THE SCIENCE OF EXCHANGES, BY N. A. NICHOLSON, M.A'., TRINITY COLLEGE, OXFORD. " Demand is in reality the bond which keeps all commercial dealings together. For if men wanted nothing or not so much, there would not be any or not so much commerce." ARISTOTLE'S ETHICS. FOURTH EDITION. ISED AND ENLARGED. CASSELL, FETTER AND GALPIN, LONDON, PAEIS AND NEW YOEK. 1873. PRICE FIVE SHILLINGS. PRINTED BY WERTHEIMER, LEA AND CO., FINSBURY CIRCUS. CONTENTS. PAGE . VALUE ...... i CHAPTER L- II. LABOUR 13 HI- BUYING AND SELLING . . 28 IV. CURRENCY ol V.-Gou, 72 VI- THE FOREIGN EXCHANGES . 1 15 YII. DEPRECIATION OF THE CURRENCY . 140 VIII. LAND loo IX. TAXATION , ,_ . 174 CONCLUSION . 2 1 o INDEX. Abundance, 34 Absenteeism, 323 Accommodation bills, 108 Assay of gold, 208 Auxiliary currency, 96 Balance of trade, 78 Banker, 112 Banking, 87 Bank note, 113 Bill of exchange, 102, 106, 206 Budget, 326 Buying, 73 Capital, 49 Cheque, 114 Circulation, 90 Clearing house, 147 Commodity, 3 Comparative exchanges, 209 Competition, 20 Connexion in value between gold and silver, 187 Consumption, 6, 7, 8 Convertibility, 94 Course of exchange, 203 Credit, 81 Currency, 88 Customs, 281 Demand, 14 Deposits, 115 Depreciation, 218 Discount, 104 Double standard of value, 177 Duty on plate, 189 English coinage, 198 Exchange, 2 Excise, 280 Exchequer bills, 309 External panic, 119 Foreign coinages, 199 Free Trade, 37320 Glut, 41 Hoarding, 52 Interest, 44 Internal panic, 120 Issue, 86 Journey, 198 Labour, 57 Land, 238 Light gold coin, 198 Milliemes, 189 Mintage, 208 Mint price, 198 Money, 83 Monopoly, 40 Panic, 118 Par (true), 200 Par (actual), 208 Price, 42 Production, 5 Profit, 10 Property, 48 Protection, 39321 Pyx, 207 Rate of exchange, 201 Regulation of the exchanges, 217 Rent, 250 Reserve, 137 Retrenchment, 54 Saving, 53 Security, 109 Seignorage, 208 Selling, 74 Silver coinage, 199 Single standard of value, 199 Sources of wealth, 46 Specie point, 210 Speculation, 75 Standard of value, 188 Standard gold, 199 Strike, 67 Supply, 15 Tariff, 290 Tax, 258 Tendency of bullion, 209 Theory of value, 33 Theory of labour, 70 Theory of capital, 72 Theory of the coinage, 198 Tokens, 180 Trade, 36 Value, 1 Value of capital, 50 Value in exchange, 4 Valuing of gold, 207 Wages, 58 Want, 13 Wealth, 35 Weekly return of the Bank of Eng- land, 137 THE SCIENCE OF EXCHANGES, CHAPTER I. VALUE. 1. What is value? Value is the real or fancied advantage which men derive from the use of anything, whether it be an exchangeable article, or not. 2. What is exchange ? Exchange* is the giving something which has a value in order to get something in return which has also a value. 3. What is a commodity ? A commodity is anything which has a value and can be exchanged. 4. What is value in exchange ? It is the quantity of any other commodity which we can get in exchange for the particular quantity of the commodity which we give. When the word value is used in the science of which we treat, we always mean value in exchange, unless we particu- larly specify that we are using the word in its first and simplest sense. 5. What is production ? It is turning the gifts of the earth into com- modities. B 2 THE SCIENCE OF EXCHANGES. 6. What is consumption? It is the using of commodities. 7. What is consumption for the mere sake of consumption ? It is the using of commodities for the purpose of enjoyment. 8. What is consumption for the sake of pro- duction ? It is the using of commodities which is una- voidably caused by that production ; it is the cost of production itself. 9. What is profit ? Any gain or advantage, from whatsoever source it is derived. 10. What is profit on a commodity ? It is the clear gain which any one makes by the exchange of that commodity. 11. What is the minimum of profit ? It is the lowest rate of profit which will satisfy the producers of any commodity, for without this minimum they would not continue to supply the commodity. 12. What brings the profit made by the pro- ducers of any commodity to its minimum ? Competition amongst each other for other com- modities, for one undersells the other till the minimum of profit is reached. 13. What is want ? Want is the feeling that it would be to our advantage to have some commodity which we have not. 14. What is demand ? THE SCIENCE OF EXCHANGES. 3 Demand is the offering a commodity which we have in exchange for one which we want. 15. What is supply? Supply is the commodity itself which we offer in exchange. 16. What is effective demand ? It is offering a sufficient quantity of the com- modity which we have to enable us to get the commodity which we want. 17. Can demand, as we define it, exist without supply, or supply without demand ? Certainly not, for we must furnish a supply of some sort or other, in order to offer it for the commodity which we want. 18. Does the furnishing a supply of any com- modity create a demand for that commodity ? No, it does not ; it only creates a demand for those commodities which the furnishers of that supply may want. Unless people offer commodities in exchange for the commodity supplied, there is no demand for it, and the supply remains on hand. 19. What does create a demand for a com- modity ? The offering other commodities in exchange for that commodity. 20. What is competition ? It is offering more of any commodity, or a better quality of commodity, than others offer, in order to induce the suppliers of the commodity which you want, to deal with you instead of with the other offerers. B2 4 THE SCIENCE OF EXCHANGES. 21 . What effect has competition upon the value of any commodity competed for ? It always increases the value of that commodity, for the competitors, in bidding against each other, offer more of the commodities which they have, in exchange for the particular quantity of the com- modity which they want, and thus increase its value. 22. What causes a diminution in the value of any commodity ? Competition for other commodities amongst those who supply that commodity, for they must offer more of it in exchange for particular quan- tities of those commodities which they are com- peting for. 23. What is the meaning of proportion between demand and supply ? The relative difference between the quantity of a commodity which is actually supplied in a par- ticular market and the quantity which people want and offer for in that market. 24. When is a supply said to be too large ? When the quantity of a commodity actually supplied is larger than the quantity offered for by those who want the commodity. 25. When is a supply said to be too small ? When the quantity of a commodity actually supplied is smaller than the quantity offered for. 26. When is a supply said to be sufficient ? When the quantity of a commodity which is actually supplied is about equal to the quantity which is offered for. THE SCIENCE OF EXCHANGES. 5 27. What is the effect in each case on the value of the commodity supplied ? (1) When the supply is too large, those who supply the commodity must compete against each other for any commodities which they want, and thus diminish the value of their supply. (2) When the supply is too small, those who want the commodity supplied must compete against each other to obtain it, and thus the value of that supply is increased. (3) When the supply is sufficient, those who supply the commodity compete against each other for the commodities which they want, till they bring the value of their supply down to the cost of its production, and the minimum rate of profit to be made on its exchange. 28. What is average value ? The average value of any commodity to those who produce it consists of the average cost of its production and the average rate of profit to be made on its exchange ; to the world at large it consists only of the cost of production, for this includes the average rate of profit which must be made by the producers. 29. What are fluctuations in value ? They are alterations in the proportion which the supply of any commodity in some particular market bears to the demand for it there. 30. What may be called the equilibrium of any commodity's value ? The average value of that commodity, for the commodity will rise above its average value or fall 6 THE SCIENCE OF EXCHANGES. below it, according to the proportion which the supply of it in any particular market bears to the demand for it there. 31. What is intensity of demand? The demand for any commodity is said to be intense when it much exceeds the supply of that commodity, and increases in intensity as long as people continue to offer more of the commodities which they have, in exchange for the particular quantity of the commodity which they want, 32. Does the demand for any commodity neces- sarily produce in process of time a supply propor- tionate to that demand ? It does not necessarily do so, for demand is merely offering a commodity which we have, in exchange for one which we want; intense demand for any commodity will certainly set many people at work to endeavour to supply it, for the profit to be made on its exchange will tempt them, but they may find great difficulty in procuring it themselves, from a variety of causes, and the supply may still be small and limited. In. this case the only effect of intense demand will be to increase the value of the commodity ; but in the general run of in- stances intense demand does lead to a propor- tionate supply, for all who can supply the com- modity are tempted by the high rate of profit to do so. 33. Give a short theory of value. If we define want to be the feeling that it would be to our advantage to have some commodity which we have not, we come at once into the pre- THE SCIENCE OF EXCHANGES. 7 sence of demand, or the offering a commodity which we have in exchange for one which we want ; and we thus bring in our supply, or the com- modity itself which we offer in exchange. Effec- tive demand is the offering a sufficient quantity of the commodity which we have to enable us to get the commodity which we want, and the whole theory of value turns upon what makes the quan- tity, which we offer, sufficient to obtain the quan- tity which we want. To understand this we must define value in its two senses. The first sense is unconnected with exchange altogether. Value is the real or fancied advantage which men derive from the use of any thing, whether it be an ex- changeable article or not. Value in its second sense is the quantity of any other commodity which we can get in exchange for the particular quantity of the commodity which we give. If any article had no value in the first sense of the word, it would assuredly possess no value in the second, for no one would exchange a thing they could make some use of for a thing they could make no use of at all. Whatever be the exchange we may consider, we shall find that we do, in reality, exchange the real or fancied advantage which we derive from the use of the commodity which we have, for the real or fancied advantage which we hope to derive from the use of the commodity which we want, and are offering for. Hence effective demand must always depend upon the sacrifice which the suppliers on each side 8 THE SCIENCE OF EXCHANGES. are prepared to make in order to gratify their wants. Mr. Thornton has done good service by drawing the attention of the student to this fact. The tallow speculation a few years ago is a good instance to bring forward. Some merchants bought up all the supplies of tallow at a time it was rather scarce and dear, in order to command the market and drive the price up ; but the specu- lation failed completely because the public were not prepared to make the sacrifice necessary to acquire the tallow under the circumstances, and they determined to do without tallow rather than pay the price demanded. This brings us to the conclusion, that in par- ticular cases the adjustment of the price must be in the nature of an experiment. Demand and supply may both exist without any actual transac- tion taking place, but once demand becomes effec- tive, then an exchange takes place ; hence effective demand for a commodity need not necessarily coin- cide with the supply of it in any market because but a few buyers may be willing to make the sacri- fice which sellers demand of them, and a portion of the supply only will change hands while the rest goes away unsold. If there are seventy thousand sheep sent to a fair for sale, the supply of sheep remains the same, viz., seventy thousand, whether there be forty or fifty thousand of them sold ; the demand for sheep may be very good, and yet sellers may ask such high prices that the effective de- THE SCIENCE OF EXCHANGES. 9 mand may not be sufficient to carry off the whole number. In the ordinary run of cases, the proportion be- tween demand and supply regulates the price of the commodities exchanged. 34. What is abundance ? It is great plenty of any commodity. 35. What is wealth ? Wealth is the power of obtaining commodities which the possession of one or many commodities gives ; it does not lie in the mere actual possession of commodities, because from circumstances they may have little or no value ; it lies in the power which the possession confers. 36. What is trade? Trade is the steady and continued exchange of commodities, which arises from a simple exchange having been found advantageous to both ex- changers. 37. What is free trade ? Free trade is trade open to all who desire to engage in it without any regulations to restrict competition amongst them, whatever be their race or country, in their dealings with each other. When Colbert, says Doctor Franklin, assembled some wise old merchants of France, and desired their advice and opinion how he could serve and promote commerce : their answer, after consulta- tion, was in three words only, " laissez-nous faire." 38. What do you mean by regulations to restrict competition ? 10 THE SCIENCE OF EXCHANGES. Any regulations in any particular country which either shut out certain competitors altogether who would willingly offer their commodities in the markets of that country, or which press unfairly on them in the shape of duties on their commodi- ties, to the advantage of other competitors who supply the same kind of commodities, but have no such duties to pay. 39. What is protection ? It is restricting competition in trade for the special advantage of particular classes of ex- changers in any one country. 40. What is a monopoly ? A monopoly is permitting only a favoured few to supply any particular commodity, so as to pre- vent any competition amongst those who supply that commodity. It differs from protection, for this last admits of a restricted competition the protected producers competing against each other. 41. What is glut? Glut is when any commodity falls below the cost of its production, from the superabundant supply of it in any particular market. 42. What is price ? It is the quantity of money which a man can get in exchange for a commodity. 43. What is average price ? It is the average price of a commodity during a given time. 44. What is interest ? It is the price paid for the use of money. THE SCIENCE OF EXCHANGES. 11 45. What is rent? It is the price paid for the use of land, houses, &c. 46. What are the sources of wealth ? The sources of wealth are production and trade. 47. What two things are most conducive to the development of a nation's wealth? Cheap power of production and free trade ; that is, the being able to produce commodities cheaply, and the being allowed to compete without restric- tions in any market whatever, either as buyers or sellers. 48. What is property ? Anything which legally belongs to any one. 49. What is capital? Any commodity, or combination of commodities, which is being employed with a view to increasing our capabilities of production by the material profit derived from that employment. 50. What is the best indication of the average value of capital in any country ? The average market rate of interest in that country, for capital in the shape of money can be easily applied to any purpose of production. 51. What ought the rate of interest to depend upon in any country where there are no usury laws ? It ought to depend ui^Fthe proportion between the quantity ofmon^^ actually in use in that country, and the denuH for its employment there. In new countriB Bstralia, where gold is pro- duced in large qua nine's, the rate of interest is 12 THE SCIENCE OF EXCHANGES. high, because every one who has capital in the shape of gold prefers to have it in any other shape, in order to make the most they can out of it, and the gold is consequently exported at once. Hoard- ing money, if practised on a large scale, as it used to be in France, will have the effect of raising the average rate of interest. 52. What is hoarding ? Hoarding is the accumulation of unemployed commodities. 53. What is saving? Saving is the accumulating of commodities with the purpose of converting that accumulation into capital. 54. What is retrenchment ? It is saving by diminishing consumption for the sake of enjoyment, and is only useful to a nation in so far as it secures a better distribution of capital ; but as it diminishes consumption for the sake of enjoyment it injures trade. 55. What is the best kind of saving for a nation ? Saving without retrenchment ; for then con- sumption for the sake of enjoyment is not inter- fered with, and the nation produces each year more than it can consume, and so adds to its wealth. 13 CHAPTER II. LABOUR. 56. What is labour? Any work, toil, or exertion. 57. What is labour when considered as a com- modity ? Labour is any work which a man performs in order to get other commodities in exchange for that work. 58. What are wages ? Any commodity given to the labourer in ex- change for the work which he does. Wages may be either in money or in kind. 59. Does labour, in the long run, make a solid return to the labourer ? It does, for a labourer could not continue to work if he did not get other commodities in ex- change for the work which he does. 60. Can a labourer be his own employer ? Certainly ; any one who employs his labour in producing commodities which he exchanges for others that he wants, unites the characters of employer and labourer in his own person. 61. What is productive labour? It is labour which makes a solid return to both employer and labourer, whether the labourer is his own employer, or whether he has an employer distinct from himself. 14 THE SCIENCE OF EXCHANGES. 62. What is unproductive labour ? . It is labour which makes a solid return to the labourer only. Any labour for a continuance, whether we call it productive or unproductive, must make a solid return to the labourer, or he could not continue to work ; but it need not neces- sarily make a solid return to the employer. It is then called unproductive, because it is so as far as the employer is concerned. 63. How, then, can we distinguish the produc- tive labourer from the unproductive one ? The productive labourer may be his own em- ployer; the unproductive labourer must have a distinct employer, for he must find some one who is willing to give commodities in exchange for labour which makes him no solid return. 64. Are unproductive labourers of advantage to the prosperity of a nation ? They are; for if there were only productive labourers to be found in a great industrious nation, capital would be created much faster than it could be consumed, and the motive to further produc- tion would be taken away. In Great Britain, as it is, what we want is an extension of our markets ; if we can only get customers for our goods, we shall produce the goods fast enough. A nation in a really healthy state ought always to produce more than she can consume, and thus, by saving, add to her wealth ; but this balance of pro- duction over consumption is never very large, for the individuals of which the nation is com- posed live better as they get richer, and so con- THE SCIENCE OF EXCHANGES. 15 sume more than they did ; they also increase in numbers. 65. What does the value of labour depend upon ? It depends upon the proportion which the quan- tity of labour in the market bears to the demand for its employment. If labour is plentiful, it will be cheap ; if scarce, it will be dear. 66. What is every bargain between an employer and a labourer ? It is a simple bargain between a buyer and a seller ; the employer tries to buy the commodity, labour, as cheap as he can ; the labourer tries to sell his labour to the best advantage, by giving as little of it as he can in exchange for the employer's money. 67. What is a strike? It is a contention between employers and la- bourers about the price of labour. The labourers refuse to work unless they get increased wages, and the employers refuse to give the extra sum. Each side stands out, and those who can stand out longest are the winners. 63. Are strikes unjust in principle ? No, there is no harm in men trying to get the best price for the commodity in which they deal, whether it be labour or money. 69. Are strikes injurious to the general interests of society ? Certainly ; every one suffers by business being brought to a stand- still ; the public cannot get what they want, the employers are greatly injured 16 THE SCIENCE OF EXCHANGES. by their capital lying idle, and the labourers have to suffer great privations before they can induce the employers to yield ; indeed, they have some- times to return to their work on the old terms. 70. Give a short theory of labour. The first thing to be done with the term labour is to bring it into the domain of the science of exchanges, by excluding all labour which is not itself the subject of an exchange for some other commodity. Labour is any work which a man performs, in order to get other commodities in exchange for that work. The labourer, then, is a seller of the commodity, labour ; he brings it to the labour market to ex- change it for what he wants, and he ought to try to get the best price he can for his commodity. The peculiarity which distinguishes labour from all other commodities, is that it is a necessary ingredient in their production. There may be more or less labour employed in the production of any commodity, but there is always some of this ingredient required. The theory of labour, which we seek to estab- lish, is based upon this fact ; if we once admit that labour is an ingredient necessary to the pro- duction of all commodities, we must also admit that the more commodities we consume in a fair manner without waste, as long as we pay honestly for them, the more demand we create in the great labour-market of the world, and the better the chance the labourer has of selling his special com- THE SCIENCE OF EXCHANGES. 17 modity at its highest market price, Free trade is the labourer's best friend, because it enables us all to lay out the commodities which we have got to the best advantage, in purchasing those which we want, and by thus encouraging the consumption of commodities, it increases the demand for what all labourers have to sell their work. Every labourer in the community is benefited by the consumption of commodities which is always going on, whether it be a consumption for the sake of enjoyment, or a consumption for the sake of production, and the more commodities any nation can consume for the sake of production, the more active its trade will be, and the better price its working men will get for their work ; I may add, too, that consumption for the sake of pro- duction will soon lead to consumption for the sake of enjoyment; they are twin brethren acting and reacting on each other, and they are ever at work carrying off the supplies which human industry is getting ready for them. Whatever is produced, says Jean Baptiste Say, is sooner or later consumed ; the products of industry have only been produced for the purpose of being consumed, and when any product is finished and fit for the market, if it remains on hand awaiting a consumer, the portion of capital which it represents lies idle ; now as all capital can be employed in a reproductive way, and can thus become a source of profit to its possessor, every product of industry, which is not consumed, occasions a loss equal to the profit, or, if you pre- 18 THE SCIENCE OF EXCHANGES. fer the expression, to the interest which its value, if put in the shape of capital, would bring in (" Traite* d'Economie Politique," book 3, chap. I). Trade is the voluntary and continuous exchange of commodities which arises from the different wants of different people ; profit is the gain which each people makes on its own exchanges ; the more, then, that we can multiply voluntary exchanges, the more we shall increase our profits. Now what tends to multiply voluntary ex- changes ? I reply the most absolute freedom being given to each people to exchange what it has in the markets it likes best. Free trade is what gives this freedom. If, then, we wish for free trade in labour, we must impose no peculiar restrictions on its exchange ; we must allow each labourer to decide for himself how many hours he will work each day ; for if we once attempt to cramp our productive powers as a nation by limiting a day's labour by law to eight, or nine hours, we are then treating full-grown men as if they were women or children; and we are giving other nations an advantage over us, for they will leave their labourers perfectly free, and then they will beat us in our own markets because they can get labour, the necessary ingredient in all commodi- ties, cheaper than we can. If the Trades-Unions could succeed in perma- nently shortening the hours of labour, and fixing the exact time which each man is to work during the day, the result would be a diminished produc- THE SCIENCE OF EXCHANGES. 19 tion of commodities, bringing with it diminished means of obtaining the ordinary comforts of life. The lower classes would be the first sufferers, and the whole community would in time be affected, because diminished production must lead to dimi- nished consumption. Happily there is no likelihood of success in this case, because the labourer in England is as free as the employer, nor will he long continue to be the slave of either a Trades-Union or a capitalist. The value of labour is regulated exactly as the value of any other commodity is regulated, nor can the labourer in the long run obtain more for it than its current price in a free market ; if he holds out for more, he drives the employer either to seek for foreign workmen, who will be satisfied with less wages, or to withdraw his capital from a business which does not admit of sufficient profits being made. I give the following account of an importation of foreign workmen to show what Trades-unions may bring about by ordering a strike. It is taken from the Scotsman paper, 1870. " In the State of Massachusetts, the making of shoes is a very extensive branch of industry, giving employment to some 60,000 men. The manufacturers have for a long time been carrying on a game with their workmen, who had formed themselves into a trade-union, with the appropriate title of the " Society of the Knights of St. Crispin " the purpose of each party in the game being to win such an advantage over the other as would vest in the victor the right to fix the rate of wages and the scale of profits. The trade society was very well organised ; its members adhered faith- fully to each other ; at the command of their leaders they c 2 20 THE SCIENCE OF EXCHANGES. resorted to intimidation and violence as means of gaining their ends ; and until lately the manufacturers were gene- rally compelled to yield to the dictation of their workmen. About two months ago, a manufacturer in the town of North Adams, finding that the market for shoes was declining, pro- posed to his workmen that they should consent to accept a deduction of 10 per cent, on their wages until trade should revive. The proposition was referred to the leaders of the Crispins, and they appointed a committee to wait on the manufacturer with this message: ' We do not believe that the state of trade is as you represent it : but if you will submit your books to our inspection, in order that we may see for ourselves what orders you have to fill, and what prices you are to receive for the goods, we will be able to satisfy our- selves, and will then decide on the acceptance or the rejection of your offer.' The manufacturer declined to comply with this demand ; the union ordered a strike ; and the workmen left the factory. The manufacturer shut up his factory, and set out for California, -whence he returned in a month with seventy-five Chinese labourers, whom he had engaged to take the place of his strikers. An angry crowd of the Knights of St. Crispin met the Asiatics at the railway station, hooted them, hustled them about, and threw stones at them ; but they reached the factory safely. The manufacturer then prepared for defence; armed himself and his associates with ' six-barrelled revolvers,' and caused the newspapers to state that the Chinese were also armed with pistols, and with ' long knives that they could use with fearful dexterity;' and that they would be in no wise backward in defending themselves should they be attacked. The Chinese displayed the usual quickness of their race in learning the processes of their new business, and mastered the mysteries of the machines they were to use in a manner that promises full success to the experiment. They are under a contract to work for the manufacturer for the term of three years; they are to have twenty-three dollars a month for the first year, and twenty- six dollars a month for the rest of the time ; they are to be furnished with lodgings, and with a certain quantity of food ; and, if they die, their bodies are to be sent to China. The other shoe-manufacturers in Massachusetts are about to follow the example of the North Adams firm ; two hundred and thirty other Chinese have arrived, and have been taken to different factories ; and the question that now presents THE SCIENCE OF EXCHANGES. 21 itself to the Crispins, and to the other trades-unions in Mas- sachusetts, is what can be done to resist this invasion, which, if allowed to go on, will ruin their organisations, and place them at the mercy of employers ? Thus far they have done nothing but hold meetings, 'at which they passed resolutions to carry the question into the coming elections, and to refuse to vote for any candidate who would not pledge himself to legislate against the importation of Chinese labourers into the country. It may be added that Congress seems to have been somewhat affected by the protests of the Crispins, inasmuch as it has incorporated into a bill for the amendment of the naturalisation laws a provision excluding Chinese from the rights of citizenship. This, however, can scarcely be ex- pected to discourage Chinese emigration, for the Chinese who go to the United States are not animated at all by a desire to exercise political rights, but simply by a wish to earn money. The trades-unions, while insisting that the right to combine for higher wages is indisputable and sacred when exercised by themselves, demand that this same right shall not be exercised by the Chinese. The latter, who work for a penny a day at home, come to the United States in the hope of getting higher wages. Employers are willing to give them wages which are high to them, on condition that a large number of them will engage to work together, and for a certain period of time. In the opinion of the American trades-unionists, this is ' slavery,' and must be put down, by legislation if possible, and by violence if necessary." I may add that the report of the Massachusetts bureau of labour, 1872, throws no light on the results obtained from this experiment. Mr. Sampson, the manufacturer referred to, positively refused to admit the Labour Commissioner into his shoe factory, or to give him any information whatever respecting his agreement with the Chinese. The National Labour Union held a mass meet- ing at Albany to consider the question of the Chinese immigration, and one of their speakers 22 THE SCIENCE OF EXCHANGES. put the matter very clearly before the meeting, thus : " When manufacturers consent to let the working man buy his goods in the open markets of the world, I, as a working man, will admit his right mine having been admitted. What I object to is, to the paying of his prices, and the working at his prices too. If he has the right to buy his labour in the lowest market, I have an equal right to buy my goods in the lowest market. Let him try the experiment of competing with foreign goods, and I am willing to compete with foreign labour. When he consents to Free-trade, I'll consent to his importing his workmen ; but to compel me to buy his goods at his rates, while he refuses to buy my labour at my rates, is not justice, and no arguing can make justice of it." As to the second safeguard of the employer, viz : the withdrawal of his capital, Mr. Brassey says (i that our workmen are not sufficiently alive to the necessity which exists, for the utmost effort and ingenuity to enable capital invested in Eng- land to hold its own in the industrial campaign. " The Trades-Unions might be of real service to the working man if they would put the truth before him here and supply him with cheap and accurate information as to the state of trade. Let us take the one article, iron. The advance in the price of iron in England is due to the increased cost of production caused by an advance in wages, a reduction of the hours of labour, and an increase in the price of coal ; one of our ironmasters stated lately that he had to pay 32,000 for the same quantity of coke, which he used to procure for 12,000 a year ago. The cost of producing iron has been increased by about 40 per cent, in Eng- THE SCIENCE OF EXCHANGES. 23 land. If this state of things continues, many orders for iron goods, which would formerly have been placed in England, will now be executed in other countries, where the work can be done for less money. " Business in the iron trade in the north of England, though there is no material yielding of prices, is much less firm in tone than it was a month ago. Orders are not so pressing, and there is little desire on the part of buyers to enter upon new contracts at the present rates if it can be avoided. A good deal of iron is being shipped from the Tees, the Tyne, and Hartlepool, and pigs in small parcels are being sent to Germany. The iron shipbuilding trade, which has been so important and flourishing a branch of in- dustry in the North of England during the past two years, within which period a very large capital has been sunk in new plant, does not look promising for the winter. Last autumn, it will be remembered, any amount of work might have been had by the builders, and very extensive contracts were then entered into by partnerships in iron steamers, for the northern iron shipbuilders to construct their new ton- nage, the last of which contracts have been wrought off recently. Several large steamers were launched on the northern rivers last week. But a good deal more work will have to be got through before the principal iron shipbuilding yards in the north will be slack. There are, however, few new orders to replace those on hand. In many building yards, when vessels are launched, keels for other new ships are not laid. By the end of the year, therefore, unless there is a great change in the prospects of this trade, business is likely to become extremely dull, and a large number of work- men employed on it will have to be paid off." Times, 26th September, 1872. A lesson or two of this sort will prove advan- tageous to us before the short time movement goes too far. In this case, as in all others, freedom within the law for all is the best safeguard for all. " Capital 24 THE SCIENCE OF EXCHANGES. kann mir daim Allen wirklichen Segen bringen wenn die Arbeit, die Quelle des Vermogens mid des Capitals, fur Alle frei 1st." (Max Wirth.) 71. Is labour, when considered as a commodity, to be looked upon as capital ? Capital has been denned to be " any commodity, or combination of commodities, which is being employed with a view to increasing our capabilities of production by the material profit derived from that employment." Now, a labourer will always employ his labour with this view, for whether the labour which he sells is profitable or unprofitable to his employer, it must be profitable to himself, or he would not continue to supply the commodity; labour, therefore, is always capital to the labourer. But labour is not necessarily capital to the em- ployer, for he may pay labourers who are engaged in works conducted without any view to profit, and this sort of labour is not capital to him, although it is capital to the labourers themselves. Produc- tive labour is capital to both the employer and the labourer ; unproductive labour is capital to the labourer only, for it is unproductive as far as the employer is concerned. 72. Give a short theory of capital. We must first define property, if we wish to get a true idea of what capital is. Property is that which legally belongs to any one. As employed in the science of exchanges, the term property is a creation of law whether written or unwritten. The savage's idea of pro- perty rests upon custom or unwritten law. THE SCIENCE OF EXCHANGES. 25 Capital, therefore, must always be property, though this last need not necessarily be capital. Port wine, laid in at a low price, and maturing in the cellar of a wine-merchant in order to fetch a higher one at some future date, is the man's pro- perty, but it is a part of his capital also; while wine of the same class, under the same circum- stances maturing in the Duke of Devonshire's cellar, is the Duke's property, but not his capital. Dr. Whately says that almost all the definitions of capital which he is acquainted with pointedly exclude knowledge and skill. The reason of this is, that political economists have taken unneces- sary trouble in keeping labour and capital distinct from each other; whereas, if we once admit labour to be a commodity, we cannot help admitting " that it may be employed with a view to increas- ing our capabilities of production by the material profit derived from that employment," (see 49), and it then becomes capital to all intents and purposes. Let us take the instance of a skilled labourer with nothing but his labour to depend upon. A doctor may get on an average 10 a day in fees ; he is able to pay his way honestly and live com- fortably on 5 ; what of the other 5 which he invests in profitable securities ? Are not they capital, and must not such a man, if he keeps proper accounts, count his labour for a day at so much money ? Again, if we count our merchant steamers as capital, are we to exclude the skilled labour of their crews, when we include the coals 26 THE SCIENCE OF EXCHANGES. which keep them moving ? u The distinction be- tween capital and non-capital," says Mr. Mill, " does not lie in the kind of commodities, but in the mind of the capitalist in his will to employ them for one purpose rather than for another; and all property, however ill-adapted in itself for the use of labourers, is a part of capital so soon as it, or the value to be received for it, is set apart for productive reinvestment." ("Principles of Poli- tical Economy," People's edition, page 35.) A shilling may therefore be capital as well as a thousand pounds, and the street Arab, who scrapes together a shilling to buy a shoe-brush, is a capi- talist, and may live to be the possessor of many thousand pounds from such a beginning. But if a shilling may be capital, that part of a day's labour which a shilling represents is capital also. The common objection to this doctrine is that the day's labour is not realised tangible property, like the shilling, until the day is over. A labourer going to work may fall down and break his arm, undoubtedly he may;, but substitute a dozen of eggs for the shilling or the labour, and may not the woman who carries them to market fall down too and break them ? A commodity is that which has a value and can be exchanged, and any commodity whatever may be so used, that we must acknowledge it to be capital. Capital must of course be accumulated by saving, but most economists have created a difficulty for themselves here by not distinguishing between THE SCIENCE OF EXCHANGES. 27 saving and retrenchment. Saving is the accumu- lation of commodities with the purpose of turning that accumulation into capital, while retrenchment is saving by diminishing consumption for the sake of enjoyment. A really healthy creation of capital results from saving, and not from retrenching, which can only be useful in special cases, where a better distribution of existing capital is suddenly called for. Everything, then, which is being employed with a view to increasing our capabilities of production by the material profit derived from that employ- ment is capital, whether it is a productive instru- ment, or the produce of that instrument to be afterwards employed with a view to profit. The land which produces a crop, the plough which turns the soil, the labour which secures the pro- duce, and the produce itself, if a material profit is to be derived from its employment, are all alike capital. Now, as all capital is necessarily property, the measure of a nation's prosperity and its real strength lies in the proportion which its capital bears to its other property, because the greater this proportion is, the more the nation in question can produce, and the more it can consume also. The two best means of increasing capital are, first education, to enable the workmen to diminish the cost of producing commodities ; and secondly, free trade, to enable them to dispose of their com- modities to the best advantage. 28 THE SCIENCE OF EXCHANGES. CHAPTER III. BUYING AND SELLING. 73. What is buying ? It is giving money in exchange for any other commodity. 74. What is selling ? It is giving any other commodity in exchange for money. 75. What is speculation ? It is buying any commodity which is liable to alteration of price, when the supply of ifc is large and the price low, with a view to selling it when the supply chances to be small and the price high. 76. What is speculative demand? It is any demand created by speculators, and not caused by the wants of trade. 77. What is foreign trade? It is the exchanging the surplus produce of our own country for the surplus produce of some other country ; we want to be supplied with commodities which are produced both better and cheaper abroad than we can produce them at home. 78. When are the foreign exchanges said to be favourable to a nation? They are said to be favourable when that natior sells more to other nations than she buys fron THE SCIENCE OF EXCHANGES. 29 them, and the balance which then becomes due to her is called the balance of trade. 79. When are the foreign exchanges said to be adverse to a nation ? They are said to be adverse when that nation buys more from other nations than she sells to them. 80. When are the foreign exchanges said to be at par ? They are said to be at par between two nations when the amount of what is bought by the one in their mutual dealings exactly balances what is sold by the other. 81. What is credit? Credit is the being able to obtain another man's capital upon trust. It is the means by which capital is put into the hands of those members of the community who can turn it to the best ac- count, but who, not being themselves possessors of capital, would have to remain idle without the assistance which credit gives to them. Credit, therefore, does not create capital, but it gives capital already in existence a greater value than it would have possessed, if those who wanted capital for various enterprises, could not obtain it upon trust. Sans contredire au vieil adage, Plus cautionis in re quam in persona, il est trop certain qu'un pays auquel la probite manquerait gene*ralement, et qui serait destitue notamment de ce fier et moderne sentiment qu'on appelle Thonneur commercial, de- vrait renoncer avoir le credit fleurir dans son sein. 30 THE SCIENCE OF EXCHANGES. Bien ne donne une moins favorable idee, si Ton peut s'exprimer ainsi, de la bonne tenue morale d'un peuple que d'etre oblige, dans toutes ses transac- tions, d'avoir toujours 1'argent a la main. L'ex- p^rience le prouve : le credit ne s'etablit a demeure que dans une population dont le moral presente de la solidite, oil la masse des emprunteurs est honnete et intelligente, oil, enfin, la manie de thesauriser et d'enfouir, qui paralyse le capital, est remplacee par 1'activite laborieuse qui cherche avant tout a le feconder. Probite, intelligence, travail et securite, telles sont en tout lieu et en tout temps les condi- tions du credit. BAUDEILLART (Manuel tfEco- nomie Politique.) 82. What is the golden rule in commerce ? Buy in the cheapest and sell in the dearest markets ; without free trade this is impossible. THE SCIENCE OF EXCHANGES. 31 CHAPTER IY. CURRENCY. 83. What is money ? It is the common measure by which we value all other commodities. 84. What is the great advantage which money possesses over all other commodities ? That people who have money can always find people who want money and are willing to ex- change commodities for it, whereas people who have other commodities very often cannot find customers for them. 85. Mention any other advantages. Money is easily brought from one market to another, and has been divided at the Mint into those sizes of coin which are most convenient for the purposes of exchange. 86. What is issue ? It is the power of creating money. 87. What is banking? It is the duty of using and distributing that money after it is issued in a proper manner in the conduct of business. 88. What is the currency ? The currency is the money which is in use in any country, and consists in Great Britain of coin and bank-notes, issued under certain restrictions. 32 THE SCIENCE OF EXCHANGES. 89. What is managing the currency ? Managing the currency in Great Britain is regu- lating the fluctuations in the amount of bank-notes which we issue, by the fluctuations in the amount of gold coin, or bullion which comes in and goes out of the country, according to the state of the foreign exchanges. 90. What is the circulation ? The circulation is that amount of currency which is in use in any country. 91. How ought the circulation to be managed? It ought to be left free to manage itself, ex- panding or contracting, according to the wants of trade. 92. What is the cause of alteration in the value of the currency ? Any continuing alteration in the circulation, whether it expands or contracts. 93. What is monetary pressure? It is that rise in the rate of interest which ought to accompany any considerable contraction of the circulation. 94. What is convertibility ? It is an exact coincidence in value between bank-notes and the coin or bullion they are issued against. 95. What is a period of full currency ? It is when the foreign exchanges continue for some time at par, and the amount of the circula- tion is not affected by the state of the foreign exchanges. 96. What is auxiliary currency ? or 'UHIVER 0*r Vv^ /I * ^_ THE SCIENCE OF E3 Bills of exchange, promissory notes, cheques, and anything which serves to economise the circu- lation, are called auxiliary currency ; as they are not made by law to fluctuate in their amount as bank- notes are, they cannot maintain a precisely equal value with true currency. 97. What is meant by the term ec in circula- tion " ? Anything which is performing the functions of money is in circulation. Bank-notes, performing these functions, are equally in circulation whether they are in the hands of the public or the bank which issued them ; bills of exchange, promissory notes, cheques, &c., are in circulation whenever they are actually enabling us to do with a less amount of currency than if they were not in exist- ence. 98. What is meant by the term, " in active cir- culation " ? Any kind of currency is in active circulation while one person passes it as money to another in constant succession. 99. What does the efficiency of the circulation in any country depend on ? It depends on the state of credit in that country; if the state of credit is good, a much less amount of currency will be sufficient for the purposes of trade than if the state of credit is bad. When people lose confidence they begin to hoard their money, and thus they diminish the amount of cur- rency in active circulation. Auxiliary currency, too, is based upon credit, so that its power of D 34 THE SCIENCE OF EXCHANGES. economising the circulation is weakened or de- stroyed. 100. Is a want of money the same thing as a want of capital? Certainly not ; a want of money is a want of a particular kind of capital, not a want of capital generally. 101. What is the principal point of difference between a bill of exchange and a promissory note ? A bill of exchange contains an order to pay, whereas a promissory note contains a promise to pay. 102. Give some account of the parties to a bill of exchange. The party who draws the bill is called the drawer ; the party to whom the order to pay is addressed is called the drawee till he gives his assent to the transaction by writing his name across the bill, when he is called the acceptor; the party to whom the bill is made payable is called the payee ; the drawer and the payee may be the same person. When any holder of a bill writes his name on the back of that bill, in order to make over his interest in it to some other per- son, he is called an indorser. The drawee, on accepting a bill, either personally or by his recog- nised agent, becomes primarily liable for that bill ; but if he refuses to accept the bill when presented to him, or cannot pay it when it becomes due, he is said to dishonour it, and the drawer and any indorsers there may be become immediately liable to the holder, on receiving notice from him that THE SCIENCE OF EXCHANGES. 35 the bill which he holds is dishonoured, accom- panied by a request to pay its amount. If the drawer of the bill which has been dishonoured pays its amount, all the indorsers are discharged from their liability to the holder by such payment ; but if the last indorser is compelled to pay the amount of the bill, the drawer and the previous indorsers are not discharged by this payment, for the last indorser can sue them for the amount he has paid to the holder of the bill. A bill may be paid any number of times before it is due, and may be put into circulation again between each payment ; but once it is paid by the acceptor on its becoming due, it cannot be put into circulation again, nor can any action be brought upon it. 103. What is discounting a bill ? Any broker or banker who buys a bill, deducting so much from its price as interest till the bill be- comes due, is said to discount that bill, and the interest which he deducts is called discount. 104. How does discount differ from interest ? Discount is the allowance which is made in order to get a sum of money paid before it is due. It differs from interest in this particular that when we get a bill discounted, the discounter not only deducts a certain rate of interest, being the interest for the time the bill has to run on the exact sum which he pays to us, but he also charges us with interest at the same rate on this interest itself. If ' the rate of discount is said to be five per cent., the discount on a bill for 105 to run for D2 36 THE SCIENCE OF EXCHANGES. one year amounts to 5 5s. or 5 for interest on 100, and 5s. for interest on 5 and the present worth of such a bill is 99 15s. 105. What is money at call ? Money lent by bankers, with the option of having it back at any moment, to bill-brokers, on the security of bills which they deposit with the banks. 106. Give an instance to explain the use of bills of exchange. The operation which takes place, is put very clearly by Mr. Mill, in the following passage : "A merchant in England, A, has exported English commodities, consigning them to his correspondent, B, in France. Another merchant in France, C, has exported French commodities, suppose of equivalent value, to a merchant, D, in England. It is evidently unnecessary that B, in France, should send money to A, in England, and that D, in England, should send an equal sum of money to C, in France. The one debt may be applied to the payment of the other, and the double cost and risk of carriage be thus saved. A draws a bill on B for the amount which B owes to him ; D having an equal amount to pay in France, buys this bill from A and sends it to C, who, at the expiration of the number of days which the bill has to run, presents it to B for payment. Thus the debt due from France to England, and the debt due from England to France, are both paid without sending an ounce of gold or silver from one country to the other." 'Principles of Political Economy.' THE SCIENCE OF EXCHANGES. 37 107. What advantages do bills of exchange at short dates possess ? Though the drawer, acceptor, and indorsers of such bills may all of them be persons of doubtful credit, yet still the shortness of the date gives some security to the holder of the bill ; though all of them may be likely to become bankrupts, it is a chance if they all become so in so short a time. 108. What are accommodation bills? Inland bills, which are not based upon any trade transactions, either present or future, but which are drawn for the sole purpose of raising money. In general, where an accommodation bill is con- cerned, the only real creditor is the man who discounts the bill, and the only real debtor is the man who gets the amount of the bill minus that discount. It requires great experience to dis- tinguish accommodation bills, when properly disguised by dishonest traders, from bills which really are based on trade transactions or are drawn in anticipation of trade transactions, which will certainly take place. 109. What is a security ? A security is that which is given in pledge for the performance of an engagement. 110. What does banking depend upon ? In all its forms it depends upon credit. 111. What is the duty of a banker ? He ought to act as an intermediate party be- tween those who have money seeking employment, and those who have industry and enterprise, but want money to carry out their plans. 38 THE SCIENCE OF EXCHANGES. 112. Define a banker ? A banker is a man who makes it his business to borrow and lend money already in existence. The Times, in reviewing Mr. Hankey's book on banking, published in 1867, speaks of the substitu- tion of accurate definitions for loose and shifting usage. The question : What is a pound ? is then correctly answered, but when we come to the next question, What is a banker ? though the answer is the correct one, it is not kept to throughout the review. A banker, says the Times, is a man who makes it his business to borrow and lend money. As there is nothing here said about the creation of that money, it must be presumed to be " already in existence," and the addition of these three words would have prevented the able writer of the review from getting into the quicksands of loose and shifting usage. A little further on we read, " there is no distinc- tion in the nature of things between a banker's ordinary business (i. e., the borrowing and lending money already in existence), and this (the issuing of bank-notes) which is denied him. If he re- ceives a sum from a customer, he enters in his books his indebtedness to the customer, and he holds himself ready to repay the same to the cus- tomer on his order. " Had he given in exchange for the deposit pro- mises to pay on demand, he would have made a memorandum of the transaction as before; the difference being that instead of becoming indebted THE SCIENCE OF EXCHANGES. 39 to a known person, lie would be indebted to the person or persons from time to time holding the promises he had issued. "It is a difference of machinery, not of the essence of the business." We might almost despair of accuracy being ob- tainable in the science of currency, when we com- pare this with the following passage : " No one is constrained to become the creditor of a particular banker by opening an account with him, but an ordinary tradesman is almost compelled -to become the creditor of the bankers of his neighbourhood by taking their bank-notes ; unless he is prepared to see his business dwindle away, he must take the bank-notes which pass current round him." So the essence of the banking business is just the same whether bankers have voluntary customers, or are given by law the power of making their whole neighbourhood their creditors whether they like it or not. Well does Mr. Stirling say in his practical con- siderations on Bank management, u A strange heresy has arisen that paper- money is not money." Bank-notes, or transferable promises to pay coin to bearer on demand, circulating side by side with coin in endless succession , liquidating debts like coin, and which, when in circulation, all business people are, as it were, compelled to take, are absolutely money; and people who complain of restriction in the issuing of them, might just as well complain that they have not the power of coining gold, silver, and bronze money. 40 THE SCIENCE OF EXCHANGES. Had the Times given a definition of a banker in accordance with its subsequent observations, it would have been in the following form : A banker is a man who makes it his business to borrow and lend money, and to give transferable promises made by himself to pay bearer coin on demand, in exchange for deposits, or in satisfaction of any claims made upon him. This would be tantamount to proclaiming that a banker ought to be allowed to create money as well as to borrow and lend it. 113. What ought a bank-note to be ? It ought to be a transferable promise on the part of the British Government to pay to bearer on demand a certain amount of coined gold ; cir- culating side by side with coin in endless succes- sion ; liquidating debts like coin ; and a legal tender everywhere in the United Kingdom, except at certain fixed places where gold can always be obtained according to promise when required. 114. What is a cheque ? A cheque is an order directed to a banker to pay over a specified sum of money ; it must be dated, be made payable to bearer, or order on demand, be signed by the drawer, and be duly stamped. " A crossed cheque,'* says Mr. Newman, in his admirable little work on bankers' cheques, " is a cheque payable either to bearer or order, having the name of a banker, or two transverse lines with the words ' and Co.' written across the face of it, and the effect of the crossing is to direct the banker on whom the cheque is drawn to pay THE SCIENCE OF EXCHANGES. 41 the cheque to some other banker only. The crossing of a cheque is now deemed by law a ma- terial part of the instrument, and it is made a felony to obliterate it." Sir John Lubbock pro- poses to extend the advantages, which are certainly derived from the crossing of cheques, to Bank of England notes, by introducing a bill to enable them to be crossed also. I believe that such a proposal arises from a complete misapprehension on Sir John Lubbock's part as to the true nature of a bank-note. We shall next hear of a proposal to cross sovereigns themselves, to pre- vent them being stolen out of tradesmen's tills. 115. What are deposits? Deposits are any public or private moneys en- trusted to the care of bankers during business hours. 116. What effect has the deposit system upon the circulation ? It serves to economise the circulation, for bank- ers need only keep whatever reserve of bank-notes they find sufficient to meet the average demands of depositors ; it also serves the same purpose to an enormous extent by making transfers from one account to another possible. The amount settled at the clearing house in London by transfer, during the year from 30th April, 1870, to 30th April, 71, was 4,018,464,000, and all th's without the em- ployment of a single bank-note or sovereign. 117. Can deposits be said to form a part of the circulation ? No, for the same bank-note might possibly be 42 THE SCIENCE OF EXCHANGES. lodged as a distinct deposit by two or three differ- ent depositors in the same week. Once a deposit is lodged in any bank, it becomes a debt owed by that bank ; the amount of reserve in coin and bank-notes which banks must hold to meet the average demands of depositors, certainly does form a part of the circulation, but this is a widely dif- ferent thing from the total amount of deposits lodged in the banks. 118. What is panic ? It is a state of general alarm, arising from loss of credit. 119. What is external panic ? External panic is a panic arising from the ex- haustion of bullion, consequent upon continued adverse exchanges. 120. What is internal panic ? Internal panic is a panic arising from the amount of bank-notes issued against other security than that of bullion being too large, and thereby causing doubts as to the convertibility of the bank-notes and an internal demand for bullion. 121. What is the best guard against external panic ? The only true way of guarding against external panic is raising the rate of interest slowly and steadily during a drain of bullion, till at last it will become cheaper to export other commodities, and the foreign exchanges will turn in our favour. Whenever we buy more than we sell in our deal- ings with other nations the foreign exchanges become adverse, and the effect is the same whether THE SCIENCE OF EXCHANGES. 43 we buy commodities or invest in foreign securities only another form of buying. 122. Is there any other means of guarding against external panic ? The Bank of England may strengthen the re- serve by gradually realising securities, but a sud- den realisation of securities to a large amount is not to the advantage of the Bank or the public. 123. Is there any remedy for internal panic? As banking is dependent upon credit, our mone- tary system gives us no remedy for an internal panic except the strict limitation of the amount of bank-notes which we allow by law to be issued against other security than that of bullion. Sir Robert Peel assumed that the circulation in Great Britain had never been reduced so low as seven- teen millions, and he also assumed that it will never again be reduced lower than it has been reduced in former times, and he came to the con- clusion that in the worst circumstances he might safely allow fourteen million pounds in bank-notes to be issued against other security than that of bullion, and still have three million pounds in gold, or thereabouts, necessarily remaining in the country. By his act of 1844 he divided the Bank of England into two departments, the issue depart- ment and the banking department, and he per- mitted the issue department to issue 14,000,000 in bank-notes against other security than that of bullion, any issue of bank-notes over this amount to necessitate a corresponding amount of bullion being received into the till of the issue department, 44 THE SCIENCE OF EXCHANGES. that is, that any bank-notes issued over the amount of 14,000,000 should be only so many certificates of the deposit of a corresponding amount of bullion. Sir Robert Peel allowed the Bank of England, and it alone, to buy bullion with its own notes, and thus increase its issues. On bullion being withdrawn from the till of the issue department, a precisely equal amount of bank-notes must be cancelled by the Bank of England, so that the fluctuations in the amount of bank-notes issued over the fixed amount are regulated by the fluctu- ations in the amount of the bullion as it comes in and goes out of the country, according to the state of the foreign exchanges. Sir Robert Peel, at the same time, limited the issues of all the other exist- ing banks in England to the exact average amount of bank-notes which each of them had in circula- tion during the space of twelve weeks preceding the 12th April, 1844 ; whatever this amount proved to be, no bank in England was to exceed it, whatever amount of gold they might hold in their tills. No London bank but the Bank of England can issue bank-notes, and no bank cre- ated after the 6th of May, 1844, can issue them either. The Bank of England at present issues 15,000,000 in bank-notes against other security than that of gold coin or bullion, for some of the private banks have ceased to exercise their right of issue, and the Act allows the Bank of England to issue two-thirds of the whole amount of bank- notes which these banks used to issue. In Scot- land and Ireland bank-notes are not a legal tender ; THE SCIENCE OF EXCHANGES. 45 in England, Bank of England notes are a legal ten- der everywhere except at the Bank of England and its branches ; but there is this difference between the issues of the Scotch and Irish banks and the issues of the English banks (the Bank of England being excepted) the latter cannot issue bank- notes above the fixed amount, but the former are allowed to issue over and above the fixed amount any amount of bank-notes they please, provided that for every bank-note so issued they possess a corresponding amount of coin, of which three- fourths must be gold, and one-fourth may be silver, either at their head offices, if they are Scotch banks, or at any of the four depots chosen in Ire - land for that purpose, if they are Irish. In Great Britain, then ; the power of issue has been very strictly limited ; but even with these limitations, if all holders of bank-notes were to present them simultaneously for payment, their demands could not be met ; our monetary system must be depen- dent upon credit. 124. How does a bank increase its liabilities ? By increasing its securities, and thus paying out bank-notes or coin again when deposited in the course of business. 125. Can a bank fail as a banking concern and yet maintain the convertibility of its notes ? Certainly, if it invests too largely in securities, and those securities cannot be readily converted into cash. 126. How does a bank, which is strictly limited 46 THE SCIENCE OF EXCHANGES. in its power of issue, obtain the money to invest in securities? By employing its customers' deposits and its own capital. 127. What makes it difficult to understand questions bearing on the issue of bank-notes ? Because people do not clearly Separate in their minds the business of issuing from that of banking; issuing is creating money, banking is managing money after it has been issued. 128. What is the difference between paying bank-notes out of a bank in the ordinary course of business and re-issuing bank-notes ? Bank-notes deposited by customers in the ordi- nary course of business are already issued, and the bank pays them out again as so much money, merely keeping whatever amount is sufficient to meet the average demands made upon it; re-issuing bank-notes is issuing bank-notes again which have been tendered for payment in gold at the bank, and have been paid. The object of the Act of 1844 was to secure. that over and above a certain fixed amount of bank-notes issued against other security than that of bullion, any additional issue of bank-notes should be only so many certificates of the deposit of a corresponding amount of bullion, and therefore, when bullion is withdrawn from the issue department, a precisely similar amount of bank-notes ought to be cancelled. 129. Why is the permission to issue a certain amount of bank-notes against other security than t hat of bullion so very valuable ? THE SCIENCE OF EXCHANGES. 47 Because there is a double return of profit on capi- tal thus invested : first, the dividends arising from capital invested in profitable securities ; secondly, the interest payable on the bank-notes issued against those securities. 130. Is the power of issuing bank-notes over the fixed amount one which can be safely used by any other bank than the Bank of England ? It is very doubtful whether it is a safe power in the hands of the Scotch and Irish banks, even strictly limited as they are at present ; they may, and perhaps often do, abuse the power granted to them. 131. Give an instance to show how the Scotch and Irish banks may avail themselves of the power of extra issue. Let us suppose that one of those banks has an authorised circulation of 100,000, and notes issued to that amount against other security than that of coin, and that it holds 25,000 in coin, of which 15,000 are at its depot or head office, and 10,000 in its own till; by the Act of 1844 it might issue, if it pleased, 25,000 in bank-notes, by transferring the 10,000 in coin, which it holds in its own till, to its depot or head office, but this would leave it no fund in coin to maintain the convertibility of its authorised issue. It issues, we will say, 20,000 in bank-notes, above its fixed amount, and transfers 5,000 in coin to its head office. Its affairs now stand thus : it has a total circulation of 120,000 in bank-notes, and it holds 25,000 in coin; but as it has issued 48 THE SCIENCE OF EXCHANGES. 20,000 in bank-notes over its fixed amount, it holds, in reality, but 5,000 in coin, against which no extra notes have been issued to meet its autho- rised issue of 100,000, this is one twentieth. 132. In what, then, does the unsoundness of such a system consist ? In the necessity which it entails on any banks which follow it of evading the Act of 1844, though for very short intervals, should any pressure or difficulties arise. A part of the coin which the banks ought to keep at their depots or head offices, by the Act of 1844, if they issue any bank-notes over their fixed amount, can be called upon for a very short time, to help out the small fund of coin which the banks keep in their own tills to maintain the convertibility of their authorised circulation, and against which they issue no extra notes. Temporary as such an evasion of the Act of 1844 is, it gives the banks time to realise secu- rities and put their houses in order should there be signs of pressure. 133. Can the Scotch and Irish banks make a profit on their extra issues without evading the Act of 1844 ? As long as the times are prosperous and there is no pressure, they can ; they are able to keep a much larger note-circulation afloat, and to give much more accommodation in consequence of their extra issues. The profit is not made absolutely on the extra issues themselves, for there is the expense of issuing, the wear and tear of the notes, and a duty of seven shillings per cent, on every THE SCIENCE OF EXCHANGES. 49 issue to be taken into account ; but on the in- creased business which the extra issues bring to the bank. When monetary storms and pressure arise, the Act of 1844 must be temporarily evaded, and a risk of awakening an internal panic amongst their customers must be run. 134. Give an instance to show how large their indirect profit must be. About eight years ago the Bank of France for some considerable time paid 16,000 a month in premiums, buying gold ; this was, of course, in itself a dead loss, but the bank considered it would be much more than compensated by the in- crease in its business, as it was able to keep a much larger note-circulation afloat, and to give much more accommodation than it would other- wise have done. 135. What has been often the ruin of joint- stock banks ? Making enormous advances to directors without proper security, and alluring depositors by high rates of interest, in order to obtain the funds ne- cessary for those advances. 136. Is there any real safeguard against com- mercial disasters ? No ; the tide of trade must ebb and flow ; adverse circumstances, such as famine, or war, or undue speculation, will come upon us whatever we do ; but the Act of 1844 enables us to meet them better, because it preserves the convertibility of our paper-issues, and prevents the calamity of internal panic being added to external panic. 50 THE SCIENCE OF EXCHANGES. 137. What is the reserve in the Bank of England ? It is the amount of bank-notes kept by the bank in the till of the banking-department, in order to meet the average demands of depositors, and all other demands whatever made on the bank. When a drain of bullion begins, as the bank can- not get at the notes which are in the hands of the public, it must come on the reserve, and cancel bank-notes taken from it as the bullion is being withdrawn from the issue-department. The bank must take care to protect the reserve in order to be able to meet the demands made on her, and when a drain of bullion is going on, the way to do this is by slowly and steadily raising the rate of interest as the bullion goes on diminishing, for money is in reality getting scarce, and more ought to be paid for its use. The bank may still further protect the reserve by realising as large an amount of securities as she can conveniently do without injury to herself, and without awakening alarm in the minds of the public. The Balance-sheet of the two Departments appears weekly in the " Gazette" in the following form : ISSUE DEPARTMENT. LIABILITIES. Notes issued 37,507,905 37,507,905 ASSETS. Government Debt .... 11,015,100 Other Securities 3,984,900 Gold Coin and Bullion. . 22,507,905 Silver Bullion 37,507,905 THE SCIENCE OF EXCHANGES. 51 BANKING DEPARTMENT. Proprietors' Capital 14,553,000 Rest (Undivided Profits and Reserve Fund) . . 3,749,970 Public Deposits, includ- ing Exchequer, Sav- ings' Banks, Commis- sioners of National Debt and Dividend Accounts 7,896,805 Other Deposits 19,333,700 Seven Day and other Bills 462,405 Government Securities 13,356,411 Other Securities 20,930,994 Notes (Reserve) 11,067,120 Gold and Silver Coin . . 641,355 45,995,880 45,995,880 FRANK MAY, Deputy Chief Cashier. Dated 6th September, 1 872. The above Balance- sheet, if presented in the old form before the separation of the Depart- ments took place, would appear thus : LIABILITIES. Circulation with Bank Post Bills 26,903,190 Public Deposits 7,896,805 Private Deposits 19,333,700 54,133,695 Balance of Assets or Rest 3,749,970 57,883,665 ASSETS. Securities 34,734,405 Coin and Bullion 23,149,260 57,883,665 57,883,665 The advantage which the new form of stating the account confers, is that we can readily ascertain the proportion which exists between the supply of bank-notes and coin in the Banking Department, and the immediate demand which may at anytime arise to carry off this supply. The proper management of the Bank turns upon an accurate estimate of this proportion, and not upon the actual amount of the reserve taken by itself without reference to the amount and nature of the deposits. E 2 52 THE SCIENCE OF EXCHANGES. By tlie new form of account the Bank holds two distinct reserves, one against its issue of bank-notes, and the other against the deposits intrusted to its management ; by the old form of account the Bank held but one reserve against its circulation of bank-notes and its deposits com- bined ; this prevented the public from obtaining a true view of the Bank's position as a banking institution. If we take the Bank return of the 31st May, 1866 (answer 147), and if we compare the old and new forms of stating the account, we find that by the old form the Bank held a reserve in gold-coin, and bullion of 11,878,775, against a liability, in circulation and deposits combined, of 53,218,1 17 ; and that by the new form the reserve in the Bank- ing Department had fallen to below one million, while the deposits amounted to over twenty-six millions and a half. " The separation of the Departments,'* says Mr. James Stirling in his " Practical Considerations on Banking," (i was not a change in form only, or, as it has often been called, a mere matter of account; on the contrary, it was a change of the most vital nature, relieving the Bank at once and for ever from the perplexities which had originated in the twofold character of its management. It subjected the currency to the control of a self-acting me- chanism, following the natural movement of the precious metals, while it left the Bank free to concentrate its attention on its banking-reserve, and to conduct its money-dealing business accord- THE SCIENCE OF EXCHANGES. 53 ing to the ordinary influences of the market. On the one hand it secured the convertibility of the note, by basing on Government securities the portion held to be the practical minimum of cir- culation, and by causing the remainder to vary exactly as it would have done if metallic ; on the other, it enabled the Bank to follow the move- ments of the money-market, un distracted by ex- traneous considerations. The Act of 1844 pro- vided a legal basis of indisputable solidity for the issues of the Bank, while it left to the discretion of the directors the amount of reserve to be held against deposits. 138. What effect has a proper management of the reserve on the foreign exchanges ? A steady increase in the rate of interest will check the exportation of bullion, which is only exported because it happens to be the commodity which we can best spare at that time, and the contraction of the circulation caused by the drain of bullion, and the corresponding withdrawal of bank-notes from the reserve, will soon lead to a fall of prices, which will induce foreign nations to buy more largely in our markets, and thus turn the foreign exchanges in our favour. 139. Is it wise of the Bank of England to refuse to discount for the discount houses? Yes ; if the Bank of England were to discount for the discount houses, she would expose herself to the danger of their uniting in times of panic, presenting very large amounts of bills, and de- manding their discount on the threat of stopping 54 THE SCIENCE OF EXCHANGES. payment if they did not get it. Such a course of action would embarrass the bank, and might cause most serious mischief to the country. The dis- count houses are in the habit of taking money at call to an enormous amount, and whenever they have to pay a high rate of interest for it, they can afford to keep but small cash-balances idle. As long as the Bank of England discounted for them they discounted bills rather under the bank rate, in order to get the business into their hands, and if bad times came, and their cash was run out, they had a great mass of bills on hand ready to present to the bank for discount in a threatening manner. Now that the bank has wisely refused to discount for them, and money begins to show signs of scarcity, they are afraid to discount bills under the bank rate, and the bills, instead of being massed together in the hands of a phalanx of dealers, find their way to the Bank of England, the National Bank, or any other of the strong money-holders who are in a firmer position than the discount houses, and not likely to increase the difficulties of the situation by any very sudden requirements. 140. What was the only check on the issues of the Bank of England before the Act of 1819? The common rule of the bank, to discount only good mercantile bills at sixty-one days' date, at the rate of 5 per cent, per annum, which chanced to be about the market rate of interest at the time, with her extra issues of bank-notes. Notes issued on these terms were within some sort of THE SCIENCE OF EXCHANGES. 55 limits; that is, they were not so pregnant with mischief as bank-notes issued under no checks at all, as the country banks issued them. 141. What is the plain principle involved in the matter ? That a currency, when composed of bank-notes and coin ought to be made by law to fluctuate in its amount exactly as a currency composed of coin only would have fluctuated under similar circum- stances. There is no other means of securing that the public should always be able to obtain sove- reigns in exchange for bank-notes without any loss or risk whatever. 142. Can we prevent the temporary inconveni- ence which commerce in England suffers from when an advance in our rate of discount is caused by any sudden demand for money on the part of any nation who deals with us ? A certain amount of pressure and inconvenience is unavoidable, but by strictly adhering to the Act of 1844, and by steadily advancing the rate of interest as our circulation contracts, the matter adjusts itself. No nation can obtain more from us than we owe them, and the more our rate of inte- rest advances the more money is attracted to us from every quarter, for more can be had for it with us than elsewhere, so that pressure and inconveni- ence from this source cannot last long. 143. What is the gold and silver coin kept for in the banking-department? It is kept for the convenience of customers ; no bank-notes are issued against this gold coin, for 56 THE SCIENCE OF EXCHANGES. then the bank-notes and gold against which they are issued would be in circulation at the same time. This amount is, like the stock in a jeweller's shop, necessary to the business of a bank, and the holding it is a dead loss. 144. If the currency were purely metallic, would that be a safeguard against panic ? Certainly not; as long as the deposit system prevailed, and auxiliary currency was in existence, bankers would then, as now, hold only whatever amount of gold they found necessary to meet the average demands of their customers ; and if any extraordinary demand was to take place, they could only meet it by realising securities, which, in times of panic, must always be done at a loss. 145. Are there any valid objections to three central issuing establishments for the whole of the United Kingdom, under the control of the House of Commons ? The objections do not appear to be valid. Ob- jectors say that it would be dangerous to allow so large an amount of bank-notes to be issued against Government securities, and that it would render convertibility impossible in times of panic ; but, from the very nature of our monetary system, con- vertibility must always be impossible in times of panic, for if all the holders of bank-notes were to present them for payment in gold at one time, their demands could not be met, the securities against which our limited amount of bank-notes are issued could not be converted into gold during such an emergency. As long as the amount of bank-notes THE SCIENCE OF EXCHANGES. 57 permitted to be issued in the United Kingdom, against other security than that of bullion, is lower than the circulation could ever be reduced to in the worst possible circumstances, we are safer with our bank-notes issued against Government securi- ties than we could be if they were issued against any other securities whatever other than bullion itself. Objectors also say that entrusting the business of issuing bank notes to private enter- prise secures ,more care, diligence, and economy in the management of that business, than if it was entrusted to three central issuing establishments under the control of the House of Commons. The same might be said of any Government establish- ments whatever, but with less truth in this special instance, for the business of issuing bank-notes is purely mechanical, only requiring the very best preventives against the possibility of forgery that science can discover. 146. Sketch a plan for a new monetary system? What we propose is, that all bank-notes above a certain amount, to be fixed by the House of Com- mons, should be issued by Government in exchange for properly assayed gold 22 carats fine at the rate of 3 17s. 10|d. per ounce, exactly as sovereigns are now issued by the Mint in exchange for the same kind of gold at the same rate. Giving bank- notes in exchange for bullion at the exact value of this last per standard ounce, and which is to lie idle in a vault, as long as the amount of bank- notes, which represents it, is in circulation, is a very different thing from being a dealer in bullion ; 58 THE SCIENCE OF EXCHANGES. nor does it involve any transactions in either home or foreign securities. The House of Commons must determine what amount of bank-notes may be issued against secu- rities other than gold coin or bullion, and this amount should be unalterable without their con- sent. The Government, once this amount of bank-notes was issued, would have nothing to say to the various bankers in the country ; its duty would be simply to take care that any one who wanted bank-notes in exchange for bullion or gold coin, should be able to get them, or vice versd. This could be arranged by three issuing establish- ments at London, Edinburgh, and Dublin, where stores of bullion, gold coin, and bank-notes, should be kept for the purpose of being exchanged one for the other, according to the wants of the public. The bank-notes of the State should be a legal ten- der everywhere but at the issuing establishments ; here they would be simple certificates, establishing bearer's claim to the quantity of gold they repre- sented, and they should be allowed to go as low as one sovereign. This last regulation would tend to keep holders of bank-notes away from the issuing establishments until they required gold for expor- tation, and the tedious process of changing five- pound notes into sovereigns, and back again into five-pound notes, would be thereby avoided. . I have never seen any objection that I con- sidered valid against one-pound notes when issued under proper regulations ; and any one who has lived in Scotland or Ireland, and has given any THE SCIENCE OF EXCHANGES. 59 attention to the subject, will admit their conveni- ence of carriage and superiority to sovereigns, which are often light, and may have to be weighed. The legitimate business of a banker is to borrow and lend money already in existence, and the issuing establishments referred to would in no way interfere with this business ; it is their part to create the gold and bank-note currency, which all Her Majesty's subjects may then use to their best advantage. To each of the three issuing establishments there should be a Government clearing-house depart- ment attached, which should be open to all bankers on payment of an annual fee ; they should be per- mitted to settle with each other by drafts on the reserves which they had previously lodged at the clearing-house department, just as they now do by drafts on the Bank of England, such drafts to be payable to clearing bankers only. This system would extend the convenience of the clearing system to Scotland and Ireland, and allow the Bank of England to assume her true position as bank to the State, and therefore the great joint- stock banker excellence, and no more. I do not propose that the Government should keep their own accounts, manage the public debt, and collect the revenue ; the Bank of England ought always to be the bankers of the State, and to receive a sufficient remuneration for being so. Nothing would, with my system, be heard of duty on the part of the Bank of England to help the whole community in times of difficulty ; and 60 THE SCIENCE OF EXCHANGES. the principal advantages gained thereby would be that no bank-note would then circulate in the country, unless it was just as secure to the holder as a sovereign, and that dangerous speculations would be discouraged in their beginnings by the natural system of each bank holding its own sepa- rate reserve, and being thus forced to care for its own solvency. 147. Explain the operations of the clearing house ? The clearing house, says Mr. G. G. Newman, is a large room fitted with desks. Each banker using the house has one or more of these, marked with his name or firm. In the morning and at three o'clock in the afternoon of each week-day a clerk from each banker using the house attends, bringing with him the cheques on other banks that have been paid into his bank since last clearing ; these he deposits on the desks of the respective banks on whom they are drawn. He then credits their accounts separately with the different amounts they have placed on his desk as against his bank. Balances are then struck from the several ac- counts, and a general balance of all the balances of the several accounts, debtor or creditor, as the case may be, is struck, in which, of course, the grand total of the amount to be received by the several banks agrees with that to be paid. Each bank then gives or receives, as the case may be, a ticket or draft on the Bank of England for the amount due to, or owed by it on the result of its own balance. Every bank using the clearing THE SCIENCE OF EXCHANGES. 61 house must for the purpose keep an account at the Bank of England. (Summary of the Law relating to Cheques, 2nd edition, page 35). We add the following extract from Mr. Laing's " Theory, of Business," 2nd edition, page 171, to complete the picture : " Banks which, as the result of the day's opera- tions are in the position of having to pay a balance to the clearing house, hand a peculiar white cheque on their account at the Bank of England, tech- nically called a transfer ticket ; whereas banks which have to receive a balance, pass a green ticket, instructing the Bank of England to place the amount specified on it to their credit. The transfer tickets are conveyed to the bankers' sec- tion of the Private Drawing Office, where the clearing house account is kept. The sum of the white and green tickets should exactly balance one another at the end of the day. The Bank of Eng- land has recently been admitted to the clearing, so far as to pass cheques on other bankers re- ceived from its customers through the house ; other banks, however, still bring their cheques on the Bank of England to it at once for encashment. The effect of this arrangement on the condition of the clearing account is, of course, to place the Bank in the position of always holding a green transfer ticket, that is, of having to receive a balance." The whole clearing house system is clearly ex- plained in "London Banking," by Mr. Ernest Seyd. We refer the student to his little work, 62 THE SCIENCE OF EXCHANGES. extracting the following resume of the sys- tem : 1. We have the cheque system by the cus- tomers. 2. Its first concentration from the customers into the hands of the bankers. 3. The reduction in the clearing house to balances between each of the bankers. 4. The further reduction of these balances into one final balance for each banker. 5. The absorption of the twenty- six final balances through the clearing house account at the Bank of England" (Page 55). Now we advance nothing against the clearing house system per se ; it is an admirable one for the convenience of bankers and their customers, and we should try to give bankers throughout the United Kingdom increased facilities for clearing, rather than to diminish the existing ones. This is not the weak point of our present mon- etary system. I assert that the Bank of England should cease to hold the working cash reserves now deposited there by all the clearing bankers. These reserves may be looked upon by the Bank either in the light of deposits, or in the light of a trust to be held untouched for each bank ; if they are looked upon as deposits and treated as such, the Bank makes a hazardous and therefore illegiti- mate profit on their use ; if they are looked upon in the light of a trust, the Bank can make nothing THE SCIENCE OF .EXCHANGES. 63 by holding them for the banks, and ought not to be required to perform such a service. In my opinion the clearing house ought to be made a government department, and a clearing office established in each of our three issuing estab- lishments, previously referred to, with special vaults for the keeping of the cash reserves of all bankers who wish to enter this department as clearing bankers. We economise ready money too much, because we are not satisfied with the simple economy of depositors entrusting their money to our banks, and these last holding a sufficient reserve in actual money to meet the demands of their depositors ; but our bankers themselves must become in their turn depositors, and entrust the greater part of their reserves to the Bank of England which, as Mr. Hankey truly remarks, cannot be made to supply ready money beyond what, under the ordi- nary good management of a deposit bank, it can retain in reserve, that is to say, that while our present clearing house system continues as it is, the Bank of England is a deposit bank, well managed it is true, but still dealing with enormous banking establishments in London as depositors. We extract the following passage from the "Times" (City Article, 29th May, 1869) as the best practical commentary on our observations : " The discussion last evening as to the probable ef- fects of the new revenue arrangements on the money market has excited very little attention in the city. 64 THE SCIENCE OF EXCHANGES. Practical traders and acute speculators are alike conversant with the fact, that in whatever hands any portion of the currency may happen to be at any given time, it will not be allowed to lie idle, but will find its way to the discount market in order that it may yield some income to its pos- sessors. 53 No language can be clearer or more true, nor could we cite a stronger confirmation of the views we put forward here. The " Times " tells us that another panic may certainly be expected in 1876 ("Times," 31st May, 1869), and we tell the "Times" that, if our present system is allowed to continue, we shall certainly see a fourth suspension of the law on which our cur- rency system is based. Such a suspension ought not to be necesary, speaking theoretically as Economists are so fond of doing ; but given the existing system, and looking at its practical working, it is necessary, for it is the only safety valve we have to prevent our business boilers being blown absolutely to pieces. Commercial panics must occur from overtrading and speculation ; what we suggest is not a means of preventing their occurrence, but of diminishing their effects when they do take place. We want to lop off the unsound branches, once their un- soundness is known, instead of leaving them where they are, to spread mischief through the whole tree. But no, this is too plain and simple a course to THE SCIENCE OF EXCHANGES. 65 follow. The " Times" even declines to discuss it, it is quite impracticable. Let us sacrifice everything to our great banking establishments ; let us always stand in fear of ever- recurring panics ; let all honest, regular traders throughout the United Kingdom suffer the dread- ful infliction of a ten per cent, rate for three months when the great panic arrives. What of this ? Do not our bankers distribute dividends year after year, varying between fifteen and twenty per cent. ; and ought not " rational combinations of powerful banking establishments " to be able to protect honest traders in their hour of need ? The panaceas hitherto offered are futile to the last degree ; there is but one firm basis for the honest, regular trader to rest his foot upon. We must make each bank hold its own reserve, stand on its own merits, and take care of its own solvency. I here add, to illustrate my views, the return of the Bank of England for the week ending on Wednesday, 30th May, 1866 : ISSUE DEPARTMENT. LIABILITIES. Notes Issued 26,434,205 26,434,205 ASSETS. Government Debt 11,015,100 Other Securities 3,984,900 Gold Coin and Bullion. . 11,434,205 Silver Bullion 26,434,205 66 THE SCIENCE OF EXCHANGES. BANKING DEPARTMENT. LIABILITIES. Proprietors' Capital. . . . 14,553,000 Rest 3,419,759 Public Deposits 6,188,512 Other Deposits 20,467,080 Seven Days' and Other Bills 543,730 45,172,081 Dated 31s* May, 1866. ASSETS. Government Securities 10,864,638 Other Securities 33,447,463 Notes 415,410 Gold and Silver Coin . . 444,570 45,172,081 W. MILLER, Chief Cashier. Or, if made out in the old form Circulation with Bank Post Bills 26,562,525 Public Deposits 6,188,512 Private Deposits 20,467,080 53,218,117 Balance of Assets or Rest 3,419,759 56,637,876 Securities 44,759,101 Gold Coin and Bullion . . 1 1,878,775 56,637,876 56,637,876 The student may compare this return with that given in answer 137. 148. What is the advantage of publishing the account of the Bank of England every week ? It enables capitalists and men of business, by comparing the account of one week with another, to make some guess at what the value of money is likely to be. They look to the amount of bullion held by the bank, and the state of the reserve. 149. Would a statement of the same kind, but relating only to the central issuing-establishments proposed, have the same effect ? Certainly ; capitalists and men of business would then only look to the amount of bullion held each week by those establishments. THE SCIENCE OF EXCHANGES. 67 150. What is the difference between the system of issuing bank-notes in France, and the system we have in England? The precious metals are the basis of our bank- note circulation, because Sir Robert Peel, although he allowed a certain fixed amount of bank-notes to be issued against securities other than that of the precious metals, arranged that all bank-notes over this amount are to be issued against the precious metals only. The Bank of France considers good mercantile bills approved of by the Bank a sufficient basis for the issue of bank-notes. M. Coullet, a very high authority, writes thus : " une circulation de billets de banque, basee uniquement sur les effets de commerce d'un pays, n'offre aucun peril et presente les plus grands avantages au commerce et au public tout en tier." Now, however good the bills may be against which the bank-notes are issued, the simple prin- ciple of making the precious metals the basis of the bank-note circulation is broken through in France ; and once we come to making property of other kinds a joint basis with gold and silver, we do in reality introduce a new measure of value, and we must depend on the discretion of the issuers of such bank-notes as to how far they may choose to go on their perilous path. The Bank of France has been managed with great skill during the reign of Napoleon III, and the extraordinary financial solidity which it dis- 68 THE SCIENCE OF EXCHANGES. plays since the war of 1870 71 ought to make all Frenchmen proud of such an institution. Mr. Ernest Seyd makes the following statement in the " Times:" " from the 13th August, 1870, when the law of prolongation came into force up to the present time (6th July 1 872), on a grand total of 868,000,000 francs, or 34,700,000 of suspended or prolonged bills, there is a loss of 100,000, or scarcely one third of 1 per cent. Englishmen are proud of their financial solidity, but if such dis- asters, as happened to France, were to fall upon this happy land, and if the "bill cases" of our banks and the Bank of England were suddenly turned into u suspended paper," I question whether one third of 1 per cent would cover the ultimate total loss." 151. What proportion did the metallic circula- tion of France bear to that of the United Kingdom before the war of 1870? Mr. Ernest Seyd assumes that the total amount of precious metals in use as money in France ranged between 330 and 350 million pounds ster- ling in June, 1870, and that after payment of the whole indemnity, a sum of from 125 to 150 million pounds sterling will still remain in France. Mr. Seyd estimates the metallic circulation (including uncoined bullion) in England at 113 million pounds sterling, so that France, after pay- ing 200 millions, will have more metallic money for purposes of exchange than England finds it necessary to keep. (London Banking, Pages 3 and 4.) THE SCIENCE OF EXCHANGES. 69 152. What may we learn by observing the great resources which France proves berself to possess ? We may, and I hope that we shall learn the im- portance of sufficient reserves of the precious metals being held in the United Kingdom ; our people do not hoard their money as the French do, and as we all keep as little ready money by us as possible, we carry our economy in this respect too far. " Ready money is a most valuable thing," says Mr. Hankey in his excellent treatise on Banking ; " it cannot from its very essence bear interest everyone is therefore constantly endeavouring to make it profitable, and at the same time to make it retain its use as ready money, which is simply impossible." 153. What does a contraction of the circulation lead to ? It leads to an increase in the value of the cur- rency and a gradual fall of prices in consequence of that increase in value ; we then sell more com- modities to foreign nations than we did before, for they are encouraged to buy by the fall in prices, and this serves to turn the foreign exchanges in our favour. 154. What does an expansion of the circulation lead to ? It leads to a depreciation in the value of the currency and a gradual rise of prices ; we then buy more commodities than we did from foreign nations, for we want to get rid of our spare cash. 155. Why is bullion exported? 70 THE SCIENCE OF EXCHANGES. Because it happens to be the cheapest commodity for us to export at that time we can best spare it. 156. Why is bullion imported ? Because it happens to be the cheapest commodity for foreign nations to send to us at the time it is imported; besides, when our circulation begins to get contracted, standard gold begins to increase in value at home, the rate of interest rises, and money comes to where it is most wanting and bears the highest price. 157. What is the difference between a fall in price and a fall in prices ? A fall in price is a fall in the price of some one kind of commodity, and is the result of some alteration in the proportion which the supply of that commodity in some particular market bears to the demand for it there. A fall of prices is a fall in all prices generally, and is therefore the result of some alteration in the value of gold, that being the standard of value by which we measure the value of all other commodities in Great Britain. A corresponding difference exists between a rise of price and a rise of prices. 158. Has the state of the circulation any effect on the common alterations in prices which are con- stantly happening ? No ; for these alterations in prices are not general, but confined to particular commodities ; partial rises, or falls in the prices of particular commodities, arise from some alteration in the proportion which the supply of those commodities bears to the demand for them. A permanently THE SCIENCE OF EXCHANGES. 71 altered state of the circulation will affect all prices without any exception, although other circum- stances may frequently prevent the effect being visible. 159. What effect has the state of the circulation on the rate of interest in Great Britain ? Any expansion or contraction of the circulation will have a temporary effect on the rate of interest, causing it to rise or fall as money is plentiful or the reverse, but this effect can only last till the circu- lation returns to its natural state. 160. Will a steady fall in the value of gold all over the world cause the rate of interest to fall in Great Britain? No ; for the interest payable in gold will fall in value in exactly the same proportion as the prin- cipal lent in gold ; temporary fluctuations in the rate of interest will continue to take place, what- ever may be the change in the value of gold, for they depend upon the particular value which money has at a particular time in Great Britain, and not upon the general value of gold all over the world. 161. Will a steady fall in the value of gold have any effect on the circulation in Great Britain? It will have the effect of numerically increasing the amount of currency in use in that country. 72 THE SCIENCE OF EXCHANGES. CHAPTER Y. GOLD. 162. Is there any such thing in reality as a standard of value which is subject to no variation ? No, there is not. If gold is chosen as the least variable standard, and consequently the one by which we are to measure the value of all other commodities, it follows that when gold rises in value all other commodities must fall, and when gold falls in value all other commodities must rise. 163. What does the value of gold depend upon? It depends upon the proportion which the supply of gold bears to the demand for its employment. In considering the gold question we must bear in mind that the supply of gold may go on increasing for a long time without any alteration taking place in its value, provided that the demand for its em- ployment increases in the same proportion. 164. What causes have been at work to increase the demand for gold during the last ten years ? A great stimulus to every kind of industry has been given by the best medium of exchange be- coming more plentiful than it was before, and the commerce of the world has been much more rapidly developed on account of that stimulus. Fresh supplies of gold, up to a certain point, have not the effect of diminishing the value of gold, but of in- THE SCIENCE OF EXCHANGES. 73 creasing the demand for its employment. The work of colonising new countries is carried on more rapidly, railways are constructed, packet services established, docks built in short, every kind of capital is more readily created ; and all this activity in business absorbs the gold as it arrives. 165. Up to what point do increasing supplies of gold give this stimulus to trade and business ? Till a marked rise in the price of all commodi- ties but gold takes place ; once this general rise in prices takes place, gold has begun to fall in value, and the only effect which further supplies of gold on the same scale can have is to cause a further steady increase in prices. 166. What separate causes may influence the exchangeable value of any commodity in a country where gold is the standard of value ? There are two causes. One is the proportion which the supply of that commodity in any particu- lar market bears to the demand for its employment there ; the other is the abundance or scarcity of gold itself in that market. 167. What must be the first signs of any fall in the value of gold? A marked rise in the price of all other commodi- ties must take place. Once Europe, for instance, is saturated with supplies of gold, she will soon begin to offer less commodities in exchange for an ounce of that metal than she formerly did, and gold will fall in value. Rises in the prices of par- ticular commodities are often attributed to a fall in the value of gold, when they ought to be attri- 74 THE SCIENCE OF EXCHANGES. buted to the supply of those commodities being too small in proportion to the demand for their employ- ment. Secondly, in those countries where gold is the standard of value there will be a steady nume- rical increase in the amount of currency required by the wants of trade. 168. Had this general rise of prices taken place in 1865 (date of third edition of this work) ? The best authorities on the subject disputed whether it had or not. We find Professor Cairnes stating in the 24) f 2 ' ( -950 milliemes. 1 20 1 20 112 THE SCIENCE OF EXCHANGES. British gold better 3^ carat grains = French gold, report '950 milliemes fine. The tariff rates for milliemes of gold and silver begin with 1000 as their highest expression in each case, better 2 carats than British standard gold, and better 18 pennyweights than British fine silver, thus : For gold. Tariff rates at French Mints. British reports. Milliemes. Francs per kilo. Carats. carat grs. 1000 . . 3437 Better 2 999 . . 3433 56 M 1 3| 998 . . 3430 12 J) 1 3| 997 . 3426 68 5) 1 3 1 And so on till we come to British standard gold : 916 . . 3148 29 Standard And to French standard gold : 900 . . 3093 30 Worse If The intrinsic value of a kilogramme of pure gold in France, without any* deductions being made, is fr. 3444-44, and of a kilogramme of pure silver, fr. 222'22. For silver Tariff rates at French Mints. British reports. Milliemes. Francs per kilo. Pennyweights. 1000 . . 220 56 Better 18 999 . . 220 33 17f 998 . . 220 11 997 . . 219 89 17$ And so on till we come to British fine silver : 925 . . 204 01 THE SCIENCE OF EXCHANGES. 113 And to French standard silver : For silver Tariff rates at French mints. British reports. Milliemes. Francs per kilo. Pennyweights. 900 . . 198 50 Worse 6 The prices per kilogramme in francs are found thus; we multiply the price for either French standard gold or silver by the number of milliemes the price of which we want to find out, and di- vide by the standard number of milliemes. For instance, the price in francs per kilo for gold 916 fine is : Francs. 3093-30 x 916 = francs 3148-29 900 For silver 925 fine 198-50 x 925 - = francs 204*01 900 In doing these sums, if 5, or above it, remains after the division, it makes the rate another cen- time. There are regular tables of tariff rates for milliemes and British reports, constructed to shorten exchange calculations. (See " Bullion and Foreign Exchanges,'* pp. 152, 153). As I am treating of the silver coinage of the United Kingdom in this answer, I may remark that the issue of half-crowns from the Mint has been suspended since 1851, and that the public are not only deprived thereby of a most con- venient coin, but that a large additional number I 114 THE SCIENCE OF EXCHANGES. of sixpences must be coined to do the duty of those contained in the half-crowns. It is just as easy to count by eighths of a sovereign as by tenths, and when we have a good old coin like a half-crown which we all like to see, and which can stand wear and tear well, we ought to keep it. " Yideant poveres et lastentur." THE SCIENCE OF EXCHANGES. 115 CHAPTER VI. THE FOKEIGN EXCHANGES. 200. Give an instance of exchange when it is said to be favourable, when adverse, and when at par between two places in different countries. (1) When you pay a sum of money in London which contains ten ounces of standard gold by mintage valuation, for a bill which you can have cashed in New York for a sum of money which contains an equal quantity of standard gold by mintage valuation, exchange is said to be at par between London and New York. (2) When you pay less in London for such a bill, it is said to be at a discount, and exchange is said to be in favour of London, and against New York. (3) When you pay more in London for such a bill, it is said to be at a premium, and exchange is said to be against London, and in favour of New York. The true par of exchange, therefore, between any two places in different countries, is the being able to obtain a quantity of standard gold or sil- ver, when you cash a bill in the one place, exactly equal to the quantity of standard gold or silver which you have paid for the same bill in the other ; it is not the merely obtaining an equal nominal i2 116 THE SCIENCE OF EXCHANGES. amount of money, for if the currency of any country is much depreciated in value from over- issues of paper money or a base coinage, so much the more of it will be required to make up the necessary amount, and this in exact proportion to the extent of the depreciation in value -which has taken place. 201. What is a rate of exchange ? Ib is the price of the money of any one country reckoned in the money of any other country. 202. What is the course of exchange ? The fluctuations in the rate of exchange above and below what is considered to be par between any two places in different countries are called .the course of exchange between those places. When two countries have one and the same standard the par of exchange between them is on a solid, fixed basis ; but when one country has gold for its standard and the other has silver, the number of ounces of standard silver in the one country which are to be considered equal to an ounce of standard gold in the other must first be fixed, and the par of exchange is on a basis which must fluctuate slightly as the relative proportion in value which the precious metals maintain towards each other fluctuates. 203. Explain the course of exchange as quoted in the newspapers. If the rate of exchange is considered with regard to any two places, it will be seen that the price given for any particular sum of money may vary, but that the particular sum of money to be THE SCIENCE OF EXCHANGES. 117 bought is always the same, though more or less may be given for it. For instance, Paris may give London 25 francs 20 centimes, or 25 francs 30 centimes for a pound sterling, but whatever Paris gives, the pound sterling is fixed and in- variable, though the price paid for it may vary. The place which pays a variable price in its own money for a fixed sum in the money of some other place is said to give so much of its own money, while the place to whom that variable price is paid for the fixed sum in its own money is said to receive so much of the money of the other place ; thus, London gives St. Petersberg 38J pence for one silver rouble, but receives 6 dollars 24J silver groschen from Berlin for a pound sterling. (See next page.) 204. How many kinds of exchanges are there ? There are two direct, and arbitrated. Direct exchange is the operation of exchange between any two places in different countries, without the medium of any other place, as between London and Paris. Arbitrated exchange is the operation of exchange between any two places in different countries, through the medium of some other place or places in other countries. 205. What is the object of bankers and cambists in all these operations ? It is to choose whatever mode of payment costs them least ; for remittances abroad they will choose whatever mode of payment gives the greatest sum in foreign money for a given sum in the money of their own country, and for returns to their own 118 THE SCIENCE OF EXCHANGES. . . .O* * t bQ bb bb t> k> k> kQ >* "^ tiD fcO bO j O O 0? ^i O erf ^ "p^ 15 15 +j +? +e+?^^-2 w ^ .-H ie S^^ 3j fc$ o iii iiiiii bO H 1 ^1 iSS .M 8 a *a >H ^ &" [iW a -s ai*JUl!.Sl Sc-5 o -!H oQ-^o-t- >r Spirii i >H ; s -a s & a u s a 5 s. .- -^ J;-?* ***: T^ CD O ^ tN i i -; - jA Q o So,2c9ffiC9ei 2 CJ Pd".-o<^ -nnH tfoo os ^ a ^ P< -^ CN M O *s , W5 11111 a^-in^.o .0.2 I '^g^fLiPHp^CKSk a d^ p^-^H <5~-0 53 ^o ^ o o - bC-E bo o 2' llill : = : r s s 4l-4 1 1 J 2i |9 THE SCIENCE OF EXCHANGES. 119 country they will choose whatever mode gives the greatest sum in the money of their own country for a given sum in the money of any foreign coun- try. What is bad, therefore, for remittances, will be good for returns, and vice versd ; for instance, the rate of 25 francs 70 centimes per 1 is a good rate for remittance to Paris from London, because you get more foreign money than usual for a given sum of your own money, but it is a bad rate for a return of money to London, because you get less of your own money than usual for a given amount of foreign money. If we want to buy lemons at Palermo, the more of them we can get for a sove- reign, the better for us ; but if we want to sell lemons there and obtain a sovereign for them, the fewer the lemons we have to give to get that coin, the better for us. If we substitute Italian lire for the lemons we shall see that when we want to sell sovereigns and to buy lire, the more lire we can get the better the exchange is for us ; while if we want to sell lire and to buy sovereigns, the fewer lire we have to give to get the number of sove- reigns required the better for us the exchange is. Hence an Englishman buying sovereigns at Pa- lermo would like very well to obtain them at 24 lire Italiane each, while an Englishman selling sove- reigns there would like to get 26 lire Italiane for each of them if it could be had. The price which the operator would like to pay, varies according to the nature of the transaction. The terms cash and bills are generally used instead of remittances and returns; thus, when 25 francs 70 centimes 120 THE SCIENCE OF EXCHANGES. can be had for 1 in Paris, it is said to be better for cash in London, that is, the laying out of cash in London, and worse for bills or receiving returns from Paris, because less English money can be then obtained for a given sum of French money. The amount of a bill payable in a foreign country is usually expressed in the money of the country in which it is to be paid, and the rate for brokerage is generally a tenth per cent, in the principal places of Europe. 206. Is there any limit to the extent of the rise above or the fall below par, as the exchange be- tween London and any other place is favorable, or the reverse ? In ordinary cases the limit is the total expense of transmitting bullion from the one place to the other ; by total expense we do not mean the mere carriage of bullion, for, except in times of war, this will vary hardly at all, but we mean all charges whatever connected with the transmission of bul- lion, including the calculation of the rates of interest obtainable for the money represented by the bullion in the country it is sent from and in the country it is sent to. If a merchant had to pay more for a bill on any place than it would cost him to transmit bullion or coin to that place, he would not buy the bill, but would send the bullion or coin instead ; on the other hand, a banker or cambist who holds a bill will not generally take less for it than it would cost him to send it to the place on which it is drawn, have it cashed there, and the proceeds sent to him in coin or bullion. THE SCIENCE OF EXCHANGES. 121 The higher the rate of interest rises at home the more it will cost to send bullion or coin abroad, as the price which could have been had for its use as money at home must be taken into consideration, and, except in the case of a loan, it will only be transmitted from one country to another when this is the cheapest mode for the deb tor- country to satisfy its foreign creditors, either from its having superfluous cash at home or from its having no other mode of payment immediately available for the purpose. u Merchants," says Jean Baptiste Say, " find out the difference of purchasing power, which the money of any one country may possess in any other country, by comparing what that money is able to procure for them there with what other kinds of merchandise would procure, if sent in- stead of money." " A merchant who is considering whether he will export piastres or Malaga wine from Spain to France, compares the quantity of any particular commodity which a thousand piastres will pro- cure for him in France, with the quantity of the same commodity which Malaga wine to the value of a thousand piastres in Spain would procure for him if exported to France. "If, for instance, a thousand piastres when sold in France would be able to purchase a hundred pieces of cloth of Brittany, and if Malaga wine, worth a thousand piastres in Spain, and exported to France to be sold there could only purchase ninety- six pieces of the same cloth, there would 122 THE SCIENCE OF EXCHANGES. be a gain of four per cent, on sending the piastres instead of the wine, supposing the same cost of transmission in each case. " When the precious metals, from the effect of payments of money which we have to make to other countries, become scarce in our own, so as to raise their value at home by two or three per cent, only, our merchants are directly interested in importing them ; bufc our merchants cannot im- port the precious metals without paying for them, without exporting some equivalent in the produce of our own country. " It is to the last degree plain that we can pay our debts with our produce only, or, what comes to the same thing, with what we acquire by the sale of our produce. " A country like Mexico, which pays for its pur- chases abroad by the export of silver bullion, is still paying its debts with the produce of its soil and its industry, for silver bullion in such a case forms a part of the produce of the country." (Notes 24 and 25 Catechism, 2nd edition.) 207. Give an explanation of the valuing of Gold? What we call the Mint price is a division and not a price, because gold is divided in the same way at the Royal Mints; nor has the value of the sovereign anything to say to this division, whether sovereigns rise or fall in value, whether the Mint be in London or at Sydney, 40 pounds troy of gold 22 carats fine are divided into 1,869 standard ingots or sovereigns. THE SCIENCE OF EXCHANGES. 123 However largely the production of gold in Australia might be increased, the only effect this would have would be to make it fall in value as compared with other commodities ; more of it would then be sent to London ; and this, if con- tinued long enough, would make gold in London fall in value also. Once the trading communities of the world have enough gold at a certain value to carry on their operations with, any further supplies can only have the effect of making the metal fall be- low that value, as compared with all other com- modities. Where three sovereigns had a certain purchasing power, four will then be required, and so on. " By Mr. Dunlop's statement," says Colonel Smith (page 51, " Remarks on a Gold Currency "), " Australian gold costs the same, if not more, on delivery in London, as it does landed in India, namely 3 18s. 4d. per standard ounce; never- theless, the greater part of it is sent to England, and sold to the Bank for 3 17s. 9d. per ounce only." Such a statement may appear puzzling at first, but we think it can be made quite clear by the following instance : Let us suppose a wool mer- chant in Australia to have some reason for setting up business as quickly as he possibly can in Lon- don. He goes to another wool merchant at Syd- ney, and he says, u I know you have a good lot of wool on its way to London, I shall be glad to give you some of mine which I have here in ex- 124 THE SCIENCE OF EXCHANGES. change for it, and you will give me an order to enable me to take yours when it arrives in Lon- don.' 7 If wool in London is worth one-tenth more than it is in Sydney, his friend answers, u Your wool and mine are equally good, therefore 1 have no objection, but for every ton I give you delivered in London, you must give me a ton and 2 cwt. delivered here." Wool is worth more in London than it is in Sydney, and therefore, to get a ton of wool delivered in London, more than a ton, though the wool is equally good, must be given at Sydney. It is exactly the same with gold ; it is sent from Australia because it is worth more in London, and therefore, to secure the delivery of 10 ounces of 22 carat gold in London, somewhat more than 10 ounces of the same gold must be given in Sydney, so that where gold is worth the least, the quantity of it which we have to give to secure its delivery in the countries where it is worth most, must be always greater than the actual quantity which is delivered in such countries. For instance, if 22 carat gold in Lon- don is worth one -tenth more than it is at Sydney, and, if we exclude the expenses of transmission each way, to get 10 ounces delivered in London we must give 11 ounces at Sydney. On the other hand, if we are in London, and want 10 ounces of 22 carat gold delivered in Sydney, we need only give 9 IT ounces. As the Mint price or division of gold is exactly the same in each place, our only way of expressing the nature of the transaction is by adding or subtracting from the Mint price in THE SCIENCE OF EXCHANGES. 125 London or in Sydney ; we must add one-tenth of 3 17s. 10d. to this sum itself, to represent the price of gold in London bought at Sydney, while we must subtract one -eleventh from 3 17s. lOid. to represent the price of gold in Sydney which is bought in London. We thus arrive at the Aus- tralian and Indian price of 3 18s. 4d. It was this difference in the value of the same quantity of standard gold in two different coun- tries at the same time which Mr. Goschen was thinking of when he said, "if we could get rid of all fluctuations of exchange, that would indeed be a very agreeable result. But even if the piece of twenty-five francs was made equal to the sovereign, and the two coins were absolutely identical, were two sovereigns in fact, the sovereign in France would not necessarily be equal to the sovereign in England. It would still depend upon the balance of trade ; upon the demand for gold for remittance to England, or for remittance to France; you would never get rid of the fractions." I am decidedly against the introd action of an international coinage, but I agree with Mr. Jacob A. Franklin in thinking that an international Mint code might be very useful, whereby all bars of gold held in stock, and prepared for coinage, should be of one weight, quality, length, and thick- ness, and have their value stamped upon them by the Mint they came from ; they would prove a very convenient means of remittance, as they could be sent in sealed parcels from one Mint to another. 126 THE SCIENCE OF EXCHANGES. Our credit, both at home and abroad, depends on the quality of our gold coinage, and we ought therefore to trust to none but our own Royal Mints for its manufacture, and to none but a Pyx Jury of English Goldsmiths for the verifica- tion of its weight and fineness. " The object of the trial of the Pyx is to satisfy the public that the coins issued from the Mint are accurate, both in respect of weight and fineness, and this guarantee is furnished by means of a periodical examination made by the Freemen of the Gold- smiths' Company, under the direction of the Crown." (First Report of the Deputy-Master, page 34.) The trial of the Pyx is to be held once in every year in which coins have been issued from the Mint. One coin is taken from each journey weight, and the gold and silver coins carefully laid by in sealed packets. The jury then take from each packet as many coins as they think necessary for the purpose of the trial ; they first weigh these coins, and then they assay them individually to ascertain their fineness. " The jurors having assembled and their names having been called over, the Queen's Remembrancer administers the following oath to them : * You shall well and truly, after your knowledge and discretion, make the assays of these moneys of gold and silver, and truly report if the said moneys be in weight and fineness according to the standard weights for weighing and testing the coins of the realm, and the standard trial plates of gold and silver used for determin- ing the justness of the gold and silver coinage of the realm in the custody of the Board of Trade, and be in conformity THE SCIENCE OF EXCHANGES. 127 with the first schedule of the Coinage Act, 1870. So help you God.' Before dismissing the jury to the performance of their duties, the Queen's Remembrancer addresses a few remarks to them, specially pointing their attention to the schedule mentioned in their oath, and to the instructions generally contained in Her Majesty's Order in Council. The following extract from the first schedule of the Coin- age Act, 1870, will show at a glance the delicacy of test to be observed by the jury in weighing and assaying the various moneys submitted to their trial, and the closeness to Standard to which the officers of the Mint are compelled to work. The Imperial weight in grains only is here given : Coin. Weight. Remedy. Sovereign . . 123-27447 0*20000 Half-sovereign . ' 61 63723 O'lOOOO Florin . . . 17454545 072727 Shilling . . . 87-27272 0-36363 Sixpence. . . 48'63636 0-18181 " The standard fineness for gold coins is ll-12ths fine gold and l-12th alloy, or millesimal fineness 916*66 ; the remedy, or margin allowed to the Master of the Mint on coinage being millesimal fineness 0*002. For silver coin the standard fineness is 37-40ths fine silver and 3-40ths alloy, or millesimal fineness 925*, the remedy being millesimal fine- ness 0-004. "Before the jurors proceed to the laboratory to commence their operations, they are furnished with small portions of the Standard trial plates, in the custody of the Board of Trade, to guide them in their assay of the coins deposited in the Pyx. " At the hour named by the jury for rendering their ver- dict, the Queen's Remembrancer again attends at Goldsmiths' Hall to receive it." (From the Times.) The jury also weigh the residue of the coins left in the packets in bulk to ascertain that they are within the remedy for weight. 208. What is the effect of a mintage or charge on the manufacture of standard coin ? 128 THE SCIENCE OF EXCHANGES. As long as any currency continues at its usual value as compared with the other currencies of the world, a mintage, or import duty on bullion turned into coin, paid by bearers of gold to the Mint, will add to the value of the gold currency in question. It therefore acts as a bar to prevent the coin being exported, because during this par- ticular state of the circulation, the coin is worth more in its own country than in any other. But let us suppose the currency to expand for a time, and therefore to become depreciated in value from redundancy, the coin gradually sinks to its actual intrinsic value as metal, while the depreciation is going on. It is then exported or melted until a gradual contraction of the circulation restores the currency to its usual value. The increased value, therefore, which a mintage gives, cannot be always maintained, because when the circulation of any country is contracted its coin will be worth more, and when it expands and becomes redundant, its coin will be worth less. " It is my opinion/' says Mr. Goschen, M.P., c< that although at the time of coining, the coin is more valuable than the bullion from which it is made (at any rate in the opinion of the person who carries the bullion to the Mint to be coined), that increased value cannot be permanently maintained, and under certain circumstances, of not unfrequent occurrence, actually disappears." (Blue Book on The Coinage, page 124.) M. Chevalier calls the actual expense of making coin brassage, when paid by those who bring the THE SCIENCE OF _ metal to the Mint ; he terms any charge made by Government in addition to brassage, seignorage. It is undesirable in my opinion to make any charge whatever on the manufacture of standard bullion into standard coin, because the actual par of exchange depends, as the " Times " points out, upon the terms upon which standard bullion can be converted into standard coin. I give the extract from the City Article, 21st March, 1 870 : " The change in the method of stating assays of gold bars at the Bank of England is of importance. Hitherto, it appears, they were stated at 1 -768th (|th carat grain) fine, and the importer ran the risk of losing 1 in every 768, while on the average the loss actually amounted to 1 in every 1,536. The new system states the fineness to 1-3 millieme, giving a risk of 1 in 3,000, or an actual average loss of 1 in 6,000. The difference between these averages is 0'493 pence (^d.), equivalent on standard gold to 10s. 6d. for every J1,000. An experienced writer on the subject points out that, small as this difference seems, it nevertheless raises the actual pars of exchange between England and other countries by J per mille in our favour. The true par of exchange results from the respective fine gold contents of the coins ; the actual par depends upon the terms upon which gold bullion can be converted into such coin. In per- fecting these terms, not only does the importer of gold receive more sovereigns for bullion, but on all exchange transactions now current, whether in the shape of bills or contracts of all kinds (foreign investments in State debts, &c., included) an advantage of Is. per cent, accrues to the country a consi- derable item when calculated on the many millions involved. The change is of still greater importance for the future. It is tantamount to relieving the importation of bullion of a tax of -^d. per oz v and to doing away with a premium of Jd. per oz. in favour of exportation. In regard to the French exchange, for instance, whereas now the rate of 25f. lOc. per &l leads to the export of bullion from the Bank, it must in future fall to 25*08 before withdrawals become practicable, and, instead of receiving gold from Paris, K 130 THE SCIENCE OF EXCHANGES. when the exchange is in our favour at 25*35, we shall already receive at 25'33j. The same rule applies to other exchanges ; we shall receive gold sooner, and keep it longer." Now I apply the same reasoning to the l|d. per ounce which the Bank now levies as an import duty on all standard gold brought to it for sale, amounting to 1*605 per mille. The fact that the Bank receives this import duty instead of the Mint, does not alter the nature of the tax at all ; the importer must pay it in order to get sove- reigns ; it remains a mintage still. ( See the Gold Coinage Controversy, page 211). I think that one of the advantages to be de- rived from the system of issuing- establishments, which I have referred to, would be the doing away with all charges whatever on the actual manufacture of standard coin, that is to say, that Mint-notes would then be exchanged for standard bullion on delivery at 3 17s. lO^d. an ounce. I here refer the student to Mr. Hankey's a Treatise on Banking," page 91, for a confirmation of Mr. Ernest Seyd's statement, that the Bank of Eng- land note-issue is very expensive and wasteful; the assaying of gold for coinage purposes costs exactly double what it ought to do, because the Bank of England does not accept gold bars until they are re-melted into Bank of England shapes, and each bar must be assayed by treble assay at a cost of 4s. 6d. per bar ; yet when these bank-bars are sent to the Mint for coinage, the resident assayer must assay them over again, as no metal, THE SCIENCE OF EXCHANGES. 131 which has not been standarded at the Mint, can be melted into the Mint ingot iron forms, which are 1 inch thick by If wide, and 24 inches long, and which turn out ingots weighing about 320 ounces. Mr. Roberts, chemist of the Mint, describes the process of gold assaying thus : 1st process : the portion of metal to be assayed is adjusted to an exact weight by cutting and filing. 2nd process : the accurately weighed portions of alloy are added to molten admixtures of lead and silver, contained in porous cups, or u cupels," of phosphate of lime, which are arranged in rows in a muffle, or small oven. The proportions of the latter metals are calculated so as to bear a definite relation to the supposed amount of gold and base metals present in the alloy. Result : the lead oxydizes, and is absorbed by the porous u cupel," together with the copper and other oxydizable metals, and the silver and gold remain in the form of a button, which may also contain platinum, iridium, or metals possessing similar properties. 3rd process : the button is reduced by rolling to a thin strip, which is annealed and bent into a loose coil, or " cornet.' 7 4th process : the " cornet " is placed in nitric acid of the specific gravity of 1 '25, and the acid is maintained at an incipient ebullition for fifteen minutes ; the coil is then treated in a similar man- ner with nitric acid of specific gravity 1*4; the K2 132 THE SCIENCE OF EXCHANGES. silver is removed by the action of the acid, and the gold remains in a spongy state. 5th process : the sponge of gold retains the ori- ginal form of the coil, but it is necessary to impart a certain degree of coherence to the metal by annealing it at a dull, red heat. I may here ob- serve that a small quantity of silver is invariably retained by the gold. It is necessary, therefore, to make check assays on pure gold, or on stan- dards of known composition, upon which the accuracy of the result will in a great measure depend. 6th process : this consists in weighing the gold u cornet." The weights employed bear a decimal relation to the original weight of the assay piece operated upon, and the amount of gold therefore present in the alloy is at once indicated without further calculation. The method of silver assay by cupellation pos- sesses great antiquity, and is still retained at the Mint. The process consists in melting the alloy in a (l cupel," with an amount of lead which bears a definite relation to the weight of the supposed amount of base metal associated with the silver. The weight of silver which resists oxydation at once indicates the amount of precious metal origi- nally present in the assay piece. (First Mint Report, page 103). 209. What is the natural tendency of bullion? It is to flow towards those markets where the best price can be obtained for it, so that the raising of the rate of interest to a very high point in any country THE SCIENCE OF EXCHANGES. 133 has the double effect of preventing the exportation of the bullion or coin which is in that country and of attracting bullion or coin to it from foreign countries; what is called the comparative exchange between any two places in different countries is the price of gold or silver in the one place, as deduced from the price in the other ; the data for these calcula- tions are the price in the foreign place, and the rate of exchange at which either the cost is drawn for, or the proceeds of the sales are remitted for, with the relations between the weights and the de- grees of fineness at which the prices are reckoned. For instance, we read in the papers, under the head of c( comparative exchanges," such statements as the following : The quotation of gold at Paris is 2 per mille pre- mium, and the short exchange on London is francs 25*25 per 1. On comparing these rates with the English' Mint price of 77s. 10|d. per oz. for stan- dard gold, it appears that gold is about one-tenth per cent, dearer in London than in Paris. By advices from Hamburg, the price of gold is 428 per mark, and the short exchange on London is 13 -5^ per 1. Standard gold at the English Mint price is therefore about four-tenths per cent, dearer in Hamburg than in London. The course of exchange at New York on London for bills at 60 days' sight is 109 (25th July, 1872); at this rate there is no profit on the importation of gold from the United States. When the exchange is expressed in paper cur- rency, the premium on gold is added. 134 THE SCIENCE OF EXCHANGES. PARIS AND LONDON. ? shillings = 1 oz. troy. 1 oz. troy = 31*103496 grammes. 1000 grammes= 3151/30 francs. 1000 francs = 1002 (premium included). 25-25 francs - 20 shillings. 311035 x 3-15130 x 1002 x 2 -=77-792 25-25 or 3 17s. 9Jd. Gold is therefore Id. dearer in London than in Paris, or rather more than a tenth per cent., if we take a hundredth part of the given price as one per cent. HAMBURG AND LONDON. ? shillings = 1 oz. troy. 82 oz. standard gold = 10 Cologne marks, fine (in gold). 1 Cologne mark =428 marks banco. 13*5| marks banco, j = 20 shillings (see Course or 13-34375 decimal ) of Exchange, 203). 10 x 428 x 20 -= 78-23156 82 x 13-34375 or 3 18s. 2fd, as the price required; so that gold is 4jd. dearer in Hamburg than in London, or rather more than four-tenths per cent. The Cologne mark, fine, is equal to 3,608 English troy grains. THE SCIENCE OF EXCHANGES. 135 NEW YOKE AND LONDON. ? United States dollars = 1. 1869 sovereigns = 40 Ibs. troy. 1 pound troy = 5760 grs. British Standard. 24 grs. Br. St. = 22 pure gold. 9 gs. pure gd.= 10 gs. Unit. States Std. 258 gs. U. S. St. = 10 dollars. 40 x 5760 x 22 x 10 x 10 -=4 dollars 86 cents. 1869 x 24 x 9 x 258. A pound sterling is taken at 4 dollars 84 cents., according to tariff. I give the following extract from " Bullion and Foreign Exchanges," page 347, by Mr. Ernest Seyd: " According to an old United States' coinage, the dollar was formerly valued at 54 pence, so that 40 dollars were worth 9, and 100 dollars 22*500, but in the present coinage 100 dollars are worth only 20*5483, which makes a differ- ence of 9*4981, or 9^- per cent. ; so instead of adopting the new form of exchange, the old valua- tion of 100 dollars, equal to 22 10s., has been re- tained; and the difference is quoted by way of premium on the 100. The exchange between New York and London is thus quoted at New York either at a premium varying from 8| to per cent., or it is quoted simply London, at or 1 10 J. The actual Mint par being, according to this system, exchange on London 109^ dollars in gold, for 22 10s. There is, therefore, no profit 136 THE SCIENCE OF EXCHANGES. on the importation of gold from the United States at the rate given." 210. What generally regulates the rise above or the fall below par, which is constantly going on within the limit which we previously mentioned, between any two places in different countries ? The proportion which exists between the num- ber of bills on either of those places which chance to be on sale in their respective markets, and the demand for their employment. If, for instance, there be many bills on London for sale at New York, and but little demand for them, bills on London will fall at New York till they reach the specie-importing point, that is to say till they fall to what it would cost the owners of them to get them cashed in London, and in ordinary times they will fall no lower ; on the other hand, if there be few bills on London for sale at New York, and great demand for them, bills on London will rise at New York till they reach the specie-exporting point, that is to say till they rise to what it would cost to transmit bullion or coin instead of making use of bills, and in the general run of instances they will not rise above this point. The price of bills, therefore, depends upon supply and demand, like the price of any other merchandise, but it does not generally rise higher or fall lower than a certain point on either side of the par of exchange, as above or below this point the demand for bills ceases, and specie is imported or exported, as the case may be. THE SCIENCE OF EXCHANGES. 137 211. What other element affects the price of bills ? The credit of the drawer, acceptor, and in- dorsee of the bills. A bill backed by first-class names will always command a higher price than a bill backed by' second-class names ; anything which tends to diminish the credit of any country will at once lower the price of all bills drawn upon it. 212. In what case may the price of bills fall below the specie-importing point ? In any case of sudden panic where the holders of the bills cannot afford to wait sufficiently long to get the bills cashed in the country they are drawn upon. The capitalists who buy the bills under such circumstances make so much extra profit, but they must lose the use of the money which they give for the bills during the interim. 213. In what case may the price of bills rise above the specie- exporting point ? In any country where the currency is much de- preciated from over-issues of paper money, and where the export of bullion is forbidden by law, the price of bills may rise much above the specie- exporting point whenever the merchants of that country have no produce of any kind available for export as a means of paying their debts. 214. What are bills drawn in blank ? Bills which are not based upon any actual trade transactions between any two different countries, but which are either drawn in anticipation of the 138 THE SCIENCE OF EXCHANGES. ordinary trade transactions between those coun- tries or are drawn as a means of obtaining the money which is paid as their price ; in either case they may be called foreign accommodation bills. They have an important influence on the state of the foreign exchanges, as there is gene- rally a large amount of them afloat. 215. When the exchange between London and New York is favourable to New York, and bills on London are near the specie-importing point, what effect has this on the exporting and importing merchants in New York ? The importing merchants have a decided ad- vantage over the exporting merchants, for they can buy the exporter's bills at a discount, and thus pay for their own importations. 216. What effect has the same state of the exchange on the exporting and importing mer- chants in London ? The exporting merchants have a decided ad- vantage over the importing merchants, as they can sell the bills which they draw on New York at a premium, while the importers must either pay a premium for the bills they want or be at the cost of transmitting coin or bullion. 217. What is the only means which any par- ticular country possesses of regulating the foreign exchanges, as far as it is itself concerned, sup- posing that its currency is not depreciated in value from over-issues of paper money, or a base coinage ? The raising or lowering the rate of interest, THE SCIENCE OF EXCHANGES. 139 according to its state of debt or credit with all other countries (1) When it owes more to other countries, taking all its transactions together, than they owe to it, an efflux of coin or bullion soon takes place, and the rate of interest must then be raised at home ; this will have the effect of restricting its purchases in foreign countries and increasing its sales at home for exportation, and the foreign exchanges will very slowly become more favorable. (2) When other countries owe more to it, taking all their mutual transactions into account, than it owes to them, an influx of coin or bullion soon takes place, and the rate of interest will then fall of itself at home, this will have the effect of increasing its purchases in foreign countries, and restricting its sales at home for exportation, and the foreign exchanges will slowly become less favorable. The state of the foreign exchanges, as far as any such country is concerned, depends upon its state of debt or credit with all other countries. 140 THE SCIENCE OF EXCHANGES. CHAPTER VII. DEPRECIATION OF THE CUEEENCY. 218. What is meant by the term depreciation of the currency? A diminution in its purchasing power. What- ever substance may be used as currency, an ex- cessive quantity of it (more than is required by the wants of the community) necessarily causes a diminution in its purchasing power. 219. Could a currency then, consisting of the best gold coin only, be depreciated ? Certainly; provided that the exportation of gold could be altogether prevented, the amount of currency in use would soon become greater than what was required by the wants of the commu- nity, and its purchasing power would diminish in the same proportion. 220. What prevents a properly regulated cur- rency from being depreciated? A very large proportion of such a currency possesses an intrinsic value, and can be exported to other countries whenever it is in excess of the exact amount required by the wants of the com- munity to whom it belongs. 221. What is the principal cause of deprecia- tion in currencies at present ? The age for uttering base coin by Government THE SCIENCE OF EXCHANGES. 141 authority is gone by, and a more polite way of ob- taining money is at present in fashion, viz., un- limited issues of Government bank-notes which are inconvertible, and at the same time a legal tender. We use the term good coin in this chapter in contradistinction to base coin, and as applicable to either gold or silver money which- ever be the standard of value chosen. 222. On what does the purchasing power of such notes depend ? It depends on the quantity of them that is issued and remains in circulation, and however wealthy the Government may be that issues them, any large increase in their amount soon produces a diminution in their purchasing power. 223. How can the extent of this diminution be shown ? By the difference in the price of any article when paid for in good coin, or in inconvertible paper notes, or in other words by the relative value of the inconvertible paper when compared with the standard money of the country, whether it be gold or silver coin. Thus, in America, at present 314 inconvertible legal tender paper dollars are required to purchase what 100 gold dollars can readily purchase, while in Austria from 112 to 130 legal tender inconvertible paper gulden may be required to purchase what 100 silver gulden can purchase in the same market. 224. In what way then must we look on an in- convertible legal tender paper currency ? As a distinct and independent substance 142 THE SCIENCE OF EXCHANGES. made use of as currency ; gold and silver under such circumstances assume more and more the character of merchandise, while they lose the character of money. 225. Does a depreciation of the currency, arising from over-issues of paper money, affect all prices uniformly ? It does, but we often cannot see its effect, for each commodity is affected by its own particular circumstances, and its price in paper money will rise or fall accordingly. 226. Is it ever necessary for States to resort to a suspension of cash payments, and to inconver- tible bank-note currencies ? I agree with Mr. Ernest Seyd when he states, " That over-issues of bank-notes are thoroughly legitimate, when the pressing necessities of a nation by war or rebellion cannot be met other- wise; then they must take place. Indeed, with- out such paper-money, the United States would have been unable to repress the late rebellion, and their issue became an imperial duty." (Metallic Currency of the United States, page 100). The celebrated " green-backs " were the unfunded debt of the American people ; and when the citizens bought Government stock with their green -backs, which were then burnt, they added to the funded Debt that portion of the unfunded Debt, which they withdrew from the circulation. 227. What is the principal inconvenience caused by over-issues of inconvertible paper-money ? The fluctuations which are constantly taking THE SCIENCE OF EXCHANGES. 143 place in its value, and the greater the fluctuations the greater is the inconvenience which is felt by business men, for the debts which they contract in a currency of one value they have to pay in a currency of either a higher or a lower value as the case may be. Either the buyer or the seller is sure to lose as the paper currency becomes more or less valuable. 228. On what does the amount of currency in use in any country depend when that currency is not depreciated, and when the foreign exchanges are either at par, or but slightly affecting the cir- culation ? It depends on the exact amount which the wants of trade require in that country; its Government may determine what proportion of this amount shall exist in the form of bank-notes issued against other security than that of good coin, or bullion, and what proportion shall exist in either bank- notes issued against good coin, or bullion, or in good coin itself, but further than this they cannot go, for if they once attempt to increase the amount of currency above what we may call its natural limits, by extra issues of paper-money, a diminu- tion in its purchasing power will infallibly take place. They could not increase the total amount of currency in any other way but by over-issues of paper-money, if we except the uttering of base coin, for it has been found impossible to prevent the exportation of gold or silver, and any good coin, which was not required at home, would soon be ex- ported. Let us suppose ninety-nine millions ster- 144 THE SCIENCE OF EXCHANGES. ling to be the exact amount of currency which the wants of trade require in some particular country, when the foreign exchanges are but slightly affect- ing the circulation, then the Government of that country might, if they chose, have sixty-six mil- lions of this amount in bank-notes issued against other security than that of bullion, or good coin, and as long as the same state of the foreign ex- changes continued, this currency need not neces- sarily be depreciated, and the bank-notes might be apparently convertible. 229. What would be the danger then in follow- ing such a system? If the foreign exchanges became unfavourable, and gold or silver were required for exportation, there would be two-thirds of the circulation of that country in the form of promises to pay certain quantities of the precious metals, and but one- third of the actual substance required for payment to meet all the promises. The bank-note circulation of the Bank of France is about ninety-seven millions of pounds sterling (20th July, 1872), with a metallic reserve of about twenty-nine millions, and with permission to issue more bank-notes to the total amount of one hun- dred and twenty-eight millions (Law of 15th July, 1872.) The very large metallic circulation in use before the war of 1870, has rendered it possible for M. Thiers to increase the bank-note circulation of the Bank of France by about thirty-eight mil- lions of pounds sterling, without subjecting them to a greater depreciation than about one- and a-half THE SCIENCE OF EXCHANGES. 145 per mille, July, 1872. The object of this great statesman should now be to give the Bank every possible support in the policy which it has hitherto been following, of diminishing its loans, and thus of restraining its issues as much as possible. M. Thiers should also give every possible facility to production in France, so as to enable his people to supply themselves again with the precious metals. 230. What is one of the errors into which the opponents of the present currency principle often fall? They forget that we have chosen gold as our only standard of value in Great Britain, and that prices are consequently but the quantities of gold which each article can command when exchanged. Mr. Macleod, in his excellent work on the 'Theory and Practice of Banking/ speaks of the great banking fallacy of the present day, that the issues of banks should be rigidly restricted in amount to what would be the amount of gold-coin if they were not in existence ; a little further on, he says, " if, therefore, when to a previously existing gold currency there is added a paper currency, if new fields of industry are opened up, if new manufac- tures are started, if lands are reclaimed, they will absorb a currency far greater in amount than would have been sufficient if they had not been attempted, and so operations may be generated of a far greater amount than if there was nothing but a gold and silver currency. Now it seems so obvious a truism, that, if while any given amount of currency be required to conduct the operations 146 THE SCIENCE OF EXCHANGES. of a country, and any given increment be made to that currency, then if the increased operations which that increment of currency gives rise to, are in the same proportion to it, as the operations previously carried on were to the previously exist- ing currency, the value of the whole currency will not be altered, that it seems incredible that it should be required to enunciate it, and moreover that it should be fatal to the leading banking prin- ciple of the day" The value of the whole currency under such circumstances might not perhaps be altered if estimated in any commodity but standard gold, but the paper part of the currency when brought to this touchstone could not maintain a precisely equal value with that exact amount of standard gold which it purported to represent for this simple reason, that when gold became wanting for exportation there would be more paper notes in circulation than could by any possibility be converted into their equivalent in gold, and promises to pay being then easier obtained than actual payments in gold, the paper currency would be depreciated, however much it was needed by the operations of trade. If the gold discoveries in California and Australia had never taken place, the trading operations of the world would certainly have gone on increasing, though at a far slower rate ; gold would have become slowly more valua- ble and prices would have fallen all over the world ; nor could gold under such circumstances have been prevented slowly rising in value by any issues whatever of really convertible paper money ! We THE SCIENCE OF EXCHANGES. 147 might just as well say that gold could be prevented from falling slowly in value, when the civilised world have as much gold and silver as they require for their trading operations. Mr. Macleod has defined convertibility admirably, " so long as the market or paper price of gold bullion coincides with the mint price, it is an infallible proof that the currency is not depreciated that paper is at its par value/' How long would this be the case if Lord Overstone's great law was not in force, viz., " that the sole duty to be performed in regulating a currency composed of bank-notes and coin is to make its amount vary as the amount of a currency exclusively metallic would vary under the same cur- cumstanceSy because the mere obligation to pay in gold on demand is not a sufficient security to the public that the power to do so will at all times be maintained by the issuers of bank-notes.'' 1 We have previously remarked that the wants of trade prescribe the amount of currency which any country requires, as long as that currency continues undepreciated ; now it is the proportion which exists between that amount of currency which is represented by bank- notes issued against other security than that of gold coin or bullion, and that amount of currency which is represented by gold-coin itself, or bank- notes issued against bullion, supposing gold to be the standard of value, which must be looked to by the true advocates of convertibility as defined by Mr. Macleod ; if this proportion is not carefully attended to, the total amount of currency may not be at all greater than the wants of trade require, L2 148 THE SCIENCE OF EXCHANGES. and yet the paper money will not preserve its convertibility, if put to the test by gold being required for exportation ; it simply cannot if its amount is much higher than the amount of gold coin or bullion which chances to be in the country. The ' Economist ' says with great truth, that the authorities even of the famous system of monetary philosophy known as the currency principle no longer insist upon the variations of the bank-note circulation as the symptoms to be chiefly regarded ; but why is this the case ? Simply because the act of 1844 has succeeded in maintaining Lord Over- stone's great law, and therefore rendered the varia- tions which can take place of no importance ; a diminution in the authorised bank-note circulation of some of the banks in the United Kingdom may not be for the interest of those banks, but can hardly be a source of much inconvenience to the public as long as the Bank of England has the power of issuing against bullion, and all the old banks in Scotland and Ireland have the power of issuing against sovereigns. " Plans for an im- proved system of currency," says Lord Overstone, " are frequently laid before the public ; the exclu- sive object of these systems is to obtain for the paper currency to be issued under them a greater degree of security, than that which is supposed to attach at present to the notes of the Bank of England. This end the authors of these schemes generally propose to accomplish by contrivances, which they deem to be extremely ingenious, but which always resolve themselves into the simple THE SCIENCE OF EXCHANGES. 149 plan of making property of some kind or other the basis of the circulation. Sometimes the plan sug- gested proposes to issue a paper currency against the security of land, sometimes against the security of the public debt, and sometimes against mer- chandise in the docks ; but having provided for the security of the notes, the plan generally termi- nates at this point ; the projector apparently con- ceiving that he has satisfied all the desiderata of a good paper currency, although he has introduced no specific measure for regulating the amount of that currency, and maintaining its value relatively to the currencies of the other countries of the world." 231. What does the " Economist " declare to be the true and complete doctrine in this matter ? It declares that the entire credit currency ought to enlarge and contract with the influx and efflux of bullion, and that the rise or the reduction of the rate of discount is the effectual and sole mode of effecting either that enlargement or that con- traction. In the present day, says the same jour- nal, it may be safely laid down that if you can keep the rate of interest right, so far as the ex- changes go, and so far as prices are concerned, you may leave bank-notes alone. If you secure that the wholesale currency in which all great loans are effected, and in which all large bargains are settled, shall be kept right, you need not care for the retail currency in which petty loans are made, in which clerks' wages are paid, and small transactions brought to a termination. 150 THE SCIENCE OF EXCHANGES. 232. How does this differ from the doctrine that Lord Overstone lays down ? " I consider/' says that scientific banker, u the money of the country to be the foundation, and the bills of exchange, &c., to be the superstructure/' having previously defined money as the quantity of metallic coin, and of bank-notes promising to pay the coin on demand which are in circulation in the country. This is attaching a very different impor- tance to what the " Economist " designates as "the retail currency" of this country. Lord Overstone' s principle, with regard to the manage- ment of the currency is this, that the amount of money in use in the country, taking his own definition of the term, should be made by law to vary when com- posed as it now is, exactly in the same way as it would vary if composed of coin only. There is no means of maintaining the absolute and constant convertibility of our bank-notes but by strictly limiting the amount of them that may be issued against other securities than those of gold coin or bullion ; should we require bank-notes above this amount on account of their superior economy and convenience, such notes should be but so many certificates of the deposit of a corresponding amount of gold coin or bullion. " The Act of 1844," says Mr. Weguelin, " does not restrain the circulation in the hands of the public; it simply says that if the public employ more circulation than they do at present, it shall be on the security of gold." The difference between bank-notes under our present currency system and auxiliary THE SCIENCE OF EXCHANGES. 151 currency is this, that the amount of bank-notes which can be now issued over and above a certain fixed amount, is made by law to depend on the amount of gold coin or bullion which the issuing banks may chance to get hold of; there is, there- fore, an artificial regulation affecting bank-notes, which does not affect cheques, bills of exchange, &c. Now, if we remove this regulation, the ' Economist ' would be right in classing coin, bank-notes, and all auxiliary currency together; nor would there then be any other means of regu- lating 6i the entire credit currency " of the country but that which it indicates. 233. Where, then, is the error? It is in the fact that raising the rate of interest is the very way to get "the retail currency," which, by the " Economist's " hypothesis is to be left alone, into such a disordered state, that " the wholesale currency " would soon be affected, and the entire credit currency of the country would collapse. Lord Overstone says, " I will attend to the money which I consider to be the foundation, and I will allow the superstructure to take care of itself." The " Economist " says, '" We will attend to the foundation and the superstructure both together, for we do not recognise the distinction between bank-notes and auxiliary currency, which the theorists of 1844 believed that they estab- lished." The gold discoveries in California and Australia have nothing to say to the matter, for a bank-note says nothing about the value of the pounds which it promises to pay ; the true ques- 152 THE SCIENCE OF EXCHANGES. tion is how can we best render it a certainty, that the public can always change the bank-notes which they hold into the actual sovereigns when they want them, without any loss or risk what- ever. According to our present system, if gold should be depreciated from over supplies, our circulation (however small our excellent credit system may have rendered it) will expand itself in exact proportion to that depreciation. 234. What does the * Times ' say ? It would be hard for any one to explain by what principle f L the Government is called upon to inter- fere with the freedom of individuals to put forth whatever pecuniary promises they may see fit, whether in the shape of notes or bills, or anything else. All that is necessary is, that no notes should be a legal tender except those issued by the Bank of England, &c. Notes of all other descriptions the public might be left to issue or to receive at pleasure, the issues being, in cases of fraud, amen- able to the ordinary law of the land (City Article, 13th February, 1865). 235. What would be the effect if the views here expressed were carried out? We should probably obtain one national state bank for issuing purposes more quickly than with our present system, for men of business never could stand such a mixture of paper currencies as would then be in circulation. People cannot appeal to the laws of the land in cases of fraud of this description; men of business have not the time to inquire into the solvency of each bank THE SCIENCE OF EXCHANGES. 153 whose notes are in circulation ; it ought to be the duty of Government to take care that the business of issuing bank-notes is in proper hands, and where they did not do so, as in the United States, wild-cat paper and forgeries were so common, that men of business had to keep dictionaries of bank- notes by them, which came out monthly, contain- ing the note-marks, and all the known forgeries, and before they took the notes they had to look them out. The American Government has now adopted a system of national banks, which are allowed to issue bank-notes received from Government, provided that they give as a guarantee Govern- ment securities, worth one-tenth more than the bank-notes which they receive, and that they put one- third of their subscribed capital in Govern- ment securities. They must also keep from 15 to 25 per cent, of their liabilities (bank -notes and deposits combined) in greenbacks. No other banks in the United States are allowed to issue bank-notes. 236. Can you mention any one whose opinion is different from the " Times" ? u The claims of right to such freedom of action in banking ought to be strenuously resisted ; they do not rest, in any manner, on grounds analogous to the claims of freedom of competition in produc- tion." Mr. Tooke. " We do not want," says Sir Eobert Peel, " a considerable quantity of bank-notes at the lowest price possible, but we want a certain quantity of 154 THE SCIENCE OF EXCHANGES. bank-notes whose value is exactly equal to the gold which they represent." 237. What may we conclude was Sir Robert Peel's ultimate object with regard to the currency system ? To get rid of all the anomalies and difficulties which must always arise from the business of banking being mixed up with the business of issue, by creating one national state issuing establish- ment, and depriving all banks of the power of issue. " It has always appeared to me," says Mr. Hubbard, M.P., u that if it is the proper function of the State to provide the people with currency, it ought not to be limited to one material more than another ; if it is the duty of the State to pro- vide a safe currency of gold, silver, and copper, why not also of paper ? If this question is ever to be brought to a satisfactory issue, Parliament must affirm the right of the State to create all money, and be the coiner of all expressions of value." THE SCIENCE OF EXCHANGES. 155 CHAPTER VIII. LAND. 238. Is land to be looked upon as capital ? Once land is occupied and appropriated it becomes capital, because it is then employed with a view to increasing our capabilities of production by the material profit derived from that employ- ment. If a man has five thousand pounds in ready money to invest as capital, he may lay it out in land, or in a manufactory, or in a ship, or in a mine, but whatever be the way of laying out his capital which he may select, what he obtains is equally capital whether it be a piece of land or a brewery. 239. What gives land its value ? The real or fancied advantage derived from the use to which it is put. Land may derive its value from agriculture, from buildings, from mines, from situation, etc., and the value of land will be depend- ent upon the proportion which exists between the supply of it to be obtained in any particular mar- ket, and the demand for it in that market. In new countries, where there is much unoccupied land, like the United States or Australia, the sup- ply is large in proportion to the demand, and land may be bought almost for the mere cost of fencing and appropriating it ; in old settled countries like 156 THE SCIENCE OF EXCHANGES. England and Scotland the demand is very large in proportion to the supply, because many wealthy people wish to acquire land as a means of increas- ing the consideration in which they are socially held, and they are therefore satisfied with but a small return for the investment of their capital ; in the one case land is sold below its value as a productive engine, in the other it is sold very much above it. 240. Is it true that land is a different kind of property from everything else, " that it is a mono- poly existing in limited quantity and not suscep- tible of increase ?" (Mr. J. S. Mill). The acquisition of land is perfectly free, nor can its possession be in any way termed a monopoly, for there is always plenty of land in the market for those who have money to buy it. Cultivated land might, perhaps, be said to exist in limited quantity, but then it is largely susceptible of increase ; if land was really a monopoly, all other commodities would be monopolies on the same principles. Take any one commodity, hats for example. The limit to the production of hats is the existing number of human heads requiring hats ; if A be the number of heads, we can but want A hats ; if we produce A 2 hats, we cannot get rid of them without a fall in price. Let us now compare hats with land, and we shall see that the increase of occupied land is what is principally required to increase A or the number of heads requiring hats because we can only per- manently increase our numbers by increasing our THE SCIENCE OF EXCHANGES. 157 means of subsistence. If our world was all occu- pied and cultivated like a garden if land was in- deed a monopoly existing in limited quantity, and not susceptible of increase, the production of hats would be also a monopoly hats would then exist in limited quantity not susceptible of increase. As all commodities are produced to gratify the wants of mankind, the limit to the production of any particular commodity may be reasonably laid down when a supply sufficient to gratify the wants of all who require it at its lowest producible price, is brought into the markets of the world. "Whatever be the commodity, its production with a sufficient profit to the producers, must be limited by the number of those who want it. Had the Greeks been able to persuade other nations to eat currants in the same way that we in England eat them, the production of currants would have been a source of great wealth to Greece, but they forgot that the production of currants must be limited by the number of those who want currants ; and when they extended their currant vineyards some years ago, without increasing the number of their customers, they only brought down the price of currants. The human race cannot increase permanently in number without increasing their means of sub- sistence, and there are but two ways of doing this, either by getting more produce from the land already under cultivation, or by reclaiming new and untilled land. This last work has been facili- tated greatly by improved means of communica- 158 THE SCIENCE OF EXCHANGES. tion and increased facilities of transport. The last custom-house returns show how much the English people depend upon foreign supplies of grain; in the first half of the year 1872 there were imported into the United Kingdom 15,636,842 cwt. of wheat, more than half of it coming from Russia; 1,446,084 cwt. of wheat-rneal and flour; 7,036,697 cwt. of barley; 5,632,269 cwt. of oats; 454,855 cwt. of peas; 1,622,952 cwt. of beans; 8,181,066 cwt. of Indian corn ; and 2,581 cwt. of Indian corn-meal. The declared value of this importation was 19,376,938. A limited quantity of land, however well it may be cultivated, can produce a limited quantity of produce only, and if land in our time was really limited in quantity, the production of commodities would soon reach its limits too. > M > H 3 r ^ O O o o o 000 o o o o o ses 42,703,000 3. Surplus of Estimated Income over Estimated Expenditure 312,000 O il o I ~ 1 CM 1 ^ 1 2. Supply Services Army 14,824 Abolition of Purchase 853 Navy 9,508 Miscellaneous Civil Service 10,652 Revenue Department 2,621 Post Office 2,610 Telegraphs 500 Packet Service 1,135 Extraordinary Expen- O O O SOOOOO 00000 o o o o o o O o \ \ O O CO r-T Cf) 00 rH ^ o co >0 ^^ ^D ^^ X s * *O !> X^* CO O^ X 1 ** 00 CO o CO CO \ CO CM CM OS CM CO * . : \$ ; t : : . : : . . . ' nrl . Customs Excise . 'Ti f^ rt CD 00 H OQ^ M L_| rd (S eg ^^ cd Pu 1 03 H S ^ g^S a & i |1 |lf 1 Miscellaneous rH CM oo ^ 5 CO jh- 00 o THE SCIENCE OF EXCHANGES. 211 There are three items on the expenditure side. No. 1 consists of the charges on the Consolidated Fund, a certain part of the public revenue set apart each year to meet these charges. They are not the subject of a vote in the House of Com- mons, as they must be paid without further ques- tion once they are put on the Consolidated Fund. These charges on the Consolidated Fund are again divided into two heads, the expenses con- nected with the management of the Funded and Unfunded Debt, and " the other charges." This last item is again divided thus : Civil List, Annuities and Pensions, Salaries and Allowances, Diplomatic Salaries and Pensions, Courts of Justice, Miscellaneous charges. The Civil List is the sum allotted to Her Majesty the Queen, and amounts to 385,000. The Privy Purse, consisting of 60,000, is the only part of this sum over which Her Majesty has absolute control and disposal ; the balance, or 325,000 is parcelled out amongst the various departments of the household. When we compare the expense of our Sovereign power with the expense which other great nations incur for the same object, we have no reason to complain of our present system, and we may be grateful to Queen Victoria, who acts on the good old principle " out of debt out of danger." 2-12 THE SCIENCE OF EXCHANGES. No. 2 consists of the Supply Services which are voted each year by the House of Commons. We now expend above 24 millions on our army and navy; but if we look back to 1853, we find Mr. Gladstone, on the 18th April, estimating the cost of these services at 12,860,000 for the financial year 1853-54. Fortunately for us, the revenue, exclusive of the income-tax is augment- ing at the rate of 3,500,000 a year, and we may be thankful for the improvement which Sir Robert Peel and Mr. Gladstone have effected in our financial system. There is still much to be done in this direction. We ought to apply all surplus to the reduction of taxation, and to make no at- tempt to pay off the National Debt, either by Sinking-fund Acts or by Terminable Annuity schemes. No. 3 is the surplus which will be very much larger than the estimated one, but as we sub- mitted ourselves to be governed by an u ex post facto " law in the Alabama case, and as we were justly condemned by fair arbitration to pay a fine because we did so submit ourselves, our surplus will be sent to New York. When we examine the income side of the account, we are struck by the simplicity of its arrangement: sugar, tea, tobacco, spirits, wine, beer and ale, malt, coffee, cocoa, preserved fruits, and a few other minor heads are the only articles of consumption which we impose taxes on. We owe this simplification, and the vast development of trade which has resulted from it, to the intro- duction of the income-tax as a permanent source of THE SCIENCE OF EXCHANGES. 213 revenue. Let us hope that we may always have the good sense to continue it. We extract the following account of the public income for the year ending 30th March, 1872 from the " Times " of 3rd October, 1872:- " The Finance Accounts recently issued for the financial year ending the 31st of March, 1872, show that the revenue received into the Exchequer amounted to 74,708, : 314. The * Statistical Abstract/ which extends over the last 32 years, shows also that in all that time this amount of revenue has only once been exceeded viz., in the financial year 1869-70. The following statement explains how the revenue of the year 1871-72 was obtained. The Customs' duties produced 20,326,000. The chief items are 6,797,018, the amount of the duties levied on the import of tobacco and snuff into the United Kingdom ; 4,523,848 on the import of foreign and colonial spirits; 3,179,930 on sugar; 3,079,284 on tea; 1,646,735 on wine. Four of these items are constantly increasing in productiveness, but the duty on sugar, which was largely reduced in 1870, produced above 6,000,000 sterling ten years ago. The excise duties produced the large amount of 23,326,000 in the year 1871-72. The largest item, an ever-increasing item, is 12,274,596 levied on British and Irish spirits; the duty on malt brought in 6,670,955 ; the railway passenger tax, always increasing in productiveness, 527,567. The item of licences is becoming very large, and reached 3,781,979. Among them are these: 753,229 for spirit licences granted to distillers, dealers, and publicans ; 428,250 for licences to brewers; 368,496 licences for sale of beer, cider, and perry; 524,206 licences for carriages; 433,277 for horses; 279,425 for dogs; 198,946 for male servants; 193,843 for sale of wine and sweets; 189,824 for game certificates or licences; 62,437 for gun licences; 86,652 for armorial bearings; 64,228 for auctioneers and appraisers; 35,032 for pawnbrokers. The next class of duties is that of stamps, which produced in the year 1871-72 no less than 9,772,000, which is a larger amount than in any other year in the 32 years' list. The duty on legacies and successions produced 3, 360,489, and on probates and administrations, 1,852,560; the latter amount slightly exceeded in the preceding year, the former never equalled. The following amounts are very 214: THE SCIENCE OF EXCHANGES. large : Deeds, etc , 1,842,422 ; bills of exchange, 846,258 ; receipts, draughts, and other penny stamps, 648,843. The item of stamps used for the collection of fees in courts of justice and public offices reaches 525,788. The next class of taxation retains the imposing title of f Taxes,' but now includes only the land-tax, amount- ing in the year 1871-72 to 1,086,350, and the in- habited house duty, which shows an increase to 1,262,611; but the account of payments into the Exchequer states these taxes at only 2,330,000. The income-tax also is stated at 9,084,000, but the detailed statement puts the amount of this tax for the year at 9,328,102., and the amount is ap- proximately estimated as appropriated thus : Schedule A, 3,325,492 ; B, 434,903; C, 897,541; D, 4,125,324; E, 544,842. This tax was at 6d. in the pound. These five items Customs, Excise, stamps, income-tax, and land- tax and house duty constitute our taxation proper, amount- ing to about 65,000,000 sterling in the year 1871-72. Then comes the Post Office, producing a payment of 4,680,000 into the Exchequer, not deducting the expense of conducting the service ; and the telegraph service, with 1,183,156 gross receipts and 755,000 net produce. The Crown lands supplied 375,000. The account closes with the large item of ' Miscellaneous receipts 4,060,314.' It includes fourteen classes of receipts. The first comprises small branches of the hereditary revenue, 25,393. Next comes 138,578, payable by the Bank of England out of profits of issue. Then, fees received in public offices, 569,396, including an item of 302,972 from County Courts. Receipts by naval and military departments come next, amounting to 1,177,794 viz., contributions from Indian and Colonial Governments and sales of old stores. There is also a further sum of 496,842, contributed by India for military and diplomatic charges. Next stands 380,656 receipts by Civil departments, including 53,293 for convict establishments, chiefly repayments of expenditure for Colonial Governments ; also 45,049 repayment for extra constabulary force in certain Irish counties ; 35,608 from Dublin, chiefly police tax ; 17,659 proceeds of sales of books at the Irish Education Office ; 45,806 for seignior- age on silver purchased for coinage ; 34,910 proceeds of the sale of books and waste paper at the Stationery Office ; 39,348 sale of old materials by the Office of Works and receipts from Parks, etc. Next comes 332,419, receipts THE SCIENCE OF EXCHANGES. 215 by revenue departments for various services, including repay- ments from India and Australia on account of the mail ser- vice, Custom House charges on delivery of goods from bonded warehouses, inland revenue fines, and charges of manage- ment of Post Offi'ce banks repaid by the National Debt Com- missioners. Then comes 13,440 the income of the Gazettes ; then 883,144 over-issues repaid, chiefly the Abyssinian Grant. The rent of the Malta and Alexandria telegraph, 16,320, follows, and then 1,918 profit on Treasury chest transactions. Customs revenue and repayments of expendi- ture amounting to 12,458 come from the Isle of Man, and 8,000 from Greece, towards the sum paid by us under our guarantee of the Greek Loan. The list -closes with 3,956 casual receipts ; among them is 630 for fines inflicted by naval authorities on African chiefs for breach of treaties. Thus was our year's revenue of nearly 75,000,000 sterling made up." 327. What should we desire most at present for the general advantage of all classes in Eng- land ? That the nations we deal with should become free traders like ourselves, for we should then have plenty of employment at home, and con- sequently be better able to pay whatever taxes are found to be necessary. CONCLUSION. We judge of truth in practical matters from facts and from life, for on them the decisive point turns ; and we ought to try all that has been said by applying it to facts and to life ; and if our arguments agree with facts, we may receive them, but if they are at variance, we must consider them as mere words. ARISTOTLE'S " ETHICS," Book 10, Chap. 8. THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW AN INITIAL FINE OF 25 CENTS WILL BE ASSESSED FOR FAILURE TO RETURN THIS BOOK ON THE DATE DUE. THE PENALTY WILL INCREASE TO 5O CENTS ON THE FOURTH DAY AND TO $1.OO ON THE SEVENTH DAY OVERDUE. SEP 17 1933 *~ o 19:; J954LU LD 21-50m-l/33 YC 23976 UNIVERSITY OF CALIFORNIA LIBRARY