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THE DEPRECIATION If •r TM PAPER CURBENCY OF GREAT BRITAIN, ''PROVED.'^ ■i-y^ '■%' EDINBURGH: Pmttdbpjikx,Smettie. • ••.*• •/ • • • . • . •• • ^TlAs ■r • ■^ ^'v L 19 10-. • •• [, >^7^:r REMARKS, t&c. To the first part of the pamphlet, respecting the standard value of our circulating medium, 1 have no objection to make, being satisfied that the value of that medium, whether consisting of specie or paper, bears reference to, 'and is founded upon, the intrinsic value of our coin as bullion j and being, as much as his Lordship, an enemy to the new- tangled doctrine of abstract currencies. But it will be obvious in the sequel, that this concession can have no effect whatever in aiding the course of argument pursued by his Lordship in the after-part of his pamphlet. The principal illustrations of Lord Lauderdale's and the Bullion Committee's theory of a deprecia- tion of our currency, in thivS pamphlet, are derived, Ij/, From the example of all governments who have issued paper money, and, more particularly, the conduct of the North American States previ- ously to the revolution which established their in- depehdence, and also during their struggle with the mother country, by means of which their in- A -.'^^•^H^'j « I dependence was secured, and the case of the aa- signats issued by the French National Convention. ^i^/y, From the supposed parallel situation and conduct of the Bank of England during the two lirst years after its original establishment in the year 1()94; and, lW//, From the conduct of the two public banks in Scotland in the year 17()'2. As to the first. In all cases where paper money is issued by go- vernments, and declared a legal tender of payment, it is evident that the community can have no se- curity whatever against such issues being carried to excesii. The extent of them does not depend on the demand of the community for the circulating medium, (in which case no more would be called for, or could possibly be kept in circulation, than the circulation could easily absorb), but on the ne- cessities of the states by whom liiey are issued. In all such cases, therefore, the circulation might speedily be overstocked with this paper money ; and as it bore no interest, every person holding it would be desirous of getting rid of it as speedily as possible ; and, rather than keep it without any pro- spect of its payment for a course of years, would be willing to sell it at a discount. This discount, according to the circumstances of the case, and extent of the issues, might amount to .50 or 1 00 per cent. ; and it is evident that the price of foreign bills of exchange, when computed in such degraded currency, would undergo the same nominal rise as the prices of all sorts of com- modities when paid for in it. This was precisely the case with the paper mo- ney issued by the North American States before the revolution. The paper currency of North America, says Dr « (C (( (( « (C <( it (( «( <( (( cc (< 4( i^- m. Adam Smith, (Book II. Chap. II.) " consisted, " not in bank notes payable to the bearer on de- " mand, but in a government paper, of which the " payment was not exigible till several years after " it was issued. And though the colony govern- " ments paid no interest to the holders of this paper, they declared it to be, and in fact ren- dered it, a legal tender of payments for the full " value for which it was issued. But, allowing *' the colony security to be perfectly good, a hun- dred pounds payable fifteen years hence, for ex- ample, in a country where interest is at () per cent, is worth little more than forty pounds ready money. To oblige a creditor, therefore, to ac- cept of this as full payment for a debt of a hun- dred pounds, actually paid down in ready money, was an act of such violent injustice as has scarce perhaps been attempted by the government of any other country which pretended to be free.** The cases of the paper dollars of the American Congress, and the assignats of the French Conven- tion, must be fresh in the recollection of many per- sons ; and it would be a mere waste of time and words to set about proving that these are totally dissimilar to that of the present issues of the Bank of England. The Bank of England, though the greatest bank of circulation in the world, is in fact a bank of de- posit, and issues no notes whatever, b.ii on the security of real property of some kind or other. It does not require, indeed, the actual deposit of that property \ but the Directors take care to be satis- fied .nat the person obtaining their notes in ex- change for his bill, is actually possessed of such property, which is thus virtually pledged for the repayment of the notes. In this way, it is evident that the bank affords a much greater aid to the in- C( C( (C 4( (( ank, on ; till, in d by the 1 of the rer could nplished, currency, d in less :es allud- ed to the S,— these nstances ; ,wn from ihip's ar- I It ig matter of historical fact, the most incontro- vertible, that the silver coin of this country, about the time of the establishment of the bank, in the year lCy4, was in the state of the greatest degra- dation in which it had ever been from the days of Ouecn Klizabeth ; and that chiefly from the frau- dulent practice then prevalent of clipping it, in so much, that the standard guinea then passed cur- rently for '2j8. to 30s. ; and as silver, not gold, was then the subject of legal tender in payments, it followed as matter of course, that the foreign ex- changes should fall in proportion to the degraded state of the silver coin. But this fall in the ex- change had taken place before the bank's esta- blishment ; and by none of the writers of those days was it attributed to any other cause than the degradation of the silver coin. And, accordingly, no sooner was the base coin called in, and the sil- ver coinage reformed, than the exchange returned to its usual par, in the course of the years }6i)li and J 697. Previous to the establishment of the bank, a kind of government paper, cal4ed Tallies, charged on different branches of the revenue, had been is- sued by the public. These tallies, being payable in the debased silver currency of the time, must, of course, have been subject to the same depreckition with it ; and, ac- cordingly, the depreciation of the tallies fully kept pace, and was in fact measured by, the deprecia- tion of the silver currency. The depression of the exchange with foreign countries had in like manner kept pace with the degradation of the coin ; and, as stated by Dr Smithy on the authority of Mr Lowndes, in the year l6i)6, reached the same point of depression of Q6 per cent. But surely there is not the slightest ground G T for concluding, with Lord Lauderdale, that eithei* the depreciation of the silver currency, or the fall in the exchange, was the consequence of an exceusive circulation, produced by the issues of the govern- ment tallies. On the contrary, this degradation had taken place before any tallies were issued. Dr Smith explicitly states, that it *" n^d begun in the " reign of Charles IL and had gone on continually ** increasing till the year l6yA, at which time,) as ** we may learn from Mr Lowndes, the current *' silver coin was, at an average, near *25 per cent. ** below its standard value." Let us next attend to the consequences of the establishment of the bank, and the extension of its paper circulation, at that critical period. yVccord« ing to the doctrine of Lord Lauderdale and the Bullion Committee, it ought to have aggravated the depreciation of our currency, and the depression of the foreign exchange, by increasing the quantity of circulating medium. But so far from this being the case, according to the very authorities quoted in his pamphlet, the bank notes bore a premium against the degraded currency ; and in consequence of the government tallies and foreign bills of ex- change being now paid in bank notes, the former (in the words of Lord Lauderdale's authority) *' were soon brought by the bank to par ; while '* the discount on the latter was reduced to 3 per " cent." It is no doubt true, that afterwards (on the silver coin being reformed) the bank paper itself fell to a discount ; but, while the bank paper fell to a dis- count, the foreign exchanges rose fully to par ; and both from the very i>aaie cause, the reformation of the coin to its genuine standard. While the coin was degraded, people preferred bank notes to silver -, and thus the bank's issues tc (( (( (( (( (( (( (( cc li cc n i( ,r '..«..'. were drawn out to a greater extent than was con- sistent with a due regard to its own safety : but now that the coin was reformed, fhe bank was obliged to pay in coin of standard weight ; and such was the reflux of its notes, that it was unable to retire them, and forced to lay its payments un- der temporary restrictions ; and its notes upon this fell to a discount ; not surely from any excess in the circulation, for the putting silver in their place would not have much effect in reducing it, but from ;i doubt of the bank's solvency, or from discredit ; which, in the infancy of such an esta- blishment, is not to be wondered at. Thus, says Dr Smith, ** during the great recoinage of the sil- *' ver which was going at this time (16*96), the " bank hud thought proper to discontinue the pay- " ment of its notes, which necessarily occasioned *' their discredit." Thus, also, Anderson, in his History of Commerce, states, tiiat " the bad state of the silver coin, more " especially In the years 16".93 and I6y(>, and the ** ill humours contracted thereby, and by disaffec- tion to the government, had brought the infant Bank of England into much difficulty and dis- tress ; so that their cash notes were now at a discount of 1 5 to <£() per cent. Their credit be- ing so low as to be necessitated to pay those notes only by 10 per cent, once a fortnight, and at length to pay only 3 per cent, on these notes once in three months, occasioned by the bank's having taken in, for the notes issued, the clipped " and otherwise diminished silver money at the " legal or par value by tale, and also guineas at thirty shillings price j and for which receipts they issued their notes payable on demand, not having yet received out from the mint a sufli- '' cient quantity of the fine new silver coins fjr (( n (( (• it t< a iC (( C( n (( s , when the circumstances in which they were placed arc /airly taken into consideration. Tlie fact seems to have been, that prior to the seven years war, from the year 17.'J0, and also during I'he earlier part of that war, while the rate of interest was low, large sums had been borrowed, by persons carrying on iuiprovements in Scotland, from the monied people in England ; and when, towards the conclusion of tit:; seven years war, the public funds had undergone u degree of depression hitherto unprecedented, a great part of that money naturally came to be called up. This, joined to the eagerness cf the money holders in Scotland to make advantageous investments themselves in the public funds, and to that spirit of agricultural im- provement and mercantile speculation which then t'jok possession of the country, as well as the in- creased amount of the public taxes, which now fell 9 to be remitted to London, naturally produced a great demand for bills on London. The premium on London bills, which had never hitherto been fixed, but fluctuated according to the dispositions of parties, of course now rose to an unprecedented height, and was often as high as 5 per cent. This extraordinary demand for London bills had begun in or before the year 1 76O, and had gone on increasing during the two succeeding years, un- til at last it had reached its height, about the begin- ning of the year ] 762. In this state of things, whatever had been the state of the paper circulation, it must have been matter of great difficulty, if not an absolute impos- sibility, for the banks to supply drafts on London to the extent demanded The natural consequence of this was, that people, obliged to make remittances to London, and finding they could not get bills but at an euormous premium, endeavoured to sup- ply their place by remittances in specie. An un- usual demand for specie at the banks was the un- avoidable consequence ; and, what greatly aggra- vated their distress, a new set of dealers in ex- change arose, whose business it was to pick up all the specie they could procure from the banks or otherwise, and transmit it, by sea or by the waggon, to London, so as to entitle them to draw bills for the amount, which they then sold at the high pre- mium of exchange then current. Thus, while the banks were continually bringing down specie, the exchange dealers were as regularly sending it up, and the parcels must have frequently crossed each other upon the passage. This extraordinary demand for specie, keeping pace with the depression of the exchange or premium on London bills, seems to have reached its height about B m f if 10 :At i 'V I 4( « cc cc the beginning of the year 1762 ; in so much, that in January that year, the banks found themselves under the necessity, for their own safety, of adopt- ing every measure in their power for checking it. On ^Oth January 1 7 62, they resolved to restrict the credits on ail cash-accounts ** to three-fourths of the sums contained in the bonds ; and on 17 th March thereafter, they resolved to take in money at legal interest for ax months, or longer, if agreed on, and at 4 per cent, if repayable on demand, or on cash-accounts." Lord Lauderdale is pleased to say, that in adopt- ing these resolutions, the Directors acted under a conviction that the demand for specie was the effect of an over issue, and consequent depreciation of their paper. And that though " the conduct of ** the Directors was described at the time as highly <* illiberal, and arraigned as ruinous to trade and *' manufactures, yet that, fortunately for the ** country, they persevered in the salutary expe- << dient of limiting their issues ; and that ultimately ** this was attended with complete success." Now, how far his Lordship is correct in his as- sertion, either as to the bank's perseverance in their plan of restriction, — the conviction under which the Directors acted with regard to the cause of the demand for specie, and the success of the restriction of their credits, in restoring the ex- change, will be sufficiently obvious from the fol- lowing facts and documents. The first notice of the unusual demand for specie, appearing from the records of the Bank of Scot- land, is in an order of 1 1th January 1762, in which it is stated^ that the extraordinary demand for specie had existed for so7ne years past. And on ] 8th Ja- nuary 1 762, preparatory to the restriction of the cash-credits to three-fourths of their amount, the ■V. ba: to {( u u «< ct tiC (C t< u M (C cc cc cc cc «c tc c« I under the impression that the demand for specie was the consequence of any excess in their paper circulation, but that they attributed it to its true cause, the high premium on bills of exchange. On the 6th of ^pril following, the banks were reduced to the necessity of " taking the benefit of ** the option in their notes, to try whether this •* will put a stop to the demand." " No sura *■*■ exceeding L.SO to be paid in specie, without ** the authority of the Committee of Directors." 6th May. — A message was received from the merchants, importing that they would discourage riders coming down from England to collect debts and carry away specie. It would appear that, through the joint co-ope- ration of the Danks and the merchants, a tempo- rary reduction of the rate of exchange was effect' ed so early as the beginning of May 1/6^. 8th July 1762. — It was resolved, " that the <' restriction of a fourth part laid upon all cash- *• accounts on 20th January should be taken off *' all accounts of L.IOOO sterling and under." And, on 7 th October I762, the restriction was taken off all accounts not exceeding L.20()0. Any appearance of improvement, however, in the pecuniary affairs of the country that had hitherto taken place, turned out, it would appear, to have been entirely fallacious ; for, by the end of August 1763, the demand for specie " made by English riders and others, who want to remit money to England," as expressed in the minutes of the bank, was as great as ever. On 30th August J 763, it was resolved by the banks to grant no further cash-credits till 1 st No- vember. 19th January I764. — A scheme and proposal was made to the banks by Messrs Alexander and c« i ^ te 4 ; but the exchange on London bills continued high during the years J 7^0', 17()7, and I76S; and, as already observed, was not finally reduced till about the beginning of the year 177'i. There is reason to believe ihat few, if any, of the notes of the Bank of Scotland had ever been marked under the optional clause prior to April I76'2j and that the whole amount marked during that and the three following years, extended only to about L.f).'j,()()(), while the specie imported and paid away by that bank, within one year, from ]7f>^2 to I76J, exceeded L.1()U,()0(). The optional clause was finally abolished, as al- ready mentioned, in the year 1764 ; after which the banks uniformly paid all their notes in specie on demand, to whatever amount required ; and yet the high premium on London bills continued for six or seven years thereafter. These are facts that speak for t|iemselves, and against which it will be in vain to oppose the opinion of any speculative writer, however deservedly high his reputation may otherwise be. Besides the general causes of the increased de- mand for London bills towards the conclusion of the war 17.'55'-1 763, before pointed out, it seems probable that the evil was considerably aggravated t$ by the great number of mercantile adventuiers, who, chiefly after the peace of 1/63, launched out in extensive speculations in different parts of Scot- land, and who, possessed of no adequate capital themselves, supported their credit by a circulation of accommodation-bills, drawn and redrawn be- twixt Edinburgh and London ; and that the general failure which took place among these adventurers in the year 1770, was favourable to the reduction of the exchange effected in that year. But this very tendency to over-trading may reasonably be ascribed to the unfavourable state of the exchange iwith London, as is uniformly the effect of an un- favourable exchange under any circumstances. That this unfavourable exchange with England must have given a powerful stimulus to our export trade with that counri-y, is a point that will not admit of dispute. But it is not easy to perceive that the system of over-trading could have had any effect in depressing the exchange. On the con- trary, by increasing our export to England, it must have had rather a tendency to ameliorate the ex- change ; and it is not altogether improbable, that the restoration of the exchange, by depriving the merchant exporters of one considerable source of protit, may have in some degree contributed to the geiMral failure which took place among the mer« chants concerned in the trade betwixt Scotland and England in the year iT7'i. I have been thus full in my detail of the situa- tion of the Scotch banks from the year 176*^ to the year 177 V, because it bears so strong an ana- logy to the present situation of the Bank of Eng-» land, while the foreign exchanges are so much against this country. And we may safely con- clude, from the example of the Scotch banks, that were the Bank of England obliged to pay in specie, while the premium on foreign bills continues as .^-^.•--»i'*Va..* -t-r-- ^ t,, ,ii, '^' -'" ■' .li '^ Ma ' 20 high as at present, the doing so could have no other elRrt tiian to encourage the same sort of traffic in specie which took place in Scotland under the un- favourable state of the exchange there, by tempting; people to ilemanil coin for illicit exportation, which, as it wouUI have again to be brought back by the bank, could have no efl'cct whatever in re- storing the exchange. Such are the examples referred to by Lord Lau- derdale in support of the theory of the Bullion Committee, that the depressed state of our foreign exchanges, and enhanced price of gold and silver bullion, are not the effect of an unfavourable ba- lance of payments, but of the depreciation of our paper currency, in consequence of its excess. And I may be allowed to obser.e, that he has paid a very poor compliment to the understandings of his countrymen to imagine, for one moment, that they ever could be convinced by unauthorised conclu- sions, deduced from facts not merely not support- ing, but absolutely hostile to the arguments drawn from them. It is admitted by all writers on the subject, that this is merely a practical question, the solution of which depends not so much on theory as on matter of fact; and I shall now proceed to shew that, by this unerring test, the question may be considered as completely resolved. According to the doctrine of the BuUif^r' Com- mittee, the exchange cannot, from causes, jiiiiiy mercantile, vary more than from 3 ' '> p> . cent, above or below par. Now, supposmg the real balance of payments to have been against this country for the thrte last years, this, according to n tht'lr iheoi-y, could liave at'Ounttd for the tleprcs- jil'^n only to that extent; and in o far as the pre- mium on foreign bills went l>evond that, tiiey eon- eluded it must have been oN\in,i to the ikyrtt iation of our currency,— not frou' discnil' is they were obliged to admit, but from mere supeiabumi^nce ; that is, from people having mof of it in theif hands than they knew h(5w to dispose of. If the balance of pa)incnts was during all this tiiu.' la favour of this country, tiien, according to iuir il.x'trine, it followed, that not only the whole of the depression, but froi.i M to (> per cent. iiMre must have been owing to the depreciation of our currency, 'ihus, the utmost possible amount of the ductuatlon, from merely mercantile causes, runs from «; to liJ, or, on an average, <) per cent. Now, if any of the supporters of the Bullion Committee will tike the pains to calculate, they will llad, that during the very time when his Lord- shiji was engaged in preparing his pamphlet for the press, and iince it was published, the exchange with Hamburgh has risen about !(> per cent, in favour of this country, taking the par of the exchange at '3A.'d{- Mcmish shillings to the pound sterling, or froju 'J4 I'lemi^h shillings to the j)ound sterling, which it sttHjd at in August and September last, to ^2i).-\^ which it stands at now I April IHl'i), — a fact uhich is completrly decisive of the question at it;sue. I'or, let it even be sup- posed that the real exchange was unfavourable till within these three months, though it may be ob- served that the advocates of the Bullion Commit- tee never wouM admit that it was so, and that it is jiow turned Ii\ our favour, this might account for about j) per cent, of the dillerence which has actually takai place, — but, how is the remaining »t n 7 per cent, to be accounted for? Not sUrely by any reduction of our paper circulation ; for it will not be pretended that any such reduction has taken place. On the contrary, it has rather been increased. And if this improvement of the ex* change has not been the consequence of a reduc- tion of our circulation, the conclusion inevitably follows, that the rising and falling of the exchange is not depexident on the extent of our domestic cir- culation, but on other causes ; and these, unques- tionably, of a nature purely mercantile and political, and nowise the effect of an excess of currency. Let :hose who insist that it is owing to an ex« cess of currency, point out the way in which such excess could take place* For my own part, I never could discover the possibility of it, any more than that of a vessel being made to hold more of a liquid after it has been filled to the brim. Neither can I discover how the introduction of a paper currency ever could have any effect in raising the prices of commodities, otherwise than indirectly by encou- raging industry, and increasing the demand for them. Directly they can have none ; for no man will get bank-notes but on the security of property^ which he could have exchanged for other commo- dities, by means of private bills, without the inter* vention of a single bank-note. But though I have supposed, for the sake of argu- ment, that the real exchange may ikjw be 4v per cent, in favour of this country, yet it is capable of complete demonstration, that this cannot possibly be the case ; but, on the contrary, that the existing de* pression, so ilir as it continues, is entirely owing fo a real unfavouriiblc balance; lor if the balance were really favourable, an influx of gold would be the necessary consequence ; whereas it is well known to have still ^ tendency to leave this country. • ■■'■ -'^ . .-,, u I ex* It must be almost superfluous to offer to prove that gold or silver, even under the present circum- stances of the country, never can be exported with profit, in the face of a favourable real ex- change, at whatever depression the computed ex- change may be. The following data, however, may be stated, for shewing with what advantage this can be done. The price of standard silver is at present (is. l-j-d. the ounce, whereas the mint price is only 5s. *id. To •)urcha8e it therefore with bank notes, the ex- porter must give u premium of 1 l|d. per ounce, or 1 84 per cent. When this is done, he has still to export it to the Continent ; and let the risk and expence of this be only stated at 4~ per cent. iliis will make the total expence, when the silver is landed in the Continental port, — say at Ham- burgh, 9,3 per cent. But in place of purchasing and exporting gold or silver bullion at this expence, the exporter has only to go to the Exchange of London, and there, for payment of L. 1 14 in the same bank paper, he will receive a bill on Hamburgh for the very same quantity of silver, of equal fineness, deliverable to his order at Hamburgh, at two months from the date of the transaction, free of all expence. And is ir possible to conceive that any man would hesitate for a moment which of these methods to prefer ? In like manner it might be shewn, that the foreign merchant will always prefer sending pay- ment of his debt to this country in bullion, so long as the high price of bullion here makes it his in- terest to do so. It is evident from this, that, with a favourable real exchange, an unfavourable computed exchange will nowise discourage the importation of specie. "( \ 7 I 24 »r For, so long as the debts due by the Continent in this country can be discharged in Bank of England notes, and that bullion bears a premium against these notes, it is clear that bullion may be trans- mitted with advantage ; and it is equally indisput- able that, by the competition of these remittances, the premium on bullion must speedily fall, and the computed as well as the real exchange become favourable to this country. The case would be very different if the debts were payable in a debased metallic currency, in place of bank, paper of undoubted credit. In the former case, the computed exchange would con- tinue invariably against this country, until the coin should be refornx'd, according to what happened in the time of King William. But, even then, the low computed exchange did not prevent the influx of gold. On the contrary, it was staled, by the writers of that period, that the price of foreign gold had risen in proportion to the advance on guineas ; " whereby nmch gold was run in upoii ** us from beyond sea." It is evident that the price of bullion must necessarily adjust itself to, and be regulated by, the premium on the bills of exchange. Ac- cordingly, even now that the exchange is gra- dually improving, the price of bullion is progres- sively falling ; bat as the f per cent, within the last three months, the price of gold has fallen from L.4. l:^s. to L.4. l-Js. the ounce, being equal only to about fi per cent, on the mint price ; and silver has yet fallen very little. vX 25 It is beyond all doubt, howeverj that as the ex- change shall continue to rise, the price of bullion will continue to fall ; and on the former reaching its usual par, the latter will fall to its former price of L.4 the ounce for gold, and 5s. 2d. for silver. With regard to the real causes of this great im- provement in our foreign exchanges, no person who considers the subject with impartiality, can entertain the slightest doubt concerning them. It is well known that, in the end of 1810, and beginning of 1811, a great relaxation had taken place in the demand for our manufactures. Numer- ous bankruptcies in consequence took place, and many thousands of weavers were thrown out of employment. It was after all this had happened that the great depression in our foreign exchanges took place ; that the exchange with Hamburgh, for example, fell to '■24, at which low rate it continued all last summer and autumn. It is equally well known, that in the beginning <^f last winter the demand for our manufactures began again to revive. Every successive account from our manufacturing districts, for the last four or five months, has been more and more favourable, until at last, in some of the most important branches, our manufacturers are nearly fully employed. If the fall in the exchange followed tiie stagna- tion of our manufactures in the first case, the improvement of the exchange has with equal re- gularity followed their revival in the second ; and is it possible, with these facts before his eyes, for any man to doubt of the connexion betwixt the one and the other ? After this, will any person be- lieve that the great depression in the exchange was owing, not to an unfavourable real balance of pay- ments, but merely to an excessive circulation of bank paper ? If it is still alleged to have been owing 'X 26 k) •■ f > to this latter cause, let it be shewn that the paper circulation has been reduced during the time the exchange has been improving. This, however, the supporters of the Bullion Committee will find a difficult task to perform, as there cannot be a doubt that our paper circulation, in place of being nar- rowed, is extending, along with our reviving manu- factures. It may still be said, however, by the supporters of the new theory, that the rise even of l6 per cent, is not more than what may be accounted for by the difference betwixt an unfavourable and a favdurable real exchange ; and that the real ex- change which, during all last year, was unfavour- able, is now completely otherwise. But we are not surely obliged to take their bare words as proof of this fact. Let the turning of the real balance of payments be proved by its usual and unavoidable consequences, the influx of bullion. This, how- ever, they will find a task as difficult as that of proving the reduction of our circulation. If, then, these gentlemen fail in either establishing that the improvement in the exchange has been owing to the reduction of our circulation, or to the turning of the real balance of payments, it follows as a necessary consequence, that it must be owing to causes purely mercantile ; and if the recovery of the exchange has been owing to such causes, it may be fairly concluded, that its previous depression must have been owing to causes of a similar nature. That the real exchange, after all the improve- ment on it that has of late taken place, is still against this country, is a point that admits of the most complete proof, by the efflux of bullion : no one principle in political economy being better established than this, that no bullion can be ex- 27 ported from a country that Is creditor in the balance of payments, to the country that is debtor in that balance. If, then, the exchange has been raised 16' per cent, by the operation of causes purely mercantile, and yet is still unfavourable to this country, it follows that, under the present circumstances of this country, and of the Continent of Europe, it is capable of being depressed and raised by such causes to an extent greater than 16 per cent. And if so, the doctrine of the Bullion Report, by which its elevation or depression from mercantile causes are limited to 6 per cent, falls to the ground. It is further proper to remark, that Lord Lauder- dale, throughout his pamphlet, has affected to hold the opposers of the Bullion Committee as assert- ing that the temporary and casual rise which has taken place in the price of bullion proceeded from general and permanent causes. But tb's is not a just view of their argument. The better informed writers on that side of the question have con- tended for no such rise in the price of gold, nor any other permanent rise than the trifling one of 2s. J id. the ounce, which had taken place pre- viously to the year IHOH, and which may have arisen from a slight variation in the relative value of gold and silver. The great rise which has taken place since the year 1 808, they justly consider as only of a temporary and accidental nature, and ascribe to the high premium which bills on the Continent then began to bear, owing chiefly to the demand for remittances to supply our increasing expenditure in the Peninsula, and to pay for large importations of corn, timber, and other continental produce ; but which, as already stated, must ne ; cessarily cease, so soon as the premium on the i }a 28 foreign bills is done away, and the par of the ex- change restored. I shall only further observe on this head, that the usual limitation of the fluctuation of the ex- change for or against any country, to the expencc of the transmission of bullion, varying from 3 to d per cent, applies only in cases where the trans- mission of specie is free, but is not applicable to cases where it is subjected to restraint. In the latter circumstances, it is admitted by all writers on political economy, that the depression may greatly exceed its usual limits. Indeed, it is evidently impossible to fix any limit to the premium on foreign bills, which, under particular exigencies, either of a piiblic or private nature, may be given ; and it is difficult to conceive such a premium to exist, without having the effect of increasing the demand for, and consequently raising for the time the price of gold and silver bullion ; or, to use more correct language, giving rise to a temporary preT mium on these articles. In truth, the substitution of bank paper, such as that of the Bank of England, in place of gold or silver coins, has a direct tendency to raise the com- puted exchange with foreign countries, instead of depressing it. This was the opinion of Dr Adam Smith, who observes, (Book IV. Chap. III.) that " the com- " puted exchange may be in favour of that country *' which pays in bank money, though the real ex- " change may be in favour of that country which " pays in current money ; for the same reason ** that the computed exchange may be in favour " of that which pays in better money, or in money *' nearer to its own standard, though the real ex- " change should be in favour of that which pays " in worse," And, again, after a long digression, C( (C (C 29 into which he says he had been led in endeavour- ing to explain the reasons why the exchange be- tween the countries which pay in what is called bank money, and those which pay in common currency, should generally appear to be in favour of the former, and against the latter, he concludes, in assigning as the reason of it, that " the for- " mer pay in a species of money of which the in- trinsic value is always the same, and exactly agreeable to the standard of their respective mints, whereas the latter is a species of money, of which the intrinsic value is continually varying, and is almost always more or less below the *< standard." It must have been on this principle alone that the introduction of bank paper, in the year 1 Gg^ and 1695, had the eifect of raising the computed exchange to within 3 per cent, of par, from a depression of 14 per cent, as noticed in the autho- rities quoted by Lord Lauderdale ; and 1 think it not improbable, that the unprecedented height to which the exchange has occasionally arisen since the bank restriction, particularly during the years 1797 and 1798, may have been in some measure owing to the same cause ; the substitution of bank paper virtually raising the par of the exchange. And, on the same principle, the anomalous cir- cumstance that gold could not be imported in 1 796, and beginning of 1797, with an apparently favour- able exchange of 34 and 3.5, by which the mer- chants and bankers were at the time so much puz- zled, may perhaps be accounted for. But while the substitution of bank paper has the direct effect of raising the computed exchange, it must be admitted that the extension of bank credits may lead to temporary difficulties, through the fa- cilities thereby afforded to rash and hazardous spe* -.* A 'C^ so ul ll '*> I p 1- ;•/ ibr culatlon ; and may possibly also have an indirect effect in depressing the real exchange, by increas- ing the consumption of, and consequently the de- mand for, foreign produce, though this is not quite clear. With a free commerce, however, there is no rea- son to expect that, under the present system of the bank restriction, the real exchange will be other- wise than generally favourable to this country, seeing our funds for supporting it, consisting of the produce of our unrivalled manufactories, and the extensive produce of the East and West Indies, of which Britain is now the emporium, will always be equal, if not greatly superior, in exchangeable value to the European goods required for our na- tional supply, even though our home production of corn should fall short of our consumption, in a proportion still greater than that which exists at present. In fact, in this increase of our consumption of corn, which has been progressively going on for the last 50 years, we may be considered in the light of a nation whose population is only following up its means of subsistence, seeing our colonial and other resources, while exchangeable for the neces- saries of life, are as much the means of subsistence as an increase of the productions of our own soil would be ; and the greatest objection to it is the placing us, in some degree, in a state of dependence on foreign countries for articles essential to our ex- istence ; while, from the uncertainty of the supply, the price both of the imported and native produce, and consequently of labour, must be kept much higher than, in the ordinary course of things, it would otherwise be. I am now quite satisfied, however, that the main tenance of this euhanctd price of corn, and conse quentiy of labour, does not necessarily produce au 31 It t-fflux of specie or bullion ; but that the efilux or influx of these is wholly dependent on the state of the real exchange, and subject to the influence of no other cause whatever. To open the bank, before the real exchange is fully restored to par, would, as already observed, be just to encourage the same sort of trade in trans- mitting specie, and drawing for it by bills of ex- change, as took place in Scotland, more or less, from the year 17()I to the year 1773 ; audit would force the bank of England either greatly to limit its cre- dits, and of course to become so much less useful to the country, or to subject itself to the same kind of expence which the public banks in Scotland were subjected to, with great loss to themselves, but with- out the least advantage to the public, in the above mentioned period. I shall take my leave of this subject, with offer-* ing a few brief and general remarks respecting the causes of the high prices of corn, and the other necessaries of life, which have taken place in this country of late years. Without going back into an investigation of the causes of the progressive increase of our national consumption, which is perhaps the surest of all tests of an increasing national wealth, it may be taken for granted, that our consumption of corn first came fully to equal our production about the year I76'(), previous to which period Britain had been an exporting country in the article of corn ; and that since that period our consumption has been continually and regularly on the increase, with the exception of a few years, during the continuance of the American war, so as at last to leave our pro- duction far short of our necessary annual supply j and this increase in our consumption has been moru I l\ 32 rapid during the course of the present war than in any fonnir period. Under these circumstances, there can be no rea- son to doubt that the true causes of the enhanced price of corn, and consequently of labour, and all other home made commodities, are, 1*/, The existence of a real deticiency in our home supply of corn. Qdlj/, The possession of a superabundance of co- lonial and manufactured produce, or of real ex- changeable wealth, even to the extent of an absolute commercial monopoly. 3(/ii/, The interruptions that have been thrown in the way of our exchanging the latter for the for- mer, partly by our own corn laws, but chiefly by the effects of the war, and the increased expence of freight and insurance, under the present system of carrying on the trade with neutral states. These causes must have operated whether the bank had been paying in specie or not. That the relieving of our paper circulation from the restraint of paying in specie, may have given somewhat of more scope to the progressi\ e Tidvance in the price of corn, may be admitted ; but that it acted anywise as a direct cause of that advance, or presented any obstacle to the reduction of prices, when circumstances were otherwise favourable to it, I deny ; and the following facts may be appealed to as affording incontrovertible evidence of the contrary, 1st, Previous to the bank restriction, on the "first occasion of a great scarcity of corn being felt, in the year 1795, and the earlier part of 17J)6, the advance on the price of grain was as great in pro- portion to the pressure of the scarcity as it ever was at any period after the bank restriction had been adopted : the price of wheat having been then occasionally as high as 1 2Cs. the quarter. sd 5 .1 : ;»t* t2^%l^ i 'i O ' . I n y. I '. J -i} ,' **«. "i«--,. *. the rf