A SKETCH 
 
 OF THE 
 
 HISTORY OF THE CURRENCY-: 
 
 COMPRISING 
 
 A BRIEF REVIEW OF THE OPINIONS 
 
 OF THE 
 
 MOST EMINENT WRITERS ON THE SUBJECT. 
 
 BY JAMES MACLAEEN. 
 
 OF THE r 
 
 UNIVERSITY 
 
 Eontron : 
 
 GRQOMBRIDGE & SONS, PATERNOSTER ROW; 
 THOMAS BUMPUS, 6, HOLBORN BARS. 
 
 1858. 
 
8PRECKELS 
 
 PRINTED BY 
 
 G. J. CROSS, 85, CHANCERY LANE, 
 LONDON. 
 
PREFACE. 
 
 THE following pages are placed before the public 
 in the hope that the brief review which they con-> 
 tain of the opinions of many eminent men, and 
 of the events which tend to confirm or disprove 
 those opinions, may, though very imperfect, be 
 found useful at the present time, when the difi> 
 culties which lie in the way of a satisfactory regu- 
 lation of the paper circulation,, arid, still more, 
 the questions connected with the depreciation 
 which may, probably, take place in the national 
 standard of value, in consequence of the recent 
 discoveries of gold in California and Australia, 
 render a more general diffusion of a knowledge 
 of the nature of the currency and its influence 
 on the social economy an object of the greatest 
 importance. 
 
 PASHLEY, 
 
 December, 1857. 
 
 119972 
 
ERRATA. 
 
 In page 39, line 6, /or " created by credit," read " exerted by 
 
 credit. 
 
 In page 47, line 10, for "lower prices " read "raise prices." 
 
 In page 59, line 7, for "this phenomena," read " these phenomena." 
 
 In page 60, line 26, for "raised" read "lowered." 
 
 In page 61, line 2, for " falls again " read " rises again." 
 
 In page 237, line 16, for " abundance of money" read " scarcity of 
 
 money." 
 
 In page 297, line 22, for " results," read "result." 
 
 In page 304, line 10, for " in the hopes," read '- in the hope." 
 
 The reader is requested to correct the errors in pages 47, 60, 61, 
 and 237, before commencing the perusal of the book, for though patent 
 mistakes, they might mislead a person not familiar with the subject. 
 The author must plead the haste with which it was necessary to prepare 
 this work, that it might be placed before the Public while engaged 
 with the subject, as an apology for these, and, he fears, many other 
 imperfections. 
 
CONTENTS. 
 
 CHAPTER I. 
 
 PERIOD OF A METALLIC CURRENCY. 
 
 Early Debasements of the Coin. Questions to be considered on such 
 occasions. Rise in Prices in the Reign of Elizabeth, in consequence 
 of the Discovery of the fertile Silver Mines of America. Its In- 
 fluence on the Progress of the Country. Alternate Disappearance 
 of Gold and Silver Coin in the Reign of James the First, and appa- 
 rent Scarcity of Money. Gradual Debasement of the Coin from 
 Neglect to keep up its Weight. Method of estimating the Devia- 
 tion of the Coinage from the Standard Value Explanation of the 
 terms Mint and Market Price of the Precious Metals, and Rise and 
 Fall of the Exchanges. Evidence afforded by the Depreciation 
 of the Coin in the Reign of William the Third, of the Depend- 
 ence of Prices on the Extent of the Currency. Effect of this Depre- 
 ciation on the Industry of the Country .... 1 
 
 CHAPTER II. 
 
 FIRST PERIOD OF A MIXED CURRENCY OF GOLD AND BANK- 
 NOTES CONVERTIBLE FOR GOLD. 
 
 Rise of the Modern System of Credit and Banking. Its supposed 
 Effects on the Value of the Precious Metals. Prevailing Notion 
 that Money constitutes National Wealth. Plan to increase the 
 Currency by Issues of Notes on the Security of Land. Dr. Smith's 
 Inquiry into the Nature and Causes of the Wealth of Nations. 
 His Views of the Sources of National Wealth, of the Nature of 
 Metallic Money, of the Distribution of the Precious Metals 
 throughout the World and in each State, and of the Measure of 
 Prices. Difficulties connected with these Views. Dr. Smith's 
 Statement of the Causes of the Exportation of the Precious 
 Metals. His Views as to the Nature of a Loan of Money. 
 Mr. Hume's Argument that Money, while increasing, encourages the 
 National Industry and lowers the Rate of Interest. State of 
 Trade and Banking on the Continent at this Time. Paper Money 
 of the United States, of France, and of Russia. Commercial 
 Distresses of the Period. Evidence as to the Connexion between 
 these Distresses and the Issues of Bank-notes . . . .33 
 
 CHAPTER III. 
 
 PERIOD OF INCONVERTIBLE BANK-NOTES. 
 
 Suspension of Cash Payments by the Bank of England. Bank-notes 
 not made a Legal Tender. Sir F. Baring's Pamphlet in Defence of 
 the Bank. Mr. Boyd attributes the High Prices to the Deprecia- 
 tion of the Bank-notes. Mr. Thornton on Paper Credit. His 
 Views on the nature of Credit and of Bills of Exchange and Bank- 
 notes. On Variations in the Efficiency of a Circulating Medium. 
 
VI. CONTENTS. 
 
 On the mode in which Prices are raised by an Issue of Bank- 
 notes. On the Causes of the Exportation of Coin On the 
 
 Exportation caused by a Bad Harvest. Of the Power of the 
 Bank to regulate the Country Issues. On Objections to the 
 Theory that Prices depend upon the Extent of the Currency. 
 Lord King and others on the Bank Restriction in Ireland. The 
 Exchanges become favourable in 1804 ..... 75 
 
 CHAPTER IV. 
 
 PERIOD OF INCONVERTIBLE BANK-NOTES CONTINUED. 
 
 The Berlin and Milan Decrees. Rapid Fall of the Exchanges in 
 1809, and Rise of the Price of Gold. Mr. Ricardo's High Price 
 of Bullion a Proof of the Depreciation of Bank-notes. His View 
 that neither a Bad Harvest nor a Foreign Subsidy causes Gold to 
 be exported unless the Currency be redundant. Importance and 
 Difficulty of this Point. Report of the Bullion Committee in 
 1810. Mr. Huskisson's Pamphlet in Explanation of the Report. 
 His Opinion as to the Ruinous Consequences of a Continuous De- 
 preciation of the Currency. Attack upon the Bullion Report by 
 Mr. Bosanquet. His Reasons for supposing that the Bank cannot 
 
 increase its Issues at will Mr. Ricardo's Answer, and his Theory 
 
 that an Increase of Convertible Notes depreciates the Value of Gold 
 Bullion. Arguments of Mr. Rose against the Existence of a De- 
 preciation, and of Lord Castlereagh against the Policy of making 
 our Currency vary with the Exchanges Rise of the Exchanges 
 and Fall in the Price of Gold on the Conclusion of Peace. 
 Sudden Revulsion on the Escape of Napoleon from Elba. Mr. 
 Blake's Observations on these Facts. Great Fall in the Price of 
 Agricultural Produce in 1813 and following years. Consequences 
 of this Fall in Prices, and Theories deduced from them. Bill of 
 1819 directing a Return to Cash Payments. Small Extent of the 
 Depreciation and Steadiness of the Currency during the Restric- 
 tion. Foreign Transactions conducted without a Store of Gold in 
 the Bank. Effect of the State of the Currency on the Working 
 Classes. 106 
 
 CHAPTER V. 
 
 SECOND PERIOD OF A MIXED CURRENCY OF BANK-NOTES AND GOLD. 
 
 Motion to Repeal the Act of 1819. Estimates of Mr. Attwood and 
 Sir A. Alison of the Depreciation of the Currency during the War. 
 The Panic of 1825. Notes under 5 prohibited, and Joint- 
 Stock Banks allowed to issue Notes. Drain of Gold in 1830. 
 Committee on the Bank Charter in 1832. Statement of the Direc- 
 tors as to their Mode of Managing the Circulation. Mr. Norman's 
 View of the Connexion between the Currency and Prices. The 
 Country Bankers deny that they have any Power over their Issues. 
 The Pressure in 1837. Mr, Horsley Palmer denies that the Bul- 
 lion left the Country from Over-issues of Notes. Lord Overstone's 
 Tracts. Considers that Prices can be regulated by the Issues of the 
 Bank. His Theory that the Currency should be made to vary ac 
 all times, as if metallic. His Cycle of Trade. Advises the Separa- 
 tion of the Banking and Issue Departments of the Bank. Mr. 
 Tooke's History of Prices. He denies any Connexion between the 
 
CONTENTS. Vll 
 
 Issues of the Bank and Prices. Remarks upon his Views. Drain 
 of Bullion in 1839. Lord Overstone considers it to have been 
 caused, in part, by the Country Banks. Admits that Prices may be 
 influenced by Speculation as well as by Extension of the Currency. 
 His Views identical in Principle with those of Mr. Ricardo. 
 The Committee on Banks of Issue in 1840. Are Bank-notes 
 Money, or mere Forms of Credit ? Views of Lord Overstone and 
 Mr. Norman on this Point. The Private Bankers again state their 
 Inability to enlarge the Currency. The Bank Act of 1844 . . 15E 
 
 CHAPTER VI. 
 
 SECOND PERIOD OF A MIXED CURRENCY OF NOTES AND GOLD, 
 CONTINUED. 
 
 Opinions of Mr. Tooke and Mr. Fullarton on the Question. They 
 deny the Power of the Bank to extend or diminish the Currency 
 when the Notes are convertible. Drains of Bullion are Modes 
 of transferring Capital, and, under a Metallic Currency, are paid 
 out of Hoards and not out of the Circulation. They advise the 
 Keeping of a larger Stock of Bullion. They predict the Sus- 
 pension of the Act. Mr. Wilson's Capital, Currency, and Banking. 
 Supports Mr. Tooke' s View. The Currency and the Country, 
 by Mr. Hubbard. Drains are stopped by the Rise in the Rate of 
 Interest caused by the Efflux of available Capital in the Shape of 
 Gold. The Crisis of 1847. Committees on Commercial Distress. 
 Lord Overstone' s Evidence in favour of the Act. Consideration 
 of the Question, What determines the Rate of Interest? Im- 
 portance of the distinction between Capital and Currency The 
 Lords report in Favour of an Amendment of the Act. The Com- 
 mons in Favour of its Existing Form. Mr. Hubbard's Estimate 
 of the Extent to which our Debt on this occasion was paid in Bul- 
 lion and hi Securities. Mr. J. S. Mill's Review of the Principles 
 on which the Act of 1844 is founded, and of its working. Mr. 
 Macculloch's View of the Theory of a Mixed Currency . . .206 
 
 CHAPTER VII. 
 
 SECOND PERIOD OF A MIXED CURRENCY OF NOTES AND GOLD 
 CONTINUED. 
 
 Discovery of the Gold Fields of California and Australia. Present 
 State of the Social Economy as affected by these Events. Then- 
 bearing upon Lord Overstone's Theories. Publications in Antici- 
 pation of the Renewal of the Bank Charter, by Mr. Tooke, Colonel 
 Torrens, and Mr. Arbuthnot. The Committee of 1857 on the 
 Bank Acts. Lord Overstone maintains that the Price of Securities 
 is affected by the Contraction of the Currency though that of 
 Commodities may remain unchanged. Comparative View of the 
 Theories of Lord Overstone and of his Opponents. His Theory 
 correct, but its Effects in Practice obscured by the greater Results 
 of Changes in the State of Credit Estimate of the Act of 1844 
 considered as acting on credit. Extent to which Lord Overstone's 
 Views are received in France and America. Opinions of M. Michel 
 Chevalier and of Mr. Bowen. The recent extraordinary Panic in 
 America. Dangers to which we are exposed from the Liability of 
 the American Banks to a run for Gold. Progress of Opinion in the 
 
Vlll. CONTENTS. 
 
 Birmingham School. Views of the Effect of Extensions of the 
 Currency upon Industry. Mr. Attwood. Mr. Babbage. Mr. 
 Bailey. His Theory that Production may be increased by a Mental 
 Stimulus. Views of Mr. Scrope, Mr. Mill, and Mr. Macculloch. 
 To what an extent would a limited Currency of Inconvertible Notes 
 save us from Commercial Convulsions ? .255 
 
 CHAPTER VIII. 
 
 THE NEW GOLD. 
 
 Mr. Tooke's View of the present and future Effects of the New Gold. 
 He supposes that Prices have not been affected by it. That the 
 Gold has itself created more Commodities, and forms an Addition to 
 the fixed Capital of the Country. That Gold is not obtained at a 
 less Cost than formerly. That Silver has risen in Price only from a 
 Demand in the East. Examination of Mr. Tooke's Views. His 
 Error in supposing that an Increase of some Commodities can pre- 
 vent others from Rising in Price. Insufficient Proof of the Fact of 
 an Increasing Demand for Silver in the East, by Mr. Tooke. 
 Colonel Sykes and the Editor of the Economist. Silver is dearer 
 valued in Gold and cheaper valued in Commodities, and is, there- 
 fore, exported. The Export of Silver to the East a Proof of the 
 Fall in the Value of Gold. Error of Mr. Tooke in supposing that 
 the New Gold is directly Productive of Wealth. Views of the 
 Editor of the Economist on the Effects of the New Gold. He 
 allows that it has fallen in Value. The Committee on the Bank 
 Act consider this Point uncertain. The Fall in the Value of Gold 
 is a Premium on its Exportation to France, and a probable Cause 
 of a High Rate of Interest here. Adoption of a Silver Standard 
 by Holland and Germany. Views of French and American Econo- 
 mists on the Subject. They agree that Gold is falling in Value. 
 M. Chevalier's Argument against allowing the existing Distribution 
 of Property to be disturbed. What Steps will our Government 
 take ? Argument for and against allowing the Depreciation of the 
 Currency to run its Course. . . . . . . .322 
 
 CHAPTER IX. 
 
 THE CRISIS OF 1857. 
 
 Phenomena of the Crisis. Lord Overstone's Theory might be applied 
 to explain them. He considers that the Suspension of the Act 
 depreciated the Currency. Objections to this View Occurrences 
 at Hamburgh a Proof of the Importance of Mr. Mill's Theory that 
 a Mixed Currency may be rendered less unsteady than a Metallic 
 one. Ewor of those who complain of the Public for expecting As- 
 sistance from the Bank during the Pressure. Are the Reproaches 
 on American Banking merited? Impossibility of altering the 
 modern System of Business to render the Act of 1844 effective. 
 Difficulties as to the Exercise of a Power of suspending the Act. 
 Important Lesson afforded by recent Events as to the Effect of the 
 New Gold. Strong Claims of those who would suffer from it to 
 the Attention of the Government. . . 370 
 
A SKETCH 
 
 OF THE 
 
 HISTORY OF THE CURRENCY. 
 
 CHAPTER I. 
 
 PERIOD OF A METALLIC CURRENCY. 
 
 Early Debasements of the Coin. Questions to be considered 
 on such occasions. Rise in Prices in the Reign of Eliza- 
 beth, in consequence of the Discovery of the fertile Silver 
 Mines of America. Its influence on the Progress of the 
 Country. Alternate Disappearance of Gold and Silver 
 Coin in the Reign of James the First, and apparent Scar- 
 city of Money. Gradual Debasement of the Coin from 
 Neglect to keep up its Weight. Method of Estimating 
 the Deviation of the Coinage from the Standard Value. 
 Explanation of the terms Mint and Market Price of the 
 
Precious Metals, and Rise and Fall of the Exchanges. 
 Evidence afforded by the Depreciation of the Coin in the 
 Reign of William the Third, of the Dependence of Prices on 
 the Extent of the Currency. Effect of this Depreciation 
 on the Industry of the Country. 
 
 THE great object of all discussions upon the 
 currency has been to ascertain its influence 
 upon the price of property and upon the in- 
 dustry of the country. 
 
 When the method of reckoning by pounds, 
 shillings, and pence was introduced into this 
 country by William the Conqueror, a certain 
 amount of pure silver was allotted to each coin ; 
 the pound sterling and the shilling were then, 
 indeed, but imaginary money, the largest silver 
 coin in existence being the penny, which con- 
 tained the two hundred and fortieth part of a 
 pound of silver ; but a shilling if then coined 
 would have contained the twentieth part of a 
 pound, and the pound sterling would have 
 weighed a pound. 
 
 Our kings soon began to debase the currency, 
 by diminishing the quantity of pure metal con- 
 tained in the coins without altering their deno- 
 mination *, their motive, 3 according to Lord 
 
 a Letter to the King on the Coins of the Realm, p. 107. 
 
Liverpool, being not merely the gain which 
 they themselves obtained by making more money 
 out of the same amount of bullion, but also a 
 desire to increase the wealth of their subjects, 
 which they supposed to depend upon the quan- 
 tity of money in the country, so ancient is the 
 theory which attributes a power of increasing 
 national prosperity to an extension of the cur- 
 rency. These debasements were practised to a 
 great extent in the latter years of the reign of 
 Henry the Eighth, and in the beginning of that 
 of his son, who, however, afterwards prepared a 
 scheme for the restoration of the coinage to its 
 former standard, which, with some modification, 
 was carried into effect by Elizabeth. 
 
 We here meet at once some of the most diffi- 
 cult questions connected with our subject. Prices, 
 we find, always rose when the coinage was de- 
 based ; their tendency to rise was, indeed, so 
 well known, that the Government, when about 
 to debase the money, usually attempted, though 
 in vain, to fix prices by act of Parliament ; and 
 we may be sure that the currency was extended 
 on these occasions, as the object of those who 
 debased it was to make more money. Now, did 
 prices rise because the people saw that there was 
 less pure metal than before in the coins ? and did 
 
 B 2 
 
they rise in exact proportion to the diminution of 
 the quantity of the pure metal, so that goods 
 continued to exchange for the same quantity of 
 pure metal as before ? If this view be- taken, a 
 difficulty occurs ; when people had become accus- 
 tomed to estimate their property by reference to 
 a certain number of pieces of the coin of the 
 realm, and when they sold all their commodities 
 for these coins, they could not increase the prices 
 of their goods universally until the purchasers 
 had more money, until the coin had been suffi- 
 ciently increased to supply the quantity of it re- 
 quired in effectuating the exchanges at a higher 
 price. Was it, then, the extension of the cur- 
 rency, and not the diminution of the quantity of 
 pure metal in the coin, that caused the rise in 
 prices ? and was this rise exactly proportioned 
 to the extension of the medium of circulation ? 
 Again, did prices fall when the coin was restored 
 to its former standard without any contraction of 
 the currency, or must a contraction of the cur- 
 rency necessarily follow such a restoration ? And 
 lastly, as the machinery by which circulation is 
 conducted was apparently increased or dimi- 
 nished on these occasions, did this circumstance, 
 or the general rise or fall of prices, produce any 
 effect on the industry of the country ? We shall 
 
shortly meet with important evidence upon all 
 these points ; but with respect to the very early 
 debasements and restorations of our coin, the 
 statistical details are so very uncertain that we 
 can form no definite conclusion ; all we know is, 
 that there are no historical facts from which we 
 can at all infer that these depreciations of the 
 currency had any beneficial, or its restoration 
 any injurious, effect upon the industry of the 
 nation ; on the contrary, the debasement of the 
 coin was universally complained of as an evil 
 unmitigated by partial prosperity ; and its 
 restoration to its former standard by Elizabeth, 
 though effected at a great expense, and after the 
 coinage had remained for a considerable time in 
 its degraded state, and many contracts must 
 have been made with reference to it, was hailed 
 by the nation with joy, and is recorded as being, 
 after the reformation of our religion, the most 
 useful act of that reign. 
 
 From the year 1570, notwithstanding the resto- 
 ration of the coinage by Elizabeth, the prices of 
 all articles continued to rise gradually until about 
 the year 1640, after which period they maintained 
 the same average level for a century at least. 
 This rise in prices, estimated by Dr. Smith and 
 Mr. Jacob at 400 per cent., but by Mr. Tooke 
 
at 200 per cent, only, is universally ascribed 
 to the large supplies of silver which were 
 produced by the fertile mines of America. It 
 is a remarkable fact,, that, notwithstanding the 
 smallness of the quantity of silver then existing 
 in this country, which we should suppose would 
 have rendered the effect of any addition to our 
 stock immediately evident, prices did not on this 
 occasion begin to rise, until more than twenty 
 years after the discovery of the very rich mines 
 of Potosi. a 
 
 We ought here to find some evidence as to 
 whether prices depend upon the value of the metal 
 in the coin, or the extent of the currency ; did 
 prices rise because the pure metal contained in 
 the coins had become less valuable as a commo- 
 dity, or did goods remain at their old prices until 
 more coins had been made ? There seems to be 
 no direct evidence on this point, owing to the im- 
 perfection of the statistical details of the period ; 
 but as prices did not begin to rise in this country 
 until long after the richest mines were discovered, 
 there seems some ground to argue that they were 
 not affected until an increase of the coinage had 
 taken place. 
 
 * Wealth of Nations, book 1, c. xi. 
 
Again, as there was nothing to cause a feeling 
 of distrust on this occasion, or in any way to 
 interrupt the ordinary course of business, for 
 there was no debasement of the coin from the 
 standard, nor any change in its weight or appear- 
 ance, there could be no interference of any kind 
 with the power of an increasing currency to pro- 
 mote the general prosperity, and we should 
 expect to find that power, if it really exist, most 
 conspicuously displayed. There certainly oc- 
 curred, about this time, a considerable extension 
 of our commerce, and this fact is often referred 
 to by the admirers of an abundant currency, as 
 a proof of the beneficial effects of an increase of 
 the money of a country. We shall shortly 
 meet with the opinions of several eminent econo- 
 mists upon this question ; at present we must 
 remind the reader that, before we attribute the 
 advance of commerce, which took place at this 
 time, to the fall in the value of money, we must 
 allow for the beneficial influence exercised by 
 the destruction of the feudal system, the pro- 
 gress of good government, and the increased 
 security of property and person, which had 
 occurred, and by the new market afforded by 
 America; having made this allowance, we shall 
 apparently have but a small part indeed of our 
 
8 
 
 social advance to attribute to the depreciation of 
 the value of money, yet, at that time, there 
 were circumstances which would, perhaps, tend 
 to make such a change in the currency far more 
 effective in increasing the productive power of 
 the country than it now could be ; then by its 
 action on the rents reserved on perpetual leases, 
 it would tend to break up the very large estates 
 of the great nobles, giving their tenants a greater 
 interest in the land, a circumstance which, in 
 those days, when there existed no class of tenant 
 farmers possessing capital, would, it is generally 
 allowed, have promoted the cultivation of the 
 soil. It might have facilitated the creation of a 
 middle class, and it would tend to make the 
 Crown more dependent upon Parliament, and 
 our Sovereign the head of a constitutional go- 
 vernment, instead of the most powerful noble of 
 the country. 
 
 There are some circumstances which see,m to 
 shew that, even at this time, the fall in the value 
 of money was felt rather as an impediment to 
 the progress which the country undoubtedly 
 made. Mr. Jacob* states that complaints of 
 distress amongst all classes were never so fre- 
 quent nor so loud as at this period, and he quotes 
 
 History of the Precious Metals, vol. ii. p. 89. 
 

 a work printed at this time in the form of dia- 
 logue between a landowner, a husbandman, a 
 shopkeeper, a manufacturer, and a doctor of 
 divinity, on the state of the country; all the 
 speakers have complaints to make, the landowner 
 laments that his land is on lease, that not above 
 one-third of it is likely to fall into his hand 
 during his life, and that in the meantime he 
 is ruined by the high prices he is obliged to 
 pay. The manufacturer and merchant complain 
 of the high wages they are compelled to give 
 their workmen, though they allow that those 
 wages are too small to meet the increase in the 
 price of provisions, or to provide a sufficient sub- 
 sistence. The fact that in those days when books 
 were not so plentiful as at present, a work should 
 appear on such a subject, points to anything but 
 a state of general prosperity, it is certainly a 
 fair inference that the depreciation of money, 
 instead of assisting the progress of the country, 
 rather interfered with the beneficial influence of 
 the new market, and produced a useless confusion 
 of property, accompanied with a peculiar pres- 
 sure on the lower classes. Of this last fact of the 
 distressed state of the labouring classes at this 
 period we have direct proof, many acts of Par- 
 liament were passed for their relief at different 
 
10 
 
 periods of the reign of Elizabeth, and just before 
 its close it was found necessary to establish our 
 compulsory system of poor laws, a course of le- 
 gislation clearly indicative of growing poverty. 
 
 The reader will probably wish to know in what 
 manner this great and long-continued fall in the 
 value of money was received by the statesmen of 
 that period. It is said that Lord Burleigh and 
 Sir Thomas Smith were aware that the great rise 
 in the price of all articles, which occurred about 
 the end of the reign of Elizabeth, was a con- 
 sequence of the increasing supply of silver, and 
 that in order to preserve the colleges of Oxford 
 and Cambridge from the consequences of the fall 
 in the value of money, they procured an act of 
 Parliament to be passed, by which these bodies 
 were obliged to reserve one-third of their rents 
 in wheat or malt. It is difficult to see with what 
 other object this act could have been passed; 
 but it is singular that these statesmen should 
 have confined their solicitude to these colleges; 
 we should have supposed that the same proviso 
 would have been inserted in the leases by deans 
 and chapters and other ecclesiastical persons; 
 and even if the crown lands were already leased 
 at perpetual rents, so that this plan could not be 
 adopted with respect to them, there seems no 
 
11 
 
 reason why these statesmen should not have ap- 
 plied it to their own estates, and have been imi- 
 tated by their neighbours. We have seen that 
 the rise in prices was sufficiently rapid to be 
 severely felt by the landowners of this period, 
 whose land was on lease, though they might not 
 be generally aware of the cause of it. It is to 
 be observed that, on this occasion, the supply of 
 both precious metals was greatly increased, and 
 they both fell in value, though not indeed exactly 
 in the same proportion ; the statesmen of this 
 period had not the power of preserving the mea- 
 sure of value by so simple an expedient as adopt- 
 ing one of the precious metals for that standard 
 in place of the other. 
 
 Up to the reign of Edward the Third, the 
 small quantity of gold coin which existed in this 
 country, exchanged for the silver coin in accord- 
 ance with the market value of the gold as^bullion, 
 and silver was the sole standard of value ; but in 
 that reign gold coins were made in considerable 
 numbers, and were ordered to pass current for 
 a certain number of silver pieces, the number at 
 that time corresponding with the relative value 
 of the two metals. We now had a double stand- 
 ard, debts could be paid in gold or silver, at the 
 option of the debtor. When our kings debased 
 
12 
 
 the silver coinage, they either reduced the quan- 
 tity of metal in the gold coins, or declared that 
 they should pass for a larger number of the de- 
 based silver coins, under these circumstances 
 both species of coin continued jointly to circulate; 
 but in the reign of James the First, great in- 
 convenience was felt in consequence of the dis- 
 appearance of the gold coin from circulation. 
 This event is considered evidence of a change in 
 the relative values of gold and silver. The quan- 
 tity of silver which was brought from America 
 having greatly exceeded that of the gold derived 
 from the same source, silver bullion became 
 cheaper than gold, i. e. } would purchase as bul- 
 lion fewer commodities than the gold bullion to 
 which it was before equivalent, and for which it 
 would now exchange in the coinage, silver was, 
 therefore, coined and exchanged for the gold 
 coins, which were melted down and employed as 
 bullion. To remedy this inconvenience, the king 
 diminished the quantity of gold in his coins, and 
 ordered that they should pass current for a greater 
 number of pieces of the silver coin. As the ex- 
 tent of this rise in the denomination of the gold 
 coin was too great, the case was reversed, and it 
 now became profitable to exchange gold coins for 
 silver coins, and to melt the latter. Thus, at 
 
13 
 
 the time when the American mines were in full 
 operation, there existed in this country a scarcity 
 of the coins of each of the precious metals alter- 
 nately, and it would seem, from repeated procla- 
 mations issued at this time/ in restraint of the 
 use of both gold and silver in the arts, that one 
 metal did not merely at once replace the other, 
 but that during the process, a feeling of a scar- 
 city of money of every kind was experienced. 
 This is, certainly, an extraordinary circumstance ; 
 we shall see that it may, perhaps, point to the 
 cause of some part at least of the want of money 
 which is generally experienced at present through- 
 out Europe, where a great substitution of gold 
 for silver is in progress. 
 
 This melting down of the silver coin ceased as 
 silver gradually fell in value, when compared 
 with gold ; and this fall still continuing, Charles 
 the Second again reduced the quantity of metal 
 in the gold coin. Guineas were now first coined, 
 receiving that name from the country from which 
 the gold had been procured ; they were intended 
 to pass for 20s., but no proclamation was made 
 prescribing the rate at which they should pass ; 
 they became current, by consent of the people, 
 
 a Lord Liverpool, Letter to the King, p. 62. 
 
14 
 
 for 21s. and 22s., without being a legal tender ; 
 and, so far as they formed the bulk of the gold 
 coinage, silver became again in law, as it was at 
 this time in practice, the only standard of value. a 
 
 By the middle of the reign of Charles the 
 Second, when the alteration of the relative value 
 of gold and silver caused by the unequal pro- 
 duction of those metals in America attained its 
 maximum, silver had fallen in value ; as compared 
 with gold, rather more than 32 per cent. b 
 
 After the restoration of the coin to its former 
 standard by Elizabeth, it was never intentionally 
 debased, but it was allowed to circulate after it 
 became worn ; and the consequence was, that a 
 progressive depreciation of it took place, for the 
 debasement of the coin naturally grew greater 
 and greater, and whatever new coin was issued 
 was either hoarded or clipped and reduced to the 
 average condition. Affairs continued in this 
 state until the reign of William the Third, when 
 a reformation of the coinage became absolutely 
 necessary. We shall now find more distinct 
 evidence upon the questions which we have seen 
 arise on a debasement of the coinage ; but, in 
 
 a Lord Liverpool, Letter to the King, p. 29 to f>9. 
 b Lord Liverpool, Letter to the King, p. 57. 
 
15 
 
 the first place, we must notice in what manner 
 the extent of a depreciation of the currency from 
 the value of a currency of full weight can be 
 measured. This is effected by comparing the 
 mint and market prices of bullion, and by 
 examining the state of the foreign exchanges. 
 
 These expressions mint and market price of 
 bullion, rise and fall of the exchanges con- 
 stantly recur in discussions upon the currency, 
 and are frequently felt as a difficulty when the 
 attention is first turned to such inquiries. 
 
 The mint price per ounce of the precious 
 metals is simply the number of pieces into which 
 an ounce of them is divided by the mint ; it is 
 always the same until the standard of the coin is 
 altered by law, and does not depend at all upon 
 the value of the precious metals as compared 
 with commodities. Thus the mint price of an 
 ounce of silver was 5s. 2d. from the time of 
 Elizabeth, because the ounce of silver was always 
 divided into five shillings and twopence, what- 
 ever might be the variations in the value of 
 silver as compared with commodities. The 
 market price of an ounce of silver is, of course, 
 the sum for which an ounce of it in the shape of 
 bullion can be actually sold, reckoned in the 
 money for the time being current. If the 
 
16 
 
 current money consist of pieces of silver bullion 
 of full weight, the mint and market prices of 
 silver must obviously in general agree ; but if 
 the currency be depreciated, then the price of an 
 ounce of silver bullion, like that of any other 
 commodity, will rise, and this rise in price will 
 clearly indicate the extent to which the purchas- 
 ing power of the currency differs from that of 
 the bullion which it represents. Some little 
 difficulty occurs with respect to the mint price 
 of gold. Our coinage was originally adapted to 
 the employment of silver only hence an ounce 
 of silver can always be divided into a certain 
 aliquot number of pieces of coin ; but, as gold 
 was introduced at a later period into a coinage 
 adapted only to silver, an ounce of gold cannot 
 be coined into an aliquot number of pieces 
 hence the mint price of gold, the precious 
 metals being always priced by the ounce, must 
 be reckoned in what are called the monies of 
 account, that is, in pounds, shillings, and pence. 
 This has led to much misapprehension, and 
 persons, seeing the mint price of gold quoted 
 3 17s. lOJd., frequently suppose that it has 
 some connexion with the value of gold as com- 
 pared with commodities. At present gold is our 
 standard, its value regulates that of the shillings 
 
17 
 
 and pence, in which the mint price is expressed, 
 and they may be taken as portions of the ounce 
 of gold. 
 
 By the rate or course of exchange is ordinarily 
 meant the terms on which merchants residing at 
 a distance from each other settle their pecuniary 
 transactions. A bill of exchange is an order by a 
 creditor on his debtor to pay a certain sum out of 
 the debt to a third party, to whom the creditor 
 has money to pay. If, for instance, a merchant 
 in Edinburgh has a payment to make in London, 
 instead of sending gold, which would be a dan- 
 gerous and expensive mode of remittance, he 
 draws a bill upon some person residing in Lon- 
 don who is indebted to him, and he sends the bill 
 to the London merchant to whom he is himself 
 indebted. If there be no person in London who 
 is indebted to him, he inquires amongst his 
 brother merchants in Edinburgh until he finds a 
 person who has a debt due to him in London ; he 
 pays this person the debt which should be paid in 
 London, and receives from him, in return, a bill 
 upon his debtor in London ; that is, he purchases 
 a bill .upon London, which, as in the former case, 
 he sends instead of the money which he owes. 
 The London merchants are doing the same thing 
 in London with respect to payments which they 
 
 c 
 
18 
 
 have to make in Edinburgh ; and if it happen that 
 the amount of debts due to Edinburgh in London 
 is equal to the amount due to London from 
 Edinburgh, no difficulty is found on either side 
 in obtaining the necessary bills, and the exchange 
 between the two places is said to be at par ; but 
 if more debts should be due from Edinburgh to 
 London than from London to Edinburgh, the 
 Edinburgh merchants will not all be able to 
 obtain bills upon London. They will therefore 
 be obliged to give a premium to some person 
 who has connexions in London, to, as it were, 
 create a fictitious debt from London to Edin- 
 burgh, by drawing upon some one with whom he 
 has connexions, and who will pay his bill. In 
 this case the exchange is said to be against 
 Edinburgh and in favour of London. When the 
 exchange is at par, one pound sterling in Edin- 
 burgh will purchase a bill for one pound sterling 
 in London, or, in other words, will be equal to 
 one pound sterling in London. When the ex- 
 change is against Edinburgh, one pound and six- 
 pence in that city may be required to purchase a 
 bill for one pound in London, and will be equiva- 
 lent to one pound only in London ; and nineteen 
 shillings and sixpence in Edinburgh might be 
 
19 
 
 equivalent to one ponnd in London were the ex- 
 change favourable to Edinburgh. 
 
 In the same way payments are made between 
 different countries, as, for instance, between 
 France and England ; but here a new feature 
 presents itself. The currency in which the two 
 payments are made is no longer the same ; we 
 reckon by pounds, shillings, and pence, and 
 France by francs and centimes. There must, 
 however, be a proportion in which the coins of 
 the two countries exchange with each other, 
 irrespective of the balance of payments for the 
 time being between the two countries. This 
 proportion, which is well known, and which is 
 called the par of the currency, or the intrinsic 
 par of exchange, depends upon the quantity of 
 pure metal contained in the coins of the respec- 
 tive countries, it is settled amongst the mer- 
 chants, either by a general agreement as to the 
 amount of pure metal contained in the respective 
 coinages or by reference to the mint regulations 
 of the different countries. Thus, our sovereign 
 contains as much pure metal as twenty-five francs 
 twenty-two centimes, which is the intrinsic par of 
 exchange between England and France. When 
 the course of exchange with France, as settled by 
 the merchants, from the demand and supply of 
 
 c 2 
 
20 
 
 bills, is such that a pound in London will pay 
 25 francs 22 centimes in France, the exchange 
 between the two countries is said to be at par, as 
 it was between London and Edinburgh when one 
 pound in that city paid one pound in London ; 
 when one pound sterling pays more than 25 
 francs 22 centimes, the exchange is said to be in 
 favour of England, and the contrary when one 
 pound pays less than 25 francs 22 centimes. 
 
 In calculating exchanges with some countries 
 we consider our money fixed, and receive from 
 them a variable sum, with others we give a vari- 
 able sum and consider their money fixed. Thus, 
 in our transactions with France, we treat our 
 pound as the fixed quantity and receive for it a 
 certain number of francs and centimes, varying 
 according to the state of the exchange. In this 
 case the more we receive, evidently the greater 
 is the advantage, and the exchange is said in this 
 case to rise when it is becoming more favourable 
 to us, and, as we consider our pound the fixed 
 quantity in our transactions with the most im- 
 portant commercial nations of the continent, the 
 exchanges are said to rise when they are generally 
 becoming favourable. 
 
 The balance of payments in the ordinary course 
 of mercantile transactions is never long in favour 
 
21 
 
 of any one country, for if our merchants are 
 obliged to give 105 here to buy a bill for 100 
 on a foreign state, they evidently lose 5 per cent, 
 on the transaction, which must diminish their 
 profits, at the same time the foreigner would 
 gain 5 per cent., which would increase his profits 
 on any importation of our goods into his country. 
 An unfavourable exchange, therefore, acts as a 
 tax on the import of foreign goods, and as a 
 bounty on the export of those of home produce. 
 There are soon more foreign bills to be bought 
 in England, and their price falls ; there are fewer 
 English bills to be bought abroad, and their price 
 rises, and, after a short time, the exchange comes 
 again to par ; nor can the rate of exchange 
 much exceed the expense of sending bullion 
 abroad, for, rather than pay a higher price for a 
 bill, it would seem that bullion would be sent in 
 discharge of the debt. 
 
 Besides these mercantile exchanges, however, a 
 rate of exchange may arise from variations in the 
 currency. It is evident that if the quantity of 
 pure metal in the coinage of either country be 
 diminished, more of the coins of that country 
 must be given to provide an amount of pure 
 metal equivalent to that in the coins of the other 
 country. If, when such a change occurred in 
 
22 
 
 either currency, merchants were in the habit of 
 re-arranging the intrinsic par of exchange, no 
 effects would be produced by such change, nor 
 would any rate of exchange arise between the 
 two countries. But this is not the habit of mer- 
 chants, the intrinsic par is left as it was, and 
 the difference between the two currencies is esti- 
 mated in an increase in the number of the coins 
 of the depreciated currency required as an equi- 
 valent for the former amount of the unchanged 
 currency, and, though the balance of payments 
 between the two countries be at par, a rate of 
 exchange is established between them similar in 
 appearance, though not in reality, to what might 
 have occurred from mercantile causes, while both 
 currencies had remained unchanged. This ex- 
 change is generally called the nominal exchange ; 
 there is evidently no limit to its amount, except 
 the extent of the change in one of the currencies ; 
 it offers no premium on exports, nor does it ope- 
 rate as a tax upon imports ; it is merely a mode 
 adopted by merchants of keeping their accounts, 
 instead of making those alterations in the in- 
 trinsic par which would cause the nominal 
 exchange to disappear. This exchange is, in 
 practice, mixed up with the mercantile exchange, 
 and the two together form the computed ex- 
 
23 
 
 change, by which merchants regulate their trans- 
 actions, and which is that quoted in the papers. 
 It is evident that if the currency of any country 
 become depreciated, the computed exchange will 
 have a great tendency to be constantly against 
 that country ; and the extent to which the ex- 
 change is unfavourable will, making due allow- 
 ance for the state of the mercantile exchanges at 
 the time, be the measure of the extent of the 
 depreciation. The reader must note, however, 
 that if any circumstances give the depreciated 
 currency a purchasing power at home beyond 
 what is due to the quantity of pure metal con- 
 tained in it, a smaller amount of that depreciated 
 currency will have to be given to provide a por- 
 tion of pure metal equivalent to that contained in 
 the given number of coins of .the foreign currency, 
 and the nominal exchange will be diminished ac- 
 cordingly. 
 
 When the reformation of the coinage came to 
 be discussed, in the reign of William the Third, 
 Mr. Lowndes, the secretary to the Treasury at 
 that time, considered that the stamp and the de- 
 nomination fixed the value of the coin ; but Mr. 
 
 
 
 Locke a asserted that coins were merely pieces of 
 
 a Further Considerations concerning Raising the Value of 
 Money. 
 
24 
 
 bullion, and that prices had risen on that occasion 
 because people saw that there was less of this 
 bullion in the clipped and worn coins, and pro- 
 portioned their demands in such a manner as to 
 obtain for their goods the proper equivalent in 
 silver bullion. The arguments by which he sup- 
 ported his theory were long considered satisfac- 
 tory, and money is called by many economists a 
 universal equivalent, as distinguished from a 
 sign of value ; " but there were some incongrui- 
 ties/' says Lord Liverpool/ " in the value of 
 the gold and silver coins, and of the price of bul- 
 lion with reference to them, which seem to prove 
 that the events which then happened, by no 
 means correspond with the conclusions which, in 
 Mr. Locke's opinion, resulted from the principles 
 laid down by him, and afford strong reason to 
 infer that there are other causes which may 
 sometimes influence the value of coins, while they 
 are current only within the realm, besides the in- 
 trinsic value of the metal in such coins." The in- 
 congruities alluded to by Lord Liverpool seem to 
 have been as follows, the market price of silver 
 bullion was, at this time, 6s. 3d. per ounce, and 
 the exchanges constantly from 25 to 30 per cent. 
 
 a Letter to the King, p. 79. 
 
25 
 
 against us, thus indicating that the coin had, on 
 the average, lost one quarter of its value. But it 
 was found to have lost, not a quarter only, but 
 nearly one-half of its weight. <57,200 of coin 
 were weighed, the weight ought to have been 
 above two hundred and twenty thousand ounces, 
 it was found to be under one hundred and four- 
 teen thousand ounces.* To correspond with such 
 a deficiency of weight, the market price of silver 
 ought to have been nearly ten shillings per ounce, 
 if the value of the coin had depended solely upon 
 the quantity of pure metal contained in it, and 
 the exchanges should have been nearly 50 per 
 cent, against us. The purchasing power of the 
 currency was, in reality, depreciated in a much 
 less proportion than that in which the quantity 
 of pure metal was diminished. Lord Liverpool 
 suggested no explanation of this difficulty, but 
 Mr. Ricardo, b at a later period, maintained that 
 the market price of bullion did not rise, and the 
 foreign exchanges did not fall, on this occasion in 
 proportion to the diminution of the quantity of 
 pure metal in the coin, because the coin, though 
 much increased in quantity by the illicit coining, 
 
 a Macaulay, vol. iv., p. 624. 
 
 b See the chapter on Currency, in his Political Economy, 
 and Reply to Mr. Bosanquet, Political Works, p. 347. 
 
26 
 
 which was carried on to a large extent at that 
 time, yet existed in a degree of scarcity which 
 gave it an artificial value ; there was not enough 
 of it to supply the machinery for exchanging the 
 commodities of the country at double their for- 
 mer prices, though more than enough to circulate 
 them at the former rate, and, therefore, though 
 prices rose, they were kept from rising to the 
 full extent of the deficiency of pure metal. 
 
 It is, certainly, highly probable that the cur- 
 rency, though extended at this time, was not in- 
 creased in the proportion in which the coin was 
 debased, for coining, though a very profitable, 
 was a very dangerous occupation ; numbers of 
 coiners and clippers being hanged or burned. 
 And, as no other reason than that alleged by Mr. 
 Ricardo can be given for the comparatively small 
 fall in the exchanges and rise in the market price 
 of bullion, we must allow, that under circum- 
 stances such as existed at this time, when the coin 
 was allowed to circulate in a worn state, and it 
 was the habit of the people to use the coins of 
 the country as the only, or, at least, the chief in- 
 strument of exchange, the value of these coins 
 depends upon their number and not upon the 
 quantity of pure metal contained in them. 
 
 There are other circumstances in which, by 
 
27 
 
 analogy to this case, we may infer that the value of 
 coins depends upon their number. The expense 
 of manufacturing the coin is, with us, borne by 
 the state, but in some countries a small portion of 
 all the bullion brought to the mint is kept back 
 as the cost of the workmanship. This deduction 
 is called the seignorage. In these countries, 
 therefore, even when the coins are new, all eco- 
 nomists allow that they must circulate at a higher 
 value than an equivalent weight of pure metal 
 they must, like the worn coins, be tokens or signs 
 of value, and coins much worn or affected with 
 a very high seignorage, must approach in their 
 nature to bank-notes. When, therefore, we find 
 metallic money considered as a universal equiva- 
 lent as distinguished from a mere sigh of value, 
 we must remember that this can be true as to the 
 internal circulation only when, as in this country, 
 the money is coined at the expense of the state, 
 kept up to its full value, and allowed to be melted 
 or exported, treated, in fact, just as bullion. 
 
 We shall see that, even when the money of the 
 country is similar to that now in use with us, it is 
 still a very important question whether prices 
 depend upon the number of the pieces or upon 
 the intrinsic value of them. 
 
 When a reformation of the coin had been 
 
28 
 
 decided upon, the question naturally arose, 
 Should the ancient standard be retained, or 
 should the new coin be issued at a standard 
 which would render it equal to the average of 
 that then in circulation ? The second of these 
 plans was supported by Mr. Lowndes, amongst 
 other reasons, on the ground that, as the depre- 
 ciation of the coin had lasted for a long time, 
 the greater part of existing contracts had been 
 formed with reference to it, and that to issue the 
 new coin at the lower standard would leave those 
 contracts unaffected, while to retain, or, rather, 
 to restore the ancient standard, would injure the 
 debtor to the amount of the difference between 
 the old and the new coin. Notwithstanding this 
 argument, which, perhaps, was not very distinctly 
 urged by Mr. Lowndes, it was resolved, on the 
 advice of Mr. Locke, who relied upon the fact 
 that the debasement of the coinage had not been 
 recognised by the state, to adhere to the ancient 
 standard. The light coin was called in and re- 
 placed by pieces of full weight, at a loss to the 
 nation of nearly three millions sterling. 
 
 When the silver was recoined, the market 
 price of silver bullion fell nearly, but not quite, 
 to the mint price ; that is, an ounce of silver 
 bullion was still rather more valuable than an 
 
29 
 
 ounce of silver coin. This difference in price 
 is supposed to have arisen from a demand for 
 silver bullion for exportation, and from the laws 
 which at this time prohibited the exportation of 
 coin ; there being thus a demand for bullion 
 which did not exist for coin, the former was 
 the more valuable. Nor did the value of the 
 guinea fall quite so much as it ought to have 
 done, according to the relative values of gold 
 and silver in the bullion market. It is said 
 that the people had been accustomed to the use 
 of gold coin while silver was out of circulation 
 during the recoinage, and that they set volun- 
 tarily too high a value on the guinea, which 
 passed currently at 21s. 6d. The consequence 
 was, that it became profitable to procure the 
 silver coin in exchange for guineas, and to melt 
 it down ; and the new silver coinage, which dis- 
 appeared very rapidly, is said to have been melted 
 down on this account. To prevent this, on the 
 advice of Sir I. Newton, the guinea was ordered 
 by proclamation to pass for 21s. only. The 
 guinea was said to be still too highly rated as 
 compared with silver bullion ; it was still more 
 profitable to pay a debt in gold than in silver, 
 and for this cause gold gradually came in prac- 
 tice to be the chief currency, and the only actual 
 
30 
 
 standard in lieu of silver,* as every one chose to 
 discharge his obligations in that metal which was 
 overrated with respect to the other. In the year 
 1774, the gold coin, which had become much 
 worn, was called in and recoined. At this time 
 the silver coinage was also in a very debased 
 state, but as it had now ceased to be the prin- 
 cipal currency of the kingdom, and existed only 
 in sufficient quantity to afford the necessary 
 change for the gold, a guinea, both before and 
 after the recoinage of the gold, continued to ex- 
 change for the same number of shillings. At this 
 time, also, a bill was passed enacting that no 
 tender in payment of money made in the silver 
 coin of the realm should be allowed to be a legal 
 tender for more than according to its value by 
 weight, after the rate of 5s. 2d. for each ounce of 
 silver. b This Act, in the then state of the silver 
 coin, amounted to the establishment of gold coin 
 as the only legal tender, and the standard by 
 which all property was measured, though silver 
 was not formally deprived of its character in this 
 respect until the year 1816. In this country 
 
 a Lord Liverpool on Coin, p 85. 
 b 14 George III., c. 42. 
 c 56 George III., c. 68. 
 
31 
 
 gold of the proper standard is now coined by 
 the mint without any charge, and to any extent ; 
 but silver bullion is coined only by permission of 
 Government/ 
 
 It is to be observed that if the large number of 
 defective pieces of silver coin existing in the reign 
 of William the Third had been replaced, as seems 
 to have been the case, by an equal number of 
 pieces of full weight, there must, according to 
 the views of those who maintain that prices 
 depend upon the quantity of pure metal in the 
 coin, have been more bullion employed for cur- 
 rency than was requisite on a comparison of the 
 value of bullion and commodities, and a part of 
 the new pieces would naturally be melted down 
 and withdrawn from the currency ; and, again, 
 unless the number of pieces had been diminished, 
 prices, according to the theory of those who con- 
 sider that prices depend upon the extent of the 
 currency, could not have been reduced by the 
 new coinage, as was the case, and as was ex- 
 pected by the advocates of the restoration of the 
 coin, one of whose great arguments in favour of 
 that measure was the high price of the necessaries 
 of life. 
 
 a 56 George III., c. 68. 
 
32 
 
 There is no trace of any stimulus having been 
 given to industry by this depreciation of the coin, 
 and the extension of the currency and general 
 rise of prices by which it was accompanied ; on 
 the contrary, we find again, on this occasion, that 
 the working classes were great sufferers. Nor does 
 the restoration of the old standard appear to have 
 given any check to commerce ; the difficulties 
 which occurred from want of money during the 
 recoinage ceased when it was completed, and 
 would apparently have been as great had Mr. 
 Lowndes's plan been adopted. The benefits de- 
 rived by the whole community from a steady 
 measure of value, seem to have completely over- 
 shadowed the effects of the gains and losses of 
 those who were borrowers and lenders. 
 
 The events of this period would seem to prove 
 two points : first, that when no care is taken to 
 keep the coin up to its weight, money is certainly 
 not an equivalent commodity exchanged for the 
 goods purchased by it, but a token or sign of 
 their value ; and, secondly, that, at least where 
 there is no system of credit to be stimulated by 
 it, an extension of the currency has no beneficial 
 effect on the industry of the country. 
 
33 
 
 CHAPTER II. 
 
 FIRST PERIOD OF A MIXED CURRENCY OF GOLD 
 AND BANK-NOTES CONVERTIBLE FOR GOLD. 
 
 Rise of the Modern System of Credit and Banking. Its 
 supposed Effects on the Value of the Precious Metals. 
 Prevailing notion that Money constitutes National Wealth. 
 Plan to increase the Currency by Issues of Notes on the 
 Security of Land. Dr. Smith's Inquiry into the Nature 
 and Causes of the Wealth of Nations. His Views of the 
 Sources of National Wealth, of the Nature of Metallic 
 Money, of the Distribution of the Precious Metals through- 
 out the World and in each State, and of the Measure of 
 Prices. Difficulties connected with these Views. Dr. 
 Smith's Statement of the Causes of the Exportation of 
 the Precious Metals. His Views as to the Nature of a 
 Loan of Money. Mr. Hume's argument that Money, 
 while increasing, encourages the National Industry and 
 lowers the Rate of Interest. State of Trade and Banking 
 on the Continent at this time, Paper Money of the United 
 States, of France, and of Russia. Commercial Distresses 
 of the Period. Evidence as to the Connexion between 
 these Distresses and the Issues of Bank-notes. 
 
 Up to the end of the seventeenth century it 
 might, perhaps, be assumed, without much error, 
 that the commodities of the country were circu- 
 
 D 
 
34 
 
 lated by means of coin only ; but commodities 
 can be circulated in a very different manner. 
 The wholesale importers or producers of goods 
 may supply their customers on credit, merely 
 entering in their books the amount of the debts 
 and the time of payment, their customers may 
 dispose of these goods to other persons in the 
 same manner, and so the transfer may go on 
 until the goods come into the hands of the con- 
 sumer. Goods may thus circulate without either 
 barter or money, provided the period of credit 
 given on the first transaction be long enough to 
 include the several periods of credit given on the 
 subsequent sales ; but not only may goods circu- 
 late without money, but a species of money may 
 be created by their circulation. The original 
 vendor, instead of entering his customer's debt in 
 his books, may demand from him a written pro- 
 mise to pay the purchase-money, should the 
 customer's reputation for wealth be good, the 
 vendor will be able to use his promise to pay as 
 money ; he may go into the market with it, and, 
 by handing it over to a third person, may get 
 goods for it. The person who receives this pro- 
 mise-to-pay may, in like manner, hand it over in 
 payment to a fourth person ; and it may pass 
 from hand to hand until the time comes which 
 
35 
 
 is mentioned for the payment of the money, when 
 the holder for the time being of the written pro- 
 mise will receive the amount. It is evident that 
 such a promise-to-pay, in the course of its pro- 
 gress, may circulate many commodities besides 
 those the transfer of which called it into exist- 
 ence, and that it performs some of the functions 
 of money. In early times, our law prohibited 
 the assignment of debts, probably with a view of 
 protecting debtors from oppression ; but in the 
 reign of William the Third, inland bills of ex- 
 change were allowed to pass from hand to hand 
 by indorsement ; and in the succeeding reign the 
 like privilege was extended to promissory notes. 
 From this time, the new system of trade upon 
 credit may be said to have commenced, and it 
 became customary, on account of the facilities 
 which they afford in recovering the amount of a 
 debt, and from the other advantages which they 
 possess, to require either bills or promissory notes, 
 in many instances where sales were made on 
 credit. 
 
 It sometimes happened that the holder of a 
 bill required the money before the time of pay- 
 ment came; in this case persons were always 
 found ready to cash the bill for him, deducting 
 from its amount the interest of the money ad- 
 
 D 2 
 
36 
 
 vanced up to the time of payment of the bill. 
 This is called discounting the bill. A great deal 
 of this business soon fell into the hands of 
 bankers, and they cashed the bills which they 
 discounted, not with gold, but with their own 
 notes or promises to pay gold on demand. 
 Bankers also issued notes or promises to pay 
 money to such persons as required advances 
 from them; they received deposits of money 
 from their customers, and it became customary 
 to make payments by cheques or orders upon 
 the bankers to pay a certain sum out of the 
 money so held in deposit. These cheques some- 
 times passed from hand to hand, and circulated 
 other goods as well as those for payment of 
 which they were drawn, and by these means 
 written instruments still more completely sup- 
 plied the place of coin. 
 
 The Bank of England, established in 1694, 
 was connected with the state by the loan of the 
 greater part of its capital to Government, and, so 
 far as its capital was concerned, the security for 
 the convertibility of its notes was, from the first, 
 not entirely bullion, but to a considerable extent 
 the national credit. In 1708, an act of Parlia- 
 ment was passed, prohibiting any firm consisting 
 of more than six partners from issuing notes, 
 
37 
 
 
 
 thus giving the bank of England a species of 
 monopoly by diminishing the amount of security 
 by which the notes of the private bankers could 
 be supported. Country banks began to appear 
 about 1750 ; they issued notes for very small 
 sums, and payable only on conditions with which 
 the holders were not likely to be able to comply, 
 in Yorkshire, notes were issued for sums of 5s. and 
 even of 6d., payable on condition that the bearer 
 brought change for a guinea. a These practices 
 being found very injurious to the poorer part of 
 the nation, an act was passed in 1775, prohibit- 
 ing the issue of any note under 20s., or on any 
 condition, and declaring that all notes previously 
 issued on conditions should be payable on de- 
 mand. By a later act, passed .in 1777, the 
 lowest sum for which notes could be issued was 
 raised to 5. 
 
 The bank of Scotland was established in that 
 country in 1693, and many other banks shortly 
 afterwards. None of them were connected with 
 the state in the same manner as the bank of 
 England. The act restraining the number of 
 partners in a bank issuing notes to six, did not 
 extend to Scotland, and the number of partners 
 in most of the Scotch banks is considerable. 
 
 * Wealth of Nations, p. 143. McCulloch's 4th edition. 
 
38 
 
 These banks, like the English country banks, ori- 
 ginally issued notes for small sums, and reserved 
 to themselves the option of paying them on de- 
 mand or at the expiration of six months with 
 interest ; but in the early part of the reign of 
 George the Third, all notes for less than 20s. 
 were prohibited in Scotland, the insertion of this 
 optional clause in them was forbidden, and all 
 notes then issued were made payable on demand. 
 The Scotch banks have always possessed the con- 
 fidence of the people, and their notes have en- 
 tirely superseded the use of coin in that country. 
 
 The bank of Ireland was established in 1783, 
 on the plan of the bank of England, its capital 
 was lent to Government, and its monopoly of the 
 issue of notes was secured by a similar limitation 
 of the number of the partners in every bank 
 issuing notes. 
 
 It is evident that the connexion between the 
 currency and the price of commodities, or the 
 state of the national industry, has now become 
 much more complicated the coin appears to 
 play a less important part in the distribution of 
 property and the determination of its value ex- 
 changes are made by means of bills and notes as 
 well as by coin, and even by credit, without the 
 use of a circulating medium of any kind, though 
 
39 
 
 they still have a certain reference to the coin. 
 We have to consider the direct effect of this new 
 currency in raising prices and encouraging indus- 
 try, its collateral influence in these respects 
 
 through its effect on credit, and the influence 
 
 t(?r^ti 
 
 ffaj$#A by credit itself upon the social economy, 
 
 independently of a currency of any kind. 
 
 One obvious consequence of this new mode of 
 conducting business is, that a very much smaller 
 amount of coin may be used than would have 
 been required had all exchanges been effected 
 by it. A part of the bullion formerly employed 
 as coin would then be no longer required for that 
 purpose, and would be used as plate and orna- 
 ments ; but before its consumption for these pur- 
 poses could be increased, its value must fall.. 
 Mr. Wheatly a accordingly supposed that bullion 
 fell so much in value on account of the introduc- 
 tion of the system of credit, that prices were 
 more affected by this event than by the discovery 
 of the American mines. The tables of prices 
 upon which he founds this theory are not of 
 much authority, nor is it probable that the use of 
 paper instead of coin was, at this time, sufficiently 
 universal to produce any effect upon the value of 
 
 a Wheatly on Commerce, p. 178. 
 
40 
 
 bullion, but there seems no theoretical error in 
 the supposition of a great fall in the value of 
 bullion, from the more general use of paper as 
 money. 
 
 It may, perhaps, be in the use of written forms 
 of credit, that we are to find an explanation of a 
 very curious fact, which the reader probably re- 
 marked hi the account of the rise of prices con- 
 sequent upon the discovery of the rich mines of 
 America, in the time of Elizabeth. On that oc- 
 casion prices rose steadily until about the year 
 1640, after which time they maintained the same 
 level for a long period. It is generally said that 
 the annual supplies of silver, though still very large, 
 were no longer more than just sufficient, after re- 
 placing the wear and tear of the vast mass of it by 
 that time accumulated in the world, to circulate 
 the annual increase of commodities ; but it is 
 difficult to conceive that such a close correspon- 
 dence between the increased amount of commo- 
 dities and of the money to circulate them should 
 have accidentally endured for so long a time. It 
 seems a more natural explanation of the steadi- 
 ness of prices, to suppose that the use of paper 
 credit varied so as to keep the demand for silver 
 and its value constant. 
 
 But the most important question which arose 
 
41 
 
 immediately after the introduction of this system 
 of credit was, as to the power of these forms of 
 paper money directly to extend the currency 
 and affect prices. 
 
 At the commencement of the period which we 
 are now examining, the belief that the national 
 prosperity was increased by an extension of the 
 currency was almost universal. An abundance 
 of money was supposed to give the landowners 
 really high rents, and the merchants really high 
 prices, and to lower the rate of interest and faci- 
 litate the borrowing of money, thus assisting 
 young merchants of no capital but great ability, 
 by whom, according to the celebrated Sir Josiah 
 Child, the greater part of our commerce was 
 carried on. The only persons who could be hurt 
 by such a state of affairs were the moneyed men, 
 who with the old prejudice against taking interest 
 for the use of money, were held in slight esteem ; 
 they were considered the " worst enemies of the 
 nation, who had done more injury to the gentry 
 and yeomanry than an invading army from 
 France (the great bugbear at that time) would 
 have had the heart to do." a "The difficulty was 
 to bring about such an extension of the currency, 
 
 a Macaulay, vol. iv., p. 494. 
 
42 
 
 and this seemed to be removed by the intro- 
 duction of bank-notes. These appeared to dis- 
 charge all the functions of money, and it was 
 supposed that they might be increased to any 
 extent without loss of value, if the public could 
 but be persuaded of their security. The 
 favourite scheme was to issue notes upon land, as 
 that afforded, it was supposed, unquestionable 
 security ; the landowner, it was thought, while 
 still using his land, might by issuing notes upon 
 it, produce an additional amount of property of 
 equal value, which might also be profitably em- 
 ployed. This was the scope of the land bank 
 planned by Chamberlayne in England, in the 
 reign of William the Third, and of the proposal 
 made by the famous Law to the Parliament of 
 Scotland, to appoint a commission to coin notes 
 on the security of land. As in this scheme any 
 person was to be at liberty to pay these notes 
 into the hands of the commissioners at pleasure, 
 and to receive again the security on which they 
 had been issued, it was supposed that the public 
 would apply to the commissioners for these notes 
 when money was required, and redeem their 
 estates by repaying them when it was no longer 
 wanted, and that in this manner just the amount 
 of money necessary for the business of 
 
43 
 
 country would remain in circulation. This 
 scheme is plausible, but we shall soon see that it 
 must have failed to succeed in extending the cur- 
 rency. 
 
 It was in a great measure to expose the fal- 
 lacies of these views that Dr. Smith published his 
 celebrated " Enquiry into the Nature and Causes 
 of the Wealth of Nations." In this work, which 
 is universally allowed to be the foundation of 
 modern political economy, and which has in 
 many respects had great influence upon the 
 opinions of most of those who have taken part in 
 the discussions upon the currency, Dr. Smith 
 maintains that commodities and not money form 
 the wealth of a nation ; that commodities are 
 produced only by labour and the employment of 
 raw materials, tools and subsistence, previously 
 stored up, or capital, and not by money, which is 
 neither a tool to work with, nor a material to work 
 upon, but only the instrument by which com- 
 modities are distributed ; he maintains that the 
 mines of gold and silver discovered in America 
 added but little to the real wealth of the world ; 
 that it was not the increase of money, but the 
 progress of good government, the destruction of 
 the feudal system, and the opening of new mar- 
 kets, which caused the advance in industry and 
 
44 , 
 
 Wealth which was observed in many parts of 
 Europe at that time, and he refers as a proof of 
 his views to ^the state of Spain, Portugal, and 
 Poland, countries in which the amount of gold 
 and silver money had increased, but which from 
 bad government remained as beggarly as ever. 
 
 The theory of the dependence of prices on the 
 extent of the currency had not, as yet, attracted 
 attention ; and Dr. Smith, like Mr. Locke, con- 
 siders metallic money nothing but a commodity. 
 From the inconvenience of barter, it must always 
 have been an object with every man to have by 
 him a certain quantity of some commodity or 
 other which he imagined few people would be 
 likely to refuse in exchange for the produce of 
 their industry. Men, for many reasons, agreed 
 to employ the precious metals as this commo- 
 dity ; at first, they settled their transactions by 
 weighing out portions of gold or silver, but as it 
 was difficult at the moment to weigh these 
 metals with sufficient accuracy, and still more 
 difficult to ascertain their purity, it became cus- 
 tomary for the ruling power in the State to divide 
 them into uniform pieces, stamped with a parti- 
 cular stamp denoting the weight and the degree 
 of purity. 
 
 Dr. Smith goes on to state that the amount of 
 
45 
 
 gold possessed by every nation will depend upon 
 its power of purchasing it with commodities, and 
 that this quantity will be divided by the people 
 into three parts, one of which will be used for 
 plate and ornament, another as coin for the 
 internal circulation of their commodities, and a 
 third in the shape of bullion for the adjustment 
 of their foreign transactions, bullion being the 
 money of the great mercantile commonwealth, 
 and used in facilitating exchanges between indi- 
 viduals of different nations, as coin is between 
 individuals of the same country.* 
 
 Dr. Smith does not suppose the whole bullion 
 set apart as money to be constantly employed in 
 circulating commodities. Merchants, in all coun- 
 tries in which there are no banks, must keep by 
 them unemployed considerable sums of money to 
 meet occasional demands, and, where banks exist, 
 these occasional demands will be supplied by the 
 bankers, who will be obliged to keep a reserve 
 for that purpose, though evidently of smaller 
 amount than the aggregate of the sums kept by 
 the merchants themselves. Dr. Smith seems to 
 consider that, when a purchase is to be made, the 
 buyer takes from his stock of gold such a portion 
 
 a Book iv., c. 1. 
 
. 46 
 
 of it as he thinks equivalent to the article to be 
 purchased, and that the seller, on his side, parts 
 with his goods for what he considers an equiva- 
 lent portion of the commodity gold, neither party 
 taking into account the amount of the stock of 
 gold which is available at the time for making 
 purchases. Prices then depend upon some in- 
 trinsic value inherent in the gold, and not on the 
 amount of the currency, which amount, in fact, 
 depends upon the business to be done. 
 
 We are inclined to accept the views expressed 
 by Dr. Smith in these passages, for he seems to 
 describe what is of every-day occurrence ; here, 
 however, in reality, we meet one of the great 
 difficulties of the currency question. Many eco- 
 nomists, including the supporters of the Bank 
 Act of 1844, maintain that prices, or the propor- 
 tion in which gold will exchange with any other 
 commodity, must depend not upon any intrinsic 
 value of gold as compared with commodities, but 
 upon the quantity of that metal which is capable 
 of being offered in exchange for goods, for it 
 is the quantity of any article capable of being 
 brought to market which determines its value, 
 which, in the case of gold, is the price of commo- 
 dities. Now, the quantity of gold capable of 
 being offered in exchange is, they say, the whole 
 
47 
 
 amount of that metal in the country not em- 
 ployed as plate and ornaments ; prices, therefore, 
 depend upon the extent of this amount. We 
 shall . see that the establishment of this view is 
 essential to the theory of the export and import 
 of bullion, which is the grand foundation of the 
 Act of 1844. 
 
 The reader will remember that increased pro- 
 ductiveness of the mines of gold would l8w& 
 prices under either supposition, provided the 
 amount of commodities to be circulated remained 
 constant. The value of gold as a commodity 
 would be lowered in the one case, and in the 
 other the quantity of the currency would be in- 
 creased. 
 
 Dr. Smith supposes that in any given state of 
 the wealth of a nation a certain amount of gold 
 would be required to circulate its commodities. 
 When just the amount of gold was employed as 
 coin, the channel of circulation would be full. 8 
 If while the commodities remained the same, and 
 no change took place in the productiveness of 
 the mines, the quantity of coin in any country 
 exceeded this amount, the channel of circulation 
 would become too full and would overflow, the 
 
 a Book ii., c. 2. 
 
48 
 
 people would find that they had more money 
 than they required, and that they could export a 
 part to other countries. Here again is a dif- 
 ficulty : How can the people feel that the national 
 channel is so full as to permit exportation, when 
 they are constantly in the habit of putting away 
 their money in reserve to meet contingencies 
 how are they to ascertain that they have put 
 away enough for that purpose, and that they 
 may safely export the remainder ? 
 
 Dr. Smith then considers what happens on the 
 introduction of paper into the currency ; he sup- 
 poses a person of undoubted credit to establish a 
 bank and to issue notes, the people would look 
 upon these notes as money, and they would now 
 find that the channel of circulation was too full, 
 just as if more coin had been issued, and would 
 be desirous of making use of part of their money 
 abroad, and as the gold was money both abroad 
 and at home, while the paper was money at 
 home only, the gold would be exported and the 
 paper would take its place, some small amount 
 of gold only being required to be kept by the 
 banker, to meet occasional demands for the con- 
 version of the notes. The result would be the 
 substitution of a very cheap for a very expensive 
 mode of distributing the commodities of the 
 
49 
 
 society. The exported gold might be exchanged 
 for provisions, and the materials of manufacture, 
 and the wealth of the country would be increased. 
 Coin is like a high road which distributes the 
 corn and other crops of the adjoining fields, but 
 produces nothing itself; the substitution of paper 
 in place of coin suspends this high road in the 
 air, and allows the ground which it formerly oc- 
 cupied to be used as corn-fields and pastures. 
 
 The small amount of gold which Dr. Smith 
 mentions as necessary to be kept to meet occa- 
 sional demands for payment of the notes in gold, 
 must evidently be of a totally different nature 
 from the reserve, which in the case of a metallic 
 currency the people kept by them to meet occa- 
 sional demands for mercantile purposes. These 
 latter reserves must now be kept either by indi- 
 viduals or by bankers in the form of notes. We 
 must apparently consider the circulation as con- 
 sisting entirely of notes, the fund of gold kept by 
 the bankers being merely to replace them when 
 distrust arises, not to add at any time to the 
 amount of the currency. 
 
 If the bankers issue more notes than will 
 supply the place of the gold which would have 
 circulated if no notes had been in existence, 
 the excess, Dr. Smith says, will constantly be 
 
 E 
 
50 
 
 returned to them ; all the gold will, in the first 
 place, go abroad, and the people then, finding 
 they had too much money, and having no gold 
 left to export, would hring the excess of notes 
 to the bankers to be exchanged for gold, which 
 could be sent abroad, and he illustrates this 
 position by the example of the Ayr bank, which 
 was established in Scotland for the express pur- 
 pose of extending the circulation at a time when 
 many important undertakings were on foot, and 
 when the enterprise of the country was supposed 
 to be languishing for want of money. Many of the 
 first noblemen in Scotland were partners in this 
 bank, and their estates were worth several mil- 
 lions. There could be no doubt of the security on 
 which their notes were issued, nevertheless, the 
 attempt to extend the currency utterly failed^ 
 the notes were constantly returned to the bankers* 
 who shortly became bankrupt. Dr. Smith also 
 states that both the Scotch banks and the bank of 
 England had for a long time been put to great 
 expense in purchasing bullion to meet the de- 
 mand upon them for gold, in consequence of 
 their having issued too many notes. 
 
 Dr. Smith points out that the circulation of 
 every country may be divided into two branches, 
 the circulation of the dealers with one another, 
 
51 
 
 and the circulation between the dealers and the 
 consumers ; each requires a certain stock of money 
 to carry it on, for both are going on at the same 
 time. If the notes issued by bankers are for 
 considerable amounts, the circulation of them 
 will be confined to transactions between dealers ; 
 and the transactions between dealers and con- 
 sumers, being for smaller sums, will be carried on 
 by coin ; and he advises that no notes should be 
 issued for Jess than 5. As the bank of England 
 issued no notes below 5, the circulation, so far 
 as the bank was concerned, might be said, accord- 
 ing to Dr. Smith's view, to consist entirely of 
 paper, when she had issued notes enough for the 
 circulation between the dealers ; she might, there- 
 fore, have to buy gold if she issued too many notes, 
 though there were still many guineas circulating 
 in the country. Dr. Smith observes, that the 
 value of the goods circulated between the different 
 dealers can never exceed the value of those 
 circulated between the dealers and consumers, 
 whatever is bought by the dealers being ulti- 
 mately destined to be sold to the consumers. It 
 would seem, therefore, that prices cannot be high 
 from an issue of paper, which circulates only 
 among dealers, while the circulation between 
 dealers and consumers is carried on by gold. 
 
 E 2 
 
52 
 
 Dr. Smith maintains that bank-notes, which 
 are paid in gold when presented, must be equal 
 in value to gold, and that whatever is bought 
 with such paper must be as cheap as if bought 
 with gold. He does not allow that the increase 
 of the notes can augment the currency, because 
 a quantity of gold is always taken from the cur- 
 rency, exactly equal to the quantity of paper 
 added to it ; and he supports this view by show- 
 ing that the prices of articles had not been raised 
 in Scotland by the establishment of many banks, 
 and that prices were not higher, other circum- 
 stances being considered, in England, where 
 bank-notes were in general use, than in France, 
 where there were no banks issuing notes.* In 
 this passage. Dr. Smith evidently considers that 
 prices depend upon the quantity of money 
 capable of being offered for them, for he sup- 
 poses that the notes, if they could have remained 
 in circulation, would have raised prices. 
 
 A difficulty may here, perhaps, strike the 
 reader. As the circulation of the larger bank- 
 notes is confined to the wholesale dealers, how 
 can an increase of these notes cause an imme- 
 diate displacement of the coin, which circulates 
 
 a Book ii., c. 2. 
 
53 
 
 only between the dealers and consumers ? It 
 would seem that the increased amount of these 
 notes would be taken to the bank and exchanged 
 for part of the gold held in reserve, and would 
 
 * 
 
 diminish that reserve without affecting the coin in 
 circulation with the people. An excess of notes 
 would, therefore, show itself in the shape of a 
 drain of bullion, and not by a rise in prices at 
 home. 
 
 Now, we may naturally ask, while these 
 changes were taking place with respect to the 
 portion of bullion set apart by the nation for 
 their internal circulation, what became of that 
 part of it which was necessary for the adjustment 
 of the foreign transactions ; had this, after the 
 establishment of the bank of England, come to 
 be confounded with the reserve held by that 
 bank for meeting occasional demands for pay- 
 ment of its notes ; and were some of the drains 
 upon its treasure caused, not by over-issues of 
 its notes, but by the adjustments of foreign trans- 
 actions required by trade, quite irrespective of 
 the state of the currency ? Here we have a hint 
 of some more of the difficulties of the currency 
 question. 
 
 The position of the bank of England at the 
 time of the great recoinage, in the reign of Wil- 
 
54 
 
 Ham the Third, offers an opportunity for the 
 application of the views which we have been con- 
 sidering. The bank-notes ought to have occupied 
 the place which the coin would have occupied : 
 they were, therefore, as much debased as the 
 coin. When that coin was called in and reissued 
 of full weight, bank-notes must have still, in 
 number, represented the worn coin ; they must 
 have existed to a greater amount than they could 
 have done had they been issued in a currency of 
 full weight ; they ought, therefore, to have been 
 depreciated when the recoinage was completed ; 
 accordingly, they fell to a discount of 17 per 
 cent. 8 The bank was obliged, on this occasion, 
 to increase its capital and withdraw a large num- 
 ber of its notes before it could raise them to par, 
 a circumstance which seems to show that the 
 channel of circulation for <20-notes (the smallest 
 notes then issued by the bank) had, even at this 
 early time, been quite filled by bank-notes, or the 
 excess in the currency would have ceased of 
 itself, by gold, to a certain extent, being driven 
 out of circulation. It seems, also, to show that 
 it was the excess of notes, and not any want of 
 confidence in the solvency of the bank, which 
 
 * Lawson's History of the Bank, p. 72, and Bullion Re- 
 port, p. 17. 
 

 55 
 
 caused the notes to be at a discount. We should, 
 however, mention that during the time when 
 money was extremely scarce, before the recoinage 
 was completed, the bank was unable to pay its 
 notes in full; it paid only 15 per cent, on notes 
 presented for payment. At this time, too, the 
 goldsmiths, who were opposed to the bank, col- 
 lected its paper and made a sudden demand for 
 payment, which the bank refused for the time, 
 leaving them to seek their remedy at law. a These 
 circumstances may have injured the credit of the 
 bank, and may be sufficient to account for the 
 discount to which the notes had fallen. It may 
 be mentioned that it was on this occasion that 
 exchequer bills were first issued ; they were 
 drawn for various sums, from 100 down to 5, 
 and proved a most effectual substitute for money ; 
 they answered this purpose so effectually that it 
 is said the Government proposed, at one time, to 
 issue twenty and fifteen shilling bills. b 
 
 We can now see what would have been the 
 fate of Law's scheme for coining notes on the 
 security of land. So long as there had been 
 any coin in circulation, it would have been dis- 
 placed by the notes, and they would have main- 
 
 a Macaulay, vol. iv., p. 696. 
 b Macaulay, vol. iv., p. 698. 
 
56 
 
 tained their value and remained in circulation, 
 but so soon as all the coin was gone they must 
 have fallen in value, and those who held them 
 would have demanded the land on the security 
 of which they had been issued. The currency, 
 therefore, would never have become more exten- 
 sive than when metallic. 
 
 Dr. Smith in another part of his work states 
 that what is called a loan of money is in reality 
 a loan of capital. What the borrower really 
 wants is, not the money, but the money's worth. 
 By means of the loan, the lender assigns to the 
 borrower his right to a certain portion of the 
 annual produce of the land and labour of the 
 country, and the quantity of capital to be lent at 
 any time, in any country, is regulated, not by the 
 value of money, but by the value of that part of 
 the produce which, so soon as it comes from the 
 hands of the producer, is destined for replacing a 
 capital, and which the owner himself does not 
 want to employ. 
 
 The money is, as it were, but the deed of as- 
 signment which conveys from one hand to another 
 those capitals which the owners do not care to 
 employ themselves. Those capitals may be 
 greater, in almost any proportion, than the 
 amount of the money which serves as the in- 
 
57 
 
 strument of their conveyance, the same pieces of 
 money successively serving for many different 
 loans as for many different purchases. Dr. Smith 
 maintains, which seems a necessary consequence 
 of these views, that the rate of interest is not 
 affected by changes in the amount of money, but 
 of the capital to be lent. 
 
 Dr. Smith seems to think that when banks 
 have advanced to merchants, that part of the 
 capital of their business which the merchants 
 would otherwise be obliged to keep idle in their 
 own hands to meet sudden demands, and when 
 they have to the proper extent substituted paper 
 for gold, they have done all that banking can do 
 to assist commerce. 11 He appears surprised that 
 the introduction of banks into Scotland should 
 have caused so great an increase of prosperity as 
 he acknowledges took place. Like most other 
 economists, he is so anxious to prevent his 
 readers from considering credit a producing 
 power identical with capital, that he appears to 
 have underrated the effect which credit has 
 in producing wealth by facilitating exchanges. 
 Written forms of credit and the system of bank- 
 ing were, to the complex state of society now 
 existing, what money was to the simple commu- 
 
 a Book ii., c. 2. 
 
58 
 
 nities who first adopted the use of it. We shall 
 find, too, that credit has the effect of allotting 
 the capital of the society to those hands which 
 are most capable of perfectly employing it. 
 
 Dr. Smith makes no allusion to the probable 
 influence of any written forms of credit on 
 prices except bank-notes, which alone he seems 
 to have considered as being in the nature of 
 money, nor does he touch upon the effect of 
 credit upon prices. 
 
 Mr. Hume agreed with Dr. Smith that the 
 quantity of gold and silver existing in any country 
 is in itself a thing indifferent, and that in those 
 cases in which populous nations in the enjoyment 
 of plenty of commodities possessed but little 
 money, this state of affairs resulted from the 
 manners and customs of the people who were 
 satisfied with a simple style of living. When 
 such a society becomes more refined, more ex- 
 changes are required and money increases ; but 
 this is a consequence, not the cause of the ad- 
 vancement. 
 
 Mr. Hume, however, thought that while an 
 increase in the quantity of money was actually 
 going on, industry would be quickened, he says/ 
 
 a Essay on Money. 
 
59 
 
 " In every kingdom into which money begins to 
 flow in greater abundance than formerly, every 
 thing takes a new form, labour and industry gain 
 life ; the merchant becomes more enterprising, 
 the manufacturer more intelligent and skilful, and 
 even the farmer follows the plough with greater 
 alacrity and attention." His explanation of this 
 phenomena is, that " when any quantity of money 
 is imported into a nation, it is not at first dis- 
 persed into many hands, but is confined to the 
 coffers of a few persons, who immediately seek to 
 employ it to advantage, they employ more work- 
 men than formerly, who never dream of demand- 
 ing higher wages, but are glad of employment 
 from such good paymasters ; if workmen become 
 scarce, the manufacturer gives higher wages, but 
 at first requires an increase of labour, and this is 
 willingly submitted to by the artisan, who can 
 now eat and drink better ; he carries his money 
 to the market, where he finds every thing at the 
 same price as formerly, but returns with greater 
 quantity and of better kinds for the use of his 
 family ; the farmer and gardener, finding that all 
 their commodities are taken off, apply themselves 
 with alacrity to the raising of a fresh supply, and 
 at the same time can afford to take more and 
 
60 
 
 better clothes from the tradesmen, whose price is 
 the same as formerly, and their industry only 
 whetted by so inuch gain." 
 
 This argument is one of the strongest of those 
 which are brought forward to prove that an in- 
 crease of money promotes the general prosperity ; 
 we shall find it considered by several economists ; 
 at present it is only necessary to observe, that 
 Hume here supposes that there are always some 
 labourers unemployed, for, if the first possessor 
 of the increasing money had to take them away 
 from his neighbour, he could not do so without 
 at once offering them higher wages. Again, the 
 argument requires the supposition that at every 
 market there is a quantity of produce which is 
 thrown away, for, if not, if the artisan has to get 
 it away from some other customer, he at once 
 raises the price. It is probable that this surplus 
 of labour does always exist in this country, but 
 no corresponding surplus of commodities. An in- 
 crease of money, therefore, is likely to benefit 
 the capitalist employed in production, but not 
 the labourer. 
 
 Mr. Hume supposed, also, that if the new ac- 
 quisitions of money fall into few hands, the rate 
 of interest will be raised, for the owners will 
 seek a revenue, either by the purchase of land or 
 
61 
 
 by interest ; but after these sums have been dis- 
 persed, the rate of interest falls again, whatever 
 may be the amount of money in the country. 
 There seems no objection to this view, for prices 
 cannot be raised until after the loan has taken 
 place ; accordingly, we shall find it is admitted by 
 Mr. Ricardo and other economists. 
 
 The system of banking and trade upon credit 
 did not prevail so extensively on the continent 
 at this period as in this country. In 1719, Law 
 established a bank of issue in France, for the ex- 
 press purpose of increasing the money of the 
 country. This bank, shortly after it commenced 
 business, became connected with the Mississippi 
 Company, and was then transferred to the 
 government. In the course of the stock-job- 
 bing operations which ensued, an enormous 
 number of notes were issued. These notes were 
 forced into circulation, many payments were re- 
 quired by the government to be made in them 
 and not in coin. Gold and silver were permitted, 
 even ordered to be exported, and, finally, an 
 arret was issued forbidding any person to retain 
 silver or gold in his possession to a greater 
 amount than 500 livres. A very great rise took 
 place on this occasion in the price of all articles, 
 but the bubble burst before sufficient time had 
 
62 
 
 elapsed to decide whether this rise was caused by 
 the spirit of speculation or by the actual exten- 
 sion of the currency ; in less than three years 
 the notes fell to a hundredth part of their nomi- 
 nal value. 
 
 The Mississippi scheme diffused in France a 
 feeling of distrust in all banks, and no attempt 
 was made to form a bank of issue in that coun- 
 try until the establishment of the Caisse d'Es- 
 compte, or Bank of Discount, in 1776. Very 
 few banks even of deposit existed in that country 
 until a very recent period, and all payments even 
 between persons at a distance from each other 
 were made by the transmission of silver coin at a 
 great expense. The Caisse d'Escompte dis- 
 counted bills in its own notes payable on demand 
 in silver. It flourished for some years ; it then 
 became embarrassed by large loans to Govern- 
 ment just before the Revolution, and was finally 
 suppressed by the Convention in 1793. 
 
 In Holland and Hamburgh there existed no 
 bank issuing notes, nor even any public bank 
 employing its deposits in discounting bills. The 
 banks of Amsterdam and of Hamburgh were 
 banks of deposit in the strictest sense of the 
 word, and all the gold and silver that was paid 
 into them was understood to remain stored up in 
 
63 
 
 their vaults. The object of these banks was not 
 to increase the amount of money or to obviate 
 the necessity of possessing a large amount of 
 gold, but simply to meet the difficulty which oc- 
 curred in countries, like Holland and Hamburgh, 
 of great commercial business and small territorial 
 extent, from the variety of coin of different 
 countries which their extensive mercantile enter- 
 prises brought into circulation. This coin the 
 banks received at its intrinsic value, giving 
 credit for the amount in their books, and pay- 
 ments were made by transfers from one account 
 to another. These banks also received deposits 
 of bullion, for which they granted receipts, 
 by the transfer of which payments were also 
 made. 
 
 The notes issued by the government of the 
 United States of America, during the contest 
 with the mother country, afford an example of 
 the consequences of an extensive issue of paper, 
 the notes first issued were equal in value to sil- 
 ver, but they became rapidly depreciated, and at 
 length, when the amount of them had reached 
 the sum of four hundred millions of dollars, they 
 ceased to circulate. Mr. Jefferson taking into 
 consideration the state of depreciation which 
 existed at the period of each successive issue, 
 
64 
 
 calculates that the real value given by the people 
 for these notes was seventy-two millions of dol- 
 lars. After the war the government of the 
 United States proposed to pay them off with six 
 millions of dollars, that being the amount which 
 they calculated that the then holders had given 
 for them. Mr. Jefferson candidly admits that 
 the difference between these two sums, amount- 
 ing to sixty-six millions of dollars, had been lost 
 on the paper by the successive holders of the 
 notes. This, he says, was a real tax on the peo- 
 ple of the United States, who actually contri- 
 buted those sixty-six millions during the war by 
 a mode of taxation the most oppressive of all, 
 because the most unequal of all. a 
 
 It is hardly necessary to remind the reader of 
 the great creation of paper money by the revolu- 
 tionary government of France. The celebrated 
 assignats were originally issued as a means of 
 making the national property immediately avail- 
 able. To avoid the delay which must have 
 occurred before the price could be received on 
 the sale of this property, notes were issued repre- 
 senting its value, which the officials who con- 
 ducted the sales were bound to receive at their 
 
 a Memoirs, vol. i., p. 412. 
 
65 
 
 value from the purchasers. For some time the 
 assign ats maintained their value, but, the number 
 of them being very greatly increased, they became 
 so depreciated that, at last, five hundred francs in 
 paper were given for a cup of coffee. Consider- 
 ing the extreme uncertainty of property of all 
 kinds in France at this period, we should not be 
 able to draw a safe conclusion as to the exact 
 extent to which the assignats owed their depre- 
 ciation to their number. The most remarkable 
 fact connected with this financial expedient is 
 that, though the whole of the silver coin, amount- 
 ing, probably, to one hundred millions sterling, 
 entirely disappeared from the circulation, being 
 sent abroad, according to Dr. Smith's theory, 
 yet there occurred no fall in the value of silver 
 in other countries. This fact would seem to shew 
 that so large a sum as a hundred millions of 
 silver might be thrown upon the market without 
 causing a fall in its value ; but we must remember 
 that it is possible that much of the silver did not 
 really leave France, though it left the circulation ; 
 it was probably hoarded. 
 
 The notes which we have hitherto considered, 
 professed (at least at the outset) to be promises 
 to pay money, and might have sustained their 
 
66 
 
 value for a time from the hope that the promise 
 would be performed ; but in some countries paper 
 money, in the proper sense of the word, existed 
 at this time. 
 
 In 1768, the Empress Catherine the Second of 
 Russia established the Banque d'Assignat, to issue 
 notes payable to the bearer. It did not appear 
 distinctly in which kind of metallic currency 
 these notes were to be paid, but it was assumed 
 that the meaning was that they were to be pay- 
 able in the copper money of the country, which 
 passed only in small payments, which was depre- 
 ciated as regarded the silver money, and which 
 could not be melted down or exported ; in other 
 words, they were not in reality payable at all in 
 coin of any kind, and, of course, their value could 
 not depend in any way upon that of coin. The 
 amount first issued was only forty millions of 
 roubles, which was moderate compared to the 
 whole circulation of the country, and they were 
 ordered to be taken in all payments which had 
 been agreed to be made in silver, and to be 
 received in all payments to the State. Under 
 these circumstances, they rose to a premium of 
 five or six per cent, over the copper money ; and 
 in 1774, on the close of the war with Turkey, 
 
67 
 
 they were on a level with the silver money. In 
 1786, the Empress issued assignats on the 
 security of land and houses, and carried the total 
 amount of paper money up to a hundred millions 
 of roubles. From this time the assignats fell 
 rapidly, though no difference was made with 
 respect to the manner of their payment, and all 
 the phenomena of a depreciated currency ap- 
 peared. The foreign exchanges turned against 
 Russia, the prices of all articles rose, and those 
 who lived upon fixed incomes were reduced to 
 great distress, in the number were included the 
 employees of Government whose salaries had been 
 fixed by Peter the Great, and were not raised 
 by a Government which did not acknowledge that 
 its currency was depreciated ; and to the neces- 
 sities arising from this cause, are often attributed 
 the universal corruption and dishonesty which 
 are said to exist amongst the public officials of 
 Russia. 1 * 
 
 We shall find that Dr. Smith's view that a 
 currency cannot be extended by the issue of 
 notes convertible for gold at will, is rejected by 
 some modern economists of great eminence, who 
 suppose, not only that the currency can be ex- 
 
 a Storch Economie Politique, vol. iv., p. 196. 
 
 F 2 
 
tended by those means, but also that the greater 
 number of the instances of sudden commercial 
 prosperity, followed by great distress, which have 
 so frequently occurred, have been caused by such 
 extensions of the currency, and the contraction 
 of it which inevitably follows on the exportation 
 of the coin. It is, therefore, important to note 
 the circumstances connected with such events 
 which tend to confirm or disprove this view. 
 
 Of the great commercial distresses of this 
 period, we have seen that the Mississippi scheme 
 was connected with the issue of a great number 
 of bank-notes. It is said that the success of 
 Law's banking operations at the outset, and, per- 
 haps, the stimulus given to trade by the high 
 prices caused by the notes, gave birth to the state 
 of excitement which led the French nation into 
 such a wild course of speculation ; but our own 
 South Sea bubble, which occurred in 1720, was 
 unconnected with any banking operations, and 
 the ardour of the public was excited simply by 
 vague ideas of the richness of the countries of 
 South America, and of the advantages to be de- 
 rived from a trade with them, which had just 
 been opened up by a treaty concluded with 
 Spain on the establishment of the peace of 
 Utrecht ; at this time, too, the excitement was 
 
69 
 
 more universal and carried to a higher pitch than 
 has been known since bank-notes came into com- 
 mon use. a 
 
 In 1763, many failures occurred at Amster- 
 dam and Hamburgh. These failures, says Mac- 
 pherson, were attributed by some to the large 
 sums owing by the French and British armies, 
 and by others to the vast quantity of base money 
 issued by the German princes during the war, for 
 which the merchants had expected to receive 
 the value, or at least a considerable portion of 
 the value it was issued for. He himself suggests 
 that they might be owing, in addition to these 
 causes, to the peace, in consequence of which the 
 trade enjoyed by those neutral places during the 
 war was drawn off. The commercial distress at 
 this time did not affect this country; it is re- 
 markable only as occurring in countries where no 
 banks of issue existed, and where such discounts 
 as were effected were made in coin. Another 
 crisis occurred in 1772, which is attributed by 
 Macpherson b to the spirit of launching into 
 vast and boundless projects in commerce which 
 
 a See Macpherson, Annals of Commerce, vol. iii., p. 88> 
 for an account of the extravagant projects and wild specu- 
 lations of this time. 
 
 b Macpherson, vol. iii., p. 524, 533. 
 
70 
 
 were to be supported by artificial credit, and to 
 gambling in the funds. We have seen that bank- 
 ing was, to some extent, connected with these 
 events in Britain, in the case of the Ayr bank ; 
 but it is remarkable that the distress was again 
 on this occasion very great in Holland, where 
 this cause for it did not exist, though great num- 
 bers of private bills of exchange had, doubtless, 
 been issued. Sir Francis Baring says, that the 
 circulations from Holland were very large at this 
 time. a 
 
 The period between the conclusion of the 
 American war and the commencement of that 
 with revolutionary France, is always described as 
 one of great manufacturing and commercial pros- 
 perity in this country. The year 1791, and the 
 earlier part of 1792 in particular, are distinguished 
 by the historians of this period as eminently pros- 
 perous, but in the month of November, 1792, 
 many bankruptcies took place, and in March, 
 April, and May of the succeeding year there 
 occurred a commercial crisis of extreme severity. 
 " Many houses," says Macpherson, " of the most 
 extensive dealings and the most established credit 
 failed, and their fall involved vast numbers of 
 
 * Pamphlet in defence of the Bank, vol. iii., p. 33. 
 
71 
 
 their correspondents and connexions in all parts 
 of the country. Houses of great respectability 
 and undoubted solidity, possessing ample funds, 
 which actually did, in a short time, enable them 
 to pay every shilling of their debts, were obliged 
 to stop payment. Amidst the general calamity, 
 the country banks, which were multiplied greatly 
 beyond the demands of the country for circu- 
 lating paper currency, there being 280, or, accord- 
 ing to other accounts, 400 of them in England 
 and Wales, were the greatest sufferers, and, con- 
 sequently, the greatest spreaders of distress and 
 ruin amongst those connected with them."* 
 
 On this occasion Mr. Pitt, in consequence of 
 an application from some of the principal mer- 
 chants, appointed a commission for advancing 
 exchequer bills to the amount of five millions ster- 
 ling, to such merchants, traders, and bankers, as 
 should apply for them on security to be approved 
 by the commissioners. This measure afforded 
 immediate relief, only 2,202,000, were advanced, 
 the whole of which sum was repaid, and hardly 
 any of those who received this assistance became 
 bankrupt. 
 
 This commercial crisis, in particular, is con- 
 
 Macpherson's Annals of Commerce, vol. iv., p. 267. 
 
72 
 
 stantly referred to as a striking example of the 
 effects of unrestricted issues of bank-notes, though 
 convertible for gold at the will of the holder, in 
 extending the currency, raising prices, and en- 
 couraging speculation. There are, however, 
 many circumstances which seem to shew that it 
 is, at least, possible that this crisis might have 
 arisen from other sources. The great prosperity 
 which followed the close of the American war 
 may be accounted for without supposing any ex- 
 traordinary issue of notes. . It was about this 
 time that the system of internal communication 
 by canals, commenced by Brindley, was brought 
 to perfection. Arkwright's patent for spinning 
 cotton expired in 1784, when his invention came 
 into general use ; and Watt completed his im- 
 provement on the steam-engine about the same 
 time. The introduction of the banking system 
 itself, exerting only its legitimate influence on 
 trade, must have had a powerful effect. There 
 were thus many reasons why business should 
 have been brisk, and, under these circumstances, 
 it is not at all improbable that a spirit of specula- 
 tion might have arisen without any previous en- 
 largement of the issues of notes. The sudden- 
 ness, too, of the rise in prices in 1792, though 
 
 ! 
 
73 
 
 many banks had been in existence long before 
 that year, seems to shew that it was not caused 
 by banking operations alone, for if the banks had 
 possessed the power of producing these effects at 
 will, they would probably have produced them 
 before. Many circumstances, too, shew that the 
 distress was not caused by a mere collapse of 
 bank paper. The first great increase in the 
 number of bankruptcies occurred in November, 
 1792, just after the revolutionary war with France 
 may be said to have broken out, for the British 
 Ambassador had been recalled from Paris in the 
 preceding August (though war was not declared 
 by our Government until the ensuing January), 
 a circumstance which must have given a shock to 
 credit. Business was unusually checked by the 
 timidity inspired amongst the holders of property 
 by the spread of revolutionary doctrines. Com- 
 mercial difficulties were at this time felt in the 
 principal cities of the Continent in which no banks 
 of issue existed/ and the first failures, and those 
 which caused the prostration of credit, were of 
 mercantile houses in London and Liverpool, who 
 could not, apparently, have been the most closely 
 connected with the country banks. b On the other 
 
 a Tooke, History of Prices, vol. i., p. 178, note. 
 b Chalmers's Estimate, p. 294. 
 
74 
 
 hand, against the country bankers, are the facts 
 that so many of them failed, that the exchanges 
 had declined in 1792, and bullion had been ex- 
 ported circumstances which are said to prove 
 that a redundancy of bank-notes must have 
 existed, 
 
75 
 
 
 CHAPTER III. 
 
 PERIOD OF INCONVERTIBLE BANK-NOTES. 
 
 Suspension of Cash Payments by the Bank of England. 
 Bank-notes not made a Legal Tender. Sir F. Baring's 
 Pamphlet in Defence of the Bank. Mr. Boyd attributes 
 the High Prices to the Depreciation of the Bank-notes. 
 Mr. Thornton on Paper Credit. His Views on the nature 
 of Credit and of Bills of Exchange and Bank-notes. On 
 Variations in the efficiency of a Circulating Medium. On 
 the mode in which Prices are raised by an issue of Bank- 
 notes. On the Causes of the Exportation of Coin. On 
 the Exportation caused by a Bad Harvest. Of the Power 
 of the Bank to regulate the Country Issues. On Objec- 
 tions to the Theory that Prices depend upon the Extent of 
 the Currency. Lord King and others on the Bank Re- 
 striction in Ireland. The Exchanges become favourable 
 in 1804. 
 
 WE now come to a most important event in the 
 economic history of this country, namely, the 
 suspension of cash payments by the bank of 
 England in 1797. " The great and continued 
 drains of bullion/' says Macpherson, " in conse- 
 quence of the war, the loans to the Emperor of 
 
76 
 
 Germany, and other subsidies to foreign powers, 
 and also the large sums payable for cargoes and 
 freights of neutral ships taken,* and which the 
 foreign owners required to be paid in bullion, had 
 raised the price of gold, on the 8th of October, 
 1795, to <4 4s. per ounce, and, our gold coin 
 being only ,3 17s. lO^d. per once, it was evident 
 that the current money of this country, consisting 
 almost entirely of gold, would be carried abroad 
 to a very alarming extent." b From these or some 
 other causes, the amount of bullion at the bank 
 was not large when, in the beginning of 1797, the 
 dread of an invasion from France, brought to a 
 height by the landing of a few French troops in 
 Wales, caused a run on the bank for gold. The 
 demand had been very great during the week 
 commencing with the 20th February, 1797 ; and 
 on the ensuing Saturday the directors, alarmed 
 at the rapid diminution of their cash, applied to 
 Government for direction. The King came to 
 town on Sunday, when a privy council was held, 
 and an order issued forbidding the directors to 
 issue any gold in payment until the sense of Par- 
 liament could be taken on the subject. This 
 
 a These were ships laden with corn and bound for France* 
 b Annals of Commerce, vol. iv., p. 407. 
 
77 
 
 order was made public by the bank on Monday 
 morning, and a meeting of the principal mer- 
 chants and bankers of London was held the same 
 day, at which they passed a resolution to receive 
 bank-notes in payment of money due to them, 
 and to make their payments in the same manner. 
 This resolution was afterwards adopted by more 
 than three thousand of the principal merchants, 
 bankers, and traders. 
 
 These transactions taking place while Parlia- 
 ment was sitting, a committee was immediately 
 appointed to inquire into the state, of the bank, 
 and the laws against the issue of notes under 5 
 were suspended. The committee reporting that 
 the affairs of the bank were in a satisfactory 
 state, the order of council was confirmed by 
 act of Parliament/ and the restriction on cash 
 payments continued to the 24th of June then 
 ensuing. By this act bank-notes were not made 
 in express words a legal tender, it was merely 
 declared that payments made in them should be 
 deemed payments made in cash, if made and ac- 
 cepted as such, and parties tendering payment 
 in bank of England notes were exempted from 
 the ordinary form of arrest for debt. The col- 
 lectors of the revenue were also to accept pay- 
 
 a 37 George the Third, c. 45. 
 
78 
 
 ment in notes. In November of the same year, 
 a committee was appointed to consider the expe- 
 diency of resuming cash payments. This com- 
 mittee reported that the bank was in a condition 
 to resume its former manner of payment, which 
 opinion was confirmed by a resolution of the 
 board of directors to that effect ; but the com- 
 mittee further reported that no inconvenience 
 had been felt from the restriction on cash pay- 
 ments, and that as the circumstances which had 
 rendered the suspension necessary might again 
 occur during the hostilities, particularly as it was 
 the avowed intention of the enemy to attack us 
 through our finances, it appeared advisable to 
 continue the restriction until the conclusion of 
 peace. The report of the committee was (may 
 we say unfortunately) adopted, and the restric- 
 tion extended accordingly, until six months after 
 the conclusion of a definite treaty of peace. 
 
 After the first few days business went on as 
 before the suspension, the credit of the bank was 
 not in the least shaken, and its notes circulated 
 as freely as ever at their former value, or even, 
 as it is said, at a premium for a short period. For 
 a time gold continued in circulation with the 
 bank-notes, but the number of guineas grew gra- 
 dually less and less, and though some few re- 
 

 79 
 
 mained, which were used as presents, the fees of 
 physicians, and the like, the currency, for all 
 practical purposes, came to consist of paper only. 
 It is quite clear that the expectation of receiving 
 gold on the arrival of so uncertain an event as 
 the restoration of peace, cannot have made the 
 notes equivalent to gold. They must have cir- 
 culated quite irrespective of this expectation, 
 simply because those who took them believed 
 they should be able to make their payments with 
 them. Under these circumstances, the prices of 
 commodities could have no connexion with the 
 value of gold, and there was, apparently, nothing 
 to influence them but the number of the notes, and 
 here a very curious question arises : Would 
 prices depend upon the number of the one and 
 two-pound notes which supplied the place of the 
 gold which circulated between the dealers and 
 consumers, or upon the whole amount of notes ? 
 It would seem, that if prices are settled by the 
 transactions in the retail trade, they must be in- 
 fluenced by that part of the currency only which is 
 essential to that trade, and would not rise until 
 the gold had disappeared, and one and two-pound 
 notes had been issued to greater extent than the 
 gold had existed. 
 
 It is to be observed that the bank of England, 
 
80 
 
 in the hope of arresting the drain of gold,, had 
 greatly contracted its issues for some time before 
 the suspension of cash payments. The average 
 amount in circulation, for the three years ending 
 December, 1795, having been 11,975,573, and 
 the amount, in 1 797, having been only 8,640,250, 
 yet the price of gold was about 4 per ounce, 
 and bullion was sent abroad even while com- 
 plaints were made of the want of a sufficiency of 
 circulating medium, and of a great fall in prices 
 in consequence/ We shall see hereafter how 
 important these facts are with reference to the 
 question of the causes of gold leaving the 
 country, and the propriety of attempting, in all 
 cases, to retain it by contracting the currency. 
 
 Although there was no peculiar pressure for 
 gold on the bank of Ireland, the Parliament of 
 that country authorized the bank to suspend cash 
 payments, for the sake of uniformity with what 
 had occurred in England. The directors of the 
 bank of Ireland soon turned the privilege to great 
 advantage ; their issues rose from 737,268, in 
 1798, to nearly two millions and a half in 1800. 
 
 The suspension of cash payments by the bank 
 of England gave the first impulse to the long dis- 
 
 & See Mr. Boyd's Pamphlet, p. 11. 
 
cussions upon the currency, which, with occa- 
 sional intervals, have continued to the present 
 day. 
 
 Sir Francis Baring a observed, in a pamphlet in 
 defence of the bank, that gold was drawn from 
 it for three purposes : as a medium of remit- 
 tance to foreign parts ; for the purpose of 
 hoarding, from a want of confidence in the 
 Government and in the circulating paper ; and to 
 supply the country banks while confidence in the 
 bank of England remained entire. He allowed 
 that, when the foreign exchanges are unfavour- 
 able, every effort should be made to prevent the 
 drain of gold ; but while they are favourable, and 
 the demand for gold arises from a shock to the 
 system of credit in the country, the bank should 
 continue its discounts, as all the gold issued must 
 speedily return to it when confidence is restored, 
 and to withhold the supply only increases 
 the evil, thus, in 1793, when the exchanges were 
 in favour of this country, the moment that confi- 
 dence was restored by the grant of the exchequer 
 bills to the tottering houses, the danger ceased. 
 In 1797, the bank had to stand simultaneously 
 the drain caused by unfavourable foreign ex- 
 
 * Observations on the Establishment of the Bank of 
 England and on the Paper Circulation of the Country (1797). 
 
 G 
 
82 
 
 changes, and that originating in a desire to obtain 
 guineas to hoard, through fear of invasion a de- 
 mand such as could be met by no stock of gold 
 which the bank could possibly keep. Sir Francis 
 Baring advised that the suspension should be 
 continued while any dread of invasion existed, 
 lest credit should be again subject to revulsion. 
 He allowed that the value of the bank-notes de- 
 pended upon their number, and he proposed that 
 this number should be limited, to ensure them 
 from a depreciation, a precaution which had been 
 also suggested during the debates in the House 
 of Commons on the Restriction Bill. 
 
 The price of many articles becoming very 
 high shortly after the suspension of cash pay- 
 ments by the bank, people began to consider the 
 two circumstances as connected. The amount 
 of bank-notes issued was kept secret, but Mr. 
 Boyd, a in 1801, attempted to prove the great 
 probability of an increase of them sufficient to 
 cause the rise in prices, he seemed to think that 
 at all times prices depend upon the amount of 
 bank-notes and specie, and that there could be 
 
 a Letter to the Right Honourable Mr. Pitt, on the Influ- 
 ence of the Stoppage of Issues of Specie at the Bank of 
 England, and the Price of Provisions and other Commodities. 
 By Walter Boyd, Esq., M.P. 
 
83 
 
 no doubt that they depended upon the amount of 
 the notes since the restriction, for these notes 
 had become by that measure "the elementary 
 means of circulation, communicating its influence 
 
 the whole paper circulation of the country, 
 rhich turns round it as a common centre." Mr. 
 
 >yd apparently meant, that even allowing prices 
 
 depend upon the amount of the whole circu- 
 lating medium, including in that term the bills of 
 exchange as well as notes and coin, the extent of 
 that circulating medium now depended upon the 
 quantity of bank-notes, as it had formerly upon 
 the quantity of gold in the country. 
 
 Mr. Boyd supported his opinion that the cur- 
 rency had been enlarged, by shewing that the 
 market price of gold had been constantly above 
 the mint price, and the exchanges permanently 
 against this country, facts which he considered to 
 indicate a depreciated currency, though he allows 
 that both these circumstances may arise for a 
 short period from other causes. 
 
 Shortly after the time at which Mr. Boyd 
 wrote, it became known that the bank of Eng- 
 land had increased its issues about three millions 
 and a-half. Sir F. Baring, in some observations 
 upon Mr. Boyd's pamphlet, points to this sum as 
 a triumphant refutation of his arguments in con- 
 
 G 2 
 
84 
 
 sequence of ite complete insignificance. Sir F. 
 Baring evidently did not consider notes as form- 
 ing the basis, but merely a part of the whole sys- 
 tem of paper credit, and his observation implies 
 that he supposed prices to depend upon the 
 amount of the whole of this mass of paper credit. 
 This notion is still sometimes entertained, and it 
 is argued, that no probable amount of gold from 
 the new mines can bear such a proportion to the 
 whole circulating medium, bills, notes, and coin, 
 as to make any perceptible change in its value. 
 It seems, however, quite clear, that if goods go 
 into consumption by comparison with gold, their 
 price must depend upon the quantity and value 
 of gold, and that the amount of the bills of ex- 
 change, which circulate between the dealers, 
 would be increased in proportion to any addition 
 to the quantity of gold. 
 
 About the beginning of the century, we suf- 
 fered from a succession of bad harvests, and the 
 price of corn rose to a very high pitch, wheat 
 reaching 156 shillings a quarter, and barley 90 
 shillings. These enormous prices must have sti- 
 mulated our merchants to make large importa- 
 tions, and, in addition to these inducements, they 
 were offered a bounty by the Government.* We 
 
 a Tooke, History of Prices, vol. i., p. 22. 
 

 85 
 
 may assume, then, that large importations were 
 made ; and we may perhaps assume, too, that they 
 were paid for in gold, as payment in bullion is the 
 usual mode of meeting large importations of corn ; 
 yet there does not seem to have been any difficulty 
 in finding the means to make these purchases, 
 notwithstanding that the bank no longer afforded 
 a store of gold ; nor is there any record of a pe- 
 culiar pressure upon the mercantile classes, or an 
 unusually high rate of interest in consequence of 
 the withdrawal of so much capital in the shape of 
 gold. 
 
 In 1802, Mr. Thornton, one of the bank di- 
 rectors, published his " Inquiry into the Nature 
 and Effects of the Paper Credit of Great Britain," 
 his object being, apparently, to shew that the 
 bank directors were aware of the dangerous nature 
 of the power with which they were entrusted, and 
 that they would be careful not to abuse it. His 
 work contains many important remarks upon the 
 influence which the nature of the circulating 
 medium exerts upon the mercantile and mone- 
 tary transactions of a nation. 
 
 After shewing that credit forms no addition to 
 the capital of the country, Mr. Thornton says 
 that credit is the confidence which exists between 
 merchants, and induces them to sell goods in 
 
86 
 
 consideration of an equivalent promised at a 
 future period. This commercial credit is the 
 foundation of paper credit, paper serving to ex- 
 press that confidence which is in the mind. The 
 multiplication of paper securities serves to enlarge, 
 confirm, and diffuse that confidence among traders 
 which in some measure existed independently of 
 paper, and would, to a certain degree, remain 
 were paper abolished. He states that the pre- 
 cious metals, when coined, are no longer to be 
 considered as commodities, but merely as a mea- 
 sure of the value of other articles (he seeems to 
 think this view of the nature of money essential 
 to the theory that prices depend upon the extent 
 of the currency). He considers bills of exchange, 
 promissory notes, and bank-notes, to be forms of 
 paper credit, and that they came into use in the 
 order above-mentioned as confidence increased 
 amongst merchants. He maintains that bills of 
 exchange circulate commodities like money ; but 
 he allows that they effect fewer payments in the 
 same time than bank-notes, because, as they bear 
 interest, the holder has no special inducement to 
 part with them ; they will, therefore, circulate 
 more slowly, and a greater amount of them than 
 of bank-notes will be required to give the same 
 prices. He seems, indeed, to think that, while 
 
 
87 
 
 bank-notes and bills circulate together, prices 
 are regulated by the amount of the notes only. 
 
 Mr. Thornton is the first author who gives 
 any hint that prices depend upon the state of 
 credit; but he supposes that credit acts upon 
 prices only through the circulation. He .con- 
 siders that prices depend upon the quantity of 
 any medium for the time actually employed in 
 circulating commodities, that whatever increases 
 the reserve of notes or of guineas, which bankers 
 keep by them, lowers prices, for it destroys the 
 action of a part of the circulating medium, while 
 a high state of confidence raises prices, because 
 men keep less reserves, both bank of England 
 notes and gold being hoarded only in times of 
 distrust. The crisis of 1793 is an example of 
 this. There were not at that time fewer bank- 
 notes than usual in circulation, and as soon as 
 confidence was restored by a] loan of exchequer 
 bills, that is, by a loan of Government credit, for 
 the crisis was not relieved by a loan of money, 
 the want of money was no longer felt. 
 
 It may strike the reader that, as Mr. Thornton 
 considers the confidence which is in the mind to 
 be the cause of sales, he should attribute the 
 number of those sales and the state of prices to 
 the extent of that mental confidence, and not to 
 
the amount of the circulating medium for the 
 time actively employed, which is a mere conse- 
 quence of the existing state of confidence. It 
 would seem to be more consistent with his views 
 to suppose that, in times of distrust, it was the 
 want of confidence, and not the diminution of 
 the currency by hoarding, that caused low prices. 
 We shall find the supporters of the Bank Act of 
 1844 adopting Mr. Thornton's views, and main- 
 taining that the fall in prices, which has some- 
 times taken place during a commercial panic, 
 without any previous reduction of bank of 
 England notes, is, in reality, caused by a con- 
 traction of the currency, brought about by 
 hoarding, while their opponents maintain that 
 it arises only from the shock given to credit. 
 The reader will observe that Mr. Thornton does 
 not allow that the notes, when kept in reserve 
 by bankers, have any effect on prices, at least in 
 times of distrust. 
 
 Mr. Thornton says, a large issue of notes raises 
 prices in the following manner : a The traders 
 in the metropolis find that there is an increased 
 facility in obtaining notes for bills, this inclines 
 them to enlarge their speculations ; everybody 
 becomes eager to buy and unwilling to sell, and 
 
 a P. 193. 
 
thus prices may rise, though no large speculations 
 exist, and the increase in the eagerness of each 
 buyer may be trifling. When the number of notes 
 is lessened, exactly opposite effects are produced. 
 He refers, as a proof that prices depend upon 
 the amount of the currency, to what took place 
 with respect to Government securities at the time 
 of the suspension of cash payments ; immediately 
 before that event, the number of the notes had 
 been diminished, and Government securities fell 
 in price ; within a few days after the suspension, 
 when the number of notes had been increased 
 those securities rose again, though no event had 
 occurred to increase the public confidence in the 
 Government, but, on the contrary, the bank had 
 confessed its inability any longer to pay in gold, 
 which should have diminished public confidence 
 in the national securities. We must remember, 
 however, that if the Bank Restriction Act was a 
 good measure under the peculiar circumstances 
 of the times, it would increase public confidence. 
 When Mr. Thornton wrote, bank-notes were 
 issued for one and two pounds, and no gold re- 
 mained in circulation ; but it may, perhaps, occur 
 to the reader to consider how far this process of 
 raising prices, as described by Mr. Thornton, 
 could go on, while the circulation between the 
 
90 
 
 dealers and consumers was, as supposed by Dr. 
 Smith, conducted by gold ; how far could the 
 paper circulation, in the hands of the dealers 
 only, be enlarged and affect prices ; would not a 
 stop be put to the rise because the dealers would 
 find the consumers unable to pay the enhanced 
 price, their circulation not having been enlarged ; 
 would not the rise in prices amongst the dealers 
 be caused simply by speculation, and last for a 
 short period only, the affair being an extension 
 of credit and not of currency. 
 
 Mr. Thornton, in opposition to Dr. Smith, 
 maintains that a currency of notes, convertible at 
 will for gold, may be depreciated by too copious 
 an issue below the value of a metallic currency, 
 and that prices will be raised by such deprecia- 
 tion. It is, he maintains, this rise in prices, and 
 not the filling of the channel of circulation, 
 which turns the exchanges against us, raises the 
 market price of gold above the mint price, and 
 drives gold out of the country ; he says that it 
 is not possible for the channel of circulation to 
 become too full, as stated by Dr. Smith, every 
 increase of paper enhances the price of goods of 
 all kinds, which advanced price affords employ- 
 ment for a larger quantity of circulating medium, 
 
91 
 
 so that the circulation can never be over fall; 
 but the advanced price of goods is the same thing 
 as a reduced price of coin, and it is because coin 
 has thus become cheap that it leaves the country 
 in which the issue of notes has taken place, and 
 goes to others in which there has been no such 
 increase of the currency, and in which the coin, 
 therefore, bears the same relation to commodities 
 as before. Mr. Thornton maintains, however, 
 that this cheapness of our coin maybe occasioned 
 by other causes than an increase of the currency 
 anything which gives rise to a balance of debt 
 against us will produce it : he supposes, as an ex- 
 ample, that the harvest has been bad, and that we 
 have made unusually large importations of corn 
 from Hamburgh, the exporters will draw bills on 
 London and offer them for sale in their own coun- 
 try ; the persons in Hamburgh who want to sell 
 London bills for Hamburgh money will be more 
 in number than those who wish to buy bills on 
 London, or, in other words, to sell Hamburgh coin 
 for London bills. The price of Hamburgh coin, 
 therefore, rises as compared with English money 
 which the bills represent ; gold becomes dear in 
 Hamburgh as valued in English money, gold, 
 therefore, will be sent abroad, the foreign bullion 
 
92 
 
 will be collected in the first place, and when that 
 is exhausted, guineas will be melted down and, 
 exported.* 
 
 Such a depreciation will be accompanied with 
 a rise in the market price of gold, as well as with 
 a fall of the exchanges ; when the coin is thus 
 rendered cheap, bullion is not rendered cheap 
 too, coin is cheap because it is part of our circu- 
 lating medium, the whole of which has been re- 
 latively depreciated ; bullion is a commodity, and 
 nothing but a commodity, and rises and falls in 
 value on the same principle as all other commo- 
 dities. In the case of an unfavourable exchange, 
 we are to consider coin as falling below its 
 proper worth, while bullion retains its accus- 
 tomed price, and hence arises a difference be- 
 tween the mint and market price of gold. b We 
 shall find that Mr. Thornton is supposed to be 
 in error here, and that it is said that no difference 
 can arise between the mint and the market price 
 of gold, while the notes are convertible for gold, 
 but that all the bullion in the country is lowered 
 in value by the same causes which lower the price 
 of coin. This is a very important question, be- 
 cause, on late occasions, when the currency has 
 
 P. 123. 
 b P. 202. 
 
93 
 
 been said to be greatly depreciated, there has 
 been no rise in the market price of gold, though 
 the exchanges have been against us. 
 
 In another passage, Mr. Thornton says, a suc- 
 cession of bad harvests, or the necessity of 
 making large payments abroad, as subsidies to 
 foreign powers and the like, may give rise to a 
 balance of debt against us, which must be dis- 
 charged in gold. The fair statement of the case, 
 he says, seems to be this ; at the time of a very 
 unfavourable balance, produced through the 
 failure of the harvest, the country has occasion 
 for very large supplies of corn from abroad, but 
 the goods which we have to export are not in 
 such demand abroad as to afford even a tolerable 
 price ; the country from which we import corn 
 being, to a certain degree, eager for payment, but 
 not in the immediate want of all that supply of 
 goods which would be necessary to pay the balance, 
 prefers gold, at least in part, for gold can always 
 be turned to a more profitable use than a very 
 great overplus of any other commodity.* Mr. 
 Thornton is supposed here to mean that we have 
 a debt to pay independently of all considerations 
 as to the state of the currency, to discharge 
 
 a P. 131. 
 
94 
 
 which we must send a part of our capital, and 
 that gold is the cheapest and most convenient 
 form in which that capital can be sent. Whether 
 the exportation of gold, in the event of a bad 
 harvest, is a payment of this kind, or a result of 
 the state of our currency, is one of the disputed 
 points in the currency question which will be re- 
 peatedly noticed. 
 
 Mr. Thornton allows that a reduction in the 
 amount of bank-notes will facilitate the return of 
 the gold which has been exported, because such 
 a reduction will raise the value of our whole cur- 
 rency, and make our coin dear at home ; it will 
 also lower prices, and induce our merchants to 
 diminish their importations and foreigners to buy 
 our goods, thus increasing our exports ; but he 
 deprecates any great or sudden reduction of the 
 notes ; he says, that as the greater part of the 
 notes of the bank of England circulate in London, 
 and a large portion of these are in the hands of 
 the bankers, through whom all large payments 
 are made, and who keep no more of them than 
 experience, after all their endeavours to econo- 
 mise them, has shewn to be just sufficient, a 
 very small reduction in the amount of the notes 
 in circulation may produce very great results ; 
 a diminution of one-third or two-fifths might, 
 
95 
 
 perhaps, by checking the power of the bankers to 
 assist their customers, be sufficient to produce a 
 very general insolvency in London ; gold would 
 in such a case be hoarded, and would not re- 
 appear until confidence had been again restored 
 by the previous introduction of paper of some 
 kind. Such a crisis as this, however, could not 
 be allowed to occur ; whether much or little gold 
 were in the country, steps would be taken to 
 induce the bank to issue its usual quantity of 
 notes.* Mr. Thornton observed that there is no 
 substitute for these notes so kept by the private 
 bankers, and that they sustained and regulated 
 the whole paper credit of the country. This, the 
 reader will remember, was written during the 
 suspension of cash payments ; but it would seem 
 that the amount of these bank-notes would at all 
 times have great influence on the state of credit. 
 In order to induce the country from which we 
 have imported the corn to take all its payments 
 in goods, the bank might have to reduce its issues 
 so much as to produce a very great fall in prices, 
 and trade and manufactures might be exceedingly 
 depressed. Again, the favourable effect produced 
 by the contraction of the bank issues on the ex- 
 
 a Such a crisis occurred in 1847* 
 
96 
 
 changes is certainly not instantaneous, and they 
 might rectify themselves in the ordinary course of 
 trade before the reduction of the bank paper 
 could have any effect. It might also be necessary 
 for the contraction of the bank paper to be so 
 large that it might, perhaps, annihilate the whole 
 of the country bank paper (by destroying the 
 credit of the bankers), and in that case the bank 
 of England would have to supply gold for this 
 paper, and thus a fresh demand for gold would be 
 created. For these reasons, it may be the true 
 policy of the bank to permit gold to leave the 
 country for a time, and to a certain extent ; and 
 it must, in that case, increase its loans to the 
 extent to which its gold is diminished. The 
 bank ought to be provided with a fund of gold so 
 ample as to be enabled to pursue this line of 
 policy with safety to itself. 
 
 In another part of his work, Mr. Thornton 
 maintains that, if bank-notes were abolished, 
 other forms of credit would be substituted for 
 them ; a bills of exchange, for instance, would be 
 used, though, as they circulate more slowly than 
 notes, a larger amount of them would be required. 
 If this be so, it does not seem probable that the 
 
 * p. 54. 
 
97 
 
 merchants would allow the prices of all their 
 goods to be altered in order to get the gold back 
 immediately, and that the bank would be power- 
 less to contract the currency unless she could 
 impair the degree of credit and confidence exist- 
 ing at the time. This is another unsettled point 
 in the currency question. 
 
 Mr. Thornton maintains that the country 
 banks have no power over the extent of the 
 currency. If the country banks enlarged their 
 issues, prices would rise locally, and parties 
 would buy in places where the rise had not 
 taken place ; to do which they would require 
 the local paper to be exchanged for a paper of 
 general currency, i.e.) for bank of England notes. 
 However much the country banker might wish to 
 enlarge his circulation, he would be restrained by 
 being compelled to exchange so many of his notes 
 as were excessive for bank of England paper. 
 
 He then examines some objections to the 
 theory that prices depend upon the number of 
 bank-notes. 1. It is said that the increase of 
 bank paper is the effect, not the cause, of high 
 prices. To enlarge bank of England notes 
 merely in proportion as safe and real bills are 
 offered for them, is only to exchange one species 
 of paper for another ; it simply affords a guarantee 
 
 H 
 
98 
 
 to the transaction of the merchant. 2. The de- 
 preciation of the paper arises from a want of con- 
 fidence in it, not from an extension of its quantity. 
 The depreciation of assignats in France did not 
 bear a proportion to the extension of their 
 amount; in September, 1790, four . hundred 
 millions were in circulation, and the discount 
 did not exceed six to ten per cent. ; in May, 
 1791, after many more millions had been issued, 
 the discount was only from seven to ten per cent., 
 nor did prices rise. In England, too, the price 
 of corn has never followed the changes in the 
 amount of bank-notes in circulation. 3. Un- 
 favourable exchanges arise only from an un- 
 favourable balance of trade. The bank should, 
 by a liberal emission of paper, encourage trade 
 and manufactures, the only means of restoring a 
 favourable balance. In answer to these objec- 
 tions, Mr. Thornton states that those who main- 
 tain them must shew that a very large creation of 
 bank-notes fifty millions, for example will not 
 produce the effect which he has mentioned, or 
 that there is some smaller amount which will not 
 produce these effects, and to which the issues of 
 the bank naturally limit themselves (the point is, 
 rather, can the bank issue the notes ? riot what 
 their effect will be). He points out that assignats 
 
99 
 
 were at first kept in hand, in hope of obtaining 
 the land upon which they were issued ; that they 
 were not, in fact, in circulation until their credit 
 fell in this respect ; that bank of England notes 
 have always been in credit ; that they even rose 
 in value immediately after the suspension. That 
 there can be only two modes of employing the 
 increased paper, either in circulating a vast 
 amount of articles which it must itself create, or 
 in transferring the same articles at an increased 
 price. Paper can cause the introduction of goods 
 from abroad only to the extent to which it causes 
 gold to be exported. How does it cause increased 
 production at home ? The first persons who ob- 
 tain a loan of the new notes will set labourers to 
 work, but, as the number of idle labourers can be 
 but few, they must take the greater part of the 
 workmen from employments already in progress. 
 The holders of the new paper acquire a power 
 over a larger share of the existing capital of the 
 country than they had before ; but the holders 
 of the old paper must have a power over a 
 smaller portion of that capital. 
 
 Mr. Thornton agrees with Mr. Hume, that 
 while money is increasing the apparent success 
 of every mercantile and manufacturing transac- 
 tion gives spirit to new enterprise, that it is pro- 
 
 H 2 
 
100 
 
 bable that prices increase faster than wages, and 
 that thus some stock is created at the expense of 
 the labourers ; but he maintains that the increase 
 of commodities will not keep pace with that of 
 the paper. 
 
 The objection that to exchange bank-notes 
 for bills is only an exchange of existing credit, is 
 answered by the fact that bank-notes are so 
 much more efficient instruments of circulation 
 that the change amounts to an extension of the 
 circulating medium. 
 
 That the price of corn has not followed the 
 variations in the number of bank-notes, arises 
 from the fact that the directors of the bank of 
 England have not extended their issues so far as 
 to raise the price of articles sufficiently to 
 overbalance the circumstances which ordinarily 
 affect the price of corn. The increased issue of 
 paper can have raised the prices of commodities 
 above their bullion price only to the extent of 
 the difference between the market price and the 
 mint price of gold. Mr. Thornton calls the at- 
 tention of his readers to the difference between 
 the notes of the bank of England and the paper 
 of the Government banks on the Continent ; he 
 points out that many of its notes are issued on 
 loan to merchants, and are continually returning 
 
101 
 
 to it, and that even those which are lent to 
 Government do not remain in permanent circu- 
 lation, for the Government funds its liabilities from 
 time to time, by means of new loans, and on 
 these occasions, the notes which the Government 
 had paid away return to the bank from the hands 
 of those who subscribe to the loans. These cir- 
 cumstances delay the diffusion of an increased 
 number of bank-notes, and, upon the whole, Mr. 
 Thornton maintains that their number had not 
 been at this time sufficiently increased to affect 
 prices. 
 
 The subject of the depreciation of the currency 
 was taken up the following year by Lord King, 
 Sir Henry Parnell, Mr. Foster, and others, who 
 called the public attention to what was occurring 
 in Ireland, where the issues of notes 'had been 
 increased, as we have seen, in a much greater 
 degree than in this country. The exchange be- 
 tween Dublin and London had become unfavour- 
 able to Ireland to an unusual extent, and an ex- 
 change had sprung up between Dublin and Bel- 
 fast, in which latter town guineas continued to 
 circulate, as the people of the north of Ireland, 
 being dissatisfied with the Government, refused 
 to take the notes of the bank of Ireland. Guineas, 
 too, were sold openly in Dublin at a premium, 
 
102 
 
 and in a short time, the depreciation became so 
 great, that even the worn Irish silver coin became 
 more valuable than its estimated proportion of 
 the depreciated notes ; it disappeared from the 
 circulation, and a new race of small bankers arose, 
 who issued notes for shillings and sixpences. 
 Many of these bankers were small tradesmen, 
 who never troubled themselves to keep any re- 
 serve to ensure payment of their notes/ and are 
 said to have sometimes offered to cash them 
 with the goods in their shops ; they were, in fact, 
 mere coiners, who were saved the trouble and 
 expense of false dies. 
 
 These occurrences in Ireland are very impor- 
 tant ; we shall find it argued that the exchanges 
 were against us, and that the gold disappeared 
 from England only because of a great demand for 
 that metal for the Continent. Now this demand, 
 if it existed, would not have affected Ireland to 
 a greater degree than England. The apparently 
 greater demand, therefore, which existed for gold 
 in Ireland, must have been entirely due to the 
 operations of the bank of Ireland, and it is a fair 
 inference that the apparent demand for gold in 
 England arose from the conduct of the bank of 
 England. 
 
 a Foster, on Exchanges. 
 
103 
 
 Mr. Foster mentions, that in 1753, long before 
 the bank restriction, and while the notes were 
 convertible for gold, an exchange of three per 
 cent, had been established against Ireland in 
 favour of England by too large issues of notes 
 by the Dublin bankers, the consequence was, a 
 large export of gold to England, and, in the suc- 
 ceeding year, the failure of the banks which had 
 issued the paper, a reaction of the exchange in 
 favour of Ireland, and an entire substitution of 
 gold for paper.* 
 
 This instance, as given by Mr. Foster, appa- 
 rently affords very strong evidence in favour of 
 the power of bankers to extend a currency of 
 convertible notes at will, for no mention is made 
 of the prevalence of any speculative mania on 
 this occasion amongst the people ; but we must 
 remember the account of these events is given by 
 a person prejudiced in favour of a particular 
 view, and, perhaps, not aware of the importance 
 of stating all the circumstances of the case. It 
 is not said that the extension of the currency by 
 the bankers on this occasion was accompanied 
 with a general rise in the prices of goods, and it 
 is remarkable that no mention is made by these 
 
 a P. 175. 
 
104 
 
 authors of any great rise in the price of commo- 
 dities in Ireland at the time at which they wrote ; 
 if the currency of that kingdom had really been 
 more depreciated than that of England, the 
 general rise in the price of commodities must, 
 we should suppose, have been greater there than 
 in England. 
 
 In 1804, the exchanges came again nearly to 
 par, and the market price of gold fell to about 
 4 per ounce, in which state affairs remained for 
 nearly five years. As there was no remarkable 
 change in the currency to account for this event, 
 the amount of notes of 5 and upwards in cir- 
 culation being less than that in 1802, by about a 
 million only, a reduction which seems far too 
 small to have produced so marked an effect on 
 the exchanges, it is inferred by Mr. Tooke and 
 others, that the high prices which had occurred 
 previously to this period were not caused by the 
 issues of the bank, but arose from natural causes 
 affecting the individual articles only. Mr. Tooke's 
 opponents, however, would not admit this, we 
 shall see they would account for this fall in the 
 price of gold by the good harvests of the pre- 
 ceding three years, which had increased the 
 amount of commodities to be circulated, thus 
 reducing the redundancy of the currency. It 
 
105 
 
 seems to be assumed that the place of the gold, 
 as it continued to flow out of the country, was, 
 at least, fully supplied by the issue of one and 
 two-pound notes ; if that had not been the case, 
 then the continued efflux of gold would, of itself, 
 have restored the equality between the mint and 
 market price of that metal. 
 
106 
 
 CHAPTER IV, 
 
 PERIOD OF INCONVERTIBLE BANK-NOTES 
 CONTINUED. 
 
 The Berlin and Milan Decrees. Rapid Fall of the Exchanges 
 in 1809, and Rise of the Price of Gold. Mr. Ricardo's 
 High Price of Bullion a Proof of the Depreciation of Bank- 
 notes. His View that neither a Bad Harvest nor a Foreign 
 Subsidy causes Gold to be Exported unless the Currency 
 be Redundant. Importance and Difficulty of this Point. 
 Report of the Bullion Committee in 1810. Mr. Huskis- 
 son's Pamphlet in Explanation of the Report. His Opi- 
 nion as to the Ruinous Consequences of a Continuous 
 Depreciation of the Currency. Attack upon the Bullion 
 Report by Mr. Bosanquet. His Reasons for supposing 
 that the Bank cannot Increase its Issues at will Mr. 
 Ricardo's Answer, and his Theory that an Increase of 
 Convertible Notes depreciates the Value of Gold Bullion. 
 Arguments of Mr. Rose against the Existence of a De- 
 preciation, and of Lord Castlereagh against the Policy of 
 making our Currency vary with the Exchanges. Rise of 
 the Exchanges and Fall in the Price of Gold on the Con- 
 clusion of Peace. Sudden Revulsion on the Escape of 
 Napoleon from Elba. Mr. Blake's Observations on these 
 Facts. Great Fall in the Price of Agricultural Produce in 
 1813 and following years. Consequences of this Fall in 
 Prices, and Theories deduced from them. Bill of 1819 
 
107 
 
 directing a Return to Cash Payments. Small Extent of 
 the Depreciation and Steadiness of the Currency during 
 the Restriction. Foreign Transactions conducted without 
 a Store of Gold in the Bank. Effect of the State of the 
 Currency on the Working Classes. 
 
 ON the occupation of Hanover by the Prussians, 
 in 1806, and the exclusion of British shipping 
 and commodities from its ports, a notice was 
 issued by our Government to neutral powers, 
 stating that means had been taken to place the 
 rivers Ems, Weser, Elbe, and Trave, the outlets 
 of Prussian commerce, in a state of blockade, 
 which blockade was soon afterwards extended 
 to the whole coast, from the Elbe to Brest. In 
 retaliation, Napoleon issued the celebrated Ber- 
 lin and Milan decrees, declaring that all com- 
 merce with the British islands was interdicted, 
 that all letters directed to England, or to an Eng- 
 lishman, should be seized ; that every subject of 
 England found in the countries occupied by his 
 troops and those of his allies, should be made 
 prisoner of war, and that all property belonging 
 to English subjects should be good prize, and all 
 English manufactures, to whomsoever they might 
 belong, should be confiscated. 
 
 In consequence of these decrees, orders in 
 council were issued by the British Government 
 
108 
 
 prohibiting all trade from one port to another in 
 the possession of France or her allies, or so far 
 under her control that British vessels might not 
 freely trade there/ and subjecting all the ports 
 and places of France and her allies, or of any 
 other country at war with England, and all other 
 ports and places of Europe, from which the 
 British flag was excluded, to the same restraint 
 in point of trade as if actually blockaded. 
 
 An immediate consequence of these proceed- 
 ings was a quarrel between England and the 
 United States respecting the rights of neutral 
 vessels, and all intercourse between those two 
 countries ceased. 
 
 The writer of the historical division of the 
 Annual Register for 1 806, which was not pub- 
 lished until 1808, states that the Berlin and 
 Milan decrees soon became perfectly harmless 
 and inoperative, that some slight and temporary 
 embarrassments were experienced from them at 
 first, but that in a short time their existence was 
 known only by the bribes given to the generals 
 of division and custom-house officers for omitting 
 to enforce them. These decrees and our own 
 
 a Annual Register, 1807, p. 672, 
 
109 
 
 orders in council were indeed systematically dis- 
 regarded by the Governments which issued them; 
 licences were granted by both parties for the trans- 
 mission of goods between the forbidden ports, even 
 corn was imported into England by permission 
 purchased from Napoleon. The general result, 
 however, of these measures and of the cessation 
 of intercourse with America, was a great check 
 to trade, and a change in its character and direc- 
 tion. Raw produce, and the materials of manu- 
 facture in this country, and on the Continent 
 manufactured articles and colonial produce, rose 
 very much in price. The expense of importing 
 hemp, tallow, and timber was increased tenfold, 
 the freight and insurance of these articles from 
 the Baltic were from 20 to 30 per ton ; raw 
 silk was sent from Italy to England through 
 Russia and Turkey, and was more than a year on 
 the road, at the same time there was so great an 
 accumulation of colonial produce in our ware- 
 houses, and on the Continent so great a scarcity 
 of it, that the price of sugar was with us six- 
 pence, and on the Continent from six to eight 
 shillings a pound, and other articles of colonial 
 produce in proportion.* 
 
 
 
 a Tool's History of Prices, yol. i., p. 309. 
 
110 
 
 Very shortly after these occurrences, in the 
 heginning of 1809, the exchanges became sud- 
 denly very unfavourable to this country, and the 
 market price of gold rose to 4 10s., and even 
 to <4 13s. per ounce. The controversy on the 
 state of the currency was immediately renewed, 
 many pamphlets were written on the subject, 
 and it attracted the attention of Parliament. 
 
 Mr. Ricardo commenced the second part of 
 the discussion by his " High Price of Bullion a 
 Proof of the Depreciation of Bank-notes." He 
 maintained that the precious metals employed in 
 circulating the commodities of the world have 
 been divided in certain proportions among the 
 different civilized nations of the earth, according 
 to the state of their commerce and wealth, and, 
 therefore, according to the number and frequency 
 of the payments which they have to perform ; 
 that while so divided, the precious metals pre- 
 serve everywhere the same value, and as each 
 country has an equal necessity for the quantity 
 of them actually in use, there can be no tempta- 
 tion offered to any for their exportation or im- 
 portation. 
 
 If any nation increased in wealth as compared 
 with others, a greater proportion of the money of 
 the world would be allotted to it. If any nation 
 
Ill 
 
 lost a part of its wealth, it could not retain the 
 same quantity of the circulating medium that it 
 before possessed ; a part would be exported and 
 divided amongst the other nations of the world, 
 till the usual proportion was established. 
 
 While the relative situation of countries con- 
 tinued unaltered, they might have abundant 
 commerce with each other, but no money would 
 pass, as it would have the same value in all coun- 
 tries, all transactions would be settled by bills of 
 exchange. 
 
 If, under these circumstances, says Mr. Ri- 
 cardo, a mine of gold were discovered in any 
 country, the currency of that country would be 
 lowered in value, goods would rise in price, and 
 gold would flow from that country to the rest of 
 the world. If, instead of the gold mine, a bank 
 were established, whose notes fulfilled the office 
 of gold, the circulating medium would, in like 
 manner, be enlarged and lowered in value, goods 
 would rise proportionately in price, and the equi- 
 librium between that and other nations would 
 have to be restored by the exportation of a part 
 of the coin. 
 
 Mr. Ricardo maintains that gold is never ex- 
 ported except in cases where this equilibrium 
 has been disturbed, and the currency of one 
 
112 
 
 country become redundant as compared with 
 that of some other. He rejects Mr. Thornton's 
 suggestion that gold is exported in the event of 
 a bad harvest because it is the most convenient 
 form in which we can transfer the necessary 
 amount of capital, and because other nations are 
 unwilling to receive payment in commodities. 
 He says, if we give coin in exchange for goods, 
 it must be from choice, not necessity ; we 
 should not import more goods than we export, 
 unless we had a redundancy of currency, which 
 it therefore suits us to make a part of our exports, 
 The exportation of coin arises from its cheap- 
 ness, and is the cause, never (as Mr. Thornton 
 supposes) the effect of an unfavourable balance. 
 We should not export if we did not send it to a 
 better market, or if we had any commodity 
 which we could export more profitably ; it is a 
 salutary remedy for a redundant currency, and 
 the demand for our coin abroad arises only from 
 the comparative deficiency of the currency of the 
 importing country, which there causes its superior 
 value. (By a salutary remedy for a redundant 
 currency Mr. Ricardo means that it would reduce 
 our currency to its proper level.) Mr. Ricardo 
 carries this theory so far as to maintain that even 
 subsidies to foreign powers will not be paid in 
 
113 
 
 specie, unless our currency be redundant as com- 
 pared with that of the country to which the pay- 
 ment is to be made. 
 
 When our harvest is bad, Mr. Ricardo main- 
 tains that England is in the position of a country 
 which has lost part of its wealth. The currency, 
 which was before equal to her payments, would 
 now become superabundant, prices would rise at 
 home, and the currency would be cheap in pro- 
 portion to that of other countries. 
 
 The reader will see that Mr. Ricardo is the 
 originator of those views which we mentioned in 
 our account of Dr. Smith's work, as being op- 
 posed to the opinions held by that writer. Mr. 
 Ricardo considers all the bullion in the country 
 to be money, and applicable for the purchase of 
 commodities ; he cannot allow that any portion 
 of the precious metals possessed by the nation 
 can be used, as Dr. Smith supposes, only for the 
 purposes of international adjustment, without in 
 any case affecting internal prices. There is, cer- 
 tainly, great force in Mr. Ricardo's argument, 
 particularly if part of the bullion which Dr. 
 Smith would consider set apart for international 
 purposes should consist, as would now be the 
 case, of the coin of the realm . Economists seem 
 now to consider that the value of any article 
 
 i 
 
114 
 
 depends upon the supply of it known to be 
 capable of being brought to market, and that 
 supply, in the case of money, appears to include 
 the reserves which, though occasionally required 
 for making foreign payments, are, for the time, 
 not employed in performing that duty, but are 
 lying idle in the hands of the merchant or banker. 
 Mr. Ricardo seems, however, to have considerable 
 difficulty to meet, when applying his theory to the 
 case of a bad harvest. It has been found, a that 
 when any article of vital importance, such as corn, 
 becomes scarce, its value, when compared with 
 other commodities, rises more than in proportion 
 to the diminution of the quantity. We should, 
 therefore, expect, that a larger quantity of a cur- 
 rency such as ours, consisting of pieces of bullion 
 of full weight, would be required when our har- 
 vest is bad. Mr. Ricardo seems to get over this 
 difficulty by supposing that even money of this 
 kind is but a sign of value, and that the prices of 
 commodities reckoned in such a currency, depend 
 as completely upon the number of pieces, with- 
 out any reference to their intrinsic value, as if 
 those pieces were mere paper. It is only on this 
 supposition that there appears any possibility of 
 
 a History of Prices, vol. i., p. 13. 
 

 115 
 
 considering that prices depend upon a compa- 
 rison of the whole number of pieces with the 
 whole of the commodities, and that a destruction 
 of part of the commodities necessarily raises the 
 price of the remainder. It is difficult to grant 
 this supposition to Mr. Ricardo. The reader will 
 remember, that at this time, when the currency 
 consisted of inconvertible notes, the money 
 of the country was undoubtedly a mere sign of 
 value. 
 
 Mr. Ricardo shews that an increase in the 
 quantity of money has no permanent effect upon 
 the rate of interest, the absence of any such 
 effect having been set up at this time, as a proof 
 that the currency was not increased, he shews 
 that the rate of interest depends upon the supply 
 of loanable capital, materials, food for labourers, 
 &c., in the market, and not upon the amount of 
 the money in which they are valued ; but he 
 allows, that while money is increasing the rate of 
 interest will be lowered; during the interval be- 
 tween the increase of money and the consequent 
 rise in prices, there would be a sensible abun- 
 dance of money, and the rate of interest would 
 fall. Mr. Ricardo agrees with Mr. Thornton 
 that the issues of the country bankers depend 
 upon those of the bank of England, upon 
 
 i 2 
 
116 
 
 the ground that if their issues were increased, 
 their notes would become less valuable than bank 
 of England notes, and would be exchanged for 
 them. 
 
 In the next year, 1810, a committee of the 
 House of Commons was appointed, on the mo- 
 tion of Mr. Horner, to inquire into the causes of 
 the high price of gold bullion, and to take into 
 consideration the state of the circulating medium* 
 This committee is celebrated in the annals of 
 the currency question as the bullion committee, 
 and those who support its views as bullionists. 
 Jt numbered amongst its members Mr. Horner, 
 Mr. Thornton, and Mr. Huskisson. 
 
 The committee addressed their inquiries, in 
 the first place, to the opinion then prevalent that 
 the high price of gold arose from the scarcity of 
 it, caused by an unusual demand upon the conti- 
 nent of Europe for the payment of the armies 
 and for the purpose of hoarding. They stated 
 that there did not appear to be, in reality, any 
 rise in the price of gold on the continent, com- 
 modities were no cheaper there, and in those 
 countries where the measure of value was silver, 
 and gold only a commodity, its price was not 
 raised. The great supply of gold which had 
 been sent to the continent from this country 
 
117 
 
 must, they alleged, have satisfied the demand for 
 the armies. They maintained that there was no 
 evidence of a scarcity of gold bullion even in this 
 country, though the coin had disappeared ; and 
 they referred to the experience of former wars, 
 during which there had been no suspension of 
 cash payments and no scarcity of gold, and they 
 stated that silver had risen in price in proportion 
 to the gold, though no scarcity of that metal was 
 alleged ; they therefore inferred that gold had 
 disappeared from our currency because of large 
 issues of notes by the bank. 
 
 Whether gold left the country at this time be- 
 cause it was rendered cheap by the issue of bank- 
 notes, or because there existed a great demand 
 for it abroad, is a very important question, as it 
 is now alleged, in like manner, that silver leaves 
 Europe because there is a great demand for it in 
 China and India, and not because it has been 
 rendered cheap by a fall in the value of the gold 
 coin, for which it can be procured in exchange. 
 It is, however, evidently very difficult to ascertain 
 whether gold was unusually dear on the continent 
 at this epoch. Many causes, in such disturbed 
 times, would influence the price of commodities. 
 The comparison with silver is not to be depended 
 upon as a proof that there was no such increase 
 
118 
 
 of price, because the same causes which created a 
 demand for gold would, to a considerable extent, 
 influence silver ; nor is the fact that in former 
 wars there was no such demand for gold abroad 
 conclusive, for there never had been a time at 
 which the hoarding of gold on the continent was 
 likely to have been carried on to the same extent 
 as at this time. On the other hand, there is no 
 evidence to shew that a scarcity of gold was felt 
 in Europe ; prices were not unusually low on the 
 continent. It is inconceivable, too, that any de- 
 mand for the continent could have so completely 
 stripped us of our gold coin unless the state of 
 the currency had facilitated the process. 
 
 Most of the witnesses examined before this 
 committee attributed the great fall in the ex- 
 changes which had recently occurred, to the dis- 
 turbance of the usual commercial relations of this 
 country with the continent in consequence of the 
 Berlin and Milan decrees. The committee allowed 
 that this might have been the original cause of 
 the fall of the exchanges ; but they maintained 
 that the extension of the currency by the bank 
 was the reason why there had not been the usual 
 recovery from such a fall. Before the restriction 
 on cash payments the exchanges, they say, would 
 have been restored by the transmission of guineas, 
 
119 
 
 which would have caused a contraction of the 
 circulation, and consequent fall in prices. The 
 continuance of the low rate of exchange and the 
 high market price of gold, taken together, they 
 considered an infallible sign of a depreciated 
 currency. 
 
 The bank directors, and some of the merchants 
 examined before this committee, stated that, in 
 their opinion, there could not be an excess in the 
 issue of bank paper so long as it was issued on 
 the discount of good bills, growing out of real 
 commercial transactions, and having but short 
 periods to run. The bank-notes, say the direc- 
 tors, will return if not required, because no one 
 will pay interest for them if he do not want to 
 make use of them. a The committee dissent from 
 this position if the notes be inconvertible ; but 
 they agree with Dr. Smith, that if the notes be 
 convertible at will for gold, the bank directors 
 cannot produce much excess in the circulation 
 without having their notes returned upon them 
 for specie. When notes are issued in discount of 
 a bill, the operation is, at first, an advance of so 
 much capital; but so soon as the notes are 
 exchanged for goods, they fall into the channel 
 
 a P. 33. 
 
120 
 
 of circulation, and form so much circulating me- 
 dium, and are an addition to the mass of the 
 currency, any given portion of which is depre- 
 ciated as compared with commodities. If the 
 addition were made by notes convertible into 
 specie, this diminution of the relative value of 
 any given portion of the whole mass would 
 speedily bring back upon the bank which issued 
 the notes as much as was excessive (the com- 
 mittee do not say why the notes would come 
 back, but they evidently seem to think they 
 would return before they affected prices) ; but if 
 the notes are not convertible, they will remain in 
 circulation until the bill is paid. In the mean- 
 time, they perform the functions of currency, 
 and before they come to be paid in they have 
 been followed by a new issue of notes in a similar 
 operation of discounting. Each successive ad- 
 vance repeats the same process. If the amount 
 of discounts is progressively increasing, the 
 amount of paper which remains out in circulation 
 over and above what is otherwise wanted for the 
 occasions of the public, will progressively increase 
 also, and the money prices of commodities will 
 progressively rise. 
 
 The committee allowed that there had not 
 
121 
 
 been a very accurate correspondence between 
 the amount of bank of England notes and the 
 state of the Hamburgh exchange during several 
 years, but they maintained that even a greater 
 discrepancy would not have given them any dis- 
 trust in the general principles which they had 
 stated. They adopted Mr. Thornton's theory, 
 to account for occasional fluctuations in prices 
 of a general character, while the issues of the 
 bank had appeared to be unchanged, namely, 
 that, on those occasions, the currency had been 
 rendered more or less efficient in consequence of 
 the greater or less confidence that existed at the 
 time. 
 
 There is nothing in the report of the committee 
 confirmatory of Mr. Ricardo's view, that bullion 
 can never be exported except when the currency 
 is depreciated ; on the contrary, they allow that 
 circumstances totally unconnected with the state 
 of the currency will cause an exportation of the 
 precious metals, but this will not continue for 
 any length of time unless the currency is depre- 
 ciated. 
 
 The committee elicited from the bank directors 
 that they had not been in the habit of attending 
 to the state of the foreign exchanges or the price 
 
122 
 
 of gold, in regulating the issue of their notes. 
 The directors stated that their principle was to 
 look to the amount already advanced to the indi- 
 viduals asking discount, to the solidity of the 
 paper, and the appearances of its being wanted 
 for commercial purposes. 
 
 The committee reported in favour of resuming 
 cash payments- 
 
 Shortly after the publication of the bullion 
 report, Mr. Huskisson wrote a pamphlet on the 
 subject of the supposed depreciation of bank- 
 notes, which is remarkable as shewing the inju- 
 rious effects which that eminent statesman sup- 
 posed that a progressive fall in the value of money 
 would produce upon the national prosperity. He 
 says, to lower the standard of the currency by 
 an act of the state, though practised in less en- 
 lightened periods, is now justly reprobated and 
 condemned, as too disgraceful in its principle and 
 too ruinous in its policy to be resorted to, even 
 by governments the most arbitrary in their inter- 
 nal administration and the most destitute of more 
 substantial resources. Yet this injury once done, 
 the extent of the evil would be known ; prices at 
 home and abroad once accommodated to the 
 change in the value of our currency, all uncer- 
 tainty and consequent speculation upon a further 
 
123 
 
 disarrangement would cease. Creditors, annui- 
 tants, and all who possessed . incomes fixed in 
 amount by a contract of any description, would 
 be able to measure the extent of their loss. All 
 future leases and bargains for time, would be 
 made with a reference to this definite alteration 
 in the common measure of all exchangeable 
 commodities The existing evil (meaning the 
 depreciation of bank-notes) is indefinite, un- 
 certain, and fluctuating, though progressive in 
 its growth (like the depreciation of money 
 threatened by the new gold) ; ' it has, conse- 
 quently, a greater tendency to discourage and 
 unsettle all the transactions of society, and to 
 depress the labouring classes, and all who derive 
 their incomes from salaries or wages of any descrip- 
 tion. It increases the expenses of Government, 
 and adds to the amount of the annual loans and 
 taxes ; a saving, it is true, accrues to the state 
 from paying the wages of valour, talent, industry, 
 and labour, in a depreciated currency, and from 
 the reduction which is thus made in the value of 
 the dividend paid to the public creditors ; but 
 these savings to the state are more than counter- 
 balanced by its increased expenditure, and the in- 
 creased taxation necessarily consequent upon it 
 doubly aggravates the evil on those classes of the 
 
124 
 
 community at whose expense these savings are 
 made, by taking from them a large proportion of 
 their already depreciated incomes for the pay- 
 ment of all the other charges of the state. Mr. 
 Huskisson denies that the landed or mercantile 
 interest will be benefited by the continuance of 
 the depreciation ; the landholders, whose lands 
 were in lease, would be direct losers, and a check 
 would be given to the granting of leases which 
 would prevent the improvement of their estates, 
 nor could the increased rent which they received 
 be a real gain, for it would not be exchangeable 
 for more commodities than they would have be- 
 fore received. As to the commercial class, some 
 have, no doubt, obtained more easily credit upon 
 the discount of mercantile securities ; but it is a 
 doubtful question whether the mercantile body 
 of the country, considered in the aggregate, has 
 reaped any substantial advantage from the super- 
 abundance of paper. The mercantile and manu- 
 facturing classes, he admits, are not necessarily 
 exposed to the same injury as is cast upon the 
 other classes of the community ; but let them 
 remember all the ties with which they are con- 
 nected with those classes, and that the durable 
 prosperity of the one cannot be built upon the 
 distress of the other. 
 
125 
 
 With reference to the high price of gold on 
 the continent, Mr. Huskisson treats the fact that 
 the price of commodities had not fallen on the 
 continent as incontestible. 
 
 The bullion report was immediately attacked 
 by two classes of opponents, first, by the dis- 
 ciples of Law, who were far from being extinct 
 in England, and who considered an abundance 
 of money of any kind the great source of national 
 prosperity, and, secondly, by those who denied 
 the existence of any increase of the circulating 
 medium, and the correctness of the statements 
 and reasonings of the committee ; of these latter 
 opponents, Mr. Bosanquet, one of the directors of 
 the bank of England, was the most able, he en- 
 deavoured, in his " Practical Observations on the 
 Report of the Bullion Committee," to shew that 
 the theory contained in that report was not borne 
 out by the facts of the case. Mr. Bosanquet was 
 followed, step by step, by Mr. Ricardo, in his 
 Reply to the Practical Observations on the Re- 
 port of the Bullion Committee." We can notice 
 but one or two of their arguments. 
 
 Mr. Bosanquet said that the bank could not 
 increase its issues beyond the legitimate demands 
 of trade, because merchants never come to the 
 bank of England for discount until money is so 
 
126 
 
 scarce that they cannot get it elsewhere. As 
 soon as the amount of notes in the hands of the 
 public exceeds their ordinary wants, they employ 
 them, not in purchasing commodities, hut in dis- 
 counting the best bills. The demand for notes 
 at the bank then ceases, for these bills are no 
 longer taken to the bank of England for dis- 
 count, and the payment to the bank of the bills 
 already discounted by it causes its notes to return 
 to it, and thus their number is diminished. Upon 
 this Mr. Ricardo observed that the excess of 
 notes immediately begins to cause a depreciation 
 of the currency and a rise in prices, which, by 
 extending the nominal amount of all transactions, 
 gives rise to a demand for nominally higher dis- 
 counts, requiring a larger issue of notes. He 
 says : Let it be supposed that a bank of un- 
 doubted credit is established in a country whose 
 circulation is wholly metallic, let such a bank 
 discount bills with its notes and make^ advances 
 to Government. According to Mr. Bosanquet, 
 their notes ought immediately to return to them 
 as soon as issued, because the circulation being 
 already sufficient for the commerce of the coun- 
 try, no additional currency could be employed. 
 If the principle advanced on behalf of the bank 
 were true, not a note could have been kept in 
 
127 
 
 circulation before the restriction, nor would the 
 discovery of the mines of America have added 
 one guinea to the circulation of England. The 
 additional gold would, according to this system, 
 have found a circulation already adequate, and in 
 which no more could be admitted. 
 
 In estimating the force of this argument, the 
 reader must remember that the notes took the 
 place of the gold because there was another em- 
 ployment ready for the displaced gold, and that 
 the interest of the issuers of the notes and of the 
 public combined to incline all parties to direct 
 the gold to this new employment, and to use 
 notes in its place. If the currency consisted of 
 inconvertible paper, this inducement to make use 
 of new issues of notes would not exist. 
 
 In this answer to Mr. Bosanquet, Mr. Ricardo* 
 maintains a theory which is of great importance 
 in the question whether a currency of notes con- 
 vertible for gold can be depreciated. We have 
 seen that Mr. Thornton supposed that such de- 
 preciation would be shewn by a rise in the market 
 price of gold. The same view was entertained 
 by other writers at this time. Mr. Blake, in his 
 essay on exchanges, says : When the currency is 
 
 a Political Works, p. 337. 
 
128 
 
 extended by an issue of paper, an ounce of gold 
 rises in value in the market ; but in the currency 
 it cannot rise above the mint price ; it cannot 
 legally be tendered in payment for more than 
 3 17s. lOJd. A profit will arise from convert- 
 ing coin into bullion, and it will be melted. It 
 is from this cause, and not because there is a de- 
 mand for gold abroad, that coin is taken out of 
 the circulation. An exportation of bullion fre- 
 quently follows this melting, because the amount 
 of bullion here is increased in proportion to that 
 of other countries, and its price is lower here. 
 According to these views, the absence of any 
 difference between the mint and market price of 
 gold, and such difference has not been known to 
 exist while the notes were convertible, should 
 prove that such a currency cannot be depreciated. 
 Mr. Ricardo, however, says that, in our currency, 
 coin and bullion are identical, because coin can be 
 converted into bullion and bullion into coin at 
 will ; whatever, therefore, makes coin cheap will 
 make bullion cheap also ; and how much soever 
 the currency may be increased, bullion will fall in 
 price along with it. We shall find great reliance 
 placed upon this very subtle argument by those 
 of Mr. Ricardo's disciples who support the Bank 
 Act of 1844. 
 
129 
 
 Mr. Ricardo observes, the value of the gold 
 currency formerly regulated the value of the 
 pound sterling all over England. If gold had 
 become more abundant from the discovery of 
 new mines, and more money had been employed 
 in London, a proportionate increase must have 
 taken place in the country, to preserve equality 
 of prices. Bank-notes then performed the office 
 of gold, and if they were increased, the country 
 banks must have made use of a proportionally 
 larger number of them, or must, have increased 
 their own issues. 
 
 In this pamphlet Mr. Bosanquet certainly failed 
 to shew that it was impossible to increase a 
 currency by the issue of inconvertible notes. 
 In a second edition, he even acknowledged that 
 the gold contained in a guinea was, at that time, 
 of more value than twenty-one fortieths of a two- 
 pound note, and that, in fact, gold was no longer 
 the standard of value. He allowed that, under 
 these circumstances, it was not easy to say what 
 was the standard of value ; and he proposed that 
 the interest of <33. 6s. 8d. Three per Cent. Stock 
 should be considered as the standard pound a 
 ridiculous proposal, for what was to measure the 
 <33. 6s. 8d. but allowing that bank-notes were 
 no longer equivalent to the gold they repre- 
 
130 
 
 sented. Mr. Bosanquet denied, with more suc- 
 cess, that the currency had been increased by 
 the bank of England ; that it was depreciated in 
 the ordinary sense of the word, that is, was of 
 less value than formerly when compared with 
 commodities ; it was the gold that had become 
 scarce. This is a most important phase of the 
 question, to which we shall soon recur. 
 
 About this time there occurred a great amount 
 of commercial distress, and many failures took 
 place ; these events may readily be accounted 
 for, not only by the check which had been given 
 to trade by the measures of Napoleon, but by the 
 rash speculation which had taken place on the 
 opening of the market of Brazil about this time ; 
 they were, however, sometimes attributed to the 
 fear of a contraction of the currency in the event 
 of the adoption of the bullion report. The distress 
 on this occasion was not of long continuance. 
 
 In the following year, 1811, Mr. Horner moved 
 a series of resolutions, founded upon the report 
 of the bullion committee, to the effect that bank- 
 notes were depreciated as compared with coin, 
 that the depreciation was caused by the excessive 
 issue of the bank of England, that the exchanges 
 were unfavourable in consequence of the depre- 
 ciation of the currency ; that it was the duty of 
 
131 
 
 the directors of the bank of England to look to 
 the state of the foreign exchanges as well as 
 the price of bullion, with a view to regulate the 
 amount of their issues, concluding with a proposal 
 to resume cash payments in two years. 
 
 Mr. Horner's resolutions were supported by 
 arguments so similar to those which we have 
 already examined, that it is unnecessary to repeat 
 them ; we shall refer only to one passage in the 
 speech of Mr. Thornton, the author of the work 
 on paper credit. Mr. Thornton insisted upon 
 the gradual and continual rise which it was 
 allowed had taken place in property of all kinds, 
 whether land, houses, shops, or commodities, as 
 strong evidence of a depreciation in the value of 
 money, arising from its existence in greater quan- 
 tity than before the restriction on cash payments. 
 
 Those members who took the opposite side of 
 the question were obliged to acknowledge that 
 bank of England notes were no longer equivalent 
 to coin, and they were driven to definitions of 
 the existing standard even more absurd than that 
 of Mr. Bosanquet. Lord Castlereagh described 
 it as a " sense of value in reference to currency 
 as compared with commodities." They rested 
 their opposition to the bullionists upon two most 
 important grounds (1) that though bank of 
 
132 
 
 England notes might be depreciated, as com- 
 pared with gold, the amount of the currency had 
 not been increased, and that therefore the high 
 prices of commodities could not be a conse- 
 quence of the Bank Restriction Act ; and (2) 
 that to make our currency dependent on the 
 foreign exchanges at a time when they were 
 subject to such very great fluctuations, far from 
 rendering our standard of value steady, would 
 have the effect of making it to the last degree 
 uncertain. 
 
 Mr. Rose observed in support of the first of 
 these points, that since the suspension of cash 
 payments there had been a very great increase in 
 the amount of commodities to be circulated, re- 
 quiring an increase of currency, instead of which 
 he affirmed that the currency was not then so 
 large as it had been in 1798 ; he estimated the 
 amount of guineas in circulation in 1798 at 35 
 millions, and the amount of them in circulation 
 in 1811 as not more than three millions. To 
 so great an extent had gold disappeared from 
 the currency, that in Mr. Rose's county out of 
 426,000 collected in taxes, only <476. 8s. were 
 paid in specie. The bank of England notes 
 amounted in 1798 to 11,278,000, and in 1811 
 to 23 millions; thus the total currency in 1798 
 
133 
 
 | 
 
 amounted to 46,278,000, and in 1811 to 26 mil- 
 lions only, making the currency in 1811 less than 
 that in 1798 by 20 millions. (There is no doubt 
 that Mr. Rose's estimate of the guineas in circu- 
 lation in 1798 is far too high. Mr. Tooke, a 
 from a comparison of many estimates by various 
 persons, supposes the amount of guineas before 
 the suspension to have been about 22 millions 
 and a half only, this would still leave an excess of 
 13 and a half millions in favour of the currency of 
 1798, but Mr. Rose neglects the country bank- 
 notes on both occasions. The amount of country 
 notes in 1811 was about 21 millions, the amount 
 of country bank-notes in 1798 is nowhere stated, 
 but it must have been much less than 1 1 millions, 
 as no one-pound notes were then issued by the 
 country bankers ; if we take it at five millions, a 
 probable amount, we shall have the currency in 
 1811 exceeding that of 1798 only by three mil- 
 lions, no large amount considering the great in- 
 crease of commodities to be circulated and the 
 great increase from natural causes of the prices 
 of many articles,) 
 
 As to the general rise in the price of all articles 
 mentioned by Mr. Thornton, Mr. Rose stated 
 
 a Tooke's History of Prices, vol. i., p. 131. 
 
134 
 
 that he had ascertained that the price of com- 
 modities had gradually increased in France since 
 the commencement of the war, as it had done in 
 this country, and he quoted a statement contained 
 in a report of the Agricultural Society of Paris 
 in 1805, that in most of the departments the 
 price of labour was increased since 1789 by one- 
 third, while in a few it was doubled, that all the 
 instruments of cultivation were raised in pro- 
 portion, building materials from a third to a 
 fourth, beasts of labour about one-half, and all 
 the articles requisite for the maintenance of 
 the farmer's family in the same proportion ; he 
 mentioned also that M. Daru, a in a speech to 
 the Legislative Assembly in January, 1810, ob- 
 served that the revenue appointed to Louis 
 the Sixteenth, and afterwards continued to Na- 
 poleon, was no doubt very considerable, but 
 that if attention were paid to the real value of 
 money at that time and at present, it would not 
 be thought an extravagant assertion that the 
 same income did not at the time at which he was 
 speaking represent more than two-thirds of what 
 it had done in the time of Louis the Sixteenth. 
 With regard to the second point, Lord Castle- 
 
 a Tooke, vol. i., p. 336. 
 
135 
 
 reagh observed, " To what an extent of mischief 
 must it not lead, so long as the foreign exchanges, 
 and with them the price of the precious metals, 
 are convulsed by the violence of the enemy, should 
 the scale of value within the country be made to 
 undergo similar variations. The value of pro- 
 perty would become so uncertain, that no man 
 could judge one day what he would be worth the 
 next. The quantity of circulating medium must 
 be so enormously and so rapidly reduced as to 
 throw everything into confusion, yet such must 
 have been the result had the Bank Restriction 
 Bill not been passed. Why," he asks, " should 
 we throw away the benefit experienced under 
 that bill, by voluntarily inflicting on ourselves 
 the mischiefs it was intended to obviate ?" 
 
 It seems to have been supposed at this time 
 that the suspension of cash payments facilitated 
 the raising of the public loans. Mr. Horner's 
 motion was treated as an attempt to embarrass the 
 Government, the affair became a party question, 
 his resolutions were rejected, and others, opposed 
 both to the facts advanced by the bullionists and 
 to the inferences drawn from them, and including 
 a distinct declaration that bank of England notes 
 were at that time equivalent in value to the legal 
 coin of the realm, were proposed by Mr. Van- 
 
136 
 
 sittart, supported by the Government, and carri 
 by a large majority. 
 
 We have seen that the act of Parliament by 
 which cash payments were suspended, did not 
 make bank-notes a legal tender, but merely pro- 
 hibited the bank from paying them in gold, de- 
 clared they should be received in payment of 
 taxes, and protected persons offering them in 
 payment from arrest. On one occasion since the 
 passing of the act, payment of a country bank- 
 note had been demanded in gold, and it was held 
 by the Judges that the demand could not be re- 
 sisted. About this time the fall in the value of 
 the notes became too apparent to be overlooked, 
 and further alterations in the law became neces- 
 sary. A person named De Yonge was prosecuted 
 for buying guineas, but acquitted on the ground 
 that bank-notes were not coin. Lord King also 
 gave notice to those of his tenants whose leases 
 were prior in date to the suspension, that he 
 should demand their rents in gold. Under these 
 circumstances, Lord Stanhope brought in a bill 
 making it illegal to give more money for guineas 
 than their lawful value, or to take bank-notes at 
 a value less than they purported to be equal to, 
 and making bank-notes a legal tender in the case 
 
 : 
 
137 
 
 of a distress for rent ; this act was to be in force 
 only until 1812. The bill passed after much dis- 
 cussion, and was afterwards continued and ex- 
 tended to Ireland, the general opinion being 
 that however objectionable the act might be in 
 principle, it was necessary under the circum- 
 stances. The reader will observe, that even now 
 bank of England notes were not expressly made 
 a legal tender, so reluctant were the Government 
 to allow that they were depreciated, or that force 
 was requisite to compel the public to take them. 
 In 1813, the Dutch ports were opened, on the 
 approach of the termination of the long struggle 
 with France, and the harvest being good, there 
 occurred a great fall in the price of corn, and 
 numerous bankruptcies took place amongst the 
 country bankers. These events were attributed 
 by those economists who consider that all varia- 
 tions of price are caused by changes in the cur- 
 rency, sometimes to the preparations made by the 
 bank of England to resume cash payments, which 
 compelled the country bankers to reduce their 
 issues, and sometimes to the repayment of a large 
 portion of the debt due from Government to the 
 bank, by which means a part of the bank-notes 
 which had been employed in payment of wages 
 
138 
 
 and the like, was taken from that employment 
 and lent to merchants, in whose hands they were 
 not considered so efficient in supporting prices. 
 
 Mr. Tooke, however, in his History of Prices, 
 maintains that prices began to fall before any 
 reduction took place in the issues of the country 
 banks, that so far from the bank of England having 
 contracted its issues in preparation for a return 
 to cash payments, these issues were actually en- 
 larged at this time ; and that during earlier 
 periods of the restriction on cash payments, very 
 large reductions of the advances to Government 
 had not lowered prices, but, on the contrary, had 
 sometimes happened to coincide, in point of time, 
 with a very great rise in prices ; and that, in fact, 
 the greatest increase of advances by the bank to 
 the Government was coincident with the fall of 
 prices in 1813 and 1814. a Mr. Tooke infers 
 from these facts that prices fell on this occasion 
 from causes independent of the currency. The 
 economists of Mr. Ricardo's school agree with 
 Mr. Tooke, so far as to allow that the fall in the 
 price of corn on this occasion arose from the 
 abundant harvest and the opening of the ports, 
 circumstances which increased the supply of com- 
 
 a History of Prices, vol. ii., p. 42. 
 
139 
 
 modities to be circulated, while the extent of the 
 currency remained, for the time, the same as be- 
 fore. But this fall in the price of corn, they say, 
 ruined some of the farmers, who, in their turn, 
 ruined some of the bankers, and threw discredit 
 on the whole of them ; in the crash which fol- 
 lowed, a great amount of country paper was de- 
 stroyed, and the whole currency of the country 
 diminished, notwithstanding the increase of bank 
 of England notes^ and to this diminution of the 
 currency they attribute the general fall of prices 
 and the reduction of the market price of gold 
 nearly to its mint price which shortly afterwards 
 took place, circumstances which could not, ac- 
 cording to their theory, have occurred while the 
 amount of the currency continued unchanged. 
 The only difficulty which we have in accepting 
 this view is, that as the restriction on cash pay- 
 ments continued for a considerable time after 
 these events, there seems no reason why the 
 country bankers should not have recovered them- 
 selves and again restored the high prices, if those 
 prices depended upon the extent of their issues. 
 
 On the conclusion of peace with France, in 
 1814, the market price of gold was five guineas 
 per ounce ; by March, 1815, it had fallen to 
 ,4. 9s. ; but on the arrival of the news of Napo- 
 
140 
 
 Icon's landing in France from Elba, it rapidly rose 
 again to five guineas per ounce, and the exchange 
 fell at once ten per cent. This state of affairs 
 continued during the hundred days of Napoleon's 
 power. After the battle of Waterloo, the price 
 of gold fell back proportionately ; and in the 
 course of the following year it was 3 18s. 6d. 
 per ounce. During the whole of this period 
 there was but little variation in the numerical 
 amount of the notes. a Mr. Blake, whose opinion 
 in favour of the existence of a difference between 
 the mint and market price of gold whenever the 
 currency is depreciated, we have noticed, and 
 who was at that time a firm supporter of the 
 views of the bullion committee, changed his 
 opinion in consequence of these events. He 
 was satisfied that, in this case, b the gold was 
 raised for the time by the demand above the 
 level of the currency, and afterwards fell back to 
 it ; and if in this case, why not in others that 
 occurred previously, when the same disturbing 
 forces were in action? 
 
 It is, no doubt, impossible to account for the 
 sudden rise in the price of gold on this occasion, 
 
 a Tooke, vol. ii., p. 33. 
 
 b Blake, Observations on the Expenditure of Government, 
 &c., p. 21. 
 
141 
 
 on any supposition connected with the state of 
 the currency ; but it does not follow that it was 
 caused by a demand for gold at the time ; it might 
 probably have been caused by the mere anticipa- 
 tion of a return to that state of affairs in which 
 gold had been worth five guineas an ounce. 
 The rise and the fall in the price of gold seem 
 too sudden to have been caused either by the 
 state of the currency or, as Mr. Blake supposes, 
 by a real demand. 
 
 In 1817, the issues of the bank of England 
 reached the highest amount which they attained 
 during the restriction. The market price of gold, 
 however, remained but little above the mint price ; 
 so little, indeed, that the bank directors under- 
 took, by public notice, to pay their notes in gold, 
 and issued, in consequence, above five millions 
 before they found that it would not remain in cir- 
 culation. 6 
 
 About this time Mr. Ricardo, in his " Princi- 
 ples of Political Economy and Taxation," gave a 
 further development to his theory of the distribu- 
 tion of money between different countries. He 
 stated that the commodities of two countries will 
 interchange with each other by barter in certain 
 
 a History of Prices, vol. ii., p. 57. 
 
142 
 
 proportions, according to the facilities which each 
 country possesses for their production ; that the 
 prices of these commodities in each country, to 
 which prices alone merchants look, must be such 
 that they may be exported and imported in these 
 proportions ; and that the extent of the currency 
 of each country must be such as will give these 
 prices. Whenever, therefore, prices are above 
 this level in either country, money must leave it, 
 and must come to it when they are below the 
 proper limit. This theory, to which it is difficult 
 to find an objection, is evidently quite inconsistent 
 with Dr. Smith's opinion as to the existence of 
 unemployed reserves which do not affect prices, 
 and of a fund of bullion set apart solely for the 
 adjustment of national balances, and forming no 
 part of the internal circulation. 
 
 At length, in the year 1819, the act of Parlia- 
 ment* familiarly known as Peel's Bill was passed, 
 by which the bank was directed to resume cash 
 payments in May, 1823. At this time the 
 market price of gold was about 4 Is. per 
 ounce, about three or four per cent, above its 
 mint price. By this act the melting down and 
 exportation of coin was permitted, and our coin- 
 
 a 59 Geo. III., c. 49. 
 
143 
 
 age thus rendered as nearly as possible identical 
 with pieces of bullion. As the act restraining 
 the issue of notes of less than 5 had been sus- 
 pended until two years after the expiration of the 
 Bank Restriction Act, the issue of those notes 
 would cease in 1825. The bank directors found 
 no occasion to avail themselves of the whole of 
 the delay allowed by the act. They resumed 
 cash payments in 1821, and ceased, after that 
 time, to issue notes for less than .5. Up to this 
 time they adhered to the opinions which they had 
 expressed in 1810, and they now passed a resolu- 
 tion formally denying that the bank could obtain 
 a favourable turn of the exchanges and an influx 
 of gold by reducing its issues.* 
 
 When cash payments were resumed, the ave- 
 rage amount of the notes of the bank of England 
 above 5 was about seventeen millions, and of 
 the notes under 5 between seven and eight 
 millions. Those small notes were replaced, in 
 the next two years, by nearly twelve millions of 
 sovereigns ; and the amount of the notes above 
 ,5, though somewhat less than at the time of the 
 resumption, was not diminished to the extent to 
 
 a Appendix to the Report of the Committee of 1819, and 
 quoted in Lord Overstone's Remarks. 
 
144 
 
 which the amount of the sovereigns exceeded tha 
 of the small notes/ some few of which remained 
 in circulation. So far as the bank of England 
 was concerned, there appears to have been no 
 diminution of the currency, and there seems to 
 have been no reason to suppose that, at this time, 
 any further diminution took place in the notes of 
 the country banks. 
 
 The evidence taken before the committee of 
 the House of Lords on this occasion, affords an 
 example of the tenacity with which the people of 
 this country, in spite of all the efforts of the 
 economists, cling to the idea that credit is di- 
 rectly productive of wealth, and that it is encou- 
 raged by an abundance of the currency. Mr. 
 Ricardo was asked, may not a man get credit 
 from a bank on the security of his capital which 
 is profitably employed, whether vested in stock 
 or in land ; and may he not, by means of that 
 credit, purchase or create an additional quantity 
 of machinery and raw materials, and pay an 
 additional number of labourers, without dis- 
 lodging capital from any existing employment in 
 the country ? He answered, impossible ! An 
 individual can purchase machinery, materials, &c.^ 
 
 a Appendix to the Bank Charter Report in 1832, p. 80. 
 
 , 
 
145 
 
 with credit, he can never create them ; if he 
 purchase, it is always of some one else, and, con- 
 sequently, he displaces some other from the em- 
 ployment of capital. In answer to another ques- 
 tion, Mr. Ricardo observed, I have no notion of 
 credit being at all effectual in the production of 
 commodities commodities can be produced only 
 by labour, machinery, and raw materials, and if 
 these are to be employed in one place, they must 
 necessarily be withdrawn from another. Credit 
 is the means which is alternately transferred 
 from one to another to make use of capital 
 actually existing ; it does not create capital, it 
 only determines by whom that capital shall be 
 employed.* The reader will observe, that Mr. 
 Ricardo does not allow that capital may be lying 
 idle and may be set in motion by credit. We 
 shall see that the notion that credit may be ex- 
 tended by increasing the currency, and that the 
 result is an increase in the production of wealth, 
 still has a strong hold upon public opinion. 
 
 What opinion are we to form as to the real 
 state of the currency during the war ? In what 
 sense and to what extent was it depreciated, and 
 
 a Quqted by Mr. Macculloch (Economy, p. 128) from the 
 Lords' Report. 
 
146 
 
 was it possible or politic to continue to pay in 
 cash ? 
 
 There seems to be no doubt of the correctness 
 of the theory of the bullionists, what they believed 
 to have occurred might have happened. The 
 experience of every nation which has tried a 
 paper currency not convertible for gold, proves 
 that paper money, if issued in excess, loses its 
 value, gold rises in price, and the exchanges be- 
 come unfavourable. Our bank-notes had become 
 to a great extent mere paper money, they might 
 have been issued in excess, and it is clear that 
 they were no longer of equal value with the 
 gold which they represented. But we have seen 
 a depreciation of the currency may mean two 
 things, either that money is more abundant and 
 less valuable, as compared with commodities in 
 general, than it used to be ; or that it is less 
 valuable as compared with the gold which it re- 
 presents, without any reference to the value of 
 commodities. The currency may have been 
 increased beyond its usual extent by the issue of 
 notes, or the notes may have merely kept up the 
 currency to its usual amount by supplying the 
 place of the gold which has become scarce. This 
 distinction is very important ; if the bank-notes 
 existed only to the amount to which a mixed cur- 
 
147 
 
 rency of gold and notes, such as we had before 
 the suspension, would have existed for the time 
 being under the circumstances, had gold not be- 
 come scarce, the return to cash payments, in 
 1819, could not have affected prices in any way. 
 Gold would have come out of the hoards and 
 taken the place of the notes, as in 1797 the notes 
 had taken the place of gold, and no difference 
 would, on either occasion, have been made in 
 prices or in contracts. 
 
 The phenomena upon which the bullionists 
 founded their theory would still have occurred 
 the market price of gold would still have exceeded 
 its mint price, and the exchanges would have been 
 against us, for if a portion of all the gold in the 
 world were destroyed, or, what is the same thing 
 for currency purposes, concealed, the gold which 
 remained in circulation would rise in value as 
 compared with commodities, unless the amount 
 of them was similarly reduced. The currency 
 of all those countries which retained a gold cir- 
 culation would be reduced, and prices would fall. 
 Now, if we had adopted a paper currency, which 
 had just supplied the place of the currency partly 
 gold and partly paper, which we had before the 
 destruction of gold, a pound sterling of our money 
 would continue to represent a certain portion of 
 
 L 2 
 
148 
 
 the original quantity of gold, while the conti- 
 nental coins which used to be equivalent to our 
 pound sterling, would now represent a portion of 
 the reduced and more valuable gold, and would 
 be more than equivalent to our pound sterling, 
 which would be represented by a smaller portion 
 of the foreign gold, the exchanges would turn 
 against us, and the market price of gold here 
 would rise above the mint price, the market price 
 being reckoned in a currency of the value of the 
 original gold, and the mint price, or the number 
 of coins made out of a given quantity of metal 
 at the time, being evidently reckoned in the re- 
 duced gold. 
 
 It must be allowed that an extensive hoarding 
 of gold was probable at this time. We know 
 that for long after the conclusion of peace large 
 quantities of guineas continued to be brought to 
 the bank of England, and the inducements to 
 hoarding on the continent were far greater than 
 in this country. There certainly are, then, cir- 
 cumstances which afford a probable explanation 
 of the phenomena without reference to an exten- 
 sion of the currency, and we must therefore allow 
 great weight to the evidence offered by Mr. Rose 
 to shew that there really was no such extension. 
 The imprudence of the bankers in 1815 and 1816 
 
149 
 
 may have accelerated the equalization between 
 the mint and market price of gold ; but even if 
 the bankers had been able to reduce their issues 
 in proportion to the lower prices of corn, a reduc- 
 tion which would have been no diminution of the 
 currency as compared with commodities, it seems 
 probable that the gold would soon have fallen 
 nearly to the mint price. 
 
 Mr. Thornton's statement, indeed, that the 
 price of all kinds of property had steadily risen 
 in this country since the commencement of the 
 war, seems, at first glance, conclusive in favour 
 of a continual increase in the currency. But we 
 find that prices rose equally on the continent, 
 where there was no suspicion of any increase of 
 the currency. This important fact, stated by 
 Mr. Rose, and confirmed by M. Say in his 
 " Cours Complet d'Economie Politique," a is very 
 difficult of explanation. It seems to shew that our 
 currency had not necessarily been increased, since 
 prices had risen in other countries, where no in- 
 crease of currency was supposed to have occurred. 
 But what, then, caused the universal rise of prices? 
 All economists agree that a general rise of prices 
 cannot take place without an increase in the pro- 
 
 * Vol. ii., p, 433, edition Guillaumin. 
 
150 
 
 
 portion of the currency to the commodities to be 
 circulated by it. Is it possible that the produc- 
 tion of commodities abroad had been so dimi- 
 nished that the precious metals bore a less relative 
 value to them ? At this time, with an increasing 
 industry and an increasing population as was 
 the case with France, at least this supposition 
 is hardly possible. Had the precious metals ac- 
 tually increased in France faster than commodi- 
 ties ? This supposition seems equally inadmis- 
 sible. There must, then, have been some change 
 in progress, rendering these metals more effective 
 in circulating property, perhaps by supporting a 
 larger and a larger amount of credit. If this 
 change were in progress at this time in France, 
 it must have been so, at least to an equal extent, 
 in this country, and will account for a consider- 
 able portion, at least, of the rise in prices, with- 
 out requiring the supposition of an increase in 
 the number of bank-notes beyond the amount of 
 a gold currency in ordinary times. 
 
 Unless we can place implicit faith in the theory 
 of Mr. Ricardo, that gold never leaves the coun- 
 try except when the currency is redundant, we 
 must also allow great weight to the observation 
 which we have quoted from the speech of Lord 
 Castlereagh, upon the evils which might have re- 
 
151 
 
 suited from a currency fluctuating as rapidly and 
 as violently as the foreign exchanges. It does 
 not seem to have been possible for the bank 
 by any contraction of the currency to have 
 prevented these adverse exchanges. Mr. Tooke 
 says that the price of sugar here was 4d. per 
 pound, and on the continent it was 4s. or 5s. 
 Could the bank, by any restriction of the cur- 
 rency, have so increased this difference of price 
 as to have compelled the exportation of sugar 
 instead of bullion ? It is clear that the continent 
 must have been effectually shut against us, or the 
 difference between 4d. and 4s. would have caused 
 exportation. It seems clear, too, that Napoleon's 
 measures did affect the exchanges to such an 
 extent, that a currency which followed them, had 
 that been possible, would have lost all claim to 
 be a standard of value by which men could regu- 
 late their transactions. 
 
 Upon the whole, perhaps, we shall not err if 
 we decide that there is not evidence sufficient to 
 prove that the currency was seriously extended 
 during the restriction upon cash payments, nor, 
 on the other hand, to shew that it was not ex- 
 tended at all. The system pursued by the bank 
 directors in conducting their discounts, giving an 
 opportunity for the return of the notes in the 
 manner mentioned by Mr. Bosanquet, and the 
 
152 
 
 frequent repayments out of the produce of the re- 
 peated loans of the advances made by the bank 
 to the Government, which, in like manner, caused 
 a return of notes to the bank, seem to have en- 
 abled us to escape a great part of the danger 
 with which we were threatened, while we enjoyed 
 the great advantage of a steady currency, free 
 from those rapid changes which would have taken 
 place had our exchanges, as appears most pro- 
 bable, been exposed to great variations, and our 
 currency compelled to follow them. At the same 
 time, it is not possible, perhaps, to suppose that 
 there existed no depreciation whatever from the 
 former value of our currency when the interest of 
 the state, of merchants, and of the bank, united 
 to encourage a large issue. Our astonishment is, 
 indeed, excited that the depreciation should have 
 been so small; that during more than twenty 
 years the bank, if she really possessed the vast 
 power over the currency usually attributed to 
 her, did not employ it more actively, and that 
 her notes, when once issued, and having once 
 affected prices, should, under any circumstances, 
 have returned to her. We should certainly be 
 inclined to infer, from the experience of those 
 times, that the power of a bank issuing con- 
 vertible notes to extend the currency must, to 
 say the least, be, in practice, very limited indeed. 
 
153 
 
 
 
 The general opinion at this time was, that the 
 currency had been less valuable during the re- 
 striction than formerly, by the difference between 
 the mint and market prices of gold, and serious 
 thoughts were entertained, in 1819, of reducing 
 the national standard of value, which were aban- 
 doned, partly from the difficulty of deciding upon 
 the proper amount of the reduction, and partly 
 from the consideration that any reduction would 
 be unjust. 
 
 It is remarkable that no difficulty was experi- 
 enced ^by our merchants in carrying on their 
 trade with other nations during this period, 
 though they no longer had a stock of bullion 
 kept for them at the bank, by means of which 
 they might adjust their foreign payments ; no in- 
 convenience indeed of any kind was felt from the 
 substitution of paper for gold, and, if the bank 
 directors had so ordered their issues as to keep 
 the mint and market price of gold on an equality, 
 it seems that no objection whatever could have 
 been urged against the paper currency, except 
 its liability to forgery, and we should never have 
 heard of the currency controversy. 
 
 As it seems extremely doubtful whether our 
 currency was really augmented during the restric- 
 tion to such an extent as to produce any effect 
 
154 
 
 
 
 on prices, it is hardly necessary to enter into the 
 arguments which have been brought forward to 
 prove that the prosperity which we are said to 
 have enjoyed during the war, was due to the ex- 
 tension of our currency; one remark, however, 
 may be made, namely, that assuming the exist- 
 ence of a depreciation of the currency, it had not 
 had the effect of benefiting the labouring classes, 
 for, notwithstanding the demand for men to sup- 
 ply the army and navy, and to carry on the in- 
 creasing manufactures and the improved agri- 
 culture, the poor were great sufferers ; it is at 
 this time, when our currency is said to have been 
 greatly depreciated, that the system of paying 
 part of the labourers' wages out of the poor- 
 rates arose, a system which was, in fact, an 
 extension of those poor laws which were first 
 introduced on the occasion of the great increase 
 of the currency in the reign of Elizabeth, a coin- 
 cidence which seems strong evidence that a rise 
 in prices, caused by a depreciation of the cur- 
 rency, is injurious to the working classes. 
 
 The reader will not fail to notice the smallness 
 of the sums which are supposed to extend the 
 currency so as seriously to affect prices, an addi- 
 tion of three or four millions is considered suffi- 
 cient to raise prices twenty or thirty per cent. 
 
155 
 
 CHAPTER V. 
 
 SECOND PERIOD OF A MIXED CURRENCY OP BANK- 
 NOTES AND GOLD. 
 
 Motion to Repeal the Act of 1819. Estimates of Mr. Att- 
 wood and Sir A. Alison of the Depreciation of the Cur- 
 rency during the War. The Panic of 1825. Notes under 
 5 prohibited, and Joint-Stock Banks allowed to issue 
 Notes. Drain of Gold in 1830. Committee on the Bank 
 Charter in 1832. Statement of the Directors as to their 
 mode of Managing the Circulation. Mr. Norman's View 
 of the Connexion between the Currency and Prices. The 
 Country Bankers deny that they have any Power over 
 their Issues. The Pressure in 1837. Mr. Horsley Palmer 
 denies that the Bullion left the Country from Over-issues 
 of Notes. Lord Overstone's Tracts. Considers that Prices 
 can be regulated by the Issues of the Bank. His Theory 
 that the Currency should be made to vary at all times, as 
 if metallic. His Cycle of Trade. Advises the Separation 
 of the Banking and Issue Departments of the Bank. Mr. 
 Tooke's History of Prices. He denies any Connexion be- 
 tween the Issues of the Bank and Prices. Remarks upon 
 his Views. Drain of Bullion in 1839. Lord Overstone 
 considers it to have been caused, in part, by the Country 
 Banks. Admits that Prices may be influenced by Specu- 
 lation as well as by Extension of the Currency. His Views 
 Identical in Principle with those of Mr. Ricardo. The 
 Committee on Banks of Issue in 1840. Are Bank-notes 
 
156 
 
 Money, or mere Forms of Credit ? Views of Lord Over- 
 stone and Mr. Norman on this Point. The Private 
 Bankers again state their Inability to Enlarge the Cur- 
 rency. The Bank Act of 1844. 
 
 SHORTLY after the resumption of cash payments, 
 a severe fall occurred in the price of all agricul- 
 tural produce. As the corn-laws, passed in 1815, 
 proved on this occasion so ineffective in keeping 
 up prices, the agriculturists began to suspect the 
 influence of the recent change in the currency ; 
 they drew the attention of Parliament to the sub- 
 ject, and Mr. Western moved for a committee to 
 examine the effect of the bill of 1819 on "the 
 Agriculture, Manufactures, and Commerce of 
 the kingdom," with the express object of obtain- 
 ing an extension of the currency, until the price 
 of a quarter of wheat should reach 80s. From 
 this time the currency unfortunately became 
 again a warm party question. Those who could 
 see no force in the arguments of the bullionists 
 during the suspension of cash payments, and 
 who supported the Government of that day in 
 maintaining that the currency was not depreci- 
 ated, now suffered themselves to be persuaded 
 that a most extraordinary diminution in the value 
 of money had occurred at that time. It would 
 occupy too much space to enter into any detailed 
 
157 
 
 examination of the arguments brought forward in 
 favour of Mr. Western's motion, we must confine 
 ourselves to the views expressed by Mr. Attwood, 
 his most powerful supporter, and the founder of 
 what, from his being at this time member for 
 Birmingham, has been celebrated as the Birming- 
 ham school of political economy, whose disciples 
 consider an extension of the currency the only 
 hope of the nation. Mr. Attwood maintained 
 that the fall in prices had not affected agricultural 
 produce alone, but had been general, and he re- 
 ferred, as proof of this assertion, to a table 
 compiled by Mr. Tooke, of the price of thirty 
 articles, from which he shewed that there had 
 been an average fall of 45 per cent, in their 
 price. This fall in price must, he maintained, 
 have been occasioned either by a great increase 
 in the quantity of all produce, or a diminution 
 in the quantity of money, and the latter supposi- 
 tion must be the true cause, for it was impossible 
 to believe that the quantity of so many different 
 commodities had been increased, that all labour 
 had become suddenly more skilful and efficient. 
 He then entered into an examination of the 
 connexion between the reduction in the amount 
 of the currency and the extent of the fall in 
 prices. He estimated that the five-pound notes 
 
158 
 
 had been reduced by about five millions, that is, 
 by somewhere between a fourth and a fifth of the 
 whole amount ; as, however, prices had fallen to 
 the extent of one-half, he endeavoured to shew 
 that there were many articles whose price con- 
 sisted in great part of taxation, and, therefore, 
 could not be lowered, they, consequently, re- 
 quired as much currency as before, leaving less 
 than a fair proportion of the diminished currency 
 to circulate the other articles, such as corn, 
 which were not taxed/ and which, consequently, 
 fell in price more than in proportion to the con- 
 traction of the currency. This argument is in- 
 genious, but Mr. Ricardo has shewn that the 
 increase of price, caused by taxation, does not 
 require more currency, the tax merely transfers 
 the consumption of the articles, and the money 
 to pay for them, from the people to the state.* 
 Mr. Attwood maintained/ also, that the difference 
 between the mint and market price of gold was 
 no criterion of the value of that metal, as com- 
 pared with commodities ; that during the restric- 
 tion on cash payments, the general disuse of 
 gold in the country, by taking away one great 
 
 a Political Works, p. 127. 
 b Hansard, vol. vii., p. 386. 
 
159 
 
 demand for that metal, lowered its value, as 
 compared with commodities, and that, on the 
 other hand, the sudden demand for so large a 
 quantity as was required for coin in this country 
 on the resumption of cash payments, enhanced 
 its value. The theoretical correctness of this 
 view is generally acknowledged, but it is doubted 
 whether the extent of the change in the demand 
 for gold was sufficient to cause any perceptible 
 effect on the value of the large mass of that metal 
 in the world ; we have seen, too, that the practice 
 of hoarding, carried on during the war, in all 
 probability more than counterbalanced any extra 
 supply of gold thrown on the market of the world 
 by our abandonment of cash payments. 
 
 This theory, that the difference between fhe 
 mint and market price of gold is no criterion of 
 the amount of 'the depreciation during the war, 
 is a favourite with the advocates for an abundant 
 currency. Sir Archibald Alison does not hesitate 
 to estimate the depreciation of the currency as 
 compared with commodities at 75 per cent. He 
 says that bank-notes never were depreciated as 
 compared with gold, whatever party spirit might 
 affirm to the contrary, but that the value of the 
 whole currency, gold and notes, was depreciated 
 
160 
 
 75 per cent, as compared with commodities. 51 
 Now, this amounts to saying that the abundance 
 of gold in the market in consequence of our ceas- 
 ing to use it as currency was so great, notwith- 
 standing all the demand for that metal for the 
 armies and for hoarding, that its value fell 75 per 
 cent, as compared with commodities. The ob- 
 vious extravagance of this position is sufficient to 
 render it unworthy of our notice, except as shew- 
 ing us to what an extent men's minds are warped 
 with respect to this subject by prejudice and party 
 feeling. 
 
 Mr. Attwood did not, at this time, argue that 
 an increase of money promoted industry ; he 
 allowed that it was of little importance to the 
 weralth of a nation whether its property and com- 
 modities were exchanged at a high or a low mo- 
 neyed price ; nor did he consider that the mere 
 existence of low prices occasioned the distress 
 which he considered to prevail : that arose from 
 the fact that the same amount of money then 
 possessed a different signification from that which 
 it possessed when contracts were made, money 
 had kept accounts falsely, and had given to one 
 man the property of another, of the debtor to the 
 
 a History of Europe, vol. viii., p. 89. 
 
161 
 
 creditor, of the tenant to the landlord, of the 
 landlord to public and private annuitants, and to 
 those that had incumbrances on their estates.* 
 
 Mr. Tooke b maintained that, extraordinary as 
 it might appear to Mr. Attwood, the fall in prices 
 on this occasion was really caused by an abund- 
 ance of commodities. There is certainly nothing 
 wonderful in abundance being the consequence of 
 renewed peace ; but the complaints of distress 
 about this time were so general that they must, we 
 should suppose, have had some foundation. If 
 abundance of commodities really existed, it is not 
 unlikely that, until trade had found its proper 
 channels, the interchange of the commodities was 
 impeded. This is, indeed, the most rational ex- 
 planation, and the one which is now, perhaps, most 
 usually given by economists of the feeling of dis- 
 tress so unexpectedly experienced on the termi- 
 nation of the war. But if this check to business 
 existed, what became of the money ? Was a large 
 part of it kept in idleness while low prices were 
 current ? If so, this period affords evidence in 
 support of the views of Dr. Smith, and against 
 Mr. Ricardo's theory that prices depend upon the 
 extent of the currency. 
 
 a Hansard, vol. vii., p. 968. 
 
 b History of Prices, vol. ii., p. 89. 
 
 M 
 
162 
 
 Mr. Western's motion was rejected by a large 
 majority ; but, in the same session, the time at 
 which the issue of one and two-pound notes was 
 to cease was deferred for ten years, with the view 
 of affording relief to the landed interest by an 
 extension, or at least by delaying an expected 
 contraction, of the currency. 
 
 About this time the rate of interest began to 
 fall, and the Government, in 1822, reduced the 
 Five per Cents, to a Four per Cent. Stock ; and 
 early in 1824 the old Four per Cents, were con- 
 verted into a Three-and-a-half per Cent. Stock. 
 
 We now come to the great panic of 1825. 
 From the close of 1822 prices gradually rose ; in 
 1824 this rise became very rapid, and great spe- 
 culations were made in almost every article ; in 
 the same and the following year large foreign 
 loans were contracted in this country, and the 
 celebrated and unfortunate schemes for working 
 the gold and silver mines of America by English 
 capital were set on foot. In the beginning of 
 1824 the foreign exchanges began to be un- 
 favourable, and they continued to decline until 
 the autumn of 1825, when they again improved. 
 In December of that year the panic was at its 
 height, and about seventy banks and an immense 
 number of mercantile houses stopped payment. 
 
163 
 
 On this occasion, the bank of England was ex- 
 posed to a double drain of bullion ; first, to meet 
 the foreign demand ; and, secondly, to supply the 
 place of the one and two-pound notes of the 
 country banks, whose credit was quite gone. Its 
 treasure was reduced to about one million, and it 
 is said that it must have stopped payment, and 
 that we should have been reduced to a state of 
 barter but for a box full of old one and two- 
 pound notes, which was discovered by accident, 
 and which satisfied a part of the demand arising 
 from the destruction of the country paper, as con- 
 fidence in the stability of the bank of England 
 was still unimpaired, and its notes were as readily 
 taken throughout the country as gold. In this 
 position of affairs, though the amount of bullion 
 in the bank was not much more than a million, 
 the directors, seeing that the exchanges were 
 favourable, were bold enough to increase their 
 issue of notes by nearly eight millions. The 
 panic was at once allayed by this measure, and 
 the increased issues did not check the influx of 
 bullion. This is a most important fact. This 
 large addition to the currency could not have 
 raised prices, or the importation of the gold must 
 have ceased. The notes, as suggested by Mr. 
 Thornton, must have been obtained by bankers 
 
 M 2 
 
164 
 
 
 and merchants merely as reserves, and thus never 
 came into comparison with commodities ; or they 
 supplied the place of the currency, already locked 
 up in such reserves, merely restoring the circu- 
 lating medium to its former state, thus not raising 
 prices more than would permit the return of an 
 ordinary amount of gold. 
 
 During this panic the injurious effect of the 
 usury laws upon the mercantile classes became 
 extremely evident. The risk was so great, that 
 no one could be found to lend money at the legal 
 rate of five per cent., and many persons were 
 forced to sell their property at a great sacrifice, 
 to obtain the money which they could not borrow 
 on the security of it. 
 
 The great prosperity which preceded the panic 
 of 1825, and the commercial distress which ac- 
 companied it, like the occurrences of 1793, are 
 constantly referred to as proving the power of 
 bankers to produce such catastrophes by the issue 
 of notes, therefore, as on the former occasion, we 
 must notice any circumstances which may shew 
 another origin for these events. The most pro- 
 bable cause for them, apart from the state of the 
 currency, appears to have been, as alleged by 
 Mr. Tooke in the second volume of his History 
 of Prices, the reduction of the rate of interest on 
 
165 
 
 the Government stock ; this induced many per- 
 sons to invest in foreign loans, the large gains of 
 the early speculators in these loans tempted 
 others, and excited a gambling spirit in the 
 public, who then rushed into the schemes for 
 working the silver-mines of America, and into 
 the wildest speculation in all kinds of produce in 
 the home market. How far the power of issuing 
 notes may foster a spirit of this kind, though it 
 may not haye the power of creating it, is a ques- 
 tion of great importance, to which our attention 
 will soon be called. 
 
 The country gentlemen who supported Mr. 
 Western's views, attributed the prosperity which 
 preceded the panic entirely to the extension of 
 the currency, which they considered to have re- 
 sulted from the permission granted to the country 
 banks to continue the issue of small notes ; and 
 they conceived that this prosperity would have 
 been permanent but for the necessity of paying 
 the notes in gold. We must, however, at present 
 defer any further inquiry into their views, and 
 turn our attention to the steps which were taken 
 to improve the existing currency of convertible 
 notes. 
 
 The first practical measure taken on this occa- 
 sion was an attempt to give greater stability to 
 
166 
 
 our banking system. Public attention had been 
 attracted to the great distress caused by the 
 stoppage of so large a number of private banks, 
 and although only ten of the whole number of 
 banks which stopped payment ultimately became 
 bankrupt, it was supposed that want of sufficient 
 wealth, and not want of due caution and prepara- 
 tion, was the great element of danger in the 
 system of private banking. To remedy this evil, 
 the law limiting to six the number of partners in 
 any bank issuing notes was repealed, except as to 
 the district within sixty-five miles round London, 
 and the issue of all notes under <5 was prohibited. 
 The bank of England also established branch 
 banks in many of the large provincial towns. 
 
 The directors of the bank of England, however, 
 did not escape all blame ; it was said that, finding 
 the amount of their bullion very large in 1823, 
 they had pushed their notes into circulation in 
 every possible way ; that by this means the 
 country bankers had been enabled and induced 
 to make large issues, and thus speculation had 
 been encouraged. They were also blamed for 
 having continued to increase their issues, even 
 after the exchanges began to turn against this 
 country. 
 
 It is, perhaps, hardly necessary to mention that 
 
167 
 
 the bullion kept by the bank was so much capital 
 lying unproductive ; that it was an expense to the 
 bank, while the securities, public and private 
 that is, the investments in which its notes and the 
 deposits of its customers are placed were the 
 chief sources of its income ; it was, therefore, for 
 the interest of the bank to keep the amount of 
 the securities as high, and that of the bullion as 
 low, as a due regard to safety would permit. 
 
 In 1 830, the bank experienced a drain of gold 
 during the political excitement on the continent, 
 and in this country ; on this occasion, the bullion 
 was reduced from nearly ten millions to about 
 five millions ; but no inconvenience was felt by 
 the commercial classes. This result was attri- 
 buted, by the bank directors, to the fact that no 
 speculative feeling existed at this time amongst 
 the merchants, and credit was not in a state to be 
 easily injured. The supporters of the Bank Act 
 of 1844, however, maintain that no inconvenience 
 was felt at this time, only because the bank direc- 
 tors had, for once, contracted their issues at the 
 proper time. Perhaps, as this drain of gold arose 
 from political causes, the notes which were pre- 
 sented for payment in gold were taken, to some 
 considerable extent, from the amount of notes in 
 the hands of the public generally, and not, as is 
 
168 
 
 is usual in such cases, from the reserves of 
 bankers. 
 
 In 1832, the period for which the bank char- 
 ter had been granted being upon the point of 
 expiring, a committee of the House of Commons 
 was appointed to inquire into " the expediency 
 of renewing the charter of the bank of England, 
 and into the system on which banks of issue in 
 England and Wales were conducted." The bank 
 directors who were examined before this commit- 
 tee, described the mode in which they managed 
 their business as follows : The liabilities which 
 they had to meet were the notes and the depo- 
 sits of their customers, their assets were their 
 , securities, public and private, and the bullion. 
 At what they called a period of full currency, by 
 which they seem to have meant such a currency 
 as exists when the exchanges are at par, they 
 endeavoured to have these assets so arranged 
 that the securities formed two-thirds, and the bul- 
 lion one-third of the whole, and they professed 
 to keep their securities at this fixed amount, sup- 
 posing that the public, when in want of bullion, 
 would procure it in exchange for notes, thus 
 diminishing the amount of the circulation as they 
 diminished the stock of bullion, and regulating the 
 amount of the circulating medium for themselves- 
 
169 
 
 The bank directors stated also, that in 1827, 
 they had rescinded the resolution which had 
 been passed in 1819, declaring that the amount 
 of their issues had no connexion with the foreign 
 exchanges, and that they now contracted their 
 issues by the sale of a portion of their securities 
 whenever the exchanges became so unfavourable 
 that bullion began to leave the bank. 
 
 Mr. Loyd, afterwards Lord Overstone, and 
 Mr. Norman, two of the principal authors of the 
 plan by which the bank of England is now regu- 
 lated, were examined before this committee. 
 Lord Overstone's evidence, on this occasion, 
 turned chiefly upon the question then agitated 
 of allowing another bank of issue in London, and 
 has not much reference to the plan which he 
 afterwards proposed. It may, however, be 
 mentioned, that he allowed that, even in 1825, 
 there was no want of confidence in the ultimate 
 solvency of the bank, and that if we had been 
 driven to a state of barter, the inconvenience 
 would have been very transient. 
 
 Mr. Norman enters more into the principles 
 which he supposed to regulate prices ; he states 
 that the whole of a currency consisting of gold 
 and of paper convertible for gold, might, for " a 
 certain period" and to a " certain extent/' be de- 
 
170 
 
 predated by an increase of the paper part of it, 
 and, on this ground, he thought that the bank of 
 England might force more paper on the public 
 than was necessary for the circulation ; he allowed 
 that by depreciation he meant a less value as 
 compared with commodities, but he denied that 
 the market price of gold could be raised, except 
 to a very slight degree, so long as the notes were 
 convertible for gold. (The reader will here re- 
 cognize Mr. Ricardo's theory.) He stated that 
 a depreciation of the currency, while the notes 
 were convertible, could reach a very low per 
 centage only, yet he allowed that an increase of 
 a million of notes on a previous circulation of 
 fifteen or twenty millions, might produce a rise 
 in fmces to the amount of five per cent, if all 
 other portions .of the circulating medium in- 
 creased in the same proportion ; he did not say 
 what he meant by the other portions of the cir- 
 culating medium, though the views which he 
 afterwards expressed shew that he must have 
 meant country bank-notes only. He did not think 
 the increase of prices in 1825 was due wholly to 
 the increase of paper, or that it was in proportion 
 to the increase of paper. The same amount of 
 currency may perform much more work in periods 
 of excitement, because the velocity of circulation 
 
 
171 
 
 is greater. If a speculative rise in prices takes 
 place, large issues by the banks will keep up the 
 prices and carry on the spirit of speculation. 
 
 The country bankers who were examined before 
 this committee denied that they had any power 
 over their issues, they said that they could not 
 pay any regard to the state of the exchanges, that 
 the amount of their issues depended entirely upon 
 the demands of their districts for circulation, 
 varying with the state of business. Mr. Gurney 
 and the late Baron Rothschild, when examined 
 before the committee, agreed in this view; and 
 Baron Rothschild further said, that the bank of 
 England had no power, for any length of time, 
 over the exchanges by means of its issues. 
 
 The principles upon which the bank directors 
 professed to conduct their business being ap- 
 proved, the charter was renewed, in 1833, for ten 
 years, with some changes in the law calculated to 
 mitigate the inconveniences which had lately been 
 felt. To diminish the probability of drains of 
 gold, in support of the country banks, the notes 
 of the bank of England were made a legal tender 
 by all persons except the bank itself. The usury 
 laws were repealed as to bills not having more 
 than three months to run. The bank accounts 
 were to be published monthly in the Gazette, 
 
172 
 
 both to insure the adherence of the directors to 
 their rule and give the public the means of know- 
 ing when to expect a contraction of the currency 4 
 And lastly, that the bank directors might have a 
 greater command over their issues, and thus be 
 enabled more easily to contract the currency 
 when the state of the exchanges required it, one- 
 third of the debt due to the bank by the public 
 was to be repaid, by which its available capital 
 would be increased by three millions and a half. 
 
 After the removal of the prohibition against the 
 issue of notes by firms comprising more than six 
 partners, many joint-stock banks issuing their 
 own notes were established ; and in the year 
 1836, their number was so greatly increased that 
 either a bank or a branch bank was to be found 
 in almost every town. 
 
 In 1837, there occurred another severe pres- 
 sure in the money-market ; several joint-stock 
 and other banks stopped payment, and some of 
 the largest and oldest houses in the American 
 trade failed. The convulsion on this occasion 
 fell with extreme severity on America, and the 
 whole of the banks of the United States suspend- 
 ed cash payments. Attention was again called 
 to the connexion between events of this kind 
 and the state of the currency, and a discussion 
 
 
173 
 
 ensued which led to the passing of the Bank Act 
 of 1844, the effects of which have been the sub- 
 ject of so much dispute. 
 
 The reader will have remarked that the theory 
 that prices depend upon the extent of the cur- 
 rency, particularly upon the number of bank of 
 England notes in circulation, had been gaining 
 ground for some time. The general impression 
 on the public now seems to have been, that the 
 bank possessed almost unlimited power over the 
 trade of the country ; that she could raise or 
 lower prices, and excite or check a spirit of 
 speculation amongst the people almost at will ; 
 and that she had abused this power for her own 
 advantage, giving rise to speculation by forcing 
 out her notes when it suited her purpose so to do, 
 and ruthlessly contracting her issues when she 
 found herself in danger. 
 
 Mr. Horsley Palmer, in his " Causes and Con- 
 sequences of the Pressure in the Money Market," 
 published in 1837, denied, on the part of the 
 bank directors, that their issues had been exces- 
 sive, or had caused the efflux of bullion. He 
 stated that it had occurred, while the mercantile 
 exchanges were favourable, in consequence of the 
 loans to Don Pedro and to Spain, and that a fur- 
 ther drain of gold had been caused by the mea- 
 
174 
 
 sures taken by the President of the United States 
 to introduce a gold coinage into that country. As 
 the mercantile exchanges were favourable, there 
 could have been no over-trading; and it would 
 not have been justifiable, on the part of the bank, 
 to have distressed commerce by diminishing 
 her issues, while that course could possibly be 
 avoided. He complains that when the direc- 
 tors thought it necessary to contract the circu- 
 lation, the joint-stock .banks counteracted their 
 efforts ; that country notes were issued as fast as 
 the bank of England notes were withdrawn ; that 
 when the bank raised the rate of discount, the 
 joint-stock banks lent money at the old rate, until 
 their resources were exhausted ; and that it was 
 in consequence of the excitable state of the trad- 
 ing community, caused by the existence of so 
 much paper credit created in this manner, that 
 the attempt of the bank of England to contract 
 the circulation had, on this occasion, been at- 
 tended with a panic, while an equally great con- 
 traction of her issues had taken place in 1832 
 without inconvenience. 
 
 Mr. Palmer's pamphlet called forth a reply 
 from Lord Overstone,* who entirely acquitted the 
 
 a Reflections on Mr. J. H. Palmer's Pamphlet, by S. J. 
 Loyd. 
 
175 
 
 bank directors of any intention to extend the 
 currency for the benefit of the bank proprietors, 
 but maintained that the rule on which they pro- 
 fessed to regulate their business, namely, by 
 keeping the amount of securities fixed, and to 
 leave any variation in the amount of circulation 
 and deposits to be met by a corresponding 
 variation in the amount of specie, could not be 
 applied by bankers who combined the regula- 
 tion of the currency with their ordinary busi- 
 ness. The diminution of specie might be met 
 by a corresponding decrease in the deposits 
 alone, leaving the amount of the circulation the 
 same as before, and a heavy drain of bullion 
 might thus take place without any contraction 
 of the circulation by which alone that drain could 
 be checked. He affirmed that the bank of Eng- 
 land had not contracted its issues at the proper 
 time ; he doubted whether a continuous drain of 
 bullion could go on, except from an unfavourable 
 state of the exchanges, because a drain arising 
 from peculiar circumstances in one direction 
 would be soon corrected by a corresponding in- 
 flux from other quarters ; the safe course was, to 
 consider any continuous drain of gold from the 
 bank as conclusive evidence, without reference to 
 vague and uncertain speculations as to the pre- 
 
176 
 
 else cause of that drain, of the necessity of effect- 
 ing a corresponding reduction of circulation. If 
 the drain had arisen from peculiar or local cir- 
 cumstances only, a very slight contraction of the 
 circulation would cause an influx of bullion, a 
 slight contraction early applied, would prevent a 
 convulsion. The one simple duty which the 
 manager of the currency has to perform, is that 
 of making the amount of the paper- circulation 
 vary precisely as the amount of the circulation 
 would have varied had it been exclusively me- 
 tallic. Mr. Palmer had not proved that this had 
 been done by the bank. Lord Overstone, in- 
 deed, doubts the possibility of any banker having 
 the power to issue notes performing this duty. 
 A banker having the power to issue notes could 
 not avoid, in times of difficulty, making use of it 
 for the relief of his customers. 4 Trade appears 
 to revolve in a cycle, first, a " state of quies- 
 cence ; next, of improvement, growing confi- 
 dence, prosperity, excitement, over-trading, con- 
 vulsion, pressure, stagnation, distress ending again 
 in quiescence. The banker cannot contract his 
 accommodation while the whole trading and mer- 
 cantile world are acting under one common 
 
 a Reflections, p. 44. 
 
177 
 
 impetus of expansion ; if, under these circum- 
 stances the banker, in addition to what may be 
 properly called his ordinary and legitimate re- 
 sources, is also en trusted with the power of issuing 
 paper money, ad libitum, is it not inevitable that 
 he should abuse that power ? The effect will be 
 to give a further stimulus to the existing tenden- 
 cies of the trading world, and ultimately to aggra- 
 vate the convulsion to which they must lead. 
 It may be desirable that the bank should assist 
 commerce, but out of its banking resources, not 
 by expanding the currency. As to the effects 
 produced upon the currency by the transactions 
 on the foreign stock exchange, if they could not 
 have taken place under a metallic currency, the 
 paper currency, which permits them, is impro- 
 perly managed ; if these transactions would have 
 taken place under a metallic currency, then the 
 effects which they would have produced on a 
 metallic currency, (L e., a contraction of it) they 
 ought to be permitted to produce equally upon a 
 paper currency ; the utmost that can be expected 
 from a paper currency is, that it shall be the 
 medium of adjusting the transactions of the 
 country, without greater inconvenience than 
 would arise under a metallic circulation. To 
 attempt to limit the fluctuations of the paper 
 
 N 
 
178 
 
 money to narrower bounds than those within 
 which a metallic currency would have oscillated, 
 is an empirical procedure, not founded upon 
 sound principles, and which could lead to none 
 but the most dangerous results.* 
 
 Lord Overstone advised the gradual strengthen- 
 ing of the central issuer, and the separation of the 
 banking functions from the management of the 
 currency. 
 
 In another pamphlet , b published in the latter 
 end of the year 1837, when the exchanges had 
 become favourable and bullion had been for some 
 time steadily flowing into the bank. Lord Over- 
 stone remarked that the circulation had not un- 
 dergone a corresponding increase, as it ought to 
 have done, and would have done, if the circula- 
 tion had been metallic ; in that case, the influx of 
 gold which had taken place would have been so 
 much actual increase of the circulating medium. 
 He shewed that, so far from this being the case, 
 the circulation had actually decreased. He attri- 
 buted this state of affairs to the union of the 
 business of banking with the management of the 
 currency, which obliged the bank to support the 
 
 a Reflections, p. 57. 
 
 b Further Reflections on the State of the Currency. 
 
179 
 
 tottering houses during the pressure, thus caus- 
 ing a great increase of her notes ; which when 
 the pressure was at an end, she was obliged to 
 receive again, as those whom she had assisted then 
 wished to repay her. 
 
 Lord Overstone here anticipated* the question 
 which would be asked, namely, Ought the bank 
 to force her notes into circulation on such an 
 occasion ? would she not render money, already 
 too cheap, still cheaper, foster speculation, and 
 drive capital out of the country ? He replied : 
 In a metallic currency, the intrinsic value of the 
 coin will of itself preserve the circulation at its 
 proper amount ; if it be too large or too small, 
 as compared with the currencies of other coun- 
 tries, it will adjust itself by means of the ex- 
 changes. A paper currency is but a substitute 
 for a metallic one, but, as it has no intrinsic 
 value, it has no power of self-adjustment ; and 
 some rule must be adopted for that end, and the 
 proper rule evidently is, to cause it to vary as a 
 metallic currency would do. Lord Overstone 
 maintains that, if the circulation were expanded, 
 the moment bullion began to flow in, the ill 
 effects of the extension of the currency would be 
 
 N 2 
 
180 
 
 
 reduced to the lowest possible amount ; sooner 
 or later, notes will be forced into circulation ; 
 delay only increases the intensity of the effects. 
 By a timely adherence to the above rule, the 
 effects, which must occur to some extent, and 
 which would equally occur under a metallic cur- 
 rency, will be rendered moderate and compara- 
 tively insensible in their consequences. 
 
 The reader will here, perhaps, feel inclined to 
 ask, Has the bank the power to force her notes 
 into circulation under the circumstances which 
 Lord Overstone supposes ? Would not the rea- 
 sons which made the merchants, who repaid the 
 notes, unwilling to keep them, render others un- 
 willing to receive them ? According to Lord 
 Overstone's view, the bullion imported is really 
 money, but is deprived of its true quality by being 
 kept in the vaults of the bank, unrepresented by 
 notes. This course must, however, be entirely 
 contrary to the interests of the bank, and we 
 cannot suppose that it is voluntarily adopted. 
 
 Lord Overstone says that the managers of the 
 currency must have some fixed rule by which to 
 guide their conduct. If we depart from the prin- 
 ciple of making the paper circulation vary as a 
 metallic currency would vary, and cause it to 
 vary as the supposed wants of commerce require, 
 
181 
 
 the amount of the currency and the value of all 
 property must become completely vague ; nor 
 will mere convertibility for gold regulate the 
 amount of the notes. Convertibility is a security 
 against permanent excess of the currency, and 
 fixes a limit beyond which irregularity in its 
 management cannot be carried ; but this prin- 
 ciple comes into operation only through the me- 
 dium of prices. If the currency be in excess* 
 prices will rise, the balance of trade will be dis- 
 turbed, and gold will leave the country ; and thus 
 there will, indeed, be a tendency, through the 
 medium of convertibility, to restore the currency 
 to its proper amount ; but unless the notes which 
 have been exchanged to procure the gold be can- 
 celled, if they be reissued, the same process will 
 occur time after time, until all the gold is gone, 
 and the foundation upon which the paper cur- 
 rency rests may be shaken before the irregularity 
 is corrected. 
 
 But the reader will perhaps think that it does 
 not follow that, while these operations are in pro- 
 gress, there should be, at any time, a marked 
 rise in prices. Arise just sufficient to pay the ex- 
 pense of exporting the gold ought to bring about 
 the commencement of the contraction of the 
 currency, and, if so, the currency could hardly be 
 
182 
 
 expanded until all the gold was gone, and then an 
 expansion would be shewn by a rise in the market 
 price of gold bullion. Again, Lord Overstone 
 seems to contemplate, as a natural state of things, 
 that gold coin and notes should circulate together, 
 and be used by the people indifferently in their 
 ordinary business. But is there any instance in 
 which notes of undoubted credit have circulated 
 in this way, simultaneously with gold, being of 
 the same denomination or amount as the gold ? 
 Is it consistent with theory that they should do 
 so ? Let us suppose, with Dr. Smith, an issue of 
 one-pound notes of undoubted credit into a cur- 
 rency of sovereigns ; the notes would be used, be- 
 cause they were more convenient than sovereigns, 
 and because the sovereigns could be sent abroad 
 to be exchanged for the materials of manufacture 
 and the like. Now, what is to stop this process 
 until all the gold is gone out of the circulation, 
 leaving only a sum of money in the banker's hands, 
 which is not in circulation, but kept only to be 
 substituted for notes, if demanded ? Yet the 
 currency would not, by this process, be in the 
 least increased beyond its metallic amount. Is 
 not this the case in Scotland, where no gold cir- 
 culates ? Would it not naturally be the case in 
 America, were it not that the notes of the diffe- 
 
183 
 
 rent local banks are not of undoubted credit, and 
 do not circulate throughout the whole of the 
 States, and, consequently, a considerable metallic 
 currency is required for the use of persons going 
 through different States ? Is it not probable that 
 almost all the payments above 5 in this country 
 are made with notes, and that our circulation is 
 entirely paper, to the extent of the denomination 
 of the paper ? 
 
 Lord Overstone says, if the bank would strictly 
 adhere to the rule of making the paper circula- 
 tion vary as a metallic currency would do, she 
 could have no power over the abundance or scar- 
 city of money, or the rate of interest. As a 
 mere regulator of the currency, she would keep 
 out the requisite number of notes, either by pur- 
 chase of Government securities, or by loans of 
 money to the highest bidder ; but in her banking 
 capacity she can, and frequently does, produce a 
 strong effect upon the money-market. The 
 minor bodies which revolve around her, follow her 
 example, and the public attribute this effect to 
 the management of the currency, and not to a 
 simple banking operation by a powerful body. 
 
 About this time Mr. Tooke published a new 
 edition of the two first volumes of his great work 
 on the History of Prices and the Circulation, in 
 
184 
 
 which he, for the first time, announced the views 
 which he now maintains with reference to this 
 subject. He had traced the connexion between 
 prices and the state of the circulation, from the 
 commencement of the great struggle with France, 
 in 1793, expecting to find that prices had closely 
 followed the variations in the issues of the bank, 
 but the evidence which he collected gradually 
 changed his views in this respect. It is impos- 
 sible to follow him into this inquiry in detail, we 
 can only mention that he now supposed that he 
 had found, that even during the suspension of 
 cash payments, prices had not only not varied 
 with the issues of the bank, but had frequently 
 taken an opposite direction, becoming high when 
 the amount of notes was comparatively small 
 and low, when a large issue had taken place. 
 Such changes in price as had taken place could be 
 attributed, he maintained, to special causes, and 
 wanted that character of generality which attends 
 changes arising from a depreciation of the cur- 
 rency. Similar results had occurred since the 
 act of 1819, and, on the whole, Mr. Tooke con- 
 ceives, that facts shew that the issues of the bank 
 do not directly influence prices by extending or 
 reducing the currency, nor by exciting a spirit of 
 speculation in the people. 
 
i 185 
 
 Upon these points we must remark, in the first 
 place, that Mr. Tooke has not shewn, that 
 during the restriction on rash payments, any fall 
 of prices occurred ; now if, as is probable, gold 
 had become scarce at that time from hoarding, 
 prices ought to have fallen, our bank issues then, 
 though they did not raise prices, kept them from 
 falling, which is as good a proof of the depen- 
 dence of prices on the extent of the currency as a 
 general rise of them from its augmentation. 11 And, 
 secondly, as to the amount of generality in the 
 variation of prices. A fall in the prices of many 
 articles may occur at the very time when the cur- 
 rency is being extended and general prices are 
 rising. People seem generally to contemplate 
 only the case in which the quantities of articles 
 do not increase, or in which they increase pro- 
 portionally ; but let us suppose the quantity of 
 any one article to be greatly increased, the others 
 remaining as they were, then a given portion of 
 this article will no longer exchange for so much 
 of other articles as before, and, as the currency 
 cannot alter the proportion in which articles 
 exchange with each other, at the same time and 
 place, the price of the article which has increased 
 
 a See this point noticed in La Monnaie, par M. Michel 
 Chevalier, p. 351. 
 
186 
 
 must fall, so as to permit it to exchange with 
 other articles, through the medium of money, as 
 it would, by barter. It might happen, therefore, 
 that when the general average of prices was 
 steadily rising, from an increase of the currency, 
 there might be a great fall in the price of several 
 articles, and the small change in price due to the 
 increase in the currency, might be easily over- 
 looked. We have seen that Mr. Thornton spoke 
 with confidence of a general increase in the 
 value of all property since the commencement of 
 the century ; the very fact that two practical 
 men, such as Mr. Thornton and Mr. Tooke, 
 should differ so much upon this point, shows the 
 difficulty which attends such statistical inquiries. 
 The importance of this observation will be more 
 apparent when we come to examine the effects of 
 the gold discoveries. 
 
 As to the correctness of Mr. Tooke's sta- 
 tistics, they have frequently been attacked by his 
 opponents, but the errors they have alleged, if 
 allowed, have not, perhaps, been to an amount 
 sufficient to allow us to attribute to them any 
 important effect upon prices, through the agency 
 of the currency, now that we have seen such 
 comparatively small results produced by means 
 of the new gold. 
 
187 
 
 In 1839 there was a fresh drain of bullion, and 
 the treasure of the bank of England was so much 
 reduced, that the directors were driven to what 
 is often called the discreditable expedient of bor- 
 rowing two millions and a half on the Continent. 
 Lord Overstone pointed out, a on this occasion, 
 the near approach which the bank had made to a 
 position in which she would have been obliged to 
 suspend cash payments, the amount of bullion 
 remaining in her vaults being less than the sum 
 borrowed on the Continent. He allowed that 
 the period 'had been one of heavy pressure. 
 Two bad harvests in succession, large importa- 
 tions of securities from the United States, and a 
 peculiar state of the money-market at Paris, had 
 all united to cause a heavy drain ; but the trials 
 of our monetary system must always arise from 
 causes of tjiis kind, and the rule for the manage- 
 ment of our circulation must hold good under 
 them. 
 
 Lord Overstone, however, did not allow that 
 the bank of England alone was to blame, as 
 was frequently stated ; he maintained that the 
 issues of the country banks do not of necessity 
 conform to those of the bank of England, as sup- 
 posed by Mr. Thornton and others ; that local 
 
 * Remarks on the Management of the Circulation, p. 31. 
 
188 
 
 prices and an exchange cannot be caused by the 
 local banks, because the district in which each 
 local issuer is situated is not isolated so com- 
 pletely from the district of the central issuer as 
 one country is from another ; the issuers of the 
 same country are competitors, and a contraction 
 by one issuer may cause an expansion by another. 
 At first, when the central issuer contracts his 
 issues, the void created is filled up by the local 
 issuer, who thus prevents the reduction of the 
 notes of the central issuer from affecting the ex- 
 changes and bringing back the gold ;b ut when, 
 by a steady perseverance in contraction, the cen- 
 tral issuer gives a shock to credit and confidence, 
 then the country issuer, in common with all en- 
 gaged in commercial operations, must submit to 
 this influence ; and in proportion as his steps 
 have been in a wrong direction, so his subsequent 
 rebound is sudden and rapid.* As an instance 
 of this, Lord Overstone states that the highest 
 amount to which the country issues were ever 
 carried was in June, 1839, a period of unfavour- 
 able exchanges and of a heavy drain upon the 
 bullion, and when the bank of England had re- 
 duced her issues by more than seven hundred 
 
 a Management of the Circulation, p. 66. 
 
 
189 
 
 thousand pounds. The result of this state of 
 affairs is, that the necessary and inevitable con- 
 traction of the currency is delayed, and rendered 
 more oppressive than it would have been. 
 
 In allusion, apparently, to the views recently 
 expressed by Mr. Tooke, Lord Overstone re- 
 marked that the connexion between fluctuations 
 in prices and variations in the amount of the 
 circulating medium, is a question of extremely 
 difficult solution, that the immediate effect upon 
 prices of any variation in the amount of the cir- 
 culation may be over-estimated, but that there 
 certainly exists a very intimate connexion be- 
 tween them.* Leaving this point, however, at 
 that time, he maintained that a due regulation 
 of the currency is necessary to preserve the 
 convertibility of the paper ; and he instanced 
 America, to show that a central issuer is neces- 
 sary to secure this proper regulation, without 
 which we should be subject to a succession of 
 disasters, such as had just occurred in that 
 country. 
 
 The bank'of England having been attacked by 
 the Manchester Chamber of Commerce as the 
 cause of the fluctuations which had occurred in 
 
 Management of the Circulation, p. 91. 
 
190 
 
 prices, and of the pressure felt by the mercantile 
 classes, Lord Overstone maintained* that fluctua- 
 tions in the amount of the currency are seldom, 
 if ever, the existing causes of fluctuations in prices 
 and ill the state of trade. These causes are 
 the buoyant and sanguine character of the human 
 mind, miscalculations as to the relative extent 
 of supply and demand, fluctuations of seasons, 
 changes of taste and fashion, legislative enact- 
 ments and political events, excitement or depres- 
 sion in the condition of other countries connected 
 with us by trading intercourse. Mismanagement 
 of the circulation, that is, fluctuation of the 
 amount of paper issues not corresponding to 
 those of the bullion, only aggravates these evils, 
 but does not create them ; nor was the bank of 
 England to blame for the pressure which had 
 recently occurred. A reduction of the circula- 
 tion must, at all times, tend to check the facility 
 of credit and to lower prices ; it may be felt as a 
 serious pressure, but if the bullion be diminishing, 
 the bank ought to have no option she must reduce 
 her issues, otherwise the paper circulation could 
 not act as a metallic circulation would have done. 
 He maintained, too, that though the bank may 
 
 Letter to J. B. Smith, p. 10. 
 
191 
 
 exert a powerful temporary influence upon the 
 rate of interest, the proportion between the 
 supply and demand of money will fix the price of 
 money, if the bank be not allowed arbitrarily to 
 augment her issues. When asked how these 
 views are to be reconciled with his theory that 
 prices depend upon the extent of the cur- 
 rency, and that the bank has the power of 
 lowering prices by contracting her issues, and 
 that this course must be pursued, to restore 
 the exchanges and recover the bullion, he re- 
 plied, that a change in the amount of the circu- 
 lating medium must always have a tendency to 
 produce a corresponding effect upon prices, and 
 must, if maintained for any length of time, ine- 
 vitably have that effect ; but the rapidity of the 
 change, and the extent to which it will go, de- 
 pend in no inconsiderable degree upon other cir- 
 cumstances than the simple variation in the 
 anfount of the circulation. If the change take 
 place simultaneously and act in the same direc- 
 tion, with a tendency originating in other cir- 
 cumstances, to a rise or fall in prices, it will 
 both accelerate and intensify this result, but if 
 the change be unaccompanied by, or be in oppo- 
 sition to such tendency, its effects will be very 
 seriously counteracted, and may remain for some 
 
192 
 
 time altogether imperceptible. 11 Time is a great 
 ingredient in all such questions ; the doctrine 
 that the general level in prices is determined by 
 the value of the circulation in which those prices 
 are measured, and that such value is liable to be 
 affected by fluctuations in the amount of the 
 paper issues, was, he asserted, well established ; 
 but in making practical application of this prin- 
 ciple, it is necessary to take into account all the 
 disturbing circumstances, and to make due allow- 
 ance for the friction and resistance which those 
 will offer to the pure development of the results 
 which might be otherwise anticipated. 
 
 Without passing any opinion at present upon 
 the correctness of Lord Overstone's general 
 views, this certainly appears a weak point in his 
 theory ; if prices do depend upon the extent of 
 the issues of bank-notes, it seems only necessary 
 to make the contraction sufficiently great, and 
 the check to the rise in price will be immediate, 
 apply more power and the friction will be over- 
 come ; again, if time be required to enable the 
 measures of the bank to take any effect, we en- 
 counter another difficulty, because we must then 
 allow that convertible notes may be in circulation 
 
 a Second Letter to J. B. Smith, p. 22. 
 
193 
 
 r ft considerable period in a greater or less ex* 
 tent than the gold, whose place they would 
 , supply. 
 
 This point is of extreme importance to the 
 whole of Lord Overstone's theory ; indeed, he 
 allows, that unless it be admitted that a very 
 intimate connexion exists between the amount of 
 the circulation (that is, according to his views, 
 between the amount of bank-notes and coin,) and 
 prices, the whole doctrine of regulating the cir- 
 culation by reference to the state of the ex- 
 changes falls to the ground, and we are left 
 without any principle upon which the manage- 
 ment of the circulation can rest.* 
 
 Lord Overstone seems to have supposed that 
 the bank had, on more than one occasion, been 
 so near a suspension of cash payments as to 
 cause great alarm to the public. 
 
 The reader will see that Lord Overstone's 
 views are very similar to those of Mr. Ricardo ; 
 he supposes, with him, that when the currency 
 is metallic, prices depend upon the quantity of 
 bullion in the country, and that the greater part 
 at least of exports and imports of bullion, are ad- 
 justments of the currency, rendered necessary by 
 
 a Remarks on the Management of the Circulation, p. 91, 
 
 O 
 
194 
 
 changes which have taken place in the prices of 
 goods, either from a direct extension or con- 
 traction of the currency, or, more frequently, 
 from changes in trade, and in the quantity of 
 commodities, which render the same amount of 
 currency more or less efficient in circulating 
 commodities, or cause it to have a different ratio 
 to them, and he supposes, with Mr. Ricardo, 
 that even on the occasion of a bad harvest gold 
 leaves us, not as the most convenient form of 
 capital with which to pay for our corn, but from 
 causes connected with the currency ; and, as the 
 depreciation of the currency, which he supposes 
 to have caused high prices, is not accompanied 
 with any change in the market price of gold, he 
 evidently adopts Mr. Ricardo's very abstract 
 theory, that gold bullion is made cheap by an 
 expansion of the paper portion of the currency. 
 Lord Overstone, however, admitting that fluctua- 
 tions in price may occur from causes independent 
 of the currency, from the buoyant and sanguine 
 character of the human mind, that is, from an 
 expansion of credit, has to consider a point 
 which was omitted by Mr. Ricardo, namely, what 
 is to be done when the exportation of gold takes 
 place in consequence of such last-mentioned rise 
 in prices ; we shall find that he still thinks that 
 
195 
 
 the gold is to be retained only by acting on the 
 currency. 
 
 Very similar views were entertained at this 
 time by Mr. Norman, Colonel Torrens, and 
 others. It is evidently necessary to their prac- 
 tical application to establish the fact that bank- 
 notes form the basis of the whole circulation, 
 and that prices depend upon the amount of 
 them. If prices could be kept up by the em- 
 ployment of bills of exchange or cheques on 
 bankers, it would evidently be of little use to 
 regulate the amount of bank-notes. Accord- 
 ingly, a great dispute arose as to this fact, dis- 
 cussions upon which fill a large part of the bulky 
 volumes issued by the committee of the House of 
 Commons appointed, in 1840, to "inquire into 
 the effects produced on the circulation of the 
 country by the various banking establishments 
 issuing notes payable on demand." Lord Over- 
 stone, when examined before this committee, re- 
 peated his opinion that a currency consisting of 
 coin and bank-notes convertible for coin might 
 be depreciated for a considerable time, as com- 
 pared with the currencies of other countries ; 
 that if bullion left the country, under any circum- 
 stances, it could not be regained without a con- 
 traction of the money ; and he stated that bank 
 
 o 2 
 
196 
 
 notes alone, of all paper instruments by which 
 payments were effected, were money, and alone 
 formed the regulator of prices. The money, 
 or currency of the country, he maintained, is 
 marked by certain distinguishing characteristics j 
 its amount is determined by the laws which 
 apportion the precious metals to the different 
 countries of the world ; it is, in every country, 
 the common measure of the value of all other 
 commodities, the standard by which the value of 
 any other commodity is ascertained, and every 
 contract fulfilled ; and it becomes the common 
 medium of exchange for the adjustment of all 
 transactions, equally, at all times, between all 
 persons, and in all places ; it has, further, the 
 quality of discharging these functions in endless 
 succession. Bank-notes come within this de- 
 scription, but neither deposits (i. e., cheques on 
 bankers,) nor bills of exchange, in any way pos- 
 sess these qualities, the amount of them is not 
 determined by the laws which determine the 
 amount of the precious metals in the country, 
 they are not a common measure of value, or a 
 standard by which the relative values of all other 
 things can be measured, and they do not possess 
 that power of universal exchangeability which 
 belongs to the money of the country. (It is ne- 
 
197 
 
 cessary for Lord Overstone's theory that all bank- 
 notes, whether issued by the bank of England or 
 by country bankers, should be considered money. 
 The reader should examine how far these dis- 
 tinguishing characteristics of money are applica- 
 ble to a 20 bank-note issued by a country 
 banker.) Lord Overstone further stated, that 
 bank-notes and coin formed the basis which sup- 
 ported bills of exchange and other forms of cre- 
 dit in use in the country, and regulated their 
 number. 
 
 Mr. Norman did not deny to bills of exchange 
 and cheques the character of money so com- 
 pletely as Lord Overstone ; he stated the three 
 most essential qualities which money should pos- 
 sess to be that it should be in universal demand 
 by every body, in all times and in all places ; 
 that it should possess fixed value, and that it 
 should be a perfect numerator, that is, should 
 measure the value of all other commodities with 
 the greatest facility ; and he mentioned that bills 
 of exchange and cheques possessed these quali- 
 ties only in a very low degree ; a bill of exchange 
 is of no use to an individual unless it be indorsed 
 to him ; a man cannot go into a shop and buy 
 what he wants with a bill of exchange, he could 
 not pay his labourers with it ; the same with a 
 
198 
 
 
 
 banker's deposit or credit in a banker's book ; by 
 these means he can make his payments with less 
 money, but he cannot do with them what he 
 could do with sovereigns and shillings. Mr. Nor- 
 man here seems to forget that paper for large 
 amounts, whatever may be its nature, cannot be 
 expected to fulfil the duties of small money ; we 
 should put his definition of money to the same 
 test as Lord Overstone's, and try how far we can 
 distinguish a bank-note for 20 from a cheque 
 on the banker. 
 
 The effect of a rise in the rate of interest in 
 stopping a drain of gold, and the power of the 
 bank to raise the rate of interest, were discussed 
 at some length before this committee. Lord 
 Overstone and Mr. Norman supposed, that a rise 
 in the rate of interest acts by contracting the cur- 
 rency, it diminishes confidence, thus causing the 
 bankers to hoard notes, which, in fact, amounts 
 to a contraction of the currency, lowers prices, 
 and encourages the export of commodities in 
 place of gold. This we see is Mr. Thornton's 
 theory revived, and it seems to have been the 
 view generally entertained by the committee ; 
 but Mr. Tooke maintained that the rise in the 
 rate of interest would not necessarily have any 
 

 199 
 
 effect on the price of commodities, but would 
 cause a fall in securities, which would induce 
 foreigners to invest in our securities, and thus 
 give rise to an influx of gold. All parties seemed 
 to agree that the bank has power over the rate of 
 interest only for a short time during periods of 
 excitement, and to a small extent. The rate of 
 interest, Lord Overstone says, is determined by 
 the proportion between the quantity of capital in 
 the country and the demand for the employment 
 of it. These are difficult points, which we shall 
 find much discussed. 
 
 The English country bankers and the Scotch 
 bankers, when examined before this committee, 
 again unanimously stated that they had no power 
 to enlarge their circulation at will. The Scotch 
 bankers, in particular, stated that, if they made 
 an advance to a customer in their own notes, in 
 general these notes were returned to them in a 
 few hours. They had control over their advances 
 of capital ; they could extend or contract these, 
 and they were in the habit of regulating them by 
 reference to the state of the foreign exchanges. 
 
 All the supporters of Lord Overstone's theory 
 refer to the state of banking in America as con- 
 clusive proof that mere convertibility will not 
 
200 
 
 * 
 
 ensure the maintenance of the value of the notes 
 without some regulation of the issues ; and Mr. 
 Norman states that, after the general suspension 
 of cash payments in 1837, there were instances of 
 convertible notes being depreciated ten per cent, 
 although there existed no want of confidence in 
 their ultimate payment in coin. In this passage, 
 Mr. Norman evidently seems to allude to a differ- 
 ence between the value of the notes and the 
 value of gold at the same time and place, which 
 is a very different thing, as we have seen, from a 
 depreciation of the currency by its extension, by 
 means of notes, beyond its due proportion to the 
 currency of neighbouring states, which is what 
 Mr. Norman generally means by a depreciation. 
 It is very unfortunate that Mr. Norman should 
 have made use of this illustration, as it certainly 
 throws a considerable appearance of confusion 
 over his theory, already sufficiently abstruse. 
 
 Mr. Norman considered a central issuer so im- 
 portant to the steadiness of a currency, that he 
 predicted that, without one, the United States 
 would experience frequent repetitions of the dis- 
 asters of 1837. 
 
 We have seen that it seems essential to Mr* 
 Ricardo's theory to consider money as having no 
 
201 
 
 intrinsic value ; his followers accordingly describe 
 money as a sign of value.* 
 
 The labours of this committee were brought to 
 a sudden close by the dissolution of Parliament 
 which followed Sir Robert Peel's return to power 
 in 1841. That statesman, however, adopted, in 
 a great degree, the views of Lord Overstone and 
 his supporters, and procured the passing of the 
 celebrated Bank Act of 1844, which embodies 
 these views. 
 
 In the opening of his address to the House on 
 the introduction of this measure, Sir Robert Peel 
 speaks in the strongest terms of its importance. 
 He says : " There is no contract, public or private 
 no engagement, national or individual which 
 is unaffected by it ; the enterprises of commerce, 
 the profits of trade, the arrangements made in all 
 the domestic relations of society, the wages of 
 labour, pecuniary transactions of the highest 
 amount and the lowest, the payment of the 
 national debt, the provision for the national 
 expenditure, and the command which the coin 
 of the smallest denomination has over the neces- 
 saries of life, are affected by it." These expres- 
 sions are remarkable. They show the import- 
 
 * Mr. Norman's Letter to Sir Charles Wood on Money. 
 
202 
 
 ance attached by Sir Robert Peel to even tem- 
 porary variations of the measure of value, and 
 would lead us to expect that the lasting and 
 progressive depreciation of the currency threat- 
 ened by the new gold should attract the atten- 
 tion of the statesmen of his school. 
 
 By the Act of 1844, the business of the bank 
 was divided into two departments. Upon the 
 31st of August, 1844, there were to be trans- 
 ferred to the issue department, first, fourteen 
 millions of securities, including the Government 
 debt, and, secondly, all the bullion and coin, 
 except a small sum employed in banking ; and 
 this department was thereupon to deliver to the 
 banking department such an amount of notes as, 
 together with the notes then in circulation, should 
 be equal to the amount of the securities and bul- 
 lion so transferred to it. The issue department 
 was not allowed to issue any notes for the future, 
 except in exchange for bullion, or for other bank 
 of England notes, but it was compelled to give 
 notes in exchange for bullion, and the bank was 
 authorized to issue such notes as it received from 
 the issue department without restraint, as any 
 other person obtaining them in lieu of gold might 
 have done ; weekly accounts were to be published 
 by the bank. On the 7th of September, 1844, 
 
203 
 
 when the first weekly account appeared, the bul- 
 lion exceeded fourteen millions, the number of 
 notes in circulation in the hands of the public 
 was about twenty millions, about eight millions 
 of notes were, therefore, handed over to the 
 banking department, and with these the bank was 
 to deal as any other banker, they formed the 
 fund out of which alone the bank had power to 
 increase its discounts. The reader will see that 
 even now there was no security that the amount 
 of notes actually in the hands of the public 
 should vary with the amount of bullion. These 
 eight millions of notes did not necessarily go 
 into the hands of the public ; they, in fact, re- 
 mained for a year and a-half on this occasion 
 in the till of the bank unemployed ; we shall 
 see, however, that Lord Overstone and his 
 school maintain that they influence prices in this 
 state, as much as if with the public. 
 
 It is evident that the amount of these notes so 
 handed over to the issue department, limits the 
 power of the bank over the bullion in its coffers ; 
 if the bank chose to exchange them for gold, 
 there would be left still in the issue department 
 an amount of bullion equal to the difference be- 
 tween the amount of notes actually in circulation 
 with the public and the sum of fourteen millions, 
 
204 
 
 and this difference forms, in fact, the fund pro- 
 vided by the act as a guarantee for the converti- 
 bility of the notes. 
 
 The amount of notes to be issued, without re- 
 ference to the stock of bullion, was not fixed at 
 fourteen millions because that happened to be 
 about the amount of the capital of the bank, but 
 because experience had shown that the number 
 of notes in the hands of the public had never, in 
 any previous panic, been reduced below that 
 sum ; it was, therefore, unnecessary to provide a 
 fund of gold to meet these fourteen millions of 
 notes, as they would never be required to be paid 
 in gold. Our bank of England notes may now, 
 therefore, be said to be, to all purposes, as much 
 represented by gold as if there were in the bank 
 bullion to the whole amount of them issued. 
 
 As it can but rarely happen, that the notes 
 in circulation with the public should ever ap- 
 proach the low limit of fourteen millions, a 
 practical effect of the act of 1844 must be to 
 render a large part of the bullion in the bank 
 unavailable to meet any drain upon it, except a 
 run for gold for internal purposes, such as oc. 
 curred in!797 or 1825. For the purposes of in- 
 ternational adjustment this bullion is locked up, 
 but not as to the purposes of internal circulation, 
 
205 
 
 as it is represented by an equal amount of notes 
 in the banking department ; it is, in fact, that bul- 
 lion which Dr. Smith supposed the bankers would 
 keep as a security for the convertibility of the 
 notes ; it forms no part of the* circulation, being 
 kept to take the place of that circulation when 
 requisite. 
 
 By this act no new banks were to issue notes, 
 and any bank already existing which ceased to 
 issue them, was not to be allowed again to re- 
 sume that privilege, all the private banks, too, 
 were limited, under heavy penalties, to the ave- 
 rage amount of their issues for the twelve weeks 
 preceding the 17th of April, 1844, and the bank 
 of England was allowed to compound with issu- 
 ing banks for the transfer to her of that privilege, 
 the object of all these provisions being evidently 
 the gradual extinction of the private issues. By 
 this act it was provided that the bank might issue 
 additional notes upon securities to the extent of 
 two-thirds of the lapsed issues of the country 
 banks, on being authorized so to do by an order 
 in council. 
 
206 
 
 CHAPTER VI. 
 
 SECOND PERIOD OF A MIXED CURRENCY OF NOTES 
 AND GOLD, CONTINUED. 
 
 Opinions of Mr. Tooke and Mr. Fullarton on the Question. 
 They deny the Power of the Bank to extend or di- 
 minish the Currency when the Notes are Convertible. 
 Drains of Bullion are Modes of Transferring Capital, and, 
 under a Metallic Currency, are paid out of Hoards and 
 not out of the Circulation. They advise the Keeping of a 
 larger Stock of Bullion. They predict the Suspension of 
 the Act. Mr. Wilson's Capital, Currency, and Banking. 
 Supports Mr. Tooke's View. The Currency and the 
 Country, by Mr. Hubbard. Drains are stopped by the 
 Rise in the Rate of Interest caused by the Efflux of 
 available Capital in the Shape of Gold. The Crisis of 
 1847. Committees on Commercial Distress. Lord Over- 
 stone's Evidence in favour of the Act. Consideration of 
 the Question, What determines the Rate of Interest ? 
 Importance of the distinction between Capital and Cur- 
 rency. The Lords report in Favour of an Amendment of 
 the Act. The Commons in Favour of itsExisting Form. 
 Mr. Hubbard's Estimate of the Extent to which our Debt 
 on this occasion was paid in Bullion and in Securities, 
 Mr. J. S. Mill's Review of the Principles on which the 
 Act of 1844 is founded, and of its working, Mr. Mac- 
 culloch's View of the Theory of a Mixed Currency. 
 
207 
 
 WE will now take a glance at the views of some 
 of the opponents of the theory upon which the 
 act of 1844 is grounded. Mr. Tooke a says, that 
 the promoters of the act of 1844 have misunder- 
 stood the working of a purely metallic currency ; 
 he denies that every exportation of bullion 
 would be attended with a contraction of the 
 amount of the currency, and a rise of prices ; the 
 bullion exported is not, necessarily, part of the 
 circulating coin, there is always a mass of bullion 
 in such a country as England, which forms no 
 part of the circulation, but is kept for the pur- 
 pose of settling international balances. As the 
 coinage is free, a 'part of this bullion may very 
 likely exist under the form of sovereigns, but 
 these sovereigns form no part of the coin used 
 for internal circulation, probably this bullion may 
 amount to five or six millions sterling, it is capi- 
 tal not currency. This we see is nearly identical 
 with Dr. Smith's view upon the subject. 
 
 Mr. Tooke maintains that bank-notes are no 
 more money than bills of exchange or cheques 
 upon bankers. Bills of exchange might be used 
 in lieu of the higher bank-notes if the stamp- 
 duty were removed, and he shows that they 
 
 a K j; n q u i r y j n to the Currency Question." 
 
208 
 
 were so used in Lancashire ; they might, indeed, 
 not be quite so convenient as notes, but cheques 
 on bankers would settle accounts quite as readily 
 as notes. This question, however, he considers 
 of little importance, for he denies that under a 
 convertible currency such as ours, prices depend 
 upon the amount of either bank-notes or bills of 
 exchange. Prices depend upon the terms in 
 which articles go into consumption, and these 
 terms depend upon the quantity of money con- 
 stituting the revenue valued in gold, which is set 
 apart by the community for current expenditure. 
 (The reader will remember that Dr. Smith stated, 
 that when the notes, as in our currency, were not 
 for small sums, the circulation was confined to 
 transactions between dealers, leaving the circula- 
 tion between the dealers and consumers to be car- 
 ried on by gold, and that prices amongst the dealers 
 could not be higher than those between the 
 dealers and consumers.) 
 
 The amount of the circulation must depend 
 upon the quantity of it required to circulate the 
 commodities of the country at the price deter- 
 mined by this law, and neither the bank of Eng- 
 land, nor any other bank, has the power of alter- 
 ing this amount at will. The universal denial by 
 the private bankers of the possession of any 
 
209 
 
 power to increase or dimmish their issues, and 
 the small amount of notes circulating in Scotland, 
 not half so large in comparison with the popula- 
 tion as that circulating in England, notwithstand- 
 ing the keen competition of the Scotch banks, 
 show that this principle is correct, as far as the 
 private banks are concerned, and what greater 
 power has the bank of England of extending her 
 issues than any other bank ? Her notes are de- 
 livered out on loan like those of other banks, and 
 not in payment, as is the case with a Government 
 paper money ; they are issued only to those who, 
 being entitled to demand gold, ask for notes, 
 and they are returnable to the issuers ; the quan- 
 tity demanded depends upon the purposes for 
 which the notes are wanted ; the quantity is 
 an effect, and not a cause of the demand. Mr. 
 Tooke, we have seen, had already shown, in 
 his History of Prices, that there had not, in fact, 
 been any correspondence between the course of 
 prices and the variations in the issues of the bank 
 of England, and that there was no proof that an 
 abundance of notes excited speculation. Fur- 
 ther observations had confirmed his belief in 
 these respects. It is the expectation of gain 
 which supplies the motive for speculative pur- 
 chases, and the credit of the buyer supplies the 
 
210 
 
 means of purchase ; notes are mere written forms 
 of this credit ; nor is it the scarcity of the circu- 
 lating medium which causes prices to fall, but the 
 mistaken anticipations of the speculator. He 
 allows, however, that, though banks of issue can- 
 not increase the circulation at will, and, therefore, 
 cannot, by this means, stimulate speculation, yet, 
 in their attempts to get out their notes, they are 
 likely to grant advances with less regard to the 
 stability of the borrowers than mere banks of 
 deposit, they are more likely than these to grant 
 advances of capital recklessly, and may thus give 
 rise to and foment a spirit of speculation ; but 
 this is the result of an easier state of credit, not 
 of an extension of the currency. Mr. Tooke's 
 admission, however, seems fatal to the argument 
 that banks of issue are not fomentors of specula- 
 tion, for that generally takes its rise amongst those 
 who have little to lose, and little security to 
 offer ; if these persons can get credit from banks 
 of issue, when they could not get it from banks 
 of deposit, then it must be allowed, that the 
 privilege of issuing notes does conduce to the 
 excitement of speculation. 
 
 Though Mr. Tooke denied that prices of com- 
 modities could be regulated by the direct opera- 
 tion of . expansions and contractions of the issues 
 
211 
 
 of bank-notes, he did not suppose, with Lord 
 Overstone, that we should be left without any 
 means of restoring the exchanges, if it were 
 thought necessary to take any steps for that pur- 
 pose. The exchanges would be very powerfully 
 affected by the bank raising the rate of interest, 
 which would lower the price of securities, though 
 not necessarily of commodities, and would at- 
 tract capital from foreign countries for investment 
 here ; but the fluctuations of the rate of interest 
 under this plan would be much greater than for- 
 merly, and would prove injurious to commerce ; 
 the bank should be compelled to keep a larger 
 stock of bullion, and drains should then be 
 allowed to take their course, as experience had 
 shown that, if left alone, they would cease in a 
 short time, and the exchanges become again fa- 
 vourable. Mr. Tooke considered a reserve of 
 ten millions a sufficient mass of treasure to sup- 
 port a drain without interference. 
 
 With reference to the working of the new act, 
 Mr. Tooke observed, that a demand for gold 
 would, most likely, take place through the depo- 
 sits, and not by withdrawing a part of the notes 
 in circulation with the public (it would affect the 
 unemployed notes before it disturbed those ac- 
 tually in use.) The result would be, that the 
 
 p 2 
 
212 
 
 directors of the bank, uncertain of the extent of 
 the drain, would be obliged instantly to contract 
 their accommodation to the public, they must 
 have recourse to means to direct the drain of gold 
 to the notes in the hands of the public. Before 
 two or three millions could be extracted from the 
 amount of these notes, the pressure upon the re- 
 serves of the London bankers would be very 
 great ; these bankers would, to the utmost extent 
 practicable, call in their loans and resolutely re- 
 fuse further accommodation. No one can doubt 
 the extremity of the pressure which would be in- 
 flicted upon the public, and, perhaps, in vain ; 
 probably the bank might not recruit its reserve 
 in time, and, it might happen, that with an 
 amount of six millions of bullion in the issue 
 department, the banking department would be 
 obliged to stop payment. The separation of the 
 two departments divides the^ means of support- 
 ing any drain, while the drains will, in all proba- 
 bility, fall upon one of them only. Mr. Tooke 
 predicted that, in such a case, the Government 
 would be called upon to interfere, and the only 
 interference that could meet the emergency 
 would be, to authorise a temporary transfer of 
 coin from the issuing to the banking department, 
 
213 
 
 that is, to suspend the act.* These objections 
 seem to apply rather to the proportion in which 
 the bullion of the bank is appropriated to these 
 different purposes, than to the principle of making 
 a division of that fund, setting apart a portion to 
 meet external, and a portion to meet internal 
 drains. 
 
 Mr. Tooke does not enter into any considera- 
 tion of the difficulties which attend the determi- 
 nation of price under a metallic currency, on the 
 supposition that a large sum in sovereigns is vo- 
 luntarily kept unemployed, that is, kept from 
 coming into comparison with commodities ; he, 
 apparently, treats gold money as a commodity 
 having intrinsic value independent of its supply. 
 
 Mr. Fullarton, b like Mr. Tooke, denies that 
 overissues of convertible bank-notes are possible, 
 but, admitting the fact, it is useless he says to 
 attempt to regulate prices through them, because 
 prices do not depend upon them alone ; they can 
 act upon prices only in the same manner as other 
 forms of credit. The increased issue of notes can 
 influence prices only by passing into the hands of 
 individuals, and enabling them to compete with 
 
 a Currency Principle, p. 71. 
 
 b On the Regulation of Currencies. 
 
214 
 
 each other on a larger scale in the market for 
 commodities ; it is not the mere existence of the 
 notes which can cause a rise in prices, but the 
 transfers to which they give rise ; it cannot be 
 maintained that a payment which, when made by 
 bank-notes, will cause a rise in prices, will not 
 cause an equal rise if made by a bill of exchange 
 or by a banker's cheque. The whole bank-note 
 circulation of the country might be turned at 
 once into a system of book-credits transferable by 
 cheque, or, on the contrary, all our banking ac- 
 counts might be commuted for bank-notes, with- 
 out the course of monetary transactions being 
 essentially disturbed or altered. Unless it can be 
 shown that payments made in one medium affect 
 prices, and that payments made in the other 
 medium do not affect them, the identity in prin- 
 ciple between bank-notes and other forms of cre- 
 dit is not impeached, it is not enough to show that 
 bills of exchange and cheques have certain pecu- 
 liarities, which render them rather less conve- 
 nient. Bank-notes have, indeed, to some extent, 
 been actually turned into a system of bank-credit. 
 From the great increase of banks, many more 
 transactions than formerly are now effected by 
 cheques, and, notwithstanding the great increase 
 of business, the number of bank-notes is de- 
 
215 
 
 creasing. Nine-tenths of all the transactions of 
 the kingdom are conducted without the interven- 
 tion of bank-notes ; it is, therefore, useless to at- 
 tempt to regulate prices by limiting the amount 
 of the notes. The reader must remember that 
 these observations are addressed to the limitation 
 of prices through the notes as currency, not to 
 any effect to be produced by a check given to 
 credit by restraining the employment of notes, 
 which are the most efficient form of credit. 
 
 It follows, from Mr. Fullarton's views of the 
 impossibility of prices being affected by any issue 
 of convertible notes, that no unfavourable ex- 
 change can be caused by them ; such a state of 
 the exchange must be caused by an unfavourable 
 balance of debt to foreign countries ; it is a ques- 
 tion of capital, not currency, Gold is sent to 
 pay for corn when our harvest is bad, because we 
 must purchase that corn with part of our capital, 
 and gold is that capital in its most convenient 
 form. It is impossible, by any direct action on 
 the notes, which form a portion of a mixed cur- 
 rency of gold and notes, so to reduce the price of 
 goods as to cause the merchants to send them, 
 instead of bullion, to a market where there is no 
 demand for them. It is, indeed, possible, by 
 withdrawing the usual facility of discount, at the 
 
216 
 
 commencement of any drain, to give a shock to 
 credit, and force the holders of goods to throw 
 them on the market, and thus lower prices, and 
 the new system is perfectly calculated to ensure* 
 that no unfavourable exchange shall take place, if 
 there be anything like a pressure in the money- 
 market, without producing a crisis ; but it does 
 not follow that the crisis will be lighter because it 
 will be earlier ; a drain of bullion does not com- 
 mence until the foreign debt has been incurred, 
 and the crisis must be prolonged until that is 
 paid. The reader will, however, consider that it 
 is because the price of commodities is high here 
 that, on some occasions, af; least, bullion is ex- 
 ported ; now, an inflation of credit causes high 
 prices, and will, therefore, apparently produce an 
 exportation of bullion, and if that drain of bul- 
 lion is to be checked, a shock must be given to 
 credit. 
 
 But Mr. Fullarton's main difference with the 
 economists of Lord Overstone's school is as to 
 the working of a metallic currency ; he maintains 
 that when the currency is metallic, hoards always 
 exist, from which, and not from the money in cir- 
 culation, drains of bullion are met, the amount of 
 
 a Regulation of Currency, p. 137. 
 
217 
 
 the circulation remaining the same as before the 
 commencement of the drain. It is from these 
 hoards that payments are made, for imported corn 
 on the occurrence of a bad harvest, or when a 
 foreign subsidy is to be paid ; we have no private 
 hoards, but the bullion in the bank of England 
 is a public hoard, and the drains should fall on 
 this to make our currency similar to one purely 
 metallic. Under the new system the hoard is 
 preserved, and the drain is made to fall upon the 
 money in circulation. 
 
 Mr. Fullarton with Mr. Tooke advises the 
 keeping of a larger hoard in the bank, and then 
 to leave drains to themselves ; he doubts whether 
 Mr. Tooke's plan of raising the rate of interest 
 will stop a drain, because the public are not de- 
 pendent on the bank at a time when a foreign 
 debt is contracted, which is a time when the 
 money-market is easy. Drains cure themselves, 
 because the countries to which the gold is sent 
 are soon saturated with it. The bank is power- 
 less to act until the evil has taken root,* the 
 remedy is then near at hand in the ruin of the 
 speculators, and when that has occurred and 
 credit is shaken, then is the time for the bank to 
 
 a P. 167. 
 
218 
 
 assist those who have still some security to offer, 
 and thus to restore credit as she has frequently 
 done under the old system, but which she now 
 cannot do until the bullion has returned to the 
 country, when it will be too late. 
 
 Mr. Fullarton considers that the hoards by 
 absorbing unusual supplies of the precious metals, 
 and again giving them up when a scarcity is felt, 
 preserve them from the continually recurring vi- 
 cissitudes in value, whether arising from occa- 
 sional variations in the cost of production or in 
 the proportion of the supply to the demand, 
 which are incident to other commodities. This 
 seems to make the value of gold depend upon the 
 fancy of the hoarders, upon the supply which 
 they choose to permit in the market. Mr. Ful- 
 larton supposes that the principle by which they 
 are guided in supplying currency is the rate of 
 interest, that they bring out their money when 
 interest is high, and hoard it again when it is low. 
 He says that the market rate of interest rises in 
 the first instance with every contraction of the 
 medium through whose agency capital is dis-' 
 tributed, whether that be money or credit,* a 
 scarcity of money, therefore, raises the rate of 
 interest, and brings out the hoards. 
 
 a P. 71. 
 
219 
 
 The connexion between the supply of money 
 as distinguished from capital, and the rate of in- 
 terest, is one of the most difficult questions con- 
 nected with our subject, and it will perhaps be 
 better to defer its consideration, until we have seen 
 more of the views of economists upon the point ; 
 at present we may notice some difficulties which 
 lie in the way of Mr. Fullarton's theory. It is, he 
 says, when every thing looks prosperous, when 
 wages are high, prices on the rise, and factories 
 busy, that an additional supply of currency is 
 required, whereas it is chiefly in a more advanced 
 stage of the commercial cycle, when difficulties 
 begin to present themselves, when markets are 
 overstocked, and returns delayed, that interest 
 rises. According to this view, the hoarding prin- 
 ciple would supply the additional currency at the 
 very time when it was not required. At such a 
 crisis, credit is what is wanting, or capital, not 
 currency, and even allowing the theory, it would 
 not apply to reserves in the hands of our bankers, 
 which are very different from the hoards properly 
 so called ; the reserves are in the market, and 
 their owners eager to employ them ; the hoards 
 are kept entirely out of sight and unemployed, 
 and their very existence is unknown to the 
 ublic. 
 
220 
 
 Both Mr. Tooke and Mr. Fullarton maintain 
 that it is not possible for notes which are con- 
 vertible for gold, and which have always been 
 paid in gold coin, to be less valuable than that 
 metal, because so soon as that fact became known, 
 they would be exchanged for gold ; but they do 
 not seem to have fully appreciated Mr. Ricardo's 
 views as to the expansion of the whole currency, 
 both gold and notes, by an overissue of the latter. 
 
 Mr. Fullarton maintained that the system of 
 banking in America was so imperfect that no in- 
 ference could be drawn from it, that notes really 
 convertible for gold were depreciated. 
 
 A series of articles on the currency by Mr. 
 Wilson, the editor of the Economist, and now 
 financial secretary to the Treasury, appeared in 
 that paper at intervals between 1845 and 1847. 
 These articles were afterwards collected and pub- 
 lished under the title of ff Capital, Currency, and 
 Banking." Mr. Wilson differs entirely from the 
 school of Mr. Ricardo and Lord Overstone. He 
 maintains, with Dr. Smith and Mr. Tooke, that 
 but a part of the bullion possessed by a country 
 is employed in its internal circulation ; that, even 
 in the case of a metallic currency, only that part 
 of the coin which is actually in the hands of the 
 public, and engaged in performing the exchange 
 
221 
 
 of commodities, is to be deemed circulation ; all 
 the coin, or money, or bullion, in the hands of the 
 bankers, seeking an opportunity for profitable in- 
 vestment, is capital. The bankers have no power 
 to influence the amount of coin in circulation 
 that would depend upon the amount which it was 
 necessary for the public to retain in their own 
 hands ; if trade increased, if commodities rose in 
 price, the public would find that they required to 
 keep a larger portion of their capital in the state 
 of money. Gold has other functions to perform 
 besides those of a circulating medium ; it forms 
 the reserves held by bankers, which are trans- 
 ferred from one to another by the cheques of their 
 customers, but which never get into circulation. 
 Gold is also used, and far more extensively, for 
 the purpose of transmitting capital from one 
 country to another. 
 
 Mr. Wilson asserts that a purely metallic cur- 
 rency could not be diminished in the event of an 
 exportation of bullion to meet a bad harvest, be- 
 cause as, according to his views, coin has intrin- 
 sic value, an increased quantity of it would be 
 required to circulate the higher priced commo- 
 dity ; coincident with the drain for the purpose of 
 foreign export, there would be a demand upon 
 
222 
 
 the bankers for more coin for the internal circu- 
 lation. The country bankers were not to blame 
 for increasing their notes in 1839, when the 
 bank of England reduced the amount of its paper, 
 because there being a deficient harvest at that 
 time, more money was required to circulate it, 
 and if the country banks had not thus increased 
 their issues, the drain on the bank of England 
 for gold to supply the internal circulation would 
 have been much greater. The bank of England, 
 on this occasion, took severe measures to check 
 the issues of the country banks, and succeeded in 
 effecting a reduction in the circulation to the 
 amount of thirteen hundred thousand pounds, in 
 less than three months ; but during this period, the 
 drain of gold was more severe than at any time 
 before or after ; he admits, that after the high 
 price of corn and the adverse exchange had lasted 
 long enough to reduce the consumption of other 
 commodities, to lessen the demand for manufac- 
 tures, the amount of employment, and the sums 
 required for payment of wages, the circulation 
 would, of its own accord, become contracted ; 
 but a considerable period would elapse before this 
 result could take place. 
 
 Mr. Wilson shows, that from 1841 to 1843, 
 
223 
 
 there had been a great Influx of bullion into the 
 bank, and yet the circulation in the hands of the 
 public did not increase, notwithstanding all the 
 measures resorted to by the banks to employ 
 their increased means ; so far from the bankers 
 having been enabled to extend their note circula- 
 tion at this period, there is good reason to believe 
 that part of the accumulation of gold was derived 
 from the internal circulation which had been in- 
 creased during the very high prices, and was con- 
 tracted again on the depression of trade, which 
 occurred in 1841 and 1842 ; he implies this fact 
 from the sudden appearance of a great number 
 of worn sovereigns in the hands of the private 
 bankers in London, showing an influx of those 
 coins from the more distant parts of the country. 
 Convertible notes cannot be issued in excess, 
 they must at all times be equivalent to gold, for 
 | if people found their notes of less value than 
 coin, they would exchange them for coin. As 
 to the view that our whole currency may become 
 redundant, as compared with that of other na- 
 tions, Mr. Wilson says, that the cost of exporta- 
 tion of bullion is a mere trifle, that, in conse- 
 quence, the exportation would begin immediately 
 that our currency began to become redundant, 
 and thus any perceptible rise of prices on that 
 
224 
 
 account would be prevented. This seems a most 
 important objection to Lord Overstone's views in 
 those cases, in which he supposes the currency 
 to be increased by the issues of the bank, but 
 not in those instances in which the currency is 
 considered to have become redundant by the de- 
 struction of a part of our commodities. 
 
 These gentlemen consider the exports of bul- 
 lion, which Lord Overstone attributes to a re- 
 dundancy of the currency, to be a consequence of 
 speculation, which either causes a high price of 
 goods, prevents their exportation, and requires 
 bullion to be sent in their place, or occasions a 
 greater consumption and importation of foreign 
 goods, which, being unaccompanied by an increase 
 of exportable goods, establishes a balance of debt 
 against us with foreign states, which we have to 
 pay in gold. Their theory of the currency may, 
 perhaps, be shortly stated as follows, prices, so 
 far as they depend on the currency, are deter- 
 mined, in this country, by a comparison of gold 
 with commodities. Bank-notes and other written 
 instruments, are merely forms of credit employed 
 by merchants to economise the use of gold. 
 
 Mr. Hubbard* rejects Lord. Overstone's theory 
 
 
 
 a The Currency and the Country. 
 
225 
 
 that changes in the price of commodities are 
 caused by the exports or imports of gold which 
 take place in the course of adjusting the distribu- 
 tion of the precious metals in the world. He 
 maintains that money is an indicator of value ; 
 prices, in England, are measured by the pound 
 sterling that is, by a certain weight of gold, and 
 that no diminution of the quantity of gold for the 
 time being in England lowers prices, because 
 gold is the currency of the commercial world ; 
 and the statement that a bale of cloth is worth 
 five ounces of gold conveys the same idea of 
 value to men in London, Paris, Petersburgh, and 
 New York. He admits that when a currency 
 has no intrinsic value, a diminution in its quantity 
 causes a fall in prices, as would a destruction of 
 part of all the gold in the world ; but the diminu- 
 tion of money, under consideration, is, he says, 
 merely local ; the cost of procuring gold has not 
 altered, the sum of gold in the market of the 
 world remains unchanged, and, the amount of 
 commodities remaining unchanged, the relative 
 value of gold to commodities must remain un- 
 changed. But would not these local diminutions 
 of money cause local and temporary changes of 
 price ? which is all that Lord Overstone contends 
 for. 
 
226 
 
 Mr. Hubbard supposes* that the effect of 
 an exportation of gold is, to diminish the avail- 
 able capital of the nation, the balances of mer- 
 chants at their bankers, the balances of bankers 
 with their money-brokers and the reserve in their 
 tills. The immediate result of this diminution 
 of the amount of unemployed capital will be a 
 rise in the rate of interest, without any interfer- 
 ence on the part of the bank ; the prices of 
 securities, though not of commodities, will fall 
 here; the merchants and capitalists will be 
 induced to withdraw their capital from foreign 
 loans to lend it here ; and the former will sell 
 their goods abroad for cash, and buy on credit, 
 thus reversing their former practice. Here we 
 meet again the question, Does the rate of interest 
 depend upon the quantity of money in the coun- 
 try, or upon the quantity of capital as distin- 
 guished from money that is, of the materials 
 for work, the support of labour, and the like, for 
 the time unemployed ? 
 
 Subsequently to the passing of the act of 1844, 
 the bank directors abandoned the custom, to which 
 they had formerly adhered, of maintaining for long 
 periods a uniform rate of discount, and lowered 
 
 * P. 42. 
 
227 
 
 and raised their terms in such a manner as they 
 supposed would give them a share of the discount 
 business of the country. In 1845, when their 
 reserve of notes was very large, their rate of dis- 
 count was as low as two and a-half per cent. It 
 is hardly necessary to remind the reader that the 
 railway mania reached its height about this time, 
 a vast sum had been spent on works actually con- 
 structed, a still larger sum was required for works 
 in progress or undertaken, and it seems to be 
 generally admitted that the high wages paid to 
 the workmen, and other kinds of railway expen- 
 diture, had caused an unusual consumption, and, 
 consequently, an unusual importation of foreign 
 articles. In this state of affairs, the potato 
 blight made its appearance, and, the harvest 
 being at the same time deficient, importations 
 of food became necessary ; the exchanges with 
 America and the continent fell rapidly, and a 
 drain of bullion ensued. When the drain com- 
 menced, the stock of bullion in the bank was 
 i about sixteen millions, the reserve of notes about 
 1 nine millions and a-half, and, consequently, the 
 amount of notes circulating with the public about 
 twenty-one millions. By April, 1847, the reserve 
 I of notes was reduced to three millions, two mil- 
 
 Q 2 
 
228 
 
 lions and a-half of this reduction taking place be- 
 tween the 27th of March and the 17th of April. 
 
 At first the directors of the bank of England 
 took no steps to check the drain beyond a very 
 slight increase in the rate at which they dis- 
 counted bills, the rate of interest was not raised 
 even to four per cent, until January, but in the 
 end of April it was suddenly raised to five per 
 cent, for the best bills having only a few days to 
 run ; the amount of bills admitted for discount 
 being at the same time limited, and renewal of 
 outstanding bills refused. No measure, says Mr. 
 Tooke, of so severe a character had been resorted 
 to by the bank since December, 1795. These 
 proceedings on the part of the bank stopped the 
 drain of bullion, and a large sum, already on 
 board the American packets, was relanded. From 
 this time forward the demand for bullion was 
 very slight, and the exchanges shortly became 
 favourable to this country; nevertheless, the com- 
 mercial distress continued, the demands upon the 
 bank for discount w,ere very great, and about 
 October many failures occurred. In their efforts 
 to keep up their reserve, the bank directors raised 
 the rate of interest successively to five and 
 a-half, six, seven, eight, and even nine per cent. 
 
229 
 
 (the exchanges, the reader will remember, being 
 all this time favourable to this country) ; but, 
 notwithstanding these steps, the amount of the 
 reserve of notes continued to decrease, until on 
 the 23rd of October it was not more than two 
 millions ; a panic ensued, perhaps almost equal 
 to that of 1825, the principal London bankers, 
 with the exception only of Lord Overstone/ 
 went in a body to Government to represent the 
 evils that must ensue from a continuance of the 
 restriction on the issue of notes ; the Govern- 
 ment now interfered, and suspended the act of 
 1844, authorising the bank to issue notes on se- 
 curities beyond the limit prescribed by that act, 
 but at a minimum interest of eight per cent. 
 The panic was instantly allayed, and it was not 
 found necessary to use the permission thus 
 given to issue notes. After April, the amount 
 of bullion remained at about eight millions; 
 during the whole of the pressure, the amount 
 of notes in the hands of the public varied but 
 little. 
 
 It is impossible not to allow that the events 
 which occurred on this occasion, very closely fol- 
 lowed the line pointed out by Mr. Tooke and 
 
 a Mr. Bevan's evidence before the Commons' Committee 
 of 1848. 
 
230 
 
 Mr. Fullarton, and so complete a fulfilment of 
 their predictions, cannot but incline us to attach 
 considerable importance to their views of the 
 policy of the act. 
 
 Enquiries took place before committees of 
 both Houses of Parliament as to the cause of 
 the distress on this occasion, and the extent to 
 which it had been increased or diminished by the 
 act of 1844. 
 
 The distress was generally said to have arisen 
 from a diminution of the available capital of the 
 country ; even Lord Overstone, whose theory 
 would seem to lead him to maintain, that the 
 gold had been exported because our currency 
 had become redundant in consequence of the de- 
 struction of so large a portion of our commodi- 
 ties, attributed the distress " to the heavy demand 
 upon the capital of the country arising from the 
 deficiency of our harvest, and the large amount 
 of provisions suddenly imported in consequence, 
 aggravated by the failure in the supply of raw 
 materials, both cotton and wool, from which our 
 means of making foreign payments were to come, 
 and by the large abstraction of capital from mer- 
 cantile and trading purposes for the construction 
 of railways."* 
 
 * Commons' Report, p. 388. 
 
231 
 
 Lord Overstone, in his examination before 
 these committees, maintained that the act of 
 1844 had mitigated the crisis of 1847, because, 
 if that act had not been passed, in addition to 
 the difficulties which existed, there would have 
 been such a reduction of the bullion as to oc- 
 casion serious apprehensions for the convertibility 
 of the notes, and thus cause an internal de- 
 mand for gold. The pressure would have been 
 considerably more severe, though probably post- 
 poned to a later period. Two accidents, he says, 
 gave suddenness to the contracting operation of 
 the act on this occasion, the mismanagement of 
 the directors in the early part of the drain, in 
 increasing their discounts, and the number of 
 failures in the latter part of the year ; probably on 
 another occasion these two accidents might not 
 occur, and a gradual contraction of the notes in 
 the hands of the public might take place. Under 
 any circumstances, the act had shewn itself ef- 
 ficient for its intended purpose, which was the 
 effective protection of the convertibility of the 
 bank-note ; if the act of 1844 had not been in 
 operation, the bank would probably have con. 
 tinued in the course in which it began, until its 
 bullion had been reduced to two or three millions, 
 and then would have come the convulsion, ren- 
 
232 
 
 dered more severe by fears for the convertibility 
 of the note. Lord Overstone, when pressed upon 
 this point, allowed that even without the act of 
 1844 the bank would probably have preserved 
 the convertibility of the notes ; the bank had 
 large powers, credit would be convulsed, subor- 
 dinate members of the community would be sa- 
 crificed, but the bank would probably be saved. 
 The objection to the old system was, that it did 
 not provide a necessity for making an effort to 
 adjust the exchanges, until the bullion was re- 
 duced so low, that no means existed for meeting 
 an internal demand for gold ; he maintained that 
 the suspension of the act could hardly be called 
 an interference with its principle, which was, to 
 secure the convertibility of the note. When 
 again pressed as to whether the bank of England 
 had not always preserved the convertibility of its 
 notes, Lord Overstone remarked that the bank had 
 been more than once driven to extreme measures 
 to secure that end, and that the act of 1844 was 
 passed to preserve the public, non solum a 
 calamitate sed etiam calamitatis metu. It is a too 
 common delusion to suppose that if the circulation 
 be kept up, and the demands of trade be freely 
 supplied, the difficulty will exhaust itself. 
 
233 
 
 Lord Overstone endeavours to shew, that 
 though the currency was contracted sufficiently 
 to bring back the bullion, the extreme want of 
 money felt by the public on this occasion was not 
 caused by that measure, but by the panic which 
 caused the notes to be hoarded. There were not 
 fewer notes than usual in the hands of the public, 
 if they had chosen to use them. The contraction 
 of the currency which had occurred he, therefore, 
 allows had taken place entirely in the reserve 
 notes, and to support his theory he has to shew 
 that the amount of those notes affects prices; 
 accordingly, he maintains that notes in the re- 
 serves of bankers, including those in the till of 
 the bank of England, are the most efficient part 
 of the whole issue in regulating prices. 
 
 The greater part of the witnesses examined 
 3efore these committees do not find fault with the 
 act for having caused a pressure for the purpose 
 of stopping the drain of bullion. They agree that 
 if our notes are to be convertible for gold, means 
 must be taken to preserve a fund of gold, and 
 sacrifices must be made ; but they say that the 
 act, by fixing a definite limit to the extent to 
 which the bank may lend its credit, tends to 
 create panics. When the public mind is in an 
 excited state, and people see that the bank has 
 
234 
 
 nearly reached the limit of her power to assist 
 them with her credit, they are seized with a 
 panic ; each man is eager to get in time the 
 means of meeting possible demands ; and when 
 he has obtained those means, he hoards them. 
 The consequence is so great a scarcity of the 
 ordinary instruments of exchange, that business 
 comes to a dead lock ; there is a run upon the 
 bank for notes, not because they are really 
 wanted, but because the people see that there 
 may be a time when it will be impossible to pro- 
 cure them. 
 
 The bank directors seem to have approved of 
 the act of 1844. It had relieved them of a con- 
 siderable part of the responsibility which they 
 had previously had to bear in the management 
 of the circulation; it was, however, generally 
 agreed that they must still keep the state of 
 the circulation in view, and that they were not to 
 carry on their business in the same manner as 
 other bankers ; and they were blamed for lower- 
 ing their rate of discount in the attempt to get 
 their notes into circulation, in accordance with 
 Lord Overstone's theory, that the circulation 
 should be increased when bullion came into the 
 country. The amount, indeed, of discretion 
 required at the hands of the bank directors was 
 
235 
 
 still so great, that many of the witnesses con- 
 sidered that it would be better to leave the whole 
 management to them, and simply to repeal the 
 act. 
 
 Lord Overstone's theory, of the effect of the 
 expansions and contractions of the amount of 
 bank-notes on the price of commodities, certainly 
 did not seem to have been admitted by the wit- 
 nesses before these committees ; but they con- 
 sidered that a reduction in the amount of notes 
 would check the means of granting discounts, 
 raise the value of money, and lower the price of 
 securities,, by which means gold would be pre- 
 vented from leaving the country ; and Lord Over- 
 stone agreed with them in these views. 
 
 We must now consider the question, What de- 
 termines the rate of interest, and, at the same 
 time, what is the difference between capital 
 and money ? The usual description of capital, 
 that which is given by Dr. Smith/ is a portion of 
 wealth set apart to be employed in the pro- 
 duction of more wealth, and the rate of interest 
 paid for the use of a portion of this capital 
 depends, he says, upon the amount of it for the 
 time being unemployed, and which the owners 
 do not want to employ themselves. Money is 
 
 * Ante, p. 56. 
 
236 
 
 only the title-deed by which this amount of 
 wealth is conveyed to the borrower. One regula- 
 tor of the rate of interest will, therefore, necessarily 
 be the supply of capital, and this regulator may 
 apparently affect the rate of interest to a very 
 great extent ; but we should suppose that its 
 operation would be gradual. Again, if while 
 the supply of capital on loap remains unchanged, 
 there should be an increase in the number of 
 deeds which confer a title to the capital, the 
 owners of those deeds would compete with each 
 other, and would give them to the borrowers at a 
 lower rate. When the quantity of money was 
 increased, the rate of interest would fall ; and, on 
 the other hand, when money was made scarce, 
 the rate of interest would rise. There would be 
 no change in the quantity of capital in either 
 case ; but the borrowers would obtain it on diffe- 
 rent terms, under the different circumstances. 
 Abundance, or scarcity of money, would therefore, 
 as we have seen allowed by Mr. Hume and Mr. 
 Ricardo, a be another regulator of the rate of in- 
 terest; but its effects could not be permanent, 
 because the change in the supply of money 
 would, in a short time, affect the prices of the 
 goods really transferred by the loan, thus, after a 
 
 a Ante, pp. 60, 115. 
 
 
237 
 
 time, rendering it necessary to borrow a larger or 
 a smaller amount than before, and restoring the 
 original proportion between the supply and de- 
 mand. A third cause of a change in the rate of 
 interest is, a variation in the degree of confi- 
 dence. This last cause may evidently have 
 powerful effects, but they are not likely to be 
 of long continuance. 
 
 Whenever the rate of interest rises, it must be 
 remembered that the price of interest-bearing 
 securities falls. 
 
 The operation of any of these three regula- 
 tors of the rate of interest may cause a move- 
 ment of bullion, if in any country the rate of 
 interest rises from the scarcity of capital, or from 
 the abundance of money, or from the weak state 
 of credit, bullion will flow into it. Lord Over- 
 stone seems inclined to consider the rise of the 
 rate of interest which caused the influx of bul- 
 lion on this occasion, a consequence of the con- 
 traction of the currency produced by the act; 
 the witnesses, however, seem to attribute it 
 chiefly to a change in the state of confidence, 
 but in part to a scarcity of available capital 
 caused by the great expenditure of capital in the 
 construction of the railways. 
 
 As to this point, the effect of the railway ex- 
 penditure in raising the rate of interest, the wit- 
 
238 
 
 nesses seem, on the whole, though with some 
 hesitation, to agree that much of the floating 
 capital of the country had been turned into fixed 
 capital in prosecuting these undertakings, and 
 that a diminution of the capital on loan was a 
 necessary consequence. This question is consi- 
 dered in detail by Mr. Wilson, a he says, capital 
 is of two kinds, fixed capital, such as machinery, 
 which is not consumed in production or replaced 
 out of the current income of the country, and 
 floating capital, which consists of commodities 
 required for every-day consumption, and which is 
 entirely consumed in production and replaced 
 with a profit out of the current incomes of the 
 people; it is this last species of capital which car- 
 ries on the ordinary business of the country, and 
 if any portion of it be turned from the reproduc- 
 tion of capital of a similar kind to the formation 
 of fixed capital, business must be embarrassed ; 
 it is only the savings of the profits of capital 
 which can be so employed without impeding or- 
 dinary business. 
 
 It would seem then that we must consider the 
 money in the money-market, in ordinary times 
 at least, to represent the amount of the current 
 savings which the owners do not wish to employ, 
 
 a Capital, Currency, and Banking, chap. 12. 
 
239 
 
 and of such capital as may be in a state of trans- 
 fer from one employment to another. The 
 reader will remember that what is called money 
 in the money-market, is not currency of any 
 kind, but the power of lending. 
 
 The distinction between money and capital 
 seems to have been very generally felt as a dif- 
 ficulty. Incorrect views upon this subject have, 
 as we have seen, led to much confusion in the 
 inquiry into the phenomena presented by a com- 
 mercial crisis. We shall find them to be the 
 cause of a large part of what is erroneous in the 
 views of Mr. Attwood, and of those persons who 
 expect great advantage from the extension of the 
 currency which is to be caused by the new gold ; 
 and they appear to have given rise to a strange 
 argument sometimes advanced by the supporters 
 of the act of 1844 against its suspension, namely, 
 that it is as impolitic and unfair for the state to 
 make money cheap by suspending the act as to 
 lower the price of corn, or any other commodity. 
 Now, this position is true, if we are to understand 
 that the Government interferes with the price of 
 capital as established by the demand and supply 
 of it; but false, if the interference complained of 
 is merely a restoration of the currency, or of 
 credit, to that state in which they will permit 
 
240 
 
 j 
 
 capital to be dealt in at that price. The opera- 
 tion in this case, far from being a violent inter- 
 ference with the price of a commodity, is ana- 
 logous to the removal of impediments which 
 prevent the commodity from being sold at its 
 natural price. Capitalists deal in capital, not in 
 currency, and neither they nor those who borrow 
 from them have any right to complain of steps 
 taken by the state to check, if possible, fluc- 
 tuations in the measure by which all the pro- 
 perty of the nation is estimated. 
 
 In the course of the next year the rate of in- 
 terest fell again to its usual amount, a circum- 
 stance which seems to show that the rise, which 
 took place at this time, was not caused by the 
 railway expenditure, for that continued, nor by 
 the export of capital, for the capital could hardly 
 have returned to us so soon ; the rise in the rate 
 of interest must apparently have been caused 
 either by the scarcity of money, or by the shock 
 to credit, perhaps by both these causes, but more 
 particularly by the latter. 
 
 The Lords' committee reported that the re- 
 strictions of the act had materially aggravated 
 the pressure, and had produced the panic which 
 occurred in October ; that it had been shown to 
 them that an enlargement of the issues of the 
 
241 
 
 bank, under a favourable foreign exchange > would 
 frequently be expedient, at times when under 
 the provisions of the act no such enlargement 
 could take place, and even in cases where by 
 the act a compulsory contraction would be en- 
 forced ; that it appeared probable that such cases 
 would occur from time to time so frequently, that 
 it would be inconsistent with the fixity and order 
 which is, or ought to be, the object of all laws to 
 secure, if the Crown and its advisers were so fre- 
 quently to set aside the powers of a distinct sta- 
 tute ; they reported, therefore, in favour of an 
 amendment of the act by the introduction of 
 a discretionary relaxing power, to be exerted 
 only during the existence of a favourable state 
 of the foreign exchanges. This, the reader will 
 observe, is, in other words saying, when we are 
 sure that gold is coming in, let us anticipate its 
 effect in restoring confidence ; it is not, under 
 these circumstances, necessary that we should 
 have an equal value of gold in reserve for every 
 note issued, because we are sure that we soon 
 shall have such a value, and there can be no im- 
 mediate prospect of an internal drain. 
 
 The committee of the House of Commons, 
 however, took a different view, and decided, 
 
 R 
 
242 
 
 though by a small majority only, in favour of the 
 act as it then existed. 
 
 The subject was introduced by Mr. Herries, in 
 the House, in 1848, but by that time commercial 
 affairs had become prosperous again, and it ex- 
 cited little interest. 
 
 The reader will have remarked that the chief 
 merit now claimed for the act of 1844 is, that it 
 has secured the convertibility of the notes. It 
 would, however, according to Lord Overstone's 
 views, still have all the effect in moderating com- 
 mercial convulsions, which could be derived from 
 a gradual expansion of the circulation as bullion 
 flowed into the country, because, as he considers 
 notes in the issue department of the bank to be 
 in circulation and to affect prices, the currency 
 would be gradually increased with the bullion. 
 
 Mr. Hubbard a estimated that in 1847 we had 
 a balance of foreign payments to make to the 
 amount of twenty millions, and that six millions 
 only of this large amount were discharged by the 
 payment of bullion, the rest being met by pur- 
 chases, on behalf of foreigners, of our securities, 
 which had fallen in value in consequence of the 
 high rate of interest in this country. 
 
 * Letter to Sir C. Wood. 
 
243 
 
 Shortly after the suspension of the act of 1844, 
 Mr. J. S. Mill published his " Principles of Poli- 
 tical Economy," which has the reputation of being 
 one of the ablest works that have appeared on the 
 science. Mr. Mill enters at great length upon 
 the subject of the currency. He admits, in 
 general terms, that prices depend upon the quan- 
 tity of money, but upon the quantity of money 
 only which goes into the market for commo- 
 dities, and is there actually exchanged against 
 goods ; money hoarded does not act on prices, 
 nor money in the coffers of the bank, nor the 
 reserve of private bankers, unless drawn out and 
 actually expended in commodities. He main- 
 tains, too, with Mr. Tooke (and this seems a 
 most important position), that, in a state of com- 
 merce in which much credit is habitually given, 
 general prices depend much more upon the state 
 of credit than upon the quantity of money, for 
 oredit, though it is not a productive power, is a 
 purchasing power; and a purchase by means of 
 credit creates as great a demand for goods, and 
 tends quite as much to raise their price as a pur- 
 chase of equal amount for ready money. He 
 allows that money is frequently brought into a 
 country and carried out again without affecting 
 prices, acting only on the market for securities or 
 
 R 2 
 
244 
 
 the money market, and not on that for commodi- 
 ties. He, however, adopts and extends Mr. Ri- 
 cardo's theory of the distribution of the precious 
 metals amongst nations, and supposes that many 
 exportations and importations of bullion are ad- 
 justments of the currency. If the prices of com- 
 modities are raised beyond their proper point by 
 an expansion of the currency or of credit, bullion 
 will leave the country, and will not return until 
 the currency is contracted, or a destruction of 
 credit tantamount to such contraction has taken 
 place. Mr. Mill does not explain the manner in 
 which this supposition of the adjustment of the 
 currency by exportation of money is consistent 
 with the theory that the reserves of bankers have 
 no effect on price. It is through its effect on prices 
 that Mr. Ricardo supposes the exportation of bul- 
 lion to adjust the currency. If, then, exportation 
 take place, as is always the case from the reserves, 
 prices cannot, according to Mr. Mill, be affected, 
 and no reason should exist for the exportation of 
 money rather than of goods. 
 
 During a quiescent state of the market, Mr. 
 Mill a considers that it is not possible for bankers 
 to increase the issue of their notes at will ; but 
 when anything excites more than usual hope 
 
 * Chapter on the regulation of Currency. 
 
245 
 
 gain, and gives increased briskness to business, 
 persons are disposed to make a more than or- 
 dinary use of their credit> and to this desire 
 bankers often unduly administer. If bank-notes 
 be obtained for the purpose of making a specula- 
 tive purchase, they may be returned into deposit 
 by the persons obtaining them,, as stated by Mr. 
 Tooke and Mr. Fullarton, and will not affect 
 prices; but when speculation has proceeded so 
 far as to reach the producers, and they obtain 
 advances of bank-notes, these notes are not re- 
 turned into deposit, but are employed in the pay- 
 ment of wages, and must increase prices ; and 
 this employment of bank-notes must have been 
 powerfully operative upon prices at the time 
 when one and two-pound notes were permitted 
 by law. (The country gentlemen, therefore, 
 according to this view, were not wrong in sup- 
 posing that the permission granted in 1822, to 
 the country bankers, to continue the issue of 
 small notes, amounted to an extension of the cur- 
 rency.) Again, bank-notes are obtained by spe- 
 culators, when the tide begins to turn, to enable 
 them to hold on ; and this increase of bank-notes 
 must tend to prolong the speculations, to keep up 
 prices, and to increase and prolong the drain of 
 the precious metals for exportation ; and the 
 banks are at last compelled to contract their 
 
246 
 
 credit more suddenly and severely, than if they 
 had not been allowed to prop up the specula- 
 tions by increased advances after the time when 
 the recoil had become inevitable. Mr. Mill 
 agrees, therefore, on this point with Lord Over- 
 stone and his school. 
 
 Before the passing of the act of 1844, the 
 bank of England reissued the notes paid into it 
 for gold, continued its former amount of discount, 
 prevented the contraction of credit, and the ces- 
 sation of the drain. The bank of England may 
 still work this mischief to a great extent through 
 her deposits ; but banks who commit this error 
 with their deposits, would commit it still more if 
 they were at liberty to make increased loans with 
 their issues, as well as with the deposits. If, says 
 Mr. Mill, the act of 1844 is no obstacle to the ad- 
 vances of banks, before the crisis, why is it found 
 an obstacle when the crisis comes ? Evidently it is 
 an obstacle, and if it be blamed for imposing ob- 
 stacles after the crisis, when facilities are needed, 
 it should be allowed the merit of imposing them 
 when they are required. In this respect the new 
 system is an improvement upon the old, but these 
 advantages, whatever value may be put upon 
 them, are purchased by still greater disadvantages. 
 When the collapse has come there is a great de- 
 struction of credit, and advances by the bank at 
 
247 
 
 that time are invaluable, as they do not extend 
 the ordinary amount of floating credit, but merely 
 restore it to that state which is requisite to the 
 support of firms of undoubted solvency ; this 
 support of credit is consistent with the principle 
 of the act, for that principle is, to draw gold into 
 the country, and to compel a proportionate en- 
 largement of the circulation, but by not suffering 
 the increase to take place until the gold has ac- 
 tually arrived, this object cannot be effected until 
 almost all the losses and failures attendant on the 
 crisis are consummated. This function of banks 
 in filling up the gap made in mercantile credit is 
 so entirely indispensable, that, if the act of 1 844 
 continue unrepealed, its provisions must be sus- 
 pended, as they were in 1847, in any period of 
 great commercial difficulty, as soon as the crisis 
 has really and completely set in. But there is 
 another objection to the act of 1844, of a more 
 comprehensive nature ; the new system is adapted 
 to the case in which the drain of gold originates, 
 in a rise of prices produced by an undue expansion 
 of currency or credit ; in such a case it is a fair 
 assumption that the gold exported would be drawn 
 from the currency itself, (Mr. Wilson, we may re- 
 member, stated, that no drain has ever gone so far 
 as to touch the currency actually in the hands of 
 
248 
 
 the people,) because such a drain, being in its na- 
 ture unlimited, will, necessarily, continue as long 
 as currency and credit are undiminished, but it is 
 adapted to no other case, not to a drain of gold 
 caused by a great foreign expenditure on the part 
 of the Government, nor to a large exportation of 
 capital for foreign investment, nor to a failure of 
 the crops in the countries which supply us with 
 the raw produce of our manufactures, nor to fai- 
 lures of our own harvests. In all cases of this 
 nature, Mr. Mill agrees with Mr. Tooke and Mr* 
 Fullarton, the gold, if the currency were metallic, 
 would be taken out of the boards, and not out of 
 the circulation. Drains of gold of this kind are 
 not interminable in their nature, they are demands 
 for capital, they raise the rate of interest on loan- 
 able capital, cause a corresponding fall in securi- 
 ties, and thus cease of themselves by attracting 
 gold for investment ; gold may also be brought 
 back in a moderate period by the ordinary opera- 
 tion of commerce. 
 
 Mr. Mill is one of those economists who main- 
 tain that it is the possible supply of every article 
 which determines its price, but he does not enter 
 upon the difficulties which this view throws in 
 the way of supposing that the reserves of bankers- 
 have no effect on prices. 
 
The question of the regulation of the cur- 
 rency was discussed at considerable length by 
 Mr. Macculloch in the article on Money, ap- 
 pended to his edition of Dr. Smith's Wealth of 
 Nations. The views of this well-known econo- 
 mist require our attention, because, though they 
 certainly appear to be somewhat confused, this 
 article is, no doubt, much read, and is quoted 
 frequently by Lord Overstone as of indisputable 
 authority. 
 
 Mr. Macculloch says, that when, as with us, 
 metallic money may be freely supplied, and con- 
 sists of pieces of full weight, prices do not de- 
 pend upon the extent of the currency, but upon 
 the relative cost of producing gold and the com- 
 modities for which it is exchanged ; it is only 
 when the supply of metallic money is limited, or 
 when the money of the country consists of paper, 
 or of any other article of no intrinsic value, that 
 the value of money can depend upon its quantity. 
 However true this may be, it certainly seems a 
 most extraordinary theory to be put forth by an 
 admirer of Lord Overstone's plan for regulating 
 the currency, as that plan requires us to consider 
 that prices depend on the quantity of money, 
 and to treat money as a sign of value, and not as 
 commodity. 
 
250 
 
 A currency of inconvertible paper money may 
 be kept on a par with a metallic currency simply 
 by limiting its amount, and, if the issue of paper 
 should not be too great, the use of gold for all 
 pecuniary purposes might be dispensed with. 
 When the currency consists of paper money con- 
 vertible for gold, but no gold is used with it, a 
 very slight depression in the value of paper below 
 gold is sufficient to cause gold to be demanded 
 for it.' When the currency consists partly of 
 paper, and partly of gold used along with it, as 
 Mr. Macculloch supposes to be the case in this 
 country, it is clear, he says, that there cannot be 
 any depreciation in the value of the paper as 
 compared with gold, for it may be exchanged for 
 gold, and is as readily received in all payments as 
 gold ; but the effect of inordinate issues, though 
 it cannot cause any discrepancy between paper 
 and gold in the home market, is to increase the 
 amount of the whole currency, both paper and 
 gold, and, by rendering it redundant as com- 
 pared with that of other countries, to depress 
 the exchanges, and then, as notes do not circu- 
 late abroad, to cause a drain upon the bank and 
 an exportation of coin. The fact, therefore, of 
 an unfavourable exchange, and of gold being for 
 any considerable time demanded from the bank, 
 
251 
 
 is to be taken as conclusive evidence that the 
 currency is redundant as compared with the cur- 
 rencies of other countries. a (To make the proof 
 conclusive, ought it not to be shown that no 
 other circumstances can affect the exchanges and 
 cause an efflux of gold ?) In most instances, such 
 redundancy is caused by additional quantities of 
 paper or coin having been brought into circula- 
 tion ; but this is not always the case. A fixed 
 amount of currency may sometimes be in excess 
 and sometimes be deficient, according to the 
 varying state of credit and our commercial rela- 
 tions with foreigners. The state of the exchange 
 is the only unerring test by which to judge whe- 
 ther the currency is or is not at its proper level. 
 He says the directors of the bank of England 
 have often involved themselves in difficulties by 
 their ignorance of this principle. Observing the 
 exchange to fall, and a drain of bullion to begin 
 while the issues were not greater than usual, they 
 concluded that this drain had no connexion with 
 the amount of the paper afloat, and that it would 
 not be stopped by its contraction ; but in this 
 case the currency has still become redundant^ 
 not, indeed, by the increased issue of notes, but 
 
 * Wealth of Nations, by Macculloch, p. 423. 
 
252 
 
 because, from changes in the state of trade an< 
 the like, a less quantity of it has become suffi- 
 cient for the purposes to which it is applied.* 
 
 Mr. Macculloch then takes a review of the 
 commercial distresses which have occurred since 
 1793, and assuming as a point of departure that 
 an adverse exchange and an efflux of bullion are 
 the unerring sign of a redundant currency, he 
 easily arrives at the conclusion that they have all 
 been occasioned by the bankers, who have either 
 directly extended the currency by an issue of 
 notes, or omitted to contract it when rendered 
 redundant by circumstances. Perhaps we may 
 venture to caution the reader who turns to this 
 article not to be too hastily carried away by its 
 clear and confident tone. Mr. Macculloch is, 
 perhaps, distinguished among economists for his 
 love of an abstract theory, and for the length to 
 which he pushes it. The reader will probably 
 remember that he carried the proposition that 
 labour is the source of all value so far, as to 
 maintain that the value added to a cask of wine 
 by being kept to maturity was labour ; and that 
 from Mr. Ricardo's theory, that a rise of wages 
 lowers the price of all goods in which much fixed 
 
 P. 496. 
 
253 
 
 capital is used, he argued that the superiority of 
 England as a manufacturing country was to be 
 , found in the high wages which her manufacturers 
 had to pay and the small profits which they re- 
 ceived. 
 
 Mr. Macculloch denies that the act of 1844 
 aggravated the crisis of 1847 ; he says that crisis 
 was the result of the railway mania and of the 
 Irish famine, that, in consequence of this defici- 
 ency, and of the Government having come forward 
 to provide means for its relief, there was an un- 
 precedented importation of all sorts of corn, and 
 the demand for bullion to meet the importation 
 occurring simultaneously with an immense railway 
 expenditure, pecuniary accommodations were ob- 
 tained with the greatest difficulty. Does not Mr. 
 Macculloch here speak as if the demand were for 
 capital to pay for the corn ? We should have 
 expected him to say, the currency becorning very 
 greatly redundant, as compared with that of other 
 countries, in consequence of the loss of our har- 
 vest and our potatoes, an unprecedented exporta- 
 tion of coin took place. Mr. Macculloch seems 
 to treat the distress suffered at this period rather 
 lightly, merely stating that a great many mercan- 
 tile houses, which had been trading upon insuffi- 
 cient capital, failed, that the alarm thereby occa- 
 
254 
 
 sioned was without foundation, and that the inter- 
 ference of Government was to be regretted. a 
 
 In another work Mr. Macculloch approves of 
 the conduct of the bank in 1839, in obtaining a 
 supply of gold by selling bills on the continent. 
 The epithet* disgraceful is often applied to this 
 transaction, but if we consider the reserve of the 
 bank as comprising the fund which the nation 
 sets apart to adjust its foreign transactions, what 
 degree of discredit can attach to the bank for 
 supplying a temporary deficiency in that fund by 
 credit ? 
 
 In this year the Revolution occurred, in whicl 
 Louis Philippe was driven from the throne oi 
 France. Shortly after that event cash payments 
 were suspended by the bank of France, by order 
 of the provisional government. The notes re- 
 mained inconvertible for some years; but no 
 depreciation of their value seems to have taken 
 place. 
 
 a P. 507. 
 
255 
 
 CHAPTER VII. 
 
 SECOND PERIOD OF A MIXED CURRENCY OF NOTES 
 AND GOLD CONTINUED. 
 
 Discovery of the Gold Fields of California and Australia. 
 Present State of the Social Economy as affected by these 
 Events. Their bearing upon Lord Overstone's Theories. 
 Publications in Anticipation of the Renewal of the Bank 
 Charter, by Mr. Tooke, Colonel Torrens, and Mr. Arbuth- 
 not. The Committee of 1857 on the Bank Acts. Lord 
 Overstone maintains that the Price of Securities is affected 
 by the Contraction of the Currency though that of Com- 
 modities may remain unchanged. Comparative View of 
 the Theories of Lord Overstone and of his Opponents. 
 His Theory correct, but its Effects in Practice obscured 
 by the greater Results of Changes in the State of Credit. 
 Estimate of the Act of 1844 considered as acting on 
 Credit. Extent to which Lord Overstone's Views are re- 
 ceived in France and America. Opinions of M. Michel 
 Chevalier and of Mr. Bowen. The recent extraordinary 
 Panic in America. Dangers to which we are exposed 
 from the Liability of the American Banks to a run for Gold. 
 Progress of Opinion in the Birmingham School. Views 
 of the effect of extensions of the Currency upon Industry. 
 Mr. Attwood. Mr. Babbage. Mr. Bailey. His Theory 
 that Production may be increased by a Mental Stimulus. 
 Views of Mr. Scrope, Mr. Mill, and Mr. Macculloch, 
 To what extent would a limited Currency of Inconvertible 
 Notes save us from Commercial Convulsions ? 
 
256 
 
 WE now come to events of the very greatest im- 
 portance in an inquiry into the effects which are 
 produced upon society by variations in the value 
 of money. The existence of a great gold-field 
 in California seems to have been long suspected. 
 Dr. Jameson, in his " Mineralogy/' published in 
 1816, states* that on the coast of California there 
 is a plain fourteen leagues in extent, covered with 
 an alluvial deposit, in which lumps of gold are 
 dispersed. It would seem that gold must have 
 been found at a former time in considerable 
 quantities in that country, and it is a singular 
 circumstance that such a discovery should not 
 have been prosecuted. In 1848, as is well 
 known, gold was discovered in large quantities 
 on the river Sacramento. Attention was shortly 
 after called to the similarity between the geolo- 
 gical formation of that district and of large tracts 
 of land in Australia; and in 1850, rich deposits 
 of gold were found near Bathurst. From that 
 time to the end of the year 1856, 174 millions 
 sterling of gold have been produced from 
 these new sources. The annual production has 
 steadily, though slowly, increased, and in 1856 
 
 Vol. iii., p. 13. 
 
 
257 
 
 reached the amount of twenty-nine millions and 
 a half. a 
 
 We must postpone to a future chapter the 
 consideration of the general effects of the new 
 gold on society, at present we need only men- 
 tion, that of the above quantity of new gold 
 about fifty millions sterling have been retained in 
 the United States, partly in lieu of paper, and 
 that twenty millions have been added to the coin 
 of this country. The rise in prices, however, 
 consequent upon this great addition to our circu- 
 lation, is, to say the least, so little marked, that 
 its existence is doubted by many of those who 
 have taken part in the discussions on the currency 
 which we have just considered. 
 
 In a few years after the discovery of the 
 new gold fields, the bullion in the coffers of 
 the bank of England reached the large amount 
 of twenty-two millions; then came the Russian 
 war, the amount of bullion began to fall, and, 
 notwithstanding the great importations which 
 continually take place, it has been less on the 
 average than before the discovery of the gold 
 fields. b The rate of interest has been very high 
 for a long time, there have been several 
 
 
 * Tooke's History of Prices, vol. vi., p. 146. 
 b Bank Act Report, p. 3. 
 
 S 
 
258 
 
 periods of considerable pressure, and, in October, 
 1856, tbe reserve of the bank of England w* 
 reduced to the sum of about two millions an< 
 a-half, an amount not very much higher thj 
 that which it possessed when the act of 1844 w; 
 suspended. 
 
 During this period there has, apparently, beei 
 no overtrading in this country, no extraordmar; 
 issue of notes, and no sudden destruction of oui 
 commodities ; if we attempt to explain, by Loi 
 Over stone's theory, the difficulty which we fe 
 in retaining our bullion, we must suppose that il 
 is because the currencies of other nations 
 become too small, and that part of our money is 
 going to them to restore the equilibrium. But 
 we should have thought that exportations of 
 bullion, which were made from any country 
 for this purpose, could not have been felt as 
 causing a pressure, they ought merely to relieve 
 us from a superfluity; we are, therefore, inevita- 
 bly led to consider that the exportations of bul- 
 lion which we have such difficulty in restraining, 
 arise from causes totally independent of the cur- 
 rency ; they must take place either to transmit 
 capital, to support credit in other countries, or, 
 perhaps, from some mysterious cause connected 
 with a change in the relative values of silver and 
 
gold, in consequence of the great production of 
 the latter metal. 
 
 About this time the directors of the bank of 
 England made an application, in accordance 
 with the act of 1844, for permission to issue 
 notes to the extent of two-thirds of the amount 
 of the notes of those private bankers who 
 had failed, or had ceased to issue notes, and the 
 permission was granted. 
 
 Under th&e circumstances we approach the 
 time when the bank charter might again be re- 
 newed, and the provisions of the act of 1844 be 
 either modified or confirmed by the legislature ; 
 many new publications have appeared on the 
 [subject, and it has again been submitted to a par- 
 liamentary inquiry. Of the publications we need 
 notice only Mr. Tooke's pamphlet, " On the 
 Bank Charter Act of 1844," and the two bulky 
 and expensive, but valuable volumes which he 
 has added to his History of Prices, " Sir Robert 
 Peel's Act of 1844, Explained and Defended/' by 
 Colonel Torrens, and "The Vindication of Sir 
 [Robert Peel's Act," by Mr. Arbuthnot, who was 
 lis private secretary. 
 
 Mr. Tooke abides by the theory contained in his 
 nquiry into the Currency Principle, and asserts 
 
 8 2 
 
260 
 
 that, but for the supplies of gold from California 
 and Australia, the Act of 1844 must again have 
 been suspended. 
 
 The works of Colonel Torrens and Mr. Arbuth- 
 not are, for the most part, merely restatements 
 of Lord Overstone's theory. Colonel Torrens, 
 however, expressly allows that the leading ele- 
 ment of the theory on which the act of 1844 is ; 
 founded, is, that all the most signal fluctuations j 
 of prices are caused, not by an expansion or , 
 contraction of the bank-note circulation, but by a 
 redundancy or deficiency in the supply of com- 
 modities, 11 and he ridicules Mr. Tooke for sup- 
 posing that he refutes the principles of the act of 
 1844, by showing that prices have not followed 
 the issues of bank notes. This, however, is a most 
 important admission on the part of the advocates 
 of the act of 1844, as it confines the application 
 of their theory to a few cases only, and to 
 those in which they have the greatest practical 
 and theoretical difficulties to encounter. It is in 
 these cases that injury is inflicted on the trading 
 part of the community, without any previous im- 
 prudence on their part, and it is here that Colonel 
 Torrens and his friends have to treat our cur- 
 rency as of no intrinsic value, or their theory 
 
 * P. 102. 
 
261 
 
 fails, for we have seen, a that if we are to consider 
 our coin as a commodity having intrinsic value, 
 not less, but more of it than usual would be re- 
 quired to circulate our commodities when our 
 harvest was bad. Colonel Torrens, indeed, does 
 not feel this last point a difficulty, he maintains 
 that coin acquires the character of money, not 
 from intrinsic, but imparted qualities, which may 
 be and are given to bank-notes. 
 
 Colonel Torrens complains that when the 
 harvest is tad, and, therefore, the quantity of 
 commodities to be circulated diminished, and, 
 according to his views, our currency become 
 redundant, the farmers require advances from 
 the banks to extend their cultivation, and the 
 millers to carry on their transactions at the 
 higher prices ; and he blames the bankers for 
 making these advances. He, apparently, sup- 
 poses that these increased transactions would, 
 but for the action of the banks, have been met 
 by a portion of the currency taken from the cir- 
 culation (already much reduced by the export of 
 gold) employed in circulating other commodities, 
 thus causing a great fall in the price of export- 
 able articles, in consequence of which they are 
 sent abroad and the gold recovered. The 
 
 Ante, p. 114. 
 
262 
 
 reader must decide how far this plan could be 
 forced upon the public. 
 
 With regard to Mr. Mill's remarks on the im- 
 portance of the function which had been frequently 
 exercised by the bank in filling up the gaps in 
 mercantile credit made by the revulsion of specu- 
 lation, Colonel Torrens says the act of 1844 
 secures to the bank the possession of this power, 
 for if the bank keeps a proper amount of reserve 
 during the pressure, no sooner is that at an end 
 than the necessity for so large a reserve ceases, 
 and the bank may afford accommodation out of 
 it. We have seen a that Lord O verstone considers 
 it almost impossible for bankers to avoid going 
 with the stream. How, then, is it possible for 
 the bank to preserve so large a reserve through a 
 severe pressure, as to be able at once to throw 
 seven or eight millions of notes into the hands of 
 the public, as she did in 1825 ? 
 
 Colonel Torrens's observation is less open to 
 objection when he states that the hoards of coin 
 which are found in barbarous countries are of a 
 very different nature from the reserves of precious 
 metals accumulated in the vaults of bankers in 
 civilised states, and that examples drawn from 
 the one state of society are not applicable to the 
 other. 
 
 a Ante, p. 176. 
 
263 
 
 Mr. Arbuthnot's pamphlet is considered to con- 
 tain a correction of the statistics of Mr. Tooke 
 and Mr. Wilson, in many points in which they 
 are unfavourable to the theory of the supporters 
 of the act of 1844. It is quite beside the scope 
 of this work to enter into an examination of these 
 different statements. We can only observe that he 
 maintains that, in 1825, the amount of the notes of 
 the bank of England exceeded that in circulation 
 in 1821 by rather less than three millions, instead 
 of being slightly reduced, as asserted by his op- 
 ponents ; and he maintains, also, that the issues 
 of the country banks had been increased by about 
 four millions, and had greatly contributed to ex- 
 pand the currency. Now, as to the effect of the 
 issues of the bank of England notes, we have to 
 consider to what extent an addition of three mil- 
 lions can affect prices, and, perhaps, after wit- 
 nessing the very slight result produced by the 
 addition of twenty millions of gold to our cur- 
 rency, we should not be inclined to attach much 
 importance to it, or to suppose, indeed, that its 
 influence on prices would be perceptible. Even 
 considering the effect of the great increase of the 
 commerce of the country in negativing the in- 
 fluence of that large sum of gold, our experience 
 
264 
 
 in this respect certainly tends to make us un- 
 willing to attach much importance to slight errors 
 in statistical details as to the amount of the cur- 
 rency at any time. In estimating the effect of 
 the increased country issues, we must remember 
 that Mr. Thornton and Mr. Ricardo both argue 
 that the issues of the country notes must be in 
 proportion to those of the bank of England, and, 
 therefore, do not of themselves affect prices ; and 
 though Lord Overstone has shown* that, to a cer- 
 tain extent, country bankers will fill up the places 
 of notes which have been withdrawn by the bank 
 of England, he has not proved that country 
 bankers can, by themselves, issue notes to an 
 extent capable of depreciating the currency in a 
 greater degree than it may be depreciated by the 
 central issuer, without causing an exchange be- 
 tween the country and London, which has neveV 
 been known to occur. These considerations 
 seem to prevent us from attaching any very great 
 importance to Mr. Arbuthnot's statistical correc- 
 tions. 
 
 Mr. Arbuthnot allows that a theoretical con- 
 formity between a convertible bank-note circula- 
 tion and a metallic currency can exist only if 
 
 Ante, p. 187. 
 
265 
 
 bank-notes can be considered money, and if the 
 circulation can be taken to include the reserve of 
 banks. He says* that bank of England notes are 
 held as reserves by other banks, and constitute 
 the principal means by which payments are 
 made, and by which the balances of book credits 
 are adjusted. He therefore argues that to con- 
 sider bank-notes held in reserve by private 
 bankers as circulation, and to exclude from con- 
 sideration those notes which are retained by the 
 bank of England itself for the same purposes, is 
 a contradiction in terms. But Mr. Arbuthnot 
 seems here to assume the whole question, Are 
 the notes retained by the bank of England " for 
 the same purposes/' when, for instance, the 
 amount of bullion was very large, and the bank 
 had a reserve of upwards of thirteen millions of 
 notes, were these notes necessary as the means of 
 making her payments and adjusting her book 
 credits ? Apparently not. Apparently a large 
 part of them was held because they could not 
 be employed ; they seemed to be rejected by 
 the country. 
 
 We have now an opportunity of again con- 
 sidering the views of those who are familiar with 
 
 * P. 80. 
 
266 
 
 this subject, in the report of the Bank Act 
 committee of the session of 1857. 
 
 But little change of opinion seems to have 
 taken place. 
 
 The Governor of the bank allows that the 
 recent instances of pressure had been caused by 
 the demands of the Government during the war, 
 and by other circumstances not connected with 
 an improper extension of trade ; but he main- 
 tains that while it is necessary for the preser- 
 vation of the convertibility of the notes that a 
 stock of gold should be held, credit must be 
 checked, for that is the only means by which the 
 exported gold can be recovered. The trade of 
 the country must bear the evil, and that section 
 of the trading community which in general uses 
 the greatest amount of credit, must suffer the 
 greatest loss ; he, however, considers that it is 
 for the benefit of the trading world that the 
 gold should be retained, because they would 
 suffer still more were the stock of it allowed to 
 get too low. He does not admit Lord Over- 
 stone's theory of the possibility of extending the 
 currency by the issue of convertible notes, allows 
 that neither the bank of England nor private 
 bankers have any power to issue notes at will, 
 and that the bank cannot contract the circulation 
 
267 
 
 in the hands of the people by withholding" notes ; 
 he states that the bank has but little power over 
 the rate of discount, being obliged to follow the 
 market, and that it is impossible to employ the 
 notes in the reserve when the amount of them is 
 very large. 
 
 Mr. Newmarch, who assisted Mr. Tooke in 
 the preparation of the two last volumes of the 
 History of Prices, and may be considered to have 
 appeared before this committee as the repre- 
 sentative of that veteran economist, repeats the 
 views of his school ; he maintains that the bank 
 is obliged to carry on her business with only half 
 her former reserve, and that the result has been 
 a greater fluctuation in the rate of interest. In 
 answer to the objection that the bank of Eng- 
 land can only follow the market rate, he asserts 
 (and experience seems to shew that he is right) 
 that she has in fact great power over the rate of 
 interest by her moral prestige ; he thinks that 
 the theory of redundant national currencies sup- 
 ported by Lord Overstone must be put an end to 
 by the electric telegraph, which will instantly 
 inform the merchants of each country of the state 
 of the currency in the other. 
 
 Mr. J. S. Mill conceives that the act of 1844 
 exposes the bank to a double drain, first on the 
 
268 
 
 reserve, and secondly on the bullion. Tnus a 
 drain of three millions he considers has now the 
 same effect upon the bank as a drain of six mil- 
 lions had before the act. The drain falls in the 
 first instance on the banking department, which 
 is obliged either to keep as large a reserve as 
 would be kept in both departments together, if 
 the issue department had the power of helping 
 the banking department, or to contract its dis- 
 counts the moment a small or temporary drain 
 sets in. All the practical men who are examined 
 before the committee treat this idea of a double 
 drain as a delusion ; but there can be no doubt 
 that the effect of the act is to compel the bank 
 either to keep a large reserve in notes, or to con- 
 tract its accommodation at the first appearance 
 of a drain. This, in fact, is allowed by the pro- 
 moters of the act, and is, indeed, one of their 
 objects. 
 
 Mr. Mill, alluding, apparently, to the function 
 of banks in restoring credit after a convulsion, 
 maintains that it is possible, by a system of credit 
 like that in use with us, to have a currency much 
 more steady than a purely metallic one would be. 
 This position did not seem to attract so much of 
 the attention of the committee as its importance 
 appears to merit. 
 
 
269 
 
 Mr. Hubbard, who since the publication of his 
 letter to Sir C. Wood had been Governor of the 
 bank, repeats his theory that prices of commo- 
 dities are not perceptibly affected by contractions 
 of the currency on the occasion of a drain, but 
 that the efflux of the bullion as capital, of itself, 
 raises the rate of interest, which reduces the price 
 of interest-bearing securities, and induces the 
 import of capital to be invested in them ; and he 
 supports his view by a table showing that the 
 price of commodities had not, and the rate of 
 interest had, closely followed the variations in the 
 amount of bullion. Mr. Hubbard does not allow 
 that the bank has much power over the rate of 
 interest; he thinks that rate is automatic, de- 
 pending upon the amount of bullion in the coun- 
 try, which he considers to* represent the unem- 
 ployed capital of the country. 
 
 Mr. Norman again states, that a convertible 
 currency can be depreciated by the issue of notes, 
 not to any great extent, but sufficiently to affect 
 the exchanges ; and he again refers to the case 
 of the American banks in 1837, he states that 
 the amount of notes had then been increased in 
 two years from one hundred millions to about one 
 hundred and fifty millions of dollars ; he was not 
 able to inform the committee to what extent 
 
270 
 
 prices of commodities were raised by this great 
 extension ; but he again states the circumstan< 
 which we have mentioned, as throwing a degrc 
 of confusion over his theory, namely, that aftei 
 the suspension of cash payments by the banks 
 their notes were at a discount of ten per cent. 
 Mr. Norman limits his remarks on this occasion 
 to a statement, that if the currency of the United 
 States had been purely metallic, it could not 
 have been increased to such an extent ; this may, 
 no doubt, be true, because, in a state of com- 
 merce where there was no system of credit, even 
 if the increase of commodities required an in- 
 crease of currency of the same value as before, 
 it could not have been supplied so rapidly as the 
 currency increased on this occasion. 
 
 He says that he never maintained that bank- 
 notes could be issued at will to an indefinite, but 
 only to a small extent/ and he mentions that the 
 joint-stock banks had increased our currency, as 
 shown by Mr. Arbuthnot, by about twelve hun- 
 dred thousand pounds. When told that the bank 
 of England had reduced the circulation in 1837, 
 until the amount of bank-notes hardly exceeded 
 fourteen millions, and yet the drain was not 
 
 a P. 297, 307. 
 
271 
 
 stopped, he maintained that there was still a de- 
 gree of contraction of the currency which would 
 have stopped it. 
 
 Lord Overstone not only approved of the act, 
 but speaks in terms which seem to imply that he 
 considered a great part of the prosperity of the 
 country to be due to it. He denies that the new 
 gold has preserved the amount of our bullion re- 
 serve, for it did not protect the bullion reserves 
 of other countries. The reader will remember, 
 that the bullion reserves of the Continental states 
 consist of silver, and not of gold. 
 
 Lord Overstone allows/ on this occasion, that 
 the prices of commodities are very seldom affected 
 by the fluctuations in the amount of money, but 
 he still maintains that the principle at bottom is, 
 that a reduction in the amount of money lowers 
 the price of goods. When asked if the present 
 system of currency is built upon that assumption, 
 he replies, that he is hardly prepared to say yes, 
 or no, to that question. That the present system 
 of the currency is built upon a very plain and 
 simple principle, namely, that a certain portion 
 of the precious metals is the proper money of this 
 country, and that paper notes are merely a me- 
 
 P. 351. 
 
272 
 
 chanical contrivance to be used for convenience 
 in lieu of that metal. There is an end of the 
 matter ; all the rest are consequences, not causes. 
 We must, however, remember that the reason 
 why a certain portion of the precious metals is 
 the proper money of this country, according to 
 the theory of Lord Overstone and Mr. Ricardo, 
 is, that such portion gives the prices of goods pro- 
 per for this country, as compared with our neigh- 
 bours, the principle is, that prices depend upon 
 the amount of the currency, not of the capital of 
 the country. Having thus, apparently, to some 
 extent either given up the theory on which his act 
 is founded, or, at least, allowed the weakness of 
 its influence, so far as the price of commodities 
 is concerned, Lord Overstone endeavours to claim 
 for it the rise in the rate of interest. He wishes 
 it to be understood, that the rise in the rate of 
 interest is caused by the contraction of the cur- 
 rency, and that the price of securities is really 
 influenced by the extent of the currency, under 
 circumstanc s in which the price of commodities 
 is not affected by it ; now it seems very difficult 
 to conceive that the price of one article should be 
 more affected than that of another, by changes in 
 the currency acting merely through the quantity 
 of money, and not through credit ; and we seem 
 
273 
 
 almost irresistibly drawn to the more obvious 
 conclusion, that the price of securities must be 
 influenced only by the state of confidence, or of 
 the supply of capital on these occasions, in which 
 no corresponding effect is produced in the price 
 of commodities. Again, the allowance that the 
 price of commodities is riot readily affected by 
 fluctuations in the amount of the currency, seems 
 to militate strongly against the position which is 
 so fundamental in Lord Overstone's theory, that 
 the high prices of commodities which produce 
 the export of gold are caused by redundancy of 
 the currency. 
 
 Lord Overstone maintains, again, that the 
 whole of the notes in reserve in the till of the 
 bank are in circulation, and affect prices. To 
 prove their efficiency in this respect, he draws 
 a picture of the consequences of the destruction 
 of that reserve, showing a complete stoppage 
 to business and a great fall in prices, from 
 which he concludes that it is quite absurd to 
 consider the bank reserve as an inactive part of 
 the circulation. This, however, is not quite a 
 case in point. No one doubts that a p#rt of the 
 notes in the bank is a necessary banking reserve, 
 and that to destroy this portion of it would pro- 
 
274 
 
 duce the effects described by Lord Overstone. 
 But it is alleged that there are many cases, when 
 trade is slack and the bank reserve very large, in 
 which a considerable portion of it might be 
 destroyed without producing these results. Lord 
 Overstone considers that the Government letter 
 suspending the act of 1844 is a great proof of the 
 efficiency of the bank reserve. That letter had 
 the effect of increasing the bank reserve inde- 
 finitely, and it was the increase of this part of the 
 currency which checked the panic. It seems as 
 obvious a conclusion that the letter restored con- 
 fidence, rendering no reserve at all necessary, and 
 did not act in any way through the circulation. 
 
 Lord Overstone treats our gold coin as small 
 change, and does not at all seem to feel the force 
 of Mr. Tooke's view, that prices, so far as they 
 depend upon the currency, are, in fact, in this 
 country, determined by the comparison of gold 
 with commodities. We must remember that the 
 amount of gold in circulation in this country is 
 supposed to be at least fifty, possibly seventy, 
 millions sterling a mass of money which can 
 hardly beealled small change ; and we must re- 
 member that the retail transactions of the coun- 
 try are conducted entirely by it. 
 
275 
 
 Lord Overstone then takes a review of the 
 I various cases of monetary pressure which have 
 j occurred,, all of which he considers to have been 
 ( more or less connected with the conduct of 
 I the banks. In general, he limits his charge 
 against them to a wilful keeping up of the 
 amount of the currency after circumstances 
 have pointed out that if it had been metallic it 
 would have been contracted, or to a neglect to 
 contract their issues when the currency had be- 
 come redundant from causes connected with 
 commodities or trade ; but he maintains that, in 
 1825, the banks actually were the prime movers 
 in expanding the currency beyond its previous 
 amount, were the cause of the high prices, and 
 the origin of the speculation which occurred. 
 To prove, however, that the currency was ex- 
 panded at that time, he has to rely on Mr. Ar- 
 buthnot's correction of Mr. Tooke's statistics, the 
 importance of which, after our experience of the 
 slight effect produced on prices by twenty mil- 
 lions of the new gold, we have already seen reason 
 to doubt. a 
 
 Lord Overstone takes a very high tone in his 
 evidence before this committee, he speaks of the 
 
 
 * Ante p. 263. 
 
 T 2 
 
270 
 
 difficulty of "hammering truth into the public/'* 
 of his having a great public duty to perform, and 
 of the necessity of speaking plainly ; he observes, 
 with respect to the theory, that banks cannot 
 issue notes at will, which was supported by Mr. 
 Wilson, that it is " perilous nonsense "in high 
 places ; he says, that his friend Mr. Norman had 
 told him, that when he first stated to the com- 
 mittee that an excessive issue of paper money, 
 although not depreciating the paper money with 
 reference to the coin into which it was conver- 
 tible, depreciated the whole money of the coun- 
 try, in comparison with that of others, there was 
 great surprise in the committee on the part of 
 some, who seemed to be perfectly astounded, as 
 if a ghost had appeared ; and he considers it 
 astonishing that any person should take a promi- 
 nent part in the discussions of the committee 
 without being perfectly familiar with that prin- 
 ciple which he maintains, (supporting his views 
 
 a Lord Overstone should not complain of the ignorance of 
 the public in this respect. An account of his views is to he 
 found only in ponderous blue books or in his pamphlets, the 
 original edition of which has now become very scarce, and, 
 though they have been reprinted, under the editorship of Mr. 
 Macculloch, they have not been published, and are to be ob- 
 tained only by his Lordship's private friends. 
 
277 
 
 rith the authority of Mr. Macculloch alone,) is 
 most simple and distinct, and recognized by every 
 writer of any authority on the subject.* Perhaps 
 it is to be regretted that this very difficult sub- 
 ject should have been treated in this manner ; we 
 have, however, only to caution our readers not 
 to allow their judgment to be biassed by it ; 
 though Lord Overstone's theory may be true in the 
 abstract, it does not appear to be in a position to 
 be treated as self-evident, it seems to be received 
 by a small section only of our economists, none 
 of whom adopt it in the same unqualified man- 
 ner as his Lordship, he himself seems sometimes 
 almost involuntarily to account for the phenomena 
 which occur, upon principles which are not identi- 
 cal with it. The theory has not made any im- 
 pression upon practical men, nor is it recognized 
 by many at least of the most eminent of the 
 modern economists of other countries. It cer- 
 tainly seems, from the evidence before this com- 
 mittee, that the opinion that bullion leaves the 
 country and returns to it, without any reference 
 to the state of the currency, is gaining ground 
 with the public. 
 
 The evidence of Mr. Chapman, the managing 
 
 * Bank Acts Report, p. 407. 
 
278 
 
 partner of the great money-dealing house of Over- 
 end and Co., contains some remarkable state- 
 ments. Mr. Chapman mentions, that, in 1856, 
 when the reserve of the bank was reduced to 
 about two millions and a-half, great anxiety was 
 felt by the money-dealers, and that they would 
 have contracted their business, but from a tacit 
 understanding conveyed to them, that if any real 
 pressure came they should have relief. This 
 communication did not come from any member of 
 Parliament, nor from any person in direct con- 
 nexion with the Government, or the bank of 
 England, but still from a person of such standing 
 that the witness could not misunderstand that it 
 was desirable that the house should go on with 
 their business, and they did so. This seems very 
 nearly a second suspension of the act. The com- 
 munication must, evidently, have been so closely 
 touching upon an official one as to remove the 
 anxiety of an acute man of business. 
 
 Mr. Chapman states a new reason for not re- 
 stricting the issues of the bank by the rigid line 
 of an act of Parliament ; he says, there are indivi- 
 dual capitalists in this country of such power, 
 that they may, at any time when the bank reserve 
 is low, cause a serious pressure for money, and a 
 great fall in the value of securities by withdraw- 
 

 279 
 
 ing a million or two of notes from the circulation, 
 and he says, that this course has actually been 
 adopted;' that it is true that the withdrawal of 
 the notes would be attended with a temporary 
 loss of the interest, but that would be nothing 
 compared to the advantage which might be 
 gained by the speculation. 
 
 Mr. Chapman approves of the effect of the 
 act of 1844 in bringing back the bullion by 
 causing a rise in the rate of interest, and he 
 proposes to leave the amount of the issues of the 
 bank indefinite, but to fix a rate of interest in 
 proportion to the amount of bullion for the time 
 being in the bank, a rise of so much per cent, for 
 every efflux of bullion of a certain amount. He 
 attributes considerable power to the bank of 
 England over the rate of discount. When asked 
 what course he would have pursued had the Go- 
 vernment letter suspending the act not been 
 issued, he said he believed there would have 
 been an agreement to make payments in first- 
 class bills, that they would then have had to do 
 in London what is done every day of the week 
 in Manchester ; he says b that if the question 
 
 Bank Acts Committee, p. 471. 
 b Bank Acts Committee, p. 501. 
 
280 
 
 should be whether we should maintain specie 
 payments or the industry of the country, he 
 would drop the former, that if by any possibility 
 we did not maintain our specie payments, it would 
 be an affair with the foreigner for a very short 
 time, and would soon be put right. When asked 
 would not the return to specie payments be a 
 terrible affair, he replied, not at all, it would not 
 be the want of property which made us give up 
 our specie payments. (The reader will remember 
 that he is speaking only of an accidental sus- 
 pension from an efflux of our bullion from a bad 
 harvest and the like.) The foreigner would trust 
 us just as well, his note would be depreciated for 
 a time, and the exchanges would go down for 
 a time only, but only for a time. Nor would 
 the enormity of the transaction, if a suspension 
 of specie payments occurred, add to the diffi- 
 culty, as suggested by a member of the commit- 
 tee, for if the rate of interest were raised as 
 proposed by the witness, transactions would have 
 become very limited. 
 
 It seemed to be generally allowed on this oc- 
 casion, that Mr. Tooke's plan of keeping a mass 
 of bullion sufficiently large to withstand drains 
 without protection, would be found impracticable, 
 as there existed no means by which the bank 
 
281 
 
 could be compelled, or perhaps enabled, to keep 
 a sufficient stock of gold. 
 
 Every witness before this committee is exa- 
 mined as to the effect of permitting the bank to 
 issue a further sum of two millions of notes on 
 securities instead of bullion, a plan which, it 
 seems to have been supposed, would increase the 
 reserve of the bank without diminishing the 
 security of the notes, as there was no more 
 chance now of the number of the notes ever 
 falling to the low amount of sixteen millions, 
 than there was of its reaching fourteen millions 
 in 1844. The unanimous opinion on this point 
 seems to be, that ultimately the only effect of 
 such a permission would be to diminish the 
 bullion by the sum of two millions, without in- 
 creasing the amount of the notes ; and there 
 seems no possibility of taking an exception to 
 this view, as the average amount of the cur- 
 rency being determined by the value of gold, 
 cannot be altered at will. We must remember, 
 too, that the extension of business, which pre- 
 vents the amount of notes from falling below 
 sixteen millions, would, in all probability, be at- 
 tended with an increase of liability to convulsions, 
 which would render a larger reserve of bullion 
 necessary. 
 
282 
 
 It appeared* that the application on the part 
 of the bank of England to issue notes in lieu of 
 those no longer issued by the country banks, 
 which we have already noticed, did not ori- 
 ginate with the bank directors, but was made 
 by them, pro forma, at the request of the 
 Government, who were in want of bullion for 
 a foreign remittance ; and the effect of the 
 issue of notes by the bank on this occasion was 
 simply the exportation of an amount of bullion 
 equal to that of the notes issued. 
 
 The power of the bank of England over the 
 rate of discount was much discussed before the 
 committee, and the opinions upon the subject 
 were very various ; but, upon the whole, it 
 seemed to be allowed that, in periods of pres- 
 sure, she had considerable power, being looked 
 up to as a guide. There seemed to be some 
 difference of opinion among the bank directors 
 as to whether the circulation should be con- 
 tracted by refusing accommodation or by raising 
 the rate of interest; on the whole, the latter 
 plan seemed to be preferred, as less unequal and 
 invidious. 
 
 We cannot take leave of this report, which is 
 
 P. 325. 
 
283 
 
 not very voluminous, without strongly advising 
 those who wish to acquire a knowledge of these 
 questions to peruse the whole of it carefully. We 
 hope, if these pages have not entirely failed in 
 their object, the reader will be so familiar with 
 the outlines of the subject as to find the task easy 
 and pleasant, as well as profitable. 
 
 The reader will now, probably, be anxious to 
 form some decided opinion on the merits of these 
 conflicting views, and on the importance to be 
 attached to them in considering the policy of the 
 act of 1844. Perhaps the best mode of assisting 
 him in this task will be to recapitulate shortly 
 the chief points of each theory, and the difficulties 
 which lie in the way of proving them. 
 
 . First, as to a metallic currency, the theory on 
 which Lord Overstone and his school, following 
 Mr. Ricardo, take their stand, supposes that the 
 currency consists of all the bullion in the country 
 not used as plate or ornament, and that, in ac- 
 cordance with the ordinary laws of supply and 
 demand, prices depend upon the amount of this 
 currency as compared with that of the commo- 
 dities to be circulated by it ; that any exportation 
 or importation of bullion, being taken from or 
 added to the currency, must lower or raise prices ; 
 
284 
 
 and that, in like manner, any increase or dimi- 
 nution in the commodities to be circulated, lowers 
 or raises prices, and that, as prices in all the com- 
 mercial countries of the world must be such as will 
 permit the commodities of the various countries to 
 be interchanged by the merchants on the same 
 terms as if by barter, any deviation of prices from 
 this rate, whether caused by a change in the cur- 
 rency or in the commodities, must stop the national 
 interchange of commodities, and give rise to a 
 movement of bullion ; moreover, all the bullion 
 in the country being currency and necessary to 
 give the proper prices, no importation or exporta- 
 tion of it can be made, unless for the purpose of 
 such an international adjustment of the currency. 
 The difficult points in this theory seem to be, 
 as we have seen, first, that we are obliged to 
 consider money, when consisting of pieces of 
 full weightthat is, of pieces of the valuable 
 commodity bullion as a mere sign, destitute 
 of intrinsic value. We must assume this, or 
 the theory seems to fail, in many cases, when 
 a portion of the commodities has been de- 
 stroyed, as, for instance, when the harvest is 
 deficient, a case in which more rather than less 
 money would be required if it exchanged for 
 goods in accordance with its value as a com- 
 
285 
 
 modity a ; and, secondly, that there are cases in 
 which money seems to be exported as the most 
 convenient form of capital, or to support credit 
 in other countries, without any reference to the 
 currency. 
 
 Mr. Tooke, Mr. Fullarton, and Mr. Wilson 
 consider money as possessing intrinsic value as a 
 commodity, and exchanging with goods according 
 to that value, and not merely in accordance with 
 the supply of pieces at the time ; and they sup- 
 pose, with Dr. Smith, that exports of bullion are 
 made, quite irrespective of the state of the cur- 
 rency, to discharge balances of international debt, 
 and to pay for commodities, such as corn, for 
 which there is a sudden demand, and that they 
 are taken from a fund which forms no part of the 
 internal circulation nor affects prices, but is set 
 apart for these purposes. This supposition ap- 
 pears natural, but its supporters have a great 
 difficulty to encounter in explaining in what 
 manner the bullion which they say is set apart 
 for this purpose, and has no effect on prices, can 
 escape the influence of the laws of supply and 
 demand, and though existing in the shape of 
 money lying unemployed and known to be avail- 
 
 * Ante p. 114. 
 
286 
 
 * 
 
 able for the making of purchases, is neither ap- 
 plied for that purpose nor affects prices by the 
 possibility of its being so applied. We can hardly 
 allow, as a general principle, that gold can have 
 any value in exchange independent of the quan- 
 tity of it known to be capable of being brought 
 to market ; that men can set an ideal value on 
 gold derived from their knowledge of its average 
 purchasing power, which prevents them from 
 parting with it at a less value, though for long 
 periods it may remain in their hands incapable of 
 exchange at that rate ; nor can we conceive that 
 the bullion employed in international payments 
 is in constant use for such purposes, or that it can 
 be so entirely devoted to them as not to be em- 
 ployed at home occasionally, or even, perhaps^ that 
 an average supply must be kept ready for these 
 objects. The most that we can allow seems to be 
 that in a state of society where much speculation 
 exists, there will be many occasions in which 
 business is, for the time, so paralysed by past 
 convulsions that money cannot be employed ; 
 but this state of affairs could be but temporary, 
 the money would gradually find its way into cir- 
 culation and affect prices. 
 
 It is very difficult to decide between these 
 theories ; that of Mr. Tooke appears to be sup- 
 
287 
 
 ported by facts, while that of Lord Overstone is 
 most consistent with the principles of political 
 economy. Perhaps we ought to consider that the 
 latter theory does explain the law of prices which 
 regulates the under-current of events, though 
 that law is much obscured by the influence and 
 results of speculation. It is very important to 
 note, that it is not probable that any change 
 in price arising from the flowing in of bullion 
 from the international adjustments supposed by 
 Lord Overstone's theory, could be very consider- 
 able, the only case in which a marked change in 
 price could occur, would be when a great de- 
 struction of commodities took place, and even in 
 this case, considering how very little effect has 
 been produced on prices by twenty millions of 
 new gold, we should require the amount of com- 
 modities destroyed to be very great indeed, 
 before we could allow that any considerable effect 
 could be produced. 
 
 In all cases of a change in prices in accordance 
 with Lord Overstone's views, a metallic currency 
 would immediately begin to adjust itself, bullion 
 flowing in or out of the country as required, and 
 prices would immediately begin to regain their 
 former level. 
 
 When they come to consider a currency contain- 
 
288 
 
 ing paper, Lord Overstone supposes that prices 
 depend upon the extent of this mixed currency, 
 as they did on the extent of the metallic one. 
 The mixed currency may, he thinks, be directly 
 increased by the issue of notes, and it may be 
 virtually enlarged by a deficiency of part of the 
 commodities to be circulated. There would be 
 this difference between the metallic and the mixed 
 currency, that the attempts of the mixed currency 
 to readjust itself might be defeated, if the banks 
 were to continue to issue notes as fast as the 
 bullion left the country, and the high prices ori- 
 ginally caused by the redundancy of the currency 
 would, therefore, continue much longer than 
 when the currency was metallic, and all the gold 
 might be driven out of the country, thus endan- 
 gering the convertibility of the notes. The great 
 point in this part of Lord Overstone's theory is, 
 that the whole of the mixed currency may be 
 extended for a considerable period beyond the 
 amount of a metallic currency under the same 
 circumstances, by an issue of notes, or by a de- 
 struction of commodities, and the great aim of his 
 plan for the regulation of the currency is, to 
 make the amount of the mixed currency at all 
 times the same as that of the metallic currency 
 would have been. 
 
289 
 
 Mr. Tooke and his friends say, that, as a gene- 
 ral principle, a currency of notes, convertible for 
 gold, must always be of the same value, indeed, 
 of the same amount as a metallic currency, be- 
 cause the notes will be exchanged for gold im- 
 immediately that they lose a part of their value. 
 If the currency were affected by the issue of 
 notes, it would, probably, as here supposed, 
 not be much increased, because the bullion 
 would leave it as fast as the notes were issued ; 
 but this reasoning would not apply to a redun- 
 dancy arising from a destruction of commodities. 
 But, leaving the general case, they maintain, that 
 no issue of our notes can affect prices, as the notes 
 are not for the same amount as the money of 
 the country, nor capable of being used for the 
 same purposes as the gold, by which all retail 
 transactions are conducted and prices, so far as 
 they depend upon the currency, determined. This 
 view reduces our mixed currency in fact to a me- 
 tallic one, and all our bank-notes to expedients 
 to save money. There seems great force in this 
 argument, for if prices between the retail dealers 
 and their customers are limited by the value of 
 gold, how can they be maintained at a higher 
 rate in the wholesale transactions, in which the 
 
 u 
 
290 
 
 retail dealers purchase their goods ; a and though 
 Lord Overstone supposes that gold, as well as 
 paper, is depreciated by the issue of notes, this 
 supposition requires the assumption, which Mr. 
 Tooke's argument seems to negative, that prices 
 are affected hy the notes. 
 
 It is necessary to Lord Overstone's views, to 
 show that notes, when in the reserve of the bank 
 and which the directors say they cannot employ, 
 are actually in circulation and affect prices ; he 
 has also to show, that in all cases when a destruc- 
 tion of commodities takes place, less currency in 
 required ; these points are the same as those 
 which he had to meet with respect to a metallic 
 currency, and which present difficulties to his 
 opponents. But, to support his theory of a 
 paper currency, he has also to prove, that 
 bank-notes are money, and that banks have the 
 power of issuing them at will ; above all, he has 
 to show that a currency, convertible for gold, 
 can become seriously depreciated in value with- 
 out affecting the market price of gold bullion, 
 which has never been found to rise on those oc- 
 casions in which he considered the currency de- 
 preciated, and to this end he has to maintain 
 Mr. Ricardo's very subtle theory, that all the 
 
 * Ante p. 51. 
 
291 
 
 gold bullion in the country is depreciated along 
 with the coin. 
 
 Even if we allow Lord Overstone's theory of a 
 paper currency to be correct, and to be applicable 
 to our currency, there is (except in the very 
 doubtful case of overissues by the banks, unaccom- 
 panied by immediate expulsion of gold,) nothing 
 in the introduction of paper into the currency 
 to make the changes of price, which are due to 
 currency according to his view, of greater amount 
 than they would have been under a metallic cur- 
 rency, though they might continue longer ; and 
 remembering the small effect produced on prices 
 by the addition of twenty millions of gold to 
 our currency, we shall, perhaps, be disposed to 
 consider that the great changes in price which we 
 witness, are of far too extensive and sudden a 
 character to be accounted for by that theory. 
 
 Upon the whole we may perhaps feel inclined 
 to come to the conclusion that we may reject the 
 currency as a regulator of prices, except as to 
 small and gradual changes, and that we must 
 seek the cause and the remedy for great fluc- 
 tuations of price solely in the more potent in- 
 fluence of credit. 
 
 The reader will remember that though Lord 
 Overstone allows that expansions and contrac- 
 
 u 2 
 
292 
 
 tions of credit greatly influence prices, it is 
 through the agency of the currency only. 
 
 Perhaps the truth of this conclusion becomes 
 apparent when we attempt to trace Lord Over- 
 stone's theory in the operation of the act of 
 1844. We do not always find the price of 
 commodities affected, but a great influence ex- 
 ercised on the price of securities. Lord Over- 
 stone, indeed, wishes to show that the price of 
 securities is affected only by the changes which 
 his plan has produced in the quantity of money 
 in the country ; but here we can hardly agree 
 with him. We are inclined to consider that a 
 change which affects securities, and does not 
 affect commodities, is not a change in the cur- 
 rency, but in the state of confidence, or in the 
 supply of capital; and that it is to the state of 
 credit, either here or in other countries, or to the 
 demand for capital, that the rise in the rate of 
 interest is due, and not to a decrease in the cur- 
 rency. 
 
 If our decision upon these conflicting views be 
 correct, we come to the important result, that the 
 merits of the act of 1844 may be considered by 
 practical men, without embarrassing themselves 
 with these abstruse currency theories. 
 
 We need here make but a few very brief re- 
 marks upon this act. The object of the pro- 
 
293 
 
 toters of it was to moderate, as far as possible, 
 the periodical convulsions which had agitated the 
 commercial world, and to ensure the converti- 
 bility of the notes. Let us see how these objects 
 are carried out by the operation of the act on the 
 state of credit. Mr. Thornton* has described 
 bank-notes as the most efficient form of credit, as 
 strengthening the confidence which is in the 
 mind ; and there can be no doubt that the bank 
 of England may encourage or check speculation 
 by the facility or difficulty with which she lends 
 her credit. Now, the act restrains her power in 
 this respect, fixing a limit to what was before in- 
 definite, and must, therefore, discourage specula- 
 tion. Whether that be a good or an evil is 
 another question. This restraint upon specula- 
 tion will tend to prevent those exports of bullion 
 which take place in consequence of the import of 
 an unusually large quantity of foreign goods, 
 which frequently occurs in times of speculation, 
 and which establishes a balance of debt against 
 us. And again, the connexion which the act, on 
 
 te whole, seems to establish between the amount 
 of bullion in the bank and the rate of discount, 
 must tend to check the export of bullion in those 
 cases in which our harvest is bad, or in which a 
 
 a Ante, p. 86. 
 
294 
 
 great demand for bullion exists amongst our 
 neighbours. On these occasions, the mere in- 
 crease in the rate of interest tends to preserve 
 our bullion by rendering the export of it less pro- 
 fitable, and, if carried so far as to produce a 
 shock to credit, which it would do if it caused 
 many failures, must be a very powerful means 
 indeed of effecting that object. 
 
 It does not seem prudent to rely confidently 
 upon a subsidence of the drain from the cessation 
 of the state of affairs which gave rise to it, or 
 upon the natural effect of the efflux of capital 
 in the shape of bullion in raising the rate of in- 
 terest, as supposed by Mr. Hubbard : individual 
 hardship may indeed be inflicted to a very great 
 extent ; but if the gold is to be retained, that 
 result cannot be avoided. It is difficult, perhaps, 
 to say whether the amount of this hardship will 
 be greater or less than would have been inflicted 
 in attaining the same end if the act had not been 
 passed ; but perhaps, as the act ensures the pre- 
 servation at all times of a larger amount of gold 
 than we should otherwise maintain, we must pay 
 more for it. 
 
 The weak points of the act seem to be, its liabi- 
 lity to create panics by imposing a known rigid 
 limit on the power of the bank to lend her credit, 
 and, as mentioned by Mr. Mill, the impediment 
 
295 
 
 which it places in her way when desirous of re- 
 storing confidence, when the convulsion is past, 
 when there is no apparent danger of a continu- 
 ance of the drain of gold, but the ordinary state 
 of credit no longer exists. Perhaps, also, it may 
 be dangerous to limit the means of the bank in 
 assisting the public with her credit, while indivi- 
 duals possess the power mentioned by Mr. Chap- 
 man, of absorbing for a time a large portion of 
 her available credit. 
 
 The act has already been once directly sus- 
 pended ; Mr. Chapman's evidence goes far to 
 show that it has subsequently been virtually abro- 
 gated, and great authorities predict that it cannot 
 be maintained under circumstances similar to 
 those which occurred on these two occasions.* If 
 this be the case, one effect of the act would be, 
 to connect the Government of the country more 
 closely with the management of the circulating 
 medium, which might prove a greater evil than 
 those which the act was intended to avoid. 
 
 Perhaps, before leaving this branch of the sub- 
 ject, we may inquire very briefly in what light it 
 is viewed in other countries. Lord Overstone 
 more than once quotes, in support of his views, 
 the opinions of French and American writers ; he 
 
 a It has again been suspended, see chapter IX. 
 
296 
 
 refers to M. Guatier, a peer of France, and the 
 deputy governor of the bank of France in 1825, as 
 an authority that the issues of the country banks 
 had depreciated our circulation at that time. M. 
 Guatier says/ " That in the preceding year a 
 great speculation had arisen, that the banks had 
 made large issues, and that the circulation became 
 too full, and an exportation of gold took place." 
 Now, in this passage there is nothing to show 
 that the banks caused the speculation, or that 
 it was not the high prices arising from it, which 
 caused the large issues of the banks, nor does it 
 imply that the circulation was too full until the 
 speculations began to fail ; the whole passage 
 has very much the tone, almost universal amongst 
 economists here, until the appearance of the later 
 volumes of Mr. Tooke's History of Prices, and 
 appears to express views which had been adopted 
 by M. Guatier from the writers of this country 
 without any original inquiry. Lord Overstone 
 mentions with great approbation, a speech of the 
 celebrated American statesman Mr. Webster, b in 
 which he contends for the establishment of a 
 national bank, and the regulation of the currency 
 in America exactly after the manner proposed 
 
 a Bank Acts Committee, 405. 
 
 b See an abstract from Mr. Webster's Speech on the Sub- 
 Treasury Bill, in Lord Overstone's Pamphlet of 1840. 
 
297- 
 
298 
 
 which is already published, sufficiently shows 
 what his views must be. M. Chevalier considers 
 intrinsic value to be essential to money, and does 
 not allow that bank-notes are anything more 
 than a species of written forms of credit, nor 
 does he seem at all to recognize the theory that 
 gold bullion is rendered cheap by the increase of 
 the currency ; he appears to consider augmenta- 
 tions of the currency as results of great specula- 
 tions, and that the gold goes abroad because in 
 the course of these speculations the merchants 
 have become indebted to foreign countries; he 
 mentions, that after the great suspension in 
 America, in 1837, the banks were prevented from 
 resuming cash payments by the impossibility of 
 retaining gold in America for some time after the 
 crash, all the gold which came into the country 
 being sent away to the European markets, which 
 were gorged with American commodities. Now 
 this last point seems entirely opposed to the view 
 that the exportation of gold, which brought on 
 the crisis, was necessarily connected with the 
 state of the currency, for we should have sup- 
 posed that the great destruction of paper, which 
 took place in the case of the numerous banks 
 which were undoubtedly insolvent, would have 
 at once greatly reduced the currency, turned the 
 
299 
 
 exchanges in favour of America, and enabled her 
 to retain her gold, if none but causes connected 
 with the currency caused its exportation. 
 
 M. Chevalier adopts in express terms Mr. 
 Tooke's theory of masses of bullion, even in the 
 form of money, existing in all the great com- 
 mercial nations, which are not properly money, 
 but capital* used for the adjustment of inter- 
 national balances. 
 
 For the state of opinion on these points at 
 present in America, we will refer to the work of 
 Mr. Bowen on Political Economy, a writer who 
 is apparently familiar with the labours of Eu- 
 ropean economists, and who is an advocate for 
 the regulation of the currency of his own coun- 
 try. Mr. Bowen adopts the theory that the total 
 amount of currency is determined by the exi- 
 gencies of international trade, and the necessity 
 of equalizing price throughout the commercial 
 world, but takes no notice of Lord Overstone's 
 theory of the depreciation in the value of bullion 
 by extensions of the currency, apparently because 
 he supposes that the law of international adjust- 
 ment will, by taking gold out of circulation, pre- 
 vent any extension of the currency. He agrees 
 
 a La Monnaie, p. 471. 
 
300 
 
 with Mr. Tooke that banks of issue have no power 
 to extend the currency by convertible notes, and 
 that exports and imports of bullion are not always 
 deductions from or additions to the currency. 
 
 It is unnecessary to enter at length into the 
 arguments by which these authors support their 
 views, as they are for the most part those of Mr. 
 Tooke and his school ; what we have stated will 
 suffice to shew that Lord Overstone's views are 
 not more generally adopted abroad than in this 
 country. 
 
 We may mention that M. Chevalier considered 
 that gold had become scarce in this country 
 during the great war with France, from the con- 
 tinual export of it in consequence of the peculiar 
 state of our trade with the continent, and that our 
 currency was not materially extended at that 
 time. He agrees with Dr. Smith, that the mines 
 of America did not materially add to the wealth 
 of Europe ; and that though the new market 
 offered by America assisted our progress, that 
 progress would have been very nearly as great 
 had the mines not been so rich ; and he points 
 out that money, though in the nature of fixed 
 capital, differs from it in this respect, that the 
 less a nation has of it the better, and that, up to 
 a certain point of their civilization, nations seek 
 
301 
 
 to increase their money, after which they en- 
 deavour to dimmish it by supplying its place with 
 credit. 
 
 Mr. Bowen calls attention to the illustration 
 afforded, by recent occurrences in California and 
 Australia, of the theory that there is no connec- 
 tion between the quantity of money in a country 
 and the rate of interest. He says that while 
 those two countries were overflowing with me- 
 tallic money, the rate of interest was enormously 
 high, thus showing that loanable capital was 
 scarce. He also adds that, though no paper 
 money existed in these countries, there occurred 
 in both, but more especially in California, great 
 speculations and commercial convulsions of the 
 most severe character. But we must remember 
 that the state of confidence in those countries 
 was undoubtedly, under the circumstances, very 
 uncertain, which might account for the high rate 
 of interest, at least to some extent. 
 
 The state of monetary affairs in America is very 
 different from that which exists in this country, 
 and demands our serious attention. With us, 
 the pressure on the bank during a panic is for 
 notes, that is, for the credit of the bank to support 
 the credit of the applicant ; in America, it is for 
 gold, because the applicant doubts the credit of 
 
302 
 
 the bank. A panic in the United States, there- 
 fore, will be likely to cause a very great de- 
 mand for gold here, to support the credit of their 
 banks. 
 
 The constitution of the United States seems to 
 render the establishment of a single national bank, 
 like our bank of England, almost impossible ; and 
 American statesmen have, therefore, turned their 
 attention to the improvement of the currency by 
 other means. They have proposed to infuse a 
 larger share of gold into the circulation as a 
 means of diminishing the liability to panics. 
 This was the object of what is called the sub- 
 treasury system, which, in the main, is a plan for 
 carrying on the pecuniary transactions of the 
 state in specie. To increase the security of the 
 notes, several plans have been proposed. The 
 banks have contributed to a fund for the payment 
 of the notes of any of their number which become 
 insolvent. Another plan, which has been exten- 
 sively followed, requires the banks to give security 
 for the notes which they issue.* Mr. Bowen 
 points out the futility of these plans, and pro- 
 poses the limitation of notes to sums of 5 and 
 upwards, as with us, which he thinks will place 
 
 * See the Laws relating to American Banking in the Ap. 
 pendix to the Lords' Report in 1848. 
 
 
303 
 
 the paper portion of the currency in the hands of 
 those only who understand its nature, and who 
 are not so liable to panics as the class who hold 
 the bulk of the small notes. 
 
 Unless, however, like the bank of Amsterdam, 
 the American banks keep gold for every note 
 issued, they never can be secure. Even our 
 bank of England could not stand a national run 
 for gold. If these panics occur in the United 
 States, and the banks do not suspend specie pay- 
 ments, they must put a great pressure for gold 
 upon us. Under any circumstances, this would 
 be injurious ; but if it should happen that, at the 
 same time, our harvest were bad, we might have 
 to sustain a drain of gold such as has not yet been 
 experienced, and could not, perhaps, be met. 
 
 Since Mr. Bo wen wrote, fifty millions sterling 
 of gold have been added to the metallic portion 
 of the currency of the United States, yet, at this 
 time, a panic is raging there more severe than 
 that of 1837 ; we must, therefore, give up all hopes 
 of greater security from an introduction of more 
 gold into the currency. The present panic in 
 America presents some most extraordinary phe- 
 nomena, it is said to have been deliberately caused 
 by an association of individuals attacking a pecu- 
 liar class of weak securities, at a time of the year 
 
304 
 
 when there is generally some pressure for money, 
 the object being to make a "handsome operation/' 
 that is, to buy securities at a low price. (Before 
 we indulge our astonishment at such a proceeding, 
 let us remember Mr. Chapman's evidence as to 
 similar affairs in this country.) Again, it is said, 
 that during the progress of the panic, the de- 
 positors of the banks have made a concerted run 
 upon them, with the view of compelling them to 
 suspend specie payments, in the hopes that, when 
 that event happened, the pressure in the money- 
 market would be lightened. They have suc- 
 ceeded in this object, and it is said, that the 
 wished-for result has occurred, that business has 
 been relieved and many failures avoided, both in 
 America and in this country.* It is said, too, 
 that the notes, though no longer payable in gold, 
 have not fallen in value more than two or three 
 per cent. These are events requiring our most 
 serious attention. 
 
 We will now retrace our steps for a short time 
 to examine the views of those who object to the 
 convertibility of the notes for gold ; we shall find 
 them passing from a vague theory of an unli- 
 mited encouragement to the industry and produc- 
 
 Times of the 27th October. 
 
305 
 
 tive power of the country, to the more sober aim 
 of avoiding the shock which seems to be so fre- 
 quently given to credit by the exportation of por- 
 tions of the commodity which forms its basis. 
 
 Mr. Attwood, when examined before the com- 
 mittee on the bank charter in 1832, maintained 
 that an increase of the currency would call every 
 labourer in the kingdom into employment, would 
 give him full wages, and enable him to consume 
 masses of all other commodities annually equiva- 
 lent to the masses which his own labour had pro- 
 duced, and he proposed to increase the currency 
 until this result was obtained. When pressed, 
 however, to explain in what manner an augmen- 
 tation of the circulating medium increased the 
 power of production, his arguments are so con- 
 fused that it is difficult to collect their meaning ; 
 they appear to amount merely to a statement 
 that there was not money enough to circulate 
 commodities at the high prices which taxation 
 and fixed burthens of various kinds rendered ne- 
 cessary to repay the producers ; his expectation of 
 benefit from the increase of the currency seemed 
 to resolve itself into a relief from fixed burthens. 
 
 Very shortly after this expression of his opi- 
 nions by Mr. Attwood, Mr. Babbage published 
 
 x 
 
306 
 
 his " Economy of Machinery and Manufactures." 
 Far from sharing Mr. Attwood's views, he insists 
 strongly upon the necessity of impressing upon 
 all classes of the community the importance of 
 preventing, as far as possible, any change in the 
 value of the currency. In order to illustrate the 
 effects of a fall in the value of money, he supposes 
 that a widow and two workmen are possessed of 
 100 a-piece, that the widow invests her 100 
 in an annuity, that one of the workmen places 
 his money in a savings bank, intending to pro- 
 vide himself with materials and subsistence while 
 making a machine by which he is to gain his 
 future livelihood, and that the other workman 
 buys a similar machine at once, borrowing 100 
 to assist him in the purchase. Mr. Babbage 
 then supposes money to lose half its value, 
 "prices soon adjust themselves to the new cir- 
 cumstances, and the annuity of the widow, 
 though nominally of the same amount, will, in 
 reality, purchase only half the quantity of the 
 necessaries of life which it did before. The 
 workman who had placed his money in the 
 savings bank, having, perhaps, purchased ten 
 pounds' worth of materials, and expended ten 
 pounds in labour applied to them, now finds him- 
 self, by this alteration in the currency, possessed 
 
307 
 
 nominally of eighty pounds, but in reality of a 
 sum which will purchase only half the labour and 
 materials required to finish his machine ; and he 
 can neither complete it, from want of capital, nor 
 dispose of what he has already done, in its un- 
 finished state, for the price it has cost him. In 
 the meantime, the other workman, who had in- 
 curred a debt of 100 in order to complete the 
 purchase of his machine, finds that the payments 
 he receives for work done by it have, like all 
 other prices, doubled, in consequence of the de- 
 preciation of the currency ; and he has therefore, 
 in fact, obtained his machine for <150. Thus, 
 without any fault or imprudence, and owing to 
 circumstances over which they have no control, 
 the widow is reduced almost to starve ; one 
 workman is obliged to renounce, for several 
 years, his hope of becoming a master ; and an- 
 other, without any superior industry or skill, but, 
 in fact, from having made, with reference to his 
 circumstances, rather an imprudent bargain, finds 
 himself unexpectedly relieved from half his debt, 
 and the possessor of a valuable source of profit ; 
 whilst the former owner of the machine, if he also 
 has invested the money arising from its sale in 
 the savings bank, finds his property suddenly re- 
 
 x 2 
 
308 
 
 duced one-half." a This, Mr. Babbage says, is an 
 extreme case ; but evils of this nature, to a 
 greater or less extent, attend every change in the 
 value of the currency. 
 
 Mr. Bailey, in his " Money and its Vicissitudes 
 in Value," maintains, that an increase of the cur- 
 rency increases production by the mental stimu- 
 lus which it applies ; he says, it is allowed, that 
 the opening of a new market will stimulate in- 
 dustry and increase production ; now, on this oc- 
 casion, no new capital is immediately created by 
 the new market, therefore the increased produc- 
 tion must arise from a more efficient employment 
 of the existing capital and labour of the country, 
 which are not always on the full stretch, but may 
 be more productively employed at one time than 
 another ; it is a mistake of political economists to 
 consider a certain quantity of labour and a cer- 
 tain amount of capital as constants of uniform 
 power, and operating with a certain uniform in- 
 tensity. 
 
 A mental stimulus only being thus requisite to 
 increase production, that stimulus may, he says, 
 be given by a mere increase of money. Although 
 
 * Economy of Machinery and Manufactures, chap, xjv., 
 p. 130. 
 
309 
 
 prices may ultimately rise, and thus the purchasers 
 may, ultimately, have no greater power of de- 
 mand than before, yet there may have been a 
 great encouragement to industry in the process, 
 and the temporary stimulus may lead to perma- 
 nent improvement, and may give rise to ingenious 
 contrivances for facilitating labour, which, with- 
 out such a stimulus, would never have been in- 
 vented. 
 
 Mr. Bailey allows that this increase in the pro- 
 ductive powers of the country would be accom- 
 panied by some disadvantage, a partial transfer 
 of property would take place from those who live 
 on rents, pensions, annuities, and interest, and 
 even the workmen might suffer. Masters, in ge- 
 neral, do not raise the rate of wages of their own 
 accord, they wait till the rise is asked for, until 
 the competition among themselves has shown it 
 to be necessary, and, frequently, until the work- 
 men refuse to proceed without it ; in the mean- 
 time, the labourer, in attempting to raise his 
 wages, is frequently idle, nor is it in every species 
 of labour that there is an ultimate adjustment of 
 wages to the reduced value of money, in nume- 
 rous instances the labourers continue to receive 
 the same weekly stipend. All these irregularities 
 are aggravated by the state of ignorance in which 
 
310 
 
 all parties usually are concerning the vicissitudes 
 which so nearly affect them. Rash speculation, 
 also, and its consequent reaction, are likely to 
 result from an increase of money, and, on the 
 whole, Mr. Bailey concludes, that any alteration 
 in the value of the precious metals, originating 
 on their own side, is to be regarded as an evil, 
 and not a good. 
 
 Mr. Bailey's position, that men are not mere 
 machines, and that production is a consequence 
 of mental labour, and that the mere hope of gain 
 may stimulate it, seems to be the strongest ar- 
 gument which is offered in favour of the bene- 
 ficial effects of an increase of money ; we must 
 remember, however, that it is at least doubtful 
 whether great improvements have been made in 
 times of manufacturing prosperity, or to meet a 
 falling demand, and that this stimulus would soon 
 lose its effect. 
 
 Mr. P. Scrope, in his " Examination of the 
 Bank Charter Question," says changes in the 
 common standard of value, such as that which 
 had occurred from the failure in the supply of the 
 American mines since the revolution in Mexico 
 and the other mining countries, must be unjust, 
 inasmuch as they disturb the intention of all 
 monetary contracts, giving them by law a dif- 
 
311 
 
 ferent meaning from that which was contemplated 
 by the parties at the time of the engagement. 
 Money is employed in contracts merely as the 
 expression of value in ordinary use, and neither 
 party contemplates a change in the value of the 
 sum specified. It is not credible that the parties 
 to any money contract do contemplate, or are in 
 general even aware of the possibility of any 
 change occurring in the value of money during 
 the term of their bargain. (The reader must feel 
 the truth of these observations.) Mr. Scrope 
 considered the precious metals likely to be so 
 variable in value that they were unfit to form the 
 standard of value, and he proposed that a table 
 should be formed of the values of a great number 
 of commodities, that the average of all these 
 values, which would represent the value of gold 
 estimated in commodities* at the time, should be 
 taken as the standard of value, and that any 
 change in the average value should be taken as 
 an indication of a fall or a rise in the value of 
 gold. Suppose the table to contain a hundred 
 heads, each a certain quantity of some com- 
 modity, and that the sum of the prices, divided 
 by one hundred, be taken as the pound sterling 
 for the time, then, if at the end of a twelvemonth 
 the mean price had fallen to 19s. 6d., it would be 
 
312 
 
 a sign that the value or purchasing power of the 
 pound sterling had fallen one-fortieth. By chang- 
 ing the numerical amount of the sum specified in 
 any contract, in conformity with this table, its 
 power of purchasing would be kept invariable. 
 
 Besides these writers, the effect of a depreciation 
 of the currency on the industry of the country, has 
 been discussed by two of those who are considered 
 great authorities in political economy, Mr. Mac- 
 culloch and Mr. J. S. Mill. Mr. Macculloch main- 
 tains that a depreciation of the currency does pro- 
 mote industry. It diminishes the burthens of the 
 industrious classes, the duties on their goods, the 
 toll-dues, the rents of their shops and warehouses, 
 and the interest of the capital which they have 
 borrowed, at the same time that they obtain an 
 increased price for what they sell. Their condi- 
 tion is improved at the 'expense of their creditors, 
 of those of the state, of their landlords, and of 
 professional persons and the like. The loss of 
 these persons would be great, but what they lost 
 would be gained by the industrious classes ; and 
 it is the prosperity of the industrious classes that 
 is supposed to be identical with that of the public. 
 The reader may perhaps ask, Why so ? Why 
 should the power to make a fortune be cherished 
 at the expense of the fortune when made ? If it 
 
313 
 
 were shown that production was increased by a 
 depreciation, that there were more commodities 
 called into existence, which must, therefore, confer 
 more enjoyment upon some one, there might be 
 more force in the argument. It is also but a 
 portion, and a small portion, of the industrious 
 classes that would be benefited that is, the 
 masters, who trade on borrowed capital, not the 
 workmen. 
 
 Mr. J. S. Mill says that the whole idea is a delu- 
 sion, that the stimulus supposed by Mr. Attwood 
 to be given to labourers by an increase of the 
 currency, must have been the expectation of 
 getting more real wealth in exchange for the 
 produce of their labour. This expectation must 
 have been disappointed, because, all prices being 
 supposed to rise equally, no one was better paid 
 for his goods than before. At the periods which 
 Mr. Attwood mistook for times of prosperity, but 
 which were times of speculation, the speculators 
 did not think they were growing rich because 
 the high prices would last, but because they 
 would not last, and because they expected to 
 realise before the crash came. 
 
 As to Mr, Hume's view of the effect of an in- 
 crease of money in stimulating industry, Mr. 
 Mill says, if the first holders of the new money 
 
314 
 
 were to gain more than usual, there must be some 
 persons who would gain less ; the loser would be 
 the seller of those commodities which are slowest 
 to rise in price, who parts with his goods at the 
 old price to purchasers who have already bene- 
 fited by the new. This seller has obtained for 
 his commodity only the accustomed quantity of 
 money, while there are some things of which 
 that money will no longer purchase so much as 
 before. If he knows what is going on, he will 
 raise his prices, and then the buyer will not have 
 the gain, which is supposed to stimulate his in- 
 dustry ; but if, on the contrary, the seller does 
 not know the state of the case, and only discovers 
 it when he finds, in laying his money out, that it 
 does not go so far, he then obtains less than 
 the ordinary remuneration for his labour and 
 capital, and if the dealer's industry be encou- 
 raged, it seems that his must, from the opposite 
 cause, be impaired. 
 
 Mr. Mill agrees with Mr. Macculloch, that it 
 is only by diminishing their fixed burthens that a 
 depreciation of the currency can benefit the in- 
 dustrious classes, but this benefit is obtained only 
 at the expense of the rest of the community ; he 
 does not enter into the question whether this 
 transfer of property would, in the abstract, be an 
 
315 
 
 advantage or not, considering that the injustice 
 inflicted by a change of the currency, for the 
 purpose of procuring it, is too manifest to admit 
 of the inquiry. 
 
 Mr. Salt and Mr. Muntz were examined be- 
 fore the committee of the House of Commons on 
 commercial distress, in 1847, as the representa- 
 tives for the time of the Birmingham school, 
 and, although Mr. Salt did repeat Mr. Attwood's 
 favourite theory of issuing paper money until 
 every able-bodied labourer should be employed, 
 there is much in the views expressed by them 
 which seems to merit attention. They complain 
 that the metallic part of the circulation, with the 
 extent of which the credit system of the country 
 is so closely connected, is liable to be exported 
 as a commodity, a circumstance which must 
 bring about a collapse of that system, to the great 
 injury of the mercantile classes. Mr. Muntz 
 says, that he sees no objection to the employment 
 of paper alone, regulated in quantity so as not 
 to be depreciated ; but he is so well aware of the 
 strong feeling which exists in the country against 
 an inconvertible paper currency, that he will not 
 venture to recommend it. 
 
 Sir Archibald Alison has proposed to issue in- 
 convertible notes for domestic use, and notes con- 
 
316 
 
 vertible for gold, for adjusting foreign payments, 
 and a similar plan was suggested by some of the 
 witnesses before the committee on the Bank 
 Act of last session. Lord Overstone, however, 
 seems to have satisfactorily shown that this plan 
 will not answer ; he says, the convertible and in- 
 convertible notes never could circulate together, 
 the inconvertible notes would be at a discount, it 
 
 V 
 
 would be great injustice to compel people to take 
 them, and that if people were not compelled to 
 take them, nobody would take them, and there 
 would be an end of them. 
 
 We are aware that many persons are so accus- 
 tomed to connect all sorts of dishonest quackery 
 with the idea of a currency of inconvertible notes, 
 that they will not even entertain the subject ; the 
 evils, however, which arise from a disturbed state 
 of credit are so great, and seem so likely to re- 
 cur, at short intervals, that, perhaps, we ought to 
 consider how far they would be diminished if the 
 amount of our currency were not liable to vary. 
 
 Let us, then, suppose that, at a time when we 
 possessed our fair share of the gold of the world, 
 Government paper was issued until all the gold 
 left the country, and the market price of that 
 metal began to exceed its mint price, and that the 
 issue was carefully and honestly limited to this 
 
317 
 
 amount. This paper would, according to all au- 
 thority, supply the place of the gold, and no 
 change would be made in prices, or in the distri- 
 bution of property by the substitution. Those 
 who suggest this scheme, generally suppose that 
 it would at once obviate all the evils which arise 
 from variations in the extent of the currency, and 
 that the only objection which can be made to it, 
 is the difficulty of preserving such a currency 
 from depreciation. The point, however, is by no 
 means so clear as it appears ; we must remember 
 that Lord Overstone and his school maintain, 
 that the great changes which take place in prices 
 through the currency, are, most frequently, caused 
 by variations in the commodities to be circulated, 
 and not in the currency. If, then, our harvest 
 were to be deficient, the fixed currency of incon- 
 vertible notes would still, according to this view, 
 become redundant, and the prices of commodi- 
 ties in this country would rise, and would become 
 too high to permit a trade with our neighbours. 
 If a stagnation took place in the international 
 trade, a shock would be given to credit, and if the 
 trade were carried on as usual, a great rate of ex- 
 change would arise in favour of our neighbours, 
 which would compensate them for the nominally 
 high prices they would pay, and which would, in 
 
318 
 
 reality, reduce the price of our commodities as 
 much as if we had contracted our currency ; 
 again, if a great destruction of credit took place 
 in a neighbouring country, by which its currency 
 would be contracted, our prices would be too high 
 to permit us to maintain our usual commercial 
 intercourse with it, the mutual trade must cease, 
 or our prices would have to fall, until they bore 
 the usual relation to those of that country, and, 
 as in the former case, they would be corrected by 
 an exchange against us. If, then, Lord Over- 
 stone's theory be correct, and the currency be the 
 chief regulator of prices, we should not, by adopt- 
 ing an inconvertible currency of fixed amount, 
 escape all fluctuations in prices, and, in the state 
 of credit, through the currency, we should avoid 
 only those changes which arise from direct ex- 
 tension of the currency ; accordingly, Lord Over- 
 stone seems to consider that trade was exposed 
 to more shocks during the suspension of cash pay- 
 ments by the bank, than at any other time. 
 
 Still it would seem that an inconvertible cur- 
 rency must preserve us from those shocks to 
 credit which arise from fears for the convertibility 
 of the notes when a large amount of bullion is 
 exported, and it may be said that, even allowing 
 Lord Overstone's views, our system of credit 
 
319 
 
 would not be so much disturbed by a partial ces- 
 sation of business while our currency was re- 
 dundant, (which would be but for a short period, 
 .till the next harvest or the restoration of confi- 
 dence in the country of our correspondents), or 
 even by the reduction in the prices of exportable 
 articles through the exchanges, as by a contrac- 
 tion of our currency, which, in any case, would 
 interfere with all our arrangements at home, and 
 if caused by the export of gold to one particular 
 country in distress for that metal, would, in addi- 
 tion, interfere with our transactions with all other 
 nations. If we go further, and, though admitting 
 the theoretical truth of Lord Overstone's views, 
 consider that changes in the relative extent of 
 the currency do not materially affect prices, but 
 that the great variations which we witness in 
 them are due entirely to credit, then we at once 
 get rid of a large portion of the uncertainty of 
 prices which can be alleged against an incon- 
 vertible currency. 
 
 We should, however, note that such a currency 
 would not have the elasticity of our present system 
 of notes ; it could not easily be made to expand 
 and contract as the state of credit required, and if a 
 w . convulsion of credit did occur, the bank of England 
 could not discharge that function in filling up the 
 
320 
 
 gap created in commercial credit by over-specula- 
 tion which Mr. Mill considers so essential on the 
 conclusion of a panic. t 
 
 Perhaps, notwithstanding Lord Overstone's 
 opinion to the contrary, we may be inclined to 
 admit that, considering the variety of causes 
 which tended to interrupt our commerce during 
 the suspension of cash payments by the bank, we 
 enjoyed, on the whole, a remarkably even flow of 
 commercial prosperity during that period, there 
 having been only two occasions in which com- 
 mercial distress existed to the extent which it has 
 reached in later times. A severe pressure cer- 
 tainly occurred in 1810, and again in 1814, but 
 on both occasions we had very extraordinary 
 difficulties to encounter ; the establishment of 
 the continental system of Napoleon in the one 
 case, and in the other, the change in the channel 
 of trade consequent upon the cessation of so long 
 and so peculiar a war. 
 
 The difficulty of establishing an inconvertible 
 currency, in such a manner as would satisfy the 
 public that it could not be arbitrarily extended, 
 is at present so insuperable that it is unnecessary 
 to enlarge further on the subject. We have been 
 induced to call attention to it only by apprehen- 
 sions of the increasing danger to which our system 
 
321 
 
 of credit seems to be exposed by the rapid spread 
 of a similar system, supported upon a similar basis, 
 throughout the world, and by a conviction, derived 
 from the consideration of the history of our cur- 
 rency during the suspension of cash payments, 
 that such a currency does not, in reality, deserve 
 all the censures which are passed upon it. It is 
 hardly necessary to remind the reader that an 
 inconvertible currency of fixed amount is very far 
 indeed from having any tendency to depreciate 
 the value of money. 
 
322 
 
 CHAPTER VIII. 
 
 THE NEW GOLD. 
 
 Mr. Tooke's View of the present and future Effects of the 
 New Gold. He supposes that Prices have not heen 
 affected by it. That the Gold has itself created more 
 Commodities, and forms an Addition to the fixed Capital 
 of the Country. That Gold is not obtained at a less Cost 
 than formerly, That Silver has risen in Price only from 
 a Demand in the East. Examination of Mr. Tooke's 
 Views. His Error in supposing that an Increase of some 
 Commodities can prevent others from Rising in Price. 
 Insufficient Proof of the Fact of an Increasing Demand for 
 Silver in the East, by Mr. Tooke, Colonel Sykes and 
 the Editor of the Economist. Silver is dearer valued in 
 Gold and Cheaper valued in Commodities, and is, there- 
 fore, exported. The Export of Silver to the East a Proof 
 of the Fall in the Value of Gold. Error of Mr. Tooke in 
 supposing that the New Gold is directly Productive of 
 Wealth, Views of tne Editor of the Economist on the 
 Effects of the New Gold. He allows that it has fallen in 
 Value. The Committee on the Bank Act consider this 
 Point uncertain. The Fall in the Value of Gold is a 
 Premium on its Exportation to France, and a probable 
 Cause of a High Rate of Interest here. Adoption of a 
 Silver Standard by Holland and Germany. Views of 
 French and American Economists on the Subject. They 
 agree that Gold is Falling in Value. M. Chevalier's Ar- 
 
323 
 
 gument against allowing the existing Distribution of Pro- 
 perty to be disturbed. What Steps will our Government 
 take. Argument for and against allowing the Depreciation 
 of the Currency to run its Course. 
 
 WE have now to consider the views which have 
 been entertained as to the probable effect of the 
 new gold upon our social economy. 
 
 So soon as the fact of a great increase in the 
 production of gold was established, a very great 
 fall in the value of money was anticipated, both 
 by those who had always professed an admiration 
 of cheap money, and by those whose fortunes 
 would be injured by the change. Nine years have 
 now elapsed since the discovery of the gold-fields 
 was announced, and the position of that part of 
 the economy of society which is exposed to their 
 influence is, probably, very different from that 
 expected by eit her of these parties, and, certainly, 
 in many respects, very extraordinary. Instead of 
 a feeling of abundance of money and easy times 
 for borrowers, as was expected, we have had a 
 higher average rate of interest than has ever been 
 known ; but business has been brisk, and, appa- 
 rently, profitable. Silver has risen about five 
 per cent, in price, and this rise in price has been 
 accompanied with a great exportation of that 
 metal to the East ; there has been no very 
 
 Y 2 
 
324 
 
 marked rise in the price of commodities ; but 
 there exists a general feeling that the means of 
 living are dearer. 
 
 It is a singular fact in the history of our cur- 
 rency, that none of our great financial authorities 
 came forward, when the anticipations of a fall in 
 the value of gold were so vivid, to, at least, dis- 
 cuss the propriety of preventing a depreciation of 
 the national standard of value. It is, indeed, only 
 now, after this long interval, that any of them 
 have entered at all upon an examination of the 
 probable effects of the present great production 
 of gold. 
 
 Mr. Tooke devotes a considerable portion of 
 the concluding volumes of his great work on 
 prices to this subject, and has placed before the 
 public a vast mass of statistical information, 
 which must be allowed to be of very great value, 
 however much we may dissent from the conclu- 
 sions which he draws from it. 
 
 Before entering upon the examination of the 
 effects of the new gold, Mr. Tooke takes a short 
 review of the production of gold and silver 
 during the earlier part of the century, and the 
 resulting effects upon prices ; he states that the 
 annual production of gold had been trebled be- 
 tween 1800 and 1848; but the increase in the 
 
325 
 
 annual production of silver had been very trifling. 
 There had been an increase of fifty-eight per 
 cent, in the quantity of gold between the years 
 1800 and 1848, and, as there had been no in- 
 crease of prices, nor change in the relative value 
 of gold and silver, he infers that the extension of 
 trade, population, and enterprise in Europe and 
 America, had been so rapid as to absorb the 
 whole of the increase of gold. The reader must 
 remember through what a disturbed state of the 
 currency Mr. Tooke has to trace prices during 
 this period, and how difficult it must be to ascer- 
 tain that the lowest level of prices has not risen, 
 or, rather, as money is generally allowed to be of 
 less value than it was fifty years ago, a to prove 
 that no part of this loss of value is due to the in- 
 crease of the precious metals. 
 
 Mr. Tooke estimates, that of the one hundred 
 and seventy-four millions of new gold, twenty 
 millions have been absorbed in the gold circula- 
 tion of Great Britain, sixty millions in that of 
 France, and fifty millions in that of the United 
 States, and he supposes that Australia and Cali- 
 fornia have each absorbed ten millions, Turkey, 
 and the rest of Europe, ten millions, and Brazil, 
 
 See Mr. Rose's Speech, ante, p. 133. 
 
326 
 
 Egypt, and Portugal, the like sum ; of the sixty 
 millions absorbed by France, a large part is in 
 substitution for silver. In the United States the 
 fifty millions of gold have been partly in place of 
 local bank-notes and partly of the gold coin of 
 foreign countries. In Great Britain the twenty 
 millions of gold coinage are to be regarded as re- 
 presenting an enlarged requirement for metallic 
 circulation, as the result of enlarged transactions, 
 and the same observation applies to Australia, 
 California, Brazil, Egypt, and Portugal. The 
 metallic circulation of the leading portions of the 
 commercial world has been increased about thirty 
 per cent. The reader will remember that, ac- 
 cording to Dr. Smith's views, this addition to our 
 currency must have enlarged, by one-third, that 
 part of the circulation of the country which is 
 employed in conducting the circulation between 
 the dealer and the consumer, that is, in the re- 
 tail trade, the payment of wages, and the like ; a 
 mode of employing an increase of the currency 
 which we have seen men of all views on the sub- 
 ject agree in considering the most efficacious in 
 raising prices. 
 
 For some time after the discovery of the new 
 gold-fields, Mr. Tooke expected that a fall would 
 take place in the value of money, that if the high 
 
327 
 
 prices which had prevailed had not been originally 
 caused by the influx of gold, the recoil from them 
 would be impeded by it. There were good 
 grounds for believing, that when the precious 
 metals from the new sources should have become 
 diffused and disseminated, in the shape of income, 
 of rents, of salaries and wages, a higher perma- 
 nent level of prices would be established. But, 
 afterwards, from observation of facts, he adopted 
 the opinion that there was no probability of such 
 effects being produced by the new gold. On 
 considering the actual range of prices from 1851 
 to 1856, he finds that colonial produce scarcely 
 rose at all, that provisions and butcher's meat 
 rose from thirty to forty per cent., that raw ma- 
 terials rose from thirty to sixty per cent., that 
 the finer cotton fabrics fell in price, that bricks 
 advanced about twelve per cent. ; but that, in all 
 cases where a marked rise of prices occurred, it 
 could be accounted for, in the first instance, at 
 least, by purely mercantile reasons relating to 
 supply and demand. These reasons are, as to 
 provisions and butcher's meat, the seasons, the 
 war, deficient hay-crops, a destructive murrain, 
 absorption in Ireland, excessive reductions of 
 stock, from 1848 to 1852, and extra consumption 
 of butcher's meat by the lower classes ; and, in 
 
328 
 
 the case of raw materials, the war, speculations, 
 failures of crops, strikes among workmen, and 
 the like. a 
 
 The cause of the failure of the new gold to affect 
 prices, Mr. Tooke thinks, is to be found in the fact, 
 that a great quantity of commodities has been 
 called into existence by free trade, railways, and, 
 more especially, by the new gold itself; an ad- 
 ditional amount of currency has, therefore, been 
 required to circulate commodities at their former 
 prices. 
 
 The distribution of gold, he says, through the 
 extended demand for commodities, commencing 
 with the labourers who picked up the gold, gra- 
 dually set in motion an increased number of la- 
 bourers, and increased amounts of capital to 
 supply the requirements, not only of the popula- 
 tion of the gold countries, but of the population 
 of the countries producing the goods consumed by 
 them. These requirements were satisfied entirely 
 out of an addition to the wealth of the world, called 
 into existence for that special purpose. The rise 
 of two or three hundred per cent, which took 
 place in the prices of all kinds of goods in Aus- 
 tralia, was speedily corrected, almost in a single 
 
 a Vol. vi., p. 458 ; vol. v., p. 654. 
 
329 
 
 day, by the resources available for increased pro- 
 duction in those countries which produced the 
 goods. After the first excitement, the increased 
 production has continued, because the effective 
 demand, in the form of new gold, has continued 
 in the gold countries. Year by year the circle in 
 which there is an increased demand for commo- 
 dities is enlarged, the area in which increased in- 
 comes are expended is wider in each succeeding 
 month. 
 
 Mr. Tooke, therefore, maintains that the effect 
 of the gold discoveries has been to create large 
 additions of real wealth, that in the gold countries 
 the population has been increased three or four- 
 fold, houses have been erected, waste lands re- 
 claimed, railways constructed, schools and uni- 
 versities founded, and, more conspicuous than all, 
 an enormous foreign trade established ; that in 
 those countries to which the gold has been sent 
 in exchange for commodities, the same effects 
 have been produced as in the gold countries, but 
 in a less degree. The gold has led to improve- 
 ments in the means of production, to the accu- 
 mulation of capital out of the larger incomes of 
 capitalists and labourers, and has diminished the 
 pressure of destitute persons. These results, he 
 says, are very different from a barren addition of 
 
330 
 
 a considerable percentage to the existing metallic 
 circulation, or any barren increase in the prices 
 of commodities merely from such an addition. 
 
 Mr. Tooke allows that these conclusions are 
 opposed to generally received theoretical views of 
 the effect of a great addition to the stock of me- 
 tallic money ; but he says that facts show that an 
 increase of one-third in the amount of money has 
 not produced any marked effect on prices, and 
 that, in the abstract theory, the time which will 
 be required before any effect can be produced by 
 the increase of money, and the important changes 
 which may occur in the meantime (alluding, pro- 
 bably, to the increase of commodities), have been 
 neglected. He supports his view by stating that 
 an increase of six hundred per cent, in the stock 
 of the precious metals on the discovery of America 
 produced a rise in prices of only two hundred per 
 cent., (Dr. Smith estimates the rise at four hun- 
 dred per cent.,) and that a very long period 
 elapsed before any effect at all was produced on 
 prices. 
 
 In answer to the objection that a mere increase 
 of gold is in itself no permanent addition to the 
 wealth of the world, except as affording the means 
 of an increase of plate and ornaments, Mr. Tooke 
 repeats and extends Dr. Smith's comparison of 
 
331 
 
 money to a highway. He says, an inadequate 
 stock of money is a narrow and unsound road ; 
 an extension of money makes this road smoother 
 and broader, and imparts almost the same impulse 
 to production as the conversion of a common 
 highway into a railway ; and to increase the stock 
 of money year by year is much the s^ime thing as 
 to construct, year by year, a new and additional 
 network of railways.* An addition to the stock 
 of money is an addition to the fixed capital of the 
 society, and exerts over production an influence 
 of the same beneficial kind as improved harbours, 
 roads, or manufactories. Mr. Tooke supposes 
 that such an impetus has not been given to pro- 
 duction by forced extensions of paper currencies, 
 only because such currencies are confined to their 
 own country, while gold and silver constitute the 
 circulating medium of all nations. (Should not 
 this only make a difference in the amount of the 
 effect produced, not negative it entirely ?) 
 
 As to the question of the supposed fall in the 
 value of gold because the cost of producing it has 
 been diminished, Mr. Tooke doubts this latter 
 fact. He says that, considering the expense of 
 conveying the labourers to those distant places, 
 the cost of tools and of living, and the value of 
 
 a Vol. iv.,p. 216. 
 
332 
 
 the commodities with which the gold has been 
 purchased of the diggers, no larger amount than 
 previously has been procured by the expenditure 
 of the same amount of labour and capital. Does 
 not this view go to the full extent of maintaining 
 that it is almost impossible to reduce the cost of 
 obtaining gold ? All the expenses which Mr. 
 Tooke enumerates must have been incurred in the 
 attempt to procure gold from the poorer gold 
 fields. Surely the gold procured when the field 
 was richer must have borne a larger proportion 
 to them. Again, if the cost of production be not 
 less, how are we to account for the increase in the 
 quantity obtained ? 
 
 Mr. Tooke allows that the first influx of gold 
 lowered the rate of interest, because the gold 
 was then carried to the bank and formed a part 
 of its reserve, and an addition to the amount of 
 money seeking investment. But though sub- 
 sequently nirtety millions of gold have been im- 
 ported, this effect has ceased, because they were 
 carried off at once to meet deficient harvests, for 
 war expenditure, and above all by the rapid ab- 
 sorption of capital in new enterprises, and in ex- 
 tended branches of trade, which have maintained 
 the requirements for capital at a limit which 
 seems to be continually exceeding the supply. 
 
333 
 
 As fo the rate of interest for the future, he con- 
 siders that the spread of free trade, railways, and 
 electric telegraphs, but above all the great field 
 for enterprise opened in California and Australia 
 by the gold, will require so much capital, that the 
 rate of interest will in all probability be high for 
 a considerable period : this, he says, will preserve 
 the owners of loanable capital from loss, should 
 the quantity of new gold cause a rise in prices. 
 
 With regard to the effect of the discovery of 
 the rich silver-mines of America in the sixteenth 
 century, Mr. Tooke states that before the in- 
 flux of American silver there had been a marked 
 fall in prices, consequent upon a stationary or 
 perhaps declining stock of silver.* That the 
 rise in prices which followed that influx was 
 arrested about 1640, because the annual in- 
 crease was entirely absorbed in replacing the 
 wear and tear of the enormous mass of silver 
 accumulated by that time, and in satisfying the 
 requirements of the extension of trade, disco- 
 very, production, and population. He adds, we 
 have the fullest warrant for concluding that any 
 partial inconvenience that might ensue from the 
 effects of the American supplies, was compensated 
 and repaid (but not perhaps to the sufferers) a 
 
 a Vol. vi., p. 413. 
 
334 
 
 hundred-fold by the activity, expansion, and vigour 
 which they impressed for more than a generation 
 upon every enterprise and every art which dig- 
 nifies human life or increases human happiness. 
 He devotes a section of the appendix to his last 
 volume to " the historical evidence illustrative of 
 the rapid extension of enterprise and trade be- 
 tween 1560 and 1600," in which the fact of such 
 an extension is clearly established ; but nothing 
 whatever is mentioned, beyond coincidence in 
 point of time, which connects it with the great 
 increase which then took place in the production 
 of silver, and he takes no notice of the question 
 whether this extension of our trade was caused 
 by the opening of the new market or by the de- 
 preciation in the value of money. He states that 
 in like manner the effects of the new gold have 
 been as beneficent as they are mighty. The 
 reader will note how readily Mr. Tooke allows 
 that a stationary or perhaps declining stock of 
 silver lowered prices, though he does not allow 
 an opposite effect to a decided increase of 
 gold. Why did not the scarcity of silver, accord- 
 ing to his views, check production, diminish the 
 amount of commodities to be circulated, and keep 
 up prices ? 
 
 It follows from Mr. Tooke's views, and he so 
 
335 
 
 states the fact, that the great production of gold 
 has caused no change in the relative values of 
 that metal and silver, and he attributes the rise 
 which has taken place in the value of the latter 
 metal as compared with gold, to the springing up 
 of a great demand for silver in the East, a de- 
 mand which he supposes to have been caused 
 chiefly by the sudden extension of the con- 
 sumption of the teas and silks of China in Eng- 
 land and America. 
 
 Mr. Tooke's views have not yet been considered 
 by economists, and we can look only to general 
 principles for assistance in estimating them. The 
 review which we have just taken of the opinions 
 of many eminent persons as to the power of ex- 
 tensions of the currency upon prices, has, cer- 
 tainly, not prepared us to admit readily that an 
 addition of twenty millions to the metallic por- 
 tion of our currency should produce no effect 
 whatever upon prices ; we have seen very great 
 results attributed to an addition of two or three 
 millions of notes to the circulation. 
 
 Without entering into any examination of Mr. 
 Tooke's statistics, we may admit the very great 
 probability of a considerable increase in the 
 amount of our coin, and he allows that there 
 has been a rise in the price of many articles ; the 
 
336 
 
 question is, has any part of this rise been caused 
 by the increase of coin ? This question Mr. 
 Tooke answers, though not very confidently, in 
 the negative. We cannot follow him in detail in 
 his statement of the causes which he thinks have 
 affected the prices of such articles as colonial 
 produce, butcher's meat, and the like. The 
 reader is aware of the great difficulty of ascer- 
 taining the causes of variations in the price of 
 such articles with sufficient accuracy to warrant 
 an assertion, that no part of those variations is 
 due to the influence of the new gold, and he will 
 remember, that Mr. Tooke was unable to discover 
 any connexion between the state of the currency 
 and the price of such articles during the suspen- 
 sion of cash payments by the bank of England. 
 As silver has, allowedly, not increased in quantity, 
 variations in its price seem the best test of any 
 change in the value of gold, and we shall examine 
 the grounds of Mr. Tooke's opinion, that the lise 
 in the price of silver, which commenced shortly 
 after the discovery of the gold-fields, and has 
 continued until the present time, is not due to 
 the new gold. 
 
 As the production of gold has very greatly in- 
 creased, while that of silver has remained sta- 
 tionary, Mr. Tooke would readily allow that silver 
 

 337 
 
 must, under the circumstances, exchange for 
 more gold than before, if he did not suppose 
 that a fresh employment had been found for the 
 gold in circulating new commodities, a circum- 
 stance which he seems to think would prevent 
 more gold than before from being offered for the 
 same amount of silver ; but, as silver has not, 
 and commodities have increased in quantity, an 
 ounce of silver would now exchange for more 
 commodities than before, and, as the currency 
 can make no alteration in the terms upon which 
 commodities exchange by barter, at the same 
 time and place ; an ounce of silver must now 
 exchange for more gold money, as more gold 
 money would be required to purchase the in- 
 creased amount of commodities, for which the 
 ounce of silver would now exchange by way of 
 barter ; a change would, therefore, take place in 
 the relative values of the two metals, that is, in 
 the price of silve'r, though all other commodities 
 had increased in proportion to the increase in the 
 gold. Mr. Tooke seems to take the common 
 but erroneous view of the effect of changes in 
 the currency upon prices, he seems to suppose, 
 that if the currency be extended, and a part only 
 of the commodities to be circulated be also ex- 
 
 z 
 
338 
 
 tended, but to such a degree as to leave the 
 whole mass of the currency still in the same 
 proportion to the whole mass of commodities as 
 before, there will be no change in prices. 
 
 Assuming, then, that there is nothing in the 
 alleged increase of commodities to prevent the 
 new gold from producing an effect upon the price 
 of silver, we must attribute the rise which has 
 taken place in the price of that metal to that 
 source, unless we can find some other at least 
 equally good explanation of the fact. Now, the 
 explanation usually given by those who deny that 
 the gold has produced any change in prices is, a 
 great demand for silver in the East. Mr. Tooke 
 maintains that silver has become really dearer in 
 the East ; and the same view is taken by Colonel 
 Sykes, by the editor of the Economist, and, we 
 may add, apparently, by the public in general. 
 To account for the export to China, it is supposed 
 that a great and sudden demand has sprung up 
 since 1851, in England and America, for silk and 
 tea, while there is no corresponding increase in 
 the demand in China for our commodities ; and 
 it is said that the rebellion in that country has 
 given rise to a great desire to obtain silver for the 
 purpose of hoarding. The exportation to India 
 is accounted for in a somewhat similar manner. 
 
339 
 
 Colonel Sykes says, the industry of India appears 
 to be so active, its products so much in demand, 
 and its foreign wants comparatively so limited, 
 that a large part of its produce must be paid for 
 in bullion.* Indian railways are another alleged 
 cause of the drain of silver to that country, and 
 the same fact is sometimes accounted for by the 
 rapid increase of its internal prosperity, which, 
 according to the Economist, requires and enables 
 each of the inhabitants to keep two or three 
 more rupees in his pocket. 
 
 Without entering at all into the statistics by 
 which these gentlemen attempt to sustain their 
 views, we may notice some circumstances which 
 seem to throw doubt upon them. In the first 
 place, the increase in the demand for tea and silk 
 seems too sudden to be caused by the natural 
 progress of England and America ; again, if silver 
 has really become dear in China, as supposed, 
 and we make a sacrifice to get the silver which 
 we send there, the real price of the goods which 
 we purchase with it must be higher, or the profit 
 of the Chinese trade must fall ; neither of these 
 results is alleged to have taken place, on the con- 
 trary, there is a large consumption of the articles 
 
 * Statistical Journal, vol. xix., p. 114. 
 
 z 2 
 
340 
 
 of that trade, a fact which points to a low real 
 price, such as would result from the power to 
 purchase them with cheap silver. The demand 
 for hoarding in China may be increased by the re- 
 bellion, but, perhaps, not the power to purchase 
 silver. Indian railways may require some silver, 
 but it is not likely that remittances for them will 
 be made to any extent in that metal ; these last 
 items also appear too small to have much influ- 
 ence upon the question. Colonel Sykes's view of 
 the result of increased productive power in India 
 upon her exports, is entirely at variance with 
 both general theory and experience ; it is hardly 
 conceivable that a nation can increase in produc- 
 tive power, and yet afford a diminishing demand 
 for the products of the industry of other coun- 
 tries ; finally, as to the necessity of a larger me- 
 tallic currency in India, because of the increased 
 prosperity of that country, assuming that great 
 national prosperity does require more metallic 
 money, and that India has really increased in 
 prosperity, the question is, whether her advance 
 in wealth is so much greater than that of Europe 
 and the United States as to enable her to tear 
 the silver out of the hands of those nations. We 
 know that this is not the case. Let the reader 
 
341 
 
 compare these theories with the simple hypothesis 
 that silver goes to the East because it shares 
 some part of the fall which has taken place in 
 the value of gold, an hypothesis which is consis- 
 tent with theory and supported by facts. If gold 
 were of less value than silver, it would take the 
 place of silver in those continental currencies 
 in which it exchanges by law for a certain fixed 
 quantity of silver, thus a large supply of dis- 
 placed silver would be thrown on the market, the 
 value of that metal would fall to some extent, as 
 compared with commodities, and it would natu- 
 rally be sent to India and China, in preference to 
 goods, our imports from those countries would 
 cost us less than before, and a greater consump- 
 tion of them would take place. Now, all these 
 supposed events have occurred, and, therefore, 
 the export of silver to the East is, in fact, a strong 
 evidence of a fall in the value of gold. We must 
 remember, too, that the great apparent demand 
 for silver for the East began in 1851, the exact 
 epoch at which the new mines of gold came into 
 full operation. 
 
 We now proceed to consider the reasons al- 
 leged by Mr. Tooke for a great increase in com- 
 modities since the epoch of the gold discoveries. 
 
 Mr. Tooke, we have seen, considers the new 
 
342 
 
 gold as possessing in itself a power of production 
 because money is fixed capital, and therefore the 
 gold which increases this capital must cause an 
 increase of the productive power of the world ; 
 and he illustrates this view by comparing an in- 
 adequate currency to a narrow and unsound 
 road, and an increase of that currency to the 
 conversion of the road into a railway. Now, 
 what is meant by the term inadequate when 
 applied to a currency? If the nature of the 
 commodity chosen as the medium of circulation 
 be such, that a portion of it which would ex- 
 change for the quantity of other commodities 
 usually required in retail transactions, be not too 
 small to form a convenient coin, or if a proper 
 subsidiary coinage be provided for small change, 
 and if any country has its fair share of the whole 
 stock of such a commodity which exists in the 
 world, how can its currency be said to be in- 
 adequate ? How can that currency be made 
 more adequate? It would seem that we have 
 only to carry out Mr. Tooke's simile, and we 
 shall see the error; after distant ff places are once 
 connected by railways, a new network of them 
 will not facilitate intercourse, will not be any real 
 addition to the wealth of the country, but a 
 waste of capital and an encumbrance. The 
 
343 
 
 reader will remember that we are not saying that 
 the introduction of a system of credit will not 
 facilitate exchanges and increase production, but 
 only that an increase of a metallic currency will 
 not have that effect. 
 
 Though money is called fixed capital by 
 Dr. Smith and other economists, it evidently is 
 of a different nature from other kinds of fixed 
 capital ; it is not directly productive of wealth, 
 like a machine ; it is, as Dr. Smith says, neither 
 a material to work upon, nor a tool to work with, 
 nor can it sustain labourers ; it must be exchanged 
 for other things before it can be productive ; it 
 is, as we have seen, only the deed which confers a 
 title to productive capital.* Mr. Tooke would be 
 very unwilling to allow that paper money is 
 directly productive of wealth ; and it is only 
 because metallic money can be exchanged with 
 other nations for the materials of productive 
 capital, that he distinguishes it from paper money. 
 We may safely say that the theory which treats 
 an increase of metallic money as a direct source 
 of productive power, because it adds to the fixed 
 capital of the world, cannot be maintained ; 
 most economists, indeed, consider a reduction 
 
 a Ante, p. 43. 
 
344 
 
 of that part of the national fixed capital as a step 
 towards increase of wealth.* But the new gold 
 may have placed in the power of those nations 
 who are most advanced in productive skill a 
 portion of the capital of their less favoured 
 neighbours ; production may have been increased 
 by free trade, and the facility of transport afforded 
 by railways ; and, according to Mr. Bailey's view, 
 a more efficient application of existing capital 
 may have been caused by the mental stimulus 
 given by the opening of a new market. From 
 these causes a considerable increase of some com- 
 modities may have taken place, which may have 
 tended to prevent the new gold from affecting 
 the prices of many articles. The reader will, 
 however, note the great difference between treat- 
 ing, as Mr. Tooke does, the new gold as the 
 great cause of increased production, and attri- 
 buting that fact to free trade, railways, and the 
 like. If the gold be the direct cause of the 
 increased production, that production would keep 
 on pari passu with the increase of gold ; if free 
 trade be the cause, then the production may be 
 much less than sufficient to counteract the effects 
 of the gold. 
 
 a La Monnaie, p. 368. 
 
345 
 
 tr. Tooke states, that the new gold has, 
 latterly, had no effect upon the rate of interest, 
 because it has been carried off by the rapid ab- 
 sorption of capital required by new enterprises, 
 which have maintained the requirements for 
 capital above the supply of it. Now, what is the 
 meaning of gold being absorbed as capital ? If 
 the new gold is not directly productive, but 
 must be exchanged for other commodities which 
 are so, then it is still in the nature of a currency ; 
 not, indeed, of any particular nation, but of the 
 whole world, and no more of it can be required 
 than before, unless the prices of those particular 
 goods which are used as directly productive capi- 
 tal have risen, or unless there has been a general 
 increase of them ; as Mr. Tooke does not allow 
 that prices have risen, he must maintain that there 
 has been a yearly increase of commodities em- 
 ployed as capital to such an extent, that more than 
 twenty-nine additional millions of gold are yearly 
 required to distribute them ; but what evidence 
 have we of such an enormous annual increase in 
 the ingredients of productive capital? It is a 
 much simpler hypothesis to suppose that the gold 
 never comes into comparison with them at all, 
 but goes abroad, partly to be exchanged for silver, 
 
346 
 
 and partly in consequence of the laws which re- 
 gulate the distribution of the precious metals. 
 
 In estimating the effect of the new gold on 
 prices, Mr. Tooke omits all mention of the ten- 
 dency in modern times to economise the use of 
 coin by the employment of paper and by banking 
 operations, he even supposes that the new gold 
 may have taken the place of some of the paper. 
 It is possible that there may, at this moment, 
 be an unusual degree of distrust as to paper 
 money ; but this feeling can be but of short du- 
 ration, the tendency, in the long run, must be to 
 spare coin by the use of paper, and to spare 
 money of all kinds by the use of banks. Mr. 
 Norman, writing in 1838, says, that in conse- 
 quence of the extension of the economising prin- 
 ciple, it is probable that England possesses less 
 coin than she did fifty years ago, and that France 
 has less than before the Revolution.* There is 
 yet room for extending and perfecting this sys- 
 tem of economising coin in this country, and it is 
 quite in its infancy in France and many other 
 parts of the Continent ; the probability, certainly, 
 seems to be in favour of a fall in the value of 
 gold from this cause. 
 
 * Remarks upon Currency and Banking, p. 14. 
 
347 
 
 lere is one most important consequence of 
 Mr. Tooke's theory, to which the reader's atten- 
 tion must be strongly directed. As according to 
 Mr. Tooke there has been no fall in the value of 
 money, all the beneficent effects which he attri- 
 butes to the new gold are entirely independent 
 of any depreciation in the value of money, and 
 would be just as surely enjoyed by the nation 
 were the standard changed to silver. 
 
 The probable effects of the new gold have been 
 discussed from time to time in the Economist, the 
 paper which has been already mentioned as being 
 under the editorship of Mr. Wilson, and which 
 therefore we may suppose expresses his views at 
 least to some extent; they differ considerably 
 from those of Mr. Tooke. The editor of the 
 Economist allows that silver has risen in value 
 as compared with gold, that a change in the re- 
 lative values of gold and silver has been the cause 
 of the substitution of gold for silver in the cur- 
 rency of France, that the new employment thus 
 found for gold, and the great supply of silver thus 
 thrown on the market, have delayed the full 
 effect of the new gold in producing a change in 
 their relative values ; that this displacement of 
 silver must be nearly at an end, and a much more 
 rapid and marked advance may be shortly ex- 
 
348 
 
 pected to take place in the value of silver in re- 
 lation to gold. a It should follow from this view 
 that the new gold has raised the price of com- 
 modities, for if it has raised the price of silver, 
 notwithstanding the great supply of that metal 
 thrown on the market by the substitution of gold 
 for it in the continental currencies, it must have 
 raised the price of commodities in general at 
 least in an equal degree, even allowing that there 
 has been an extraordinary increase in the supply 
 of commodities ; the editor of the Economist) 
 however, though he does not venture to deny 
 that there has been some rise in prices, seems 
 very unwilling to enlarge upon this point. 
 
 The effects of the new gold attracted but 
 very little of the attention of the committee of 
 1857 on the Bank Act. In general the effect 
 of the gold in raising prices seemed to be con- 
 sidered obscure and undecided, rather than alto- 
 gether denied. Mr. Mill, however, allowed that 
 the gold discoveries had raised the price of silver, 
 that is, that the value of gold had fallen as com- 
 pared with silver, and that the gold had displaced 
 silver in the coinage of France ; he assumes that 
 silver retains its former value as compared with 
 
 a Supplement of January 24, 1857. 
 
349 
 
 commodities, but that notwithstanding it goes to 
 the East in greater quantities than before, be- 
 cause the productive powers of the East have 
 largely increased, and the practice of hoarding so 
 prevalent in that quarter of the world, prevents 
 any loss in the value of silver from the continual 
 influx of it. 
 
 The evidence of the Governor of the bank of 
 England, Mr. Weguelin, seems to be the most 
 important that was given upon this subject. He 
 appeared to consider it a very extraordinary cir- 
 cumstance that the amount of bullion held by the 
 bank should on the average have been less than 
 it had usually been before the great discoveries 
 of gold. He accounts for this fact by the drain 
 of gold for the war, and since the conclusion 
 of peace, by the great demand for silver for the 
 East, caused principally by the failure of the silk 
 crop in Europe. He attaches slight importance 
 to the operations of the bank of France to obtain 
 gold ; and when asked whether the change in the 
 currency of France had not caused an additional 
 demand for gold for France, he merely replies, 
 undoubtedly there has been a change going on of 
 the currency of France into gold for the purpose 
 of obtaining silver to ship to the East. 
 
 Now, it seems that if we admit that in conse- 
 
350 
 
 quence of the great production of gold that metal 
 has fallen in value as compared with silver, that 
 is, that a given weight of it will now purchase 
 fewer commodities than the weight of silver for 
 which that given quantity formerly exchanged, 
 and for which it would still exchange in France, 
 it must be profitable to send gold to France to be 
 exchanged for silver without any reference to the 
 demand for that metal for the East. Gold keeps 
 its old value in France. Is not the difference be- 
 tween the new and the old value of gold clearly 
 a premium on its export to France ? Now, this 
 premium of course affects all the gold in this 
 country, our ordinary stock as well as the fresh 
 arrivals, and would naturally reduce that stock 
 when the fresh arrivals are not sufficient to 
 supply the outgoing current ; our stock would 
 apparently be reduced until gold became so 
 valuable here that it could no longer be exported 
 with a profit. To keep our usual stock of gold 
 we should be obliged to apply a pressure equal to 
 the premium upon its exportation ; and it seems 
 probable that the new gold has, in fact, cost our 
 merchants a rise in the rate of discount of one or 
 two per cent, for the last few years. 
 
 We have already mentioned that none of our 
 eminent economists have come forward to advo- 
 
351 
 
 cate the maintenance of a steady standard of 
 value. Many of our statesmen have shown the 
 same indifference, while others have even gone 
 the length of attributing the prosperity which we 
 have enjoyed of late years to the fall in the 
 value of money caused by the new gold. The 
 mercantile press has declared loudly in favour of 
 letting the value of money fall to the utmost 
 has treated all propositions for preserving steadi- 
 ness in the national measure of value as tampering 
 with the currency has drawn most extravagant 
 pictures of the stimulus to the production of 
 wealth to be given by the abundance of money 
 has endeavoured to prove to the classes who 
 would suffer, that they would be compensated 
 by their share of the universal prosperity ; and 
 finally, as if mistrusting its own arguments, has 
 taken every opportunity to lull people's anxiety 
 by endeavouring to show that after all there will 
 be no rise in prices from the new gold, or to 
 reconcile them to their fate by pointing out that 
 there is no remedy, that silver will fall in value 
 even more than gold. 
 
 Our neighbours on the Continent received the 
 announcement of these remarkable discoveries in 
 a different spirit; from the first they have consi- 
 dered them of the greatest importance, and have 
 
352 
 
 expressed great solicitude for the maintenance of 
 the standard of value. Immediately that the fact 
 of a great increase in the production of gold was 
 established, the Government of Holland, a nation 
 justly renowned, says M. Chevalier, for its fore- 
 sight and probity, discarded gold from its cur- 
 rency ; they may, says the same author, have been 
 rather hasty in passing this law, but, in a matter 
 of this nature, it is better to be in advance of 
 events than tb let them pass us. 
 
 Shortly afterwards, the Government of France 
 appointed a commission to examine into the 
 questions connected with the simultaneous use of 
 the precious metals, gold and silver, as a circu- 
 lating medium. This commission reported, that 
 the fall which had then occurred in the value of 
 gold, was temporary, that it was not possible, 
 with the existing knowledge of facts, to form cor- 
 rect opinions on the subject, and that there 
 was, at that moment, no ground for a modifi- 
 cation of their monetary system. At this time, 
 owing to the reported discovery in California of 
 rich mines of quicksilver, the metal so exten- 
 sively used in procuring silver from the ore, 
 and to accounts of the vast quantity of poor 
 silver ore in Mexico which could now be pro- 
 fitably worked, there existed a belief that silver 
 
353 
 
 was in danger of falling in value to a greater de- 
 gree than gold. The events and experience of 
 nine years seem to have produced the conviction 
 that this will not be the case ; all Germany has 
 recently adopted a silver standard, and the states- 
 men of that country finding, it is said, that since 
 the demonetization of gold in Holland, that metal 
 has ceased to be used there as coin at its market 
 value in silver, and wishing to secure the conve- 
 nience of gold money, but anticipating a rapid 
 fall in its value, have, as suggested by M. Cheva- 
 lier, declared that the gold coin shall pass current 
 at a given rate, as measured in silver, and have 
 provided that this rate should be adjusted to the 
 price of silver half yearly. 
 
 Another committee has recently been appointed 
 in France, to examine into the monetary condi- 
 tion of the country, and is now pursuing its 
 labours. 
 
 A writer in the Revue Contemporaine of May, 
 1857, M. E. Levasseur, considers that a part of 
 the present high prices of many articles is to be 
 traced to the new gold ; he supposes, that in 
 France and England these high prices have been 
 profitable to the employers of industry, but that 
 they have been injurious to all those who live 
 upon fixed incomes, or by salaries or wages of 
 
 A A 
 
354 
 
 any kind, as the advance in price always precedes 
 the advance in wages. M. Levasseur, however, 
 supposes, like Mr. Tooke, that the effect of the 
 new gold will be beneficial, because it will create 
 new commodities and increase the fixed capital 
 of the world. 
 
 M. Michel Chevalier, who has paid much 
 attention to, this question, has lately been engaged 
 in reconsidering it, and the result of his labours 
 has just appeared in the Revue des Deux Mondes. 
 M. Chevalier has examined again the probabilities 
 of a fall in the value of gold, has satisfied himself 
 that a part of the present high prices is due 
 to that cause, and that the fall in the value 
 of gold will be much more rapid as soon as the 
 displacement of silver in France is completed. 
 He shows that this fall will not be uniform in its 
 progress, but will proceed by leaps ; and thus 
 the measure of value will not only be subject 
 to continual depreciation, but will be rendered 
 uncertain. He has also, after an enquiry into 
 the monetary laws of France, come to the very 
 important conclusion that, although gold is, prac- 
 tically, treated as the standard of value, and 
 although there may be some obscurity in the 
 wording of the law, silver is, in fact, the mone- 
 tary unit in that country, and that the state 
 
355 
 
 cannot, without injustice, pay its creditors in 
 gold except at the market value of that metal in 
 silver. There is, indeed, he says, no court before 
 which the state can be cited to fulfil its liabi- 
 lities ; but he appeals to the future history of 
 the period, as a tribunal which every dignified 
 government would respect. 
 
 M. Chevalier then proceeds to consider the 
 evils and advantages which will flow from a con- 
 tinuous fall in the value of money. As might 
 have been expected from his eminence as an 
 economist, he is not influenced by visions of in- 
 creased production from the new gold as capital ; 
 he points out the losses which would be inflicted 
 on those who depend upon fixed sums of money ; 
 he allows that these persons form, even in France, 
 a very numerous class, comprising those for whom 
 society is most bound to provide ; he notices the 
 necessity which will exist for continually augment- 
 ing the amount of taxation, and the difficulty 
 which all who live by salaries or wages of any 
 kind, will have in obtaining an increase of their 
 incomes proportionate to the fall in the value 
 of money ; he allows that debtors will gain, but 
 he maintains that changes which affect injuriously 
 a vast mass of interests, even if a considerable 
 number of the members of the society were to be 
 
 A A 2 
 
356 
 
 gainers by them, are great evils. Society has in 
 such cases to pass through a revolution, to sus- 
 tain a dangerous trial, particularly when the 
 working classes are among the sufferers. 
 
 As to the equity of allowing the fall in the 
 value of money to run its course, M. Chevalier, 
 like many other economists, seems to have had 
 his attention so much occupied by the magni- 
 tude of the debts which have been incurred by 
 government, that he in some measure confines 
 his consideration of the equity of the case to 
 transactions between the government and its 
 creditors, without noticing the question whether 
 the state can for its own advantage equitably 
 neglect one of its most important duties, that of 
 providing a proper standard of value for the use 
 of the whole community. With this view he 
 seems to think that, though the French govern- 
 ment cannot pay their creditors in gold, yet that 
 our government are in the abstract justified in 
 doing so ; however, even in this case he agrees 
 with the author of these pages in thinking that 
 the distribution of property in this country is 
 so intricate, the mass of interests to suffer so 
 very large, and the frugal and prudent habits 
 which would be weakened if their rewards were 
 lessened or taken away, so important to the wel- 
 fare of the state, that he says Parliament may 
 
357 
 
 well hesitate before it allows itself to be seduced 
 into permitting such an uprooting of society in 
 the hope of escaping part of our national debt. 
 We trust our readers will carefully peruse this 
 very valuable essay, which they will find in the 
 numbers of the Revue des Deux Mondes for Oc- 
 tober and November, 1857, and which has since 
 been published in a separate form. They must 
 remember that M. Chevalier, far from being in- 
 clined to undervalue the advantages of increased 
 production and more efficient circulation of com- 
 modities, is the great advocate of free trade in 
 France. 
 
 In America, as we might, perhaps, have ex- 
 pected, the prospect of a depreciation of the 
 currency is received with great favour. Mr. 
 Bo wen anticipates a great fall in the value of 
 both gold and silver, he takes no undecided view 
 of the results of the depreciation ; he maintains 
 that a considerable decline in the value of money, 
 if arising from natural causes, is a blessing, and 
 its great merit, in his opinion, seems to be, that 
 it will slowly correct the inequality in the distri- 
 bution of wealth, which he considers the great 
 misfortune of the most prosperous nations. 
 
 As, upon the whole, no prudent person can 
 feel satisfied that there is no probability of a fall 
 in the value of money, it is time to ask what is 
 
358 
 
 to be done under the circumstances, what course 
 will the statesmen of this country take, will they 
 allow the national standard of value to sink gra- 
 dually for an indefinite period, or will they adopt 
 the means which are at hand for preserving it in- 
 variable ? Let us consider what may be said in 
 favour of each plan. In the first place, the insti- 
 tution of a measure of value, by which the dis- 
 tribution of the property of the society can be 
 regulated, is, confessedly, a necessity in a civilized 
 community, men must have such a measure by 
 which to arrange their transactions. Again, 
 every one would allow that the chief point to be 
 attended to in the choice of this measure, should 
 be invariability, and it would seem to follow as a 
 matter of course, that when the commodity 
 chosen for this purpose had lost a portion of the 
 quality which originally fitted it for its office, an- 
 other commodity, if any one could be found, pos- 
 sessing the requisite qualities in a superior degree, 
 should be at once substituted for it, before any 
 change in the distribution of the property of the 
 society had taken place ; all this seems so plain, 
 that it is almost a waste of time to state it. But it 
 is urged by some persons, that great advantages 
 will be derived from allowing the standard of 
 value to be depreciated, and that the govern- 
 
359 
 
 ment has entered into a contract by which they 
 are bound to allow to a portion of the nation 
 the advantages which they expect to reap from 
 a fall in the value of gold ; we must, therefore, 
 inquire into the force of these arguments. 
 
 Let us, in the first place, refer to authority, to 
 the denial by Dr. Smith and other -eminent eco- 
 nomists, that any advantage is gained by an 
 increase of money ; to the strong language in 
 which Mr. Huskisson denounced the ruinous 
 policy of permitting a progressive depreciation 
 of the currency ; to Mr. Babbage's account of 
 its unequal effects ; to the conclusion at which 
 Mr. Bailey arrived, that, even allowing for the 
 mental stimulus given to production by the fall 
 in the value of money, (a stimulus which would 
 not be given in the present case, as its effects 
 would have been forestalled by the new market 
 offered by the gold as a commodity,) a general 
 rise in prices originating in a change of the 
 measure of value was not desirable ; to Mr. 
 Scrope's position that it is incredible that the 
 parties to any money contract contemplate, or 
 are even aware of, the probability of any change 
 in the value of money, and that in consequence 
 every change in the standard of value from 
 natural causes must be unjust ; to Mr. Mill, who 
 treats the whole idea of increased production as 
 
360 
 * 
 a delusion, and maintains that whatever benefit 
 
 is gained by one class is lost by the rest of the 
 community ; and to the view entertained by 
 M. Chevalier of the perils with which sociefSJjfis 
 menaced by the change. 
 
 Against these views we have to set the vague 
 theories of Mr. Attwood and his school,, which 
 resolve themselves into a relief of a part of the 
 community from burthens which must be borne 
 by somebody else, and Mr. Macculloch's strange 
 dictum that the prosperity of the whole country 
 is measured by the prosperity of the class who 
 wish to borrow. As to the views of the mer- 
 cantile press, and of those statesmen who attri- 
 bute our present prosperity to the depreciation 
 of the currency caused by the new gold, they are 
 too vague to be put in competition with these 
 authorities, they do not shew us any more dis- 
 tinctly than Mr. Attwood, the manner in which 
 a depreciation of the currency does advance the 
 general prosperity, though it may promote that 
 of the class for whom they write and speak, nor 
 do they distinguish between the effects, which all 
 allow, arise from the new gold as a commodity, 
 and those supposed to be derived from a depre- 
 ciation of the currency. 
 
 As we have already considered at length the 
 
opinions of Mr. Tooke, we need not recur ta 
 them. The view taken of these events in Ame- 
 rica cannot surprise us ; according to Mr. Bowen, 
 position in society is so ephemeral in that coun- 
 try, that it is in the ordinary course of things, 
 that the son of an Irish coachman should become 
 governor of a state, and the grandson of a mil- 
 lionaire should sweep a crossing.* It is hardly 
 necessary to observe that, with us, though such 
 changes do occur, they are the exception, not the 
 rule ; our society is in a very different state, a 
 large section of the community is in a position 
 to which there is no counterpart in America, and 
 which exposes them to be seriously injured by 
 any permanent change in the value of money. 
 Mr. Bowen is, also, probably wrong in supposing 
 that the depreciation would diminish the colossal 
 fortunes of the great capitalists for the benefit of 
 the poorer classes. Lord Macaulay mentions 
 that, during the existence of the depreciated cur- 
 rency, in the reign of William the Third, the 
 bankers throve amazingly. Mr. Chapman says, 
 that all intelligent money-dealers like times of ex- 
 citement, and we have seen that those econo- 
 mists who suppose that any advantage is to arise 
 
 a Bowen, Political Economy, p. 123. 
 
362 
 
 from a depreciation of the currency, allow that 
 the larger part will fall to the share of the em- 
 ployers of labour, and not to the labourers. 
 Even the funds, the great object of attack on 
 this occasion, are not possessed by millionaires,, 
 but by trustees of family settlements, by public 
 institutions, and the like ; this fact is so well 
 known that it was allowed in the evidence before 
 the Bank Acts Committee of last session, to be 
 the chief cause why the price of Consols did not 
 fall in proportion to the rise in the rate of dis- 
 count. 
 
 If we look to the past, we can find no case in 
 which a depreciation of the currency was, in it- 
 self, an undoubted benefit to the nation ; there 
 has, indeed, been only one certain instance of a 
 depreciation in the value of money of any extent, 
 that which occurred in the time of Elizabeth, and 
 here, as we have seen, the probability is, that the 
 depreciation of the currency rather interfered 
 with the good effects produced by the opening of 
 the new market. There were no signs of increased 
 prosperity during the low value of money and ex- 
 tension of the currency in the time of William 
 the Third. During the revolutionary war with 
 France, we have seen that our currency was too 
 slightly depreciated to have produced, according 
 
363 
 
 to any theory, the marvellous prosperity some- 
 times attributed to it, while here, again, when the 
 currency was slightly depreciated, a trace occurs 
 of the evil so striking in the time of Elizabeth, 
 namely, a fall in the relative condition of the 
 labouring classes. 
 
 A slight consideration will be sufficient to con- 
 vince us that no pledge has been given to adhere 
 to a gold standard. We have seen that silver 
 was originally the standard of value in this 
 country, and that gold came by degrees to be 
 the standard, coming into general use from its 
 greater conveniency, silver not being formally 
 deprived of its character as the standard of value 
 until 1816. The resumption of cash payments 
 in 1819, which is the chief fact put forward in 
 support of this view, was merely a return to the 
 legal standard ; it no more implied that the 
 standard should never be changed, than the refor- 
 mation of the coinage in the reign of William the 
 Third was a pledge that our standard should 
 always be silver. It cannot be maintained that 
 gold should be retained as the standard, if it con- 
 tinue for a long time to fall very much indeed in 
 value. To what extent, then, are we bound to 
 allow it to fall? Is there a certain amount of 
 hardship which we may inflict for the general 
 
364 
 
 good ? or is the general good itself affected if the 
 unsteadiness in the standard become too great ? 
 It seems needless to pursue the subject any far- 
 ther, the fallacy is too apparent. 
 
 There appears, indeed, to be one great feature 
 of weakness in the arguments of those writers 
 who expect great advantages from the depre- 
 ciation of the currency. They all confine their 
 praises of a fall in the value of money to those 
 cases in which it is brought about by natural 
 causes ; they deprecate any legislative deprecia- 
 tion. Now, why should they limit their theory 
 in this manner ? If a continuous fall in the value 
 of money be for the general advantage, it should 
 be secured for the future by a legislative enact- 
 ment. There could be no injustice in a law 
 which was not retrospective in its effects, and 
 which was for the general good. Unless they are 
 prepared to maintain their theory to this extent, 
 they must give it up entirely ; they cannot, how- 
 ever, venture to propose that for the future the 
 value of money should be made to fall in the 
 manner which they suppose it will now do from 
 the new gold, because they are aware that the 
 absurdity of a proposal to select so unsteady a 
 measure of value would be too apparent, and that 
 people would not submit to such a law ; and here 
 
365 
 
 is the great merit in their eyes of the natural 
 source of the depreciation, that it is not under- 
 stood by those who are to suffer, and in con- 
 sequence will be endured. The price of silver is 
 now about five per cent, higher than it used 
 to be. We have the strongest reason to believe 
 that the value of gold must have fallen still more 
 when compared with commodities in general. 
 Money, then, has lost at least five per cent, of its 
 power of purchasing, and to that extent a per- 
 petual income tax has fallen upon all those per- 
 sons whose incomes are fixed a tax, as said, we 
 may remember, by Mr. Jefferson of the deprecia- 
 tion of the American paper, the most oppressive 
 of all, because the most unequal of all. We have, 
 too, every reason to suppose that this tax will 
 after a short time rapidly increase. It seems 
 clear that a tax like this could not be openly 
 imposed on such uncertain prospects of general 
 advantage as those put forth by the admirers of 
 the depreciation ; and it certainly seems iniqui- 
 tous to take advantage of the ignorance and want 
 of familiarity with business, of that part of the 
 community which is exposed to suffer, to inflict it 
 upon them ; their ignorance of affairs appears to 
 give them the clearest right to the attention and 
 protection of the state. 
 
366 
 
 It might have happened that, as in the time of 
 Elizabeth, both the precious metals had fallen in 
 value ; in this case, perhaps, the evil would have 
 been inevitable ; we could not apparently have ex- 
 pected the Government to adopt a plan so different 
 from any which had been tried as that of the ta- 
 bular standard proposed by Mr. Scrope ; but in the 
 present instance no difficulty of this kind occurs, 
 whatever might have been the opinions at first 
 entertained of an approaching fall in the value 
 of silver, that idea is now abandoned ; it is now, 
 perhaps, even necessary to shew that silver is not 
 dearer than it was as compared with commodities. 
 The Government undoubtedly have it in their 
 power, by following the example of Holland and 
 Germany, to preserve the distribution of property 
 as it exists without making our money more in- 
 convenient, and without depriving the country of 
 any of the advantages which the new gold would 
 give us as a commodity. They are placed in a 
 position in which they cannot escape the respon- 
 sibility of deciding these very important questions ; 
 for if they allow things to take their course, they 
 tacitly adopt the views of the advocates of the 
 depreciation, and on such grounds as they have 
 put forward are answerable for all the misery that 
 may be occasioned by it. 
 
367 
 
 Notwithstanding, however, the obvious com- 
 mon sense, and common justice of preserving the 
 standard of value as invariable as possible in this 
 country, in which from the nature of things the 
 distribution of property is very intricate, we are 
 aware that the influence of party feeling and the 
 expectation of individual gain are so powerful in 
 obscuring the plainest subject, that we have little 
 hope of seeing any steps in this direction taken 
 by our Government, unless we can awaken from 
 their apathy those who are exposed to suffer. 
 We can, indeed, cite our statesmen before that 
 tribunal to which M. Chevalier has appealed ; 
 and we think that the spirit in which the pros- 
 pect of a progressive depreciation of the cur- 
 rency has been received in this country, will not 
 form a very creditable page in its history ; but 
 unfortunately the judgments of this tribunal, 
 though very severe, come too late to interfere 
 with the results of the conduct which they con- 
 demn, and we must address ourselves to those 
 who will be injured ; we must ask our readers to 
 consider what effect will be produced upon their 
 own position, and that of their families and of 
 the public institutions with which they may be 
 connected, if the money of the country should in 
 the course of the next twenty years lose ten or 
 
368 
 
 or perhaps twenty per cent, of its purchasing 
 power, reminding them that the depreciation of 
 the currency which may produce these results is 
 not a thing of the past, but yet to come ; and 
 that if they see reason to apprehend any injury 
 to their property, they have but to come forward 
 to express their unwillingness to submit to such 
 a loss, and they would escape it. Their weak- 
 ness lies in their apathy; and this is the sole 
 source of the strength of their opponents. 
 
 The author of these pages feels very strongly 
 on this subject, believing that a very great 
 amount of suffering will be inflicted upon a very 
 large numerical portion of the community in the 
 pursuit of a shadow, for what good can result 
 from a failure in one of the most important in- 
 stitutions of civilized society, and he cannot con- 
 clude the present work without appealing to the 
 economists of this country, at least to give the 
 question of the probable depreciation of the cur- 
 rency an unprejudiced consideration. It is, per- 
 haps, consistent with the views of Mr. Tooke and 
 his school, readily to admit suppositions, which 
 account for no effect being produced on prices by 
 the addition of very large sums to our currency ; 
 but Lord Overstone and his school of economists, 
 and the financiers formed by Sir Robert Peel, 
 
369 
 
 must, we should suppose, take a very different 
 view ; we have seen that they considered an in- 
 crease of two or three millions of bank-notes 
 quite sufficient to raise prices very considerably, 
 they must, therefore, feel satisfied that there is a 
 great probability of a continuous fall in the value 
 of our money for a considerable period, they 
 must know how extensive are the interests which 
 would be exposed to suffer, and they must be 
 aware of the fallacious nature of the arguments 
 brought forward in favour of permitting the de- 
 preciation to continue- May we not then venture 
 to hope that they will no longer consider the 
 subject unworthy of their attention. 
 
 BB 
 
370 
 
 CHAPTER IX. 
 
 THE CRISIS OF 1857. 
 
 Phenomena of the Crisis. Lord Overstone's Theory might 
 be applied to explain them. He considers that the Sus- 
 pension of the Act depreciated the Currency. Objections 
 to this View. Occurrences at Hamburgh a Proof of the 
 Importance of Mr. Mill's Theory that a Mixed Currency 
 may be rendered less unsteady than a Metallic one. 
 Error of those who complain of the Public for expecting 
 Assistance from the Bank during the Pressure. Are the 
 Reproaches on American Banking merited ? Impossibility 
 of altering the modern System of Business to render the 
 Act of 1844 effective. Difficulties as to the Exercise of 
 a Power of Suspending the Act. Important Lesson af- 
 forded by recent Events as to the Effect of the New Gold. 
 Strong Claims of those who would suffer from it to the 
 Attention of the Government* 
 
 SINCE the former portion of this work was 
 placed in the hands of the printer, another com- 
 mercial crisis has occurred, exceeding in inten- 
 sity that of 1847, and the Bank Act of 1844 has 
 again been suspended. A considerable exporta- 
 tion of gold to the continent was in progress, and 
 the bank rate of discount was five-and-a-half per 
 cent., when in the month of September news 
 
371 
 
 teached us of the commencement of monetary 
 difficulties in America. Early in October, the 
 bank having sustained a great diminution of her 
 reserve and bullion, raised the rate of discount to 
 six per cent., and after the interval of a few days 
 only, to seven and eight per cent. About the middle 
 of October, Messrs. J. Monteith and Co., Mac- 
 donald and Co., Wallace and Co. failed in Glas- 
 gow. In the following week some relief seems to 
 have been experienced from the expectation that 
 the suspension of cash payments in America 
 would check the demand for gold, and on the 
 14th of October the reserve of the bank was still 
 above four millions ; but shortly afterwards the 
 money-market was unfavourably affected by the 
 embarrassments of the Borough Bank at Liver-^ 
 pool and of the Western Bank at Glasgow. The 
 week succeeding these events was one of great 
 excitement in commercial circles ; the bank raised 
 the rate of discount to nine per cent, on the 5th 
 of November, and on the 10th of that month to 
 ten per cent. This stopped the drain of gold 
 to the Continent and to America, but several 
 failures occurred in London early in November ; 
 and at Sheffield the house of Naylor, Vickers, 
 and Co. stopped payment ; shortly afterwards 
 the firm of Dennistoun and Co., of Glasgow, 
 
 BB 2 
 
372 
 
 failed for about two millions. A run took place 
 on the Scotch and Irish banks, and the Western 
 Bank and the City of Glasgow Bank stopped pay- 
 ment. Two millions of sovereigns were taken 
 from the bank to meet this run ; the great 
 money-dealing house of Sanderson, Sandeman, 
 and Co. and many other London houses failed ; 
 and notwithstanding large sales of stock by the 
 bank, and the high rate of discount, her reserve 
 and bullion continued to decrease, until, on 
 Wednesday, the llth of November, 1857, the 
 reserve was less than one million. Early on the 
 morning of Thursday funded property to the 
 amount of five hundred thousand pounds was 
 sold by the Scotch and country banks, with the 
 view of drawing gold and notes from the bank ; 
 and one firm is said to have applied for, and 
 to have obtained discounts to the amount of 
 seven hundred and fifty thousand pounds. a Under 
 these circumstances the Government suspended 
 the act of 1844 by a letter to the bank directors, 
 authorizing them to exceed the limit fixed by 
 that act for their issues on securities. 
 
 As the bank raised the rate of discount, the 
 discount houses and the London joint-stock 
 banks continued to increase the rate of interest 
 allowed by them for deposits. 
 
 a This account is taken chiefly from the Economist. 
 

 373 
 
 The rate of discount was raised on the Conti- 
 nent, but not quite to the same extent as in this 
 country; nor, except at Hamburgh and in the 
 north of Europe, has the commercial distress 
 been so great abroad as with us. 
 
 This suspension of the act was not quite so 
 successful in checking the pressure as that of 
 1847. The bank directors exceeded the autho- 
 rised limit of their issues by about two millions, 
 and many failures, including those of two large 
 joint-stock banks, took place after the suspension 
 of the act. 
 
 Of the houses which have failed, those of Mon- 
 teith and Co., Macdonald and Co., Wallace and 
 Co., of Glasgow, had no doubt traded in the most 
 reckless manner, and their assets were nominal ; 
 the joint-stock banks, too, which failed, seem to 
 have been extremely imprudent. But the great 
 houses of Dennistoun and Co., Naylor, Vickers, 
 and Co., Sandeman and Co., profess, apparently 
 with truth, to be able to pay in full ; and the 
 dividends expected in the case of the greater 
 number of the other houses which have failed, 
 are by no means remarkably small. 
 
 The Western and City of Glasgow banks had 
 issued notes to the extent of eight hundred thou- 
 sand pounds, but they held specie for about half 
 
374 
 
 this amount, as did the New York banks for half 
 the amount of the notes issued by them. 
 
 At Hamburgh, where, as we have seen, all the 
 notes are represented by coin, or, in other words, 
 the currency is entirely metallic, the convulsion 
 has been greater than in any other country, and 
 has amounted, perhaps, to a more complete break 
 up of commercial relations than has ever before 
 been witnessed. 
 
 The events of this crisis are full of instruction, 
 and when investigated, as they will be, by a Par- 
 liamentary committee, ought to be sufficient, at 
 last, to settle many of these questions on satis- 
 factory grounds, and we must look forward 
 eagerly to the report of this committee ; mean- 
 while we will consider, very briefly, some of the 
 views which have already been called forth on 
 this occasion. 
 
 Although it is now said by some of the sup- 
 porters of the act of 1844 that there has been 
 great overtrading, there certainly does not ap- 
 pear to have been anything resembling the cul- 
 minating point of one of those cycles of trade 
 described by Lord Overstone ; a some unsound 
 trading must always exist, but there has been no 
 inflation of credit in this country beyond that of 
 
 * Ante, p. 176. 
 
375 
 
 other countries, which could make our prices 
 disproportionately high when compared with 
 theirs, and, on that account, cause an exporta- 
 tion of bullion ; the comparative soundness of our 
 trade has been the common topic, Lord Over- 
 stone has, himself, acknowledged the fact before 
 the Bank Act Committee of 1857, claiming, indeed, 
 a portion, at least, of our prosperity for the act of 
 1844. Nor has there been any expansion of our 
 bank-notes, nor any destruction of our commodi- 
 ties, none of the circumstances hitherto alleged 
 as the causes of a redundant currency have oc- 
 curred on this occasion. Still the supporters of 
 the act of 1844 might apply their theory, they 
 might maintain that the unsatisfactory state of 
 credit in the continental nations, paralysing the 
 power of their currencies, and the same causes 
 in America, aggravated by a great destruction of 
 her paper, had so greatly reduced the circulating 
 medium of those countries, that our currency had 
 become redundant, as compared with theirs, and 
 that it must be reduced before our commercial 
 intercourse with them could be resumed on such 
 terms as would prevent our bullion from leaving 
 us. They may point to the act as partially 
 effecting its object, and they may say that it did 
 not succeed, only from its incompleteness ; had 
 there been a central issuer only, and no Scotch 
 
376 
 
 or country banks issuing notes, the internal drain 
 could not have arisen ; perhaps, without this 
 drain, the panic would not have taken place, and, 
 at any rate, the act has given us a large sum of 
 bullion with which to meet this panic, which, 
 without its guardianship, might have come upon 
 us with empty coffers. 
 
 The supporters of the act do not, however, on 
 the present occasion, make much reference to 
 their theory of the currency, they blame the Go- 
 vernment interference chiefly as altering the 
 value of money. 
 
 Lord Overstone says* that gold is the money of 
 England ; that every man may bring into the 
 country or take out of it what money he pleases ; 
 that we depend upon free trade for our supply of 
 money as well as of provisions ; and he blames 
 the Government for interfering with this free 
 trade in money. He asks, What would be 
 thought of a Government which, when the 
 supply of provisions fell short, undertook to 
 satisfy all demands at a given price ? a course 
 which, he says, is analogous to that which had 
 been taken by the Government with respect to 
 money by their suspension of the act of 1844. 
 Upon this point we must remind the reader, 
 
 a See his speech on the Address. 
 
377 
 
 first, that if we are to consider our money simply 
 as a valuable commodity, we encounter the diffi- 
 culty which we have mentioned as lying in the 
 way of the application of Mr. Ricardo's and 
 Lord Overstone's theory of the currency in the 
 case of a bad harvest ; we have seen that in such 
 a case more rather than less of a valuable commo- 
 dity would seem to be required to circulate our 
 dear corn ; our currency, therefore, in that case 
 could not be redundant ; the money which we 
 exported must, as maintained by Mr. Tooke, be 
 capital ; and if we once allow that money does 
 exist in the country in the shape of capital not 
 affecting prices, there appears to be an end of 
 Lord Overstone's theory. Again, the only objec- 
 tion that can be urged against the course assumed 
 by Lord Overstone to be adopted by a Govern- 
 ment with regard to provisions, is its impracti- 
 cability. The state cannot prevent provisions 
 from rising to their natural price, and any attempt 
 to interfere with the market for them would be 
 absurd as well as impolitic. In the same way 
 no doubt the state cannot prevent the natural 
 distribution of the precious metals throughout the 
 world, in such a manner as to give on the average 
 those prices which will permit a trade between 
 the various nations of the earth on the same 
 terms as if it were conducted by barter ; the 
 
378 
 
 state is powerless over prices as determined by 
 this law; and if the fluctuations in price which 
 occur before and during periods of commercial 
 pressure were due to want of adjustment in the 
 currencies of the different nations of the world, 
 there would be no remedy but to rearrange their 
 currencies ; but the new gold, by showing the 
 small and tardy effect produced upon prices by 
 large additions to the currency, seems to have 
 proved that these great fluctuations in prices 
 must be almost entirely due to the agency of 
 credit ; they, therefore, must apparently be, to 
 some extent at least, within the control of the 
 state ; and as, when confidence is once shaken, 
 their course is most capricious, they are fit 
 objects for the exertion of that control. In those 
 cases in which credit has been unduly expanded 
 in our country, it must, no doubt, be again re- 
 duced, or commercial intercourse cannot be car- 
 ried on by us with our neighbours without a 
 continual export of bullion ; but in those instances 
 in which our credit has received a shock from 
 the loss of our harvest, or from a demand for 
 capital, or from the failure of credit in neighbour- 
 ing states, perhaps we may be able to meet the 
 emergency without a contraction of the ordinary 
 machinery for circulating our commodities, and 
 without endangering the convertibility of our 
 
379 
 
 notes ; and in all cases the contraction of credit 
 might be restrained from going beyond the neces- 
 sary point, a result of which there must always 
 be great danger when once confidence is shaken. 
 
 Lord Overstone does not directly accuse the 
 Government of injustice, but he implies, and 
 many of the supporters of his views directly 
 maintain, that the currency has been depreciated 
 by the suspension of the act, and that great hard- 
 ship has been inflicted both upon the public, who 
 have been prevented from buying commodities at 
 the extremely low prices to which they would 
 have been reduced if the act had not been sus- 
 pended ; and upon the lenders of money, who 
 have been deprived of the twenty or thirty per 
 cent, interest which they would have received. 21 
 
 In reply to this charge, the Chancellor of the 
 Exchequer maintained that our notes still ex- 
 changed for gold, and were, therefore, not depre- 
 ciated in the common sense of the word ; and 
 that if the whole currency, both notes and gold, 
 were redundant as compared with the currencies 
 of other countries, that was a circumstance which 
 was incident to the fluctuations of the precious 
 metals in different countries, and could not be 
 avoided. This view is, we see, similar to that 
 
 * This is the favourite view of the Times and Saturday 
 Review. 
 
380 
 
 taken by Mr. Tooke, and is, perhaps, the one 
 most generally entertained upon this subject ; 
 but it does not seem quite to meet the point 
 made by the supporters of the act. They com- 
 plain that the currency has not been allowed to 
 take its natural value ; they say that the cur- 
 rency, though not depreciated as compared with 
 gold, was of less value than it would have been if 
 gold alone had formed our circulating medium, 
 because the gold currency would have been re- 
 duced in extent, and each piece would have be- 
 come more valuable ; the extent of the currency 
 remained greater than it would have been if there 
 had been no paper. The case is analogous to 
 that which we considered a,s probably occurring 
 during the revolutionary war with France ; a part 
 of the gold of the world was then, we supposed, 8 
 hoarded, and the remainder became more valuable, 
 while our notes continued to represent gold of the 
 former value. In like manner, our notes, since the 
 suspension of the Bank Act of 1844, represent gold 
 of the ordinary value as compared with com- 
 modities, while gold, if our currency had been 
 purely metallic, would have become locally 
 scarce here, and its value greater than usual. 
 The case is shortly this, our money now repre- 
 
 * Ante, p. 146. 
 
381 
 
 sents the average value of gold, while, if our cur- 
 rency had been metallic, it must have represented 
 the accidental, temporary, and local value of that 
 metal. If, therefore, it be understood that the 
 state, in choosing gold as the standard, bound it- 
 self to allow the effect on prices of all temporary 
 alterations in its value, and the advocates of this 
 doctrine can show, that in the case of a purely 
 metallic currency there would be no hoards to 
 meet such accidental demands, and if they can 
 refute the position of Mr. Tooke and Mr. Fullar- 
 ton, that the notes issued on such occasions are 
 for large amounts, never come into comparison 
 with commodities, and are incapable of affecting 
 prices in a country whose retail transactions are 
 carried on by gold ; they may say, with truth, 
 that the currency has been depreciated by the 
 suspension of the act ; and if, after witnessing the 
 slight result produced by the addition of twenty 
 millions of gold to our currency, we allow that 
 the effect produced by the addition of two mil- 
 lions of notes on the late occasion, could be sen- 
 sibly felt, we must, to meet their argument, 
 fall back upon general principles. What is the 
 object of the institution of a national measure of 
 value ? Evidently to facilitate the distribution of 
 commodities, but in the same manner as they 
 would, though with more difficulty, be distributed 
 
382 
 
 by barter, not to make any change in that distri- 
 bution. It is, then, the duty of the Government, 
 if it be possible, to keep the measure of value in 
 such a state as will enable it to perform this duty 
 efficiently, and they are equally justified in taking 
 steps to secure this end, whether we are threat- 
 ened with local and temporary variations in the 
 value of gold, or by the more permanent changes 
 which take place from alterations in the supply 
 of it afforded by the mines. 
 
 As to the alleged violent interference with the 
 high rate of interest, we must consider that we 
 have seen that capitalists deal in capital, not in 
 currency, that they cannot show that on this oc- 
 casion there was a sudden scarcity of capital, or a 
 great demand for it ; what was wanted was credit, 
 in this any one who has the means of restoring 
 or disturbing confidence may be a dealer, and the 
 propriety of the conduct of Government must be 
 estimated by its object, and not by its conse- 
 quences to the lenders of money. 
 
 The position of Hamburgh during this crisis 
 seems full of warning to us. The currency of 
 that city is, in fact, entirely metallic, for though 
 paper is used there, an amount of silver equal to 
 it is kept in the bank. Yet this circumstance 
 has proved no security against speculative trad- 
 ing, and the commercial distress in that city has 
 
383 
 
 not only been greater than in any other place 
 greater even than in America, but it seems less 
 susceptible of alleviation. The want of some 
 great body like our bank, whose credit might be 
 lent to those who really deserved it, seems to be 
 the cause of the sluggishness with which com- 
 merce rights itself in Hamburgh ; and we may 
 well hesitate before we, by insisting upon the act 
 of 1844 in all its rigour, reduce our system of cir- 
 culation to the state of rigidity exhibited by that 
 of Hamburgh. 
 
 These events at Hamburgh seem to show the 
 very great importance of Mr. Mill's observation, 
 that by judicious issues of notes a currency may 
 be made to form a much more steady measure of 
 value than one which is purely metallic ; and 
 notwithstanding Lord Overstone's position, that 
 to attempt to limit the fluctuations of a currency 
 within narrower bounds than those of a metallic 
 currency, is " an empirical procedure, not founded 
 upon sound principles, which must tend to the 
 most dangerous results,"* we shall, perhaps, be 
 inclined to think that the trial must be made. 
 Probably, a mercantile system, when much credit 
 has entered into it, cannot be made to bend to 
 the variations which a metallic currency would 
 
 a Ante, p. 178. 
 
384 
 
 undergo in rude times. As society advances, 
 more delicate m^cjiinery is perhaps required to 
 carry on its transactions. A purely metallic cur- 
 rency may now be too clumsy an engine, and 
 though a substitute for it which is more perfect 
 may also be more dangerous in incompetent 
 hands, we should suppose that the necessary skill 
 could be found, that the knowledge of the com- 
 munity would grow with its wants. 
 
 And here we must notice a mistake into which 
 Lord Grey and Mr. Gladstone, and other eminent 
 supporters of Lord Overstone's theory, seem to 
 fall, when they blame the tenacity with which 
 " minds of great intelligence" adhere to the belief 
 that the bank of England ought to afford relief 
 to the mercantile interest during a pressure. 
 They seem to suppose that these persons demand 
 an issue of paper money and a depreciation of the 
 currency, while, in fact, they ask only that the 
 bank should interfere to restore credit to its or- 
 dinary state. This view is evidently a result of 
 that part of Lord Overstone's theory which treats 
 bank-notes as money. 
 
 Notwithstanding the small extent of the issues 
 of the American banks, Lord Overstone seems 
 to attribute the panic in that country to a vicious 
 system of currency, as well as of trade and bank- 
 
385 
 
 ing; a and the American currency is alluded to by 
 almost all the supporters of the act as the climax 
 of what is wrong. Now, upon this point we 
 must remark that if reference be made to the 
 American currency to show the necessary evils 
 of an unregulated currency of convertible notes, 
 the example of France may be quoted to prove 
 exactly the reverse. Is it certain that on this 
 occasion, considering the usual style of American 
 trading, the convulsion has been more severe 
 in that country than with us ? France has cer- 
 tainly at present, at least, suffered much less than 
 ourselves ; and Hamburgh, where the currency 
 is metallic, we have seen, has suffered more than 
 any other country. Does not all this go to prove 
 that credit, and not currency, is the regulator on 
 these occasions ? Lord Overstone also blames 
 the local issues of Scotland and Ireland, for 
 diminishing the power of the monetary system 
 established by the act of 1844 to meet the pres- 
 sure, and for causing its suspension ; and he points 
 out the system of receiving money at call at high 
 rates of interest by the money-dealers and joint- 
 stock banks as a modern practice, which has 
 given rise to a state of affairs which cannot bear 
 the slightest check without ruin. Lord Over- 
 
 * Speech on the Address. 
 
 CC 
 
386 
 
 stone does not say that the Government were 
 wrong in suspending the act ; but he seems to 
 regret that it had not been enforced until this 
 system had been shattered. 
 
 We may, perhaps, doubt whether it would 
 avail to interfere with the Scotch system of bank- 
 ing in the hope of making the machinery of the 
 act of 1844 perfect, while the banks oi the United 
 States, which must always exercise a more 
 powerful influence on our currency, are quite 
 beyond our control; nor is it probable that any 
 practical check could be given to the new system 
 of collecting deposits by the money-dealers and 
 joint-stock banks : the system is thought by 
 many persons to be beneficial, as directing a large 
 amount of capital to mercantile purposes in times 
 of pressure; it has probably arisen from the 
 wants of society, and is, therefore, immutable. 
 
 With respect to the act of 1844, we have seen 
 that the occurrences in Hamburgh strike a fatal 
 blow at the principle on which it is founded ; for 
 they show that even if the act secured us a 
 currency varying as a purely metallic one, it 
 would not be adapted to our wants. On the 
 present^ occasion no blame attaches to the con- 
 duct of the bank directors. The effect of the act 
 has been fairly tried, and it has apparently been 
 
387 
 
 found incompatible with the system of business 
 which now prevails. There appears but little 
 probability of changing our present system 
 of business for one which would appear to the 
 partizans of the act calculated to give it more 
 effect. Its influence in frightening people into 
 prudence must in a great degree be lost, and 
 it may be considered virtually repealed. The 
 attempt to introduce a suspending power will 
 more completely produce this result, and will be 
 environed with difficulties. If the dispensing 
 power be given to the Government, the sus- 
 pension of the act is facilitated, and a most 
 dangerous power is placed in the hands of the 
 minister ; if it be given to the bank directors, the 
 act is in effect indirectly repealed, and had better 
 be removed from the statute-book ; if it be given, 
 as sometimes proposed, to a body of commis- 
 sioners, how are they to prove more efficient, 
 more honest, or more independent than the bank 
 directors ? and they are not likely to be more 
 capable ; for even assuming the great point that 
 proper men are originally appointed, they would 
 be required to act only at long intervals ; and it 
 is likely that, when the time of trial came, they 
 would not be found possessed of the consummate 
 knowledge, both practical and theoretical, and of 
 
 c c 2 
 
388 
 
 the judgment requisite for the discharge of the 
 office. We must remember that a crisis presents 
 peculiar features on every occasion, and that the 
 remedy, successful in one case, may be useless in 
 another. 
 
 Again, the exercise of a dispensing power of 
 any kind at a given period must be most invi- 
 dious. Those houses that fall just before the 
 relaxation will always feel that they are sacrificed ; 
 and if that power is to be exercised only when the 
 exchanges are favourable, it will be necessary 
 to define what is meant by that term, whether 
 the power may be exercised when gold flows 
 in under a high rate of interest, or only when 
 interest is at its natural rate. On former oc- 
 casions this point has not occurred, because, so 
 soon as our over-speculation was at an end, or we 
 had paid for our corn, there was a natural ten- 
 dency to an influx of gold in the usual course of 
 business ; but now there seems a probability of 
 the drain of gold being renewed so soon as the 
 pressure by the bank is taken of. We may 
 remember that the most severe drain which we 
 ever experienced occurred two years after the 
 suspension of cash payments by the American 
 banks in 1837. The act appears to be inopera- 
 tive in ordinary times, and to fail when the hour 
 of trial comes ; and it therefore seems hardly 
 
389 
 
 possible to embody in it a dispensing power with- 
 out altogether stultifying it ; and upon the whole 
 we must, we fear, for the future trust to un- 
 fettered prudence as a preservative against mis- 
 fortunes such as we have lately experienced. 
 
 Recent events have, we trust, afforded a use- 
 ful hint upon a very important subject ; they seem 
 to have dispelled a portion of the vague expecta- 
 tions of increasing and uninterrupted prosperity, 
 with which the announcement of the gold disco- 
 veries was received. The great increase in the 
 production of gold is now suspected of being the 
 hidden source of the late pressure. " On the 
 present occasion," says the Economist, " the pres- 
 sure cannot be attributed to any of the ordinary 
 calamities which give rise to such events, its ex- 
 planation must be found in the operation of some 
 powerful general cause, fostering for a time a 
 profound belief in the rapid expansion of the in- 
 comes and resources, not merely of a single 
 country, but of all the trading countries of Europe 
 and America, and as a direct consequence of this 
 belief, the strong disposition to calculate on fresh 
 markets, rapid consumption, and, therefore, on 
 high and rising prices. The new gold has sup- 
 ported the commerce of this country and of 
 France through severe trials ; but, in the midst of 
 highly-organized systems of credit, a support long 
 
390 
 
 continued becomes a stimulus of the most potent 
 order, and, laying aside for the moment all se- 
 condary causes? and speaking in the largest lan- 
 guage of generalisation, the deeper causes of the 
 recent pressure are to be sought in the breaking 
 down at last of the towering fabric of expecta- 
 tions and speculations, built up on the broad and 
 solid foundation of the annual influx of twenty 
 millions sterling of treasure."* 
 
 We hope that what has now occurred will 
 prove the inestimable advantage to all classes of 
 a steady measure of value, and we beg to remind 
 our rulers, who are now ready to enter into a 
 course of doubtful, perhaps hazardous legislation, 
 for the purpose of preserving the mercantile por- 
 tion of the community from a recurrence of these 
 calamities, that there is another section of the 
 society at this time menaced with loss of pro- 
 perty through a defect in the currency, who can 
 be certainly and easily helped, and who have a 
 better claim to assistance, for they have been 
 guilty of no overtrading or imprudence of any 
 kind, and they ask for nothing but protection to 
 their property from the consequences of an acci- 
 dental change in the measure by which the state 
 has decreed that it should be estimated. 
 
 * Economist, Dec. 5th, 1857. See also Mr. Disraeli's 
 speeeh on the re-appointment of the Bank Act Committee. 
 
INDEX. 
 
 Alison, Sir A., estimates the depreciation during the restriction on 
 cash payments at 75 per cent., 159 his plan for a joint circu- 
 lation of convertible and inconvertible notes, 315. 
 
 America, estimated depreciation of her paper in 1780, Jefferson, 
 64 suspension of cash payments by the banks in 1837, 172, 
 200, 270 means taken to make the currency more secure, 
 Bowen, 302 great addition to the metallic currency of, 303 
 nature of her banking system exposes us to drains of gold, 302 
 recent extraordinary crisis in, 303. 
 
 Arbutknot, his correction of Mr. Tooke's statistics, 263 his argu- 
 ments to prove that notes in the till of the bank affect prices, 
 265. 
 
 Assignats, their effect on the value of silver, 64. 
 
 Attwood, estimates the depreciation during the restriction of cash 
 payments at 45 per cent., 157 his theory that taxation requires 
 an increase of currency, 158 that the difference between the 
 mint and market prices of gold does not measure the depreciation 
 of the currency, 159 that an increase of money gives employ- 
 ment to the labouring classes, 305. 
 
 Babbage, unequal effects of a fall in the value of money, 305. 
 
 Bailey, increase of money gives a mental stimulus to production, 
 308 interferes with the distribution of property, and is not be- 
 neficial to the community, 310. 
 
 Bank of England, established in 1694, 36 issues so many notes 
 that they are returned for bullion, Smith, 50 its notes at a dis- 
 count during the recoinage in 1696, 54 suspends cash pay- 
 ments in 1797, 75 mode of conducting its discounts during 
 the suspension, 122 resumes*cash payments in 1819, 142 re- 
 solution declaring that it had no power over the exchanges, 143, 
 169 its mode of conducting business in 1832, 168 its charter 
 renewed in 1832, 171 supposed to possess unlimited power 
 over prices, 173 did not cause the export of bullion in 1837, 
 Palmer, 173 cannot adhere to the conduct necessary to secure 
 the convertibility of the notes, Lord Overstone, 175 does not 
 cause the circulation to expand and contract as if metallic, Lord 
 
392 
 
 Overstone, 178 has it the power so to do? 180 borrows two 
 millions-and-a-half from France, 187 was in danger of sus- 
 pending specie payments in 1839, Lord Overstone, 187 applies 
 for permission to issue notes in place of the lapsed issues of the 
 private banks, 259 power over the rate of interest, 198, 267. 
 
 Bankers, Country, failures ampng, in 1793, 72 must regulate their 
 issues by those of the bank of England, Thornton, 97 Ri- 
 cardo, 129 Lord Overstone and Arbuthnot, contra, 188, 264 
 allowed to continue the issue of small notes, 162 numbers of 
 stopped in the panic of 1825, 162 deny all power to regulate 
 their issues according to their own will, 171. 
 
 Bank-notes, introduction of tends to lower the value of gold, 39 
 plans for increasing the currency by means of, 41 drive gold 
 out of circulation by filling the channel too full, Smith, 48 by 
 raising the price of goods and lowering that of coin, Thornton, 
 90 Ricardo, 111 Lord Overstone, 181, 277 early instances 
 of supposed depreciation when convertible, 72 are forms of 
 credit, but have great effect on prices, Thornton, 86 are money 
 and entirely regulate prices, Lord Overstone, 195 Norman, 197 
 Torrens, 261 are mere forms of credit without influence on 
 prices as currency, Tooke, 207 Fullarton, 213 Chevalier, 298 
 how large issues of raise prices, Thornton, 88 Ricardo, 126 
 Bullion Report, 119 how they differ from paper money, 
 Thornton, 100 for very small sums in England, 37 in Ireland, 
 102 attain their highest amount in 1817, 141 stimulate spe- 
 culation, Lord Overstone, 177 Mill, 246 can they circulate 
 along with gold if for sums of the same amount, 182 conver- 
 tible cannot.be depreciated, Smith, 52 Bullion Report, 119 
 Tooke, 209- Wilson, 223 may render)) the whole currency re- 
 dundant, Ricardo, 111, 128 Norman, 169 Lord Overstone, 
 181, 195 Macculloch, 250 Torrens, 260 if for large amounts 
 circulate amongst the dealers only, Smith, 50 inconvertible, 
 causes and limit of their value, 79, 82 form the basis of the 
 currency, 83 were decidedly of less value than gold in 1811, 
 136. 
 
 Bank Act of 1844, 202 will cause a severe pressure, Tooke, 212 
 causes drains of gold to fall upon the circulation instead of the 
 hoards, Fullarton, 217 suspended in 1847, 229 mitigated the 
 crisis of 1847 and preserved the convertibility of the notes, Lord 
 Overstone, 231 approved by the bank directors, 234 general 
 opinion on in 1847, 233 produced a panic by fixing a rigid limit 
 to the power of the bank to discount, 233, 294 aggravated by 
 the pressure in 1847, Lords' committee, 240 approved by the 
 Commons' committee, 241 checks the power of bankers to use 
 their credit and so discourages speculation, Mill, 245 prevents 
 the bank from restoring confidence after a convulsion, Mill, 247 
 Torrens, contra, 262 and is not applicable to drains caused by 
 a bad harvest, Mill, 248 Torrens, contra, 26.1 considered with- 
 out reference to Lord Overstone's theory, 293 tends to pro- 
 
393 
 
 mote the interference of the state in monetary affairs, 295 sus- 
 pended for the second time in 1857, 372. 
 
 Baring, Sir Francis, describes the nature of the drain of bullion in 
 1797, 81 his theory that prices depend upon the whole circu- 
 lating medium and not on the value of gold, 84. 
 
 Berlin and Milan Decrees, their effect on trade and the exchanges, 
 107. 
 
 Bills of Exchange, their nature, 17 circulate commodities, Thorn- 
 ton, 86 are not money, Lord Overstone, 196. 
 
 Blake, his theory that an extension of the currency by means of 
 notes must give rise to a difference between the mint and market 
 price of gold bullion, 127. 
 
 Bosanquet, why the currency was not depreciated during the re- 
 striction on cash payments, 126 his definition of the standard 
 of value at that time, 129. 
 
 Bowen, an American economist, his views of Lord Overstone's 
 theories, 299 calls attention to the illustration afforded by 
 events in California of the theory of the connexion between 
 capital, money, and the rate of interest, 301 his views of the 
 plans for improving the paper currency of America, 302 of the 
 advantages of a progressive depreciation in the value of money, 
 361. 
 
 Boyd, his opinion that the issues of the bank after the restriction 
 were the cause of the high prices, 82 that bank-notes were 
 then the basis of the whole circulation, 83. 
 
 Bullion, law of its distribution, Smith, 45 Ricardo, 110 set apart 
 for occasional demands and for international payments, Smith, 
 45 Tooke, 207 Wilson, 221 quantity of in the country re- 
 gulates prices, Ricardo, 113, 141 market price of, raised by the 
 issue of notes, Thornton, 92 market price of, lowered by the 
 issue of convertible notes, Ricardo, 128 its value kept uniform 
 by hoards, Fullarton, 218 exported to assist the credit of other 
 countries, 258, 321. 
 
 Bullion Report, gold not scarce during the restriction on cash pay- 
 ments, 116 mode in which inconvertible notes depreciate the 
 currency, 119 convertible notes cannot depreciate it, 119 
 does not adopt Mr. Ricardo's view that nothing but a redun- 
 dancy of the currency causes an export of bullion, 121. 
 
 Capital, loanable, distinct from money, Smith, 56, 235 importance 
 of this distinction, 239- 
 
 Cash Payments, suspension of, by the bank of England, 75 did 
 not check business with other countries, 153 resumption of in 
 1819, 142 suspension of in America, 269, 304 in France, 254. 
 
 Castlereagh, Lord, his definition of the standard of value during 
 the suspension of cash payments, 131 if the currency had 
 varied with the exchanges the value of all property would have 
 been uncertain, 135. 
 
 Chapman, his evidence before the committee in 1857, 278 his 
 
394 
 
 statement as to the power of individual capitalists to create a 
 pressure for money by withdrawing notes, 279 proposes, instead 
 of the act of 1844, to fix the rate of interest in proportion to the 
 efflux of bullion, 279 his views of the effect of a suspension of 
 cash payments, 280. 
 
 Chevalier , M. Michel, considers that gold had become dear during 
 the revolutionary war with France, 300 agrees to a great ex- 
 tent with Mr. Tooke, 299 agrees with Dr. Smith that the in- 
 crease of money from the American mines did not add to the 
 prosperity of the world, 300 considers that a fall in the value 
 of gold is imminent, 354 that it will be progressive, and pro- 
 ceed by leaps, 354 that silver is the monetary unit of France, 
 354 that a continuous fall in the value of money may cause a 
 dangerous revolution in society, 356. 
 
 China, supposed causes of the drain of silver to, 335. 
 
 Commercial Distress in 1720, 68 in 1793, 70 how far caused by 
 the banks, 72 causes of in 1810, 130 in 1813 and two fol- 
 lowing years, 137 panic of 1825, 162 causes of it independent 
 of the currency, 164 crisis of 1847, 227 said to be caused by 
 a diminution of available capital, 230 crisis of 1857, 370. 
 
 Colonial Produce, high price of, on the continent during the war 
 with France, 151. 
 
 Credit, introduction of the system of, 33 economises the use of 
 coin, 39 not so prevalent on the continent, 61 described by 
 Thornton, 85 affects prices only through the currency, Thorn- 
 ton, 87 Lord Overstone, 198 how it differs from capital, 
 Ricardo, 144 a great purchasing power, and affects prices 
 directly by itself, Tooke, 209 Mill, 243 one of the most 
 powerful regulators of the rate of interest, 337. 
 
 Currency, reformation of, in the reign of William the Third, 23 
 cannot be depreciated by the issue of convertible notes, Smith, 
 52 Bullion Report, 120 Bosanquet, 125 Tooke, 209 Wil- 
 son, 223 contraction of in 1797, 79 is contracted or expanded 
 by changes in the state of credit, Thornton, 87 Lord Over- 
 stone, 198 may be depreciated by convertible notes, Thornton, 
 90 Ricardo, 111 Lord Overstone, 195, 277 Norman, 169, 
 269 cannot be extended by the country banks alone, Thornton, 
 97 Ricardo, 115 contra, Lord Overstone and Arbuthnot, 188, 
 264 not seriously increased during the suspension of cash pay- 
 ments, Rose, 132 extent of at the time of the resumption of 
 cash payments in 1819, 143 can it be diminished when the 
 harvest is bad, Ricardo, 114 Wilson, 221 a regulator of the 
 rate of interest and of the price of securities, 236 cannot be 
 permanently extended by allowing the bank to issue more notes 
 on securities, 281 variations in not the cause of marked 
 changes of prices, 291. 
 
 Currency, depreciation of, its effect upon industry, Jacob, 8 
 Hume, 58 a most unequal and oppressive tax, Jefferson, 64 
 ruinous policy of allowing, Huskisson, 122 effects on the 
 
395 
 
 working classes during the restriction on cash payments, 1 54 
 sets labour in motion, Attwood, 305 unequal in its effects, 
 Babbage, 305 gives a stimulus to the mental powers employed 
 in production, Bailey, 308 is injurious to the society, Bailey, 
 309 assists the industrious classes by alleviating fixed burthens, 
 Macculloch, 312 does not promote general prosperity, Mill, 
 313 may produce a dangerous revolution in society, Chevalier, 
 356 is a failure in one of the most important institutions in ci- 
 vilized society, 357 particularly injurious in this country, 367. 
 
 Drain of Gold in 1797, 75 -in 1825, 162 in 1830, 167 in 1837, 
 172 in 1839, 187 in 1847, 227 in 1856, 258 in 1857, 370 
 drains of gold are paid out of the circulation, and can be 
 checked only by contracting the currency, Ricardo, 111 Lord 
 Overstone, 175 are not paid out of the currency, but out of 
 hoards, Tooke, 207 Fullarton, 216 Wilson, 221 are paid 
 sometimes out of the currency and sometimes out of hoards, 
 Mill, 245 are caused by transfers of capital set in motion by 
 changes in the rate of interest, 237 take place to support the 
 credit of foreign countries, 258 cure themselves by saturating 
 foreign countries with gold, Fullarton, 217 by raising the rate 
 of interest at home, Hubbard, 226 Mill, 248. 
 
 Exchanges, meaning of the term, 17 are a measure of the depre- 
 ciation of the currency, 23. 
 
 Exchequer Bills issued as substitutes for money during the recoin- 
 age in the reign of William the Third, 55 to support com- 
 mercial credit in 1793, Thornton, 87. 
 
 Foster, his account of the depreciation in Ireland, 101. 
 
 Fullarton, overissues of convertible notes are not possible, 213 
 bank-notes are not money, but forms of credit, 213 inter- 
 national balances and sudden demands paid out of hoards, and 
 not out of the circulation, 216 hoards keep the value of bullion 
 constant, 218 difficulties of this view, 219. 
 
 Gold, disappearance of from the circulation in the reign of James 
 the First, 12 during the restriction on cash payments, 132 
 becomes practically the standard of value towards the end of the 
 eighteenth century, 30 legally so in 1816, 30 fall in the mar- 
 ket price of in 1804, 104 did not rise in real price during the 
 restriction, Bullion Report, 116 Chevalier contra, 300 rapid 
 rise in the market price of, on the return of Napoleon from 
 Elba, 139 causes of the fall in its price in 1815, 138. 
 
 Gold of California and Australia, discovered, 256 its present 
 effect on the social economy, 323 estimate of its amount 
 and distribution, Tooke, 325 has not affected prices, Tooke, 
 326 has itself caused increased production as capital, Tooke, 
 328 is not procured at less cost, Tooke, 331 has not altered 
 
396 
 
 the relative value of silver, Tooke, 335 apparent error in these 
 views, 335 has raised the price of silver, Economist, 347 re- 
 ceived but little attention during the enquiry into the Bank Act, 
 348 a probable cause of the present high rate of interest, 350 
 demonetised by Holland and Germany, 352 its dangerous 
 effects on social economy, Chevalier, 355 is it to be allowed to 
 interfere with the distribution of property in this country, 357. 
 
 Harvest, deficient, makes the existing currency redundant, Ricardo, 
 113 requires more currency, Wilson, 221. 
 
 Hoards, their office in supplying sudden demands for gold, Ful- 
 larton, 216 Mill, 248 in preserving steadiness in the value of 
 gold, Fullarton, 218 our bank reserves not similar to, Torrens, 
 262. 
 
 Hubbard, rejects Lord Overstone's theory of the dependence of 
 prices on the extent of the currency, 224 drains cure them- 
 selves by the rise which takes place in the rate of interest as 
 available capital, in the shape of bullion, leaves the country, 226 
 estimates that of twenty millions which we had to pay in 1847 
 only six millions were paid in gold, 242. 
 
 Hume, his theory that money while increasing promotes industry, 
 58 and lowers the rate of interest, 60. 
 
 Huskisson, his account of the ruinous effects of a continued de- 
 preciation of the currency, 122. 
 
 Interest, rate of, depends upon the amount of loanable capital, 
 Smith, 57 rises with the increase of money, Hume, 60 
 Ricardo, 115 began to fall about 1823, 162 effect of a rise of, 
 in stopping a drain of gold, 198, 235 its regulators, 235 
 raised by scarcity of money or of capital, or by a diminution of 
 confidence, 236 by the conversion of floating into fixed capital, 
 237 power of the bank of England over, 199, 267, 269, 293. 
 
 Jefferson, the depreciation of the currency a most unequal, and, 
 therefore, a most oppressive tax, 64. 
 
 King, Lord, requires his tenants to pay in gold, 136. 
 
 Labouring Classes, suffered from the progressive fall in the value of 
 money in the time of Elizabeth, 9 in the reign of William the 
 Third, 32 during the suspension of cash payments, 154 a fall 
 in the value of money injurious to, Huskisson, 122 Babbage, 
 305 Bailey, 310 Chevalier, 356 beneficial to, Attwood, 305 
 Macculloch, 312. 
 
 Macculloch, considers money, when the coinage is free, a valuable 
 commodity, 249 supports Lord Overstone's theory of the cur- 
 rency, 250 considers tfrat a depreciation of the currency 
 benefits the country, because its welfare is estimated by that of 
 the industrious classes who wish to borrow money, 3J2. 
 
397 
 
 Mill, prices depend on the quantity of money actually employed, 
 243 credit is a great purchasing power, and exercises a great 
 influence over price, 243 money flows into and out of a country 
 to adjust international balances, but all movements of bullion 
 are not of this nature, 244 banks of issue can promote, though 
 they cannot originate speculation, 244 the act of 1844. prevents 
 the bank from restoring confidence when the convulsion is 
 passed, 247 and is not applicable to the case of a foreign 
 subsidy or a bad harvest, 248 supposes that silver goes to the 
 East because the productive power of that part of the world is 
 increased, 348. 
 
 Mini Price, explanation of the term, 15 a measure of the depre- 
 ciation of the currency, 16. 
 
 Money, Metallic, does its value depend upon the quantity of metal 
 or upon the number of pieces, 24 Smith, 45 Ricardo, 114 
 a valuable commodity, Smith, 44 leaves the country because 
 the channel of circulation is too full, Smith, 47 because its 
 value is lowered by an expansion of the currency, Thornton, 
 90 Ricardo, 111 Lord Overstone, 181, 195, 277 a sign of 
 value, Thornton, 86 Norman, 201 Torrens, 261 when no 
 restriction on the coinage, a valuable commodity, Macculloch, 
 249. 
 
 Money, see Currency. 
 
 Norman, the whole of the currency may be depeciated as compared 
 with commodities by the issue of notes, 170 bank-notes are 
 money, 197 money a sign of value, 201 panics act on prices 
 only through the currency, 198 estimates the depreciation of 
 American notes in 1837 at 10 per cent., 200, 269. 
 
 Overstone, Lord, his cycle of trade, 1 76 the currency should vary 
 as if metallic, 176 the central issuer should be strengthened 
 and the banking and issue departments of the bank separated, 
 178 the rule for the management of the currency ought to be 
 applicable in cases of foreign loans, bad harvests, &c., 187 the 
 issues of the country banks do not depend upon those of the 
 bank of England, 188 'qualifies his views as to the power 
 of banks on prices, 189, 271 his theory identical with that of 
 Mr. Ricardo, 193 he maintains that bank-notes are money, 
 196 panics act on prices through the currency, 198 the act of 
 1844 mitigated the crisis of 1847, 231 the panic and not the 
 act made money scarce, 233 notes in the reserve of bankers 
 affect prices, 233, 273 a rise in the price of securities may be 
 caused by the currency though the prices of commodities are 
 not affected, 272 our gold money small change, and has no 
 influence over prices, 274 in 1825 the banks extended the 
 currency and originated the speculation, 275 takes a very 
 high tone in his evidence before the committee, 276 com- 
 
398 
 
 parison of his theory with that of Mr. Tooke, 283 reception 
 of his views in foreign countries, 297. 
 
 Palmer, the drain of gold in 1837 was caused by foreign loans, 173. 
 
 Panic of 1825, 162 of 1847, 227 of 1857, 370. 
 
 Paper Money of America, France, and Russia, 63 how it differs 
 from bank-notes, Thornton, 100. 
 
 Pee/, importance attached by him to variations in the measure of 
 value, 201. 
 
 Poor Laws, originated during the increase of money in the time of 
 Elizabeth, 9 extended during the depreciation of the currency 
 after the suspension of cash payments, 154. 
 
 Prices, do they depend upon the quantity of metal in the coin or 
 the extent of the currency, 3 views of Mr. Locke and Mr. Ri- 
 cardo, 24 determined by the value of gold, Smith 45 Tooke, 
 208 by the extent of the currency, Thornton, 86 Ricardo, 
 113 Norman, 197 Lord Overstone, 195, 272 by the action of 
 credit on the currency, Thornton, 87 Lord Overstone, and 
 Mr. Norman, 198 depend upon the value of gold, Tooke, 208 
 depend upon the money actually exchanged for commodities, 
 only, Mill, 243 depend chiefly on credit, Tooke, 209 Mill, 
 243 of commodities not affected while those of securities are, 
 Lord Overstone, 271. 
 
 Reserves, in the bank act on prices, Lord Overstone, 233, 273 
 Arbuthuot, 265 do not acton prices, Mill, 243 Wilson, 221. 
 
 Ricardo, view of the distribution of the precious metals, 110, 141 
 coin is never exported unless it has become cheap, 112 a bad 
 harvest renders the currency redundant, 113 all the bullion in 
 the country is money and influences prices, 113 his theory re- 
 quires the value of money to depend upon the supply of it without 
 reference to its intrinsic value, 114 the rate of interest lowered 
 while money is becoming more abundant, 115 his answer to 
 Mr. Bosanquet, 125 his theory that an extension of the cur- 
 rency by means of notes, depreciates the value of gold bullion 
 as well as gold coin, 127 his explanation of the difference 
 between capital and credit, 144. 
 
 Rose, his estimate of the extent of the currency during the sus- 
 pension of cash payments, 132. 
 
 Scrope, his opinion of the view taken of money by the parties to a 
 contract, 311 proposes a tabular standard, 311. 
 
 Silver, ceased to be the standard of value practically in the latter 
 part of the 18th century, 30 by law in 1816, 30 its export to 
 the East a proof of the fall in the value of gold, 341. 
 
 Smith, Dr., commodities and not money form the wealth of a 
 nation, 43 metallic money is a valuable commodity, 44 bullion 
 set apart for international payments, 45 money exported when 
 the channel of circulation is too full, 47 notes take the place 
 
399 
 
 of gold, 48 circulation between dealers and between dealers 
 and consumers, 50 convertible notes connot be depreciated, 
 52 a loan of money is really a loan of capital, 56 rate of 
 interest depends upon the amount of loanable capital, 57- 
 
 louth Sea Scheme, 68. 
 
 Standard of value, in England, silver until the reign of Edward the 
 Third, 1 1 both silver and gold until the reign of Charles the 
 Second, 14 silver until changed for gold in 1816, 30 in 
 France, practically both gold and silver, but silver the monetary 
 unit, Chevalier, 354 evil of a falling, Huskisson, 122 Che- 
 valier, 355 tabular proposed by Scrope, 311 is a necessary 
 institution of society, which cannot derive advantage from its 
 imperfection, 357. 
 
 Thornton, bank-notes are a form of credit, 86 metallic money 
 is a sign of value, 86 prices depend upon the amount of 
 the currency actively employed, 88 the crisis of 1793 re- 
 lieved by a loan of credit, not of money, 87 how a large 
 issue of notes raises prices, 88 an expansion of the currency 
 by increase of notes drives coin abroad by making it cheap, 
 90 raises the market price of bullion, 92 bullion is ex- 
 ported as capital to pay for corn when the harvest is bad, 93 
 a sudden reduction of bank-notes will injure credit and in- 
 dustry, and prevent the return of the gold, 94 if notes were 
 abolished other forms of credit would take their place, 96 the 
 country banks must follow the bank of England, 97 the effect 
 of increasing money in stimulating industry soon exhausted, 99 
 maintains that money had fallen in value since 1800, 131. 
 
 Tooke, his estimate of the amount of gold in the country in 1797, 
 133 prices began to fall in 1814, before the reduction in bank 
 paper, 138 great difference in price of colonial produce here 
 and on the continent during the war, 151 his change of 
 opinion, 184 no connexion between the issues of the bank 
 and prices, 184 caution as to this point, 185 bullion exported 
 forms no part of the currency, 207 bank-notes are mere forms 
 of credit, 207 prices depend upon the amount of revenue spent 
 valued in gold, 208 bank of England has no power to extend 
 her issues at will, nor to give rise to speculation, 208 banks of 
 issue likely to foment speculation by rash advances of capital, 
 210 the act of 1844 throws the drain upon a part only of the 
 bank reserve. 211 predicts the suspension of the act, 212 his 
 views on the effect of the new gold, 324 estimate of its dis- 
 tribution, 325 twenty millions added to our currency, 326 
 prices have not risen, 327 the gold has created fresh com- 
 modities and is an addition to our capital, 328 the cost of 
 obtaining it not diminished, 331 effect of the silver mines of 
 America on prices, 333 no change in the relative value of 
 silver and gold from the abundance of the latter metal, and the 
 price of silver has risen because of a demand in the East, 335. 
 
400 
 
 Torrens, confines the application of the currency theory to the 
 case in which the currency is redundant from a destruction of 
 commodities, 260 maintains, in opposition to Mr. Mill, that 
 the act of 1 844 enables the bank to restore confidence after a 
 convulsion, 262. 
 
 Wilson, only the money in the hands of the public affect prices, 
 221 his views of the theory of redundant currencies, 223. 
 
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