub- ind safe ;d in the ts which ts in no r of im- i, as well ; and in •e scores lividends that the lances it ling bal- d private THEORV AND PP.cnCE „r TOE M»K „P ,N„,^„. 9-1 will now briefly consider Ihe claim set m, l,v Mr Hankey a„.| „,e „,„t „, ^ ,,„,, ,„,„4 '^ '^^ »»/.■., Chal ,l,e bank ,I„es „„, ain, to • „,„I ,l,e ™e is o> n rate, but only seeks to "keep m t|,e mirkel ■■ Jf ll»s >vere true. ,vl,y do ,l,e whole of tlm c a s of e™ nents of the ,,„,iey „f ,he bank continually eakofX: bank n,an.,ers in cr ^e^ aT^ e'EH 1^ petent for a wr.ter on principles to inquire into the motives, other than those alleged for the nr!./ i the effect of the practice nn iJ . ^ '"'''' """^ ^n,e eminent ai;::;i:::!;r:r:h: '^: S': i„cf -fv„- tu^ . . .. lyings ot specu ators just after the great evil war, when, by a powerful com bmation, they were able to " lock un " so hr^l! of canifnl fr^r n t" * " '^'^S^ ao amount ot capital for a tmie, as to cause a heavy fall i„ the nrire -W.i« caused bf itfo^' «!, ■.» ^^ hTaVpt : sme- '**^^**W»**.^^*Wia«i#l?gii?i9i''«^--- 86 CURRENCY. M :ia chases. The practice in New York became so conspicu- ous, that it at length led to the passage of an Act of Con- gress making such practices misdemeanors, punishable by fmc and imprisonment ; since which time the practice of " raising the ratc^ " by such means has altogether ceased. IJut whether such mercenary motives lie at the root of the practice of the Hank of England in thus " acting on the exchanges," on the pretext of preventing the undue out- flow of bullion, or not, its injurious effects on mdustnal pursuits cannot be doubted. 1 1. The sudden raising and lowering of the rate of dis- count, or the price paid for capital in the can market, whether effected by the Bank of England, >r by other artificial combinations of capitalists, has the same effect as the rapid fluctuations in an irredeemable paper cur- rency. It strikes directly at the natural regulator of values, supply and demand, and unhinges all business plans. It is the same in its effects on values, as the per- petual " tinkering " with customs and excise duties. Pru- dent merchants and mauMfacturers look six to twelve months ahead for their suuplie. in trade and business. They make bargains for the future ; and hence it is of the utmost importance to general trade that there should be no means at the sole disposal of any financial institution, or body of capitalists, capable of causing sudden changes in the price of capital, because the price paid for goods must depend on the rate of interest. Nothing is clearer than this principle, that the price of capital invested in trade and all industrial pursuits, as well as of wages, forms a large proportion of one side of the equation of supply and demand ; and hence all artificial disturbances of such price, or, let us call it, market value, are contrary to public policy, and ought to be counteracted, and not sustained by law. , , , • 12. The "acting on the exchanges" by the bank is ■ a;afe;^-4»i^wvi#gj»fe',.*;^jfeft4!^^g, on all the trading capital of the coun- try. Such a tax, if nuide permanent, and not unduly hgh, would soon become normal ; and all business would adjust use f to it, and no great evil would ensue. IJut when the bank imposes it, no one can say exactly how ong ,t wdl last, or how high or how low it will go In th.s matter the Bank of England has a most decided advantage over other discount houses and all traders, in bemg able to profit by its own secret acts and plans It is a large dealer in first-class railway, as well as public secunt.es of foreign countries and consuls, all of which are easily mfluenced in market value by the practice in question (note III.). * '" .hn^l"/'i ""'" "^"""^ ''°"''' ''°*'^ '^''"^ imputations, it should change ,ts policy of making a flourish of the rate before the world, and move on quietly with and in the for Its resources, the true and natural method is to cur- tail Its note issue by diminishing its securities in the Issue Dejjartment, and converting them into gold coin 14. It IS evident from what Mr. Hankey says in his TZZ ""t'"'' ^'^^ '" '^"^'^ *^ ^'^-^S '^^ hold on the market. He says, " It has very frequently occurred 1 f^ * ; If If m m ■J 88 CURRKNCY. that after a vf/y long succession of very low raUs of interest, indicated by a great abundance of iinemployecl capital, an extent of business lias been undertaken, far beyond what u judicious regard to safety siiould have induced : and if, wlien this state of things is in existence, any sudilen appreiiension of an approaching scarcity should occur, no rise in (he rate of liiscount vill imme- diately check the demanil ; on the contra./, the very opposite effect may be produced." Mr. Hankey has im- wittingly laid down the natural law in respect to such spasmodic and artificial attemjits to influence the price of capital. But he has simply, like the bank managers, mistaken the cause for the effect. 15. If, in such cases as Mr. Hankey specifies, the object of raising the rate is to operate against the tendency of the market towards a temporary adverse condition of the foreign exchanges, and thus to stay the export of bullion, the effort will be abortive, unless the bank succeeds in carrying the market rate up with its own, which it now frequently fails to accomplish, /^'r the simple reason that those who find a profit in shipping bullion always buy it, or raise their capital to buy it, at the loivest, and not the highest, or bank rate, and because the market is getting too large to be influenced in this way. 16. From what has been said, it must be inferred that the bank, to the extent of its power, perpetually in- fringes or contravenes the great fundamental principles of free trade and the free action of the natural laws. Professor Bonaniy Price, in a series of well-written arti- cles published in "The Daily News," in December, 1875, pointed out the fatuity of the bank policy, in respect to the playing with the rate, because a few tons, more or less, of metal had been called for by foreign dealers, and for use in the Provinces. My own impressions up to that *Vj-^bJi»j ; a8MaMfe'»^ r/« of ployed en, far I have stcnce, carcity inimc- le very las tin- o such e price nagers, es, the ist the idvcrsc ;tay the ess tlie vitli its for the hipping ly it, at jecause in this •ed that ally in- inciples il laws, en arti- r, 1875, pect to nore or :ts, and to that THK niKOKV OK AC,T.NO ON ,„k KXCUno.:^. 83 CHAPTER X. IV^^IHE „A^K OP KNOUNO.-v,KWS OP MR. KRX.r I. Mr. Ernst Skyd, mentioned at the clos«. of .u actuarial stand-j,oint and Cs n, M 1 , ^ '"""^"y "Tt,« IT z. , ^ published two works on The Error of the Bank of Englan.l Note Issue ''hr smce the last two chapters were (Mav ,S,M , ' ica, of much interest H„ i • , ""^"'^^ '^"^i Amer- . kept *. L e.;,';.'r. : ; ;t:e'™o' '„:: *'^' SRe^. ■aSflS'lif^F'^fpi.j. •;til 11 ' CURRENCY. hence has failed to meet the clear intent of the Act of 1844. His reasoning on the failure of the bank to regulate its note issue, within the statutory limit, by low- ering and raising the amount of notes, in order to give the elasticity necessary to meet the natural laws of indus- try, or to measure out supply in conformity with demand, is unanswerable. He has made up numerous theoretical bank statements showing how, by first diminishing, and then raisiiig, wiihin the prescribed limits, the amount of securities held against notes issued to the Banking Department, and therewith pari passu, the volume of such notes held as reserve would meet the ebb and flow of supply and demand. 2. This is simply another method of proving that the bank acts on a fundamental error in treating its notes issued on securities as banking reserve ; for, if the bank does not hold a reserve of notes on Mr. Seyd's theory, it must supply their place by selling the securities and holding coin d , a reserve. The full title of the last work of Mr. Seyd, -now before me, is "Statement of Accounts showing and illustrating the Error of the Practice in the Note Issue of the Bank of England." Not the least important fact, dwelt on by Mr. Seyd with much emphasis, is, that the bank keeps its surplus funds invested in long securities. As these funds are bor- rowed, and constitute instant liabilities, being depositors' capital, it proves by Mr. Hankey's argument, already quoted in Chap. VH., that the Bank of England totally disregards what other bankers consider sound banking. What Mr. Seyd urges is, that the bank ought to engage more extensively in discounting short commercial paper, out of which he claims it would make a large profit for its stockholders by getting compound interest. He also points out the risk always attending long investments made from borrowed capital, which may be called for at 'ifmm^^imkmM^im^mm^ 'W ^^'" THE THEORY OP ACriNG ON THE EXCHANGES. 9, any moment, when such securities may have fallen in tips'. „,^ , - '■"^ words, "other securi- ci, pTpo'^ '"r '"*"""^- "> "-^ °f-y val„= for 3. I have already remarked on the fallacious plan of haymgthe entire proprietors' capital locked up tper fundamentally wrong s3-sterof Jki , ft^ Z:^ veStJ^''^'^^"^'' ^'^^ ^^"^ i-borrotecfis in- vested m long securities, liable to wide fluctuations in -ar e, ,,,,e it is no wonder the intervention rCo^U ment ,s so frequently invoked to save it from Zi disastrous losses or being compelled o su^eXaymenT om sts, and to the common sense of the people whether - such a system ought to be tolerated in tL pr^slnt 'd vanced stage of commercial intelligence. If U.e nractS of allowmg the Bank of England to suspend i o'd'o save u fron. making sacrifices to maintain its olven ; ^ a part of the system, it should be made applicable to a other jomt-stock banks. « What's sauce for the goose! sauce for the gander." ' "\"i^ goose is 4. If other large banking concerns would agree to the,r tradmg balances or margin, on deposit aUc bank, I! 92 CURRENCY. and retain them in their own vaults, it would probably have a beneficial effect on the loan market in cases of a panicky feeling threatening a crisis ; and the bank would then, probably, not have so frequently to pray to Her- cules for assistance, and the trade in debentures would be left to syndicates and debenture companies. It is very obvious that no part of a banker's trading capital, much less the capital of depositors, held on call, or at short notice, can, with propriety, be invested in such long securities as are liable to extensive fluctuations, or even consols, w.iich sometimes fall many points in a few days, as just prior to the Kusbian war in 1854. As Mr. Han- key has put it, " promises to pay at a future date " cannot be made to take the place of " a supply of ready money." 5. Should Sir Robert Peel's provision in the law of 1844, for giving to the Bank of England the whole of the lapsing country bank note circulation, be expedited, as intimated by the present Chancellor of the Exchequer, the evils of the bank's fallacious and mischievous policy will be aggravated to exactly the extent of such increase in the volume of notes issued on securities. If, instead of the present "fiduciary issue" of p^i 5,000,000, the limit be raised to ^30,000,000, and the present practice of keeping the whole in circulation (for I hold with Mr. Courtney that all " held in reserve in the bank are as much in circulation as if they were in the tills and pockets of the people"), it is easy to see how enormously the already great sensitiveness of the market will be in- creased. 6. If the bank would change its policy so as to make it conform to the illustrations of Mr. Seyd, that is, avail- ing itself of the provision of the law to lower and raise the amount of notes issued on securities, such a calami- tous state of things would be averted, in case the tlireat of Sir Stiatford Northcote be carried out, to give full t t e r c n Si ai e\ m as of ov in Se of !JS?«y?gyv4|f£tt^i:t;djaybRJ.'; -^aa#ife^M»t^&»! ..•s^m^. irobably ;es of a k would :o Her- s would t is very l1, much It short ;h long or even ;w days, r. Han- ' cannot noney." : law of hole of pedited, :hequer, s policy increase , instead ooo, the practice vith Mr, c are as pockets Dusly the [ be in- to make is, avail- md raise . calami- le tlireat give full THE THEORY OF ACTING CM THE EXCHANGES. 93 scope to Sir Robert Peel's intentions about the country Insh. and Scotch banks' circulation. A very little con^ s.derat.on will show the desirability of the su^ested alteration m policy. The metallic circulation of the country .s a fixed amount, or nearly so, and is wanting in some degree the greater elasticity of a convertible pi " cauT.l h ,1 " °f-'PPlyand demand, which St .^ f J '' ^ commodity, or raw material, to be sent abroad, and hence possesses less elasticity than the comn.od.ty which has the whole world for a market Add to th,s circumstance the fact that the bank keeps its law, It w,ll be seen how many elements of a perfect mon- etary system are deficient. 7. Mr Seyd inferentially, if not directly, treats the re^n.e of notes as Mr. Courtney and I do, '^, i„ ^ Ld pie, the same as though they were floating about outs"de he walls of the bank. The very facf that they Ire treated by the bank as trading or banking reserve houJh e^oneously, proves the correctness of'this me'thoclS regardmg such notes. They are held to meet immediate caUs for cash, just as those held by other bankers and merchants, and, in the absence of coin, are just as necTs - sary o the Bank of England as to any other bank, ar as the demand for notes is concerned. The banL, how- ever treats «// the notes given out by the Issue Denarl ment as cash liabilities against that department and not as agamst nself. In essence and in principle the issue > of notes on securities is a method whereby a man can own a good mvestment and possess himself of its value m money, which is an absurdity (postulates 52, .,) 8 One of the best reasoned-out port ons of Mr ^ Seyd's work :s where he shows the fallacy of the theor^ of usmg the "rate " to act on the exchanges, in order to i ■ i '' '• CURRENCY. influence the trade in bullion, instead of making the note issue do that work by the means indicated, and allowing the traile to be governed by supply and demand. He points out, and illustrates by statements, how the bank first raises its rate above the market, or natural rate, to attract a large supply of bullion, and then, when this end is attained, or the outflow has been arrested, runs the rate down, often as low as two per cent, in order to drive it away again, thus causing the utmost inconvenience to all industries requiring steady rather than high or low rates of interest. Mr. Seyd's words are, " It is painful, because it would seem a pity, that, after having made great efforts to recover bullion and set the issue right, we should immediately afterwards make efforts to drive it away again. It is uncertain, because, though we know that the process adopted must take bullion away, yet we cannot control or check its effect without occasional jerks upwards of cur rates." 9. While I fully agree with Mr. Seyd, as well as Mr. Bonamy Price, about the impolicy of acting on the outgo and inflow of bullion, by playing with the rate like chil- dren playing at shuttlecock, I propose a more complete and scientific, as well as practical, remedy. Mr. Seyd's reforms are limited to the raising and lowering, within the legal limit, the amount of fiduciary notes ; whilst I insist on removing the issue wholly from the Bank of England, and all other banks in the kingdom. But I concede to Mr. Seyd, as well as to Mr. Price, that they have con- clusively demonstrated the fallacy of the theory of " act- ing on the exchanges," which should be left severely alone, to be regulated by the only true, equable, and natural regulator, the demand of the world for all com- modities, bullion and money mcluded, on the one hand, and the market supply of these on the other. 10. After Mr. Seyd's elaborate exposition of the true THE THEORY OF ACTING ON THE EXCHANGKS. 95 ; the note allowing md. He bank first to attract is end is the rate r to drive nience to jh or low s painful, ing made right, we 3 drive it we know ay, yet we ional jerks ;11 as Mr. the outgo like chil- complete Mr, Seyd's within the 1st I insist F England, ;oncede to have con- y of " act- ft severely liable, and )r all corn- one hand, of the true intent and meaning of the law, in respect to the power of the bank to diminish and increase the issue of notes, Mr. Hankey's assertion, that, "since the passage of the Act, the bank has had no control over the volume of the note issue," seems utterly inexplicable. The limits within which the bank possesses this power absolutely in its hands, is equal to the whole fiduciary iss. • of ^i^iS.ooo,- coo, — a pretty wide range in the present scope of indus- try and general trade. Perhaps, half a century hence, when the business of the country shall have trebled or quadrupled, a larger amount to operate on may be necessary. II. While conceding so much to Mr. Seyd's exposition of the fallacy of the traditional policy of the Bank of Eng- land, I shall have to take exception, in a future chapter, to a theory he has attempted to set up for the regulation of interest. He has published a work on this subject, entitled "A More Perfect Working System between Bul- lion and Interest." From a glance over it, I reached the conclusion that it was simply a new version of the old Mercantile Theory. Mr. Seyd proposes artificial methods of regulating the rate of interest, all and sundry of which are fundamentally ^vrong; as the natural laws only can properly regulate the market value of capital and all other things. The English law of " Let alone," and the Ameri- can of " Masterly inactivity," express the exact idea of what is the best method of regulating the rate of interest, and all kinds of industries. 12. I will only observe, on the subject of this proposal to estabhsh "a more perfect working system between bullion and interest," that it is impracticable, and at vari- ance with the true principles of trade and industr>', which thrive best when left to the competition of all the -.vorld. Bullion is simply a commodity, of no more importance in the industrial system than any other equal in the amount CURRENCY. in which it is dealt in, and exercises no more influence on interest than cotton, in proportion to tlieir respective values. It is simply a question of values, when we come to inquire into the relative influences of commodities. Each one contributes its quota to the great ocean of float- ing capital, or trading power, which regulates all values, and dificrcntiates the exact proportion contributed by each commodity. In this ocean, gold and silver float on the same level, so to speak, as wheat, corn, and cotton ; and iron, lead, and cotton become as light as feathers or cork. Is it not, therefore, a sheer waste of time to set up pretensions in favor of the " precious metals," which are no more precious, in the vast aggregation of things having market value, than any article for which they are exchanged ? 13. I do not wish to raise side issues as to the motives of the managers of the Bank of England in playing with the rate. The alleged reasons for "acting on the ex- changes," and influencing the trade in bullion, are suffi- cient to sustain the basis of reasoning I have adopted in order to demonstrate its fallacy. In a subsequent chap- ter I shall specially treat of the subject of bullion, and point out very clearly the difference in the uses and prin- ciples of bullion and of coined money, —the raw material and the manufactured article. CHAFFER XI. MONEY AND BULLION. — WRONG THEORIES RESPECTING THEM. I. I POINTED out, incidentally, at the conclusion of the last chapter, the circumstance that the precious metals constitute only one of the factors, some more and some less influential, which make up in the commercial world "^^B—iywip— ■ influence espective we come imoditic3. 1 of float- ill values, buted by ;r float on 1 cotton ; eathers or Tie to set Is," which of things 1 they are le motives aying with »n the ex- i, are sufii- idopted in uent chap- uUion, and I and prln- iw material mNG THEM. ision of the ious metals : and some ercial world MONEV AND BULLION. n the great, ever-balancing, but never quite balanced, sheet fact Taur "f" ' ''" ''°'"'^' °"' ^'^^ ->f--dent fact, that tie trad.ng power of these metals differs in no way from that of other commodities, and was simply in he rat,o of their gross market values. I now propL o show and prove the scientific and practical difference raw materiaT'^' "'' '"'""''"'^"'■^^ "'^'^'' «"d bullion, the 2. It has been the practice of some of the best writers on economic science, from Adam Smith to the present ^me, mcludmg Mill and McCulloch, and especially of with b"!. """'' 1 '"' '"'"' '""'"'"' '° ^°"f°-d money it^TT" "' '"""' "°^ '° ^'■^^'"^"'^'^ between them Adam Smuh says, "Money is a commodity with regard to winch every man is a merchant. Nobody buys it but m order to sell it again ; and, in regard to if, inU^a^ cases, there js no last purchaser." Mr. Mill observes Money ,s brought into a country in two ways. It is imported (chiefly in the /on. of bullion) like any other merchandise, as being an advantageous article of com- merce. It ,s also imported in its other character as a medtum of exchange to pay some debt." ("Elements of Political Economy.") The distinction here made between the two methods of bringing money "into a country" ,is one without a difference; but my object in citing the passage is to show that he treats bullion and money as one , and the same thing. He next says, in express words, " I shall use the term, money, and precious metals, indis- cnmtnatelyr But, in another sentence, he speaks more accurately, when he says, "in so far' as the pLct metals are imported in the ordinary way of commerce, their value must depend on the same laws as the value Ci,v"*"" T "''■•'™'"'''" °f American reader.,, I would explain, that bv "Tl,. \i i Qg CURRENCY. of any other foreign production." The distinction will be apparent, by referring to the causes I have already stated, which give to money other elements of market value, such as being legal tender, and the supply of the ar/u/e, money, as distinguished from the articles, "precious metals." Having approached so near the rationale of the matter, it is surprising so good a reasoner should have failed to grasp the entire problem requiring solution. 3. The obvious distinction, both scientific and practi- cal, between the two, consists in the circumstance, that the commodity, bullion, must first undergo the process of coinage, or manufacture, and be made legal tender, before it becomes money. The precious metals, in their two conditions of money and bullion, bear about the same relations to each other as the chrysalis bears to the butterfly. Bullion is the sluggish chrysalis, and money the full-fledged and lively butterfly, swift of motion and lovely to look upon. The comparison may be a little po- etical ; but, literally speaking, money almost flies, so won- derful are its powers of circulation : while bullion lies hoarded and immobile in the dark vaults of brokers, bankers, and merchants, and is moved only as a com- modity. 4. Perhaps, however, the most striking distinction be- tween money and bullion consists in the former being a graduated implement, like a yard-measure, by which we are enabled to measure the values of other things, and mete out, by the scale of denominations, trading power. The stamp of the state guarantees the fineness of the metal, and the divisions and multiples of the unit of val.ie of the various denominations completes the com- parison with the yard-measure. All these differing condi- tions serve to take money out of the ordinary category of commodities, to which the precious metals in the form of buUion belong. The pound, the shUling, and the ( f r a ti c a S( it w P' m wi m gr M A go ap as po pie niz wit ma - J.. .4il|UI MONEV . .,1^ BULUON. 99 on will already market ' of the )recious 'e of the Id have •n. practi- ce, that process tender, In their lOut the - s to the money ion and little po- so won* lion lies brokers, a com- ;tion be- er being vhich we ings, and g power, s of the i unit of the com- ig condi- category the form and the penny, or the dollar or franc, aud the centum, complete the scale of measure of coined money. The reasoner wlio grasps this distinction will perceivb at a glance that a lump, or nugget, of gold does not act as an implement m the same manner or serve the purpose of a sovereign or a dollar. The nugget itself must be weighed, and its value determined. 5. Under a universal monetary system, such as I have outlmed in Chap. XXV., there would be provided a per- fect natural regulator of the supply of money; and each nation would coin only so much as was required, and the aggregate supply of coin would distribute itself throughout the world. In other words, no more bullion would be oflered for sale at the respective mints, than would afford a profit by being turned into money, and the latter would seldom be meted. 6. I have made this critical distinction, and elaborated It, m order to strike down the erroneous practice of writers of money articles, as well as economists and pubhc men, of confounding the principles and uses of money with those of bullion. There is, in fact, just as wide a difference in principle between the two, as between money and com, or cotton; and they cannot, without great and utter confusion of ideas, be treated, as Mr Mill treats them, " ind.scnminately " or as synonymous.' A bale of cotton is just as much money as a nugget of gold of equal value; and Mie corn market may just as appropriately, in principle, be called the " money market " • as the bullion market may be so called. There will be no possibility of establishing just and true scientific princi- ples m monetary science till these distinctions are recog- nized. It is simply the same thing as confounding money with capital, which I have already spoken of in my re- marks on capital. 7. The habit of confounding money, the measure of lOO CURRKNCY. values, with bullion, the raw material, or the sluggish chrysalis with the gorgeous and nimble butterfly, must be got rid of entirely.' 8. Mr. Mill has fallen into another most palpable error rc(iniring noti'-e. It occurs in his thesis on the efTect of sui)ply and demand on market values. He says, "the supply of money is all the money in circulation at the time, and the demand for money consists of all the goods offered for sale." Again he postulates this fundamental error in these words : "as the whole of the goods in the market compose the demand for money, so the whole of the money constitutes the demand for goods. The money and the goods arc seeking each other for the pur- pose of being exchanged. They are reciprocally supply and demand on each other." If Mr. Mill had substituted TRADING POWER for MONEY, he would pretty exactly have expressed a great fundamental truth, the point of which becomes very clear when we have reached the knowledge that the goods themselves, by means of their representa- tives, bills, etc., furnish by far the greatest proportion of the capital, or trading power, they are "seeking." I he absolute truth is, the floods in the market are, by means of trading power, " seeking each other for the purpose of being exchanged." As for money, it only measures and determines the ratio of value at which the goods shall be circulated in this great ocean of trading power, which constitutes the true circulating medium, and is composed of their own aggregation of values with some addition from accumulations of capital (postulates 35, 36)- 9. Money, in fact, no longer constitutes any consider- able element, or factor, in the trading power which dis- tributes goods from the producers to consumers, and . The comparison adopted in .he uxt is all .he more appn>pria.e. f-^ ''l"'^ cumsL«,ce.hat.hechry»liso(.hebu..erfyis~me..mesc.lled aureU. from auntm, gold. r ti n S( ti w st d( g( G in eq tri of CO the pla ma ma e sluggisli y, must be |)ablc error c eflcct of says, "the tion at the 1 tlic goods iindamental jocls in the the whole )ods. The for the piir- cally supply 1 substituted 'xactly have nt of which J knowledge • representa- oportion of king." The re, by means z purpose of easures ami ods shall be ower, which is composed mie addition 5,36). iny consider- IX which dis- isumers, and mate, from the cir- .c' «'on that gold had actuaHv r^^ '° '?^' °" ^^^^ delu- of paper having fallen. '" '""■''^' ^^^"^' ^n^tead 7- Tlie doctrine that :he foreign trade .r order to be profitable must If ^ ''^"ntty, i„ over imports, is one of 't^e 1 tTal^Kr?^ ""' ^"^P^^^ is the foundation of the old mer? 1^- ^l '"'^''■'^' ^"^ by all means possible to l^TTt ""^ °' ^^'^'^'"^^ ' possible supply of the n J ''°""t''y 'he largest tbe cellars oTban Lrs and t^d" '"'^j ''^ ^^°^^ ^^y i" ' fully considered thislestion'r'-- ^'"" "'"''^ has so say much about i ^1 " " '^^''^ "-^^"^ 'o found very generally to exceed t'hT"' "' ' ^°""'^>' "'"^ y exceed the imports, it is simply ^^?£5sa^^sfe* i no CURRENCY. evidence that the exporting country, or the one whose balance of trade is regarded as very favorable, is in- debted to the one having the supposed adverse balance against it; and the surplus value of goods exported over goods imported represents the sum applied each year to the payment of interest and principal. The class ot economists, especially in the United States, who rejoice over what they suppose to be large additions to the na- tional wealth, seeing that the foreign trade of Great Britain shows a very large and increasing balance against her, prophesy the approaching downfall of the nation. When the returns show an average yearly, apparent, balance against the country of over a ;£ 100,000,000, they see in the circumstance an early condition of national bank- ruptcy. The very contrary is the case. This excess of imports f.ver exports proves two facts ; first, that she is receiving foreign commodities, including bullion, in pay- ment of interest on loans which her subjects have made to foreign governments, corporations, and mdividualsj and second, that her trade is profitable, and she is real- izing the profits on her exports which, with the interest payments, make up the balance-sheet between her subjects and the citizens of other countries. The theory that the citizens of one country lose what those of another make, as a profit, is monstrous nonsense. If such were the case, the same thing would happen in the trade at home between individuals and firms; and one half the commu- nity would be growing rich, while the other half would be growing poor, which is absurd. 8 If people would get in the habit of simply regard- ing foreign trade as a trade between individuals, the same as the home trade, they will get rid of these delusions about the supposed advantages of having a balance of trade in favor of one country over another, or against the rest of the world. Every sound trader sees to it that he ■v *L. . . -.u«#«^.i^^.i . KRRORS RFSPECrwn THE BALANCE OF TRADE. notes, which, being for the time made inconvcrlil.lc were iield at par by the demand for actual money, — the notes l)cing also legal tender. All the rest of this un- precedented payment was made through bankers, anil tiic balances were effecte.! by the clearing-houses of C.rcat Britain and the Continental centres of fmance ; and the proceeds were supplied hy the credit of France, which anticipated tne earnings of French industry, wiiich it will take many years of toil on the part of tiie people of France to make good. But Germany did not need or require gold in payment of this " balance," though so stipulated in the bond. She took things that were more advantageous, on which there was a better profit than on bullion. Her traders and manufacturers — the latter needing numerous " raw materials " to keep their facto- ries going — took in payment what was better to them than gold ; and they paid the German Government the capital in question, 'l-he Government didn't want gold they simply wanted and took "trading power," which they used for such purposes as they intended the loan to effect. It is needless to follow out all the details, to show what became of tlie indemnity. It is sufficient to know Jt was not paid in this " exceptionally dcsiraW.- and cov- eted CO nmodity," bullion, or in money either. Nor is it needful to point out how all the commercial nations of the world, having trade with France, aided in the great operation. 13. The only true method of arriving at a clear per- ception of what is called "international trade," is to regard the whole world as being made up of an aggre- gation of individual traders; and foreign, as well as domestic trade, as being carried on between these, as stated in the postulates of this chapter. The principles discussed in this chapter are of the highest importance I 114 CURRENCY. to those who would master the monetary question, and should be gotten "by heart" by all students of the science.' CHAFIER XIII. MONEY, CURRENCY, LOANS. AND CHI.CK.S. — TRUE AND FALSE PRINCIPLES. I. One of the leading objects of this work is to endeavor to elimmate fundamental errors and currently accepted fallacies from what seem to be well reasoned- out and established princii)les, which are steadily gaining ground in economic science, so far as they seem to affect that branch known as " Monetary Science." If all who travel over the same ground would act on the same plan, we might hope, by and by, to have a residuum of solid truth, and a system that can be appealed to as confi- dently as geometry. Like the husbandman who seeks to grow good grain, we must first weed the field of all noxious weeds. Adam Smith, who did so much towards erecting the principles and practice of industry into a science, was compelled to devote a large space to the overthrow of almost universally prevailing errors then dogmatically insisted on, and entering largely into the groundwork of commercial le-islation. Many of these principles, overthrown by him by unanswerable arguments, still survive in some form in all countries. But even he fell into many errors, which nearly all the best writers on economic science have failed to detect, and which are thus perpetuated from generation to generation. Let it not, then, be considered that I am devoting undue space - '^'''' *""""'"' '«""P"Wished by Mr. Charle, H. Marshall, an imelli- IZlZ ^-t„T, • X' T""!. ^'* """'^ ""^'^ " °' J""- '3. .878. on .h, •ubject oC " The Balance of Trade," — note No. IV. ■*Mt^^^^ "■"W^ MONEy, CURRENCY, LOANS, AND CHECKS. 115 or giving too mud, importance to this matter of exposinc erroneous principles and practices. Wiien all such errors shall he eliminated from the theory and practice of mdustry. the science of poliiical economy will he reduced to a few simple postulates such as those I have set out with. 2. I have laid much stress on the bad logic and gen- eral confusion of thought engendered in the minds of intelligent business men. and even statesmen and pro- fessional economists, like Ricardo, McCulloch, and Mill by not distinguishing the marked difference between money and trading power, or floating capital, and the two elements of which the huter is composed; to wit. the evidences of goods in transit from producers to con- 'tT'^XT"^ '^'"'''' ^^^'"""'•'^'-1 from past industries. Mr. Mill has remarked, on the subjects I am now entcr- mg upon, as follows: "The two topics. Currency and Loans, though themselves distinct, are so blended in the phenomena of what is called the monev market, that it IS impossible to understand the one without the other • and m many minds the two subjects are mixed up in the most mextricable confusion." How admirably this de- scription applies to the whole host of " Money Article " Alters in Lombard and Wall Streets ! But is it surpris- ing when we find the late Mr. Bageat. a banker, and the highest Lombard-street authority, accused, by a learned Oxford professor of political economy, of using the term pwnej m six distinct senses, and never deigning to point out the perfectly clear and logical distinction between money and capital ? This confounding of currency, which embraces money, with loans, or. more properly speaking what IS loaned, which is Trading Power, leads the public when there is a pressure, or any sudden increased de- mand for capital, to call out lustily for more bank notes when trading power is what is wanted. ' f ^fe^^^^a^^JJ^^^g ^ -JrljF ii6 CURRENCY. 3. The confusion of tliought, referred to by Mr. Mill as bcinfi engendered in some minds on the subject of currency and loans, would immediately disappear, like the morning mist before the rising sun, liy the inculca- tion of the perfectly i)lain method of differentiating all the principles and elements involved in the various pro- cesses of utilizing trading power. Mon'.y, for instance, differentiates the ratios of all values, or, more correctly speaking, the ratios of the market values of all commodi- ties, lands, labor, etc., in comparison with eat h other. Money also has the jmnciplc, peculiar to itseii 1 differ- entiating the value of the material of which ii is fabri- cated, in comparison with other things having market value. That Uiere is ;iny mysterious or other relation between " currency and loans " is a fundamental error, and no amount of reasoning can make out such relation- ship. When currency forms a part, which it sometimes does, in a very limited degree, of the ocean cf trading power dealt in, in the loan market, it is not in its char- acter as currency at all, but {to the extent of its market value) as trading power. It certainly requires no great effort of ratiocination to reach tiiis most important start- ing-point. 4. Adam Smith had a clearer perception than most authoritative writers of the true distinction between cur- rency and loans ; but neither he nor Mr. Mill saw dis- tincdy and vividly that currency, which means simply metallic and paper money, holds no other relation to loans than that of so much trading jjower or capital. Money (I always mean by this word metallic, unless otherwise stated), in its measuring capacity of pounds, shillings, pence, or dollars and cents, performs the same service, in measuring out capital in the loan market, as the quintal or hundred weight does in the grain market. I have repeated tiiis proposition in order to apply it more fully to points I aim to establish. MONEY, CURRRNCY, LOANS, AND CHECKS. 117 r. Mill jct of r, like culca- ng all s pro- itance, rrectly iniodi- olher. (liffer- Mjri- narket elation error, lation- otimes lading cliar- narket I great start- most n cur- ,w dis- simply ;ion to :apital. unless lounds, ; same •ket, as narket. it more 5. Dr. Smitii, speaking of capital, which he calls stock, says, "The (luantily of stock, ihcrcforc, or, as it is com- monly expressed, money, which can be lent at interest in any country, is not regulated by the value of the money, whether paper or coin, which serves as liie instru- ment of the different loans made in that country, but by the value of tliat part of the annual |)roducc, which, as soon as it (omes, either from the ground, or the hands of the productive laborers, is destined, not cily for re- placing a capital, as the owner does not crre to be at the trouble of emjjloying himself " Dr. Smith eviden'ly meant the accumulated profit arising from the various industries of such country, which, as stated in i)ostulatc 36, forms a part of the floating capital, or trading power, from whicii loans are drawn ; but he has no- where shown that he had grasjjed the fact that good' themselves supply by far the greater part of that reser voir of capital (not money) out of which the commer- cial wodd at large draws supplies to keep all those [jro- ductive industries in constant motion, or to carry on reproduction in perpetual succession. 6. There is something indefinite in tlie term "mar- ket." We speak of the "Joan market " as if it were some particular place, where all who have capital in any form to lend, and all who want to borrow, meet together, and make their bargains. But in effect the same end is achieved by a very different process. The loan mar- ket is, in fact, composed of the aggregation of all that portion of the people who have any t)v", ' ley desire to lend, which very generally is held o> bankers on deposit, and tho^e who have bills given them for goods sold. The latter class are, throu"!', the aid of the banker, in a sense borrowers of their own capital ; since they furnish the very trading i^oiver they are enabled to borrow, through the magic intervention of the check. I \\ .i34^A^Mv,.^A-MJismm«i»mi ' ^i^v^ i ii8 CURRENCY. When the borrowed capital is drawn for use, the check passes it over to pay a debt or complete a purchase. When the bill falls due, which the bank has transmuted into purchasing power, the maker pays it by check. So every thing is carried on in perpetual succession by check, and seldom is any money drawn. These checks are daily balanced against each other at the various central clearing-houses, which I shall by and by more particularly describe. This, then, is the loan market, or " trading-power market." 7. The money market is quite a different affair. It is everywhere where money is bought and sold, where money is actually paid over the counter for goods, and goods are paid for money. Adam Smith very well ex- presses it when he says, "Money is a commodity, widi regard to which every man is a merchant." It is, in fact, in the small dealings by retail, and in the payment of wages, and largely for farm produce, and fares on steamers, railways, etc., where actual cash is paid, that the money market becomes conspicuous. It is in these dealings that the demand for money arises ; and the sup- ply will always be properly meted out under the system I have proposed, especially if that system should be extended, by treaty arrangements, so as to embrace all the great industrial nations of Europe and America. 8. One of the most deceptive and alluring errors of amateur economists of the " practical school," and exten- sively prevailing among the rank and file of politicians, is the doctrine that Government is bound to supply a cer- tain amount of metallic and paper cwxrency per capita, or to average it at so much a head for every man, woman, and child in a country. This is statistical lore brought into the regions of scientific principles. The question of population has no special relation to the volume of cur- rency needed to conduct the industries of a people, other check rchase. imuted check, ion by checks various { more rket, or . It is where ds, and I'cU ex- ty, with t is, in layment ares on id, that n these he sup- system 3uld be irace all :a. rrors of d exten- liticians, ly a cer- apita, or woman, brought jstion of ; of cur- )le, other MONEV, Cl/RRENCy, LOANS, ANB CHECKS. 1,9 bank deposit accounts nnT.K ' ' "" '■"'^' ^^^P taken o ^J ,1 """"""""= »" the number of codfish one ;:: r;:s t: r*rr "°'-\-'- shall more particularirdescrfbeTn^l-?"'' "='' '^ ' which I Have a,read/fre::«; :„:,fr ^""-"^' ""^ '° rore'd::cCLti-rt;:.:iijr^- fs^tirtntrnrs^ei^ib^^^^^^^ .he suppl, of p,p,r ,„oney, so as to^Tly 11? ^ rixrn:::hnt::r:;if.4- • coneetn^e/ Ssl^t^ I ;J:.r;:,; tXe":-^! of a large number of influential journals in ,he Un" ed rLrf,x;iS:;rr„j:ra~^ • volved. Their i„.er^;r;ai;;;.t:lrTd:;;:aid Bin J 20 CURRENCY. hence the issue of paper money by banks should be abolished. This proposition, however, will require more extended examination in a future chapter on banks of ''"lo The theory that there is a natural rate of interest, aboui which the market rate revolves, or osoUates, is another fallacy. Both Adam Smith and R.cardo have TclTd the existence of such a rate ; and Mill, remarkmg on their theories, says, "the natural rate is some rate about which the market rate oscillates, and to which it always tends to return." There is certainly no such natural rate, which would, if it existed, be a permanent fioced rate. A single moment's reflection will convince any logical mind that the market rate is the only natural rate of interest, because it is the market that is acted on by the natural law of supply and demand. I have sta ed this proposition in postulate 38. It is self-evident that the market rate of interest is regulated by the supply of capital /., and the demand >r, capital in the loan mar- ket : and hence the natural rate is the market rate. I am afraid I am upsetting a great many long-cherished fun- damental errors, which will have to be eliminated out of the received tlieories of industrial science; and pos- sibly many more must follow, o ^ „ii II I shall maintain, as a correct principle, that all bankers and traders who require currency should buy it at the market price, and for the full expressed value^ The plan of lending to banks a government guaranteed paper circulation on national securities, as in the United States, and to the extent provided by the Bank Act of 1844 to the Bank of England, is a violation of sound principles of public policy. It is the worst kmd o class legislation, and has no justification in principle ; while it is palpably evident that it is a false system of paper money, which should be based only on metal. Id be more iks of iterest, ites, is 3 have larking 16 rate hich it such manent Dnvince latural :ted on ; stated ;nt that ipply of an mar- :. I am led fun- ited out ind pos- that all Id buy it ;d value, laranteed e United t Act of of sound 1 of class ; while it of paper MONEY, CURRENCY, LOANS, AND CHECKS. 121 12. There is no distinction to be drawn between me- tallic and paper money, in respect to the parts they respectively perform in the general operations of indus- try, other than that the former regulates the supply of the latter, so as to exactly meet the demand for it. In practice, a sover(;ign or a half-eagle serves no better purpose in making a purchase or extinguishing a debt than a pound or a five-dollar note. // is simply a matter of convenience, and hence the public will generally prefer the note to the coin. Such notes are easier and more safely carried, and, when the security is ample, will, as a rule, be preferred to the metal. Mr. Scott Russell, the eminent shipbuilder, mentioned to me as a fact, that, in Scotland, he found great difficulty in getting the country people to take sovereigns in payment of travelling ex- penses. He -aid more than once his host or hostess pushed the gold coin back to him in disgust, saying, " I nae want that thing. Gie me a poond note." 13. One of the chief obstacles to the progress of sci- entific principles is interposed by what are termed " vested interests." Every step towards reform in mone- tary science, or in giving effect to its teachings, is certain to meet with strenuous opposition from those who have real or fancied individual or class interests likely to be effected by the change. There are some, however, whose education in old dogmas and teachings lead them to resist from what the Rocky Mountain men call " pure cussed- ness," which may be translated to mean pure obstinacy and preconceived opinions. In the matter of issuing paper money, a certain class seeks to make a profit by issuing such money. In the case of a note issue founded on and guaranteed by public securities, which makes bankers reckless in regard to keeping on hand an ade- quate reserve or trading balance in rash, the temptation to embark in banking as a mere speculation is very ssasawssass^^^^ 123 CURRENCY. great. The securities draw interest, and the notes are used to make another and larger profit by lending or discounting commercial paper. It is a nice method of " being able to eat your pudding and have it too." Pos- sibly a time may come when such a system will not be so advantageous, or sufficiently popular to maintam its existence. CHAPTER XIV. MONEY, CURRENCY, AND BANKING, AND THE ECONOMY OF PAPER MONEY CONSIDERED. I. I PROPOSE to devote this chapter to the subject of money and currency in connection with banking, and the extravagance in metallic money; and the first thing to which I shall turn my attention is the fallacy that prevails among a large class of economists and practical business men both in America and England, respecting the policy of delegating the prerogative of the state to joint-stock companies and private parties to issue paper money. Professor Bonamy Price seems to be a representative man on the side of those who favor this policy. He says in his "Treatise on Banking and Currency," pubhshed m 1875, "There is a very solid and serious distinction be- tween a private issuer of notes and a government. The property given to a solvent banker for his notes ts not lost to the mtionr (I italicize the passages that seem to me to be palpable errors of fact, as well as of princi- ple ) "The banker lends, if he is a good banker, to persons who do not waste or destroy. The public pays exactly the same for the tool of exchange, whether it procures it from the miner or from the bank. But wlun the wealth is given to the miner he consumes it. The nation retains, no doubt, an equal value of gold ; but tt is u THE ECONOMY OF PAPER MONEY CONSIDERED. ,23 anci::i,i:f T"'"''"""' ''^-^^'-^-^. in buying gets irom ,t. The same services are procured from the ban note, only it costs but sixpence \o the W. ". " extent of ^4 X9.. 6^., which must have been sent away to a forejsn mmer, now remains in England. But J. enunen tissues are directly connected with consun.pZ. 2. The reasoning in the above paragraph is so palpably fallacous that ,t is difficult to credit it to the same acute 'nmd that has so ably in the same work analyzed and reasoned out the business operations of a banker and H m such a flood of light on a subject just beginni g to be clearly understood in all its multifarious operations and ".fluences on the industries of the world. There is "o doubt, "a very solid and serious distinction beL^": pnvate .suer of notes" and a state issuer ; but "he 7Zc ^"^ '' "'°''' self-evident than the fact that If the Government, as the agent of the state, can pur chase earfcles it consumes in the maintenance ofX army, the navy, and all departments, and can pay for t le services of its hundreds of thousands of employee w^h the not ,, ^,^ ^^^^^^ .^ ^^^^^ ^^^ ^^^^^ P es w h . The note ,s no more a tool of exchange han an enua amount of any other trading power ; an'd, in the light' of tTnce ' rr °^"^^'^'' ■' '^ "°' °^ *■- ^%'^test Lpo. tance whether >t be issued by the state or by a private issuer, sav. only the considerations, which are the afe t jssuersp „eh supplies the best and most trustwor^ t ol I ^°"^'^^'-^t'°"« being conceded to be equal .t only becomes a question whether the state, or say the whole people, Shan have the profits of the i su . or'one I --itsfe*KiiS#te4ii^^j)»,35a^^„- 124 CURRFNCY. favored corporation, or two thousand, as m vhe Un.ted . sT^r "Government issues" are no more "d.rectly connected with consumption" than "private .ssues "l resolves itself, then, into the simple question as to who shall have the profu; that -- - far as any pnnc. nle is concerned in respect to the work which the ool , S exchange " performs This is as true as any propos.t.on in geometry, and Professor Price's conclusions fall to the ground. The £s note, if issued by ^^e ^-'J' ^VofJ Lrc to the state than to a bank ; and the £^. 9^- 6^-. :, ich the Professor assumes to be the P-^t o the n , will belong to the state, if the state acts as the issuer, head of giving it away to the bank. Mr. Pnce s argu- ^nt as to the' comparative advantage of utihzmg the Te of notes as substitutes '. gold can only be allowed as an incident connected with paper -""^V; J^^^^^'^^ obiect of such money being to secure to the pubhc a „^e convenient tool than gold coin, the matter of profi Tust be kept strictly in subordination to that object. It Tonly when a large' accumulation of metal takes pa Lu is needed to secure the convertibility ot the issue Tpa^r moty, that a portion of the gold can be parted : Uinrsold^'to tl. pubUc or to ^or^^^;^^ traders Again. I desire to impress on Professor Price mtnd hat neither kind of money is one whit better than Tequa amount of any other kind of trading power Teeded in the industrial pursuits of the people, and the ktter is really the element in which the banker lives anr-oveTand has his being." The supply of trading poweT is the specialty of the banker, as the supi^y of ^oney, metallic and paper, should be of the state I hope he Professor will set himself right on this que^t o^^^ and when he issues a new edition of his valuable Trea- tise on Banking and Currency," will make a note of the eL he has so palpably fallen into in his reasoning on this subject. L ^S*-5 nited rcctly on as )rinci- a tool )sition to the ost no \s. 6d., ; note, issuer, i argu- ng the illowed e main ublic a if profit ect. It IS place le issue J parted tes and r Price's tter than g power and the ;r " lives f trading upply of state. I question, le " Trea- ,te of the ioning on THE ECONOMV OF PAPER MONEY CONSIDERED. ,25 4. In respect to Mr. Price's comparison of notes with gold, he has also fallen into an error. The mark 1^ of gold . reg.^ated exactly the same as that of any o^er commoduy. But I have shown, that, when conve ted into money, the law of supply and demand acts on ' "\ '^'"'r'''- ^' '«''«0'/ which, if there were limitatio.^^ set on tl,e supply, would raise its market value abo tha of gold bulhon. On the other hand, if n,ore is coined waTir^he 'h'" "^'"^ ^°'" '-'' 1^--^'^ «""S way mto the meltmg-pot. The goods sent to the " for- eign mmer" to pay him for his labor are no more lost by h.s "consumptive " habits than goods exchanged for any other valuable product, at home or abroad. I, long as people and nations want gold, and are willing to pay for It, the foreign miner is as good a consumer as Ly other worker. Who can deny this fact ? S; Then, as to the substitution of paper money as far as IS practicable, if that principle is admissi e''a a he advantage will still be in favor of the nation's reta^! ing the issue ,n its own hands. But why has my much esteemed and distinguished friend mixed up the "wo quest.ons,-that of the ... .W of paper mo J .1 money? They are quite separate and distinct; "there >s a very solid and serious distinction between " the two things. If the tool bank notes and the tool state no es - equal in efficiency, and the state is equal in solvency TlVT" 'T? '^''"^* '^""'^ oi metallic money, so tii;r i::t;r ''--'' ^^" "- -'-'^ -^^ - ^ ^ 6. The point which Professor Price has attempted to make in favor of delegating the prerogative of the state to he has failed, -IS diametrically opposed to the plan of ia6 CURRENCY. . H i! separating the Issue from the Banking Department of the Bank of England. This separation, he claims, — and I admit the claim to be good, — makes the Issue De- partment just what the Professor calls it, "a state issue department conducted by the Bank of England directors on the premises of the bank." I quote from memory, but the quotation is right in substance. The Professor is therefore inconsistent with himself. 7, I take exception also to his argument against en- couraging the importation of gold, as being contrary to the principles of free trade. I have already refuted the theory that the consumption by the foreign miner of the wealth given in exchange for his product is a loss to the nation. " The wealth given in exchange " for any foreign product, whether of utility or of luxury, is also consumed. But what has the matter of consumption to do in either case ; that i?, in respect of gold or of any other article of trade? The only question for the mer- chant and economist to consider is, whether the trade is profitable. // is simply an exchange of equivalents in mar- ket value, — nothing more, nothing less. It is a very com- mon delusion, even among practised economic writers, that it is advantageous to a country to produce precious metals rather than other valuable comrnodities, or than to buy them abroad with other products. Now, there is only one case where the home protluct of these metals is more advantageous than importation from abroad ; namely, where they can be produced cheaper at home. If the labor and capital employed in their production at home afford a better profit than when employed in producing other things, which can be exchanged for the needed supply of the metals abroad, then home mining is advantageous. It is simply a question of profit and loss to those engaged in the business, or how labor and capital can best be invested. tment of IS, — and ssue De- ate issue directors memory, ofessor is ;ainst en- contrary y refuted miner of is a loss " for any y, is also nption to Dr of any the mer- ; trade is 's in mar- rery com- c writers, precious , or than V, there is se metals abroad ; at home, reduction ployed in ed for the le mining srofit and labor and THE ECONOMY OF PAPER MONEY CONSIDERED. 127 8. It will be seen hereafter, in Chap. XXVII., para- graph 7, that the claim set up by Adam Smith and most economists to the present day, that the substitution of bank notes for coin is a great advantage to a country on the score of economy, is a complete, though an almost uncliailenged, delusion. I shall show that the best cur- rency for a country is one composed of metallic coins and paper, issued pound for pound, dollar for dollar, on such metal, the two being interconvertible at the pleasure of the holder, and claim that to the public such currency is the /frtj/ expensive. 9. There is no certain, or even near approximate, method of ascertaining the amount of ciraihilion in a country where it is made up of mixed metallic and paper money; though the issues of the latter may be esti- mated. Good authorities assume the circulation in the United States (May, 1879) to be, paper, J?65 0,000,000 ; gold, $250,000,000 ; silver, $50,000,000; subsidiary coin, ^50,000,000; total, 2:1,000,000,000. The coin, on this estimate, is $350,000,000 against $650,000,000 of paper, — not very far from two dollars of paper to one of metal ; and if we discard the $50,000,000 of subsidiary coin' which is so much overvalued, and class it with paper, we shall have $300,000,000 of metal against $700,000,000 of paper and other token money. 10. According to Mr. Ernst Seyd, an able German actuary and statistician in London, the circulation of Great Britain stood in 1876: — In sovereigns and half-sovereigns Silver and copper coins . " Provincial," Scotch, and Irish notes Bank of England notes • jfi05,ooo,ooo 16,000,000 15,000,000 37,000,000 ;^i73,ooo,ooo Mr. Seyd add. , "Of this, the metallic currency may be taken as all in circulation; but of the country bank •mmnm 138 CURRENCY. notes there may be but ^12,000,000; of the Bank of Knt^land, Init ^27,000,000." Mr. Scyil probably means a,/ive rir( illation ; for, in his work on the " Error of the Note Issue of the Hank of England," he treats the notes helil "by the Hank as " reserve," as being in rirculation. This is the correct method of regarding all notes or metal held as reserve by bankers and merchants. But, in comparing the amount of paper and metal in order to see how much is saved by paper, we must take account of the metal held in reserve to meet conversions of notes. This will make tlie matter stand thus : Bank of I'^ngland notes uncovered by metal, $15,000,000 ; country notes, less one-third held for rcscr\'e, ,S 1 0,000,000. We thus find the excess of notes above the bullion and coin held for conversions is just ^25,000,000, against ^121,000,000 of metal. But inasmuch as the metal held in the Issue r)e])artment of the bank is nearly all in the form of bullion not counted by Mr. Seyd, and which would be promptly coined to fill the vaccuum that would ensue if the jC2'j,- 000,000 of notes issued on metal were withdrawn, we must add that amount to the coin circulation, less, say, ;^3,ooo,ooo in coin, held by the issue. We shall now find the metal to stand as ^^145,000,000 against ;^25,- 000,000 of paper, or nearly six times as much. Cireat Britain thus saves the sum of ^25,000,000 by the use of paper, or as a financial gain, the interest on which, at three per rent, is ^{^750,000 ; and this ' ^es not go to the whole peopic, but to a select few bank-stoc k holders. II. I arn now speaking only of the use of paper money as a financial expedient, which I insist is a secondary, and in no case properly 2i- primary, considera- tion. Its primary object is to supply a better tool of industry that is more convenient and readily available than metal. I discard in toto the theory that paper e Rank oi for, in his e Hank of ; Bank as lie correct as reserve paring the w mtirli is nielul Jiclcl will make uncovered -third held excess of onvcrsions of metal, •epartment iiUion not promptly Irawn, we 1, less, say, shall now 'list ^25.- ;h. Cireat ;he use of which, at : go to the (Iders. of paper nsist is a considera- ;r tool of available hat paper THK ECONOMY OF PAPER MONEY CONSIDERED. 129 money shoul.l he use.l to create new capital, or as an a-ixil.ary to (mai.cial operations, and shall hereafter demonstrate that money and f.nancc ougl>t to he wholly separated in tlu.ught and in practice, from each other (Chaps. XXIV. -XXVI.). The banks Amsterdam. Veri.ce, Hamburg, and Sweden were pure and sin.plc banks of issue, and did not at first lend the metal re- ceived in payment of notes; and it was only when they di.^f*&;i,g^?^MW ;w tfO CURRENCY. CHAITER XV. BANKS OF ISSUE, DKHOSIT, AND DISCOUNT. — THEIR ORIGIN. — THE ISSUK OF I'APFK MONKV NOl' LKCITIMAIF. NANK- ING. — CANNOr I'KOl'KKI.Y ME DKI.WJAIKU lO HANKS. 1. Thk subjects to be coiisidcrt-d in this chapter are of extreme interest in monetary science. Tliey bear down strongly on what are termed vested rights, legal and eciuitable, and tradition.-il [jrejiidices. Such con- siderations always crop out, and oijpose themselves to every social and industrial reform. They are creatures that die hard, and live down, very often, several genera- tions of men. In order to show, demonstrably, that the issue of paper money is not legitimately the prerogative of bankers, I propose to point out the distinctive features of the three kinds of banks mentioned at the head of this chapter, and ascertain what connection banking, as ' now conducted, has with metallic and paper money. I shall show that all sound and good banking is confined to receiving and holding on deposit " other folks' " capital, and discounting commercial paper, or bills given in payment of goods in course of production and distri- bution, as pointed out in postulates 35, 36. 2. I can add nothing to the clear analysis made by Professor Price of the business of a banker ; but he has ovedooked the manifest distinction existing in theory and practice between the issuing of notes to take the place of money, and that of dealing in trading power, a small part of which only is made up of money. He has, how- ever, in a few words stated the exact and legitimate busi- ness of a modern banker. He says " The bank and its great instruments, the check and the bill of exchange, transfer the ownership of wealth from one man to another. (EIK ORIGIN. MAIK liANK- > HANKS. chapter are Tliey bear rights, legal Sucli con- enisc'lves to re creatures sral genera- )Iy, that the prerogative tive features he head of banking, as ' money. I is confined her folks'" r bills given J and distri- is made by but he has theory and e the place wer, a small e has, how- tiraate busi- mk and its f exchange, to another. BANKS OK ISSUK, DM-OSI I, ANU DISCOUNT. 131 But banking is not currency, ami hopeless confusion must result if it is regarded as currency. IiuU-ed, the referring to nirrcncy as the cause of many of the most important events in banking is, to this hour, the fatal cause of the unintelligibleness of that really sin)ple matter, currency. The practice of banking leads to a vast diminution in the use of currency in the {juantity of coin ami bank notes employed ; but they are essen- tially distinct instruments, precisely as a plough drawn by horses is a different tool from a spade worked by a man, though they botii perform tlie same service of digging up the ground." 3. The legitimate offices of a banker, then, are to facil- itate tlie " transfer of wealth," or, more correctly speaking, trading power, or capital, which he has found out how to do, by utilizing the value of goods in course of production and distribution. The circumstance, that by far the larger proportion of this business is conducted by non-issuing banks, and is effected with the use of only one-thirtieth part of paper money, is demonstrative that banking has no practical or theoretical relation to the issuing of notes. Furtiiermore, it is a question hardly to be dis- puted, that these non-issuing bankers find their profit in not issuing notes. They earn, and, as a rule, return, a better profit on the cajjital invested, than such as distract their attention, and occupy their time on a business of a totally different character, and which probably, on the whole, has caused more loss to the public, the stockhold- ers, and individuals connected with the issuing of paper money, than all the profits that have ever arisen there- from. It is one of those illusory methods of seeking to make wealth, like the prospecting for gold ami diamonds, that numbers its victims by the thousand, while those who have been successfiil count by hundreds or tens. Any one who will take the trouble to investigate this subject, "«*M*sr.'nvwft?*p^er*tr* ^~e 132 CURRENCY. going back a hundred years, will be amazed at the enor- mous sacrifices of capital that banks of issue and wrongly managed government issues have inflicted on the world. Still, the delusion clings to business men and economists that banks of issue are the right things, and that they, and they only, know how to mete out currency in con- formity with supply and demand. But a careful analysis of the business, and the objects actually attained by and through the instrumentality of banking, as conducted at this time, disclose two important facts : First, that nearly all the advantages, and they are enormous, which have inured to society from banking, have proceeded from banks of deposits and discount irrespective of notes ; and second, that nearly all the evils inflicted on mankind by bankers are directly traceable to banks of issue, and the issuing of notes. These are solid reasons for putting an end to the issuing paper currency by banks, and remitting the prerogative back to the state. 4. But I must now proceed to point out the distinction between banks of deposit and discount, and such as issue circulating, or currency notes. " The hopeless confusion of ideas " respecting the issue and use of paper currency, or money, in connection with banking, is, no doubt, due to the circumstance, that until lately in the United King- dom, and still very generally in America, banks of deposit and discount have also been and are banks of issue. Whenever the state assumes and exercises the prerogative of issuing paper, as it always has exercised it in respect to metallic money, and the niime of bank note is abol- ished, then " the source of unintelligibleness " will disap- pear. So long, however, as there are banks of issue and bank notes, the public will continue "to connect currency with banking." To logical reasoners and economists, as a rule, the distinction between the printing and issuing of notes which the banker engages to pay in money, on X i Ki l jpift iI W i the enor- d wrongly :he world, conomists that they, y in con- 1 analysis ;d by and ducted at lat nearly lich have led from Jtes j and inkind by , and the utting an remitting listinction h as issue confusion currency, oubt, due ted King- )f deposit of issue, •erogative a respect ' is abol- n\\ disap- issuc and currency smists, as d issuing loney, on BANKS OF ISSUE, DEPOSIT, AND DISCOUNT. 1^3 demand, and the >uin^ of such r.tes, which represent t^e^banker's credit only, and not g .ds, appears pe'Sy S- The comparison of the plough and the spade well defines the distinction in question. The banker in1,t proper sj^^ere is at the same time a borrow " nd a ender. In a sense he lends a man his own capital when ^ he discounts his bill founded on a sale of good Be also borrows his depositors' capital, and lends i to tld along with the proceeds of their own bills, which by the jnag.c power of the check, he is able to do. VVhen le banker lends his own notes, he simply trades on Is own aiKlnototherfolks',credit. This is'a manifest and funda' mental d.stmction between banks of deposit and • Jount where the Government, m effect, lends the bank the -edit of the state, on public securities, to the extent of ^r ks vSl M " " ^--"-ent lends to all national banks, without limit, ninety per cent of paper money fullv g-ju.eed,whid. is the same thing as ^^ingt^rS Treasurof ''.T'T''' '"'""^'^^ '^'^S^d with the Treasurer of the United States, are anomalies in banking and currency. Yet neither the Bank of England nor e c""r o "n^ °' ''' '''"^' '""^ ^- -^ -"-- pu sui s or' "'" ''""'': '■'"'>' '° P^°-°^^^ -dustrial pursuits, or to earn prohts for their shareholders than non..sumg banks and bankers. The questioi of he Government as the agent of the state, knding notes to banks to trade on, excluding all other classes, will o dp v more attention hereafter. occupy 6. That there is a marked distinction between a bank- cedut".' " r "™ '"' °" ''"'' °^ ^- -«^-ers' admitted T°hV """'' °' ^°°'^' '""^^' ' ''^^^' ^^ admitted. The one case .s trading on credit /ure and ii..-.^.o-: ■^.^fesfti-C'fes.p&iit^jj^: 134 CURRENCY. simple ; the other is trading on actual capital. Though a man's credit may and does serve the purposes of capi- tal, it is unliice actual capital existing in the accumulated savings of industry, and actual goods represented by bills. It is this difference that marks the boundaries between banks of issue and of non-issue. The issuing banker trades on his own credit to the extent to which he can circulate his notes ; the non-issuing banker has solid capital to trade on. If this were not true of the issuing banker, he would have no motive of profit in circulating his own notes, instead of notes of the state. It is true, when the notes are paid out, they are used, by the public at large, as money and trading power in by far the greater number of transactions where they are used. It is only as money that such notes can be kept in circulation. If they reach the hands of a trader, he puts them back into his bank ; and they presently return to the issuer. Traders, in their regular course of business, seldom draw notes or coin. They use checks in perpetual succession, as I have somewhere else shown. Genuine banking is, in fact, as Professor Price has shown, simply acting as a broker between producers of goods and consumers, between buyers and sellers. 7. I have, I trust, sufficiently demonstrated, that the issuing of paper money is, in reality, what Professor Price says of it, not banking at all, though he insists that banks ought to issue it ; and that a banker can trade as well on notes issued by a state, like the greenbacks of the United States, or notes of the Bank of England or France. Let us briefly notice the origin of banks, as we now know them. There were bankers and " money changers " in ancient times, but they were very different affairs from the banks of modern times. The first examples of what may be called issuing banks, were those of Amsterdam, Sweden, Hamburg, and Venice. These banks were started in the ^mA i i]MiW i nn«u. ii > 1 . Though ;s of capi- ;cumulated ed by bills. :s between ing banker ch he can has solid the issuing circulating It is true, the public the greater It is only lation. If I back into r. Traders, w notes or 1, as I have in fact, as a broker s, between d, that the essor Price that banks '. as well on the United ance. Let now know angers " in rs from the f what may m, Sweden, rted in the BANKS OF ISSUE, DEPOSIT, AND DISCOUNT. 135 fifteenth and sixteenth centuries, and originated in con- sequence of the great abuses that had crept into the monetary systems of most parts of Europe. The practice of clijiping, filing, and overvaluing metallic coins, by pro- fessional rogues and fraudulent kings and legislatures, had become intolerable. These banks were established to remetly those abuses, and were pure and simple banks of issue. What they did was to receive metal by weight, at its market value, deducting the cost of coinage and management. For all such deposits they issued their notes, or, in some cases, receipts, to be held while the metal was being recoined. McLeod says, " none of these banks did any business on their own account by way of discounting bills or making loans. Thus we see the pe- culiar function of all these banks, which were pure banks of deposit, was to issue promissory notes, payable to bearer on demand, which, however, did not exceed the quantity of the bullion they were substituted for." The notes were mere vouchers for the deposits of metal. 8. The Bank of England, established in 1O94, was the first bank of deposit and issue in England. But it was also a bank of discount. Mr. McLeod says the names, '• bank and banker, were utterly unknown in England in the time of Charles the First." Those who dedt in money and loans were then, respectively, I .>v,-n as or called "money changers" and "money ^,iivene?s." The original capital of the Bank of England was ^1,200,- 000, all of which was lent to the Government for the privilege of issuing a like amount of notes, uncovered by specie, and having also granted to it .;.. right to receive deposits and lend capital and money on commercial paper and other securities. This was the origin of the bad system of founding an issue of paper currency on public securities, and treating notes as good cash reserve, which still clings to both the British and American na- '■•' ^W! fctTlCJ !%IS< jt*»,i»t^ r«ss;— .- K.T^,-^™*--*^-«fa.«ir»«i(trt! I .'1 136 CURRLNCY. tions with desperate tenacity. It was a plan which enabled the supposed lucky lenders of capital to get the current rate of interest on it, and have it, too, to trade on in the form of notes or paper money. 9. The prestige which the first British bank acquired, by its sort of partnership with the State, made the bank a great success, and has been the parent of all the manias that have so often and so violently raged in Great Britain, until the year 1844, for the establishment of banks of issue, deposit, and discount, combined. In the American Colo- nies, now the United States, the practice in question received its highest and culminating abuse, where the issue of paper money became a burlesque on monetary and financial concerns. During the latter part of the last and beginning of the present century, up to 1844, the multiplication of such " money-making " banks, by bad and reckless competition, and the over-supply of paper money, leading to inflation and overtrading, brought stupendous ruin on large bodies of stockholders and the general public. 10. In Great Britain there were three epochs, during the period last mentioned, when these manias for issuing paper money prevailed; namely, from 1810 to 1819, from 1823 to 1825, and from 1835 to 1838, each ending m hundreds, if not ihousands, of failures, and the loss to shareholders and the public of sums of startling magni- tude, and the destruction of business houses and indus- trial interests beyond estimate. These disasters led to the passage of the Bank Act of 1844, prohibiting the issue of paper money by any new companies or firms, and totally abolishing banks of issue (except the Bank of England) within fifty miles of London. II. The banks of Amsterdam, Sweden, Venice, and Hamburg, being restrained from issuing any more notes than the value of the gold on which they were issued, and I enabled ; current n in the icquired, e bank a ■ manias Britain, of issue, in Colo- question lere the lonetary of the 1844, , by bad if paper brought ind the BANKS OF ISSUE, DEPOSIT, AND DISCOUNT. 137 not being allowed to trade, were pure and simple banks of issue, m effect, being compelled to liokl all the gold received for the redemption of their notes. Thus no possi- ble harm could arise from the issue of notes fully cox-red by metal ; and their greater convenience, as a tool of in- dustry, than metal, soon made their notes very popular Ihere were also mai^y circumstances which conspired to render the Bank of Ei:gland both popular and successful from the start. These circumstances led to its receiving a large line of deposits, which amply supplied it with metal and trading capital, for which it paid no interest. There were some other advantages which it enjoyed, ist It was under the management of wealthy and experienced men, who could influence business. 2d, It had no com- petition, except from private houses. 3d, It held the government balances, and had the prestige of being con- sidered a national bank, and managed to a large extent he government finances, and negotiated government loans. It has ever since enjoyed these and other great privileges; but competition has long since set a hmit on Its profits, which are far below those of the Bank of France -the only bank of issue in that oountry,-and numerous joint-stock banks. 12. Having conceded so much to the success, charac- ter, and standing of the Bank of England, I am led, from all that I can gather respecting the embarrassments so often brought on it by its note issue, at present of ^15,000,000, on securities, to the irresistible conclusion that, on the whole, such issue has been an injury to the concern I think a clever actuary and accountant, like Air. Seyd, who had the time ana patience to go into a close analytical investigation of its affairs from tlie be- ginnmg, could demonstrate that the Bank of England has been a large loser by its issue of notes instead of con- fining Itself wholly to trading on its own and other folks' '38 CURRENCY. il I « II capital, including ;£s ,000,000 of free government de- posits. Furthermore, from a pretty careful study of the history of British banking and currency, I am led to think that economists, from Adam Smith to Ricardo, McCulloch, Mill, and Price, have exaggerated the value, to the banking classes at least, of paper money, for the reasons I have assigned ; that is, the enormous periodic losses, and the restraints that the issue of notes impose on legitimate banking. What advantages might have arisen from or may herea/ler arise out of a well and ably conducted state issue department is quite another matter. 13. I lay it down as a self-evident and fundamental principle, that paper money, being simply a more con- venient tool than metallic, ouizht never to be issued for the direct object of profit, or for the creation of private or national resources. When the main object of issuing currency notes is gain, as it always has been, till the Bank Act of 1844 set a limit to the issue on securities, the tendency is to over-issue, or keep out more notes than can be made safely to circulate. In order effectu- ally to guard against the possibilities of over-trading in paper money, the principle I have laid down is, that the first object to be aimed at, is to secure an adequate, and only an adequate, quantity of more convenient tools than sovereigns or other gold coins. The profit must only be regarded as of secondary importance, and incidental. That is, if it shall be found that the note issue of a state money department shall bring about such an economiza- tion of metal as I have pointed out in a former chapter, then the state may avail itself, in a limited degree, of such i>Lofit, and use it as resources. It cannot be doubted that a well-condur'^ed state department, in such coun- tries as Great Briiam and the United States, would not only supply the best industrial tool, in the form of paper V TTraTtinWiniinaatawiya iment de- idy of the am led to > Ricardo, the value, ;y, for the s periodic es impose ight have well and ;e another idamental more con- issued for of private of issuing !i, till the securities, ore notes :r effectu- ;rading in >, that the uate, and tools than t only be ncidental. )f a state ;onomiza- r chapter, egree, of i doubted ch coun- 'ould not of paper ' BANKS OF ISSUE, DEPOSn', AND DISCOUNT. 139 money, but would incidentally yield a larger profit than any bank, or number of banks, all of which would pur- chase their supplies of paper money from the state department. Notes issued by the state, and held within the strict limits of supply and demand, would retpiire very little gold, comparatively, to maintain their market value and hold them at par with gold : besides, their converti- bility would be guaranteed by the whole resources of the nation ; whilst those of banks, unless aided by Govern- ment, command only a very limited amount of backing. 14. The question soon coming up for consideration by British statesmen is, whether the present Bank of England Act, on renewal, shall be so amended as to transfer more promptly than is now taking place the en- tire country, Scotch, and Irish circulations, to the Bank of England, to be made available by lodging in the Issue Department an equal amount of dead securities; or whether a state issue department, pure and simple, shall be created, and established at Whitehall. The great suc- cess of the India State Issue of notes, under very serious difficulties, should encourage a hope that the latter course may be adopted. 15. If the Government of the day, taking a narrow and mistaken view of the important principles and still more important public interests involved, determine to enlarge the present plan of issuing notes on securities, the limit of such fiduciary issue will be raised to jCiO,- 800,000, To this extent, then, would the evils I have so fully pointed out in the chapters on the Bank of England theory and practice be increased. The policy of Lord Beaconsfield's government, so far as it has been devel- oped, seems to fovor the carrying out fully Sir Robert Peel's intention of gradually transferring the entire note issue of the kingdom to the Bank of England. That such a result would lead to an increased sensitiveness in 140 CURRENCY. financial affairs, and. by the increased power conferred on the bank, to still more dictatorial interference by it w.th the loan market and the trade in bullion, I think cannot be doubted. CHAPTER XVI. BANKS OF DEPOSIT AND DISCOUNT, OR LEGITIMATE BANK- ING VERSUS BANKS OF ISSUE AND CLF^RING-HOUSES. I. At t^he risk of being charged with prolixity, I feel compe led to draw occasionally from the fountain of truth deductions already made and applied, in establish- ing other fundamental and collateral branches of the subject, or used to overthrow errors. Professor Price has so fully examined and pointed out the operations of legitimate banking that I am spared much labor, and what I shall say in this chapter presupposes a well grounded knowledge of the subject so ably treated by him That legitimate banking, in the present age, has nothing in common with the issue of notes or paper money, I accept as a demonstrated truth. The bank whether it be a single individual, a firm, or a joint-stock company, must possess an adequate amount of cash capital, — that is, actual money, and accumulated capital which can instantly be turned into money, to serve as a margin of security to customers. Mr. Hankey, who is excellent authority on that matter, thinks one-third of all deposits should be held in this form, as cash reserve The next step is to accept the deposits of all and sundry cus- tomers who may have accumulated capital or desire loans or discounts on the security of goods. It need scarcely be added that the selection of customers, by a bank other than those who simply desire to leave in a banker's iMpW^pWKii^ W ' ' | r-" ' ' I M |WMWWIWWWW|MIWIii|H 1 1l BANKS OF DEPOSIT A>ro DISCOUNT. 141 r conferred rence by it , I think on ATE BANK- HOUSES. city, I feel )untain of establish- es of the isor Price rations of ibor, and ;s a well reated by age, has or paper 'he bank, )int-stock of cash d capital, Tve as a ■, who is rd of all ve. The idry cus- ire loans scarcely a bank, banker's hands surplus balances of capital, is a matter of prime importance. As a rule, with but few exceptions, a bank should never lend capital, its own or its customers', on what is known as "accommodation paper." Commer- cial paper should always represent commodities in course of production, or in transit from producers to consumers. a. In the accounts established between banks of de- posit and discount and their customers, the banker debits himself with his own and his customers' capital, whether the latter consists of accumulated or earned capital, or of the " proceeds " of bills discounted. When money is deposited, it simply counts as so much trading power in the general mass of that article. It is, however, an asset, of which we have seen a prudent banker will tiike care to have an adequate supply at command, in his own vaults, or at easy call. This "cash," together with the discounted securities, makes up the other or credit side of the ledger. 3. By this brief statement of the organization of a bank of deposit and discount, it will be seen that the funds on which he trades consist: Firs/, of his own capital (money being treated merely as capital). Secont/, of the balances of other people's capital, left with him for safe keeping, on which he may pay interest, a little below the market rate at which he lends it, or not, according to the exigencies of customers. Most sound and well- managed banks have a pretty large " line " of customers who do not care to tie up their balances for specific periods, in order to get interest thereon ; and on such the banker makes a dear net profit, without any cost to him- self, by lending to good customers. T/un/, the largest and most important part of the banker's trading fund consists of the proceeds of bills representing goods, which have been discounted; that is, the interest has 143 CURRENCY. been deducted or subtracted from the face of the bills an. the balan. ■ has been debited to the banker i; cred.ted to the c.stomer as a deposit of capital Vhe discounted • interest forms also a part of the trading wnd, be,ng the banker's pr.nt ; and the method of ^u Imcrest '" ''^''"'' '' '''"''"'"" '° S^"'"« ^°»^P°""^' 4. ''"I'at" mighty instrument "the check, as Professor Price expressively calls it, is the talisman by which the common pool of trading power, described, is made availa! . and can at any moment be convertible into cash, it is only so done in the ratio of three per cent on the gross amoun of trading power handled; and of this onlv about the half of one per cent is handled in ioin In refernng again to this fact, it must not ,. supposed that I undervalue the offices of either metallic or pa,Lr mone, as tools of industry. This half of one per c'ent of trad- ing power, handled by bankers, in the shape of money or ^oni IS indispensable to a sound monetary system, h is the .governor" of the industrial engine, and as a meas- vl f- r " r "° "'°''' ^' ^'^P^"^^'^ ^'tl^ than the yardstick and measures of length generally, as well as iLZnlT ?''"''• ^"^' •" ^°""^'"^ ^'^-^ ™-t mportant functions to money, let us not undervalue trading power wielded by bankers through the bill of exchange and the check, in manner already fully set forth. If money corresponds with the governor of the steam-engine, trading power represents the boilers and « nd.?rl ", T": ■■" '" ™'°^'^^^ "^^'^'"^^ °f human industry; and the clearing-house serves, like the safety valve, to indicate the amount and pressure of steam, or he force applied. It may here be noted, that, when the banker pays the check, he credits himself and debits the drawing customer. ■V"p- 4-'* I -s^ f^ BANKS OF DEPOSIT AND DISCOUNT. e of the bills, ic banker, or capital. The Jf the trading ethod of get- ng compound I as Professor by which the i made availa- able in cash, to cash, it is on the gross of this, only in coin. In upposed that paper money :ent of trad- of money, or ^stem. It is I as a meas- th than the , as well as these most undervalue the bill of iy fully set rnor of the boilers and * / of human the safety f steam, or , when the md debits M3 5. To make the subject still more vividly clear, I must state what con . itutcs purely and simply a bank of Di> posrr. This will separate the u[)erations of moilcrn banks, so as to show more precisely tlie dividing-lines between xplained (Chap. uj issue, pure and liof .1 state what a When a pub- ike use of its the several kinds. I have sufti XV. par. 7) what a bank of dt) simple, is, and will let Mr. J. ]!. simple bank of deposit effects, lie deposit bank is established, i services deposit with its officers the money " (Mr. McCul loch means capital including money) " they must other- wise have kept at home, in order to meet their current demands ujwn them ; and when the individual who has obtained a bank credit has a payment to make to another person dealing with the bank, — and the principal traders in most towns in which a public bank of deposit is estab- lished belong to it, — it is made by a transfer of so much credit, or iank money" (trading power), "from one account to the other ; and it is only in the event of a per- son having to pay money to a stranger, that he has any motive to withdraw his deposit from the bank. In this way the circulation of money is rendered all but super- fluous for all but the smallest payments." 6. It will be seen what an immense utilizer of money a purely deposit bank, by the use of the check, can be made ; but it will also be seen that its dealings are con- fined to the one description of capital resulting from the profits of industry defined in postulate 36, and to actual money in a very limited degree. The discount of bills is the greatest utilizer of money, as by far the largest part of floating capital is derived therefrom. Add to this the potency of the check, which, though used to aid the operations of banks of deposit, pure and simple, only finds its highest efficiency in transferring and measuring out trading power in banks of discount. '44 CVRRtlflCV. 7. Though the business thus describee! constitutes br far the greater part of the general business of banks of (lepusu and discount, there are other and kindred opera- tions to which they .k-votc themselves profitably. Most of su.:h banks, through agents and correspon.ients, n,ake remittances for their customers by letters of credit cer- tificates of deposit, certified checks, and bills of ex- charge to all parts of the country, and receive similar remittances, pay drafts, etc. In most large cities, and more especially in London, and many cities in America, th. kind of business is extended to foreign countries and is engaged in oy all other kinds of banks ■ 8. Still further to focilitate the operations of bankers an the settling of commercial accounts and balances, both .lomestic and foreign, the next, latest, and perhap most marvellous invention is the clear.no-„ousf _ Balancing-House would give to onlinary minds a more exact Idea of the nature and offices of these institutions. All business men, however, know what the clearing-house • ; ; br MS only n London where this method of balan- < |i.g accounts receives its highest development. When a clearing-house has been established in a town, a clerk from each bank belonging to it meets similar clerks from al the other "clearing-house banks," and a general ex- change o checks is effected in a few minutes ; and in London the balances are settled without the transfer of a pound of money, by each one having balances to pay ■ drawing a check on the Bank of England, where aU keep a portion of their trading power, or reserve. This plan of checking on the Bank of England went into operation in ,856, and now (r8.6) the annual clearings reach the enormous sum of six/y-sisc thousand millions of pounds; or. put it in dollars, three hundred and twenty- - five thousand million of dollars,-;, sura too large for the mind to grasp. ^ . iftK *<>».»-^i- -IHF ""■" '';-!ai^(ya*s-v<«6&i-„ constitutes by of l)anks of indrcd opcra- 'ital)ly. Most ndcnts, make >f credit, cer- bills of cx- 'ceive similar <-' cities, and 1 in America, {n countries, s. s of bankers id balances, and perhaps INO-HOUSK — nds a more institutions, -•aring-house 'd of balan- il. Wlien a wn, a clerk clerks from general ex- ;es ; and in ransfer of a ces to pay , where all irvc. This went into al clearings miliions of nd twenty- > large for s r V] e /2 ^}. IMAGE EVALUATION TEST TARGET (MT-3) 1.0 I.I itt i^ ill 1.25 1.4 III 11.6 6" Photographic Sciences Corporation 1^ 23 WEST MAIN STREET WEBSTER, N.Y. 14580 (716) 872-4503 CIHM/ICMH Microfiche Series. CIHIVI/ICIVIH Collection de microfiches. Canadian Institute for Historical Microreproductions / Institut Canadian de microreproductions historiques BANKS OF DEPOSIT AND DISCOUNT. MS 9. From what I have shown, it has been seen that the business of a bank of deposit and discount consists in receiving the surplus and temporarily unused balances of accumulated and other floating capital awaiting more permanent investments, — whether it consists of money, checks, bills, or credits on other banks or commercial houses of standing, — and out of the common fund of trading power thus collected, to lend to all customers, having good security to offer, such as bills founded on goods being preferred. The " unused balances " referred to, which nearly all large customers who borrow generally hold at their bankers, it will be seen, form a considerable part of a banker's reserve and discount fund, and become an important element in his profit. 10. In London, excepting the Bank of England, this kind of business is regarded as almost the only legitimate as it is nearly the universal system of banking. So per- fect is the syste.^ ♦'^at, but for the strenuous efforts of the Bank of Enfoiand to dominate the loan market and counteract the operation of the natural rate of interest, there could hardly be any thing to desire. As a bank of discount, the Bank of England stands, I believe, about fourth rate ; and it is entirely within the power of the other joint-stock and private banking firms to put a com- plete and final end to the power of that institution by the establishment of a bank of deposit, pure and simple, wherein to keep their trading balances, and on which they shall all draw to settle clearing-house accounts. This bank might be called " The Clearing-House Bank ; " and a certain amount of the deposits might be invested in public securities, which would yield an income, and pay the expenses of management. It might ,ilso perform the offices contemplated by the " Check Bank," which would have been a success had it been started on the plan suggested. The idea is well worth the consideration *sr- 146 CURRENCY. of London bankers, if it has not already seriously en- gaged their attention. n. It will also have been seen that the issue of notes is in no way necessary to the success of banks of de- posit and discount ; and it is certain none of the success- ful ones in the kingdom would engage in the practice, now that the fallacy as to the profitable nature of the business has been demonstrated by abundant experience. But, as I have before remarked, the delusion still prevails, mostly in America, that banks of issue sustained by gov- ernment securities are advantageous, and necessary to the industrial interests ; and I regret to find such good financiers as Mr. Spaulding, the father of the Greenback, or National Currency Law, and David A. Wells, the able advocate of free trade, and Edward Atkinson of Boston, all sound on the question of trade, with the one excep- tion of paper money, advocating the manifestly unsound practice of the nation connecting itself with and aiding private parties to circulate government guaranteed notes for profit to themselves. If these gentlemen were not national-bank presidents, or othenvise connected with the interests of those national pets, directly or indirectly, and, I may add, were younger men, I might hope for their conversion to true demonstrated principles. But the public mind of America is gradually becoming aware that bankers ought not to be the only class favored with the plan of drawing interest on a good investment, and having ninety per cent of its value in " ready money." The great danger now is, that the so-called Greenback party may push tht; money question to the argumentum ad absurdum b' -^jr/ing out the " interconvertible " plan, and run: ■: o wild extremes of inflation. 12. As an exc^j, ion to the rule, in the United States, I wish to iiiention the name of the late John E. Williams, for many years a large shareholder and president of the iriously en- ae of notes inks of de- he success- e practice, ture of the experience. ;ill prevails, ed by gov- ;cessary to such good jreenback, s, the able of Boston, sne excep- y unsound md aiding teed notes were not icted with indirectly, hope for pies. But ling aware rored with ment, and ■ money." Greenback lumenhtm ivertible " n. ed States, Williams, nt of the BANKS OF DEPOSIT AND DISCOUNT. Metropolitan National Bank, the largest in New York, whose personal acquaintance I had the pleasure to have! Mr. Williams was a warm advocate for the abolition of the national-bank circulation and confining it to green- backs, or national legal-tender notes. His writings on the subject were able ; and he pointed out clearly the desirability, and the advantage it would be to the national banks, to give up their circulation voluntarily, and sell their securities, on which they can realize a handsome profit, and use only legal-tender notes. When the silver mania runs its course, possibly these numerous pet banks may see in Mr. Williams's self-abnegation and patriotic course, and in his powerful arguments, that a true, sound, and permanent monetary system is better than one that excites public hostility, and is founded on a total miscon- ception of monetary principles, and of the uses and offices of paper money. , 13. I ought also to mention Gen. F. A. Spinner, late United States Treasurer, whose name has been appended to so many hundred millions of the legal-tender notes, great and small, from the inception of their issue, till be was forced out of office, near the end of President Grant's ad.ninistration, by the national-bank influences in Congress. He was always opposed to the principle of lending the public credit to bankers to trade on, how- ever f^ood security they were able to give in the shape of national bonds. 14. Hon. Mr. E. G. Spaulding, before referred to, president of a national bank at Buffalo, on the contrary favors this plan. This gentleman has, however, con- tributed a valuable work on the "Financial History of the War," which explains the origin of the legal-tender, or greenback, money, and the reasons for establishing the national-bank system, which is a decided improve- ment on the old State banks. This, and Mr. Spaulding's ': 1 ''■ )l 148 CURRENCY. "Centennial Address to the Bankers' Association," are excellent works of reference on the subjects of banking history and statistics in America ; and they embody the opinions of many of America's leading statesmen on the questions of issuing paper money, and general bank- ing. Mr. Spaulding's address states the number of national banks in existence in the United States then (beginning of 1876), at 2,118, having a paid-up capital of $505,485,965. There were also 907 chartered State banks with a paid-up capital of ^1164,366,669. These, and 2,375 private bankers, were «^«-issuing banks, show- ing a large development of legitimate banking.' CHAPTER XVII. "the primary object of paper money is to supply a better lx)ol of industry than metallic money. — incidentally only can it be properly treated as TRADING POWER, OR RESOURCES" {postulate j^^). I. I HAVE, in the last chapter but one, laid down the broad, well-defined distinction between issuing paper money simply to create trading power, or national re- sources, and of using it as a more convenient and effi- cient tool of industry. The subject relating to the " taking up of loans " from the public, by the issue and circulation of paper money, seems of importance to those who seek, by scientific methods of reasoning, to reach sound fundamental principles. If the position I have laid down in postulate 49, placed at the head of this chapter, is well taken, its acceptation by economists and legislators will lead to very important results. If the proposition is fundamental and true, it overthrows all > The three last paragraphs were written in 1878. tmm- Jk \ssociation," are >jects of banking they embody the ig statesmen on id general bank- the number of lited States then I paid-up capital r chartered State 566,669. These, ling banks, show- inking.' ' IS TO SUPPLY A TALLIC MONEY. — ERLY TREATED AS tulate 49). le, laid down the in issuing paper r, or national re- ivenient and effi- t relating to the by the issue and )f importance to of reasoning, to If the position I d at the head of on by economists )rtant results. If , it overthrows all 1 in 1878. THE PRIMARY OBJECT OF PAPER MONEY. 149 the past theories of economists and statesmen respecting the pnmary end gained by the use of paper money, it has hitherto been and is still the universal theory that the pnmary object of such money is to create trading power or national resources. Banks of issue think of nothing but the profit to be derived from putting notes in circula- tion; and states have generally used such money as resources to prosecute wars. It has always been consid- ered as a legitimate method of making two pounds out ot one, or, as I have expressed it elsewhere in homely language, as a plan by which a man "may eat his cake and have it too." 2 This was not originally the purpose of the inventors of bank notes, as I have shown by the practice of the first banks of issue before cited. It was reserved to British ingenuity to enlarge the uses of bank notes by granting the right to issue them, to be used as money to the Bank of England, as a consideration for a loan made to the state. It was due, however, to the fertile mind of the eminent Scotch financier, John Law, in the next generation to enlarge this fascinating method of creating wealth ; and « Lawism " still clings to the public mmd with as much tenacity as that other delusion, the mercantile theory." If a bank could lend its entire capital to the nation, and receive the current rate of interest for it, and be able to recoup itself by taking up loans from the public on a security susceptible of per- forming the office of money, it is not surprising that ingenious mmds should presently seek to improve on it ^issuing notes without having either gold or securities behind them. They argued that the tool paper money was so much more convenient than the tool metaUic money, beside being so much cheaper, that the public would not stop to inquire particularly into the nice dis- tinctions of monetary science. Law was not so wild in M0MM*«MMHmB4 mmm. ■I »50 CURRENCY. his theories as others, who improved on them. It was argued, that, if government securities formed a good basis for issuing paper money, lands and goods might serve an equally good purpose. Thus the question of providing a better tool of industry was treated as of sec- ondary importance, or altogether lost sight of. The Bank of England still acts on this false theory, otherwise it would -^ell the government securities (^15,000,000) in which it has its capital and "rest" invested, and would let the note issue rest on metal, as it did in the cases of the banks of Venice, Sweden, Amsterdam, and Hamburg. The national banks of the United States were founded on the same erroneous principles, other- wise they would sell their public securities, and trade on greenbacks and their own capital, instead of on notes founded on securities. 3. One of the inconsistencies of this theory, that the proper office of paper money is to economize metal, or make the issue of notes merely a matter of profit to the issuer, is, that banks alone should have this advantage. Indeed, Professor Price has attempted to show that only "private issuers" can make a profit in this way; that when the state takes up loans by issuing notes, the pro- ceeds of such loans " are lost to the nation " (see Chap. XIV.). I have already shown that this is an unsup- ported inference. On it, however, is founded the claim that a bank may property take up loans from the public on the security of its notes, but a government may not, for the reason, that, when a government does so, the loans are consumed, and there is no residuum of profit left to the nation. Now, I am showing that profit is only a secondary consideration, — a thing to be made subor- dinate to the higher and much more important office of supplying a better tool than metallic money. But the plan of issuing paper money on government securities them. It was "ortned a good id goods might ;he question of ;ated as of sec- sight of. The heory, otherwise (j^i 5,000,000) " invested, and as it did in the Amsterdam, and e United States jrinciples, other- es, and trade on ead of on notes theory, that the nomize metal, or r of profit to the e this advantage, to show that only in this way; that ig notes, the pro- tion " (see Chap, his is an unsup- junded the claim s from the public emtnent may not, lent does so, the ■esiduum of profit ; that profit is only be made subor- mportant office of money. But the emment securities THE PRIMARY OBJECT OF PAPER MONEY. ijx is, in effect, to allow the bank to raise government loans men "T.""'"':"' ''"' *'^ P^°""'^ *° '^e Govern^ ment at the market rate of interest. In other words mfhlfr T. ' T"^ '■'' ^"^"'^ '^^P'^^' «^°^k from the public It ,s a plan of organizing and starting a bank without any capital of its own. Hence, like a hrge pro portion of the American national banks, the ver^ notes authorized to be issued on securities are used to^X fo hose secunt.es. The plan is a total reversal of the postu- late I am enforcing. It makes profit the primary object i^oreT^ "°*"' ''''"' """ ™"'" °'"'' °^ "°'^^ ''^^"^""y 4- The idea of substituting a certain quantity of paper "^T'Z T*'"" ™°"'^' ^^''^ "^'y '^^' ^' «^^"t abroad and sold to foreign countries for other and more profit- able articles of value, seems to have taken a deep hold on the minds of even great reasoners like Adam Smith, m\, and others. This method of "makmg haste to grow nch seems so fascinating that it is almost a pity to attack It; but it certainly belongs to the same cate- gory m economic science as the "mercantile theory" overthrown by Adam Smith himself. Tn,e science can- nLr T"^ *° "'''°""' boundaries; and we cannot oIhT w? '°"r''' ^^•«"''fi<=^"y speaking, to take our old tin kettles and pans because we have found out how to do without them. This would be a fraud on the .vhole outside race of barbarians. If we have found o ,r sub- stitute for money, we are bound by honorable prin. -pies to pubhsh the recipe to all the world. If we can make extir^h "^ °"' ''°"" ^° '^' ^'^* °f *^°' ^"d can ,h?w . ^r"' '° '"'"•°"^ °" "'"^*^"«' «" nations should have the right to the secret. But this theory is something hke that of the Hindoo idea, that the world must have something to rest on; and so the big turtle was mvented. If we palm off our useless metal on other 11 m M i* »>^ate issues. The old " Continental money " of the United States, and the issues in France a few years later (during the fever of the great Revolution) of assignats and commandats, are examples of this extreme fatuity of rulers on the subject of issuing paper money to create resources. Until the principles I am contend- :i| wm IS4 CURRENCY. ing for are recognized by statesmen and legislators, and are made the base-work of laws i)rci)arcd to carry them into effect, there never can be a sound monetary system in an" country. If neither private nor public issuers have be n able to put proper restrictions on the issue of paper money, it is because no properly constructed issue department has ever been devised. The issue of the Bank of France, during late years, and of the State Issue Department of India, have come the nearest to well- regulated monetary management of any on record, unless it be those of the first four banks of issue, already several times quoted, as they were first organized. The cure of the evil, if ever it be cured, must be by the removal of the issue from all temptation, on the p.irt of managers, whether public or private, of using paper money chiefly as a method of creating either public or private wealth, otherwise than for supplying a more effective and con- venient tool than metallic money, into which it must always be made convertible on demand, to steady its market value, and regulate supply exactly to suit demand. 9. To effect this end, — to afford adequate guaranties against the abuse of flooding the market at one time, and denuding it at another time, of this valuable im- provement on metal, for circulation, — and to insure con- vertibility at all times, the issuing board must be wholly removed, alike from the influences of bankers and mer- chants, and from the control of the finance minister, who is too often tempted to tamper with the paper cur- rency, to meet emergencies in national affairs, and must sell notes for metal only. 10. The fundamental principle being thus established, the question arises as to how an issue department should be constituted to meet the necessities of the case. This will be made the subject of another chapter. Without anticipating what I have to say on that subject, I may I il U iiitir'i lii'i Jill' i ki m tty U^r mmtltUfilH •»mm TlIE PRIMARY OBJECT OF PAPER MONF.V. »5S id legislators, and ad to carry thcin nn)nctary system lor public issuers s on the issue of constructed issue rhe issue of the of the State Issue • nearest to well- on record, unless lie, already several ed. The cure of )y the removal of part of managers, per money chiefly or private wealth, jflective and coh- ito which it must md, to steady its tly to suit demand, dequate guaranties .rlcet at one time, this valuable im- and to insure con- d must be wholly bankers and mer- finance minister, ith the paper cur- 1 aflairs, and must g thus established, department should of the case. This chapter. Without hat subject, I may here remark, that paper money issued by such a depart ment will cost traders and all classes just as much as metallic money, which, is the correct thing. Bullion dealers, bankers, merchants, and miners, ti»e owners of the precious metals, will take them to the money de- partment, as they now take them to the Hank of Eng- land, the mint, or to brokers, and will sell them for notes or for coin, as they may need, each party — the state and the owner of metal — trading on market values the articles they have to exchange. Thus there will be a perfectly self-regulating or automatic machinery estab- lished. There will be no more metal coined than is needed by the public, no more notes issued than will stay in circulation, no more metal taken to the money department than will afford a profit, however small. The equation of supply and demand will find its nicest equipoise. The equilibrium will be as perfect as the face of the ocean. The waves and ripples will always tend towards an exact level. If a profit occurs to the depart- ment from the issue of paper, it will belong to the nation, and not to individuals. The profit, it will be seen, under such a department, will simply be an incidental circum- stance, and not a primary object. The profit can only arise from a sale of a part of the metal on which I have doubts. ■ II. I have now, I hope, demonstrated by logical rea- soning the distinction between issuing and usinfr paper money, for the purpose of affording a more convenient and effective tool of industry, and for creating trading or national resources. When the necessities of the state or of individuals drive them, or either of them, into the market for loans to meet emergencies, the proper thing to do is to borrow on the best security available, and at the lowest rate of interest practicable. But science and experience most amply prove that the issue of paper ri ■5 I f W iiiiiiiiiMiini|(jj g(n0 iii "J. — " m iifrtf.iH,-,irMiiilfflMMB:flBtf'' 156 CURRENCY. money, as a means of raising loans, is wrong. Practice has always demonstrated the falsity of the theory; and it is time the statesmen of England and America should master and settle this question, demonstratively and finally. The solution of the problems of monetary science, now so extensively agitating the industrial world, must be sought in a plan that will give absolute frtedom to the laws of trade, which I have shown are the laws of nature, as active and well defined as the law of gravitation. 12. A class of interested economists, especially in the United States, for want of a better argument against the issue of notes by a national department, have descended to the small trickery of politicians in raising "a cry" against the practice. They cry out on all occasions, " The Government must not be allowed to trade, or to follow the business of banking." But I have shown that the issuing of paper money is not trading or banking ; and, by limiting its issue to the offices of an industrial tool, I have knocked this senseless cry to the ground. The Government no more trades by issuing paper than by coining metallic money. This is undeniable, and I challenge its refutation. 13. M. Michel Chevalier, the eminent French econo- mist, has done good service in the cause of sound mone- tary and industrial science, by advocating the right of the state to issue and possess the profit, whatever it may be, of paper money. Two letters which I had the honor to receive fi-om him some years ago on this subject will be found in the Appendix, and I have great satisfaction in directing attention to them. I also invite attention to letters I had the honor to receive from Lord George Hamilton, Under Secretary of State for India, written at the request of the Marquis of Salisbury, then Chief Secretary of State for India, showing the satisfactory working of the ■ i-mi.tiiim:- wrong. Practicft lie theory ; and it I America should nonstratively and ms of monetary ^ the industrial vill give absolute have shown are ;fined as the law especially in the ment against the , have descended raising "a cry" }n all occasions, :d to trade, or to have shown that ling or banking; I of an industrial y to the ground. ;suing paper than ndeniable, and I it French econo- ; of sound mone- ting the right of I whatever it may I had the honor this subject will great satisfaction • invite attention )m Lord George dia, written at the a Chief Secretary ry working of the SUGGESTIONS FOR STATE ISSUE DEPARTMENTS. 157 India State Issue Department. The successful experi- ment suggests that the issue of small notes, as low as one or two rupees, would immensely increase the success and the usefulness of paper money in India. It is due to the one and two dollar greenback notes, issued in the United States, that these treasury notes have become so popular, that the people will not readily consent to their retirement, and the substitution of silver, or of bank notes issued on securities. 14. The great evils of a silver standard of value have of late led British statesmen to seek a remedy in the demonetization of that metal in India, except for a lim- ited amount of subsidiary coins. If the note issue could be enlarged by introducing small notes, which are par- ticularly adapted to the small, frugal dealings of the laboring and middle classes of India, the profit inciden- tally resulting from such issue would probably make up for the depreciation in the marltet value of silver, and the disastrous effects of having a metallic circulation that fluctuates as violently as ever the Bank of England note did during the long suspension of that institution. CHAFFER XVIII. SUGGESTIONS FOR STATE ISSUE DEPARTMENT IN GREAT BRIT- AIN AND THE UNITED STATES, AND CONSIDERATIONS CON- NECTED THEREWrPH. I. After the very clear exposition of principles as well as the functions that would devolve upon an inde- pendent, or perhaps, more correctly speaking, scientific, money department, set forth in the preceding chapters, it may seem almost a work of supererogation to indi- cate a method for organization. Besides, the details >i reign, if not France the IS the result a prejudice s and nearly The bank notes alone would disappear ; and in their place, in Great Britain, the new note would run something like this: "The United Kingdom of Great Britain and Ireland promises to pay the bearer pounds in coin on demand, at the issue office of the State Money Depart- ment, or any of its branches or agencies." In the United States, there will need to be no change from the "greenback." The same plates may be used as at present, 4. The business of the department may be briefly summarized : — First, To provide and pay coin for all the gold bullion offered, seeing that such coin is of the specified fineness. Second, To provide and pay notes, of the denomina- tions specified by law, for gold and silver to all who bring such metal, coined or uncoined, to the issue office, or its branches or agencies. Third, To provide silver, and subsidiary coins of all kinds, and sell the same to all comers for gold or silver coin, or silver bullion, at its market value, or paper money, at the option of the parties applying. Fourth, To redeem all notes and silver and other sub- sidiary coins in gold coin, on presentation at the several places specified for that purpose. Fifth, To establish agencies at such important centres of business as experience shall indicate. Sixth, To take chaige of all cash held by the Bank of England, or the Treasury Department of the United States, held for the redemption of paper money, and redeem all such paper money on presentation. Seventh, To receive, hold, and pay out, on check, all sums of money, — metallic and paper, of a specified amount, of private individuals and joint-stock associa- tions, — but paying no interest therefor. 5. The question as to the policy of using any part of ,--.T" 'I 1 60 CURRENCY. the large amount of coin that would accumulate in time in these departments, for the retirement of so much of the public debt, is one involving very nice considerations, as well as the retirement of the present bank issues. In the case of the bank of England, the Government would have to pay the bank the ;^i 1,200,000 of old debt, and the bank would take up and cancel its notes ; or this may be done by the new Issue Department taking all the coin and bullion in the Issue Department, and retiring with new state notes the entire issue of bank notes, leaving the bank in possession of the securities on which the ;^ 1 5,000,000 of notes are issued, and striking and settling the balance. It is only a simple matter of account, re- quiring time and skill to accomplish, so as not to change the volume of the currency or disturb values. The bank will have no demand for compensation. The present arrangement was not intended to be permanent. It was made when the Government wanted means, and it has always had a right to pay off the debt at its pleasure. These securities are now (May, 1879) worth nearly their face in gold. 6. Whether the country banks in Great Britain are entitled to damages for being compelled to withdraw their circulation is also questionable. They are in the same position of those in America, which issued notes before they entered the national banking system, to some extent at least ; though the former were not obliged to furnish any securities, which the American banks in most states were, — such securities being then state obligations. Such securities being good, the banks putting them up would get back their capital invested in them, to trade on. They would then do business on sound principles. But the settlement of these matters, probably, will not form any part of the difficulty in the way of a change for the better. The real question that underlies the whole '■1' 'I r imulate in time ■ so much of the >nsiderations, as : issues. In the nent would have i debt, and the or this may be ng all the coin id retiring with I notes, leaving 3 on which the dng and settling of account, re- s not to change lies. The bank . The present nanent. It was ans, and it has at its pleasure. >rth nearly their eat Britain are ed to withdraw rhey are in the ch issued notes system, to some not obliged to 1 banks in most itate obligations, tutting them up . them, to trade >und principles, obably, will not of a change for srlies the whole SUGGESTIONS FOR STATE ISSUE DEPARTMENTS. l6l money problem is, how to overcome the blind prejudices of a class of great influence in the community, who do not wish to have the present order of things disturbed. To counteract this, is really what has to be done ; and this can only be done effectually by non-issuing banks, and the community at large. In the United States public opin- ion, at this time, is nearly equally divided on the question of substituting " greenbacks " for bank notes. 7. In Great Britain the currency is only swelled above one of pure metal, about ;£2S,ooo,ooo. In carrying out the new plan, if none of the metal coming into the Issue Department were to be disposed of, a contraction of that amount of the currency would ensue ; and to that extent, at least, it might be desirable to part with the gold held for notes, pari passu, with the retirement of bank notes now issued on securities. In America the measure would have to be consummated more slowly, to avert currency disturbances. The present system might have to be got rid of, by substitution in full, or nearly so, of the national, or greenback, circulation for bank notes. It will be shown hereafter (Chap. XXIV.), that the currency is still in a highly inflated condition. How to get an adequate supply of metal behind the note issue, and hold the whole present volume of 1^650,000,000 in circulation, is a prob- lem requiring time, skill, and determination to accomplish. Perhaps another great and overwhelming commercial cri- sis may be neede 1 to sicken the people of a system that always breaks down when stability is most needed. 8. With regard to introducing a scientific (which is the true) system of issuing and regulating the supply of metallic, paper, and subsidiary currency, according to supply and demand, into the United States, the large amount of bank notes issued on public securities, and the small amount of gold held by the Government to sustain their convertibility into gold, interpose serious but not I IK&. l63 CURRENCY. m m ah •I If! n uperable d.fficuh.es to it. In the present anomalous elat.onsh,p between the Government and the national banks, the whole burden must necessarily fall on the former to maintain specie payments in a crisis. It is a system m which the Government has all the responsibility and nsk, and the banks the lion's share of the profits of the issue. Only a portion of the American people per- Thlvd Tm ''i' P'^'^ °' ^"PP'y-g paper money. They do not Uke heed of. if they perceive, the fact, that the public at large pay full gold price for these bank notes, wh>ch cost the banks only one per cent " tax on circula- tion and a mere nominal price for fabrication. When th.s fact, and a better knowledge of the advantages of a arculafon founded wholly, or for the greater part, on n etal. shall prevail, there will be no serious obstruction m the way of gradually bringing about a change that will be permanent, because it will be scientific. 9. I have pointed out the danger there would be in sellmg any considerable amou.it of the accumulations of go d m the Issue Department, in retirement of the public debt m consequence of the inflating eflcct such sales would have on the volume of the currency. To the extent, however, that the new system would operate con- traction I have suggested, as to Great Britain, such sales might be expedient. In the United States, I cannot hdp regarding the volume of paper currency, which now (May 1879) constitutes a very large proportion of the acfua/arc«/aAon outside of the banks and the treasury too large, -in fact dangerously large, because of the vast amounts of deposits, or capital held on deposit, which m crises will be the first demand for metal. The note-holders, feeling that they have the government guar- anty, will, tor a time at least, remain passive and indiffer- ent. These pertinent considerations should aU have due weight on the part of currency agitators. What I would tsam SUGGESTIONS FOR STATE ISSUE DEPARTMENTS. 163 sent anomalous id the national ily fall on the crisis. It is a e responsibility the profits of in people per- paper money. , the fact, that sse bank notes, IX on circula- :ation. When [vantages of a eater part, on Js obstruction ange that will would be in emulations of of the public ct such sales icy. To the operate con- in, such sales ss, I cannot y, which now Jrtion of the the treasury, »use of the on deposit, metal. The nment guar- ind indiffer- ill have due hat I would strongly urge in regard to the United States, is, that a gradual contraction of paper money should take place, so as to l>n'ng back gold to the channels of circulation without forcing the Government to buy it by increasing the interest-paying debt, as Secretary Sherman, acting on the authorization of a law prepared by himself and passed by Congress under his dictation, has done. I pro- pose that the laws of industry shall provide the means, and then the burden will fall equally on the whole coun- try (see postulate 61). 10. There is another circumstance incident to the adoption of a single national issue department which may justify the use of a portion of the great metal fund for retiring portions of the national debt. There is a regular annual increase of business transactions in each of the two countries under present consideration, de- manding an increase in the currency. We have no right to suppose there will be a stop to this increase. On the contrary, the steady development of industrial pursuits, caused by improved methods of production and trans- port, and the growth of wealth, lead to the almost cer- tain fact that this demand will increase in a considerable ratio. Now, the demand for more currency may be turned to account by the sale of a portion of the accu- mulating gold, equal to one-half, or even to the whole, increased demand for currency for a few years. There will then be no unnatural inflation. It will be a substi- tution of so many notes for so much gold, without dis- turbing the working of the automaton. 11. In the chapters treating of a universal monetary system, I have advocated the issue of notes as low as the lowest gold coin. This I hold to be very desirable for convenience, and in a scientifically organized issue department, worked automatically, I think the public demand should be complied with. If the people don't 'f'lf mmmtm.-^ ««4 CURRENCV. want small notes, they will not buy them, but take metal- he money. Such a department as I have outlined will completely set aside the objection to small notes, be- cause every note issued must be paid for by metal at its full face value. Small notes are almost infinitely prefer- able to silver dollars, the weight of which is very objec tionable. But give the public the choice. If they prefer silver dollars, let them have them. There is nothing so democratic as money. There is no commodity that de- mands the application of free trade so strongly as money and no system can approximate perfection that does not yield to the idiosyncrasies, so to speak, of those who use this indispensable tool. "Money," says Adam Smith, is a commodity of which every man is his own mer- chant." Then give to each money-merchant the com- modity in such denominations and form — metal or paper — as he requires, or fancies most. CHAPTER XIX. Sm ROBERT PEEL'S POSmON ON THE NOTE ISSUE.— MR GLADSTONE CLAIMS THAT IT BELONGS TO THE SUOK WHEREIN THE ACT OF 1844 HAS FAILED. I. I DO not attach much importance to the mere un- supported opim^ns of even the highest authorities in economic science, or the greatest statesmen. It is only when such opinions are backed up by close logical rea- soning that they can be accepted as good conclusions. Uf how much value are the acts of Sir Robert Peel we may decide when we compare his theory with his prac- tice, which I shall presently do. This, however, we may concede to him, that the Bank Act of ,844, putting an end to the unlimited issue of bank notes, and providing I, but take metal- ave outlined will small notes, be- >r by metal at its infinitely prefer- :h is very objec- . If they prefer ere is nothing so imodity that de- ongly as money, 3n that does not r those who use i Adam Smith, 5 his own mer- chant the com- rm — metal or E ISSUE.— JJR. TO THE STAXE 3. > the mere un- authorities in :n. It is only se logical rea- d conclusions. >bert Peel, we with his prac- rever, we may (4> putting an md providing SIR ROBERT FEEL'S POSfTION ON THE NOTE ISSUE. 165 for the ultimate absorption of all the country and Scotch and Irish bank paper circulation, by the Bank of Eng- land, and separating the Issue from the Banking Depart- ment of that institution, effected an immense improve- ment on the old system. An equally important, and, considering the circumstances, still greater, revolution in currency was effected in the United States by the Act of Congress authorizing the issue of the national legal- tender notes called "greenbacks." Had the national banking system not been tacked on to the currency, and the issue of legal tenders been kept within the limits set by specie value, the United States would to-day have an approximately scientific and perfect system of paper money. 2. The object of the issue, in the United States, was to create national resources : and hence the finance min- ister, Mr. Chase (Secretary of the Treasury), failed to grasp the fundamental principle, that nothing is gained by the nation or the people by inflating a legal-tender paper circulation ; and the plan he adopted, of afterwards dividing the issue with banks, was a blunder as serious as that committed by Sir Robert Peel, in continuing the privilege to the Bank of England to issue notes on government securities, which Mr. Chase copied, and ap- plied to the national banking system. Nothing is more true than the fact, that neither statesmen nor nations, as a rule, can readily free themselves from the tradi- tional errors of past generations ; and even good thinkers and reasoners are prone to accept the opinions, princi- ples, and practices of business men without sufficient distrust of their soundness. 3. That Sir Robert Peel had a very clear perception of correct theoretical monetary principles, is shown by his speeches, and the latitude he provided in the Act of 1844, to enable the managers of the bank to exercise Hk 166 CURRENCY. a discretion as to the amount of the notes they might call for and use on account of securities. The following extract from one of his speeches, to which my attention has been drawn by the eminent French economist, M. Michel Chevalier, is proof of this fact. iK^l*""" u'T contended, and I am not one to deny the position. l„. M 1"". 1 ^- "? "'*•'' "^ ""''"'y '" ''"' *"»'. the wisest plan would be, to claim for the state the exclusive issue of promissory notes as we have claimed for it the exclusive privilege of coinage. They consider that the state is entitled to the whole profits to be derived from that which is the representative of coin ; and that, if I,f,Kr '^ A "n "'''" P'"'" "^ '"^"'"e P^^P"' 'here would be established a controlling power which would insure, as far as pos- siDle, an equilibrium in the currency." It is quite evident that Sir Robert had a deep convic- tion of the true principles of monetary science. He had examined the subject very carefully while a member of the Bullion Committee in 1810, as a young and rising statesman, and under the able tuition of Mr. Homer whc prepared the report of that committee, which emb^ied sound principles, and which the majority of the House of Commons were incapable of understanding. 4. Before citing his motives and reasons for continuing the issue of notes by the Bank of England, notwith- standing his very evident conviction that it was not the right, or theoretically the best plan, I wish again to point out to the reader the absurdity of the system. When Sir Robert introduced the Bank Act of 1844 to Parliament, we find the Government owing the Bank ;^i4,ooo,ooo, mcludmg the original loan of ^11,200.000, for which it paid the current rate of interest. This covered the whole capital of the bank, and its "Rest" in addition, leav- ing the bank without any cash capital to use as trading reserve, or for a margin. Of course this had been going on from the inception of the bank in 1694. But liaai SIR ROBERT PEEL's POSITION ON THE NOTE ISSUE. 1 67 )tes they might The following h my attention economist, M. leny the position, \ the wisest plan ue of promissory ilcge of coinage, ole profits to be :oin ; and that, if •, there would be re, as far as pos- i deep convic- nce. He had a member of ng and rising . Homer, whc ich embodied of the House ing. for continuing and, notwith- t was not the gain to point n. When Sir 3 Parhament, 1^14,000,000, , for which it red the whole Idition, leav- >e as trading is had been t 1694. But the proprietors were applying for an extension of their charter, and all the country, with a few exceptions, had become inimical to the unrestricted issue of bank notes ; and Sir Robert was in sympathy with the people, and hit on or accepted the plan of limiting the issue to what it then was, and, accordingly, prepared his bill so as to stop all issues immediately of all banks, except 'he Bank of England, within fifty miles of London, unu author- ized the merging of all lapsed circulation in the country, and in Scotland and Ireland, into that bank, expecting that arrangements would be made by mutual consent to absorb the whole gradually, and perhaps speedily. Since then, however, barely a million pounds of such circu- lation has fallen in, making, as elsewhere stated, at the present time, but ;^i 5,000,000 as belonging to the bank, out of a total of ^^30,800,000 notes issued in the king- dom. 5. Sir Robert Peel, therefore, contemplated a time when the bank would become the owner of ^^30,800,000 of the public debt ; and the Act provides that the bank might then increase its issue on notes to that extent. This would exceed the present paid-up capital by jCig,- 600,000. I wish now to point out the exact effect of increasing the note issue to that amount, — ;^30,8oo,ooo. It would be simply to compel the bank to use, accord- ing to its present policy, the sum of ;^i 5,800,000 of addi- tional notes, issued on the additional securities required to be lodged in the Issue Department in payment for the same. This is what has been done, to an immense ex- tent, in the United States; that is, the national banks have used the notes to pay for bonds. But let any man of ordinary reasoning powers examine this proposition, which the Bank Act, as it now stands on the statute-book, involves, and he will be forced to the conclusion, that either this will be the result of giving effect to the inten- ,,^fiai. ■■1 iM CURRENCY. tions of the framer of the law, or else it will compel the bank proprietors to raise the sum in question by the issue of new shares, or to change its policy, and diminish its issue m manner pointed out in Chap. VIII. The pres- ent fiduciary issue of ^^15,000,000, resting on public securities, already exceeds the entire bank's paid-up cap- ital and rest-fund together by about a million pounds • and, leaving out the " Rest," it will make the whole excess up to nearly ;^3o,ooo,ooo. If this is sound banking, then it is a method whereby linking capital can be created ad libitum. This, then, is the proposition which the present Chancellor of the Exchequer has intimated to be the intention of the present administration to give " more immediate effect to." 6. The following apology was offered by Sir Robert Peel for not acting on his convictions as to the true prin- ciples of the note issue, stated in the extract from one of his speeches already quoted. "The true policy in this country is to work as far as possible with the instru- ments you have ready at hand ; to avail yourselves of the advantages which they possess, from having been in use — from being familiar — from constituting a part of the habits and usages of society. They will probably work more smoothly than perfectly novel instruments, of greater theoretical perfection. If we disturb that which IS established, let us have some good practical reason for the change." 7. It was lucky that Sir Robert Peel found two years later, in the urgency of Messrs. Cobden and Bright and their following, "a good practical reason " for overthrow- mg "old established usages of society," when he changed front, and helped to pass the Act repealing the "Corn Laws," which broke down the traditional theories of pro- tection. But I have shown that " instruments of greater theoretical perfection " may be created without "disturb- '.mmtjamf SIR ROBERT JtEL's POSmOM ON THE NOTE ISSUE. 1 69 will compel the stion by the issue and diminish its ^lll. The pres- Mting on public ik's paid-up cap- million pounds ; the whole excess nd banking, then can be created ition which the as intimated to stration to give by Sir Robert the true prin- xtract from one true policy in with the instru- il yourselves of having been in Jting a part of / will probably instruments, of turb that which tical reason for )und two years ind Bright and ' for overthrow- len he changed ing the "Corn tieories of pro- ents of greater hout "disturb- ing that which is established," in my proposal in last chapter to transfer the entire clerical machinery of the note issue, and the management of the mint and the national debt, from their present offices, where they would be no longer of use, to the new state department. It is only right to say, that the real lion in the path is the Bank of England. Such a suggestion strikes at the consideration and importance of the hank managers. To take away the name of " Hank of England note," and substitute therefor the title of "The United Kingdom," and to remove the public deposits, and the management of the public debt, these gentlemen would consider as worse than highway robbery. That is where the shoe pinches, and Sir Robert didn't care to tread on other people's corns at a time when his fame and power were at the highest. 8. I have already noticed the views of M. Chevalier on the subject of the right of the state to issue the entire paper money needed by the people, and to receive the profits. His letters stating those views will be found in the Appendix. Mr. Gladstone expressed himself very decidedly on the question under consideration, in 1866, when he introduced a bill into the House of Commons to indemnify the bank against the over-issue of notes during the crisis of that year. He declared emphati- cally, as he has always done when acting on well- grounded convictions, " The whole business of issue is in the state ; and, what is more important, the responsibility also belongs to the state." It was not an occasion when he could give effect to his words, or express more expli- citly what he would do if the opportunity should be pre- sented to him for carrying out his convictions. 9. This being a work on principles, I have not felt it necessary to quote mere opinions unless the reasons have been advanced by their authors for expressing them. I I70 CURRENCY. regard monetary science as too far advanced to rest on mere empirical dicta, or the unsupported dogmas of any man. Hence I have not felt called on to quote the opinions of numerous and often voluminous writers on the Bank Act. lo. I have conceded to Sir Robert Peel the credit of havmg, by the Bank Act of 1844, given to the country a greatly improved monetary system, in comparison with those which had existed from time immemorial. His fail- ure, looking from the stand-point taken by him, was clearly due to leaving it in the discretion of the direct- ore to issue, and hold in the Banking Department, the whole of the so-called fiduciary notes, -those issued on securities, from which praqtice they have never once deviated to. the present time, -always treating such --tes as cash in the banking business. I pointed out in the chapters on the Bank of England, that the law left it optional with the directors to "diminish and increase" such securities, ^nd, pari passu therewith, the cash in the Business Department. The real evils, therefore, of the system, as carried out, are due either to the greed, or the ignorance and misconception of true principles,' on the part of the directors. I have shown what the effect will be if Lord Beaconsfield's government should carry out the intimation rf the Chancellor of the Exchequer, to give immediate effect to the provisions of the law for merging the whole note issue of the kingdom into the Bank of England. Unless the bank changes its policy It will promptly issue the whole ;^3o,8oo,ooo of notes on securities, /»r^//aj^^ a,///, (he notes themselves; for it cannot be supposed that the proprietors will assess them- selves about 160 per cent on their present shares, or by the issue of an adequate amount of new shares, to fur- nish capital wherewith to purchase the additional securi- ties. ced to rest on dogmas of any to quote the ous writers on the credit of to the country )mparison with irial. His fail- by him, was of the direct- apartment, the ose issued on i never once treating such ointed out, in the law left it nd increase" le cash in the refore, of the the greed, or principles, on lat the effect should carry ; Exchequer, if the law for lorn into the es its policy, )oo of notes re/vfs; for it assess them- shares, or by lares, to fur- ional securi- BANKING AND CURRENCY IN THE UNtTED STATES. 171 1 1 . I have alluded to this point again, because I have nowhere seen it raised, nor have I anywhere seen its probable, I may say certain, effect on the policy of the bank in such a contingency as is alluded to, stated. The additional notes, issued on securities, or a portion of them, would no doubt go into the channels from which the country notes were taken. Now, a large pro- portion of these country and Scotch notes are for one pound ; and the bank only issues as low as five pounds. This would call for an enlarged supply of sovereigns; and there would, hence, be severe periodic drains on the bank for metal : and the effect on the rate would be frightful. We should have a change every few days, to stop the demand for metal in the provinces; and the whole trading community would be kept in a worse state of uncertainty, about the price of capital, than they have been for the last thirty years. " Go," said the Swedish chancellor to his son, " and see with how little wisdom the world is governed." CHAPTER XX. BANKING AND CURRENCV IN THE inOTED STATES. — EVILS OF A SYSTEM OF UNLIMITED ISSUE OF NOTES. — CEN- TENNIAL ADDRESS. — ONE HUNDRED YEARS OF BANKING IN THE UNFTED STATES. I. Free trade in respect to the issue of paper money, and protection to domestic industry, — the one as funda- mentally wrong as the other, — have very generally been characteristic of American legislation ; and the two evils still rival each other in the number and influence of their adherents. In these two important national considera- tions the United States stands to-day about where Great i:| I r t!S 173 CURRENCY. Britain stood half a century or more ago. I am not writing history, however j and those who desire informa- tion on this assertion must look for it in the records of British and American commercial legislation. As the title of this work implies, its object is to state and eluci- date principles, and apply them to existing institutions and practices, in respect to monetary science. I shall therefore proceed to describe in general terms the sort of monetary system that prevailed in the United States for over half a century prior to the outbreak of the great civil war in 1861. 2. Concurrently with the disasters inflicted on the Brit- ish public, referred to in former chapters, by the unlim- ited issue of paper money and over-trading in the banking business, and prior to the Bank Act of 1844, almost ex- actly similar events were happening in the United States, in perhaps a more aggravated form, and with more calam- itous effects on industry. These were brought about by the operation of similar causes, and were stimulated by the same class of motives, — the desire to make two or three dollars out of one. Every State in the Union had its own system of banking laws; and these enabled a small coterie of persons, very generally seeking to create salaried positions for themselves, to organize banks of issue, discount, and deposit. To start a bank, we will say with a capital of 150,000, which was a very usual amount outside of large cities, and in many cases only ^25,000, very little actual cash capital was required be- yond what was necessary to fit up an office and pay for engraving notes of the most improved and fancy styles of art. The subscribed capital was paid, in part or wholly, by the partners giving their notes, payable to and indorsed by each other, at the brand-new bank ; and these were afterwards paid by the notes of the bank when they were got ready, or were renewed until the big igo. I am not desire informa- in the records slation. As the state and eluci- ting institutions :ience. I shall terms the sort ; United States !ak of the great ted on the Brit- i, by the unlim- l in the banking 844, almost ex- : United States, th more calam- )ught about by : stimulated by make two or the Union had »ese enabled a eking to create mize banks of bank, we will s a very usual any cases only s required be- :e and pay for id fancy styles id, in part or es, payable to lew bank ; and 1 of the bank d until the big BANKING AND CURRENCY IN THE UNITED STATES. 173 profits realized finally retired them. The organization of a bank on this plan was often only the work of a few days, wliich were necessary to send some hundreds or thousands of miles to get the notes engraved and printed, and to file the articles of association at the State capital.' 3. Up to the outbreak of the civil war, the right to charter banks was universally claimed to be, as it still is by a large class, a "State's right." Prior to this event, the Constitution of the United States was held not to confer the authorization on Congress 10 grant such char- ters, the Bank of the United States being the single exception to the rule. The elasticity of this instrument had never been tested, until then, by so strong a moral force as the necessities of a great war, involving the ex- istence of the nation. The sword had to settle the ques- tion ; and it did it effectually, as to how far State's rights overlapped the boundaries of national powers and inter- ests. The Gordian knot having been cut by the sword of necessity, the present national bank system sprung into existence, like Minerva from the head of Jupiter, " full armed " and irresistible. But I am getting ahead of my subject. 4. The new bank having been opened, and the talis- manic word of " Bank " written in large letters over the door, and a few hundred dollars in gold and silver being secured, and not unfre^iuently exhibited in the window, to add at least the appearance of solidity to the " insti- tution," the public were invited to open deposit accounts, and accept, and use as money, the new and crisp notes, in exchange for labor and goods ; and, for want of any thing better, the public very generally did accept them, without questioning the ability of the bank to pay them. ' These facts are based on a statement made to the writer by the late United States Senator, Hon. J. M. Howard of Michigan, and had reference to aU the Western States. '■i 174 CURRENCY. I i'M It was a common practice in various parts of the coun- try for tliese mushroom banKs at a distance from each other to exchange notes, to prevent their being returned too rapidly for payment ; such reciprocating banks thus giving each other moral standing. The facilities for rapid travelling did not so generally prevail at the time of which I am speaking as at present ; and these banks possessed wonderful facilities for getting large amounts of their notes in circulation, and were not particularly nice about having much specie on hand to meet them, if some unforeseen event brought them home faster than was agreeable. On the fundamental principle laid down by Mr. J. B. McCuUoch, that " the people must have a circulating medium," or some kind of money, to transact their business, and as the nation had made no adequate provision for supplying such money, either metallic or paper, they accepted the only tool that came to hand that would serve the purpose of money. 5. That such a system should have prevailed for so long a period, and over nearly all the inland States, may seem to have been a reflection on the intelligence or business capacity of the American people. But such a charge would come with a bad grace from Englishmen, whose longer experience has failed, even yet, to master the problem of issuing and properly regulating the supply of paper money so as accurately to meet the demands of industry. Another excuse may also be made for the United States, in the matter of its paper-money system : the Union, in many things relating to domestic admin- istration, was scarcely better than " a rope of sand," until the great civil war broke down some of the absurd theo- ries about " State rights " which grew out of the right of States to own and deal in human beings. 6. In 1842, when Charles Dickens was on his Amer- ican travels, the currency troubles, which had culminated ^ i nwi!jimtMB ! ijt!iti »i MW8aaega!t'- rts of the coun- ance from each ■ being returned ting banks thus he facilities for vail at the time md these banks ; large amounts not particularly to meet them, ome faster than iciple laid down le must have a mey, to transact ie no adequate her metallic or came to hand •revailed for so md States, may intelligence or e. But such a m Englishmen, 1 yet, to master iting the supply ;t the demands e made for the money system : jmestic admin- of sand," until he absurd theo- of the right of i on his Amer- tiad culminated BANKING AND CURRENCY IN THE IWITED STATES. 1 75 in 1837 in the breaking of hundreds of these paper-money factories, had left the Western and most of the Southern States without even such indifferent tools of industry; and no better substitutes had been provided by these sticklers for State rights. He observes in a letter to one of his friends, that he had to carry about with him "an uncomfortable," and certainly an inconvenient, amount of gold, say ^250, or $1,250. But his real difficulty consisted in the total absence of small change ; there being nothing of the kind in many localities, — especially in Ohio, — but " shinplaster " notes, as they were called, issued by local traders, as low in denominations as ten cents. He says, " Apropos to this golden store, consider at your leisure the strange state of things in this country " (he was then in Ohio). "It has no money, really no money. The bank paper won't pass, the newspapers are full of advertisements from tradesmen who sell by barter, and American gold is not to be had or purchased." He says he bought sovereigns at first, but subsequently was unable to get these, and was compelled to buy French gold and silver coin. The least odious terms used to characterize the paper circulation were "Shinplaster," " Wildcat," " Wolverine," and " Red-dog money." 7. Passing over the period of colonial existence, and the issue of " Continental money," which is full of inter- est to the student of monetary science, and prei^i^ant with unheeded admonitions, we find that the issue of bank notes in the United States, which stood in 1830 at $66,- 628,898, was increased by the year 1837 to $149,185,890, or about 125 percent in seven years. Then came the great commercial and financial crash, which led to the stoppage of nearly every bank in the Union, 180 of which became total wrecks, including the Bank of the United States, which had advanced large sums, exceed- ing its paid-up capital, on State securities, a large pro- '>:»' PtVaSK ■ " 176 CURRENCY. portion of which were afterwards repudiated. The coun- try was only just beginning to recover from these great calamities, brought on by the excessive issues of bank- paper currency, at the time Dickens was writing his "American Notes." The losses from circulation alone, during the five years from 1837 to 1842, were estimated by statisticians at $100,000,000; and they fell most heavily on the portions of the country and the people least able to bear them. The losses to general industry must have been three times the above sum, arising from deposits, and the ruin brought on all traders by a com- plete suspension of business. Crops lay unmoved in the granaries of the farmers, and consumers had to pay exorbi- tant prices for the necessaries of life. President Jackson, an obstinate, self-willed political partisan, with a large following in Congress, had succeeded, during his eight • years' administration, in pr-jventing the adoption of any measure by the General Government to supply the peo- ple with an adequate raetiiUic or paper circulation to meet the demand for paptr currency; and the whole question was left in the banc's of ignorant State politi- cians, and f«)r a new crop of bank speculators to settle as best they might. In New York, Massachusetts, and many other States, banking laws were passed to authorize the issue of notes on state and other securities, deposited in the hands of an officer, known as State Comptroller, who acted as trustee for such banks as might fail, and to whom reports were required to be made. This plan was a decided improvement on the systems that pre- ceded it, especially in such States as had not repudiated their obligations. It was copied from the practice of the Bank of England, from its inception in 1694, and after- wards was transferred by Mr. Lincoln's government in 1864 to the national banks, substituting national for State securities. Banks, however, organized on the Sute iKm^^n' ed. The coun- om these great issues of bank- ivas writing his Irculation alone, were estimated they fell most and the people general industry im, arising from ders by a corn- unmoved in the id to pay exorbi- esident Jackson, in, with a large luring his eight- adoption of any supply the peo- r circulation to and the whole ant State politi- lators to settle as usetts, and many to authorize the ies, deposited in Comptroller, who ight fail, and to ide. This plan 'Stems that pre- l not repudiated e practice of the 1694, and after- 5 government in ing national for ized on the State BANKING AND CURRENCY IN THE UNITED STATES. 1 77 plan, were required to redeem their notes in specie, and afforded, perhaps, more security to note-holders than the States could give. 8. There was this difference between the State-security banks and the national banks created by Mr. Lincoln's administration. The States did not guarantee the full face of the notes, as is the practice of the National Gov- ernment in respect to the national bank notes. If a bank failed, the comptroller sold the securities ; and, if they realized enough to pay all notes in full and expenses, they were fully" paid: if there was a deficiency, then there was a. pro rata dividend ; and tlie notes were valued in the market accordingly. As I shall devote one or two chapters to considering the national kinking system, I will only here remark on one peculiiu-ity, which seems to have been devoid of any special object or good purpose. It is that which requires the one lind of national cur- rency issued to banks to be converjble into the other kind made legal tender, and iusued directly to the peo- ple. Both kinds rest on the same bas's of siecurity. 9. Mr. E. G. Spaulding, in an address deJivered before the United States Bankers' Association at Philadelphia in 1876, remarks on this kind of redemption as follows : — "There has been recently established a Bureau in the Treasury Department at Washington, for the purpose of assorting and enforcing redemption of national bank currency. This operation furnishes clean notes for those that are worn and defaced, but ii is In no sense an efficient redemption." In another paragraph of the same address, he says, "This is practically no redemp- tion at all. It is merely swapping one kind of paper currency for another of about the same value." 10. The only difference between the two kinds of notes consists in the requirement that thle, undeniable money of the ""gement of the e loyal States, ooo under the -. Spaulding so and all good reasoners come to perceive that banking has no connec- tion whatever with the issue of paper money, the scales will fall from their eyes, and they will no longer " see men as trees walking." The Government gained nothing by compelling tlie banks to buy public securities, which it could not have gained better, and by an immense saving of interest-bearing debt, by issuing greenbacks instead of notes to loan to the banks at one per cent taxation. Had the national bank Act limited the issue of national currency to banks to ^150,000,000, the amount of State banks' circulation at the time the Act was passed, the in- flation and depreciation of notes would never have become so great an evil. 17- I am now, before parting with Mr. Spaulding's theories about money, compelled to take close and seri- ous issue with his assertion that the true plan to have been pursued at the close of the war would have been to fund the whole ^^400,000,000 of greenbacks, and of course the fifty millions fractional currency, into a six- per-cent bond. He says, "if the right to fund the greenbacks into six-per-cent gold bonds had not been abrogated, no financier or practical business man, whose opinion is worth quoting, can doubt that we would have gone to specie payments within two or three years after the close of the war." His expressed reason for this opin- ion is, that the individual " indebtedness in the country was but small." Now, with all due respect to the excel- lence of Mr. Spaulding's historical writings, I have to say to him, and those who think as he does, that the possibility or impossibility of returning the currency to a specie basis, in one, two, or three years after the war, does not rest on any man's opinion. The first thing to be ascertained is, to what extent the inflated currency had inflated the value of labor, commodities, and real estate. Real estate was the last to feel the full force iSa CURRKNCY. of the stimulus (as it has been the last to feel the effect of contraction), and probably tiiil not reach its culmi- nating point of value, as measured by legal-tender notes, till 1867, when goods and labor had already begun slowly to recede under the upward turn in the value of the paper (then perceptible), partly fror actual contraction by Mr. Secretary McCulloch, and partly by the con- traction of increased demand. But as good judges as Mr. Spaulding have shown from actual statistics that all values except real estate had doubled at the close of the war. Take labor as the best gauge of value, and we find it had risen from one dollar to two dollars per day on the public works and railways. I am adding to this chapter in April, 1878, when labor all over the country has sunk back, under the slow contraction in the value of the currency, to one dollar, and paper money to par of gold. It is not a matter of opinion at all, but of demonstrated fact, that, had this contraction taken place in one, two, or three years after the war, it would have broken every bank and trader in the United States, end- ing most likely in a great social revolution. This will appear most self-evident when it is considered that all traders, including banks, trade on margins of capital vary- ing from the stock speculator's five or ten per cent to the banker's twenty-five, thirty, or fifty per cent. Let Mr. Spaulding take the deposits of his own bank, and ascer- tain whether he does not regard what Mr. Hankey sets down as safe — say about one-third its liabilities — as a good average margin to hold. He will therefore see, that by reducing the value of all goods, and consequenUy of all bills given for goods, from one hundred to fifty cents in the dollar, in so short a period, would produce uni- versal bankruptcy. The truth is, the entire trading com- munity in America, with a very few exceptions, trade on five, six, and up to ten per cent only, of actual cash or feci the effect ich its culml- -tender notes, begun slowly value of the il contraction by the con- )od judges as tistics that all e close of the J, and we find s per day on dding to this :r the country 1 in the value money to par at all, but of n taken place it would have d States, end- on. This will dered that all 3f capital vary- per cent to the ent. Let Mr. ink, and ascer- r. Hankey sets abilities — as a refore see, that onsequently of d to fifty cents I produce uni- e trading corn- Lions, trade on actual cash or NATIONAL IIANKINO SYSTEM OF TJIE UNHED STATM. l8j immediately available capital. A man with ^10,000 seeks to turn over ^100,000 every year. 18. Inflation is like intoxication. Everybody fancies they are growing rich under its delusive and flattering inspiration. On the other hand, contraction acts like the effects of drink passing off, and delirium tremens setting in. " No man, whose opinion is worth having," can doubt the absolute truth of the facts I have stated. The coinitry is just now finding its way out of the inter- minable vortex into which the mistaken policy of those who are responsible for inflation led it, during and just at the close of the war of the great Rebellion. The mon- ster of mistakes rests on their shoulders, and not on those who opposed rapid and ruinous contraction. It is clear, that, had Mr. Spaulding's theory been carried out, it would have caused all but universal bankruptcy. CHAPTER XXI. THE NATIOVAL BANKING SYSTEM OF THE UNriED STATES. — ITS (Jkl< -V. — GOOD AND BAD FEATURES, AND POSITION IN AMERICAN POLITICS. I. The monetary and financial systems of the United Stat. . occupy so large a space in the industries of the world that they require special notice in this work. I write this chapter on the eve of a great and exciting presidential election, in which the currency question forms a conspicuous element. On one side stand the combined forces of over two thousand national banks, which are nearly a unit in favor of absorbing the entire legal-tender note circulation; and on the other, a vast conglomeration of interests and theorists, from Governor Tilden, the Democratic nominee, v.ho rides two hobbies 1 84 CURRENCY. at the same time, — the national bank and greenbacks, — and Governor Hendricks, the proposed Vice-President on the same ticket, whose faith is in " Greenbacks made equal to and convertible into gold," to the class who propose to cut loose altogether from metal, and use stamped pieces of paper for money, to be made con- vertible into other stamped pieces of the same material, purporting to bear interest, and these again to be re- convertible into the former kind, with interest added, — the interconvertible system, in fact. But, in justice to both parties, I ought to say, they are both more or less tainted with these wild theories ; though both have a large number of sound thinkers and solid business men, who agree with Governor Hendricks, that a state issue of notes, convertible into gold, is the safest, and, theoreti- cally and practically, the best, paper currency for the country. I ought to mention that a third candidate is in the field, — the venerable Peter Cooper, who, like a second Nestor, is wrestling for the greenback and inter- convertible prize at the age of eighty-six. The result of this memorable contest will be known before these pages are sent to the press ; but the setdement of the money question in the United States, as in Europe, will be de- ferred for many a presidential election yet to come. 2. I have pointed out, in former chapters, that the legal-tender notes of the Government were, like the Rev- olutionary, or " Continental money," issued to supply re- sources to carry on the war. The law authorizing the issue was passed by the largely preponderating Republican party, under a pledge of the Government that the notes would be retired and cancelled when peace was restored ; but the Democrats in Congress to a man opposed its pas- sage, on the alleged ground of unconstitutionality. I will just observe, en passant, that the parties in question, as parties, have changed positions on this question. At greenbacks, — Vice-President :enbacks made the class who letal, and use be made con- same material, gain to be re- srest added, — , in justice to 1 more or less th have a large ness men, who state issue of , and, theoreti- rrency for the d candidate is ;r, who, like a ack and inter- The result of )re these pages of the money pe, will be de- 2t to come, pters, that the , like the Rev- 1 to supply re- uthorizing the ng Republican that the notes ; was restored ; )posed its pas- jnality. I will in question, as question. At NATIONAL BANKING SYSTEM OF THE UNHED STATES. 185 least four-fifths of the Republican members in the present Congress are crying down their own child, under the sobriquet of " the rag-baby ; " while about the same pro- portion of the Democratic members, now in tlie ascend- ency in one branch of the national Legislature, — the House of Representatives, — as lustily cry out in favor of the infant. So much for political party principle and consistency in the United States ; and so much for the opinions and knowledge of monetary principles among American statesmen. 3. But, to come to the question under consideration, Mr. Lincoln's government needed means to raise, feed, clothe, and put in the field half a million of men ; and Mr. E. G. Spaulding, aided by the Secretary of the Treas- ury, Mr. Chase, who was " cudgelling his brains " for ways and means, secured the passage of tiie legal-tender Act, referred to at the close of the last chapter, and subse- quently, in 1863, the national-bank Act. The several legal-tender Acts, passed in 1862, authorized the issue, in all, of ^400,000,000 of notes of one dollar and upwards, and 1150,000,000 of " fractional currency " below one dol- lar ; and the national-bank Act, which went into operation in 1864, added $300,000,000 more notes, to be secured to the Government by government bonds lodged in the United States Treasury. When the legal-tender notes began to be paid out in rapid issues, tiie banks were, as might have been expected, compelled to suspend specie payments. The bank circulation of the loyal States, at the time of the passage of the legal-tender Act, was esti- mated by Mr. Chase to be about $150,000,000; and these continued to circulate, under suspension, till the beginning of 1864, when the larger part of the old banks organized under the national law, in order to avail them- selves of the opportunity of getting ninety per cent of their investments in public securities in national currency money. : i86 CURRENCY. As the sole object of issuing the legal-tender or greenback notes was to create resources, in violation of the sound principle I have before laid down, that the first object should be to provide, under proper limitations, a more perfect and convenient tool of industry, that end would have been better reached by compounding with the banks for their circulation, and to have issued only greenbacks instead of " national currency " to banks. 4. Prior to this period, the experiences of the people, especially in most of the Southern and nearly all the Western States, had been, as ^ have shown in the last chapter, most unfortunate in respect to bank paper money ; and when the greenbacks were found to answer all the purposes of money, and circulated everywhere in the country at a uniform price, they became exceedingly popular. Those issued to the banks, though legal tender for every thing except certain dues payable to Govern- ment, and being also convertible into legal tenders, or greenbacks, circulated on the same level of value. The only distinction in principle between the two kinds of paper money was, that the one was legal tender in pay- ment of all debts and taxes, except customs dues, made payable in coin ^which exception lowered their market value) ; and tlie other kind, the notes loaned to the banks, was legal tender only for certain things, including all other Government dues : and the Government itself acted as trustee for banks that failed. The effect of this was, that, after the whole ;?30o,ooo,ooo had been issued to the banks, the notes of failed banks were eagerly sought after, and were sold to new banks at a premium, at one time as high as ten per cent. There was also the distinction, that the " legal tenders " were issued directly to the pub- lic in payment of supplies, material of war, salaries, and the wages of all employees of the State ; while the bank notes were at first issued in the course of general business. ■■■''s^ifc*- 1 or greenback of the sound e first object tions, a more It end would ith the banks ly greenbacks f the people, learly all the n in the last bank paper nd to answer verywhere in exceedingly legal tender ; to Govern- 1 tenders, or value. The :wo kinds of nder in pay- s dues, made their market to the banks, ding all other self acted as his was, that, isued to the sought after, t one time as ; distinction, y to the pub- salaries, and lile the bank eral business. NATIONAL BANKING SYSTEM OF THE UNFTED STATES. 1 87 After they were in circulation, however, both kinds were paid out and received indiscriminately by the Govern- ment, the banks, and by the public, except in the one case of customs dues. 5. The great question before the American people now is. Shall the greenbacks be retired by the increase of the interest-bearing debt of some ;^3 5 0,000,000 ; or shall the national banks be compelled to surrender their circula- tion, which was raised a few years ago to ;?354,ooo,ooo, on the absurd pretext of "equalizing the currency"? as if a currency that circulates at the same level of value everywhere in the Union needed "equalizing." Those troubled with nice scruples about the fundamental law, argue that the measure authorizing the issue by the Gov- ernment of legal-tender notes was only justified by the exigencies of the war. " It was a war measure ; " and the very Secretary of the Treasury, Mr. Chase, who secured its passage, had decided, when made Chief Justice, against the majority of the court, that that which was barely legal in time of war was shockingly illegal in time of peace. But the greenbacks are still too popular to be thus annihilated in this way, or by act of Congress ; and the prospects now are, that the contest will end in the separation of the greenback-men from both the old organ- izations, and that a new party will result : or that the Democrats will capture Republican greenbackers, and the Republicans will make reprisals on their opponents by capturing the Democratic bank-men ; and thus the issue will be taken by the present organized parties. 6. It is a singular thing that no one has yet raised in the courts the constitutionality of the issue of notes to the national banks. The national organic law author- izes Congress " to coin money and regulate the value thereof," but is silent about the issue of paper money, further than to secure loans. No one, I believe, claims JI 1 88 CURRENCY. that notes issued in payment of debts owed by the nation are illegal, provided they are not made " legal tender." But there is "a very solid distinction" be- tween the issuing of notes (which serve the purposes of money) in payment of Government expenses, and lend- ing such notes to the national banks to trade on for gain. If the Constitution does not expressly forbid this sort of dealing between the Government and the banks, the principle is certainly fundamentally wrong. It is so man- ifestly wrong for the Government to lend its notes to one class of traders, and refuse them to all other classes on equal security, that a high national court would be justi- fied in declaring such relations to be void on grounds of public policy, irrespective of the silence of the organic law on the subject (^vide extracts from speeches of Web- ster, Calhoun, et al., in Appendix) . 7. Leaving the legal question where it is, I will briefly point out wherein Mr. Lincoln's administration failed to meet the requirements of a very nearly perfect system of currency. When it was found that the state banks' cir- culation stood in the way of the legal-tenders, the right plan was to compound for it, and, if more paper money was really needed, to have filled the channels occupied by the old bank notes with additional greenbacks, as before stated. As a financial expedient, this plan, it is not to be doubted, would have saved to the nation about the entire 1300,000,000 loaned to the banks on its own interest- bearing securities. To put the matter in plain English, Mr. Chase made the banks a present of ^300,000,000, subject to an annual tax of one per cent, and raised the amount by the sale to the banks of ;?330,ooo,ooo of six- per-cent bonds. But the most serious blunder committed by Congress was the authorizing the issue of so large an amount of irredeemable paper, which shortly reduced its market value at one time to forty-five per cent of the M owed by the t made "legal istinction " be- he purposes of tises, and lend- de on for gain, brbid this sort the banks, the It is so man- its notes to one ther classes on would be justi- )id on grounds i of the organic ;eches of Web- is, I will briefly [ration failed to rfect system of itate banks' cir- nders, the right e paper money els occupied by backs, as before 1, it is not to be about the entire ;s own interest- 1 plain English, f ;f3oo,ooo,ooo, and raised the ,000,000 of six- nder committed e of so large an irtly reduced its per cent of the NATIONAL BANKING SYSTEM OF THE UNITED STATES. 1 89 face of the notes. Better far to have raised the ways and means by paying a higher rate of interest and to have held the value of the notes at par of gold by limita- tion of volume. The effect of the over-issue was pres- ently felt, by a sudden rise, to double their former prices of all supplies for the army and navy and the wages of all the employees of the nation. The huge loans were thus squandered, and the permane ,t debt nearly doubled. The theory acted on was, that, in order to raise loans at all, it was necessary to diminish the trading power of the currency, which never ought to have been regarded in the light of ways and means, except incidentally, in sup- plying it for convenience of use and to meet an increase in demand. The absurd theory was acted on, that the rate of interest must not be made higher than six per cent, and that the loans must be sold at par ; and, in order to sell them at par, the market value of paper money had to be reduced to fifty cents on the dollar. All this has had cne effect of building up the national banking sys- tem, and making it master of the Government and the country, instead of subservient to the nation. It is no wonder that the party, at one time all-powerful, which carried out such a policy, should now be tottering to its fall. 8. Here was the great opportunity, such as Sir Robert Peel regretted he did not possess, — "a new state of society," in which "a more perfect theoretical system of currency " might have been established ; and the Gov- ernment then had a plenary power to execute its pur- poses. But one of the great obstacles to American Par- liamentary Government is the want of leadership. It is a government oi juntas or committees, without the necessary cohesion of leading and commanding states- men holding seats in the Houses. Hence the possi- bilities of wise legislation seem to diminish in the inverse ■ i«--»i-*«^*iHiiei,-'!- ■rismm 190 CURRFNCY. ratio of the increase in wealth and population. Wash< ington is a good field for the investigation of future chancellors' sons seeking to " see with how little wisdom the world is governed." 9. Having made these critical observations on the American system of paper money and banks, it is proper to point out some of their good points. If Mr. Chase's currency measures fell short of perfection, they were certainly a great improvement on those they superseded. They were bom of necessity, " the mother of inven- tions ; " and though the legal-tender notes were intended simply as a war expedient, to create resources, they served the purpose of enabling the Government to send nearly all the gold in the country, together with the current product of that metal, to foreign countries to pur- chase war-supplies. So good a purpose did the green- back currency serve, both by enabling the Government to use the gold it had driven out of circulation, for foreign purchases, made through traders, and in sup- plying the people with a better tool of industry than any they had ever had, the originators of it may be for- given for its over-issue, which discredited it at home and abroad. Its popularity has not abated one iota in more than a dozen years, and its opponents are chiefly those interested in the national banks. The so-called " Act to provide for the Resumption of Specie Payments, and for a System of Free Banking," was passed with the view of doing for the national banks what Sir Robert Peel intended his Bank Act to do for the Bank of Eng- land ; namely, to give to these banks the whole paper circulation of the country, on Government securities. The circumstance that the plan is predicated on the perpetuity of the public debt is an argument against its correctness. The temper of the American people, at least, is not in favor of a perpetual national debt ; and jlation. Wash- ation of future )w little wisdom vations on the nks, it is proper If Mr. Chase's tion, they were hey superseded, jther of inven- s were intended resources, they mment to send ;ether with the ountries to pur- did the green- he Government circulation, for s, and in sup- f industry than F it may be for- ed it at home ted one iota in lents are chiefly The so-called lecie Payments, passed with the hat Sir Robert ; Bank of Eng- lie whole paper nent securities, dicated on the nent against its lean people, at onal debt; and NATIONAL BANKING SYSTEM OF THE UNITED STATES. 191 hence a banking system founded on such a debt rests on no durable basis. This national antipathy to a perma- nent public debt arises from the instinctive distaste for an aristocracy of wealth, or of any other kind, which they have come to connect with the public debts of Great Britain and European countries generally. I again also direct attention to the provision in this "free banking law " which permits the formation of national banks with no other limit than the whole national debt; and it is as certain as the earth revolves round its axis, that this practically unlimited issue of national banking currency will lead to new inflations whenever manias for bank speculations arise. The Act is a thorough stultification of its authors, and is most absurd in principle, and must prove most mischievous in practice. The Act itself can only be regarded, by those who carefully examine its principles, as a bonus offered by the Government of the United States to speculators in paper money founded on public securities, and a premium on inflation. 10. This latter view of the effect of the national bank- ing system has not before been noticed by writers on the subject, and I invite special attention to it. It is a powerful incentive to capitalists owning United States bonds, or having uninvested capital, to organize banks of issue. Thus a tendency is engendered to divert capi- tal from other industrial enterprises, and to maintain an unhealthy supply for banking purposes. Only men igno- rant of economic science will claim that there cannot be too much loanable capital. What is so much clamored for, namely, "cheap capital," is very generally a great evil, and is indicative of bad times, cheap labor, and low profits. The one condition is the result of the other. Men who cannot see the force of this reasoning are inca- pable of comprehending the subject, and their clamor is utterly unworthy of attention. The plan of governments "^ J 193 CURRENCY. paying bonuses to any branch of industry has the effect of denuding other branches of a portion of the capital that naturally belongs to them. If it does not, why is the bonus offered? Now, the result of all such induce- ments to invest in particular branches not only counter- acts the natural distribution of capital and labor, but in the long run injures the laborer. Adam Smith has pointed out the damaging effects on industry of govern- ment bonuses and monopolies with great force. II. There is another striking feature in the national banking system that has not been so conspicuously urged by others as its character deserves. It is what I have several times referred to as the result of the Act for the resumption of specie payments ; to wit, the provision which does away with the limitation on the issue of paper money. Since 1844 there has been a complete limitation set on the issue of paper money in Great Britain uncovered by gold or silver. There is not a pound more than when the Act of that year was passed, except what is so covered. It may be questioned whether there exists any branch of industry, or any pursuit, where the bounty principle is so obnoxious as in the case of banks of issue. It has always happened, when panics have broken out, that the causes are directly traceable to the overtrading in bank capital. These cyclones have ever been preceded by low rates of interest and overtrading in discounts, and are as invariably followed by severe contraction and high rates for loans. The last paragraph I have added, in May, 1879 : and I may observe, that, though specie pay- ments have been reached, the rate for loans in New York ranges from two and a half to four per cent ; and the prospect of a definite settlement of the currency question in the United States is as much muddled and apparently more uncertain as to the future, than ever. I has the effect of the capital jes not, why is 1 such induce- it only counter- and labor, but iam Smith has istry of govern- force. in the national picuously urged is what I have of the Act for it, the provision n the issue of :en a complete loney in Great rhere is not a ear was passed, :ists any branch inty principle is f issue. It has en out, that the trading in bank n preceded by discounts, and action and high have added, in ugh specie pay- ns in New York cent; and the irrency question [ and apparently CURRENCY an: ^^iNKINO IN THE UNFTED STATES. 1 93 CHAPTER XXII. CURRENCY AND BANKING IN THE UNHED STATES MADE SUBSERVIENT TO PARTY ENDS AND INTERESTS. 1. Nothing is more discouraging to those who seek to establish true scientific principles as the basis of currency, than the efforts of partisan politicians to make political capital out of that which should, above all other things, be made to yield to sound methods. I propose to point out in this chapter, written in the latter part of the summer of 1876, pending the canvass of the presidential election, how the currency question has been seized on by both parties to forward their purposes. I am com- pelled to point out how the President of the United States abandoned the principles he had for many years earnestly advocated, because he saw, or thought he saw, it would promote the success of his party. Being a soldier, he might have been excused for not knowing much about a question involving numerous difficult and complicated principles. But he had evidently studied it ; and what he did, he did from purely partisan subser- viency. 2. President Grant had lost no opportunity, from the time of his first message to Congress in 1869, till the spring of 1874, to magnify the excellence of the green- back currency. In each recurring message he made special allusion to it, telling Congress it was "the best currency the world has ever seen " (his own words), and urging the adoption of measures to raise its value to the standard of gold, and to provide for its convertibility on demand. Suddenly, however, during the latter year, he obtained new light, imparted to him, it was said in the newspapers, by Senator Jones from the great silver State »M CURRENCY. PI iiiil •^ 111 of Nevada, which resulted in his handing the senator for publication a memorandum on the currency question, in which he proposed to abolish the entire greenback circulation, and fill the channels then occupied by it with national bank notes and gold. His method of accom- plishing that great feat was, to purchase ;^4oo,ooo,ooo of gold in Kurope by the sale of government securities. The idea of waiting a few years for its protluction from the mines of California and other gold-producing States, was too slow for the President's impetuosity to get rid of "the best currency" in the world. He never stopped to consider what an Herculean task it would be to sell so many bonds for nothing but gold, or what effect its withdrawal in a short period of time from the European bullion markets might have. But a part of the plan was to pass laws that would " turn the balance of trade " more strongly in favor of the United States. If these remarks should ever meet the President's eye, I invite him to read the chapters on bullion and the balance of trade (Chaps. XI., XII.). 3. Nor did President Grant allude to the large addi- tion that would be made by his proposal to the public- interest debt, increasing the annual taxation say, of $15,- 000,000 a year. But such conversions are not unusual among American statesmen, — especially on the currency question. The future historian will perhaps find ample causes for the readiness with which the President and most of his party changed ground with their opiwnents on the matter of retaining or abolishing the greenbacks. As in England, "a cry" to go to the country with on each recurring presidential election is necessary ; and each party, in convention or through the party papers, gets up one to order. The Republicans scented victory in the present bitter contest, in an alliance with the " Money Powers," — the national banks; and their "cries" wer*, ng the senator rrency question, ntire greenback ipied by it with hod of accom- j 11400,000,000 iient securities, roiiuction from oducing States, jsity to get rid : never stopped >uld be to sell what effect its the European )f the plan was of trade " more ■ these remarks invite him to alance of trade the large addi- to the public- n say, of $15,- re not unusual )n the currency aps find ample President and heir opiwnents he greenbacks, ountry with on sary ; and each ty papers, gets nted victory in th the " Money ■ " cries " wer* , CURRENCY AND DANKINO IN THE UNrTED 6TATB3. 195 "Hard Money," " Honest Money," and "Rag-Baby," Willi " Democratic Repudiation " thrown in as a make- weigh^ On the other hand, a large part of tlic Demo- cratic party liave all along formed a mine of political cap- ital by an alliance with actual repudiators of public, if not private, obligations, — a class pretty numerous in all communities; and the popularity of the word "Green- back " has come to be the enticing cry of this wing of that once more rising party. With them the term means, unlimited issue of irredeemable paper. Another Demo- cratic "cry" is sympathy with what they call the "debtor classes," who, they allege, have been ground into powder between the upper and the nether millstones of the "moneyed" or "creditor classes." This exposition of the positions occupied by the two great political parties m the United States at this time, September. 1876, on the currency question, will hereafter be read by econo- mists and other investigators with the feeling that in- spired the Swedish ciiancellor, when he sent his son to see for himself " with how little wisdom the world is governed." The reader will probably see the propriety of my introducing this episode in American politics, in that it relates almost exclusively to the money question, and that the final settlement of that question is yet many years, if not generations, off, both in England and America. 4. It has been shown, that in the United States the one party appeals to the power of wealth, the other to that of the laboring millions, for sympathy and support. This is a dangerous issue to be made in such a country as the United States. It discards from consideration great fun- damental principles which teach that capital and labor wisely directed and left free from legislative restraints' will always harmonize and work together like twin sis- ters. In civilized and industrial communities the one 196 CURRENCY. can no more exist without the other, than animal life can be sustained without air, food, and water, and, in the case of the human race, than they can do without cloth- ing, houses, and all the other accompaniments of civili- zation. 5. Beside a mere record of facts, I have been led to make these statements, which are historically and literally true, not because American politicians are worse than the average public men of England or other countries, who are not over-scrupulous how they rise to power, but to show how desirable it is to have the money question definitively settled, and taken out of the whirlpool of party politics and all interested business influences. This most desirable object can only be attained by a general agreement among the educated and thinking men of all parties, and combining on a correct theory as to the real offices of money, metallic and paper, and adopting some method that shall leave the natural laws to indicate and accurately serve out an adequate supply of both kinds to meet the actual demands of industry. 6. In Great Britain the omnipotence of Parliament alters and changes the unwritten constitution ; and an Act of Parliament, passed and acquiesced in by the people, settles such questions as the issue of currency, and almost every thing else, as far as any human concerns can be definitely settled. In the United States little if any thing short of an amendment of the Constitution, which though a solemn is a tedious proceeding, affords any assurance that what is done one year will not be undone the next year. This is a very difficult process with nearly equally divided parties. Party interests, in the United States, very generally overtop national interests or considerations of patriotism. But possibly this currency question may yet find its solution, and more definite if not permanent set- tlement, by an amendment of the organic law of the mi^^^ - I animal life can ter, and, in the o without cloth- iments of civili- ive been led to ally and literally e worse than tlie ir countries, who power, but to money question he whirlpool of nfluences. This icd by a general iking men of all try as to the real d adopting some s to indicate and of both kinds to e of Parliament tion ; and an Act n by the people, ency, and almost concerns can be little if any thing )n, which though Js any assurance undone the next ith nearly equally nited States, very :onsiderations of juestion may yet t permanent set- ;anic law of the CUnRENCY AND nANKINO IN THE UNrTED ffTATES. 1 97 nation. Congress at this time having one party in the as- cendency in one House, and the other paity in the other, seems powerless to effect any settlement whatever. Both candidates for the Presidency are, l)y antecedent associa- tions and utterances, in favor of surrendering at discretion to the national bank influences, and to give the whole paper currency to those banks; but a powerful counter- actmg influence is at work against this policy in the popular branch. I have before, tiirougli influential journals m tiie United States, suggested to the people the desira- bility of agitating the question of an amendment to the Constitution, to authorize and make it obligatory on Congrebs to create by law a National Issue Department, clothed with discretionary power, within prescribed limits,' to have charge of the coinage of metallic money and the issue of paper money, in manner suggested in the chapter on a Stale Issue Department. 7. The plan of lending notes, at one per cent tax on the circulation, is so evidently unconstitutional, and con- trary to public policy, that it must sooner or later come to an end by continued agitation of the question among the masses of the people. Moderate men, of all shades of politics, would do well to sustain a plan for a change in the fundamental law of the nation. Questions of this kind become dangerous elements in governments when left alone too long. Just now the entire influential press of New York, of both sides of politics, have closed their columns against those who favor a continuance of a national paper currency, though issued on a gold basis by and for the nation. These journals, one and all, do nothing but cry out, "rag-baby," "rag-baby." In the West, nearly all the press is in favor of the "rag-baby" and opposed to the bank theory of currency ; and the question seems to be taking sectional ground. I have already pointed out the dangerous theories that have iii^ii iHi:: I I III igS CURRENCY. taken deep root in the West and South, where I have had many personal opportunities to learn the state of public opinion. The desire to have a new era of inflated values, by an excessive issue of inconvertible paper money, seems to be at the bottom of the agitation in all parts of the South and West that I have lately visited. It is not difficult to foresee, that the bigotry of journalism referred to tends to foment a much-dreaded evil in the American body politic, — anothpr sectional schism. 8. One of the phases of the money question, which has its serious as well as ludicrous sides, is the tendency that its incessant discussion by mere charlatan writers and speakers is the one already alluded to as fostering com- munism. There are numerous cheap weekly journals, extensively sold and read throughout the whole country, whose sole object is to foment the (so called) conflict between capital and labor. The one idea put forward, is to influence the election of members to the various legis- latures and the national Congress favorable to the passage of laws aimed directly at the rights of property. These philosophers, not content to leave the natural laws to regulate the price of labor and commodities, aim at im- posing restrictions of all kinds on all industries not in sympathy with the particular class to which they belong. I hope and believe that the body politic in the United States possesses sufficient cohesion, and that there is enough wisdom and moderation left in it, to settle these questions on some satisfactory basis. The costly lessons of one great civil war should be sufficient, at 'east for a century, to admonih public men of all parties not to press for extreme measures calculated to keep up sectional jealousies and hatreds of any kind. 9. The issue of paper money is still regarded by nearly all public and business men in the United States, as it was in Great Britain till the passage of the Bank Act of N]fe.. .^ fhere I have had e state of public if inflated values, ! paper money, m in all parts of isited. It is not jrnalism referred in the American estion, which has he tendency that atan writers and IS fostering corn- weekly journals, le whole country, ) called) conflict ea put forward, is the various legis- )le to the passage property. These : natural laws to dities, aim at im- industries not in hich they belong, tic in the United ind that there is it, to settle these The costly lessons ent, at 'east for a )arties not to press Lcep up sectional egarded by nearly nited States, as it f the Bank Act of CURRENCY AND BANKING IN THE UNriED STATES. I99 1844, from the one stand-point of creating trading capital. The idea of producing a better and more convenient tool of industry than metallic money hardly ev BANKING IN FRANCE. 203 3. After the assignats and commandats, came hard money, supplemented by occasional issues of what may be termed treasury notes for temporary expedients, until the Bank of France came into existence in 1800, under a charter authorizing a capital of 45,000,000 francs, say ;^i,8oo,ooo, which was soon subscribed and fully paid. In 1806 the bank received a new charter, and under- went a more complete organization, and its capital was increased to 90,000,000 francs; but this was subse- quently reduced to 67,000,000 by the bank's own act in buying in and cancelling the excess of shares beyond this sum. It stood at this until the year 1857, when the amount of its capital was again raised to the sum of 182,000,000 francs, or say ;^7,30o,ooo, at which it now stands. 4. Like the Bank of England, the French National Bank has passed through many severe trials, but has very generally been prudently and ably managed, and has yielded mucli larger profits to its proprietors than the Bank of England. Its success in this respect may, to some extent, be due to its having always possessed a monopoly in the supply of paper money; and its divi- ' dends have not unfrequently been at the yearly rate of from 150 to 250 francs on the 1,000 franc share, or from 15 to 25 per cent. 5. I have alluded in a former chapter to the marvellous manner in which the French Government, through the intervention of this powerful and generally well-managed institution, paid off the German indemnity, and showed that very little actual money or bullion was used to pay it. It may here be remarked that about nine-tenths of the 5,000,000,000 francs (;^2oo,ooo,ooo) were paid by the transferrence of " purchasing power " raised on the national credit. The Germans, being possessed of this power, could use it to buy gold, or any thing else they Is 304 CURRENCY. needed ; and as gold is only useful for what it will ex- change for or buy, but little of the sum total, probably, was ever invested in that commodity. Now, what the Bank of France did to aid in this prodigious financial operation, was to lend the Government out of its own trading resources in 1870, 1,363,000,000 francs, nearly ;^.54,ooo,ooo sterling. To do this, it was authorized to suspend specie payments, though I very much doubt whether it was, in point of fact, necessary ; still, as a prudential measure, it was perhaps the best thing to do. It is sufficient to know that the result was, the success- ful raising, through great loan agencies all over Europe, of the entire loan of ;^20o,ooo,ooo, and the repayment, within five years, of the whole sum advanced towards it by the Bank of France. 6. As an aid to these great financial operations, the National Assembly in 1872 passed "a stay law," which enabled acceptors of bills held by the bank to suspend payment for a year ; and it has been stated authoritatively, that this measure was most salutary in its effects, and that scarcely any loss was sustained by the bank in conse- quence. The same thing was done in several of the Southern States at the close of the American war. If the British Government finds it wise, for the sake of securing a " breathing-time " for the Bank of England, to suspend the Bank Act in periods of crises, may it not be wise to extend the suspension to all traders for one or two months, till the fury of the financial cyclone has had time to subside ? " What's sauce for the goose is sauce for the gander." 7. I have directed attention to the issue and manage- ment by the Bank of France of paper money as being more theoretically and practically perfect than that of the Bank of England, or any other issuer of such money. The obvious reason for this nearer approach towards a perfect system seems to be, that the bank does not issue lat it will ex- )tal, probably, iow, what the ;ious financial lit of its own francs, nearly authorized to much doubt y; still, as a ; thing to do. , the success- over Europe, le repayment, ed towards it perations, the y law," which ik to suspend uthoritatively, fects, and that mk in conse- leveral of the 1 war. If the :e of securing id, to suspend »ot be wise to ir two months, ne to subside ? ; gander." and manage- aney as being an that of the such money, ch towards a oes not issue OniRENCY AND BANKING IN FRANCE. 205 notes on public securities, and always keeps on hand an adequate supply of cash money to meet all its obliga- tions It does not treat its own notes as good reserve and discounts commercial paper freely; whilst the Bank nable .. n.. fluctuations in market ;,. • in times of great depress or unsound speculation and general mflation of values, and overtrading and "production" 8 But, after all, much of the success of the French Bank IS unquestionably due to the circumstance that it has a monopoly of the issue of paper money, and is free rom the effects of sharp competition, whic/'exists :,!::! ever there are a large number of licensed issuers in a county., whose chief aim is to make a profit out of the business. Hence, for these and other reasons of a pn^! dential nature the Bank of France affords the best'e^- Zh .°^ ^ '^' '''^^'' °^ ^ '°""^ ^"d scientifically ITlTrT'T °' P'P^"" '"^"^J' °" '--d, unless i' be that of the State Issue Department for India, which IS a pure and simple issuer of convertible paper money 9. In making these comparisons, I ought not to omit the Treasury Issue Department at Washington. Under the able and honest administration of Gen. F E Spin ner,a very perfect routine business became early "estab- l-shed ; and no possible fault can be found with the busi- ness machinery for issuing and renewing notes. The fault IS m the inception of the plan of issuing demand- notes not redeemable in coin, and in over-supply, in total disregard or ignorance of the fundamental principles of money or currency. No national issue department can b safe in the United States, that does not p/ovide effectu- ally against the temptation of a finance minister to use the and >t -«./ be kept out of party politics as effectually a the national banks of France and England. In the CURRENCY. United States, the party machinery seems to have become a part of the State itself. Party organizations are perma- nent fixtures on the body politic ; and the dominant party is always unscrupulous as to what it lays its hands on to maintain itself in power, and is not over nice about the provisions of the Constitution when a crisis in its affairs arises. Hence greater safeguards are there needed than in most other countries. lo. At this time, in France, the only really important question seems to be, whether the body of shareholders composing the Bank of France shall have the profits of the issue, or the nation. If the capital or tlie circulation of the bank were taxed in some ratio correspondent with the profits derived from the note issue, perhaps a change in favor of the State might not be expedient. The prin- ciple of " farming out " the issue of paper money to private parties is not sound, and, unless very good reasons can be shown for it, ought not to exist. The most eminent of French economists, M. M. Chevalier, is a stanch advo- cate in favor of a State issue, or of selling tlie notes for their full market value (vide his letter in Appendix). His views and arguments have been frequently set forth in the columns of the leading journal of Paris, the " Jour- nal des D^bats ; " and he claims, as I do, that the State can no more properly delegate its prerogative to bodies of incorporated capitalists to issue paper money, than it can the right to coin metallic money, or to regulate the weights and measures of the nation. II. There is one defect in the currency issue of France, that I cannot pass by without notice. It is the want of notes of lower denominations than one hundred francs. There should be issued all the twenty and forty or fifty franc notes the public may be willing to buy. It is espe- cially inconvenient, in travelling in France and in other continental countries, to be compelled to carry sums of 3 have become ans are perma- lominant party its hands on to nice about the is in its affairs e needed than eally important of shareholders I the profits of • tlie circulation •espondent with :rhaps a change ;nt. The prin- noney to private reasons can be lost eminent of a stanch advo- ig the notes for in Appendix), luently set forth 'aris, the " Jour- ), that the State gative to bodies r money, than it r to regulate the f issue of France, X is the want of hundred francs, and forty or fifty buy. It is espe- [ice and in other to carry sums of 1 KFFECT OF THE VOLUME OF CURRENCY. 307 metallic money, and especially silver change. In a pretty extended tour I made, some years ago, through France, Belgium, Germany, Switzerland, and the Austrian Tyrol, I found the Bank of France note as good as gold, but often experienced difficulty, especially in "posting," to get a hundred franc note changed. If the world comes to regard paper money in the light of a more con- venient tool of industry than metallic money, the preju- dice against smaller denominations will yield to practical utility and the wants of the people, and lead to the issue of notes to represent the gold coin commonly used in all countries, and an immense saving of capital now invested in such coin. CHAFfER XXIV. HOW THE VOLUME OF CURRENCY AND OTHER THINGS AFFECT IHE MARKET OR EXCHANGE VALUE OF COMMODITIES.— PRESENT INFI.ATED CONDmON OF THE CURRENCY AND BANK DISCOUNTS IN THE UNFTED STATES (MARCH, 1 8 79), AND WHAT IT PORTENDS. — NICHOLAS RIDDLE ON CUR- RENCY. 1. This subject has been treated generally in Chaps. IV. and V. ; but, in consequence of the attempt recently made by some American economists in the " New York Commercial Bulletin," a journal circulating in mercantile circles, to controvert the doctrine that the prices of arti- cles are influenced by the volume of currency, I propose a further examination of the subject. If the doctrine attempted to be set up by these writers is correct, then postulates 3 and 4 are incorrect, and not self-evident propositions, as I affirm them to be. No. 3 says, " Money is a commodity, and has a market value independent of ■: :,-,sgfei»j^mwdsi^.j- ' iff so8 CURRENCY. tfje mrterial of which it is made ; and, like such material, its market value is governed by its volume, or supply and demand." No. 4 : " The value of money or any other commodity is in the inverse ratio of its volume." These propositions embrace most important fundamental princi- ples, underlying the whole edifice of economic science. Hence I propose to leave no grounds for denying their correctness. 3. In respect to currency, the postulaces simply mean, that when currency, usually composed of coin and paper money, is increased in amount, its trading power, or exchange value, is correspondingly diminished in the same manner as that of other commodities ; on the other hand, if the volume be diminished, its trading or exchange value will be increased, fari passu, with such diminution or contraction. It is not denied that this law is absolute and fundamental as to other leading commodities, such, for instance, as iron, corn, wheat, cotton, and indeed the whole category. But currency, after all, i. the most conspicuous example, because with it we measure and differentiate the value of all other things dealt in, in the markets. But the theorists I am referring to contend that currency is an exception to the rule, and that there is never too much or too little of it. But that assumption is not to the point. The question of " too m. or too little " has no bearing on the proposition itself. 3. The theory is simply founded on a misconception of the services rendered by currency, and in opposition to an equally glaring fallacy that the market value of any given commodity is determined without reference to other factors in the great sum of human industries. In treating this question, I am consiaering currency in the light of coined money, and paper convertible into coin at the option of the holder. Such currency, I have shown, is very often inflated where the limit of the issue EFFECT OF THE VOLUME OF CURRENCY. 309 luch material, ar supply and or any other ime." These mental princi- omic science, denying their simply mean, 3in and paper ng power, or ^d in the same lie other hand, or exchange ich diminution law is absolute modities, such, nd indeed the , i;, the most ; measure and dealt in, in the to contend that i that there is liat assumption D m..... or too tself. misconception 1 in opposition larket value of thout reference man industries, ng currency in :onvertible into ;urrency, I have mit of the issue is allowed to run far beyond the amount of metal kept as reserve for its conversion ; but it is, nevertheless, less liable to affert other values, as measured by itself, than inconvertible paper. In other words, its effects are not 90 immediately visible as those of the latter, flence some have concluded, without reasoning, that the vol- ume of metallic and convertible paper together does not influence values at all. The question to determine is, whether the prices of goods have risen, or liie price of currency has fallen, — for it is a question of relative values, — when the one falls, the other appears to have risen, 4. The question i ; complicated by other circumstances and things. It would be erroneous to affirm, that, if the volume of currency were doubled in a short time, the market value of goods, as measured by it, would in like manner be doubled, for the simple reason that currency ia but one, and by no means the largest one, in the great volume of things wiiich act on and affect market values. In postulates 35 and 36 I very clearly presented the ele- ments which enter into this question in modern indus- trial communities, and really determine the relations of value among the whole category of commodities. In 35 I showed, that, by the agency of banks of discount, the market value of goods in course of production and dis- tribution was turned into trading power without the aid of currency, and constituted the larger proportion of the loans discounted to traders, manufacturers, and specu- lators. In postulate 36 I stated what composed the balance of such loans, including money, or currency. Now, currency only forms about five per cent of the gross amount of trading power in a commercial country like the United States ; and it is in iis capacity or office of trading power that it plays its part in the genera/ category 0/ things which stand for capital. But, though CURRENCY. metallic money is one of the smallest factors in the sum, it is the most important, because of its greater stability under the operations of supply and tlemand. Currency may be likened, in this respect, to " a little leaven whitli leaveneth the whole lump." When its stimulating eflcct is set in motion by unusual issues of bank or government notes, without regard to the quantity of metallic money behind them, it suddenly causes a rise in the market value of other and grosser things, as the leaven causes the mass of dough to rise. 5. The question as to whether gold lias risen or goods have fallen, or vice versa, is one of easy solution. If there occurs a period when there is a genernl rise along the whole line of leading commodities, — such, for in- stance, as cotton, corn, wheat, iron, etc., — it is evidence that trading power, including currency, is abundant and cheap. When one, or two, or three articles have risen, and the general category of goods remains unchanged, it is a sign that trading power, or capital, maintains its equilibrium, or that supply and demand balance each other, and the change in the exceptional articles will be found to be due to other causes, such as over or short production of the particular ones. 6. When it is seen that metallic money alone is not chargeable with fluctuations in the market value of com- modities, but forms only a small part of the things respon- sible for them, it will also be seen how important it is to hold our currency as close as possible to one of pure metal, using paper as a substitute for it, for convenience. Metallic money never fluctuates violently or suddenly, and, unlike inconvertible paper, and discounts and re- discounts of goods, or goods discounted several times over through resales, does not tend to inflation and over- trading and production. Many good reasoners have in- dulged and speculated much on the effect on market )rs ill the sum, ;reatcr stability ml. Currency e leaven which nnilating effect or government netallic money in the market leaven causes risen or goods y solution. If lernl rise along — such, for in- -it is evidence I abundant and :les have risen, ins unchanged, il, maintains its 1 balance each articles will be is over or short ey alone is not t value of com- e things respon- iportant it is to to one of pure or convenience, ly or suddenly, scounts and re- d several times flation and over- isoners have in- iffect on market EFFECT OK THE VOLUME OF CURRF.NCV. ail values produced by the great discoveries of the precious metals in the United States and Australia during the last thirty years, and founded thereon predictions of a large increase in such values in respect to labor and the entire category of the products of labor. These predictions have not come to pass, because, contemporaneously with the increased production of these metals, a still greater increase has taken place in the prod' tion and con- sumption of nearly every thing else. This latter result has been brought about by the important improvemeri? and facilities in communication, and the distribution of commodities of the most bulky descriptions, and cheaper and more improved methods of production and manu- facture. Consumption has likewise kept pace with pro- duction, in consequence of the general expansioi ^rd distribution of wealth. 7. A due regard to these considerations leads irresist- ibly to the logical conclusion that the ratio of values between the precious metals and of the general category of commodities has been wonderfully maintained. Silver has fallen most, owing to very large amounts beinp sud- denly precipitated on the markets of the world by the Germans, who have wisely adopted the sound policy of not forcing on the people a currency so clumsy, and so liable to sharp fluctuations. During the thirty years in question, the product and stock of gold and silver have been doubled : but the other productions of labor have been trebled by railway and steam.-< .! 'ransit, and im- proved methods of production and ni *. .acture ; and with these //le -ybility to consume has fully kept pace. Thus the equation between supply and demand has been, as already observed, wonderfully maintained. 8. It \Vould appear froir. hese considerations, that, but for the contemporaneous increase in the production of gold and silver during the last thirty years, their market I . ;fT mam J 212 CURRENCY. value, or trading power, must have considerably increased. But had their quantity remained stationary, being only five per cent of the capital used in conducting the indus- tries of the world, including the paper money used with the coin, the market value of other things would not have fallen in the same ratio as that in iht leopcciive tilings we are comparing. The perturbations in the market value of labor and commodities, produced by the action of supply and demand, are, therefore, brought to a scien- tific or logical solution. It is the essence of absurdity to claim that labor, or any article dealt in, in the markets, is exempt from this universal law. Bullion, the raw mate- rial, and money, the manufactured article, are alike subject to it ; and the plan I have reasoned out, and shall more fully state in the next two or three chapters, of maintain- ing a close approximate value between bullion and coin, is the only true, scientific, and practical method in exist- ence, or which can be devised for the supply of currency. I make this broad claim, because science is inexorable in its requirements. It has not two ways for reaching the same result. All deviations from its teachings are viola- tions of natural laws, and all legislation to override its precepts is erroneous and mischievous. 9. I have, in many places, endeavored to disabuse the minds of thinking men of the habit of treating money and capital as synonymous. I wish now to inculcate the equally important truth, that fully three-fourths of the capital used in conducting the industries of the chief commercial and manufacturing countries consist of the market value of goods in course of production and distri- bution. This capital is made available by banks of dis- count and deposit, by means of bills representing goods, and checks used for transferrence. This easy process of turning goods, before they are ready for market or have reached consumers, into capital, tends mightily to stimu- Mi irably increased, ary, being only cting the indus- loney used with would not have iopoi-ave tilings in the market d by the action lught to a scien- of absurdity to in the markets, 1, the raw mate- are alike subject and shall more ;rs, of maintain- allion and coin, nethod in exist- jply of currency, is inexorable in for reaching the things are viola- i to override its to disabuse the treating money to inculcate the 2-fourths of the es of the chief s consist of the iction and distri- by banks of dis- resenting goods, easy process of r market or have lightily to stimu- .M- ' EFFECT OF THE VOLUME OF CURRENCY. 213 late production, and, to the same extent, to increase the general volume of trading power; and, unless consump- tion keeps pace with production, the increased quantity of goods tends directly to diminish market values, including that of labor. If it is the general volume of capital, acting on labor and goods, that influences their market values, it follows, as a logical sequence, that any extraordinary addition (by production) in one or two articles, — such, for instance, as gold and silver, — only tends to increase that volume in the same ratio that these articles bear to the whole. The same rule applies to other productions, such as cotton, corn, wheat, or iron. In this respect the most perishable articles having market value add just as much to trading power as the " everlasting metals " of M. Cemuschi. These principles will serve to illustrate the perpetual changes that are taking place in the market values of commodities. 10. I will now further consider the part played by paper money not fully covered by coin. It has already been demonstrably shown, that mere convertibility of paper for " occasional calls " in " flush times " is no guar- anty against over-issues of such money by banks and governments. The security given by banks against loss by the abuse of the privilege does not prevent the recur- rence of periodical break-downs, and long derangements to the industries. At this time (March, 1879) gold and silver coin in the United States are at par with each other, and with paper money. The coin amounts to about ^350,000,000, in the hands of the Government, the banks, and the people. Some estimate the total higher, but I prefer to take the lowest figures set. The entire paper is in excess of i!66o,ooo,ooo ; and all must be treated as in actual circulation for financial purposes. To reach a clear estimate of the forces that act on the industries of the country, we must get at and add to these figures the dis- pwi i I ■■ .pii|.u..,i..JlM ;* CURRENCY. counts of banks. On Oct. i, 1878, the national banks had under discount 1^830,000,000 of bills. We have no means of knowing accurately the amount of discounts of state and savings banks and private bankers, and must, therefore, make the best estimate in our power. For this purpose, we will take the deposits of the national banks at the above date. These were in round numbers, ^665,000,000, showing the discounts to have been about twenty-five per cent more than the deposits. The total deposits of state, private, and savings banks, having capi- tal, and discounting more or less commercial paper, were $1,242,000,000. To be safe, we will assume that the dis- counts of these banks and bankers amounted to only twenty per cent above their deposits. It would then ap- pear, if there has been no change since last October, that there are in operation the following forces acting on the industries of the United States : — 1. Gold and silver coin .... $350,000,000 2. Government notes issued to the public, 347,000,000 3. National currency loaned to banks . 323,000,000 4. National banks* discounts . . . 830,000,000 5. Discounts o£ other banks, say . . 1,450,000,000 $3,300,000,000 Three thousand three hundred millions of dollars, — about threefold the amount of similar forces in operation in i860, or twenty years ago. There are, besides, de- posits of $800,000,000 in savings banks having no capi- tal, but which discount more or less commercial paper on the sly with public or state securities as collateral. The figures representing deposits and discounts are taken from the valuable and carefully compiled report of Comp- troller Knox for 1878. II. When it is considered that the circulation and deposits alone of the national banks, amounting to $1,150,000,000, are immediate liabilities against $150,- ; national banks 5. We have no ; of discounts of nkers, and must, >ur power. For of the national round numbers, liave been about osits. The total nks, having capi- rcial paper, were ume that the dis- nounted to only t would then ap- last October, that es acting on the $350,000,000 347,000,000 323,000,000 830,000,000 1,450,000,000 $3,300,000,000 ons of dollars, — jrces in operation are, besides, de- ls having no capi- :ommercial paper ties as collateral, iscounts are taken d report of Comp- e circulation and cs, amounting to ies against $150,- EFFECT OF THE VOLUME OF CURRENCY, 215 000,000 of cash assets, the remaining assets being bills under discount and government securities, it will be seen on what a magazine of combustible material our indus- tries are founded. Private bankers and state and savings banks, though they issue no paper currency, are in no better position. People are everywhere contemplating with satisfaction the commencement of a new era of prosperity. The wages of labor are beginning to stiffen up. "Tramps "are growing fewer in number. The prices of most domestic articles are increasing. Goods are in demand, and bills in a year or two will greatly multiply ; and banks, to use the phrase of an English economist' will "discount mightily." As trading capital is thus in- creased and cheapened, goods and labor will rise pari passu therewith. New national banks will be started, and old ones will increase their circulation. Gold and silver are added at the rate of ^150,000,000 a year. Foreign trade is largely in favor of this country. Every thing portends an early and rapid expansion and inflation of business and over-production, and the approach of " the fool's paradise." The country will soon be in the position of the rich man in the Bible, whose barns and gamers were well filled ; but there was the law of nature, which, like a spectre, said, "Thou fool," etc. 12. There is nothing to compare, in importance, to which the national Legislature of the United States can turn its attention, with that of establishing a sound sys- tem of currency ; and, to be sound, it must be wholly detached from government and banking finance. My last postulate is fundamental, and a great truth. "There is a most obvious distinction between cur- rency and finance : the one is a tool of industry, and the other a method of conducting the business opera- tions of nations, states, corporations, and individuals." Hence I have drawn the logical corollary that paper mam CURRENCY. money should never be permitted to be issued for tiie creation of resources, or for financial purposes, but only to take the place, because of its convenience in hand- ling and circulating, of metallic money. // ntus^ be con- fined to serving as a substitute for the money by which all civilized nations estimate and differentiate the value of labor and all its products, and all things having mar- ket value. If this can be done, we shall strip industrial crises of nearly all their power to injure the great mass of the industrial part of society. The evils of these peri- odical cyclones will be confined chiefly to those specu- lative, ever greedy members of the community who have been most instrumental in raising the whirlwind. The tools of the workmen will remain as sound and bright, and as efficient, as ever. The mixing up, in thought by many eminent economists, and in practice by those who follow the bad teaching of great men, of the two things, currency and finance, is at the bottom of the evils in question. The issue of paper money is not banking, and hence banks ought not to issue it. But it is banking for the Government to issue " national currency " and lend it to the banks at one per cent tax on circulation, and hence should not be continued. The Government might with equal propriety enter into any other financial or business undertaking with private parties. 13. The late Nicholas Biddle, president of the old United States Bank, which was a partnership concern between the Government and a body of private capital- ists, said many things so pertinent to the points I am illustrating, that I cannot forbear to quote some of them. In a circular which he issued to the shareholders of that institution, in May, 1829, he used the following striking language : " B^.iks are often managed by sanguine per- sons, anxious only to increase the profits without much personal interest or pecuniary responsibility in the admin- ^^-^%. issued for the poses, but only ience in hand- U must be con- ttoney by which itiate the value gs having mar- strip industrial the great mass Is of these peri- to those specu- lunity who have ifhirlwind. The md and bright, I, in thought by ;e by those who ' the two things, of the evils in lot banking, and // /■/ is banking currency" and c on circulation, rhe Government y other financial ies. lent of the old nership concern ■ private capital- ;he points I am 2 some of them, reholders of that bllowing striking by sanguine per- ts without much lity in the admin- EFFECT OF THE VOLUME OF CURRENCY. 217 istration. The constant tendency of bankers is to lend too much, and put too many notes in circulation. Now, the addition of many notes, even while they are as good as gold, by being exchangeable for coin, may be inju- rious, because the increase of the mixed mass of money generally causes a rise in the price of all commodities." Mr. Biddle's remedy for such evils, wlien they have be- come dangerous to the stability of the banks, is equally striking, and is demonstrative of the folly of allowing banks to issue paper currency at all, no matter how much security is given to guard against loss on circulation. It is against the principle as well as the practice of the thing that I am arguing ; and security may mitigate, but cannot guard against, the evil effects. Such evils, and the banker's remedy, are, it will be seen by Mr. Biddle's prescription, at the very bottom of the causes which lead to industrial crises. " When the banks of a country," says this astute and able banker, " perceive such a de- mand for coin for exportation as diminishes their stock on hand, they should stop the exportation; ... by issuing no new notes, and declining to renew the notes of your debtors, you compel them to return to you the bank notes you have lent them, or their equivalents. This makes the bank notes scarce, — this makes them more valuable, — the debtor, in his anxiety to get notes, being willing to sell his goods at a sacrifice : this brings down the prices of goods, and makes every thing cheaper," and, I will add, brings on the panic and crisis which were before impending. And such is still, and ever will be, the remedy for the evils brought on society by banks of issue and discount; and this is the pernicious system which a part of the press of this country labors inces- santly to perpetuate. A writer of an able article on the subject of currency, which appeared some time since in one of these journals in this city, to whom I am indebted U 3l8 CURRENCY. for Mr. Biddle's views, very well observes, "They first inflate the currency by increasing its volume, in order to increase their own profits; and then contract it again, to prevent their own bankruptcy, without the slightest regard for the rights or interests of the community. Not- withstanding these confessed evils resulting from banks of issue, the journal in question and its allies persist in advocating the continuance of the causes of our greatest industrial evil, when a most favorable opportunity pre- sents itself to get rid of them by abolishing the power of banks to emit paper money altogether. The Consti- tution of the United States makes no provision, express or implied, for issuing and loaning to national banks "national currency," or for granting charters to such institutions. If the currency in question were sold to banks for its full face value in gold, there could possibly be no abuse of the practice, if the Government held all the gold paid for them to secure their redemption and prevent inflation. But to lend such currency to two thousand banks, chartered expressly to be so favored, is a violation alike of the organic and the natural laws. 14. It will be seen, in the next two or three chapters, how the needful amount of metallic and paper currency may be maintained by a strictly automatic process, without any cost to the nation as such. At the time of writing" this chapter, the nation holds about $150,000,000 of nietal- lic money, purchased to maintain specie payments on $346,000,000 of greenbacks, or United States notes, issued directly to the people. If the legal-tender char- acter of these notes were abolished, and no more were sold than the people were willing to pay for in gold bul- lion and coin, and the bank notes were retired, we should approximate a more correct monetary system. See Chap. XXXI. for a formulated Act of Congress. 15. I add this paragraph in December, 1879, to state **IP^ T 58, "They first me, in order to itract it again, [t the slightest (imunity. Not- ng from banks lilies persist in of our greatest jportunity pre- ling the power . The Consti- jvision, express national banks arters to such I were sold to could possibly nment held all edemption and urrency to two so favored, is tural laws, three chapters, paper currency irocess, without time of writing' )o,ooo of nietal- e payments on I States notes, ;al-tender char- no more were "or in gold bul- tired, we should em. See Chap. ', 1879, to state EFFECT OF THE VOLUME OF CURRENCY. 219 that my foreshadowing of the tendency to inflation in values has thus far been more than verified. In Septem- ber of 1878, I placed before a comniittee of Congress a communication containing substantially the same facts and arguments respecting banks of issue and discount, and affirming that the then existing depression in busi- ness, to mvestigate the causes of whicli and recommend remedial measures the committee had been appointed, had already ceased, and a period of inflation had set in, in Its mcipient beginnings. Since then the prices of nearly all commodities and the wages of labor have simultaneously and considerably risen. Speculation is rife m most leading articles usually made the subject of speculation. There has been an aggregate rise in the market value of stocks of fully J5 150,000,000, with scarcely any increase in actual or intrinsic value Cot- ton, wheat, iron, corn, nearly all raw and manufactured articles, have risen in a single year from twenty to fifty per cent. There has been added to the volume of cur- rency about $150,000,000 of coined money, and the bal- loon bids fair to go on expanding till another explosion occurs. The national banks have only increased their reserve a trifle, and turn their loans of "national cur- rency" to the best account for the profit of their share- holders. As they hold but some $40,000,000 of metallic money, they rely on that, and their ability to draw on the Government reserve of $155,000,000, to maintain specie payments and meet their depositors' calls on them. All the other banks, and all business men likewise, have an eye on tiiat $155,000,000. The importations of gold and silver, and the production of the mines, are still at the rate of $150,000,000 a year; but these only add stimu- lus to speculation and inflation. A bad harvest, or some great failure, is only wanting to bring about a repetition of the events of 1837, 1847, i8S7,and ,873, the last date f i ; I f aao CURRENCY. having been postponed by the war, and the borrowing by the nation, Slates, and railway companies, in foreign markets, of ^2,500,000,000 of capital, which was expended in the United States. By the circumstance of the immense crops of corn, cotton, wheat, and nearly every thing else, for four successive years, and the failure of crops for two years in Europe, the balance of trade has been turned strongly in favor of this country, and a most favorable time exists for establishing a sound currency. Will it be done ? I fear not. CHAPTER XXV. GEKERAL SUMMARY OF THE ARGUMENT. — THE MONEY PROBLEM TO BE SOLVED BY A UNIVERSAL MONETARY SYSTEM. --PLAN FOR SUCH A SYSTEM SUCXJESTED, GREAT BRrTAIN AND AMERICA TO COMBINE WrrH THE LATIN NATIONS AS THE INmATION OF THE SYSTEM. 1. The reader who has followed my reasoning, and carefully considered my postulates, will probably agree with me that the money question must be taken out of the region of dogmatic and empirical teaching. States- men must treat it strictly as a science, and the issue of coin and paper money must lie confined to scientific methods. In Great Britain auJ the Latin-union coun- tries the coin issue approximates that position, but is still imperfect, as will be seen by comparison with the more perfect system I am advocating. 2. In respect to the issue of paper money, there is but a slight approximation towards a strictly scientific method in any country. The consideration of the question, as well as the methods, is still under the control of those who seek to make a profit out of paper money, either for the the borrowing lies, in foreign I was expended )f the immense ^ery thing else, r crops for two s been turned most favorable :y. Will it be — THE MONEY SAL MONETARY X3ESTED, GREAT TH THE LATIN EM. reasoning, and probably agree e taken out of ching. States- id the issue of d to scientific in-union coun- tion, but is still with the more ey, there is but ientific method ^le question, as ol of those who ,', either for the GENERAL SUMMARY OF THE ARGUMENT. a„ n^VLolnr""' r*"'"^^'^"^'"S '^'^ »he results of win IZ '" °^ experience condemn the practice Instead of treatmg paper money simply a.s a more con vement tool of industry than metallic money, it has been an< st,il .s, wholly subordinated to Hnancial c;nsiderat on,' and private or public profit. "crauons 3. When this proposition is accepted as fundamental as It certamly is, the whole theory of delegating 11^0'' rogat.ve o the State to banks or individuals, o b ex -" P ofit Tnd *T ^^ r^' "^"-y ^« »-•-". and or profit and gam to a favored class, falls to the ground The ques ,on then presents itself, Can a state depanment ale ZT °' ""'"^ ^'^^ '"°^^ ''-°-''-"y PeTct issue and management of paper money, be organized I have endeavored to show in Chap. XVIII. that "can by makmg the issue of coin and paper both autom;^ to be entirely governed by the natural laws of industry. The issue of notes wholly on metal, on the original plan of the banks of Amsterdam, Venice, Sweden, and Hamburg' has been pomted out, was founded on this theory wWch worked so long as it was adhered to. with precision and great advantage to the pubHc, who preferred their notes to gold; and that the evil effects of a deviation f^m these pnncples by the Bank of England was the bel ning of all the evils of paper money ^ 4. I have pointed out that the suppression of all banks of issue m and within fifty „i,es of London, and theTrn Ua ion set on the issues of all other banks 'in the Un "d Kmgdom, were steps in the right direction; though the aw of X849, imposing these limitations, failed in estfb! hshmg a real'v sound monetary system. I have Sso sho^ t at, :ho.gh the national bank system "f 1" Un ted States w^ s an improvement on the old American system, ^t is fatally deficient in elements of science and if perpetuated, must control the Government, and prove ■J -^^m ^^'-Bsr^i? ■^■ffjr^'i:^ 933 CURRENCY. a powerful and dangerous despotism. Furthermore, I have alUidcd to the growth and development of a party in the United States that proposes to cut loose from the stability of a metallic currency, and to issue paper stamps for the whole amount of the national debt, which they propose to pay off in these worthless sUmps of the nation. 5. On the other hand, I have kept steadily m view cer- tain great fundamental principles, and prominent among them the distinction between money and trading power, or floating capital, and the evil effects on the minds of the people, and on the course of legislation on mone- tary and financial matters, of confounding the two things, and have directed attention to the important fact, that only a certain limited amount of money is needed to perform the special services for which it was invented, and that the people refuse to buy more, because it is a costly commodity, and only useful for what it will buy. 6. I have also shown, and shall presently more clearly demonstrate, how the exact amount of money needed for industrial and other purposes may be meted out, and automatically supplied through state issue departments, and how the same may be made universal, without dis- turbing the present circulation ; or, rather, how the one system may be substituted for the other without any in- dustrial disturbance. I would here observe, that, haviP" a clear and vivid perception .. these important funda- mental truths and principles, I have been gready pained to witness the obstructions to the introduction of im- proved and readily applied methods for supplying the metallic and paper money strenuously opposed and re- sisted by "the practical men" and the banks of issue, who, as a rule, fancy their interests will be impaired by changes indicated by science as desirable. 7. It has been likewise shown, beyond controversy, Furthermore, I ment of a party ; loose from the ue paper stamps lebt, which they I stamps of the idily in view cer- rominent among i trading power, :s on the minds station on mone- g the two things, porlant fact, that ey is needed to it was invented, re, because it is what it will buy. ntly more clearly if money needed ; meted out, and ;sue departments, jrsal, without dis- her, how the one IT without any in- serve, that, havipf important funda- en greatly pained troduction of im- for supplying the opposed and re- le banks of issue, II be impaired by )le. yond controversy, GENERAL SUMMARY OK THK AKGUMKNT. 32^ that the issue of paper money forms no part .of modern banking the business of which is more than half con- ducted by non-issuing banks, and tliat the entire abo- lition of the word "bank-note" alon- will eradicate that delusion from the public mind, l urthermore. I have mcKlentally pointed out that the issuing of national cur- rency to banks by the Government on public securities held by the Government, an.l, in the case of the Hank of England, by the Issue Department, being in the nature of loans from the nation to bankers, was and is banking, m which Governments cannot properly ingage. 8. Finally, I have shown how readily a state issue department maybe created in Great Britain and America by consolidating the respective mints in each country with the issue department in former with the Issue De- partment of the Bank of England in a new office at Whitehall ; and, in the United States, with the Treasury issue department, in a building wholly separated from the financial department of the Treasury. Having, as I hope, made these positions clear, I repeat, the true scien- tific method of issuing metallic and paper money is for such departments to purchase for gold coin and notes as required, all the gold bullion that is offered, and as much silver bullion and other metal for subsidiary coin as may be asked in exchange for gold coin and notes convertible mto gold only, -the two kinds of coin and notes being made interconvertible, in sums not lower than the lowest gold coin. I may again repeat, this method will give the utmost freedom to the law of supply ai demand m Its action on all kinds of money. When gold coin is more valuable than metal, to an extent to a(T<,rd a profit or a motive, it will be taken to the issue office and sold for com or notes; and when the bullion is worth the most, the coin will be melted into ingots, or, what will generaUy happen, the mints will be stopped until equi- 334 CURRENCY. f*i!i librium is restored. In like manner, when there are nol notes or subsidiary coin enough to serve the conveniences of the people, they will buy more with gold coin or bullion ; and when there are too many, they will sell them back to the automaton. 9. Suggestions for a Scientific Monetary System, intended ultimately to embrace all civilized coun- TKIF5. — The cflbrts hitherto made to introduce a uni- versal monetary system among the chief civilized, indus- trial nations of the world, have been wholly confined to coined money. The plan I am submitting embraces also the fabrication, issue, and management of paper money, based on metal. Without including the entire money of a country, metallic and paper, the universality of a system, it is submitted, will be shorn of half its advan- tages. Hence it seems to me that such a system should be perfected in some one or more countries, and be pre- sented, so completed, for consideration or acceptance to others, where its introduction will be most easily effected without disturbance of established systems, or undue prejudices. 10. The theory of a universal coinage system has been very ably discussed in a work by Mr. J. Meyer of Berlin (translated by Mrs. C. P. Culver, whose husband is Clerk of the Committee on Coinage, Weights, and Measures, of the present Congress), and also in another work by Mr. Aug. Eggers of Bremen, also translated by Mrs. Cul- ver, which have been published together by that com- mittee on account of their great value. I desire here to express my thanks to Mrs. Culver for her able and well- rendered translation of these works, which so strongly support the theories I have reasoned out in this treatise, nearly all of which was written three years and a half ago, and nearly that length of time before I had seen those essays on monetary science. Those who desire to con- n there are not he conveniences I gold coin or ey will sell them VF.TARY System, "IVILIZED COUN- itroduce a uni- civilized, indus- olly confined to g embraces also )f paper money, e entire money universality of a ' half its advan- i system should ies, and be pre- ir acceptance to it easily effected :ems, or undue system has been Meyer of Berlin lusband is Clerk and Measures, another work by ;ed by Mrs. Cul- :r by that com- I desire here to :r able and well- lich so strongly in this treatise, 5 and a half ago, had seen those ) desire to con- OENERAL SUMMARY or THE AROUMENT. 2^5 «ult Mrs. Culver's translations will find them in the public libraries, or at the Treasury Department by imiuiring fur No. 8 Miscellaneous Docimients of the 4Sth Congress, published in 1879. In many particulars the plan I hail elaburalcd is identical with that of Mr. Meyer, except that I propose at first to confine ils operations to the " I-aliii Union," comprising France, Italy, Switzerlanil, and IJelgium, and the Knglish-speaking countries, cni- braiiiig Creat IJritain and her forty colonies, and the Unitcil States, containing forty odd States and Territories. I had proposed to make the British sovereign ihe initia- tory unit of value, because the United States Iiad given in to such a suggestion, or expressed its willingness to minimize the fine metal in the half-eagle so as to ecpialize it with the sovereign. I have, however, since reading Mr. Meyer's essay, altered my suggestion so as to accept his proposal in ito entirety, as will be seen hereaftei. II. As a preface to the plan I have to suggest, I quote the following from tlie report of the Committee of Con- gress on Coinage, etc., just referred to, which is an ex- tract from a former report of 1866 (p. 13). "At the International Congress of Uerlin, the transactions of which were reported by the United States Commissioner, and sub- mitted to Congress, it was resolved as follows: — "First, That the Congress recommends that the existing units may be reduced to a small number ; that each unit should be, .is far as possible, decimally sub-divided; that coins in use shall be expressed in weights of the metricil system, and should be of the same degree of fineness, — namely, nine-tenths fine, and one-tenth alloy. "Second, That the different Governments be invited to send delegates authorized to consider and report what should be the relative weights in the metrical system of gold and silver coins, and to arrange the details by which the monetary systems of differ- ent countries may be fixed according to the terms of the preceding proposition." The report of 1866, quoted further, very correctly re- marks (p. 14 of Report of 1878),— 336 CURRENCY. " The onl)' indispensable condition of this uniformity of value is, that, in the standing unit with its divisions and multiples used in commerce, there shall be in all countries an equal amount of gold (or silver) with a fixed proportion of alloy. Each nation will retain its own devices and I'.'gends, and other peculiarity of mintage. A common name for the standard unit would be desirable, but not essential. The presence of a given amount of precious metal, mixed with a given amount of alloy, is the only absolute prerequi- site for the establishment of international uniformity of coinage. The dollar of the United States, the four shillings of England, and five francs of France, are of approximate value. Several nations " (known as the Latin Union) "have adopted, under other names, the coinage of France, making it of equal value." At the time these favorable views were expressed by the Committee of Congress (1866), indorsing also and quoting the recommendations of the late Chief Justice Chase made in 1862, while Secretary of the Treasury, gold was demonetized and dealt in as a commodity, by reason of the excessive issues of inconvertible legal-tender paper money, which state of things Mr. Chase considered favorable to the initiation of a general monetary arrange- ment with other nations. A small reduction in the weight of gold in the coinage, when coin was not used as money, it was thought would not be noticeable when it came back as money, by the appreciation of legal tenders, to par. But we now have an overvalued silver dollar coin which, in time, will again demonetize the gold coins .: that is, so soon as the channels of circulation are fully occupied by such coin added to the large volume of paper now afloat (postulates 23, 24). This circumstance deserves serious consideration on the part of those who are laboring on that committee, as well as others, to promote a more extended coinage system in connection with the Latin Union. On the plan I propose, it will be seen the distribution of the series of coins, as well as the paper money, being left to the action of supply and demand, by a purely automatic machine, the amoimt of \ s* Mr '^"ji^ uniformity of value and multiples used n equal amount of '. Each nation will culiarity of mintage. 5 desirable, but not of precious metal, I absolute prerequi- formity of coinage, igs of England, and Several nations " under other names, e." ;re expressed by iorsing also and ,te Chief Justice af the Treasury, a commodity, by tible legal-tender Zlhase considered lonetary arrange- :ion in the weight t used as money, e when it came legal tenders, to silver dollar coin the gold coins j :ulation are fully large volume of 'his circumstance )art of those who ell as others, to m in connection '. propose, it will coins, as well as )n of supply and :, the amoimt of GENERAL SUMMARY OF THE ARGUMENT. 227 each series of coins and paper will be perfectly regulated. The plan itself is so simple, and so easily put in operation, that any man of ordinary capacity can comprehend it in a very short time. The extracts from reports of Congres- sional Committees and National Commissioners will pave the way for a more complete understanding of it. 12. PROPOSED PLAN. Firsi, Make gold the universal standard of the measure of value. Second, Make the gold coins nine-tenths fine and one- tenth alloy. Third, Abolish ali note issues by banks and the Treas- ury. Fourth, Establish in each country an independent issue department. Fifth, Transfer the mints to these departments in the several countries. Sixth, Agree on a unit of value, say, one and a half grains gold. Seventh, Preserve on one side of each coin the present national devices. Eighth, Agree on a common device for the obverse sides of the coins. Ninth, Each department to issue certain specified de- nominations of notes, not lower in amount than the lowest gold coir. Tenth, Each department to gradually call in the out- standing coin and paper money, filling their places, pari passu, with new coins, which can be effected by limitation in the volume of money. Eleventh, The method of the issue will be to exchange coin and paper money for gold bullion at its market value, less a smaU agio, or seigniorage, to cover cost of manage- ment. 228 CURRENCY. Thvclfth, Each department to issue such denominations of silver and other subsidiary coins as may be agreed on, and of one degree of fineness. Thirteenth, These subsidiary coins to be treated the same as paper money ; that is, to be sold for their face value in gold coin, and both paper and subsidiary coin to be redeemable by the several departments issuing them, at par in gold coin, when presented at the chief office or any agency, in sums not lower than the lowest gold coin. Fourteenth, Each department to establish branches, or agencies, to suit the convenience of the public. Fifteenth, The question, whether a limited amount of the accumulation of gold coin and bullion, that will accu- mulate, may be disposed of to purchase national securities, and reduce the public debts of the several countries, to be considered. Sixteenth, Each department to publish weekly state- ments of its operations. Seventeenth, All national taxes to be paid in national notes and coin, and be deposited for safe keeping and re- issue in the chief office, or its agencies, subject to the draft of the duly authorized Government authorities. Eighteenth, All other necessary details to secure effi- ciency to be agreed on, and be subject to joint revision of the several departments after being established. Nineteenth, Provision to be made for receiving into the union, or league, other countries. 13. The introduction of this comprehensive reform in monetary administration presents, in itself, no practical difficulties. The objections to it, like that to all reforms, comes wholly from those parties interested in perpetuat- ing old abuses, or unchallenged errors in administration. Issuing banks and exchange brokers, who derive many millions annually from the present imperfect systems, will oppose any reform in the methods of supplying paper GENERAL SUMMARY OF THE ARGUMENT. 229 1 denominations y be agreed on, be treated the Id for their face ibsidiary coin to ;s issuing them, ; chief office or west gold coin, ish branches, or ublic. ited amount of I, that will accu- tional securities, ral countries, to h weekly state- )aid in national keeping and re- , subject to the authorities, i to secure effi- o joint revision iblished. sceiving into the nsive reform in ;lf, no practical t to all reforms, d in perpetuat- administration. 10 derive many jct systems, will supplying paper money, and trading on exchanges. They claim that they hold vested rights in the premises, and hence use all their power to defeat reform measures. 14. If we accept Mr. Meyer's proposition to make one and a half grams of fine gold the unit, or initial coin of the system, which I think the best of any of the various propositions I have examined, the following comparative table will exhibit the result. ENGLISH MONEY. FRENCH MONEY. AMERICAN MONEY. I J grams = 4^. i.i6d =u = s/r. 16.6 <:.= 5 fr. = $ 99.7 =$ I 00 3 " = 8 a.sa =r' = lo 33-3 = 10 " ^ I 99.4 ^ 3 00 si " =10 a.9 =i" = la 63 = 13 " = a 49-25 = a so 7i " =ao 5.3 =1" = 35 83,3 = 25 '■ = 498-5 = 5 00 «5 " =40 11.64 = a" = 51 66.6 = 50 '• = 9 96.93 = 10 00 30 " =8i 11.28 1 =103 33.2 =100 " = 19 93.84= 20 00 15. In comparison with the proposed new standard measure, it will be seen, by the above table, the English and French coins are at present overvalued the amounts set down in the left-hand columns, and the American coins are slightly undervalued. The former contains so much too little gold, and the latter toe much. For in- stance, the English sovereign vvoulrl hav° to have added five pence and three-tenths in value of , 1 in order to make it up to seven and a half grams of Vie new pound ; the French twenty-five franc piece would require an increase of 83.3 cendmes of metal ; and the American half-eagle would have to be red' ;-?d 1,5 cents in order to bring the three coins to the equul weight of seven and a half grams. The change in the American gold coin would be so small r.s to be of no practical account. The percentage of deficit on the English and French coins of the present would be respecdicly 2.21 and 3.31 per 23© CURUKNCY. cent. On the present gold circulation of these countries this would entail a considerable loss on these Govern- ments, which might be made good by a seigniorage charge on the new issues. The question of seigniorage will be briefly considered in Chap. XXVII. By this method the present gold coins might at once be made to legally represent the new standard by contraction of their vol- ume sufficient to raise their money value above their bullion value, to prevent the new coins being melted. Of course this would cause a slight fall in the prices of things measured by the new standard, which would necessarily ensue under any plan whatever. I need hardly say, such a change must be made gradually, so as not to be perceptible to those engaged in any of the industrial pursuits. To enable those who care to verify the foregomg calculations, I would say that one gram is equal to 15.432 grains, and one grain to 0.0648 gram. We may call the gram in ordinary estimates 15.5 grains. 16. Mr. Meyer has also shown how readily the sub- sidiary coins — silver, nickel, and copper — may be har- monized iu most countries, and I refer to his work on that subject. By being made convertible into gold stand- ard coin, at the will of the holder, in sums not less than the lowest gold coin, and being sold for gold, or paper convertible into gold by the several departments, the automatic process, operated by the force of the natural laws, will always regulate the issue and conversion ac- cording to the exigencies of industry, both as to the denominations and the amount of money. Hence, the question of the amount of alloy or overvaluation of silver coins would be of little consequence. We treat them as promissory notes engraved on a valuable metal. Mr. Meyer proposes to make silver coins six of fine silver and one of alloy of copper, counting the copper as silver. The profit on silver then would compensate for the loss .-Ur ' Ti^i GENERAL SUMMARY OF 'raE ARGUMENT. 231 these countries these Govem- jniorage charge [niorage will be y this method made to legally )n of their vol- ue above their being melted. I in the prices i, which would tever. I need le gradually, so 1 in any of the 5 care to verify at one gram is 0.0648 gram, ites 15.5 grains, •eadily the sub- — may be har- to his work on into gold stand- is not less than • gold, or paper epartments, the i of the natural conversion ac- both as to the ey. Hence, the iluation of silver We treat them ble metal. Mr. ix of fine silver copper as silver, sate for the loss on gold in countries where the standard weight ahall be raised. The American 412^ grain silver dollar is just now about 11 per cent overvalued. Under the metric system proposed, they could not circulate in the United States so long as one and two dollar notes v.e issued, because the people prefer the notes to silver dollars, on account of their lightness and greater convenience. 17. The amount of one and two dollar notes in cir- culation in the United States on the first of November, 1878, was $47,567,816. In order, therefore, to make the silver dollars circulate before the Government shall be compelled to pay them out by the withdrawal of all the gold reserve, it will be necessary to call in all the small notes, and give the silver dollars a forced circula- tion. But if the new plan of interconvertibility between silver and other subsidiary coins and gold coins and paper convertible into gold should be adopted, and no notes under the lowest gold coin are issued, there will be room for probably twenty million silver dollars, in addi- tion to the lower denominations of that and other metal- lic coins, in the United States. 18. With silver coins made on a scale of one-seventh overvaluation, and convertible into gold as so many me- tallic notes, it would scarcely be needful to provide for the possible contingency of such a change in the relative value of the two metals as would lead to the hoarding or melting down of silver coin. In other words, it would hardly be necessary to guard against the bullion value of silver rising above the coin value, measured by gold. 19. As for the new names to be given to the new international coins, Mr. Meyer has suggested the adop- tion of the term "dollar," and the various coins to be specified by the multiples and divisions of the dollar. While we see foreigners agreeing on the desirability of using the term known and universally used in America, ' -•'«wra-v*i&Wiwfrf4i.iij,; i.w,ri;i<..)>; ft.' I ii» II niijnvi'-iim ^ 252 CURRENCY. it is surprising to find Americans desirous of inventing new and before unknown names. I indorse Mr. Meyer's proposal, with this suggestion, that the gold coins shall be called eagles, half-eagles, quarter-eagles ; and so on the ascending scale, — double and quadruple eagles. The eagle, as well as the dollar, is known all over the Euro- pean continent ; but the term " stella," as suggested by some, is unknown and " unknowable." VIEWS OF HON. JOHN SHERMAN, SECRETARY OF THE TREAS- URY, FORMERLY UNITED STATES SOATOR FROM OHIO, ON FREE TRADE AND A UNIVERSAL SYSTEM OF COINAGE. 20. The following extract from the report made by Senator Sherman (now Secretary of the Treasury) in 1868 very forcibly expresses some of the advantages to be de- rived from a universal system of coinage. I am indebted to the very valuable work of the late Dr. Linderman, Di- rector of the United States Mint, 1877, for it, as well as for much other useful information on the subject of the coinage of money. " Every advance toward a free exchange of commodities is an advance in civilization. . . . Every obstruction to commerce is a tax upon consumption ; every facility to a free exchange cheap- ens commodities, increases trade and production, and promotes civilization. ... No single measure will tend in this direction more than the adoption of a fixed international standard of value, by which all products may be measured, and in conformity with which the coin of a country may go with its flag into every sea and buy the products of every nation without being discounted by the money- changers. " Gold with us is, like cotton, a raw product. . . . Every obstruc- tion to its free use, such as the necessity of its recoinage when pass- ing from nation to nation, diminishes its value; and that loss falls on the United States, the country of production. "The United States is a new nation, and therefore a debtor nation. By placing ourselves in harmony with the money units of ; .: \'* THE PROPOSED UNIVERSAL MONETARY SYSTEM. •:3 s of inventing >e Mr. Meyer's i coins shall be md so on the : eagles. The )ver the Euro- 5 suggested by OF THE TREAS- KROM OHIO, ON F COINAGE. port made by asury) in 1868 iges to be de- I am indebted .inderman, Di- r it, as well an subject of the immodities is an ) commerce is a exchange cheap- n, and promotes is direction more ird of value, by rmity with which f sea and buy the d by the money- . Every obstruc- inage when pass- id that loss falls ;refore a debtor e money units of creditor nations, we promote the easy borrowing of money and pay- ment of debts without the loss of recoinage or exchange, alw.iys paid by the debtor. The technical rate of exchange between the United States and Great liritain, growing out of the deficient nom- inal values of coin, is a standing reproach, which can only be got rid of by unifying the coinage of the two countries when both the real and technical rates of exchange will be at par, etc." This difficulty, as stated in the last paragraph quoted, was in part obviated in the United States by an Act of Congress, which went into effect Jan. i, 1874, that re- quires the Secretary of the Treasury annually to publish the values of the standard coins in circulation of the vari- ous nations of the world, as estimated by the Director of the Mint. CHAPTER XXVI. THE PROPOSED CONSIDERED. - UNIVERSAL MONETARY SYSTEM FURTHER -SUBSIDIARY COINS TO BE CONVERTIBLE. I. The plan I have reasoned out for the establishment of national or state issue departments having sole power to issue and manage both metallic and paper money, whether confined to one country, or extended to several or all countries in the civilized world, I claim to be the only one yet devised which proposes a complete, practical, and scientific separation of the issue and man- agement of currency from the financial operations of individuals and communities. It seems to me to be the only one that will successfully and permanently preserve the currency — metallic and paper — of a country from those periodic derangements growing out of periodic panics and crises, often lasting many years, or half a life- time as in the case of the suspension of the Bank of England from 1797 to 182 1, and in America for about 234 CURRENCY. one-half of the time since the existence of national gov- ernment. I regard the adoption of the plan, whenever it shall take place, as the first step towards checking the incipient causes of panics leading to those long and frequent derangements of industrial affairs which have become chronic in Great Britain. A sound currency, incapable of derangement itself, most certainly will prove a great blessing to mankind, even though it may not wholly exterminate the evils and consequences of over- trading. It will also most certainly preserve the great and indispensable measure of values from being so often forced out of circulation, and avert the evils of a depre- ciated, fluctuating, and uncertain measure tiking its place. 2. I propose briefly to discuss the question of sub- sidiary coin, which has so often, and, as I conceive, very unnecessarily, been left in an unsatisfactory condition in most countries. No system of currency can be regarded as sound or safe which does not provide a method that shall exactly mete out to the public the necessary quan- tity of subsidiary coin. To create such a system, it is needful to devise a self-acting regulator. The system must be based on the theory that supply and demand, or the great predominating equation in human industries, shall determine the method of providing such coin. The laws of industry alone can regulate the volume of this portion, as they will do of the rest of the cur- rency. Under the proposed system, all kinds of subsid- iary coin must, like paper money, be made convertible into the standard gold coin at par. 3. Now, if such subsidiary coins are made convertible, at the pleasure of the holder, into standard gold coin, and are sold for the latter at par, it is obvious that their position in the monetary system will be the same as that of paper, except that iliey will have in themselves a if national gov- plan, whenever wards checking those long and lirs which have lound currency, ainly will prove igh it may not uences of over- serve the great being so often n\s of a depre- iure taking its uestion of sub- [ conceive, very )ry condition in ;an be regarded a method that necessary quan- a system, it is T. The system ind demand, or man industries, ling such coin, ate the volume rest of the cur- kinds of subsid- lade convertible ade convertible, iard gold coin, ivious that their le same as that n themselves a THE PROPOSED UNIVERSAL MONETARV SV^IKM. 235 market value equal to the amount of raw material of which they are made. But the same principles will gov- ern the quantity needed by the community for industrial purposes as in the case of paper. Being an indispensa- ble as ;vell as a costly tool, the public will purchase only so many subsidiary coins as are needed. Like paper, if too many arc taken out, the surplus of supply above legitimate demand will presently be returned and exchanged for gold, for home or foreign use, as the rase may be. There will be nothing left to the judgment or will of the managers of the issue department. It will be an automatic machine regulating itself. Can any one gamsay this reasoning, or doubt its amounting to demonstration as clear as mathematics? 4- In respect to the proposed universal monetary sys- te^ one of the results of no little importance would be the establishment of a method by which the equilibrium of the exchanges between the countries entering the league would be perpetually maintained, precisely in the same manner as the exchanges between domestic traders Though human ingenuity has not, for obvious reasons been able to construct a perpetual self-moving machine, the laws of nature everywhere develop perpetual action A system, therefore, founded on these laws, and which is operated and kept in motion by them through human agencies bound to obey them, is quite another affair from those systems which are operated by personal and arti- hcial impulses and considerations, and for the private gam of corporations, and to satisfy the greed of indi- viduals. 5. Furthermore, under the system I propose, the mo- hve for using coin as merchandise for settling foreign and domestic indebtedness, and for purchasing other com- modities, would be minimized in its force so as to place us position in these respects at the bottom of the list -: ■ i I of commodiries. But if, under a universal system, the coin of one cointry found its way, through the medium of travellers or any (jlher cause, into other countries, no inconvenience would luise, inasmuch as the perpetual tendency to equilibrium imparted by the free action of supply and demand would lead to an equable distribu- tii I through all the countries which have entered into the league. Tiicre being the smallest motive, in comparison with other things, for exporting coin, for the reasons stated, the coin of each country would, as a rule, remain at home, where the national stamp on one side would be better understood, and the uses of letters of credit, cir- cular notes, and bills of exchange, would always be pre- ferred by travellers as well as merchants. The interna- tional coinage should, however, knc w no national bounds. Its object is universality. 6. In order to invoke an unprejudiced and candid consideration of the arguments presented, I wish to observe, that I have endeavored, in this chapter and throughout the entire work, to subject the principles I have postulated to the closest logical reasoning, both by induction and deduction, as well as by the citation of generally admitted facts. We are as much bound to accept truths thus established as we are such as are demonstrated by the (so-called) exac^ sciences. It is a mistake to draw a distinction between the two methods of logic or reasoning. Both have equal force ; and only those who are ignorant of both, set up what is called "practice" against "theory." No practice not founded on demonstrated theory is reliable, or assured to be the best for even those who follow it. Men who manage banks or ships, or deal in goods of any kind, are the least to be trusted, unless they have mastered the compli- cated principles of political economy. Hence it is, that the theorizmg of what are called " practical men " is so \}^■^. 'ersal system, the lugh the medium ther coimtries, no as the perpetual le free action of equable distribu- s entered into the fc, in comparison , for the reasons as a rule, remain ne side would be ers of credit, cir- d always be pre- its. The intema- > national bounds. liced and candid snted, I wish to this chapter and t the principles I easoning, both by ly the citation of much bound to are such as are sciences. It is a the two methods il force ; and only up what is called ctice not founded assured to be the Men who manage any kind, are the istered the compli- Hence it is, that ictical men " is so niE PROPOSED UNrVKRSAL MONETAR\' SYSTEM. 337 generally at fault. Their theories are simple dogmas, and no betti^r than the opinions of the two knights who quanclled and fought bc< aust each had seen only one side of the shield, where they had cliaiucd to meet, and had in conseciuencc percci half the truth (see chapter on Value) 7. It will now be seen, tl ordt r to reach a per- fectly scientific solution of 1 'leslion, it is very desirable to establish the j notary league of nations, and leave the curreiK y to distribute itself under sui)ply and demand. Though such a system as I !iave shown in my reasoning is perfectly applicable and neces- sary to nations like Great Britain and the United States, it would receive its highest development and efficacy under a widely or universally extended international league, Some other great advantages of such a system, not explicitly stated before, will be, that the-.e can never be eitlier too much or too little money, metallic or paper, in any coun- try belonging to the league. There will never be " over- issues " of paper money. The great overruling law of nature, supply and demand, will maintain an equilibrium of value and of distribution. If financial or industrial crises occur in one country, or in all, their effects will be minimized by having a solid, unchangeable measure of values always assured. 8. The formulation of an Act of Parliament or of Con- gress, and of a treaty to extend the system to other coun- tries, will not be difficult for legislators, statesmen, or diplomats, when they have come to master the subject itself. As to the establishment of a league amongst the English-speaking and the (so-called) Latin nations, there does not, as shown in the last chapter, seem to be any serious difficulties. We are already making some progress towards the adoption of a universal system of weights and measures, which is surrounded with very much greater obstacles. 9" •3« CURRENCY. ' t 9. All empirical, statistical, and philosophical or scien- tific rcasoners, alike admit the long-continuing abuses of not properly guarded or restricted issues of bank and government notes, and deplore the vast losses and injury to society directly traceable to this cause. But nearly all hug the delusive system so subject to abuse. Few may at first agree with me in the necessity of adopting the heroic method of a surgical operation of cutting loose from banks of issue, and in the creation of a sound and healthy system. But the time will surely come when cor- rect principles will prevail. At present the enemies of such a system are i)rejudice, ignorance, and a mistaken notion that bank notes are a source of profit to banks ; though it has been shown, that, on the whole, banks, as well as the public, have been the losers by their issue : in a word, by acting on a mistaken view of self-interest. These lions must be got out of the path or crushed be- fire sound theories can be reduced to practice. • o. Referring once more to the uncertain deductions drawn from statistical and actuarial lore, I cannot help regarding the attempts of professional economists to use such methods, instead )f relying on logical reasoning to found theories for legislation and the conduct of indus- trial affairs, as most unfortunate. When we leave the field of scientific deduction and induction to mere em- piricism, and reason from such masses of crude statistics of prices as have been collected by Mr, Tooke, Mr. New- march, and others, we place ourselves in the position of a ship in a boundless ocean, without rudder, compass, or instrument of any kind. Such tables of statistics of aver- age values, or approximations of value, are of no real use to science ; and, so far as they seem to contradict or do not coincide with scientific principles, may be discarded as incorrect. There are cases, such as the statistics of life, where close accuracy can be attained, and where valuable I aphical or scien- inuing abuses of ics of bank and losses and injury I. But nearly all ibuse. Few may of adopting the of cutting loose I of a sound and ir come when cor- t the enemies of , and a mistaken ■ profit to banks ; : whole, banks, as by their issue : in V of self-interest, th or crushed be- ractice. ertain deductions re, I cannot help economists to use gical reasoning to :onduct of indus- len we leave the :tion to mere em- of crude statistics Tooke, Mr. New- n the position of a dder, compass, or f statistics of aver- are of no real use contradict or do may be discarded :he statistics of life, md where valuable ■^■■l^g^j ^^^ r^agi^gsaBBi&asaBJ^Me^aB ^ ^'"n building a house at the top. Statistics of bank isvies and discounts, being ascertainable facts, may, how- ever, be used for illustration, and to show the consequences of erroneous systems of economy established by legislation gmnting monopolies and privileges to private parties. We may show, in this way, the folly of delegating to banks and private individuals the prerogative of issuing paper money, or the exclusive privilege of conducting given industries of any kind. We may show the vast losses sustained by society, in consequence of violating correct principles, established by logic and reasoning. II. But when we come to reason out and determine how certain phenomena are due to certain causes ; how, for instance, money, the standard of value, measures and differentiates the values of ether things, we gain nothing, and only confuse ourselves, by trying to lug in the statis- tics of production, labor and capital, or machinery. What appear to be exceptions to scientific principles are really only unascertained laws of nature ; and that branch of ■ inquiry is to a large extent, as yet, a /erra incognUa, where statistics are only confusing. I leave this field for others to cultivate. How the market values of products i,i -*;»«" K*' i^ CURRENCY. in the course of production, manufacture, and distribu- tion are acted on by supply and demand and by each other, ia a question still affording scope for thought and reasoning. Wc have economists who have attempted by statibtics to show how much paper money is needed per capita; whereas population has little or nothing to do with the matter, it being one wholly governed by the industry of a people and their productions. 12. I have several times, in the course of this work, urged the desirability of issuing one pound, and even lower notes, to occupy the place of gold coin. Some recent writers, particularly in the United States since spe- cie payments have been resumed, are arguing against the uses of small notes. They say, " small notes should not be issued, because they almost invariably drive out of circulation all coin of the same denominations to the full extent of their issue." This is very bad logic. The ability to circulate paper money, convertible into coin, no odds of what denominations, depends on the preference which the people have for the paper as a tool of industry. It is wholly a question of convenience ; and the denominations of paper money should be determined by that great natu- ral law of industry, so often quoted, but so little regarded in theory and practice, supply and demand. Those who think that an arbitrary and artificial method of doling out to the public what the pubhc itself ought to be left free to determine, do violence to sound principles and good logic. The very purpose of a one pound or a one dollar note is to meet the public demand for such notes ; a.id, if the result is " to drive out of circu'ation," or, more correctly speaking, keep the coins representing the de- nominations in question in reserve, it is only what large notes do. This argument admits of no rejoinder. jre, and distribu- ind and by each for thought and ive attempted by ey is needed per »r nothing to do governed by the ins. rse of this work, 3ound, and even old coin. Some . States since spe- guing against the notes should not bly drive out of lations to the full ogic. The ability to coin, no odds preference which af industry. It is he denominations y that great natu- so little regarded and. Those who lethod of doling ought to be left id principles and ; pound or a one d for such notes ; u'a'.ion," or, more resenting the de- s only what large rejoinder. SOME MORE ECONOMIC FALLACIES. 241 CHAPTER XXVII. SOME MORE ECONOMIC FAI.LACIICS. — SEIGNIORAGE A TAX ON MONIiY. — GREAT ADVANTAGES OF COIN OVER PAPER MONEY. I. Professor Francis A. Walker, in his treatise on "Money," takes exception to the use of the term "com- mon measure of value " as applied to money, because "value is a relation," or a relative expression. At best this objection is hardly more than technical. Everybody is agreed on the offices performed by money, which the term in question is intended to express. It is, in fact, no more "a relation," than any measure of length, capa- city, or weight. They are all relative terms, separating a part from the whole. But there is a stronger motive for retaining the term " common measure of value " in re- spect to money. // is that money itself has been so made by law of Parliament, which has set a scale of denomina- tions, as pounds and dollars, and defines the weight of pure metal assigned to each. The definition is not only according to Webster, but its appropriateness is sustained by universal usage. Besides, " measure," according to our best dictionaries, is. defined to be " a rule by whicli any thing is adjusted or proportioned ; proportion ; quan- tity setded ; portion allotted." We might substitute the word " common valuator." The pounds, shillings, and pence, and the dollars and cents, constitute the scales on the Several measures, referring to certain fixed quantities of metal by which we measure all values, or the value of all things. Hence the term "common measure." In Chap, v., I hav3 shown how money measures such things, and metes out trading power in the loan market, as well as between buyers- and sellers generally. It not only meas- ures values by comparison with its own market value, but w\ 343 CURRENCY. it measures amount or quantity, so that we shall know how much of one thing to give for a given quantity of another thing ; and how much trading power is loaned or paid for commodities, or other things measured or weighed by the scale of weights and measures. " Difler- entiator" is a better term than denominator, because that word accurately defines what money does in determining relative values. Money can only be compared to the yardstick or measure, in so far as, by its scale of denom- inations expressed in coins, it specifies the proportion and amount of the money itself to be given for specified por- tions of the thing bargained for. In other words, the yard-measure, for instance, measures the quantity of cloth demanded ; and money measures the weight of metal to be given therefor, or its equivalent in something else. At this point the comparison stops. 2. It is by attaching the scale of denominations to metal, and making the coined money and the uncoined metal readily interconvertible, that we secure a measure the least variable. If our money consisted of paper denominations held as nearly as possible to the value of gold or other metal by limitation of their volumes, we shall have a purely artificial method of regulating such value, by hand, so to speak. I, therefore, discard this theory in favor of one that works automatically, which is the only true and scientific method of supplying money. By, however, combining the standard and the measure of value in the same coin, and making bullion always con- vertible into coin on presentation at the issue office or its agencies, there can never be wide divergencies between the market value of money and bullion. The coin may be compared to the stem, or rod, of the " compound pen- dulum," which is made of several metals welded or brazed together at the two ends, so that the expansibility of the metals, being different under the influence of heat and ve shall know ;n quantity of iwer is loaned measured or res. " Difler- •, because that 1 determining ipared to the ale of denom- iroportion and specified pot- ior words, the lantity of cloth It of metal to thing else. At lominations to the uncoined ure a measure sted of paper ) the value of r volumes, we egulating such e, discard this ically, which is jplying money, the measure of »n always con- issue office or encies between The coin may ompound pen- ilded or brazed insibility of the :e of heat and A SOME MORE ECONOMIC FALMCIES. 243 cold, may counteract the tendency to variation of length Ihe two values being tied together in one coin, and the two things, money and coin, being readily interchange- able by coinage and melting, the superiority of the coin system at once appears. 3- All economists treat money as a medium of ex- change—indeed, as the only medium for the exchange of goods. This is clearly a misconception. Money, as money, performs a very insignificant part in what is im- properly called " exchanging commodities," which are distributed, and not exchanged. The true and scientific view IS, that " trading power," or floating capital, through bankers, as stated in postulates 35 and 36, constitutes the medium " of distribution of labor and commodities. It IS, therefore, an error to attribute to one commodity, either in the raw state of bullion or its manufactured condition of money, the sole office of distributing other things whose market value in the aggregate, being turned into trading power in manner specified, exceeds that of money as thirty to one. The circulating medium is, therefore trading power, or capital, made available by bankers. / repeat, it is free trade in metal, and free trade in money, and paper based on money, coupled with interconvertibility that determine the whole question, and strip f of all mystery. Mr. J. Stuart Mill, quoted by Mr. Walker, saw this dimly, when he said, "it is not with money that things are really purchased." This concedes the whole question But in the next sentence Mr. Mill goes on to say, " pounds, shillings, and pence are a sort of tickets or orders for goods." This expression only muddles the question he came so near clearing of its obscurities. These denomi- nations do not constitute trading power, or capital, but are only the scale for measuring it. Bullion and money are capital, and, as such, trading power. The figures or numeral expressions on a yard-measure or a weighing ma- 244 CURRENCY. chine do not constitute the yardstick or the machine, but indicate the length or weight of the things these " scaled " instruments are applied to. 4. The tlieory, so persistently and almost universally put forward by economists, and quoted by Mr. Walker, that " that which measures value must itself have value," or, as they sometimes erroneously say, " intrinsic value," the same as "measures of length, capacity, and weight, must have length, capacity, and weight," is another fun- damental error resulting from pushing the comparison too far. The measure of the value of money, like the value of commodities, is set by supply and demand, or production and consumption ; while supply and de- mand have nothing to do with other measures. With regard to " intrinsic value," I have stated its definition in the introduction to this work ; and I here repeat, this sort of value is not what we are dealing with when we are considering money. Intrinsic value is a quality ; market value is the worth of a thing in the market, as measured and differentiated by money. The intrinsic value of a spade is its fitness to the purpose of digging or turning over the ground. The intrinsic value of gold consists in its peculiar adaptation to coinage and all other uses of money, and works of ornamentation and utility. But the market values of the spade and of gold are alike deter- mined by supply and demand. Paper is intrinsically valuable for purposes of writing, printing, and for " paper money," but is comparatively of little market value. J. It must not, from these or any other observations I have made, be supposed that I discard or depreciate the intrinsic value of gold, or exalt the uses, or intrinsic value, of paper for purposes of money. I am treating all kinds of money and commodities from an economic, or scientific, stand-point. Referring again tc the two essen- tial offices of metalUc money, namely, the establishing a -. «■■; g j te ,, - «.--* ir the machine, but ngs these " scaled " almost universally ed by Mr. Walker, itself have value," , " intrinsic value," pacity, and weight. It," is another fun- ig the comparison of money, like the pply and demand, ile supply and de- r measures. With tated its definition I here repeat, this g with when we are 3 a quality ; market arket, as measured ntrinsic value of a digging or turning of gold consists in d all other uses of nd utility. But the ;old are alike deter- iper is intrinsically ing, and for " paper market value. other observations ;card or depreciate le uses, or intrinsic . I am treating all m an economic, or in tc the two essen- , the establishing a ■ ■ ij igl ! .^ '! SOME MORE ECONOMIC FALLACIFS. »45 standard and a common measure of value, it will be seen, that by combining them in coin, and making coin or money value and the metal value easily intercon- vertible, we reach scientific accuracy, as far as is practi- cable, un ess we can discover some more stable material than gold. The standard and the measure, though sepa- rable m principle, as I have shown them to be in prac- tice, bemg so yoked together, interconvertibility causes their respective market values to more nearly coincide and prevents ;vide oscillations in opposite directions, or' he market value of the one from oscillating more vio- ently than that of the other, in the same direction, under the action of supply and demand. 6. Professor Jevons and others have pointed out other functions or purposes served by money, but they are more fanciful than real. One of these Professor \Valker has successfiilly disposed of. Mr. Jevons fancies that money is peculiarly adapted to "storing" or hoarding Now money is not stored or hoarded because it is money but because of the metal it contains. It may be thai bank notes or greenbacks are sometimes hoarded- but It IS because the owner feels assured that he can get the metal for them when he wants -t, or considers them "as good as gold." It is the t ,Jing power that underlies the motive of the act. He doe: not bury the money be- cause It IS a measure, but because the metal in it is the standard of value. ^^ 7- There has been much written and said about the costliness of metallic money," and in favor of the supe- nor cheapness of paper money. Mr. Aug. Eggers of Bremen, whose work, " Money Reform," has been trans- lated by Mrs. C. P. Culver, and printed by the committee ^.K Ir ^r' ° ^^P'-^^^^f^tives at Washington, along with Mr. Meyer's "International Coinage," has written well on this subject, and has pointed out some errors 5is •'■'^^ilSeSssfeSfei 346 CURRENCY. into which Adam Smith has fallen in considering paper money, and which nearly all economists have blindly fol- lowed. One of these is the great economy there is in substituting bank notes as far as possible for coin. When I wrote my chapters on that subject, and others, three years ago, I had not seen Mr. Eggers's or Mr. Meyer's works; but I have gone much farther in controverting many hitherto generally received erroneous conclusions of distinguished authorities. There is one point I have made which I again state ; namely, that the public at large pay full gold value for all the paper money they use, and it is only the issuers who get the advantage of any profit there may be in the substitution of paper for metal. I entirely agree with these authors, that the cost of metallic money is utterly insignificant in comparison with the market value of the products it is used to meas- ure and distribute. The gold in a sovereign or an eagle will last at least a hundred years, and serve to transfer from producer to consumer over ten thousand times its value in goods, supposing it to serve such purpose only one hundred times a year. Besides this simple exam- ple, we may give another illustration. The metallic cir- culation of Great Britain one hundred years ago was about ;^20,ooO;00o ; and it has now risen, as estimated by some, to ^120,000,000, or at the average rate of ;^i, 000,000 a year. The loss from abrasion, or wear, and otherwise, of gold coin is very small, and for our present purposes may be excluded altogether from this calculation. This tool, gold coin, has therefore been increased in volume and cost at the average rate of ;^i,ooo,ooo a year in the United Kingdom. My own investigations have led me to believe that this estimate, which I have accepted as the circulation of gold coin in Great Britain and Ireland, is largely in excess of the actual amount. It is more than double the sum esti- considering paper its have blindly fol- lonomy there is in le for coin. When and others, three s's or Mr. Meyer's ;r in controverting jneous conclusions i one point I have that the public at paper money they t the advantage of itution of paper for thors, that the cost ;ant in comparison 1 it is used to meas- vereign or an eagle d serve to transfer thousand times its such purpose only this simple exam- The metallic cir- red years ago was risen, as estimated !ie average rate of abrasion, or wear, small, and for our iltogether from this has therefore been le average rate of kingdom. My own I that this estimate, tion of gold coin in y in excess of the )uble the sum esti- rft SOME MORE ECONOMFC FALMCIES. 347 mated to be in circulation and in all the banks in ,868 by Mr. J. n. Mcculloch. But I am pointing out how little It costs the people in comparison with the services It renders, and the amount of the vah. » of all the products of capital, labor, and machinery i„ the United Kingdom and hence accept the largest estimates. 8. If we assume the population of the kingdom at 30,000,000, and the increase of gold coin at ;^i, 000,000 a year, we find that there is paid, on an average for each mhabitant, eight pence per annum to maintain the neces- sary supply. Again, if we accept the estimated annual value of all the products and income from past accu- mulations of labor and capital at, in round numbers, ;63.ooo,ooo,ooo, the annual increase of gold coin is only as ;6 1 to ^3,000 of the gross annual products of labor and capital. If \ve compute the interest on the whole capital invested in the estimated coin at four per cent the annual interest will be ^5,000,000, which is as ^i' to ^600 of the annual yield of labor, machinery, and capital. Compared with the population, the annual in- terest on the capital invested in gold coin is one-sixth of a pound, or three shillings and four pence, a head • and as this falls mostly on capital, the cost of money to the laboring classes is almost "nil." 9. Now, when we consider the services which this gold com renders, it will be found to be the cheapest of all the tools of industry. Is it not all but, if not altog.^ther indispensable to the successful and easy production and distribution of this vast annual income of Great Britain and equally so of other industrial countries? Is it not the solid rock on which the nation's industries are based ? A civihzed nation can no more do without money than It can without weights and measures, or spades, ploughs, and other tools. Whatever fluctuations the value of labor and Its products and the market value of capital may ,i ' ^'■^^a?&_,,..,. wm^% 34^ CURRENCY. undergo, the gold coin remains almost unchanged in its value. Like a great rork in the ocean, it remains, in its market value, unshaken and unchanged by storms or by tides and currents. In this respect no product of indus- try, which is suitable for money, can compare with it for stability and durability. lo. These just anrl logical facts and deductions, to the mind capable of sound reasoning, demonstrate the great- est of all truths in monetary science, namely, that gold coin is not only the best, but the cheapest, money the people can have. If we compare this really inexpensive tool with inconvertible paper, or even a silver circulation, which continually varies in its trading power almost in- nnitely, as compared with gold, we shall at once see the advantages of the gold standard over that of any other. This is more especially the case as to the laboring man or woman; for the simple self-evident reason that the employer or capitalist always possesses, and generally exercises, the advantage of being able to provide against loss by making a charge or deduction for the risk of such fluctuations as an unstable currency is subject to. This inevitable result of such a measure of values throws the whole loss — and it often constitutes a large percentage, reaching ten to twenty per cent of the wages of the labor- 'ng classes — on those classes. II. Furthermore, if we are going to do what so many clamor for, namely, make "money cheap" by making " cheap money " abundant, we fall into the palpable error I have so often referred to, of confounding money with capital. "Cheap money" does not make "cheap capi- tal." On the contrary, such " cheap money " as is clam- ored for makes capital dear to the people, who pay full price both for money and capital. Who, then, is bene- fited by the issue of inconvertible money, — that is, money, paper or metallic, not convertible into the money t unchanged in its I, it remains, in its il by storms or by product of indus- :omparc witii it for deductions, to the lonstrate the great- namcly, that gold leapest, money the , really inexpensive a silver circulation, ; power almost in- ill at once see the that of any other. I the laboring man It reason that the ses, and generally I to provide against for the risk of such is subject to. This if values throws the a large percentage, wages of the labor- do what so many cheap" by making the palpable error unding money with make " cheap capi- money " as is clam- people, who pay full Who, then, is bene- money, — that is, ;ible into the money SOMK MORK tCDNOMIC FALLACIES. 34,; made of the most stable known materia! suited to coin- age and convenient circulation and use? The answer in . at iiand, an.l is self-evident and indisputably true. It is only tlic bankers, excliant;o and other brokers dealing in capital, who number even in a great nation only one in a thousand, and a hamlful of skilful gnmblers and si)ecu- lators besides. 'I'hese, then, ar.- the chief movers in the agitation for inconvertible paper and overvalued silver money. 12. It will be seen, by a careful consideration of these transcendently great truths, that, if th.- nation delegates the power to banks and private parties to issue paper money, it is done solely with the view to enable such to make a profit, while the public at large derive no advan- tage whatever by the result. What, then, becomes of the theory of Adam Smith and others, that the issue of bank notes cheapens the cost of money to the nation? By this method of cheapening money, as I have many times shown, you are only giving a dangerous monopoly to a very hmited class, who have always been led by motives of gam, or d.wnright greed, to abuse it. 13- The question of seigniorage has occupied the atten- tion of most writers on monetary science, and, like many other thmgs connected with tli^- fabrication and supply of money, has very of^en been the subject of much bad logic. Mr. Ricardo was an advocate of a heavy seig. 'or- age charge for supplying coin for bullion, — even as high as fifty per cent of the market value of the bullion. Let us inquire what is seigniorage, and then determine its effects on the currency. As defined by Mr. Ricardo and others, it is a charge made to the owners of bullion for coining the same into money, or, what -s the same thmg, for giving out by the state, at the mint, coined for uncoined metal, —the manufactured for the unmanu- factured article. It is, therefore, in the nature of a tax 250 CURRENCY. imposed on one of the most necessary, if not indispen- sable, tools of industry, or which nobody can do without. Now, as all taxes imposed by the state on the products of labor are direct and artificial interferences with the natural order of things, it becomes the special duty of the statesman to select, as far as possible, such articles for taxation as are either luxuries, or tend to engender vice and idle or bad habits. When Mr. Ricardo argued in favor of a high tax on bullion when offered m exchange for money, he was simply adding so much to the cost of coined or manufactured money. If fifty- per cent is admissible, as contended for by him, its effect on the offices of money would be to diminish the quantity of money demanded in exchange for bullion, and thus in- crease its trading power pro tanto, or, in other words, to lessen the value of labor and its products, and of all things possessing market value, in a like degree. 14. According to the principles I have endeavored to demonstrate, money, of all the tools of industry, is the one that ought to be left free from state or bank influ- ences. It is, par excellence, the one article to be left to the free and undisturbed action and regulation, as to its volume and circulation, of the natural laws of industry. I have contended that its supply should be automatic, so that those who have bullion to sell may exchange it for coin, when such exchange will afford a sufficient profit ; and, on the other hand, if the price of bullion is such in the open markets as to yield a profit, the owners of the coined or manufactured money may melt it into bullion. A heavy tax would, it must be seen, interfere seriously with the scientific supply of this indispensable tool. Better far to tax spades, ploughs, and spinning-jennies, than money. 15. I have not discussed the effect which the con- sumption of the precious metals, for purposes other than ■y, if not indispen- dy can do without. :e on the products ;rferences with the he special duty of ssible, such articles tend to engender . Ricardo argued in iffered in exchange 1 much to the cost If fifty- per cent is I, its effect on the sh the quantity of uUion, and thus in- r, in other words, to roducts, and of all , like degree, lave endeavored to of industry, is the state or bank influ- article to be left to regulation, as to its al laws of industry, lid be automatic, so nay exchange it for 1 a sufficient profit ; of bullion is such in t, the owners of the melt it into bullion. 1, interfere seriously ensable tool. Better linning-jennies, than feet which the con- purposes other than I 1^^ I>fDUGTRIAL CRISES. — IHEIR CAUSES AND EFFECTS. 25 1 currency, has on the ebb and flow of money under the influence of supply and demand. Probably the consump- tion in the arts and manufactures is quite as equable as for purposes of currency. Though the methods of ob- taining the precious metals are continually undergoing improvement, and being cheapened thereby, the increased demand for them for currency, and works of utility and art, as well as mere ornament, probably keeps pace with the supplies. The increase of wealth in modern times has been immense, and this has led to an equal increase in the demand for the precious metals. The statistics of consumption of the precious metals, both for currency and in the arts, like most such statistics, are only guess- work after all, and cannot add much to the science of money ; and the founding of a />er capita theory of cir- culation is no better than to found it on the number of codfish taken annually from the sea. CHAPTER XXVIII. INDUSTRUL CRISES. — THEIR CAUSES AND EFFECTS. 1. In considering this subject, we have/rj/. To define what is meant by a crisis in industrial pursuits ; second. What are the causes ; third, What their effects on society ; and fourth, To ascertain whether the science of political economy has yet discovered a remedy for the predis- posing causes, or a method for arresting them. They are very generally called "commercial" or "financial crises;" but, as all industries conspire in some degree to bring them about and all suffer from them, I prefer the more comprehensive term of "industrial." 2. The first thing, then, is to define accurately and philosophically what an industrial crisis is. We know the r^ i^i^S-^ ' ^ S SS ^' 3r 252 CURRENCY. meaning assigned to crises in diseases of the body or of the mind. It then means that the patient has reached a point in his malady wlien he will recover or die ; or, in case of mental disorder, where the mind is restored to a healthy condition, or is overthrown and dementia sets in . So far, then, rs a comparison can be made between the bodily and nn'ntal diseases and the maladies of society, we may define a crisis in the latter to be, when a long- continued condition of things, subversive of the laws of nature, reaches a point when these laws intervene and assert their ascendency. Industrial pursuits do not, like the body, die ; but they become paralyzed, and for a time weakened and demoralized. In some countries, such as Great Britain, the United States, Canada, and some of the German States, they occur more frequently, last longer, and are more destructive than in others, such as the " Latin Union " of countries, comprising France, Switzer- land, Italy, and Belgium. Perhaps here we may find a clew to their most stimulating causes and aggravating characteristics. 3. Some economic writers, and the public very gen- erally, impute their cause to what is " unreasoning panic " among commercial men and managers of corporations. Thus, Professor Bonamy Price, in addressing the Cham- ber of Commerce of New York, in the autumn of 1874, selected the crisis of 1866, in Great Britain, as an example. He was speaking of crises in general as a subject. He said, — " The cause of this crisis was simply alarm. Simply that those vast bodies of people who had intrusted fund.s to this institution " (the London and Westminster Bank) " got into what may be called a panic, to use a common word. In that state of wild alarm, all rushed for their money, every man catching the contagion, which became more catching because it was unreasonable." The Professor then went on to show what a bank was, ' . af the body or of :nt has reached a iver or die ; or, in nd is restored to 1 dementia sets in. lade between the iladies of society, be, when a long- ve of the laws of ws intervene and rsuits do not, like ed, and for a time countries, such as I, and some of the ently, last longer, hers, such as the J France, Switzer- re we may find a and aggravating public very gen- ireasoning panic " 1 of corporations, essing the Cham- autumn of 1874, in, as an example. s a subject. He Simply that those s to this institution " ) what may be called te of wild alarm, all he contagion, which lable." (vhat a bank was, INDUSTRIAL CRISES. _ THEIR CAUSES AND EFFECTS. 253 What it did, and finally reached the, no doubt, correct concIus.on, that crises always came forth from "the re gions of the banks," to use his own words 4. But to stop here, and say panics produce crises would be a complete begging of the question. It Tu d' be more correct to say that crises produce panics B t hat explams nothing. I have defined a commerc ai pan c the pa "f H -'T"" f ' '-^— tinued violation, on the part of the mdustnal members of a community of the natural laws of industry itself, and crisis as LresuU We m,3t then, set about finding out wherein soc e "l s by, the aws of mdustry, and thus subjected it elf to the anevuable penalties of prostration, ani injury to pubt and private interests. It is clear that something mut mal character, must have previously existed to superin- duce t,. There must have been a predisp'os n"g back We in' "t ' " '''"' '''' '™^* '-'^ f-ther back. We must examine the methods of industry and especally that "region" of it forming the donS'n "f banks, where Professor Price correctly focated t'Ti^n of crises and see what we shall find there bearing on the ' cas.A,argenumberofthediseases "which .leshrid^ to are imputed, and no doubt correctly, to causes over which most people have more or less power or control A certain condition of the body, the doctors telUs W- d^poses to disease." The cholera comes along oc;asron. ally; and those whose habits and bodily condLns nve been irregular or not properly cared for, are s^d to be exactly what we want to find out in respect to crises If they "originate in the region of banks," we must s;e o 't that the "little foxes" concealed in those regon a e unearthed and nude to show themselves m M If it^*" '54 CURRENCY. 5 But though industrial crises issue forth from the region of the banks, hke the evils from Pandora's box, and carry destruction and desolation with them, we must inquire into more remote influences : we must ascertam how banks, which are only instruments of industry, are enabled to so interfere with and derange the natural order of things in society, as to bring about distrust and loss of confidence among "vast bodies of people." Panics do not come without cause : and there is, notwithstandmg Professor Price's dicUim, generally, if not always, some good reason for them ; and we must go beyond the banks in search of it. If we only just examine how tradmg power, or what is generally called floating capital, is cre- ated, and made available in conducting the industries of a country, we shall reach a point from which we can reason with some degree of accuracy. The main object I have had in view in writing this work has been to elimi- nate fundamental errors from economic principles and practices; and not to be able to point out, with some degree of precision, the causes and consequences of crises, would be a tacit admission of failure. I must, therefore, appeal to what I have laid down as self-evident or demonstrated, for what we are in search of; that is, the remote causes of crises, and point out wherem busi- ness men and banks violate natural laws. 6 Let us refer once more to postulate 35, which lays down the proposition that the bulk of trading power, or trading capital, dealt in, in the loan, improperly called the money market, results from the discount by banks of bills given for goods. It has been ascertained in London, that only three per cent of the receipts and disbursements of banks consists of money, of which but the half of one per cent is metallic money. The other ninety-seven per cent, then, consists of something else than money. A part of it is what may be called cash capital, or the savmgs of BUuJultw * e forth from the n Pandora's box, :h them, we must ire must ascertain 3 of industry, are e the natural order distrust and loss people." Panics is, notwithstanding not always, some beyond the banks mine how trading ing capital, is cre- ing the industries rom which we can The main object has been to elimi- nic principles and int out, with some consequences of " failure. I must, lown as self-evident search of; that is, t out wherein busi- ,vs. ilate 35, which lays if trading power, or 1, improperly called iscount by banks of ;ertained in London, s and disbursements but the half of one ler ninety-seven per than money. A part tal, or the savings of INDUSTRIAL CRISES. — THEIR CAUSES AND EFFECT. 255 industry, -the surplus of income over outgo, -or net profit. Tim is mostly held by bankers; and monetary sconce would be advanced, if a few bankers in London and New York, or elsewhere, would analyze tlieir business ior a year or so, and ascertain how mucli of their deposits arc tlms made up, and how mucii of discounts placed to the credit of customers. We sliould then know very accurately how to trace " inflation." I have estimated . tha four-fifths of the capital, or trading power, loaned by banks, ,s derived from bills and other securities, and devces or the transferrence of debts and crecUts, growing ou of the sales of goods in course of preparation and distribution, from the hands of laborers to those of con- sumers. 7- Bankers use the balances of customers ; but it is evi- dent that such balances as are the results of saving or are not the proceeds of discounted bills, which they also trade on, are not susceptible of expansion, except by the addition of the profits of new investments. It will there- fore follow, that the field of inquiry is narrowed down to one or two classes of customers; namely, men engaged m active production and distribution of commodities, and speculators. In order to make the subject clear and demonstrated, we must trace the operations of a commu- nity through a cycle of years embracing a crisis, which I sliall treat as a chronic industrial malady, and not as a mere momentary occurrence. We will start with what may be called a normal state of things, or, after labor and production have recovered from long depression resulting from a crisis Laborers, producers, manufacturers, and distributors (the latter class includes bankers and mer- chants) are working together on sound economic princi- ples (except so far as legal restrictions, such as protection, and erroneous dogmas about bullion and foreign trade interfere). " The outlook of the future," as it is said is -^ »B »MBawr i >ij..- i ''|n* > JL. INDUSTRIAL CRISES. —THEIR CAUSES AND EFFEOT. 257 Of wages. Blasting-furnaces, rolling-mills, car-builders railway-projectors, cotton-growers, speculators, and man' ufacturers, and so of workers, producers, and manufac turers of woollen and nearly all the great '< staples," in- cludmg "breadstuffs," work "with a will," and of course their products increase in demand, both for consumption and speculation. Bills are greatly multiplied in num- ber, and are increased in amount; and the banks "dis- count " (to use an expression of an eminent British econ- omist) " mightily." ' 9. This "fool's paradise" goes on generally for some years, say four or five, after the commencement of the "good times" when supply and demand were "at par" with each other. Excessive demand for consumption is accompanied by excessive demand for speculation. The two kinds have gone together; and the banks have promptly turned the trading power of goods into capital to sustain the inflation of values. These institutions, now, acting on the wise advice of the eminent banker, Nicho- las Biddle, already quoted in Chap. XXIV., are the first to take alarm. They first catch the panic, and promptly curtail their discounts. Is this " unreasoning panic " ? or IS It the return of reason and sober judgment after a period of partial insanity ? They only think now of them- selves and of the moment. The first thing the banks do, and which, if it does not precipitate the panic, cer- tainly intensifies it, is to force their customers to sell their goods at a loss ; and thus, in an effort to save themselves, there is an indiscriminate slaughter of traders. This causes what Mr. Biddle points out, "the return of the notes in circulation, or their equivalent," by those who owe them; and the banks, looking only to their own immediate necessities, have not stopped to ascertain who 1' I'-S- I I 258 CURRENCY. are sound and judicious traders, or who are mere specu- lators for a " turn in the market." Thus they, too, must suffer from their own acts. 10. Wc have now reached the point in the industrial cycle when "great bodies of people" who have de- posits in banks catch the contagion, and those who have bills maturing become distracted about the wherewith to meet them. They all rush to their bank to draw their balances in cash ; but the banks owe three, four, or five times the amount of cash in hand, and have no alterna- tive but to stop specie payments. This, of course, stops the " run " on the banks ; but it does not help the traders materially. The Bank of England has played that rdle three times since its present organization in 1844 : viz., in 1847, 1857, and 1866; and the banks of the United States as often. Thus it appears that the banks first lead their customers " into temptation," and then " deliver " them over to " evil." They reverse the Lord's prayer. The effect of these causes leading to panics, and followed by what I have termed chronic crises, will be more fully stated in the next chapter. Here we may pause to inquire what laws of industry have been violated to bring about such a revulsion ? who are the criminals ? and are they the results of bad methods supported by bad laws ? But, before answering these pregnant questions, I will, in the next chapter, illustrate by examples from history the per- tinency of the foregoing description of a part of an indus- trial cycle. 11. Enough has now been said to show, beyond dis- pute, that the panic of 1866, like all others, followed by a collapse of credit, or a crisis in industrial affairs, was not the cause, but the effect, of an unsound and long- existing condition in most if not all kinds of industrial workers engaged in the growth, production, manufacture, and distribiition of goods. The motive poww, so to rrsjsr' > are mere specu- lus they, too, must in the industrial ; " who have de- id those who have : the wherewith to ank to draw their three, four, or five i liave no alterna- is, of course, stops ,ot help the traders s played that rdle tion in 1844 : viz., nks of the United he banks first lead id then "deliver" :he Lord's prayer, xnics, and followed will be more fully lay pause to inquire ed to bring about lals? and are they )y bad laws ? But, tions, I will, in the im history the per- a part of an indus- show, beyond dis- others, followed by dustrial affairs, was insound and long- kinds of industrial ction, manufacture, »tive powCT, so to INDUSIRUL CRISES. — THEtR CAUSES AND EFFECTS. 259 speak, which sets the wheels of the industrial machine m motion, is tlie desire of the members of tiie commu- nity to benefit themselves, or pcriiaps, strictly speaking the necessity .that mankind is under to produce food clothing, and dwellings in tiie first instance, and then to procure luxuries, and lay up something for old age and for their offspring. If this end could be accomplisheil through natural processes, and be strictly held to the action of natural laws, there could be no such things as crises. We have seen that artificial methods form a large part of the causes leading to the point in the cycle of years when distrust, and finally entire loss of confidence take place among the members of a community in each other. It is not, therefore, "unreasoning panic" that precipitates the break-down of credit, but the too sudden return to reason on the part of the whole industrial com- munity. The failure of one or two hitherto trusted commercial houses fires the magazine or pricks the bubble. 12. In considering the great influence of the Bank of England on public financial opinion, and its pernicious policy of first leading on to inflation by countenancing an artificially low rate of interest, and, when symptoms of unsound trade have s't in, rapidly "running up the rate," I pointed out the fact that the nadral result of such policy was to sow the seeds of the disca. •, and then pre- cipitate a crisis. The directors have taken the trouble to deny the correctness of this charge made against them. But they might as well deny that they are re- sponsible for changing the rate at all. Mr. Seyd, in his work quoted in one of those chapters on the bank, has pointed out that these changes of the "rate," from two to as high as six, eight, or ten per cent, have occurred over a period of years about eight times to a similar change on the part of the Bank of France once. Hence I have 'if 36o CURRENCy. some reason to assert that the Bank of England is the head and front of crises in Great Britain. She has well earned the epithet of " panic-maker." I liave also shown that this raisciiievous policy is the result of having all its own capital invested in government securities, which it ought to hold in cash as a margin of security. It is idle nonsense to talk of the British monetary system being sound and scientific, while this policy is pursued. CHAPTER XXIX. nraUSTRIAL CRISES CONTINUED.— REMEDIES. THEIR EFFECTS AND 1. In my last chapter I defined industrial crises, and traced their causes back to original principles having their "seeds and weak beginnings" in motives of gain. I would here remark, that I have accepted the common practice of using the term crisis as a continuing condi- tion of derangement and depression in the industries of a country succeeding a "panic." Strictly speaking, the term is one defining a turning-point, and momentary as to time. But, by general consent and practice, it is used to define the period of depression until a return to a healthy condition of industry. It will also be seen that I am not writing a history of crises, which would of itself make a volume, and one which ought to be written. 2. I propose to describe one or two to illustrate more particularly how they come about, in order to see if we can get at a scientific remedy. Like skilled physicians, economic writers must first make up a diagnosis of indus- trial and social maladies, and prescribe such remedies as seem best calculated to mitigate or wholly cure the evils in question. . )f England is the lin. She has well I have also shown of having all its jcurities, which it :urity. It is idle ary system being pursued. R EFFECTS AND ustrial crises, and ;iples having their ives of gain. I ted the common :ontinuing condi- the industries of ctly speaking, the rid momentary as ractice, it is used til a return to a ilso be seen that :h would of itself be written, o illustrate more der to see if we killed physicians, iagnosis of indus- luch remedies as lly cure the evils INDUSIRIAL CRISES. -THEIR EFFECTS AND REMEDIES. 261 3- Professor Price truly said, " the origins of crises are somehow connected with banks." Mr. E. G. Spauldin« formerly a member of Congress, and father of the "green- back " currency which IVesident Grant once thought "the best the world ever saw," 'ull testify as to the causes of the crises of ,837 and i;, 7. In his "Centennial Ad- dress to the Bankers' Association in 1876, entitled One Hundred Years of Hanking in America," Mr. Spaulding says, speaking of the banks of the United States, On Jan. i, 1837, the bank circulation of the country' according to the treasury reports, was $149,000,000. By Jan. I 1843, ,t was reduced to jSsS.ooo.ooo : a ruinous fall of pnccs ensued, and wide-spread distress and many failures was the consequence." Going back, Mr. Spaul- dmg tells us, "in the seven years, from 1830 to 18^7 no less than three hundred and four new banks sprung into existence, with a nominal capital of $145,000,000, and 159.000,000 of circulation. ... The loans increased from $200,000,000 to $525,000,000." 4. Those who have carefully read the last chapter will see, that such an increase of bank loans could by f,o/,ossi. ^//K have taken place, except by the increase of bills. This increase of bills could /^y no possibilHy have occurred throughout a whole country, except by resales of goods in a rising market for speculative purposes. In fact the goods must have come to be, in their entire aggregate represented not less than two or three times in the loan market. As bills are averaged at two months, they would aggregate in the discount ledgers of the banks for the first year (1830), $200,000,000; and in the last year (18157) $525,000,000. Thus, supposing these bills to have been all founded on sales and resales of goods, we find they have I'-creased, in the seven years, considerably over two and a half fold. Such an increase of circulation would lave been impossible, but for the large increase of paper '■:> J * «^s^i4 36} CURRENCT. money. This will give some idea of the enormous amount of inflation cfrcclcd wiioily through tiic banks of issue and discount of that period. 5. Still speaking of the same crisis, Mr. Spaulding says, referring to the outbreak of it in 1837, — " Each d.iy developed some new case of insolvency on the part of the banks and individuals. Finally the distress extended to all chisscs of business ; credit was destroyed j the panic became gen- eral, when, in May, 1837, all of the banks of the country suspended upecie payments." 6. He next comes down to the great crisis of 1857, of which he says, — "This crisis, like the revulsion of 1837, was caused by too great an expansion of credit. Debts in all forms became excessive. The railway system had been largely extended on borrowed capital," etc. These extracts from Mr. Spaulding's account of Ameri- can banking will serve the purpose of illustration ; and I shall only briefly refer to British experience, where equal disasters were brought on by exactly similar causes. Mr. Spaulding's address is very valuable evidence of the im- policy of tolerating banks of issue, or the issue of bank notes at all, in any form or manner. It would have been more appropriate to have called his address, " A History of the Disasters arising from the Issue and Use of Bank Notes in America for One Hundred Years," or it might have been entitled, " One Hundred Years of Banking in America, demonstrating the Erroneous Policy of Delegat- ing to Banks the Prerogative of the Nation to Issue Paper Money for Private Gain." The last title would have been very appropriate, as well as very impressive. 7. I will only add, in reference to the greatest and most disastrous of all crises through which American industry has ever passed, — namely, that of September, 1873, from which the country has only just emerged after five years le enormous amount : banks of issue and Mr. Spaukling says, insolvency on the part istrcM extended to all ;he panic became gen- the country suspended It crisis of 1857, of as caused by too great ecanie excessive. The on burrowed capital," account of Ameri- illustration ; and I ience, where equal imilar causes. Mr. ndence of the im- thc issue of bank [t would have been Idress, " A History and Use of Bank i^ears," or it might ;ars of Banking in Policy of Delegat- ;tion to Issue Paper le would have been ssive. : greatest and most American industry tember, 1873, from jed after five years INDU_V%=^, 266 CURRENCY. ¥ convenience and safe keeping, for more or less of which they pay interest. The Bank of England and the national banks of America invest their capital, in part or in whole, in public securities, and rely mostly or wholly on bor- rowed capital to trade on. The specie they hold is merely borrowed. It belongs to depositors. The Bank of Eng- land, as I have shown, holds about one pound in thirty of specie against the latter amount of instant liabilities, and maintains itself by its prestige and great facilities for borrowing out of the cash held in the Issue Department to cover notes. Hence the intense sensitiveness of the managers in respect to the trade in bullion. II. This is the normal condition of these great and greatly predominating institutions in Great Britain and the United States. Every person of the most ordinary powers of ratiocination must now perceive how these oft-recurring heavy depreciations in the value of goods, lands, etc., wipe out, as with a sponge, these margins on which nearly all classes conduct their industries. There has been a gradual rise in prices, and a corresponding increase in the means for manufacturing trading capital through a period of some years. All kinds of industrial business have responded to this all-pervading influence. Industry has, in fact, steadily adapted itself or yielded to the causes stated. Then comes the period in the cycle when sober reason re-asserts itself, and panic is the re- sult. The whole system topples down; values shrink, thirty, forty, fifty, and sometimes more, per cent. Those who felt strong with thirty per cent margin, now find themselves beggared. The banks have compelled them to sell their property at a loss, in order "to return their notes or their equivalents." Many banks are in straits, and large numbers fail. 12. We have now examined the whole period of an industrial cycle in the two most conspicuous countries -^i.'jm^H}Sim^ -mm- m^ ^ & i & re or less of which d and the national 1 part or in whole, or wholly on bor- :hey hold is merely The Bank of Eng- le pound in thirty f instant liabilities, . great facilities for Issue Department lensitiveness of the llion. if these great and Great Britain and the most ordinary erceive how these he value of goods, , these margins on industries. There d a corresponding ing trading capital kinds of industrial ervading influence, itself or yielded to period in the cycle id panic is the re- (vn; values shrink, J, per cent. Those margin, now find ve compelled them er "to return their lanks are in straits, irhole period of an nspicuous countries i t^aagpss. DfDUSnUAL CRISES. — THEIR EFFECT AND REMEDIES, where banks of issue most predominate. We find these cycles continually recurring in greater or lesser degrees of similarity. I remarked, in passing, in paragraph 9, that the remedy, so far as paper money was concerned, had already been pointed out in previous chapters. That remedy can only be found, as I have shown, in abolish- ing bank notes and supplying paper money by the state, through a department wholly separated from the exigen- cies of finance, national and private, and selling it, pound for pound, dollar for dollar, for gold or silver coin. 13. But what inferences are we to draw from the almost entire freedom from panics and crises which ex- ists in France, where there is only one bank of issue and where the Bank of France notes are sold for gold? This bank, unlike the Bank of England and the two thousand banks of issue in the United States, has not all, or nearly all, its capital derived from shares, invested in public securities. Unlike the Bank of England, it dis- counts commercial paper " mightily." It is not, like the British bank, a dealer to a preponderating extent in for- eign and railway loans. Mr. Seyd has shown this in his work on the "Error of the Note Issue of the Bank of England." When the English National Bank gets into a strait, it finds all its share capital, and half of other folks' capital which it trades on, invested in government and other securities, including railway debentures and foreign government stock, which have fallen in market value, and cannot be sold to relieve itself without a heavy loss! There is nothing, then, left for it but to "pray to Her- cules " to come to its relief. 14. I now ask British and American statesmen to pon- der over these facts, and see if they cannot find a remedy m the suggestions I have made, and in assimilating the banking systems to a condition similar to that which has given to France freedom from crises, and in conformity S^^SS^S^sr 268 CURRENCY. with the natural laws of industry. The first step is, un- questionably, to get rid of bank notes. Furthermore, I say emphatically, if banks are to be allowed to suspend payment on occasions of great panics, let the principle be extended to all classes, temporarily. This is what the Bank of France did to all its customers, in 1872, by an Act of the National Assembly, which granted an extension of time for payment of bills {7>i(fe chapter on Bank of France) . Such a law would prevent the banks destroy- ing their customers to save themselves, and would serve to stop panic, and enable prudent men to liquidate their own indebtedness, instead of being forced into insolvency. But I predict, that, with a sound monetary system, panics and crises will cease, as in France. " Like causes pro- duce like effects." Q. E. D. CHAPTER XXX. INDUSTRIAL CRISES CONTINUED. — HOW " PROTECTION TO DOMESTIC INDUSTRY " COUNTERACTS THE NATURAL ORDER OF THINGS, — FIRST CAUSING EXTREMELY HIGH PRICES ^ AND OVER-SUPPLY ; THEN, BY RE-ACTION, EXTREMELY LOW PRICES : THUS SUPERINDUCING AND INTENSIFYING CRISES. I. A SIMPLE statement and analysis of the protective system will serve to show the fundamental error on which the system rests. Its object is to build up or enlarge the scope of certain classes of industries by the imposition of taxes sufficiently high to exclude, to an adequate de- gree, the like productions of foreign countries. The public at large, who are the consumers, are thus compelled to buy the goods of the home producers and manufacturers at a materially enhanced price. The immediate result is, not merely the addition of the amount of the tax to the "SK? iiss^ rhe first step is, un- es. Furthermore, I allowed to suspend , let the principle be This is what the tiers, in 1872, by an pranted an extension ihapter on Bank of the banks destroy- es, and would serve len to liquidate their reed into insolvency, etary system, panics " Like causes pro- W "PROTECTION TO IHE NATURAL ORDER EMELV HIGH PRICES ION, EXTREMELY LOW INTENSIFYING CRISES. is of the protective ental error on which Id up or enlarge the s by the imposition to an adequate de- luntries. The public thus compelled to i and manufacturers immediate result is, It of the tax to the INDUSTRUL CRISES CONTINUED. 269 pr.re before set on the protected goods, but also a profit on the duty paid. For instance, where an importing merchant was before content to sell for twenty-five per cent profit, and a protective duty of forty per cent is enforced (and the conscience of the protectionist is often not satisfied wuh less than sixty, eighty, or even one hundred per cent), he adds the forty per cent, and a twenty-five per cent profit on that, making the whole fifty per cent; and all this in addition to the cost of transport msurance, agency, etc. nn^"/'-" i' I ^"'^ ^"' '™' '*^'"'^'"* °f the Purpose and desired effect of protection. Let us inquire Ivho are benefited and who are injured by the plan. When indus- trial pursuits are left entirely to the natural laws, or to the distribution of natural causes and forces, it is obvious that a just equilibrium will be maintained by the action of supply and demand. If one country, or fAepcop/e of one country (which is the more correct way of expressing it) purchase the productions of the people of other coun- tries, they must pay for them with the productions of their own labor, or with articles - such, for instance, as gold and silver -which they obtain or produce by such labor • and as stated in postulate m, " all trade continually tends to balance itself, or to equilibrium." Hence it logically follows that all interferences with this natural tendency o equilibrium, on the part of governments, is injurious to the general interests, just to the extent to which their power and influence can be made effective. 3. But the economist, who seeks to establish true prin- ciples, has to analyze the general effect of these artificial methods of building up home industries. Discarding entirely from view the higher sense of eternal justice and -" fitness of things, or what might be supposed to be the sentiment and purpose of the Creator of all things in regard to the whole human family, we shall find enough ■■i » "m6l»j^fe. ^Ai'*?;=i?i^si:i^^£c i^^V - kJ 270 CURRENCY. illil in the demoralizing effect of protection on the people who it is claimed are benefited by it, to utterly overthrow the theory on which it is founded. In other words, the prac- tical effects at home demonstrate the fundamental error of the system. The fact is, the capital and the labor which are thus artificially attracted into the protected industries, are not, to any material extent, drawn from foreign coun- tries. Let us, then, see where it comes from in the United States. No one will pretend to assert that the capital and labor employed in countries like Francp and Germany, where protection still rules, were drawn from Great Britain, Russia, China, or the United States. Why, then, should the protectionists of America claim that such has been the case in respect to the latter country? It is absurd to claim that such has been the case. Expe- rience, as I shall clearly demonstrate, shows that both the capital and the labor employed under the hot-house system of establishing manufactures in the United States, as in all other countries where the system still lingers, are diverted or attracted from other home callings and indus- tries into those which the State seeks to build up by impos- ing on all consumers protective duties or taxes. It is a tax on all for the advantage of a few. 4. The argument set up by protective philosophers, that in time protection brings about such an amount of home competition as to cheapen the protected articles, and make them more abundant, than if the law did not offer a premium for the diversion to them of capital and labor, is a mere begging of the question. It is an assump- tion which overthrows the system itself. To appeal to the facts, let us take the leading protected industries of the United States as examples. These consist of the produc- tions and manufactures of iron, steel, and every thing con- nected with the construction and operation of railways, iron shi;^!S, anu cotton and woollen goods. The manu- ■TT" n on the people who itterly overtlirow the her words, the prac- le fundamental error and the labor which protected industries, 1 from foreign coun- comes from in the i to assert that the ties like Francp and s, were drawn from Fnited States. Why, America claim that the latter country? en the case. Expe- te, shows that both mder the hot-house n the United States, item still lingers, are r callings and indus- 'o build up by impos- or taxes. It is a tax :ective philosophers, such an amount of e protected articles, 1 if the law did not them of capital and 5n. It is an assump- If. To appeal to the ed industries of the Dnsist of the produc- and every thing con- peration of railways, goods. The manu- INDUSTRIAL CRISES CONTINUED. 37, factures in question existed in a very healthy and growing cond,ion pnor to the great civil war, the exigen^icTof which afforded both the excnsP nnrt \\. "^"^"^"^ °' those who are ever re^aVr^^the^^^^^^^^^^^^^ catastrophes to get their hands into other people's no k ets, to estabhsh the present vast system of pubHc plunder" Congress and the nation became demoralized by that ^ea; struggle; and a system worse than that of Spain ntt palmy days of Ferdinand and Isabella, from Sclth^ cou.^l.s^ot yet recovered, became«y«xedir 5- These are simple historical facts. We have now to tace out the results. It may fairly be claimed, hat had a revenue tariff" been established, - that is a ta fff that would have yielded the largest 'amoun 'r ve f 'f you hke,- instead of the one that was passed and ^emams still in force (the proceeds of which solr^ •'protect on" was effected, have gone into he po L" of a small number of individuals who monopolized those pnvleged productions), it would have inure'd to „ t.on and have been applied in liquidation of the pub"ic deo and reduction of taxation. It is not claiming too nmch to say, that such a revenue tax would hav" pS of he enure debt by this time; and the burden would have fallen hghter on the general public than it has close of the war. In making this very obvious claim it .s s.mply saymg that the protective system has ben^ crone hundred .iUions^r^hil^^^^^^^^^^^ ^^^ 6. Take the conspicuous case of iron and sleel rail, on wh,ch a du.y equal .o about m a ton .X^. n aja CURRENCY. t a This, together with the cost of transport, agencies, and other incidental expenses, raised iron rails to ;$8o and steel $120 a ton in 1872. Engines, cars, and other rail- way supplies, went up accordingly. These enormous taxes built up a limited number of great capitalists, and ruined thousands and thousands who invested their means in providing the much-needed highways of civilization. The laborers employed in these stimulated industries were not benefited. They were drawn from other, and in many instances more congenial, occupations. An inflated cur- rency, also, tended to increase all prices, as measured by it, still more : so that, after all, the increase in the wages of labor did not benefit the working classes ; as the cost of their living rose in proportion. This is always the effect of a protective system. By drawing both labor and capital from other industries, which do not come within the category of protection, the prices of the productions of the latter sympathize with those of the general mass of commodities, and rising prices engender speculation ; and so " the disease grows on what it feeds on," till the inevitable day of disaster bursts like a thunderbolt on the whole community, and universal crisis sets in. Now, had the tax on foreign rails not been made prohibitive, but, say, Jiio a ton, there would have been a large revenue therefrom, and the price of rails would never have ruled higher than |6o for iron and $90 for steel descriptions. Such a diminution in cost would have greatly increased the consumption ; and the country would have been sup- plied with thousands of miles more railways, at less cost, than it now possesses ; hundreds of millions of additional wealth would have been created by such means ; and the increased revenue would have gone, as I have shown, to the liquidation of the public debt, instead of into the pockets of a small class of capitalists, who alone have been profited. }OTt, agencies, and I rails to ;$8o and irs, and other rail- ese enormous taxes )italists, and ruined ed their means in af civilization. The industries were not ther, and in many 1. An inflated cur- es, as measured by :rease in the wages classes ; as the cost This is always the ving both labor and lo not come within of the productions if the general mass jender speculation ; t feeds on," till the thunderbolt on the sets in. Now, had ide prohibitive, but, en a large revenue d never have ruled ir steel descriptions, ve greatly increased 3uld have been sup- ailways, at less cost, nillions of additional jch means ; and the as I have shown, to instead of into the 5ts, who alone have INDUSTRIAL CRISES COOTINl/ED. 373 7. Looking a little below the surface of things, we shall find that these protected industries, prior to tL crisifof 1873. drew both capital and labor away from fanning,- that >s from the production of cotton, wheat, corn, and other farm products, which engage three-fourths of the entire population of the United States. Farming is by Jar the most important industry of the United States which possesses an almost boundless extent of rich and cheap wild lands. The products of agriculture far exceed •n value all others put together, and the sop of protection he d out to the farme. is wholly a delusio'n. Canada" he onb; competmg country; and the market price of the leadmg farm productions of both countries - such as wheat, corn, butter, pork, and beef, as well as cotton -is determined by the foreign demand. Therefore, the farm- Z. /. Tt^'''''' "•■' humbugged into the belief that a duty of thirty or forty per cent on most of those products benefits them ; when in fact their admission into the United States free would produce no appreciable effect on their market values, because the surplus of both Canada and the United States is exported to transatlantic countries, which set their selling prices at home. But this ,s a digression from the purpose of this chapter which, however, I could not resist making. ' 8. To return to the argument. The effect of the Amer- ican protective system has been, as I have pointed out to draw labor and capital from agricultural pursuits, «; which would have gone into such pursuits, and drive them by means of the bounty offered by the Govern- ment, into the classes of manufactures I have mentioned An immense stimulus was thus given to all the manu- factures of iron, railway supplies, and woollen and cotton goods. Everybody became anxious "to make hay whi," ThV"" T r' ^'^ '"^'"^^^ ^'^ '-g^^y "overdone." The wages of labor rose so high that farmers were unab e II :n a feg^jgfeSc . -.a-isaiiisafes^^^ 274 CURRENCY. to compete with those engaged in manufactures, and the surplus of their productions diminished or remained sta- tionary ; and the lines of steamsliips had to be reduced in numbers and tonnage. This helped to maintain the price of farm products at home. But in 1873 this condition of things rose to such a point of inflation that all that was needed was a spark to set off the combustible mass. The failure of the banking firm of Jay Cook & Co. sup- plied the spa-l- of fire, and precipitated the explosion, perhaps by a k-w months ; for it was inevitable. 9. It will nc'v be seen how important a part protection played in the vast system of American industries, thus suddenly wrecked in September, 1873. Hundreds of mil- lions of capital had been diverted or abstracted from in- vestments into which it had grown up, and then formed a part of the prior industrial system. Though agriculture had been depleted of a portion of its means and lalwr, it 'vas for a time sustained by the enhanced demand for its productions, and consequent increase in price ; but, when the general paralysis came on the country, it, too, suffered severely. As it was the last to feel the stimulus of the inflation mania, so was it the first to recover. It will not be disputed that the class of industries which suffered most severely and were longest depressed by the crisis of 1873 was essentially that which had been, and still is, most heavily taxed for "protection to domestic indus- try." The demand for these "protected" articles was greatly diminished by the panic; and the pressure to sell, to meet liabilities to banks and others, caused a heavy fall in prices. A vast army of laborers were turned loose, without employment, and were compelled to beg, or work for a bare subsistence. The country was over- run with "tramps." Farmers were able once more to employ labor at a low rate, and then followed a yearly increase in the quantity of all kinds of farm products. jMUJIAJ^u® , fiufactures, and the [1 or remained sta- id to be reduced in maintain the price 873 this condition lation that all that combustible mass, y Cook & Co. sup- ited the explosion, levitable. It a part protection in industries, thus Hundreds of mil- abstracted from in- >, and then formed Though agriculture means and labor, it iced demand for its in price ; but, when itry, it, too, suffered the stimulus of the ;cover. It will not ries which suffered essed by the crisis I been, and still is, to domestic indus- ;cted" articles was id the pressure to i others, caused a iborers were turned compelled to beg, ! country was over- able once more to \ followed a yearly ; of farm products. INDUSTRIAL CRISRS CO.MTIWED. 37s If It had not been for the failure of crops during the last two years in several European countries, " brcadstuffs " would have been a drug in tlie American market. The abundance in America came most opportunely for the needs of Europe. 10. Thus it appears that the impediments imposed by governments on the natural order of the industries of the people continually tend to disturb tiiose industries, and superinduce, intensify, and prolong industrial crises. Even If we were to admit that certain great industries have been fostered to the extent claimed by the illogical rea- soning of tiie protectionist, if reasoning it can properly be called, the destruction of capital and the injury to labor must far exceed those doubtful advantages A single year has sufficed (I am now writing in March, 1880) to tide Great Britain over the " hard times," caused partly by tiie failure of two harvests, and partly by over- productioi. in former years. II. I have said nothing of over-consumption. It must, however, be taken into account. " Over-consump- tion •• relates chiefly to capital, but in a lesser degree to goods. It is when large amounts of capital are drawn from productive and paying business, and becomes irre- trievably sunk in unproductive undertakings. Thus vast sums were drawn from the general industries during the first eight years of the cycle I have described, and were either wholly sunk, or the time of payment became so un- certain and long deferred as to materially enhance the inciting causes of the crisis of 1873, as well as in all pre- ceding ones. There is, no doubt, a considerable degree of extravagance engendered by the inflation of values and the consequent high prices of labor, as well as goods Men spend more on their personal comforts, embark in wilder speculations, and squander more on luxuries in such times. The thoughtless do not take cognizance fll r^sm^immms: 976 CURRENCY. of the "rainy days," — of the changes in fortunes, or the periodic recurrence of crises. This heedlessness of eco- nomic principles leads to more or less " over-consump- tion." There is no great warehouse in which this class store the sup* abundance of to-day to supply the press- ing needs of days to come. 12. If the principles of economic science were better understood by public men, and a knowledge of them could be more widely diffused among the people, the evils of over-production and over-consumption would gradually be reduced to a minimum. When the evils I have pointed out as largely resulting from protection in the United States shall become so great, and of such frequent recurrence, as to bring forward a new class of public men, and a purer system of public administration results therefrom, the country will assuredly throw off the baneful trammels of protection and monopolies fos- tered by the States and federal governments. The great Union of States has prospered in spite of these unnatural interferences with industry. Not protection, but free trade, among forty States and Territories has been the . mainspring to this prosperity. 13. We have now seen how protection first checked the development of agriculture, stimulated manufactures, by attracting capital and labor in an unnatural manner from other callings, and then, causing a plethora of such unnaturally fostered products, utterly broke down, inflict- ing immense and long-continued suffering on the whole community, but more particularly on the laboring classes ; and then, by an equally logical result, unduly drove an excessive amount of capital and labor back into agricul- ture. It first produces very high prices, and then, by its break-down, creates very low prices ; while true eco- nomic science teaches that steady employment in all pursuits, and equability in prices of goods and labor, are .:,,^4iai&Jg..^^^iSWB@Jg^ ^ s in fortunes, or the eedlcssness of cco- .•ss " ovcr-consiinip- in which this class supply the press- science were better knowledge of them [ig the people, the ;onsumption would When the evils I from protection in great, and of such ard a new class of iblic administration issuredly throw off ,nd monopolies fos- iments. The great ; of these unnatural protection, but free ories has been the ction first checked latbd manufactures, 1 unnatural manner a plethora of such broke down, inflict- fering on the whole he laboring classes ; It, unduly drove an r back into agricul- rices, and then, by es ; while true eco- employment in all oods and labor, are INDUSTRIAL CRISES. -THE CONCLUSION. 377 most conducive to general prosperity, and the happiness and advancement of society. "-ippmcss '4. France, like the Uniteil States, has been in th. f.rrat Dnlain m Ihe breaking iloivn the al„„r,l , i , would enable her .o disband ha ifher a^ieT ° ' "*'* CHAPTER XXXI. INDUSTRIAL CRISES. — THEIR CAtNPs *x,r iMfclR CAUSES AND REMEDIES FUR- THER CONSIDERED. ~ THE CONCLUSION. I- It appears from the facts stated in the I;,.f ♦ chapters, and the logical deductions drlwnhrfror hat mdustrial crises revolve in nearly eqal cycles"/ t.me m those countries to which they are ^cLi/r^L°- genous. It was also pointed out as an histori-^al fact tZ those countries having scientific systems Of rn^^g' ltd BSteBSTs-**^^ ti a 78 CURRENCY. ti } '■ currency, governed by the natural laws of industry, have for a long period been almost wholly exempt from these periodic disturbances. There are still other considera- tions, to which I invite the attendon of economists and statesmen, relating to causes, as well as effects and reme- dies, which have not yet had sufficient discussion. I have shown how those causes, leading to distrust, panic, and crisis, had their beginnings in the great facilities afforded by banks of issue and discount for expanding their circulation of notes, and, concurrendy therewith, the volume of trading capital, by discounting commercial paper. It will be recollected that I estimated that eighty per cent of the entire trading capital dealt in in the loan market consisted of the proceeds of bills given chiefly for goods in course of production and distribution, and pointed out that the chief source of inflation was to be found in the multiplication of these bills. The reader will please keep these facts in mind. 2. I now propose to inquire what part is played by the remaining twenty per cent of capital, which expands only by the slow process of the savings of industry, and the general surplus of production over consumption. The sta- tistics on this subject are hardly better than guess-work ; though by a careful analysis of bankers' accounts for a considerable time, and in numbers sufficient to give close approximations, it might be possible to reach a tolerably accurate estimate. The late Lord Overstone estimated the net annual savings of the whole of Great Britain to have been, some thirty years ago, about _£i 50,000,000 ; and we may accept that as the best we have. We may now claim it to have risen to ^^200,000,000, — say ;? 1,000,000,000. In the United States it will be larger, owing to a greater industrial population, and to the rapid development in the value of new lands continually brought into cultiva- tion, which is as solid a source of wealth as any other, and is as^permanent and reliable. . -,^ TSSSSUISItil mmmmn -I of industry, have empt from these other considera- ■ economists and effects and reme- nt discussion. I ;o distrust, panic, le great facilities nt for expanding rrendy therewith, nting commercial mated that eighty alt in in the loan Ms given chiefly distribution, and iflation was to be ills. The reader t is played by the lich expands only industry, and the imption. The sta- than guess-work ; •s' accounts for a cient to give close reach a tolerably tone estimated the at Britain to have ),ooo,ooo ; and we Ve may now claim .y ;S 1,000,000,000. (wing to a greater i development in lught into cultiva- alth as any other, INDUSTRIAL CRISES. — THE CONCLUSION. 2 79 3- Here is a question of the very gravest description for economists, and especially statesmen, to weigh If we only pause, and grasp the subject, we shall see that he contmual tendency to a plethora of this kind of capi- tal IS a matter which forces itself on our consideration. The effects of a crisis destroy a certain amount of this kmd of capital, or actually acquired wealth j but there is a great fund, so to speak, placed by members of all industrial communities beyond the reach of destruction by crises. The owners of this wealth become more con- servative, as well as those who hold it in trust, in con- sequence of these disasters and losses; and hence the accumiilation goes steadily on, even in times of depres- sion Hence, also, the rate of interest becomes very low for loans of such capital, and it is sought by all to lend or invest it on the higliest order of securities. It has hus happened in Great Britain, and now lately in the United States that these governments have been able to fund their debts at very low rates. The secret of Mr Shermans funding ^$500,000,000 of 6 per cent debi at 4 per cent is due to this circumstance; and, had he understood the economic question better, he could have effected it at 3.6 or 3.5 per cent just as readily. The crisis of 1873, and the destruction of confidence in other inore permanent investments, taken in connection with the fac I have stated about the accumulation of wealth are sti 1 m active operation (May, 1879) ; and unless new fields for investments of a more permanent character are opened, or a new mania for speculation in goods and railways sets in speedily, the balance of the debt of the United States can readily be funded in 1881 at , per cent Mr. Sherman is only, after all, "the fly on The coach-wheel," which fancied he had "kicked up all the 4. It was whoUy due to this tendency to a plethora of -^'t«ni,*:|^^aj^iatfei,,^-^ 28o CURRENCY. acquired wealth that enabled England to fund her debt at 3 per cent ; and a time may come when it can be re- duced by the sale of terminable annuities, or otherwise, to 2 per cent. The rate in the public markets just now for loans on government securities, in London (May, 1879), 'S ^'5 ^"d 3 P^"^ ^^"'^- Consols may soon be at a premium ; and United States fours may go to 10 pre- mium under a long-continued distrust of other securities of a pe .nanent character. I have pointed out, however, that the main cause of crises is the discount of paper given for goods, and multiplied by resales for specula- tion. But the matter of accumulated capital is a prob- lem of vast proportions. If men cannot find fields for safe and paying investments, there will be a tendency to spend more, or, more correctly speaking, //lere will be a diminished motive to save, and an increased and stimu- lated over-consumption. 5. This brings us directly to the point demanding the attention of economists and public men, — What can be done to enlarge the sphere of profitable investments in permanent undertakings? We shall understand the breadth and length of the subject by asking a few ques- tions. First, Is there a limit to the productive enter- prises of the world? Second, Are we near that limit? To which I am ready to answer, there is a limit, with our present methods of conducting the industries of the people, though very far from being as yet reached. This is my answer to both these questions. Then comes the pertinent and really perplexing question. What can be done to improve our methods of production and dis- tribution," and provide an abundant field for investments of a permanent character, available and easily reached ? 6. I have now broached the greatest problem of mod- ern society, and the greatest ever considered by the econ- omist. The tendency to the accumulation of wealth in a I to fund her debt when it can be re- lities, or otherwise, c markets just now in London (May, lis may soon be at may go to lo pre- of other securities inted out, however, discount of paper esales for specula- . capital is a prob- inot find fields for II be a tendency to ing, there will be a creased and stimu- point demanding ; men, — What can )fitable investments lall understand the ■ asking a few ques- : productive enter- ire near that limit? ere is a limit, with he industries of the yet reached. This Then comes the ition. What can be reduction and dis- leld for investments ind easily reached ? it problem of mod- lidered by the econ- ation of wealth in a INDUSTRUL CRISES. -THE CONCLUSION. 281 few hands has often been considered before. This result of modem sooety has been regarded by many as set- ing a hmu on the equitable distribution of the results of labor and, m consequence, of the productive capacity of the people. It certainly must be acknowledged, tha^ the motive to mdividual effort is diminished when men aged by aws made almost wholly with the view of pro- mmmg the interests of those who have acquired in any way the control of vast properties, and especially of Z ;rnget"^^^'^°'^ Of distributing goods an'd .J^ 7. Paine proposed, a hundred years ago, to limit tiie accumulation of capital by taxation. VaWo s plans have been discussed ever since the days of Aristotle'who was Z f;'"^"' !^ ^^"'"'""nist. He advocated public tables! o be supplied at the public expense, where all migh uooTa ; "J'" •'"'"• ^' '' "°^ ^^ P"T^«- to erne upon a long disquisition on this subject, which is daily me hod of co-operation seems to be a success, and in " has gained an extensive footing in Great Britifn though little in the United States, 'it is as y t aS olsTa.rf^'""^";r'f ''''''' 'y legislatioVmtop ohes ,n all forms. The legislatures of States as well as of the Union have become the instruments to do the bid ding of those who control railways and conduct the chief manufactures of the entire country. In these bodies men are "bought and sold like sheep in the shambles." 8. The subject I am considering opens up the whole question of taxation, in which sounder and more equj! wh eT'^rr ^^^^^^^ saining ground in Great BritL. where the whole income of the state is derived from a few articles, and these mostly belonging to the class known :j •'"i«a^^^^KS33»a^' / 283 CURRENCY. as luxuries, and an income tax, which to the largest ex- tent falls on those enjoying the accumulations of past industries and such as have drawn the higher prizes of life, which is the most equitable method of taxation. 9. In the United States, there has not been force, knowledge, or virtue enough to reach even a stepping- stone towards an equitable system of taxation. Legisla- tion is more or less controlled by a system of " lobbyism," organized and backed by combinations of capitalists who find their advantage in protective duties and the issue of paper money. The Federal Government is deficient in the matter of leadership in Congress. Forty committees in the House of Representatives, and thirty in the Senate of the United States, whose presiding officers are appointed by barter and bargaining, divide the legislative duties, and are the judges of what measures are appropriate for Con- gress to pass. Thus, Congress has b?come a sort of "impossible body," as some eminent public man once characterized it. Those who administer the government are often without influence in the Legislature, in which they have no seats. It has become a system of cabals devoid of unity of purpose or action, and is totally at va- riance with any possible theory of parliamentary govern- ment. The members of both Houses concern themselves chiefly about the patronagvj to public offices ; and hence spend a large part of their tiiUC in " President making," as it is, no doubt, very propedy called, or in subsidizing out of the national treasury various industries. 10. The American system was, perhaps, well enough suited to a sparse or wide-spread population possessed of state administrations, when the whole did not exceed four millions. But now, with a population twelvefold that number, and a vast accumulation of wealth, it does not fulfil the ends of a free and still rapidly expanding people. The " spread-eagleism " and vague " stump oratory " of to the largest ex- imulations of past le higher prizes of d of taxation, s not been force, I even a stepping- taxation. Legisla- :em of " lobbyism," i of capitalists who iS and the issue of lent is deficient in Forty committees :hirty in the Senate ificers are appointed gislative duties, and jpropriate for Con- become a sort of I public man once ;ter the government egislature, in which a system of cabals ind is totally at va- ■rliamentary govern- concern themselves offices ; and hence President making," :d, or in subsidizing idustries. erhaps, well enough opulation possessed lole did not exceed ation twelvefold that ■ wealth, it does not lly expanding people. ■' stump oratory " of INDUSTRIAL CRISES.— THE CONCLUSION. 283 fifty or even twenty, years ago, begin to pall on the tastes of the people. Universal suffrage, as in France in the days of the second empire, has become the key to mo- nopolies. The conventions of parties form an imperium tn unpeno, md name the deputies they wish to have voted for at the elections by those who stand in the l.ght of constituents. These nominations are all but universally sold to those who can pay most in cash, or in promises of official positions. Even the presidency, as well as the senatorial honors, is in this way sold, like the Roman Empire at one period, to the highest bidder. Civil Service Reform, so successful in other constitutional coun- tries IS at this hour "a snare, a mockery, and a delusion" m the United States. Neither party has presented a well- d.gested measure in Congress, to settle definitively the manner of appointing competent men to fill the offices of federal or state administrations, which a President is vainly trying to introduce in one or two departments II. These considerations are pertinent to the subject I am discussing, because they are the stepping-stones to a more perfect system of industry, having its foundations laid wide and deep on those principles -hich are termed fundamental," or which are deduced fr. . the action of the natural laws. If we are ever going to erect a solid and durable industrial structure, we must begin at the bottom, and remove all the rottenness engendered by generations of class legislation and interference with the natural order of things, and with the tendency which every thing has to obey and become the subject of those natural Jaws, when let alone. 12. The duty of all well-organized governments is clearly to protect the weak against the strong, the en- croachments of the avaricious rich on the rights of the poorer millions. In that respect much has to be done both m Great Britain and her colonies, and more espe' 284 CURRENCY. cially in the United States. The methods of gathering up the small savings of industry by rich or professional speculators, for the purpose of carrying out costly under- takings whereby a few reap the " lion's share," are surely such as should be brought under state or national super- vision. The granting of franchises of an exclusive nature, or which, within certain territorial limits, are by the nature of things exclusive, — such as the right to use streets in cities for railway lines, or through the country, where competition cannot set a limit to charges for the use of railways, — has become an evil of vast proportions, and in the United States is steadily on the increase. These seem to be cases where some supervisory power, outside of the Legislature, like the courts of judicature, should be estab- lished. 13. Finally, the providing of more extended methods for absorbing the continually accumulating savings from labor and income of all kinds must be regarded as " a safety-valve " to industrial pursuits. It would be a most important gain to society if there could be some plan devised to effect this object in conformity with those laws of industry which free labor, or labor free from the bane- ful trammels of protection imposed by legislatures, always develops. It is to promote this end that I have written this work ; and I hope the labor and thought I have be- stowed on it may lead others to follow up the subject in all its branches, and aid in perfecting the economic edi- fice, so as to give to it the sanction of science and sound logic, in which it is as yet deficient. ithods of gathering rich or professional ig out costly under- 5 share," are surely e or national super- an exclusive nature. ts, are by the nature ht to use streets in the country, where rges for the use of proportions, and in :rease. These seem Dwer, outside of the ire, should be estab- extended methods ilating savings from be regarded as " a It would be a most ould be some plan mity with those laws free from the bane- f legislatures, always that I have written thought I have be- w up the subject in the economic edi- f science and sound NOTES. !• — Postulates 10-16. ind^sr^-^rrrrss?^rr^T^ power, of inconvertible /.^«/V.«./.rpaper ^n' st tf inverse ratio of its volume. If supply^s in exce s of 1 s.ngle,ssue department, like the Bank of F^anc 'it "s "r years' suspension, fws tyltt;itrfhat ir^'T value fh,,„, fluctuaLri^Sii; i ;:,ro;t" rulmg law of supply and demand. And in M-irch frU^ ;:::or''"'? ^^ contraction, both by the su^Sefof ^^ $40,000,000 of national bank circulation in the United States and of some $15,000,000 of legal-tender notes retired uS »8S i 'J ««SSfHSg^' 286 CURRENCY. I t! the so-called Resumption Act. Both kinds of paper money have risen to witliin three-fourths of one per cent of gold par. What effect the overvalued silver coinage, just now being set afloat, may have on the future value of paper money will require a little time to determine ; but it is as certain as that the earth revolves on its axis, if the Silver Law remains in force long enough to produce a circulation anywhere from $100,000,000 to $200,000,000, both silver and paper will fall to the level of the market value of the metal ; and further- more, if the paper inflationists succeed in getting out more paper, silver in its turn will be driven out of circulation, and will be at a premium, as measured by the paper standard. The laws of nature are immutable ; and there will then be three measures of value, and traders can take their choice. The Bank of France is now (March, 1878) in the seventh year of suspension, but its notes have been held at par with gold by the limitation placed on their issue. So also has the value of silver coin been, in like manner, maintained by the cessation of its coinage the moment depreciation set in. Every schoolboy ought to learn this self-evident fundamental principle : that every thing having market value is subject to the great governor of values. II. — Postulates 35, 3d. The distinction between the two kinds of capital, or trad- ing power, dealt in, in the loan market, is very obvious. As before stated, it is so clear that bankers and loan brokers might readily separate them in their accounts. A general statement of the proceeds of all bills discounted, which sup- ply the chief trading fund of a banker, separated from other deposits, would very accurately determine the comparative amounts of the two kinds. It may sound a little paradoxical to say so, but it is abso- lutely true, as a matter of fact, the borrowing customer of a banker is a lender to the banker of the value which he lends back again to the borrower. It is the check that does the work, — the check that very seldom is converted into actual money. In effect, the banker simply lends a man back his inds of paper money ane per cent of gold zr coinage, just now value of paper money )ut it is as certain as J Silver Law remains lation anywhere from ;r and paper will fall metal ; and further- in getting out more lit of circulation, and the paper standard, d there will then be ti take their choice. 1878) in the seventh )een held at par with sue. So also has the :r, maintained by the depreciation set in. -evident fundamental :et value is subject to 3& ids of capital, or trad- is very obvious. As >rs and loan brokers accounts. A general scounted, which sup- separated from other nine the comparative say so, but it is abso- owing customer of a value which he lends check that does the converted into actual :nds a man back his NOTES. 287 own ^property made Into trading power b means of the True it is, there is another class who lend to the banker balances of accumulated canitil ik„ , T '^^"'^^'^ nn,i „f • "UKiiea capital, — the savmgs of ndustrv an of mcome over outlay. -who au seldom borrower^: and the contributions of this class to a banker's stock of trades held by then, .1 >l,d, banker, lo meot proniptlv anv ".tr^dTrirr-'"" """""^ ""'^ -■' ---^ III. — Postulate 38. Inasmuch as the true and natural regulator of the rate of nterest, which is the price paid for the use of cap ta! is the law of supply and demand, all artificial methods ofCntrolI n^ such rate are clearly and fundamentally wrong, anc in ur S to the .ndustries of the people. In my chapters on t hiBank of England, I have pointed out the fact, that the pi^ctice of Sea tl" t ° "'""^ '•"' '°"^^'"« *^^ '^'^ -- i"«"fied, on tl^e plea that ,t was necessary to "act on the exchanges" in order to regulate the trade in bullion. I wish to mfke the case quite clear, as to the effect of the practice on The busi! ness aiifairs of the country. The rationale is, that the raisJne ^^^^.. Consequently it prevents the shipment of «// */„«i g<:^;:^;adr TH '""'■°"' ^"' "^"^ -ts'injuriously on tht Sows h?. ;, ^'^'^^•"O""'^ to logical demonstration, and shows the bad effects of the practice of the bank of med- dlmg with the natural regulator of the loan market This fundamental truth will become still more striking when we consider that the sales of goods create tl e S discounted in the loan market, where they constitut a p ponderating proportion of the trading power loaned. Tlfere can be no pretext set up that the trade in bullion, which the bank seeks to control. ,>, /« ««, ^espea whatever, different ■.. . '?-'^ absurdity. IV. -Chap. XI. The following excellent exposition of the erron: respect- ing the balance of trade is from the pen of a practical busi- ness man in New York, — Mr. Charles H. Marshall: — [From " The New York Herald," Jan. r>t 'S?*-] THE BALANCE OF TRADE. —AUSURDITV OF THE THEORY THAT WE ARE RICHER llECAUSE WE EXPORT MORE THAN WE IM- PORT. — AN ELUCIDATION BY CHARLES H. MARSHALL. To the Editor of the Herald. In the excellent report of the committte of bank officers, sub- mitted to the meeting at the Clearing-Mou'se, occurs a reference to the improving condition of the country ■is shown by the so-called "balance of trade," which is said to be at present in our favor instead of against us, as in previous years ; and the writer of the report would lead one to infer, thit, in his opinion, this is a de- sirable condition for a nation to occupy permanently in respect to its commercial transactions. Now, I have no disposition to criti- cise a document so faithfully and ably written as this report, and which it is hoped will produce the best results in averting the pas- sage of the silver swindle ; but it seems to me that this " balance of trade " theory is a delusion which c ..ghf to be dispelled, as facts show that what we are accustomed to call " a favor.xble balance " is in reality an unf.ivorable one, and that, instead of regarding the existence of the former as a subject of congratulation, it is in reality an indication of national poverty. ■Sis T^ ■^s- NOTRS. iny other commodity, the bullion trade by ikcrs, is wholly with- lie public. There is r. Seyd's plan of "es- item between bullion of the old " mercan- lal propriety, set up a ommodity that is the dealt in, in domestic the price of capital alues." The bullion 389 of the error>; respect- n of a practical busi- H. Marshall: — LI), av, 1878.] 3F THE THEORY THAT r MORE THAN WE lU- H. MARSHALL. ce of bank officers, sub- ie, occurs a reference to shown by the so-called It present in our favor ; and the writer of the Is opinion, this is a de- Ermanently in respect to no disposition to criti- tten as this report, and iults in averting the pas- o me that this " balance to be dispelled, as facts " a favor.xble balance " nstead of regarding the congratulation, it is in largely of the worlcR, w" lih c , ""T"' " "■^"'""' '^''ich draw .ho. what .vc wouU. c^ ; •; rrJS'J'LT" "»'r»-«eneral,y gle example will ,„fficc f,;' Th ''"" "^ "■»^'^- ^ »'"• exceeded her import, hv J,m ?Jl"'"^"^'l"^ ^'-•^^ "-'-" in a prosperous con.li.ion / F.r^f ^r",./ '" -^ "'- "-> er y and starvation were everywhere rif Th ""'T''' '"'- laborers averaged but six to L. i , , ^ "'■''«" "^ "'<= 'x^"' -anufacturing'distric Lt .see. c :: ;' T " '^"'^' '^""^ '" '"« e.n,.loyer and employed. fZ 8^ , ,« 1' """' °^"^"'"*'= l^""' Hrhain were largdyin exc „ 'e' ' rts l" """""^ °^ ^^"' excess fallen much below Z--.. ooo ""^ ," .'" "" >'=" ''»" ""'• specie), and in ,876 the „rf ^n.^ ^"/ "•""' "^ '^""'"" and (not estimating spJl „ 'S^^";" ^y-P-'^ "ver exports period of twenty vcars-.h."; '""' ''^54 to 1874-a .1.. » t.c„ a\,J , Xc" p,,b,i w I""""": ""' '" -si^nding herca;^^^ ^ ; ;;^^^^^^^^^^ or other, she does not seem to sS'it P "'" ' ^'' ^"'"^■'■"^^ within her borders; taxes havelZ V '/"''"'^'" ''as decreased torn duty on sugar wJchvLlwt^l"; '"''''''' '"°'''''^'y '''<= '^"«- which has been do e atv th to^jr;"^ "" •^""""'' ""^ steadily increased, her fleeis t"e : .^^^^^^^ ~'-e has by a purely revenue tariff, ^f.o go. ssI' "«»! «he raised last year, serious, after all ? '9.994.f>8j. Is her poverty so very trad"!":;::': :; ^Z::^:J""^ :?" *° -^^^ the ..ba,ance of intimesofpanirand^li^ralX r-th"/T ods of our greatest Drosnrrl.v , ^ ""'=''''"; while during the pcri- of trade" fas Cn:S^V.''\TT''''''r' ''' "''="-- sons of prosperity os^e Lv h ^'\ °";" «°«'«. we have in sca- «oid to. f'oreig'n co^u^ r"^. ^sTJZl """■ '"T ^^ '^-«= conditions were reversed, andwe had a • f '''''".:' °^ '^57. the *8.67..ooo. In 1862 it wa sT[,Trl "/^^orable " balance of t90 CURRENCY. $2,410,711,000. Will any one contend that this showing indicated poverty, while the present indicates wealth f I should hardly think so, if facts be consulted. But consider if it is not .-ibsolutcly eLsen- tial that a country which does a profitable business with other n.itious should show a "balance of tr.ide" agamst it? I, for in- st.xnce, ship 1,000 barrels of flour to liic Liverpool market, which cost me, say. $5,000. I expect to sell them at a profit ; and .is a matter of fact I do realize on my venture, say. $1,000. I thus have a sum amounting to /i,200, or thereabouts, the t..tai .csult oi my shipment. I buy with this sum /Ti.JOO of Minchcstcr cot- tons, which I import into the United .Slates. The custom-house returns show here an excess of imports over exports, on this one transaction, of $1,000. But am I poorer ? Am I not richer to the extent of this sum, and is not the country of which I am a citizen richer as well ? The late Mr. Horace Greeley used to consider that a Utopian prosporiiy consisted in a condition of society v-here uU should sell and none should buy. This is what " protection " in vain seeks to accomplish. But when Mr. Evarts „. id, on a late occasion, that, if we would sell to foreign nations, we must buy from them, he uttered a truth which annihilated the "balance of trade" theory at a blow. And I will add, that, if we sell at a profit to fore.gn nations, we must buy from them, as expressed in money values, more than we give ; else we aic trading at a loss. True it is that our present exports arc gradually liquidating our debts abroad; and, so far as we are doing this, we may congratulate ourselves : but we cannot point to it otherwise than a proof that we are not rich. When real prosperity comes to us, and our debts are can- celled, it will be found that we will return (as all should wish we may return) to a condition of tr.ide when, our capacity to consume being increased, we shall take largely of foreign products ; and i£ our imports then exceed our exports, according to custom-house valuation-, there will be nothing in this to create apprehension. On the contrary, it should inspire confidence and hope. I am, etc., CHARLES H. MARSHALL. rnfir^mmm^^^^^- at thi» showing indicated h } I should hardly think it is not absolutely es-scn- able business with other e " agamst it ? I, for in- Livcrpool market, which :m at a profit ; and as a , say, $1,000. I thus have bouts, the total icsuit of i,:oo of Mmchcstcr col- lates. The custom-house over exports, on this one ? Am I not richer to the ry of which I am a citizen J consid'jr that a Utopian ciety where all should sell rolcclion" in vain seeks to I, on a late occasion, that, must buy from them, he 'balance of trade" theory sell at a profit to foreign {pressed in money values, ; at a loss. True it is that lidaling our debts abroad; ay congratulate ourselves : m a proof that we are not us, and our debts are can- urn (as all should wish we n, our capacity to consume )f foreign products ; and if according to custom-house lis to create apprehension, lence and hope. VRLES H. MARSHALL. APPENDIX I. SIAIE TO ISSUK PAPKR MONEV. economist, wa.s pub) J«I „ "'""""■•^.r'' '^'"'""^"^ ^>ench in London, in ,874 on he Ir ^'"'^^'^'' ''^''"^' '•«^ !-«l England in .he mt.ter J i eff""" '""^>' "^ "^ '^^^^ ot ot capital by raiS ' d In ". '^ '"'^"'-^'^ ""^ Pnce ^«_4 I . ^ ""Sing and lowennc the "ntn" : . control the trade in bullion: ~ ' °^^^^ '» [ Translation.] •7 AVENUB DE ./rMPtRATMCE. Dear Sir _ t «...» , . ""' '"> *'"':'>. -872. .cuer of tlfe'^Cth ieTn bTr" 'r .t^ 'f^ '] T^'"^ -- tion which this letter meritl I IT " ''"•''y '■" ""^ «"^"- «he correct pn-nciples~,cien « i7n r' .°'''"'' ""' '"^"^^ °" to currency. Unfortunately mo" ^1' "' ""'"""y '" '■^'="i°n ciate these principle, an n^Treln ":'* '^""''^ °' ''^P^"- « the American 6ov;rm,uLd.-V"T'' ""■" "'"'" ^-t- war of secession, their^elJl^r elt" t^'h^'r ''""« '"» hundreds of millions If th» r *^* ''''*=" smaller by faint knowledgeof these nrfl ,""•"'"" °^ ^""" ^ad even I a dangerous amount f S^^';;;' T!' "°' '^^^ '•^^""' -<^h to visit the courts of Europ • " Go ''" " 'T' •"=•" ^^^"^ ^'-"^ wisdom the world is governed " ^ ''°"' "*"'' '" ""'' ''"^^ ""'e 391 -'■HS^s^aSsffiSiaaa^je^sst^ '*aW*a«Hi>;-f..,!y; 393 CURRENCY. have been waiting to find time to reply at some length. But I fear I may do wrong to defer longer, as this might lead you to believe that your communication is indifferent to me, when the contrary is the case. And, besides, why should I write you a long letter ? I have not to convert you, since on the whole we are of the same opinion. The fundamental principle on which you base your arguments [theory] is, that the power of issuing paper currency belongs to the state, and is one of the essential attributes of the state for the same reason as the coining of specie, or metallic money. This principle being conceded, the granting of the power, without com- pensation, to a company of private stockholders, is in the nature of a feudal monopoly. Perhaps, if it were sold to such companies for its value, and the proceeds paid into the national treasury for the benefit of the public at large, no grave inconvenience would result to the nation. (This is a delicate question to examine and determine.) But the giving it without .in equivalent is an unjusti- fiable sacrifice of public interests. In the years 1833 and 1844 this subject was under consideration in the British Parliament, and resulted in a remarkable exposition of principles, entirely in accordance with your ideas. The two most considerable personages who took part in these discussions were, first, in 1833, Lord Althorp, then Chancellor of the Ex- chequer in the Liberal ministry of Earl Grey; and in 1844, Sir Robert Peel, then First Lord of the Treasury. Lord Althorp, not having a clear idea of what was done afterwards, — the division of the Bank of England into two departments, the one for the issue of notes, and the other for banking, — and fearing the confound- ing of the two in the hands of the Government, became excessively cautious ; but he thought the profit of the issue should belong to the Government. Sir Robert Peel supported the same views in more diicided lan- guage in a passage of his speech in the House of Commons on the 6th of May, 1844. The reason which led the Parliament of Great Britain, in that year, to agree to the proposition of that statesman, and abandon the idea of reserving to the Government the benefit of the issue, administered directly by the Government itself, was the prejudice of the English nation for customs consecrated by time and tradition. He presses in this speech that sentiment in the following striking words : — " The true policy in this country is to work as far as possible with the instruments you have ready at hand ; to avail yourselves of the advantages which they possess from having been in use — ::.:»Mi ■J.^'jJ'^V^&E' iS£=SS^*^^iM%^^-;y.!. .r..- .- APPENDIX. Tth. But 1 fear you to believe 1 the contrary is long letter ? I re of the same your arguments ;ncy belongs to the state for the c money. This ;r, without corn- is in the nature such companies inal treasury for ivenience would to examine and :nt is an unjusti- ler consideration kable exposition ideas. The two hese discussions sllor of the Ex- and in 1844, Sir ord Althorp, not — the division of me for the issue ig the confound- came excessively should belong to lore diicided Ian- Commons on the liament of Great f that statesman, >ment the benefit nment itself, was s consecrated by that sentiment in is far as possible I avail yourselves ng been in use — 293 perfectly novel Ltrumenf '"^''^'y '^^^^ -nore smoothly than we disturb I Tiers esaW hTf °"''"' P"'^^"'""" « tical reason for the cha^e " ^'' ''' " ""'"^ ^°'"'' ^^^ P«- of ^:sdL::i°:;ti::.£r:::iTb^"'"^"'^^°^ "^^ ^-^-- guished consideration ' '' ^ ^'^ '"'' '° ^"^P' ""y ^istin- H. BowtBv Wa,.so., Es,.. Nhw Yokk. ^'^"'^^ CHEVALIER. The following is the passage in Sir Robert Peel's sceech -;"::Sar:S^'-Xr^-e„y the position. rr:^ecS^^s-^-- - .^^2;=^; They consider that he Stat Si ,^0"':: t!'""' f ^"'"='^''- iTt^isSv^;^™--^ lished a cont oil /;:;;;! rj ^.^^^^ '"-« -°"'d be estab- an equilibriu„, inVZlln^? "" """"' " ^" '^ P°-''''«. n. ■ [Translation.] - "7 Avenue db l'ImpAratricb. Dpap <5rD t . . Paris, June 17, 1876. my letters. I have delaved fr.m 1 ^^^^ '° '"««••» one of now, when I write „cu The dsHf mv . ^ '' ? *'='"' ^°"' '"^ in London. This 'would Z me tn Lh' I hall t ^f" T"' ^°" obliged if you will write „.e a few lit on fr^^^f thif ^^"'^ should derive the advantages and nrofitfv '' ""'" ^''"^'^ ueoats. This newspaper, being K'w.jSissssjirv -~-:i^-^.-i-^)rK^- ' 294 CURRENCY. highly esteemed, you will probably find in some of the Paris Clubs. The numbers in which these articles appeared were the 4th, nth, and i6th February, 2d March, and one in May, 1864. I do not recollect the exact date of the last, — it may be the 6th, 7th, or 8th. If you find them, 1 should like you to read the observations on banking generally. But the point on which I have mainly in- sisted is, that in future the right to make and issue bank notes payable to bearer should be reserved to the state ; that is, to who- ever directs the United States Government. I remain, dear sir, Faithfully yours, MICHEL CHEVALIER. H. BowLBV WiLLSON, Esq., 30 Montague Place, Russell Square, London. III. THE STATE ISSUE DEPARTMENT FOR INDIA. The following information respecting the introduction of paper money into India was kindly furnished the writer by direction of the Marquis of Salisbury, Chief Secretary for India, and will be interesting, especially to American readers : — India Office, S.W., 8ih April, 1876. Sir, — I am directed by the Secretary of State for India, in council, to acknowledge the receipt of your letter, dated 24th March last, requesting infonnation regarding the metallic and paper circulation in India, for publication in a work you are preparing on this subject with reference to th2 principal commercial countries of the world ; and I have now to reply to your questions in the order in which they appear: — 1. The denominations of silver coins in India will be found on reference to sect. 6 of the accompanying Act relating to Indian coinage, with which I am directed to furnish you. 2. The total amount of silver coined and issued during the last twenty years (1856 to 1874-5 inclusive) is stated to have been ;f 142,190,605 ; but there is no means of stating the amount in cir- culation in India. 3. The amount of paper circulation in India, as it stood on the 1st January, 1876, was, rupees, 112,158,630 (about ;f 11,110,000). The denomination of notes so circulated .ere for 5, 10, 20, 50, ioo> 5no, 1,000, and 10,000 rupees, each. ;;,;.; ;#.fli,s5y?^>B : the Paris Clubs. ;re the 4th, nth, , 1864. I do not I the 6th, 7th, or the observations [ have mainly in- issue bank notes ; that is, to who- CHEVALIER. APPENDIX. '95 INDIA. he introduction ished the writer Chief Secretary ly to American v., 8th April, 1876. tate for India, in letter, dated 24th metallic and paper I are preparing on lercial countries of tions in the order > will be found on relating to Indian ;d during the last ted to have been the amount in cir- as it stood on the )out ;f II, 110,000). r 5, 10, 20, 50, 100, 4- These notes circulate, not only in towns, but commonly throughout India; and, though at first not generally understood, appear now to be highly appreciated by the people. 5. This question (which related to the economizing of metal by the issue of one or two lower denominations of notes so as to meet the wants of the vast number of small dealers and laborers) is clearly a matter of conjecture, and the Secretary of State must decline to express an opinion on the subject. 6. Gold is not a legal tender in India; but you will find at sect. 4 of the Act which accompanies this letter, the denominations which may legally be coined. It can, however, be considered in the light of bullion only, and fluctuates as such. The coinage (gold) is very limited in India, amounting to £1,178,363 during the years 1855 to 1873-4 inclusive. I am instructed by Lord Salisbury, to add in conclusion, that information is being collected by the Committee of the House of Commons appointed to consider the important qusstion of the present depreciation of silver, which will be accessible to the public on the issue of their report. I am, sir, your obedient servant, H. BowLBv WaLsoN.E*,. GEORGE HAMILTON. IV. The Act referred to in the above letter of Lord George Hamilton, Under Secretary of State for India, went into force m 1861 ; and below will be found tables showing the denominations of notes issued, and their value in sterling and the progress and fluctuations in the volume of notes DENOMINATIONS OF NOTES. 10.000 rupees, or £ 1,000 sterling. 1,000 (1 (( 100 « 500 tt tt SO u 100 it tt 10 9i 1868 . . . . 9.069.569 VIEWS OF GENERAL SPINNER, LATE UNITED STATES TREASURER, ON PAPER MONEY. Trkasury of the United States, Washington, Feb. 8, 1873. Dear Sir, — Your letter of the 6th inst. has been received. It is of little consequence, in a practical point of view, whether paper money can be accepted as money in a scientific point of view, or not. It seems to be settled now that it answers, under certain conditions, all the purposes as a circulating medium for which a metallic currency is used in our country. This is an accepted fact, whether it can be demonstrated on scientific principles or not. It will therefore be necessary to accept the fact that paper money can be used as money. That there can be too much, as well as too little, money is true to a degree, even with an exclusively metallic currency. I have been drifting to th. opinion, that, inasmuch as more cir- culation is required in most industrial and commercial communities at certain seasons of the year than at other times, the question is, how to give the currency such an elastic quality that it will adjust and accommodate itself to the real business wants of a community at all seasons and limes. Against preconceived opinions, I have come to the conclusion, that, of all the devices that have as yet been proposed, the one to authorize a limited amount of United States stocks, bearing an J^ISli ..^i i MWjri ML )tes went into the following L:h, shows the :n from " The /9.9S9.296 10,470,883 »o,437.29» i3.«67.9«7 12,864,037 ii,i4S.>9i TES TREASURER, IE United States, N, Feb. 8, 1873. 5en received, of view, whether Ific point of view, irs, under certain lium for which a an accepted fact, :iplcs or not. It hat paper money tie, money is true rency. nuch as more cir- rcial communities s, the question is, that it will adjust :s of a community to the conclusion, oposed, the one to itocks, bearing an APPENDIX. 297 interest of 365 percent per annum, that would be exchan<;cable or ega ..ender notes, and redeemable with Icgal-tender noteT aU ^mes. at the opt,„„ „f the holder of cither, these securities wou d more nearly satisfy the desired object than any other plan. I men- .on 3.6s as the n.te of interest, because this L is jL one ceT, a day on one hundred dollars, and would be easily computed • be! SKles be,ng too low for a permanent investment, and high enough to attract temporary ■nvestments when money is abundant. I hope you will publish your well-digested opinions. The ques- unt s finally settled. The views of all thinkers on the subject houlc be drawn out. so that those whose business it will be to settle the question may have the opportunity to examine, compare, and d,gest hem. In this way they will more surely arrive ar cor! rect conclusions. Very respectfully yours, H. B. WiLLSON. £«,., New York. ^' ^' SPINNER. « V VI. Treasury OF THE United States, Washington, May 17, 1874. Dear Sir, - Your letter of the 15th inst. has been received. I also received, several days since, your instructive pamphlet on The Money Question; " and I read it with much satisfaction. Your criticisms on my plan to prevent , . annual alternate superabundance, and, after, painful stringency, in the money marts of the country, is made in a manner so frank and fair that I have no reason to find fault with it or with you. With you I agree "in the propriety of preserving. the green- backs, and abolishing the bank paper money." But this is now impracticable. The banks are strong enough to rule both the Government and the people. The whole tendency of things is altogether in the other direction clTt Sir ''°"''' ^^'^ '" '*"'' '"' ^"''' "'°'' ""'^^ '^'"^ ''''^ "^• The policy now is, to increase the number of banks and their circulation and to restrict the treasury issues. So natters will have to drift for a while longer. lJ.r'^°f m''J^k''",'"^.^^"''''"S'°" newspaper would publish the letter of M. Chevalier.' oubliTM rlT/T". ''''" '°."'; "•■""' °f ""= '"*"S Journal, of New York to pubUih M. Chevalier .v.ew..„ favor of .he ngh, of .he nation .0 issue and po.«« 1 -•iik journals have long closed their columns against the arguments of even the most eminent economuU who advocata a State issue of paper money. •xtensive circula- SPINNER, 'reas. of the U, S, AP. ^,iS[DIX II. > see his fears "rule both the i States on the lolly dissipated, t the advocates ing united, and ilued nearly ten f)ublic sentiment uirency. There people are satis- payable in gold, I to its own level are got in circti- se notable illus- )g that lost the it in the stream, e of the water. the money ques- 1 for transferring lation, are repro- London, in 1874, and also by Gen. in this Appendix. President Grant, e President, then udden conversion have long closed their :conomUu who advocate VIEWS OF EMINENT AMERICAN STATESMEN AND ECONOMISTS OF PAST GENERATIONS ON THE RIGHTS OF THE NATION TO ISSUE PAPER MONEY, AND POSSESS ITS PROFITS. I. Mr. Jefferson's Views. ' The views of Mr. Jefferson are all the more valuable, in- asmuch as he took a prominent part in framing the Consti- tution of the United States. In vol. vi. of his "Letters to Mr. Eppes," Mr. Jefferson J^Kn'^Y"'"'.'""'''^^"''"^ "'^«''' C°"fi^«««. tl^e States is- sued b. Is without interest and without t.-ixes. They occupied the channels of circulation very freely, till those channels were over- flowed by an excess beyond all calls of circulation. But though we have so improvidently suffered the field of circulating medium to be filched from us by private individuals, yet I think we may re- gain It At p. 140 he expresses himself very decidedly : — "Bank paper must be suppressed, and the circulation restored to the nation, to whom it belongs." Mr. Jefferson, in using the words, "the States issued bills, etc., meant the "Congress of the States," and not individual States. The last quoted paragraph is perfectly explicit m saying, "the circulation" must be "restored to the nation." His idea was, that " Treasury bills bottomed on taxes, bearing or not bearing interest, as may be found neces- sary, thrown into circulation, will take the place of so much gold and silver, which last, when crowded, will find an efHux m other countries, and thus keep the quantify of medium at Its salutary level." 299 I ^ ^^^^^^'S^?*¥*'^^--KB^SKS;a^^.f?-.^S&^^t3 300 CURRENCY. At p. 199 he says of this government paper money,— " If their credit falter" (that is, the national notes), " open pub- lic loans, of which the bills alone shall be received as specie. Let banks continue, if they please ; but let them discount for cash alone in every other country on earth, except Great Britain and her too often unfortunate copyist, the United States." 2. Mr, Calhoun's Views are well expressed in the following extracts from several of his speeches. It is proper to explain that Mr. Calhoun was chairman of a select com.nittee of the House of Repre- sentatives which reported the first bill for incorporating the Bank of the United States during the session of 181 6, when the paper currency was in a very unsatisfactory condition. He favored the plan of a national bank then, as he many times afterwards explained, not because he considered it the best method of supplying " a sound paper currency of uniform value throughout the Union," but because at the time " it was the only one that was possible " to get through Congress. His speech in support of this bill, delivered Feb. 26, 1816, is a very excellent exposition of the true prin- ciples of monetary science ; and he strongly insisted on the necessity of making paper money convertible, under all circumstances, into metallic money, and, at the same time, graphically pointed out the evils of a depreciated and fluc- tuating "medium of exchange." At p. 157, vol. ii. of his works, he says, — " We have in lieu of gold and silver a paper medium, une- qually, but generally, depreciated, which affects the trade and industry of the country ; which paralyzes the national arm ; which sullies the faith, both public and private, of the United States, — a medium no longer resting on gold and silver as its basis." He mentions the significant fact that the banks and bank- ing capital had increased from the one State bank of " North America," at the period when the Constitution was framed, with its 1400,000 of capital, to 260 similar banks, with a gross capital of $80,000,000, and a circulation of about a like amount, when there was barely $15,000,000 of specie in the money, — :s), " open pub- as specie. Let icount for cash eat Britain and om several of . Calhoun was jse of Repre- orporating the of 1816, when tory condition. 1, as he many considered it er currency of lecause at the to get through bill, delivered E the true prin- nsistcd on the ble, under all he same time, iated and flue- vol. ii. of his r medium, une- the trade and nal arm ; which lited States, — a basis." inks and bank- ank of " North )n was framed, banks, with a of about a like i specie in the API'KNUIX. |0| country, and the bulk of that held on governmpnt account. It seems a pity that Mr. Calhoun, with such clear percep- tions of sound principles, felt compelled to yield to expedi- ency. Mr. Webster, then a member of the House of Repre- sentatives, strenuously opposed the bill reported by Mr. Calhoun, which, eighteen years later, he moved to extend, when the Act was about to expire by effluxion of time Hy this time (rS34) the two lile-long opponents h.id chan-ed positions on this measure; and we find Mr. Calhoun .ind Mr. Webster face to face in the Senate of the United States, the former arguing against the Webster bill for the extension of the bank charter. I will quote one illustration given by Mr. Calhoun of the scientific principles of paper money, as applicable to the discussions of the present day as it was then. "If," said Mr. Calhoun, "we take the aggregate property of a community, that which forms fie currency constitutes in value a very small proportion of the whole. What this proportion is in our country, and other commercial and trading communities, is somewhat uncertain. I speak con- jecturally in fixing it at one to twenty-five or thirty, though I presume this is not far from the truth ; and yet this very small proportion of tue property of the community regulates the value of all the rest, and forms the medium of circula- tion by which all its exchanges are effected." This was a pretty good^^ww at the amount of money of all kinds used in comparison with the gross amount of capital, or tradin"- power, actually employed in conducting the industries of the people, which we now know from actual analysis {vide postulate 32). In a subsequent speech (1838) he raises his estimate to thirty to thirty-five per cent. This proi^ortion has no doubt materially diminished since 1834, when Mr. Calhoun made his speech, caused by the more rapid transit and distribution of the products of labor, and the improved methods of banking and clearing houses. I quote another example given by Mr. Calhoun, at p. 347 of the same vol- ume, as illustrative of the principles of money. "If we turn our attention," he says, "to the laws which iif^**a2aWiaF**^?!:5I±^ ^--.-^^t^.STKCTS'^i^fe^E^fci L'URRF.NCY. govern the circulation, wc shall find one of the most impo^ tant to be, that, as tiie circulation is (kcreaserl or increased, the rest of the property will, all other circumstances rcmaln- ini? the same, he dccrciscil or incrcised in value exactly in the sanu ijroportion. To illustrate: if a community have an aKKrejjate amount of property of $31,000,000, of which $1,000,000 constitutes its currency, and that 51,000,000 should he reduced one-tenth part, that is to say, $100,000, the value of the rest will be reduced in like manner, one- tenth part, that is, $3,000,000." In other words, '-the trading power of ci-rrency is in the inverse ratio of its volume, all other things being equal " {vide postulate 4). If the volume of money be increased, its trading power diminishes; and the prices of commodities and labor will appear to have risen. If, from any cause, the volume is diminished, the price of goods and labor will appear to have (alien. All those who quote Mr. Calhoun's arguments in favor of a national issue of paper money, — which are sound and unanswerable, — and attempt to apply them in support of ar. inconvertible paper currency, will do well to give heed to what he said on that subject. Here it is: — • "With these convictions, and entertaining a deep conviction that an unfixed, unstahU, and fiuctmitiiig currency is to be ranked among the most fruitful sources of " whether viewed politically or .1 reference to the business trans.actions of the country, I can- not give my consent to any measure that does not place the cur- rency on a sound foundation." This speech of 1834 discloses the fact that the banks had increased, from 260, in 1816, with a capital of about $80,000,000, to 450, in eighteen years, with a gross capital of $145,000,000, and a corresponding increase of circulation, but no increase of metal behind the notes, and nearly all of which was then held by the Bank of the United States. In another speech, vol. iii. p. m, referring to the state of things at the close of the war with Great Britain, he re- marks, — " Specie payments were coerced, with us, by the establishment Tiost impor- r increased, CCS rcmaln- e exactly in nunity have )0, (if wliicii 5 1 ,000,000 y, $100,000, nanncr, onc- icy is in the equal " {vide icrcased, its commodities ly cause, the (1 labor will ints in favor e sound and 1 support of to give heed icp conviction to be ranked wed politically country, I can- place the cur- It the banks lital of about gross capital of circulation, 1 nearly all o£ d States. ; to the state Britain, he re- : establishment AI'PKNDIX. i^i of tlic Hank of the United States, and a few yearn afterwards in Great Uriiain by an Act of Parliament. In both countries the restoralioii was fi)ll(jwetl by wide-spread distress, as it always niuat be when effected by coertii.n ; for the slnijilc reason ihat banks cannot pay unless their debtors fir.st pay, and tliat to coerce the banks compels them to coerce their debtors before they have the means to pay. Their failure nnist be the consequence ; and thi* Involves the failure of the banks tliemselvcs, carryiiiK W'd> "t uni- versal distress. //,•,/,»■ / am o/>/r ,ix A-r ant dacoun, for the .:^en,ment credit Mended uj that of the 6..n: rohen the superior credit of the Oovernment could be fur- fnshcd separately without disco.-nt, to :u mutual advanta,', of the Go^'trnmtnt and the community f " '^ •' 3- Views and Opinions of Daniel , :bster, Mr. Webster'., utterances on the ri^ . - l the nation to s.tuep.-ipcr currency are p.irticularly notv-worthy, as - mine from Amenca's greatest .states, ,.u. . .d h„vyer, and f. a the circumstance U,at he belonged o an ^ppo.site school of poii- t.u.-ins from that of Messrs. Jefferson .and Calhoun. The point of difference between the two schools of his time on be currency rel.ated to the question of the right of Congress to make treasury notes ^^ legaltenderr to which he took ex- ceptions. In his speech on "The .Spec. .• Circular" issued by Presi- dent J.-ickson'8 government, delivered Dec. 21, ,8.6 fsee h's " Speeches," vol. iv. p. 271), he says, - ^ ^ "Most unquestionably there is no legal tender; and there can be no legal tender in this country under the authority of this Gov" ernment or any other, but gold and silver, either the coinage of our own mints, or foreign coins at rates regulated by Congress Thjs ,s a constitu,: v.! principle, perfectly plain, and of the ery highest importa,,.. : he .States are expressly prohibited fro n making any thing but gold and silve. a tender in p.-:vment of deb^ a.d although no such express prohibition is applied to Coi gre s' yet as Congress nas no power granted to it in tL respect, ifut to com money .,rj regulate the value of foreign coins, it clelrly has ZT'" : ?'?t'"''^ '"""■ °^ "^y """« <-•'- '^»' -i". »» a tend in payment of debts and in discharge of contracts." On the other hand, Mr. Webster insisted with great force Imr'M"',''""^''"' ^° '^-^"^ treasury notes, and make them legal tender in payment of all national taxes. Whether V ifc's. M' ^! 306 CURRENCY. equally logical reasoners may not think that Mr. Webster did not, after all, do a little iiair-splitting for party ends, in drawing this nice distinction between making national notes legal tender for debts due the nation, and denying the right of^Congress to extend that quality in dealings between man and man, is a question open for consideration. But if the notes issued by the nation a* jaranteed convertibility into legal-tender coin, and are noc .egal tender as between the Government and the public, it is of no real consequence whether they can or can not be made by Congress legal tender in payment of debts generally. He says in the same speech, — " But when Congress lays duties and taxes, or disposes of the public lands, it may direct payment to be made in whatever medium it pleases. The power to lay taxes includes the power of deciding how they shall be paid; and the power granted by the Constitution to dispose of the territory belonging to the United States carries with it, of course, the power of fixing, not only the price and the conditions and time of payment, but also the medium of payment." At p. 281 (same vol.), he says, — " I admit that a currency composed partly of bank notes has always a liability, and often a tendency, to excess, and that it re- quires the constant care and oversight of government. " I am of the opinion that even convertibility of bank notes into gold and silver, although it be a necessary guard, is not an absolute security against occasional excess of paper issues." The following extract (p. 284) shows that Mr. Webster was not always careful to distinguish between money, the tool and measure of values, and capital, of which it is only an insignificant part: — " With great general prosperity, good crops generally speaking, an abundance of the precious metals, and a favorable state of the foreign exchanges, men of business have yet felt for some months an unprecedented scarcity of money." Most clearly Mr. Webster meant that capital, or loans, were then scarce, otherwise his language is nonsense. Only a few months later the great financial and business collapse look place, followed by the long-continuing crises lasting •*% APPENDIX. 307 Mr. Webster party ends, in tational notes 'ing the right between man I. But if the /ertibility into ( between the consequence bngress legal •s in the same disposes of the hatever medium wer of deciding the Constitution i States carries 2 price and the im of payment." bank notes has , and that it re- snt. ' bank notes into i not an absolute t Mr. Webster :en money, the hich it is only nerally speaking, able state of the for some months ipital, or loans, onsense. Only isiness collapse I crises lasting over five years. The fatal year 1837 was then "casting its shadows before it ; " and the time was near, when, as Dickens expressed it, "there was no money, absolutely no money" Then It was the nation should have stepped boldly in, and issued currency notes in moderate amounts, to fill the place of the exploded and trashy bank issues. Mr. Webster pointed out that the Government, having a surplus revenue, had locked up all the specie in its various depositories. What the Government could have done, was to have suspended the collection of taxes, which would have been an immense relief to the commerce and industries of the country, and issued paper money convertible on demand for all its requirements Thus the opportunity would have been given to set such money afloat. But it might have done more. It mi-ht have undertaken some large public improvements, -such^as canals, railways, just then coming prominently into vogue or even common "post roads," -and thus to have got out $100,000,000 of paper n.oney to in part recoup the 5140,000 of those beautifully engraved, but valueless, notes of exploded banks. It will be borne in mind, that there was at this time a large accumulation of public funds, and the question had been what to do with it. But let me quote Mr. Webster's reasons for the condition of things he describes : — "The agricultural State of Indiana, for example " (p. 285) "is full of specie: the highly con.mercial State of Massachuset'ts is nearly drained. In the mean time the money in Indiana cannot be used. It is waiting for the new year. The moment the Tre.-isury grasp IS let loose from it, it will tend again to the great centres of business; that is to say, the restoration of the natural state of things will begin to correct the evil of arbitrary and artificial financial arrangements." Mr. Webster did not clearly perceive that the great finan- cial operations of the world were no longer carried on with either metallic or paper money, however important a rdle they have to perform, but by bills and other securities given m payment of goods, which are turned by bankers into trad- ing power. He did, however, great justice to his knowledge of the fundamental principles of monetary science, when 308 CURRENCY. he laid down in liis speecli delivered in tlie United Statea Senate on the 28th September, 1837, four months after the great crisis had set in, the following broad proposition, which 1 have set down amongst the postulates (34) : — " It is the constitutional duty of Government to see that a proper currency, suitable to the circumstances of the times and the wants of trade and business, as well as to the payment of the debts due to the Government, be maintained and preserved, — a 9^rrency of general credit, and capable of aiding the operations, so far as these operations may be conducted by means of the circulating medium ; and that these are duties, therefore, devolving on Congress in rela- tion to currency beyond the mere regulation of the gold and silver coins." The Italics in this proposition are mine, as the language is very expressive and explicit. All other Italicized passages are Mr. Webster's own. In another sentence he says,— " I admit at once, that, if the currency is not to be preserved by the Government of the United States, I know not how it is to be guarded against constantly occurring disorders and derangements.'.' Again he says, — " I wish it to be observed, that I am now contending only for the general principle, and not insisting on the constitutionality or expediency of any particular means or any particular agent." In support of his views, Mr. Webster refers to President Madison's recommendation to Congress, in his message of Dec. S, 1 815, to issue treasury notes. I therefore quote what Mr. Madison then said: — 4. Views of Mr. Madison on the Right of the Nation to issue Paper Money. " The absence of the precious metals will, it is believed, be a temporary evil ; but, until they can again be rendered as a general medium of exchange, it devolves on the wisdom of Congress to provide a substitute, which shall equally engage the confidence, and accommodate the wants, of the citizens throughout the Union. If the operations of the state banks cannot produce this result, the probable operations of a national bank will merit consideration ; and, if neither of these expedients be deemed effectual, it may be ^pps!' the United Stated • months after the broad proposition, lates (34) = — it to see that a proper times and the wants ;nt of the debts due ved, — a ^ijrrency of itions, so far as these circulating medium ; on Congress in rela- f the gold and silver le, as the language Italicized passages tence he says, — ot to be preserved by V not how it is to be s and derangements.'.' w contending only for le constitutionality or irticular agent." refers to President , in his message of herefore quote what 1/ of the Nation to 11, it is believed, be a rendered as a general isdom of Congress to ngage the confidence, throughout the Union. )roduce this result, the il merit consideration; ed effectual, it may be APPENDIX. 309 necessary to ascertain the terms upon which the notes of the Gov- ernment (no longer required as an instrument of credit) shall be issued on motives of general policy, or as a common medium of circulation." On this express recognition by President Madison, Mr. Webster remarks, — " Here, sir, is the express recommendation to Congress to pro- vide a NATIONAL CURRENCY " (thcse words are emphasized by Mr. Webster himself), " a paper currency, a uniform currency, for the use of the community, as a substitute for the precious metals, and as a medium of exchange." At p. 350 Mr. Webster spoke almost prophetically of the times in which we live. He says, " I was beside the Ohio River on a journey, when I heard of the suspension of the banks, and had occasion frequently to express the opinion I am now maintaining ; " — " That a new era had commenced ; that a question of principle, and a question of the highest importance, had arisen, or would immediately arise ; that hereafter the dispute would not be so much about means as about ends; that the extent of the constitutional obligations of the Government would be controverted ; in short, that the question whether it -was the duty of Congress to concern itself with the national currency MUST INEVITABLY BECOME THE LEAD- ING OBJECT OF THE TIMES." The last words were emphasized by Mr. Webster himself, and the " times " he referred to seem to have arrived. The apprehension of the author is, that the inflationists may ruin the efforts of those who desire to have the currency question settled on a sound and durable basis. The pro-bank parti- sans are using it to great advantage to frighten men of property — the great mass of whom are either interested in banks or ignorant of the principles of money — into exert- ing their influence against a national paper circulation. tIL >%[IS!U Statistics of the United States (Hand-Hook o[). A record of the Administrations and Events from the organization of the United States Government to the present time. Comprising brief biographical data of the Presidents, Cabinet Officers, the Signers of the Declaration of Independence, and Members of the Continental Congress ; Statements of Fmances under each Administration, and other valuable material. i2mo, cloth I oo "The book is of so comprehensive a character and so compact a form that it is especially valuable t-) the journalist or student."— A^. K. IVorid. What is Free Trade ? An adaptation for the American reader of Bastiat's " Sophismes Economiques." 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