M ESSAYS ON INTEREST, EXCHANGE, COINS, PAPER MONET, AND BANKS. BY JOHN EAMSAY McCULLOCH, ESQ., AUTHOR OF "THE COMMERCIAL DICTIONARY," ETC. I. ON INTEREST AND THE EFFECT OF THE USURY LAWS ', II. ON FOREIGN AND DOMESTIC EXCHANGE J III. ON MONEY, COINS, BULLION, SEIGNORAGE, STANDARD, ETC. J IT. ON PAPER MONEY, AND ON BANKS J WITH COPIOUS TABLES OF COINS AND MONEYS OF ACCOUNT. PHILADELPHIA: A. HART, LATE CAREY AND HART, NO. 126, CHESNUT BTBEET. 1851. > * Entered according to Act of Congress, in the year 1851, BY J. SMITH HOMANS, In the Clerk's Offica of the District Court of the District of Massachusetts. ESSAY ON INTEREST, BY J. R. M C CULLOCH. (Published in the Bankers' Magazine for 1850.) CONTENTS. PASS SKETCH of the rates of interest adopted by various nations. . 1 The rate of interest varies according to the security for the re- payment of the principal and the duration of the loan. . . 3 On the interference of government in adjusting the rate of in- terest. ..... .' ..... 5 Effect of the usury laws in Rome .8 History of the laws regulating the rate of interest in England, Scotland, and Ireland. . . . ,..^. . . . .9 Comparison between the market rate and the statutory rate of interest from 1714 to 1793 11 Pernicious effects of laws to regulate interest. . . . .15 The usury laws do not protect the prodigal and unwary. . 16 There were no usury laws in Holland. . . .' ' . .17 On the legal rate of interest in France, Hamburg, Russia, Aus- tria, Leghorn, Spain, and the United States. . . . _ ' . 18 Usury laws do not reach the government. . . "V. . 19 Error of some writers on the subject of a low rate of interest. . 20 2003511 (The. Bankers' Magazine contains the following elaborate Essay on Exchange, by J. R. McCulloch, Esq.) ESSAY ON EXCHANGE. BY J. R. McCULLOCH. CONTENTS. CHAPTER I. Ox INLAND EXCHANGE. Circumstances which determine the price of Inland Bills. Natural limit to fluctuations in the exchange. Fictitious bills of exchange. CHAPTER H. FOREIGN EXCHANGE. Circumstances which regulate the value of bullion in different coun- tries. Manner of estimating the quantity of bullion in different coins. Effect of variations in the value of metallic currency on the exchange. Effect of variations in the relative value of gold and silver. Effect of variations in the value of paper currency on the exchange. Effect of fluctuations in the nominal exchange on export and im- port trade. Effect of fluctuations in nominal exchange on the trade in bullion. CHAPTER HI. REAL EXCHANGE. Limit to fluctuations in the real exchange. Circumstances which give rise to a favorable or unfavorable balance of payments. The fact that the value of imports exceeds that of the exports does not warrant the conclusion that the balance is unfavorable. In countries carrying on an advantageous commence, the value of imports must always exceed the value of the exports. Erroneous notions relative to the balance of trade. Favorable or unfavorable balance not always paid in bullion. Effect of fluctuations in the real exchange on foreign trade. Operations of the bill-merchants lessen fluctuations. A large foreign expenditure has no permanent effect on exchange. Cause of the rise of exchange in 1815 and 1816. CONTENTS. CHAPTER IV. UNFAVORABLE REAL EXCHANGE. Refutation of the opinion, that, during an unfavorable real exchange, commodities of great value and small bulk are exported in preference to others. Computed exchange represents either the sum or the difference of the real and nominal exchange. State of the exchange between Great Britain and the Continent from 1809 to 1815. Causes of the exportation of bullion in 1809, 1810, &c. The unfavorable exchange during the latter years of the war no cause of the extraordinary exportation of British produce to the Continent. CHAPTER V. NEGOTIATION OF BILLS OF EXCHANGE. Arbitration of exchange. Usance days of grace, Amsterdam, Rotterdam, Antwerp, Hamburg, Altona, Dantzic, Paris, Bordeaux, Bremen, Barcelona, Geneva, Madrid, Cadiz, Bilboa, Gibraltar, Leghorn, Leipsic, Genoa, Venice, Vienna, Malta, Naples, Palermo, Lisbon, Oporto, Rio Janeiro, Dublin. CHAPTER VI. HISTORY AND ADVANTAGES OF BILLS OF EXCHANGE. The origin, progress, commercial effect, political effects, and general importance of bills of exchange. CHAPTER VII. LAWS AND CUSTOMS RESPECTING BILLS OF EXCHANGE. Requisites of a bill or note. General explanatory rules and usages. Business hours. Rules of giving notices. Effect of inevitable accident. How to act when a bill is lost. Effect of usury. Effect of gaming. Effect of forgery. Effect of vitiation. Acceptance by procuration. Conditional acceptance. In- dorsements. Duties of drawee. Duties of payee or holder. Effect of bankruptcy. Accommodation paper. Cross paper. CHAPTER VIII. MONEYS OF ACCOUNT. Table containing the value of the moneys of account of different places, expressed in pence and decimals of pence, according to the mint price both of gold and silver in England ; that is, 3 17s. 10%d. per ounce for gold, and 5s. 2d. per ounce for silver. Par of exchange between England and the following places, viz. Amsterdam, Hamburg, Paris, Madrid, Lisbon, Leghorn, Genoa, Naples, and Venice ; the same being computed from the intrinsic value of their principal coins, by comparing gold with gold, and silver with silver, ac- cording to their mint regulations, and to assays made at the London and Paris mints. (Presented by Dr. Kelly to the committee of the House of Lords on the expediency of the Bank's resuming cash payments.) *** The whole of this Essay is contained in " The Bankers' Magazine tor 1850 :? Published monthly at five dollars per annum. J. Smith Homans. Ill Washington Street, Boston. ESSAY ON MONEY. BY J. R. McCULLOCH, ESQ. AUTHOR OF "THE DICTIONARY OF COMMERCE," "PRINCIPLES OP POLITICAL ECONOMY," &c. (The whole of this Essay vnll be contained in the Bankers 1 Magazine for 1850. Published monthly, five dollars per annum.) CONTENTS. CHAPTER I. ORIGIN OF MONET. Circumstances which led to the use of money. Principal properties that every commodity used as such ought to possess. Not a sign or a measure of value, but a real equivalent. On the commodities used as money in different countries. On the defects of these commodities. Gold and silver the fittest materials for money, and first used in the shape of bars and ingots. On the coinage of gold and silver. Advantages of coined money. Coined money not a sign, or a meas- ure, of value. Use of gold and silver as a standard for estimating the relative value of commodities. Proof of the non-existence of an abstract or ideal standard. CHAPTER n. THE EXCHANGEABLE VALUE OF MONEY. The cost of production regulates the value of money, when the power of supply is not monopolized. The proportion between the 'supply and demand regulates the value of money, when the power of supply is monopolized. CONTENTS. CHAPTER HI. SEIGNOEAGE. A moderate seignorage on coined money shown to be advantageous. Principles which should regulate its amount. Reasons why a seignorage should be imposed on coined money. If the supply of coins could be sufficiently limited, a high seignorage might be exacted. Difficulty of limiting sufficiently the supply of coins, and necessity of imposing only a moderate seignorage. On the amount of the gold coinage since the accession of James II. Expense of the coinage of gold and silver. History of the seignorage in England. Remedy or shere. Seignorage hi France. CHAPTER IV. CURRENCY OF THE PRECIOUS METALS. Estimate of the expense of a currency consisting of the precious metals. CHAPTER V. PAPER MONEY. Origin of paper money, and principle on which banking is carried on. The principle on which the value of paper money is maintained. Limitation of supply sufficient to sustain the value of bank paper. Difficulty of limiting the supply of bank paper, otherwise than by ren- dering it exchangeable for gold or silver. Proposition maintained by those who deny that bank paper can be depreciated. The demand for discounts depends on a comparison between the rate of interest and the rate of profit. Necessity of making bank-notes payable in gold or silver. Scheme for paying notes in gold bars. CHAPTER VI. STANDARD OF THE CURRENCY. Whether gold or silver should be adopted as the standard of the cur- rency, or whether it should consist of both. Impossibility of arbitrarily fixing the relative value of gold and silver. Over-valuation of gold at the mint the cause of its being used in all considerable payments in Great Britain. The contrary effect produced by the over-valuation of silver in the French mint. Silver preferable to gold as a standard. A gold and silver currency equally valuable. CONTENTS. CHAPTER VII. STANDARD OF MONEY. On the standard of money. Purity of English coins. Weight of English coins. Variations of the standard. General remarks. Manner of changing the standard. Roman money. Weight of the as. Proportion of silver to copper. Value of the denarius. Value of the aureus. The sestertius. Errors of Dr. Arbuthnot and others. French money. History of the money of France. Table of the pro- gressive degradation of the livre. English money. Degradation of the pound sterling. Of the money of Scotland. Ireland. Money of Germany, Spain, Russia. Raising of the value of coin. Increase of the value of the English coins in the reign of Edward VI. Pernicious effects of a reduction of the standard. From 1601 to 1797 no change made in the standard. Effects of the restriction of cash payments in 1797 in degrading the value of bank paper. Extraordinary Resolution of the House of Com- mons. Bankruptcy of the country banks in 1814, 1815, 1816. Cause of the rise in the value of bank paper. The act of 59 George III. (1819) did not raise the value of the currency. The standard as now fixed ought to be maintained inviolate. TABLES RELATIVE TO THE MONEY OF GREAT BRITAIN AND OTHER COUNTRIES. 1. ENGLISH MONEY. Account of the English silver and gold coins, showing their value, the seignorage or profit upon the coinage, and the price paid to the public by the mint, for the pound troy of standard gold and silver, from the Conquest to the year 1816. 2. ENGLISH MONEY. Amount of the quantity of fine silver coined into 20s., or the pound sterling ; the quantity of standard silver, of lloz. 2dwts. fine, and ISdwts. alloy, contained in 20s., or the pound sterling, and the quantity of standard silver which was delivered to the mint, by the public, for 20s. of silver money, in the different reigns, from the time of Edward I. to the reign of George III. A similar account with respect to gold. And an account of the proportionate value of fine gold to fine silver, according to the number of grains contained in the coins ; and the proportionate value of fine gold to fine silver, according to the CONTENTS. price paid by the mint to the public. Calculated in grains and 1,000 parts troy weight. 3. SCOTS MONEY. Account of the number of pounds, shillings, and pennies, Scots, which have been coined out of one pound weight of silver at different times, with the degree of purity of such silver, or its fine- ness, from the year 1107 to the year 1601. 4. SCOTS MONEY. Account of the number of pounds, shillings, and pennies, Scots, which have been coined out of one pound weight of gold, with the degree of their purity, and the proportion that the gold bore to the silver. 5. ENGLISH PAPER MONEY. Account of the average market price of bullion in every year, from 1800 to 1821. Of the average value per cent, ef the paper currency, estimated from the market price of gold for the same period, and of the average depreciation of the paper currency. 6. GOLD COINS OF DIFFERENT COUNTRIES. A table containing the assays, weights, and values of the principal gold coins of all countries, computed according to the mint price of gold hi England, and from assays made both at London and Paris, which have been found to verify each other. 7. SILVER COINS OF DIFFERENT COUNTRIES. A table containing the assays, weights, and values of the principal silver corns of all countries, computed at the rate of 5*. 2d. per ounce standard, from assays made both at the London and Paris mints. 8. Account of the relative value of gold and silver in the principal trading places of the world, computed from the proportional quantity of pure metal in their principal coins, and the legal or current price of those coins respectively. Given in by Dr. Kelly to the committee of the House of Lords, appointed in 1819, to inquire into the expediency of the Bank's resuming cash payments. *** The whole of this Essay will be republished in " The Bankers' Magazine for 1 850," from " The Encyclopaedia Britannica," seyenth edition. The Bankers' Magazine also contains Mr. McCnlloch's able Essays on "Exchange" and " Interest." Published monthly, at five dollars per annum. J. Smith Homans, 111 Washington Street, Boston. ESSAY ON PAPER MONEY AND BANKS. CONTENTS. CHAPTER L UTILITY OF PAPER MONEY. Definition of paper money. Distinction between paper money, or bank-notes, and bills of ex- change. Regulations with respect to the issue of notes. Regulations as to the issue of notes defective. The confining of the issue of notes to joint-stock associations would not give them additional security or value. The issue of notes affords great temptation to, and facilities for, the commission of fraud. Paper money substantially legal tender. Security ought to be taken from the issuers of notes. CHAPTER II. SECURITY FOR BANK ISSUES. The exacting of security from the issuers of paper would not obviate fluctuations in its amount and values, and would not, therefore, place the currency on a proper footing. All local issues of paper money should be suppressed. Issues of country bankers not dependent upon the exchange. Efforts of the Bank of England to stop the efflux of bullion, in 1836, counteracted by the country banks. Destruction of country banks and paper in 1792 - 93. Destruction of country banks and paper in 1814, 1815, and 1816. Destruction of country banks and paper in 1825-26. Measures for establishing joint-stock banks in 1826. Inadequacy of these measures. Progress of the joint-stock system. Over-issue by the joint-stock banks in 1836. Reasons why there should be only one issuer of paper money. Principle on which the Bank of England endeavors to govern her issues. Counteracting agencies to which she must attend. Mode in which a single issuer of paper should act, so as to make the amount and value of the currency vary exactly as if it were metallic. CHAPTER III. CLASSES OF BANKS. Introduction and growth of private banking. The clearing-house. Regulations to which the banks for deposit only should be subjected. CONTENTS. CHAPTER IV. BANK OF ENGLAND. Renewals of Bank charter, with the conditions. Runs upon the Bank, 1745, 1780, and 1797. Suspension of cash payments in 1797. Resumption of cash payments in 1821. Bank-notes made legal tender everywhere except at the Bank. Principle on which the Bank endeavors to regulate her conduct. Bank of England in connection with the Government. Assistance rendered by the Bank to the mercantile interests. CHAPTER V. JOINT-STOCK BANKS OF GREAT BRITAIN. Statements by the Committee of 1836. Remedial measures that should be adopted. CHAPTER VI. THE SCOTCH BANKS. Establishment of the Royal Bank in 1727, and an account of the subsequent banks of that country. Reasons for the few failures among Scotch banks. Suppression of local notes in Scotland unnecessary. Remarks on the Scotch system of deposits. Remarks on the cash accounts, or cash credit system adopted in Scot- land. Tabular view of the banks in Scotland, showing the number of partners ; number of branches ; paid-up capital ; dividends ; par value of shares ; and market value of shares of each. CHAPTER VII. THE IRISH BANKS. Retrospective view of banking in Ireland ; with remarks on the fail- ures of their banks. Tabular view of the Irish banks ; showing the circulation of the Bank of Ireland for each year from 1823 to 1836. CHAPTER VIII. FOREIGN BANKS. 1. The Bank of Venice, its early establishment as a deposit bank, ruined by the French invasion. 2. The Bank of Amsterdam, founded in 1609, suspension in 1790, advances to the government. 3. The Bank of Hamburg, establishment in 1619. 4. The Bank of France, founded in 1803, terms of the charter, administration of the bank, circulation, &,c. CHAPTER IX. BANKING IN THE UNITED STATES. 1. Remarks on the banking system of the United States, erroneous views in its adoption, excessive issue of paper money. \ 2. Tabular view of the banks in the United States in the years 1811- 1820, and 1830-1836, number of banks in each State, number of banks and branches, and capital. NOTE. THE FOLLOWING ESSAYS ARE REPUBLISHED FEOM THE SEVENTH EDI- TION OF " THE ENCYCLOPEDIA BBITANNICA," EDITED BY THE LATE PEOFESSOB NAPIEB, OF EDINBURGH. IN THE PRESENT EDITION THESE WRITINGS HAVE BEEN DIVIDED INTO CHAPTERS, FOR MORE CONVENIENT REFERENCE, AND ARE ALSO FURNISHED WITH A SEPARATE INDEX TO EACH ESSAY. BOSTON, July, 185 . McCciioCH's ESSAYS. Mr. McCulloch has condensed a great mass of knowledge, which men of all parties should be glad to see so put together, in his POLITICAL ECONOMY, EXCHANGE, INTEREST, TAXA- TION, PAPER MONEY, and PRINCIPLES OF BANKING. Edinburgh Review. McCuLLOCH ON TAXATION. This work embraces one of the most extensive, and preeminently the most practical department of the all-important science to which it belongs ; and it comes to us recom- mended by the authorship of one of the most distinguished cultivators of that SCIENOB. It is a work with which not only every statesman and legislator, but every reflecting member of the community, ought to make himself acquainted ; and we can have no hesitation, therefore, in saying that Mr. McCulloch has, by the thought and labor he has devoted to its composition, added another strong claim to those he had before established upon the gratitude of his countrymen. Edin- burgh Review. ESSAY ON INTEREST. BY J. R. McCULLOCH, ESQ. INTEREST is the sum which the borrower of a capital obliges himself to pay to the lender for its use. Interet : loyer d'un capital prete ; ou bien, en termes plus exacts, achat des services productifs que peut rendre un capital. Formerly it was universally believed that, in the event of all legislative enactments fixing and regulating the rate of interest being repealed, its in- crease or diminution would depend wholly on the comparative scarcity or abundance of money ; or, in other words, that it would rise as money be- came scarce, and fall as it became more plentiful. Mr. Hume was the first to point out the fallacy of this opinion (see his Essay on Interest}, and to show that the rate of interest is not determined by the amount of the cur- rency, but by the average rate of profit derived from the employment of capi- tal. No doubt it most frequently happens that, when a loan is made, it is made in the currency of the country. This, however, is really of no con- sequence. There is obviously no difference between one individual fur- nishing another with 100 bushels of corn, to be repaid at the expiration of a twelve-month by the delivery of 104 or 105 bushels, or with as much money at four or five per cent, as would have purchased the corn. Be- sides, it is easy to perceive that the same identical sum of money might serve to negotiate an infinity of loans. Suppose A lends to X 1000, which X immediately pays away to B for commodities of equal value ; but B has no use for the money, and he therefore lends it to Y, who pays it away for commodities to C, who again lends it to Z, and so on ; it is plain, the borrowers, X, Y, Z, have really received a loan of commodities, or capital, from the lenders, A, B, C, worth three times (and it might have been worth three hundred or three thousand times) as much as the money employed in settling the transactions. According as the supply of currency, compared with the business it has to perform, is greater or less, we are obliged to give a greater or less number of guineas or livres, pound notes, or assignats, for the commodities we wish to obtain. It is plainly, however, by the ad- vantage or profit we expect to derive from the acquisition of the commod- 2 Interest. , ities which constitute capital, and not from the accidental, and, in this respect, unimportant circumstance of a larger or smaller number of pieces of gold or silver, or of bits of engraved paper, being given for them, that the rate of interest, or the compensation given to the lender for the use of his stock, must be determined. It may, perhaps, be supposed, that when the quantity of metallic money is increased, goldsmiths, jewellers, etc., ob- tain the raw material for carrying on their business with greater facility ; but this is not always the case, and, though it were, it would not affect the rate of interest. No coins are ever sent to the melting-pot unless when the currency is either degraded or depreciated ; that is, unless it be deficient in weight or relatively redundant in quantity. And it is clear that the in- ducement to promise a high or low rate of interest for loans of metallic money, which it was intended to work up into some species of manufactured goods, would depend, not on the supply of such money, but on the profit to be derived from the operation, a circumstance totally unconnected with the scarcity or abundance of coin. It appears, therefore, that the rate of interest at any given period de- pends exclusively on the supply of real disposable capital, such as land, machinery, raw and manufactured products, etc., compared with the power of profitably employing it. An increase of metallic money adds only very inconsiderably, and an increase of paper money adds nothing whatever, to the real capital of the country, or to the material of which all loans are really composed. If an increase of paper money was equivalent to an in* crease of capital, bank notes could not be too much multiplied, and France would have been about twenty times as rich at the era of the assignats as at this moment. It is not denied that considerable mischief and derange- ment must always be experienced in a highly manufacturing and commer- cial country like Great Britain, when any sudden check is given to the facility with which discounts are generally obtained, or when the currency is suddenly contracted. But the frottement and inconvenience occasioned by a contraction of the currency could only be temporary. It is impossible it could have any lasting effect on the industry of the country. We should still possess the same amount of real capital ; and as neither its productive power, nor the liberty, to transfer it from one individual to another, would be at all impaired, the real revenue of the state would continue as great as ever, and the same or a greater amount of stock might be disposed of by way of loan. Money prices would certainly fall proportionally to the reduction of the currency ; or, which is the same thing, the value of commodities would henceforth have to be ascertained by comparing them with a smaller number of bits of gold or paper. But in every other respect, the business of society would continue exactly on its former footing ; and without some change in the rate of profit, on which fluctuations in the value of money have almost no effect, the rate of interest would continue invariable. Mr. Ricardo has set this principle in a clear and striking point of view. " The rate of interest," he observes, in answer to those who had contended that it would be increased by a diminution of the discounts of the Bank of England, " is not regulated by the rate at which the Bank will lend, whether it be five, four, or three per cent., but by the rate of profit which can be made by the employment of capital, and which is totally independent of the quantity and of the value of money. "Whether a bank lend one million, ten Rate of Interest. 3- millions, or a hundred millions, they would not permanently alter the mar- ket rate of interest ; they would alter only the value of the money which they thus issued. In one case, ten or twenty times more money might be required to carry on the same business, than what might be required on the other. The applications to the bank for money, then, depend on the comparison between the rate of profits that may be made by the employment of it, and the rate at which they are willing to lend it. If they charge less than the market rate of interest, there is no amount of money which they might not lend : if they charge more than that rate, none but spendthrifts and prodigals would be found to borrow of them. We accordingly find, that when the market rate of interest exceeds the rate of five per cent., at which the bank uniformly lend, the discount office is besieged with appli- cants for money ; and, on the contrary, when the market rate is even tem- porarily under five per cent., the clerks of that office have no employment." Kicardo's Principles of Political Economy, 1st edit. p. 511. It is foreign to the object of this article to enter into any detailed exam- ination of the causes which tend to elevate or depress the rate of profit Whatever diversity of opinion may be entertained respecting them, it is abundantly evident that the rate of interest afforded for the use of borrowed capital must be proportional to the profits which might be derived from its employment. In the United States, the market rate of interest varies from ten to fourteen per cent.; and in Holland, previously to the invasion of the French, in 1794, it did not exceed two or three per cent. The immense extent of fertile and uncultivated land in America, the lowness of taxation, and the absence of all restrictive regulations, naturally occasion high profits, and consequently high interest ; whilst the sterility and limited extent of the soil of Holland, the excessive load of taxes, laid equally on necessaries and luxuries, and the injudicious restraints imposed upon various branches of commerce, by rendering it impossible to derive large returns from capital, proportionally sink the rate of interest. Had the soil of Holland been as fertile, and taxation as light as in the United States, profits and interest would, notwithstanding the abundant supply of capital, have been equally high in the one republic as in the other. It is not by the absolute amount of the stock of a country, but by the comparative facilities for its advan- tageous employment, that the compensation or interest which a borrower can afford for its use, must always be regulated. Previously to the ter- mination of the late war, the market rate of interest in this country, for sums which could not be immediately demanded, fluctuated from five to twelve per cent. It has since fallen to four or five per cent.; a decline which has not certainly been occasioned by any sudden increase of capital, but by the extraordinary depression of commerce, and the consequent im- possibility of investing stock so as to yield as large a profit as it did during the period when we engrossed almost the whole trade of the world. Rate of Interest varies according to the Security for the Repayment of the Principal and the Duration of the Loan. Besides such variations as are proportional to variations in the general and average rate of profit, and which equally affect all loans, the rate of interest must vary according to the degree of security afforded for the repay- 4 Interest. ment of the principal, and the duration of the loan. No capitalist would lend on the personal security of a gunpowder manufacturer, and on mort- gage over a valuable estate, at the same rate of interest. The extraordinary hazard of the gunpowder trade exposes the stock invested in it to an ex- treme degree of risk. It may be dissipated in an instant, and the power of the borrower to refund the capital he had borrowed annihilated forever. A lender of money on mortgage is almost entirely relieved from such con- tingencies. The owner of an estate on which a loan is secured may be- come bankrupt ; but the estate itself will remain, and may either be sold or taken possession of by the lender. It is plain, therefore, that there must be a very great difference in the rate of interest paid by those whose se- curity for the repayment of the principal is so exceedingly different. The gunpowder manufacturer, besides paying a rate or percentage equivalent to the common and average rate of interest derived from the most secure in- vestments, would have to pay an additional rate, which, although it might not be designated by that name, would really constitute & premium of in- surance proportioned to the greater risk to which the lender was exposed of losing his principal. The preferable security offered by the landholder would relieve him from the necessity of paying any considerable premium, or excess of interest, on account of risk ; and of course he would be able to borrow at so much less than the manufacturer. We should mistake, however, if we supposed that the latter was thus placed in a comparatively disadvantageous situation. He would be complete- ly indemnified for the greater risk to which his stock was exposed, and for the higher rate of interest which he was in consequence obliged to pay, by the greater gross profits he would derive from his business. The constantly operating principle of competition will not permit, taking everything into account, a greater net profit to be permanently derived from one department of industry than from another. But those who invest their stock in employ- ments of more than ordinary hazard, must be able to dispose of their pro- duce at such a price as will yield them the common and average rate of profit, besides affording a surplus adequate to insure their stock against the extra risk to which it is exposed. If this were not the case, no capitalist would place his property in a state of comparative danger, and no under- takings of a hazardous nature would be entered into. Wherever there is risk, that risk must be compensated. And it may, and very frequently does happen, that the manager of a hazardous branch of industry, paying from ten to twenty per cent, for borrowed capital, is realizing a larger net profit than the landlord who has purchased an estate with money for which he only pays three or four per cent. This principle is never lost sight of in bargaining for loans. In Athens, the rate of interest was not regulated by law ; and it is distinctly mentioned by ancient authors, that the average rate of interest paid by those who em- ployed their stock in the shipping trade with the countries situated on the Euxine and Mediterranean seas amounted, on account of the hazard of the voyage, to about thirty per cent.; whilst bankers, agriculturists, and others, whose security was preferable, paid only about twelve per cent. Say, in noticing this striking fact, supposes that the thirty per cent, was charged by the voyage ; and that, as two voyages to the Crimea or Sicily might be made annually, maritime interest really amounted at Athens to sixty per. Government Interference. 5 cent. There does not, however, appear to be the least ground for this as- sertion. It is the average annual rate of interest that is always spoken of. (Travels of Anacharsis, vol. iv. p. 368, Eng. Transl. ; DePauw, Rtcherches sur les Grecs, torn. i. p. 287 ; Say, torn. ii. p. 132.) But supposing the securities to be equal, capital lent for short periods, or in such a way that the lender may obtain possession of it at pleasure, will always bring a lower rate of interest than capital lent for a considerable or definite period. No borrower could afford to pay so high a rate of interest for a capital whose productive services he might be deprived of in an instant, and which he could not therefore venture to invest in any employment from which it might not be easily withdrawn, as for a capital lent for a fixed period, especially if that period was of considerable length. But here, as in every other case, the real interests of the borrower and lender coincide. The same circumstances which prevent a borrower from giving as high a rate of interest for a loan payable on demand as if it were payable at a fixed and distant term, induce the lender to rest satisfied with a smaller compensation in the one case than in the other. We wish to be able to exercise a complete command over our capital. No merchant would ever consent to lend his stock on mortgage. If he did, he would no longer be able to carry on his business with advantage. He would be deprived of all power of speculating ; and although this might in many instances be for his advantage, yet the flattering opinion which every one entertains of his own abilities and good fortune would but seldom allow him to doubt of its being a very material disadvantage. It is by this principle that we are able to account for the comparatively low rate of interest at which banking companies who pay the sums deposited with them on demand, and govern- ments whose circumstances are perfectly desperate, are able to borrow. A stockholder's mortgage (his claim on the revenue of the country) can be immediately converted into cash at the current prices. And however much the majority of the public creditors may be impressed with a conviction of the inability of the state to discharge all the claims upon it, every particu- lar individual, confident in his own good fortune, foresight, and acuteness, flatters himself with the idea that he, at least, will be able to predict the coming tempest, and that he will be able to sell out before a national bank- ruptcy. Interference of Government in adjusting the Rale of Interest. Instead, however, of leaving the rate of interest to be adjusted by the unfettered competition of the borrowers and lenders, on the principles we have thus briefly explained, the governments of most countries have inter- fered, either to prohibit the taking interest altogether, or to fix certain rates which it was declared legal to exact, at the same time that any excess over these rates was declared to be iisury, and prohibited under the severest penalties. In the rude and unenlightened ages in which these enactments had their origin, the precious metals, then the only species of money, were considered as uninfluenced by the same principles which regulate the value of other products. Being used both as standards, whereby to ascertain the comparative value of different commodities, and as the equivalents for which they were must frequently exchanged, they acquired a factitious im- 6 Interest. portance, not merely in the estimation of the vulgai', but in that of persons of the greatest discernment. The simple consideration that all buying and selling is really nothing more than the bartering of one commodity for another, of a certain quantity of corn or beef, for example, for a certain quantity of gold or silver, and vice versa, was entirely overlooked. The attention was gradually transferred from the money's worth to the money itself ; and the wealth of states and of individuals came to be measured, not by the abundance of their disposable produce, by the quantity or value of the commodities with which they could afford to purchase the precious metals, but by the quantity of these metals actually in their possession. Be- cause it sometimes happened that the holders of ordinary commodities were unable easily to dispose of them at any price, whilst money was always sure to find a ready and advantageous market, it was considered as some- thing mysterious, as a real merchandise, par excellence. We cannot, there- fore, be surprised at the measures to which the erroneous opinions enter- tained respecting it necessarily led ; or that efforts should have been made to protect the interests of those who were unprovided with so power- ful an instrument from becoming a prey to the encroachments of their more fortunate neighbors. Every individual was allowed freely to dispose of his corn, cattle, land, etc.; but it was imagined there was something peculiar in money, and that the desire to obtain it was so great, that, unless the lenders were restrained in their demands, they would, by taking advantage of the necessities of the borrowers, infallibly ruin them, and engross the whole property of the country. Another source of the prejudice against stipulating for interest must be sought for in the dislike so universally entertained in remote ages to accu- mulation. There can be no accumulation without economy, without a saving of income ; and this was then not only considered as indicative of a sordid and avaricious disposition, but as being positively hurtful. Before the nature and functions of capital were properly understood, it was believed that it could not be increased otherwise than by injuriously abstracting a portion of the national revenue, and that any advantage it might give to the propri- etor must have been obtained at the public expense. It did not occur to our ancestors, that an individual who, by his economy, has accumulated stock, has really added to the wealth of the state, without diminishing that of others ; nor were they aware that this stock, when afterwards expended, as is almost always the case, in the support of productive industry, would af- ford the means of producing an increased income. But reckoning, as they did, the savings of individuals as so much withdrawn from the public income, it was natural enough that they should endeavor to limit the advantage to be derived from their employment. Much, also, of the prejudice against bargaining for interest, so prevalent in the Middle Ages, may be traced to the authority of some texts of Scrip- ture, which were understood entirely to prohibit its exaction. It has, how- ever, been shown that these texts will not really bear this interpretation ; but supposing that they did, nothing, it is plain, could be more absurd than to consider the municipal regulations of a people placed in such peculiar circumstances as the Jews as general and fixed principles, applicable in all ages and countries. But, whatever may have been the causes of the efforts so generally made Government Laws. 7 to regulate and limit the rate of interest, it is cei'tain that, so far from suc- ceeding in their object, they have had a precisely opposite effect. Should a borrower find it for his advantage to offer six, seven, or eight per cent, for a loan (and, unless it were for his advantage, nothing could possibly induce him to make such an offer), what right has the legislator to interfere, and to prohibit the lender from receiving, and the borrower from paying, more than four or five per cent. Such an interference is not only uncalled for and unnecessary, but it is in the highest degree prejudicial. Restrictive laws, instead of reducing, have uniformly contributed to raise the rate of interest. Nor is this anything more than might have been foreseen and ex- pected. It is plain that no law can be so framed as to prevent a borrower from offering a higher rate of interest than what is fixed by statute ; and if the lender had implicit confidence in the secrecy and solvency of the borrower, he might accommodate him with the sum wanted, without requir- ing any additional interest, or premium of insurance, because of the danger of entering into what the law declares to be -an illegal transaction. But this must be a very rare case. Gratitude and a sense of benefits re-' ceived are, unfortunately, when they come into contact with self-interest,but slender securities for honorable conduct Numberless unforeseen events occur to waken and dissolve the best-cemented friendships ; and a transac- tion of this kind would undoubtedly afford an additional source of jealousies and divisions. In such matters, indeed, men are more than usually sharp- sighted, and are very little disposed to trust to moral guarantees for the security of their property. But neither the threatenings of the law, nor the powerful inducements which it holds out to dishonest debtors to break their engagements, and treacherously to recede from the stipulations to which they had agreed, have been able to prevent, or even greatly to lessen, what are termed usurious bargains. Their only effect has been to oblige the lender to demand, and the borrower to bind himself to pay, a higher rate of interest than would otherwise have been required. A bargain for more than the statute rate of interest being declared illegal, the lender is thus exposed to an additional risk. But no person will gratuitously place his fortune in a situation of comparative hazard; and, therefore, the sum necessary to cover this risk must be proportioned to the greater or less anx- iety on the part of government to prevent and punish such bargains ; or, in other words, the rate of interest is invariably increased according as the laws intended to reduce it become more severe, and diminished according as they are relaxed. Thus a capitalist might be inclined to lend a sum at six or seven per cent.; but as the law declares that any individual who shall stipulate for more than five per cent, shall, if detected, forfeit three times the principal, it is clear, provided there was no method of defeating this statute, that there must be an end of all borrowing, except when the market rate of interest was below the stationary rate. Whenever it was above that rate, no per- son would be able to obtain a single farthing in the way of loan. There could then be no transference of capital. It would continue locked up in the same hands ; and the national property and welfare would, in conse- quence, suffer severely. Luckily, however, the mutual interest and inge- nuity of borrowers and lenders have always proved an overmatch for the enactments of the law. These have done nothing but fetter the transfer- 8 Interest. ence of stock, and force the borrowers to pay a higher rate of interest for it. What might have been borrowed at six per cent., had there been no hazai'd from anti-usurious statutes, is, on account of that hazard, raised to perhaps eight or even ten per cent.; and, what is still worse, a contempt for the in- stitutions of society and a habit of carrying on business in a secret and un- derhand manner, are generated. The odium which attaches to a positively pernicious regulation, weakens the respect which would otherwise be felt for those which are acknowledged to be advantageous ; and that spirit of frankness, openness, and sincerity, which, wherever it predominates, is so highly valuable, is cramped in its development, or altogether supplanted, by duplicity, extortion, and cunning. Effect of the Usury Laics in Rome. These conclusions do not rest on theory only, but are supported by a constant and uniform experience. At Rome, during the period of the re- public, the ordinary rate of interest was excessively high. The debtors or plebeians, were every now and then threatening to deprive their creditors, who were generally of the patrician order, not only of the interest of their capital but of the principal itself. Repeated instances occurred to show that these were not mere empty threats ; and the patricians were therefore obliged to indemnify themselves, by means of a corresponding premium, for the risks to which they were exposed. " Des continuels changements," says Montesquieu, " soit par des loix, soit par des plebiscites, naturaliserent a Rome 1'usure ; car les creanciers, voyant le peuple leur debiteur, leur legislateur, et leur juge, n'eurent plus de confiance dans les contrats. Le peuple, comme un debiteur decredite, ne tentoit a lui preter que par des gros profits ; d'autant plus que, si les loix ne venoient que de temps en temps, les plaintes du peuple etoient continuelles, et intimidoient toujours les creanciers. Cela fit que tous les moyens honnetes de preter et d'em- prunter furent abolis a Rome, et qu'une tisure qffreuse, toujours, foudroyee, et toujours renaissante, s'y etablit. Le mal venoient de ce que les choses n'avoient pas etc menages. Les loix extremes dans le bien font naitre le mal extreme : il jallut payer pour le pret de I'argent, et pour le danger des peines de la loi." {Esprit des Loix, livre xxii. chap. 21.) Interest in the East ; in the Middle Ayes ; in France ; in Livonia. In Mohammedan countries, notwithstanding the positive prohibition in the Koran, the ordinary rate of interest is at least ten or twenty times as high as its ordinary rate in Europe. " L'usure augmente dans les pays Mohammedans a proportion de la severite de la defense : le preteur s'indemnise du peril de la contravention." (Esprit des Loix, liv. xxi. ch. 19.) During the Middle Ages, the average rate of profit could not be much higher than at present: " but the clamor and persecution raised against those who took interest for the use of money was so violent, that they were obliged to charge it much higher than the natural price, which, if it had been let alone, would have found its level, in order to compensate for the oppro- brium, and frequently the plunder, which they suffered ; and hence the Great Britain. 9 usual rate of interest was what we should now call most exorbitant and scandalous usury." Macpherson's History of Commerce, vol. i. p. 400. The extraordinary risks to which lenders were exposed rendered the premium of insurance on all sorts of capital excessively high ; for, of the fifty and even a hundred per cent., which borrowers then frequently engaged to pay as interest, not more than eight or ten per cent, can properly be said to have been given for the productive services of capital. The rest must be considered as a bonus, to compensate the lender for the hazard he encoun- tered of losing the principal itself. It is impossible to form any very accu- rate estimate of the rate .of profit in the Middle Ages ; yet several striking facts may be adduced in support of the opinion here advanced. At Verona, in 1228, the interest of money was fixed by law at twelve and a half per cent. Towards the end of the fourteenth century, the republic of Genoa paid only from seven to ten per cent, to her creditors ; and the average dis- count on good bills at Barcelona, in 1435, is stated to have been about ten per cent. But whilst the rate of interest in Italy and Catalonia, where a considerable degree of freedom was allowed to the parties concerned in bargaining for a loan, was thus comparatively moderate, it was, in despite of its total prohibition, incomparably higher in France and England. Matthew Paris says that in the reign of Henry III., the debtor paid ten per cent, every two months ; and this, though absolutely impossible as a general practice, may not have been very far from the average interest charged on the few loans that were then contracted for. (Hallam's History of the Mid- dle Ages, vol iii. p. 402.) In France, the rate of interest was fixed at five per cent, so early as 1665 ; and this, a few short intervals only excepted, continued to be the legal rate until the Revolution. Laverdy, in 1766, reduced it from five to four per cent. Instead, however, of the market rate being proportionably reduced, it was raised from five to six per cent. Previously to the promulgation of the edict, loans might have been obtained on good security at five per cent.; but an additional per cent, was now required to cover the risk of illegality. This caused the speedy abandonment of the measure. (Storch, Traite d'Economie Politique, torn. iii. p. 187.) The same thing happened in Livonia, in 1786, when the empress Cath- erine reduced the legal rate of interest from six to five per cent. Hitherto, says Storch (in loco supra citato), those who had good security to offer were able to borrow at six per cent.; but henceforth they had to pay seven per cent, or upwards. And such will be found to have been invariably the case, wherever governments have interfered to reduce the statutory below the market rate of interest. History of the Laws regulating the Rate of Interest in England. From the earliest period of the history of England down to the reign of Henry VIIL, the taking of interest was absolutely forbidden to all persons within the realm except Jews and foreigners, who, nevertheless, were fre- quently plundered for the sake of enriching the crown, under the miserable pretext of punishment for what were then called their " hellish extortions." The disorders occasioned by this ruinous interference on the part of govern- 10 Interest. ment at length became so obvious, that, notwithstanding the powerful preju- dices to the contrary, a statute was passed in 1546 (37 Hen. VIII. cap. 7), legalizing the taking of interest to the extent of ten per cent, per annum ; and this because, as is recited in the words of the act, the statutes," prohib- iting interest altogether have so little force, that little or no punishment hath ensued to the offenders." In the reign of Edward VI. the horror against taking interest seems to have revived in full force ; for, in 1552, the taking of any interest was again prohibited, " as a vice most odious and detestable," and " contrary to the word of God." But, in spite of this tremendous de- nunciation, the ordinary rate of interest, instead of being reduced, immedi- ately rose to fourteen per cent., and continued at this rate until, in 1571, an act was passed ( 13 Eliz. cap. 8) repealing the act of Edward VI., and reviving the act of Henry VIII., allowing ten per cent, interest. In the pre- amble to this act it is stated, " that the prohibiting act of King Edward VI. had not done so much good as was hoped for ; but that rather the vice of usury hath much more exceedingly abounded, to the utter undoing of many gentle- men, merchants, occupiers, and others, and to the importable hurt of the commonwealth." This salutary statute was opposed, even by those who, it might have been expected, would have been among the first to emancipate themselves from the prejudices of the age, with all the violence of ignorant superstition. Dr. John Wilson, a man famous in his day, and celebrated for the extent and solidity of his learning, stated in his place in the House of Commons, that " it was not the amount of the interest taken that con- stituted the crime ; but that all lending for any gain, be it ever so little, was wickedness before God and man, and a damnable deed in itself, and that there was no mean in this vice any more than in murder or theft." In order to quiet the consciences of the bench of bishops, a clause was actually in- serted, declaring all usury to have been forbidden by the law of God, and to be in its nature sin, and detestable. When first enacted, this statute was limited to a period of five years ; but, " forasmuch as it was by proof and experience found to be very necessary and profitable for the commonwealth of this realm," it was in the same reign made perpetual. (39 Eliz. cap. 18.) In the 21st of James I. the legal rate of interest was reduced to eight per cent., by an act to continue for seven years only, but which was made perpetual in the succeeding reign. (3 Car. I. cap. 4.) During the common- wealth, the legal rate of interest was reduced to six per cent., a reduction which was afterwards confirmed by the act 12 Car. II. And, finally, in the reign of Queen Anne, a statute (12 Anne, cap. 16) was framed reducing the rate of interest to five per cent., at which it now stands. In the preamble to this statute, it is stated, that "whereas the reducing interest to ten, and from thence to eight, and thence to six, in the hundred, hath from time to time, by experience, been found very beneficial to the advancement of trade and the improvement of lands, it is become ab- solutely necessary to reduce the high rate of interest of six per cent, to a nearer proportion to the interest allowed for money in foreign states." It was for these reasons enacted, that all bargains or contracts stipulating for a higher rate of interest than five per cent, should be utterly void. And " that all persons who should after that time receive, by means of any cor- rupt bargain, loan, exchange, chevizance, or interest, of any wares, mer- chandise, or other thing whatever, or by any deceitful way or means, or by Eighteenth Century. 1 1 any covin, engine, or deceitful conveyance for the forbearing or giving day of payment, for one whole year, for their money or other thing, above the sum of 5 for 100 for a year, should forfeit, for every such offence, the triple value of the moneys or other things so lent, bargained," etc. Laws regulating the Rate of Interest in Scotland ; in Ireland. In Scotland, previously to the Reformation, no interest could be legally exacted for money. But this great event, by weakening the force of those religious prejudices, which had chiefly dictated the laws prohibiting interest, occasioned the adoption of sounder opinions on the subject, and led to the enactment of the statute of 1587 (11 Parlt. Jac. VI. cap 52), which legal- ized the taking of interest to the extent of ten per cent. In 1 633, the legal rate was reduced to eight per cent, and in 1661, to six per cent. The stat- ute of Queen Anne, reducing the rate of interest to five per cent., extended to both kingdoms. The statutes prohibiting the taking of interest in Ireland were not re- pealed until 1635, when, by the statute 10 Car. I. cap. 22, liberty was given to stipulate for interest to the extent often per cent. In 1704, this rate was reduced to eight percent.; in 1722, it was reduced to seven per cent., and in 1732, it was further reduced to six per cent., at which it has since contin* ued fixed. Comparison between the Market Rate and Statutory Rate of Interest from 1714 to 1793. It has been observed by Dr. Smith, that the different statutory regula- tions, reducing the rate of interest in England, were made with great pro- priety. Instead of preceding, they followed the fall which was gradually taking place in the market rate of interest ; and, therefore, did not con- tribute, as they otherwise must have done, to raise the rate which they were intended to reduce. Sir Josiah Child, whose celebrated Treatise, recom- mending a reduction of interest to four percent, was published about 1670, states positively, that the goldsmiths in London, who then acted as bankers, could obtain as much money as they pleased upon their servant's notes only, at four and a half per cent. The supposed insecurity of the revolutionary establishment, and the novelty of the practice of funding, occasioned the payment of a high rate of interest for a considerable portion of the sums borrowed by the public in the reigns of William III. and Anne ; but pri- vate persons of undoubted credit could then borrow at less than five per cent. During the reign of George II. the market rate of interest fluctu- ated from three to four and four and a half per cent. On the 18th of De- cember, 1752, the three per cents, brought the highest price they have hitherto reached, namely, 106 per cent. On the 20th of September, 1797, the day on which the failure of Lord Malmesbury's attempt to negotiate with the French republic transpired, consols fell to 47-|, being the lowest price at which they have ever been sold. Dr. Smith mentions, that the increased means of profitably investing cap- ital acquired during the war which terminated in 1763, raised the market 12 . Interest. rate of interest, subsequently to the peace of Paris, to a level with the stat- utory rate, or perhaps higher. But this rise was only temporary, and it was not until the late war that any very material or general inconvenience was found to result from, the limitation of the rate of interest to five per cent. Expedients for Defeating the Laws limiting the Rate of Interest. It is necessary, however, to observe that this remark applies exclusively to the loans negotiated by individuals who could offer unexceptionable secu- rity ; for ever since the passing of the act of 1714, persons engaged in em- ployments of more than ordinary hazard, whose character for prudence and punctuality did not stand high, or who could only offer inferior security, were unable to borrow at five per cent., and have in consequence been compelled to resort to a variety of schemes for defeating and evading the enactments in the statute. The most common device was the sale of an annuity. Thus, supposing an individual whose personal credit was not good, and who had only the life-rent of an estate to give in security, wanted to borrow any given sum, he sold an annuity to the lender sufficient to pay the interest stipulated for, which, because of the risks and odium attending such transactions, was always higher than the market rate, and also to pay the premium necessary to insure payment of the principal on the death of the borrower. It is curious to observe, that although the sale of an irre- deemable life annuity, at a rate exceeding legal interest, was not reckoned fraudulent or usurious, yet, so late as 1743, Lord Hardwicke held, that in their less exceptionable form, or when they were redeemable, annuities could only be looked upon as an evasion of the statute of usury, and a loan of money. ( Considerations on the Sate of Interest, by E. B. Sugden, Esq. Pamphleteer, vol. viii. p. 278.) But the extreme inexpediency of this dis- tinction soon became obvious, and the law on this subject is now entirely changed. The greater extension of the traffic in annuities, and the advan- tage of giving as much publicity as possible to such transactions, led to various parliamentary inquiries and regulations respecting them in the early part of the reign of his late majesty. The consequence has been, that irredeemable annuities are now nearly unknown, and that the sale of a re- deemable annuity cannot be impeached, although it should appear on the face of the deeds that the lender had secured the principal by effecting an assurance of the borrower's life. By the act 53 Geo. III. cap. 141, it is enacted, " That a memorial, setting forth the date of every deed, bond, in- strument, or other assurance, whereby an annuity or rent-charge shall be granted for one or more life or lives, or for a certain number of years, the names of all the witnesses, and of all the parties thereto, the sum given for the security, and the amount of the annuity itself, shall be registered in the Court of Chancery." This act only applies to England and Wales. During the greater part of the late war, however, the usury laws op- erated, not to the prejudice of one, but of all classes of borrowers. The extent of the loans, the high rate of interest given by the state, the facility of selling out of the funds, the regularity with which the dividends were paid, and the temptations arising from the fluctuations in the price of funded property, diverted so large a proportion of the floating capital of the country House of Commons. 13 into the coffers of the treasury as to render it next to impossible for a pri- vate individual to borrow at the legal rate of interest, except from the trus- tees of public companies, or through the influence of circumstances of a very peculiar nature. The proprietors of unincumbered freehold estates, of which they had the absolute disposal, were almost universally obliged to resort to those destructive expedients which had formerly been the resource only of spendthrifts, and persons in the most desperate circumstances. Annuities were not unfrequently granted for the term of several lives, at the rate of twelve, fourteen, fifteen, and even twenty per cent., exclusive of the premium of insurance on the lives of the persons named in the grant of the annuities. Mr. Onslow, in his speech on the usury laws, 23d of May, 1816, mentions that he knew the case of a gentleman possessed of a very large estate in fee-simple, who had been compelled to grant an annuity for four lives (and the survivor of them), named by the grantee, for eight years' purchase. House of Commons 1 Report on the Usury Laivs. The Report of the Committee on the Usury Laws, laid before the House of Commons in 1818, contains much valuable evidence, establishing the impol- icy and the pernicious effects of these laws in the clearest manner. Mr. Sugden, a gentleman very extensively concerned in the management of landed property, stated that when the market rate of interest rose above the legal rate, the landed proprietor was compelled to resort to some shift to evade the usury laws. For this purpose, Mr. Sugden informed the com- mittee he had " known annuities granted for three lives, at ten per cent, upon the fee-simple estates, unincumbered, and of great annual value, in a regis- ter county. He had also known annuities granted for four lives, and more would have been added, but for the danger of equity setting aside the transaction on account of the inadequacy of the consideration. Latterly, many annuities were granted for a term of years certain, not depending upon lives." On being asked whether, if there were no laws limiting the rate of interest, better terms could or could not have been obtained, Mr. Sugden answered, " I am decidedly of opinion that better terms could have been obtained ; for there is a stigma which attaches to men who lend money upon annuities, that drives all respectable men out of the market. Some leading men did latterly embark in such transactions, but I never knew a man of reputation in my own profession lend money in such a manner, although we have the best means of ascertaining the safest securities, and of obtaining the best terms. " In all loans, two solicitors are invariably concerned, one for the borrower and one for the lender ; and although the borrower always pays the ex- pense of the securities, yet a regular professional bill is invariably made out ; whereas, in the case of an annuity, although it is in strictness a loan, only one solicitor is employed, and he never makes out a regular bill, but charges what is termed a lumping sum, for all his expense and trouble in the transaction." And, in another place, Mr. Sugden observes, the "temptation on the part of a solicitor to lend money upon annuities is very strong, be- cause, without any check upon his charges, he demands whatever sum he pleases, and he takes care that it is instantly paid ; for in no instance is the borrower 14 Interest. allowed to leave the room until he has paid the solicitor's charge" " Nothing," Mr. Sugden justly adds, " short of a repeal of the usury laws, can put a stop to the abuses which attend grants of annuities ; they strongly encourage a spirit of gambling ; for, as the repayment of the money lent cannot be en- forced, and the annuity is granted upon a contingency, the borrower too frequently neglects to provide for the payment of the loan, and trusts to chance for the determination of the annuity." " The laws against usury," says Mr. Holland, partner of the house of Baring, Brothers, and Company, and one of the best-informed merchants in the country, " drive men in distress, or in want of money, to much more disastrous modes of raising it than they would adopt if no usury laws existed. The landowner requires capital to increase his live stock, or improve his land, or for any other pui'pose, at a period when the government is borrow- ing money at above five per cent., or when the funds give a greater interest than five per cent.; no one will then lend to the landowner, because his money is worth more to him than the law allows him to take ; the landowner must, therefore, either give up his improvements, or borrow money on an- nuity interests, on much more disadvantageous terms than he could have done if no law existed against usury. The man in trade in want of money for an unexpected demand, or disappointed in his returns, must fulfil his engage- ments or forfeit his credit. He might have borrowed money at six per cent., but the law allows no one to lend it to him, and he must sell some of the commodity he holds, at a reduced price, in order to meet his engagements. For example, he holds sugar, which is worth 80s.; but he is compelled to sell it immediately for 70s. to the man who will give him cash for it, and thus actually borrows money at twelve and a half per cent., which, had the law allowed him, he might have borrowed from a money-dealer at six per cent. It is known to every merchant, that cases of this kind are common occurrences in every commercial town, and more especially in the metropolis. A man in distress for money pays more interest, owing to the usury laws, than he would if no such laws existed ; because now he is obliged to go to some of the. disreputable money-lenders to borrow, as he knows the respect- able money-lender will not break the laws of his country. The disreputable money-lender knows that he has the ordinary risk of his debtor to incur in lending his money, and he has further to encounter the penalty of the law, for both of which risks the borrower must pay. If no usury laws existed in common cases, and where a person is respectable, he might obtain a loan from the respectable money-lender, who would then only have to calculate his ordinary risk, and the compensation for the use of his money." Resolutions of the Committee. In every part of the appendix to the Report, we meet with equally con- clusive evidence of the pernicious effects of the laws restraining the rate of ( interest. And the committee admitted the full force of this evidence, by agreement to the following resolutions : 1st. " That it is the opinion of this committee that the laws regulating or restraining the rate of interest have been extensively evaded, and have failed of the effect of imposing a maxi- mum ou such rate ; and that of late years, from the constant excess of the Effects of Usury Laws. 15 market rate of interest above the rate limited by law, they have added to the expense incurred by borrowers on real security, and that such borrowers have been compelled to resort to the mode of granting annuities on lives ; a mode which has been made a cover for obtaining a higher rate of inter- est than the rate limited by law, and has farther subjected the borrowers to enormous charges or forced them to make very disadvantageous sales of their estates. 2d. That it is the opinion of this committee, that the construc- tion of such laws, as applicable to the transactions of commerce as at pres- ent carried on, have been attended with much uncertainty as to the legality of many transactions of frequent occurrence, and consequently been pro- ductive of much embarrassment and litigation. 3d. That it is the opinion of this committee that the present period, when the market rate of interest is below the legal rate, affords an opportunity peculiarly favorable for the repeal of the said laws." In spite, however, of the recommendation of the committee, and of the clear and satisfactory nature of the evidence on which it is founded, the popular prejudice on this subject continues so strong, that there does not seem much reason to expect that this desirable measure will be speedily effected. Pernicious Effects of these Laws. It is most absurdly supposed, that, were the laws limiting the rate of in- terest repealed, every individual who has capital to lend would henceforth indulge in all those mean and disgraceful practices which at present charac- terize the lowest classes of money brokers. But it might just as reasonably be supposed, that, were country gentlemen allowed to sell game, they would immediately become addicted to all the vices of the poacher. The truth is, that if the rate of interest were left to be adjusted by the unrestricted com- petition of the parties, there would be almost no employment for the inferior class of money-dealers. Except when the market rate of interest is below the legal rate, the usury laws prevent all persons, whose credit is not ex- tremely good, from obtaining loans from capitalists of the highest character, and force them to have recourse to those who are less scrupulous. Sup- posing the market rate of interest to be six or seven per cent., an individ- ual in ordinarily good credit might, were the usury laws abolished, easily obtain a loan at that rate. But the law having declared that no more than five per cent, shall be taken, and consequently having affixed a species of stigma to those lenders who bargain for a higher rate, necessarily excludes the rich and more respectable capitalists from the market, and obliges bor- rowers to resort to those of an inferior character, who, in addition to the premium for the risk incurred by entering into an illegal transaction, must receive an indemnification for the odium which in such cases always at- taches to the lender. It is idle and ridiculous to attempt to secure individu- als against the risk of imposition in pecuniary, more than in any other species of transactions. But although the object were really desirable, it could not possibly be obtained by such inadequate means. The usury laws gene- rate the very mischief they are intended to suppress. Far from diminish- ing, they most unquestionably multiply usurious transactions in a tenfold 16 Interest. proportion, and powerfully aggravate all the evife they were designed either to mitigate or remove. Nothing can be more unreasonable, or more entirely unfounded, than the clamor that has been set up against usurers, as money-lenders are sometimes termed, because of their exacting a higher rate of interest than ordinary from prodigals and spendthrifts. This, surely, is the most proper and efficient check that can be put upon the thoughtless or unprincipled extravagance of such persons. Supposing the security of a prodigal and of an industrious man to be nearly equal, and this can scarcely ever be the case, does not the capitalist, who would lend to the latter at a lower rate of interest than he would lend to the former, confer a real service on his country ? Does he not prevent those funds which ought to be employed in supporting useful labor, and in adding to the real wealth of the nation, from being wasted in ridiculous extravagances or boisterous dissipation ? They do not protect the Prodigal and Unwary. But, perhaps, we shall be told that this is mistaking the object of the usu- ry laws ; that they were not intended to force capitalists to lend to spend- thrifts at the same rate of interest as to industrious persons, but to protect the prodigal and unwary from the extortion of usurers, by declaring any stipulation between them for more than a given rate of interest, to be null and void. But why all this solicitude about the least valuable class of so- ciety ? Why fetter and restrict the free circulation of capital amongst those who would turn it to the best account, lest any portion of it might chance to fall into the hands of those who would squander it away ? If the preven- tion of prodigality be an object of sufficient importance to justify the inter- ference of the legislature, why not at once put the prodigal under an in- terdict ? This is the only way in which it is possible, to restrict him. It is not so much by borrowing money at high interest, as by contracting debts to merchants, on whose charge there is no check, that spendthrifts generally run through their fortunes. Mr. Bentham has justly observed, that so long as a man is looked upon as one who will pay, he can much easier get the goods he wants than he could the money to buy them with, though he were con- tent to give for it twice or thrice the ordinary rate of interest. How ridic- ulous is it, then, to stimulate this natural facility of purchasing, to permit prodigals to borrow (for it is really borrowing) the largest supplies of food, clothes, etc., at twenty, thirty, or even an hundred per cent, interest, at the same time that we inflict a real injury on every other class of society, rather than permit them to borrow the smallest supply of money at more than five per cent. Instead of being of any service, this restriction is evidently inju- rious to the prodigal. It narrows his choice, and drives him from a market which might have proved much less disadvantageous, to one in which no disgrace attaches to the exaction of the most exorbitant interest, and where he can scarcely escape being ruined. Neither is the outcry raised against capitalists for taking advantage of the necessities of industrious individuals, in any degree better founded than that which is raised against them for taking advantage of the extravagant Holland. 17 and thoughtless disposition of the prodigal or the simple. According as a person has a character for sobriety, and for punctuality in making his en- gagements, and according to the presumed state of his affairs at the time, so will he be able to borrow. To say that a capitalist took advantage of the necessities of any individual, is only saying that he refused to lend to a person in suspicious or necessitous circumstances at the same rate of interest he would have done had he been in high credit, or, which is the same thing, had there been no risk of losing the principal ; and had he not acted in this manner, should we not have justly considered him as a fool or a mad- man ? But as has already been shown, whatever may be the extortion of lend- ers, the usury laws afford no means of checking it ; on the contrary, they compel the borrowers to pay, over and above the common rate of interest, a premium sufficient to indemnify the lender for the risk and odium incurred in breaking them. They attempt to remedy what is not an evil, and what, consequently, ought not to be interfered with ; and in doing this they neces- sarily create a real grievance. What should we have thought of an act of parliament to compel the underwriters to insure a gunpowder magazine and a salt warehouse on the same terms ? Yet this would not have been in any respect more absurd, than to enact that the same rate of interest should be charged on capital lent to those whose security is widely different. There were no Usury Laws in Holland. Luckily, we are not left to infer from general principles, however well established, the many advantages that would result from a repeal of the laws limiting the rate of interest. The case of Holland furnishes a practical and striking proof of the correctness of the theory we have been endeavor- ing to establish. It is an undoubted fact, that the rate of interest has been, for a very long period, lower in Holland than in any other country in Eu- rope ; and yet Holland is the only country in which usury laws are alto- gether unknown, where capitalists are allowed to demand and borrowers to pay any rate of interest. Strictly speaking, this applies only to the state of Holland previously to the revolution in 1795. The enactments of the Code Napoleon were subsequently introduced ; but it appears from the Ke- port of the Parliamentary Committee on the Usury Laws, that they have not, in any instance, been acted upon. Notwithstanding all the violent changes of the government, and the extraordinary derangement of her financial concerns in the course of the last twenty years, the rate of interest in Holland has continued comparatively steady. During the whole of that period, persons who could offer unexceptionable security have been able to borrow at from three to five and a half per cent.; nor has the average rate of interest charged on capital, advanced on the worst species of security, ever exceeded six or seven per cent., except when the government was nego- tiating a forced loan. The general rate of discount in Holland is from four to five per cent., and occasionally from three to three and a half per cent., but very seldom lower. During the revolution, it had been from six to seven per cent., and even at eight ; but this was generally owing to some forced financial operation on account of the government, and was never of 18 Interest, long duration. The following is the average rate of discount at Amster- dam and Rotterdam from 1795 to 1817 : 17954, 4J 1796 4, 4| 17974, 4J 1798-^, 4| 17993, 4, 1800 1, 4J 18014, 4| 18024, 5, 18034, 5 5. 5. 6. 6. 6. 5J, 6. 18044, 4j, 5, 18054, 5, 5, 6," 18064, 4, 5," 5^ 6, 9, 12. 6. 9. 6, 9. 1807 1808 4, 3 18094, 4 18104, 4 18113, 3^ 18123, 18133, 3 18144, 1815 5j 5, 6. 4, 5, 5, 6. 5, 6. 4, 5. 4, 5. 4, 5, 5i, 5, 6, 6J, 7. 18165* 5i, 6, 6J. 18175, 5j, 6. " The Bank of Amsterdam neyer discounts at a higher rate than five per cent.; but they discount at a lower rate and vary their discounts according to the abundance of capital, never exceeding five per cent., and occasionally as low as two and a half and three." (Mr. Holland's evidence, Report of the Committee on the Usury Laws, p. 45.) But in this country, where the law declares that no more than five per cent, shall be taken, the rate of interest for capital advanced on the best landed security has, in the same period, varied from five to sixteen or seventeen per cent., or five times as much as in Holland. Surely, this ought to put to rest all doubts as to the impolicy and the inefficiency of the usury laws. Legal Bate of Interest in France. In France, the usury laws were abolished at the Eevolution ; and it is distinctly stated, that their abolition was not attended by any rise of interest. Storch, Economic Politique, torn. iii. p. 187. According to the Code Napo- leon only six per cent, irfterest is allowed to be taken in commercial affairs, and five per cent, when money is advanced on the security of real property. There is not, however, any difficulty in evading this law. The method re- sorted to for this purpose is to give a bonus before completing the transac- tion, or, which is the same thing, to frame the obligation for the debt for a larger sum than was really advanced by the lender. None of the parties particularly interested can be called to swear to the fact of such a bonus being given ; so that the transaction is unimpeachable, unless a third party, who was privy to the settling of the affair, can be produced as a witness. The Bank of France never discounts at a higher rate of interest than five per cent., but sometimes at a lower rate. In Hamburg. In Hamburg, the rate of interest is quite unrestricted ; or, if there be a written law restraining it, it has become altogether obsolete. The rate, therefore, varies according to circumstances. Occasionally, it has been at seven, eight, and even ten per cent.; and in 1799, a period of great mer- cantile embarrassment and insecurity, it was as high as fourteen per cent. Generally, however, the rate of discount on good bills does not exceed four or five per cent. Report on Usury Laws, p. 46. Usury Laws. 19 In Russia. In Russia, the legal rate of interest is six per cent. But as Russia is a country capable of much improvement, and where there are very great fa- cilities for the advantageous employment of capital, the market rate of interest is invariably higher than the statute rate, and the law is as constant- ly as it is easily evaded. Ibid., and Storch, tome iii. p. 207. In Austria. At Trieste, and throughout the Austrian empire in general, the usual rate of interest is fixed by law at six per cent.; but capital can seldom be obtained for less than eight or ten per cent. See Report, ubi supra. In Leghorn. At Leghorn, the ordinary rate of interest is a half per cent, per month, or six per cent per annum ; but there is no law to prevent the taking of a higher rate. In Spain. In Spain, the ordinary rate of interest is six per cent.; but no law exists against taking a higher rate, and it seldom falls below five or rises above seven per cent. In the United States. In the United States, legal interest is fixed at six per cent.; but the market rate fluctuates from ten to twelve per cent. Efforts, Mr. Berbeck informs us, are now making in various parts of the Union, particularly in Virginia and North Carolina, to do away the restraints on usury, which, as he justly observes, " operate merely as a tax on the needy borrower." Letters from Illinois, p. 36. f & Usury Laws do not reach the Government. If usury laws are to have any existence, they ought certainly to be made to operate on the greatest of all borrowers ; on those who do not borrow on their own credit but on that of others. Is it not the extreme of folly, that whilst an industrious manufacturer or agriculturist is prevented from giving more than five per cent for capital which he might be able to invest so as to yield ten or twelve per cent., government should be allowed to borrow at six, eight, ten, or twenty per cent.? What is this but holding out a bait to loan-mongers, and causing the capital of the country to flow with an accelerated and un- natural velocity into the treasury ? Nothing, surely, can be more impolitic than this. If we are to have usury laws, they ought to operate alike on every class of borrowers ; and considering the superior attractions which the facility of repossessing the principal gives to the investment of capital in the funds, the rate of interest at which government should be allowed to borrow should be less than the rate at which private individuals might bor- row. We trust, however, that we have said enough to show the inexpediency and the pernicious tendency of all such regulations. If a landlord is to be 20 Interest. allowed to take the highest rent he can get offered for his land, a fanner the highest price for his raw produce, a manufacturer for his goods, "why should a capitalist be restricted and fettered in the employment of his stock ? Every principle of natural justice, and of sound political expediency, is outraged by such a distinction. So long as the market rate of interest continued higher than the statu- tory rate, it cannot be doubted that considerable inconvenience would have resulted from any sudden abolition of the usury laws. It is certain, indeed, that this inconvenience would have been very speedily compensated by the check which the abolition would have given to the traffic in annuities, and by the easier circulation and more advantageous distribution of capital. Now, however, when the market is fallen below the statutory rate of inter- est, no inconvenience could attend their repeal. It could not lead to any demand for payment of borrowed money, for no individual would require payment of what he could not relend to a greater advantage. But, while their repeal would be in no respect disadvantageous, it would enable those who are engaged in employments of more than ordinary hazard, to procure ad- equate supplies of stock on more favorable terms ; and it would also secure us against the risk of future mischief should the market again rise above the legal rate of interest. It is unnecessary, however, to urge the immedi- ate repeal of the usury laws. We think it quite visionary to apprehend any danger from the instant application of a sponge to the whole of the anti- usurious statutes, but it is enough if they are repealed gradually. To avoid exciting any alarm in the minds of the most timid, the rate at which capital may be legally lent at interest might be annually raised one or one and a half per cent., until the rate had been extended to eight or ten per cent., when it is clear every restrictive regulation might be abolished without the possibility of the smallest derangement happening in consequence. Were the usury laws abolished, it would be proper to frame a statute which should fix the interest to be paid in those cases in which no previ- ous agreement had been made respecting it. But, as in cases of this de- scription, there is very frequently considerable doubt whether it was the intention of the parties at the time the transaction took place, that any in- terest should be charged, it would be proper to give the borrower the full benefit of this doubt, by fixing the rate payable in such cases at the lowest market rate. Error of some Writers on the SuJrject of a Loio Rate of Interest. Before concluding, we may remark, that until the laws regulating the rate of profit and the increase of capital had been accurately investigated, the great wealth and commercial prosperity of Holland was invariably ap- pealed to as a practical proof of the advantages of a low rate of interest. But Sir Josiah Child, and those who have insisted so much on this example, forget that the lowness of interest in Holland was the necessary effect of the circumstances in which that country was placed ; of the lowness of profits, caused by the oppressiveness of taxation, and the deficient supply of fertile soil, and not of any interference on the part of the government. Neither was this lowness of interest any advantage, but a positive disad- vantage. A country whose average rate of profit, and consequently of in- Profits. 21 terest, has been reduced considerably below the level of surrounding na- tions, may, notwithstanding, abound in wealth, and be possessed of an immense capital ; but it would be the height of error to suppose that this reduction of profits and interest could have facilitated their accumulation. Capital cannot be accumulated otherwise than by a saving of income ; and wherever incomes are large, and this will always be the case where the rate of profit is comparatively high, there must be a proportionably in- creased facility of gratifying the prevalent passion for accumulation. The case of Holland, far from contradicting, furnishes a striking example of the truth, of this principle. Sir William Temple mentions that her trade was rather on the decline in 1670 ; and the large capital of which she was then in possession had been accumulated previously to her wars with Cromwell, and when the rate of profit was much higher than at any subsequent pe- riod. Low profits are a certain proof that society has become clogged in its progress. They show that it is approaching, if it has not already reached, the stationary state, and that, unless measures can be devised for relieving the pressure on the resources of the state, it will be thrown back in the career of improvement, and outstripped by its neighbors. The rate of profit and the rate of interest are ordinarily twice as high in the United States as in Great Britain or France, and it is to this that the more rapid advancement of the former in wealth and population is entirely to be as- cribed. High profits, it is true, may not in every instance be accompanied by a great degree of prosperity ; for a despotic government, or the want of sufficient protection, may paralyze all the efforts of those who are otherwise placed in the most favorable circumstances for the accumulation of wealth. But, if the government be equally liberal, and if property be equally well secured, the degree of national prosperity will be correspondent to the rate of profit. The demand for labor, or, which in effect is the same thing, the funds for supporting the largest and most valuable portion of society, in- crease or diminish in exact proportion to the increase or diminution of profits. Wherever they are high, the laborer is well paid, and the so- ciety rapidly augments both its population and its riches ; on the other hand, wherever they are low, the demand for labor is proportionably reduced, and the progress of society rendered so much the slower. Instead, therefore, of a low rate of profit, and a low rate of interest for the one must be always directly as the other being any proof of the flour- ishing situation of a country, it is distinctly and completely the reverse. High profits show that capital may be readily and beneficially invested in the different branches of industry, and, wherever this is the case, it will be better for the borrower to pay a higher rate of interest than it would be for huii to pay a lower rate, in countries where there is less facility of employ- ing his stock with advantage. The borrower who pays ten or twelve per cent, for capital in the United States, generally makes a more profitable bargain than the English borrower who pays only four or five per cent. It is obviously not by the circumstance of the rate of interest payable on loans being absolutely high or low, but by the proportion between that rate and the average rate of profit, that we must determine whether they have been obtained on favorable or unfavorable terms. ESSAY ON EXCHANGE BY J. R. McCULLOCH. In Political Economy, the term Exchange is commonly employed to designate that species of mercantile transactions by which the debts of individuals residing at a distance from each other are either partially or wholly liquidated, without the intervention of money. The object of this article is to explain the nature of these transactions, and the principles on which they are founded. This will be best effected by treating, first, of the exchange between different parts of the same country ; and, secondly, of that between differ- ent and independent countries. CHAPTER I. INLAND EXCHANGE. SUPPOSE a merchant of London orders his agent in Glasgow to pur- chase and send to him a thousand pounds' worth of cottons ; then, although it should not suit the Glasgow merchant to commission goods of equal value from his London correspondent, the latter may, nevertheless, be under no necessity of remitting cash to Glasgow to discharge his debt. Among cities, or countries, having a considerable intercourse together, the debts mutually due by each other are found, in ordinary cases, to be nearly equal. And, therefore, the Glasgow merchant, who has shipped the cottons for Price of Inland Bills. 23 London, does not transmit the bill drawn by him on his correspondent for their price directly to London to be cashed, for that would subject him to the expense of conveying the money home from London to Glasgow, but he gets its value from some other merchant in Glasgow, who has payments to make in London, on account of teas, wines, etc., imported from that city, and who, unless he could procure such a bill, would be obliged to remit their price in money. The bill on account of the cottons is, therefore, either drawn in favor of the person to whom the money for the tea and wine is owing in London, or it is drawn in favor of the tea merchant in Glasgow, and indorsed to him ; and this last person, by presenting the bill to the pur- chaser of the cottons, receives its value and consequently the price of the cottons, and the price or part of the price of his tea and wine, at the same moment. By this simple contrivance, the expense and risk attending the double transmission, first, of money from London to Glasgow, to pay the cottons, and, second, of money from Glasgow to London, to pay the teas and wines, is entirely avoided. The debtor in one place is changed for the debtor in the other ; and both accounts are settled without the intervention of a single farthing. The bill drawn and negotiated in such a transaction is termed an in- land bill of exchange. II' the transaction had taken place between Lon- don or Glasgow and a foreign city it would have been termed a foreign bill of exchange. A bill of exchange may, therefore, be denned to be, " an order ad- dressed to some person residing at a distance, directing him to pay a certain specified sum to the person in whose favor the bill is drawn, or his order." In mercantile phraseology, the person who draws the bill is termed the drawer ; the person in whose favor it is drawn, the remitter ; the person on whom it is drawn, the drawee ; and, after he has accepted, the acceptor. Those persons into whose hands the bill may pass previously to its being paid are, from their writing their names on the back, termed indorsers; and the person in whose possession the bill is at any given period, is termed the holder, or possessor. Circumstances which determine the Price of Inland Bills of Exchange. The price of bills of exchange fluctuates according to the abundance or scarcity of them in the market, compared with the demand. Thus, to revert to our former example, if we suppose the debts reciprocally due by London and Glasgow to be equal, whether they amount to 10,000, 100,000, or any other sum, they may all be discharged without the agency of money, and the price of bills of exchange will be at PAR ; that is, a sum of 100 or 1000 in Glasgow will purchase a bill for 100 or 1000 payable in London, and v ice versa. But if these two cities are not mutu- ally indebted in equal sums, then the price of bills of exchange will be in- creased in the city which has the greatest number of payments to make, and will be proportionally reduced in that which has the fewest. If Glas- gow owe London 100,000, whilst the debts due by London to Glasgow only amount to 90,000, it is clear, inasmuch as the merchants of Glasgow 24 Essay on Exchange. have a larger sum to remit to London than the merchants of London have to remit to Glasgow, that the price of bills on London would rise in Glasgow, because of the increased competition ; and that the price of bills on Glasgow would fall in London, because of the proportionally dimin- ished competition. And hence a larger sum would be required to discharge any given amount of debt due by Glasgow, and a less sum would be re- quired to discharge a corresponding amount of debt due by London ; or. which is the same thing, the exchange would be in favor of London and against Glasgow. Bills on London would sell in Glasgow for a premium, and bills on Glasgow would sell in London at a discount, the amount of the premium, in the one case, and of the discount in the other, being obvi- ously equal. On the supposition that the balance of 10,000, due by Glasgow, de- pressed the exchange of that city on London one per cent., it would at first sight appear as if it would cost Glasgow 101,000 to discharge its debt of 100,000 due to London; and that, on the other hand, 89,108 would be sufficient to discharge the debt of London to Glasgow. But a very little consideration will serve to show that this could not really be the case. No exchange transactions can take place between different cities, until there be both debtors and creditors of the one residing in the other. And hence, when the exchange became unfavorable to Glasgow, the premium paid by the Glasgow merchants, for bills drawn on London, would not go into the pockets of their creditors in that city, but into the pockets of their neighbors in Glasgow, to whom London was indebted, and from whom the bills had been purchased. The loss to Glasgow would therefore be limited to the premium paid on the balance of 10,000. Thus, supposing that A of Glasgow owes D of London 100,000, and that C of London owes B of Glasgow 90,000 ; A will pay to B 91,000 for a bill or order on C to pay D 90,000. In this way, the 90,000 London debt at Glasgow would be quite cleared off; the premium which is lost by the debtor to London in Glasgow, being gained by its creditor in the same place. If the business had been transacted in London, C, with 89, 108, would have purchased of D a bill for 90,000 payable by A, so that, in this case, the gain would have fallen to the debtor C, and the loss to the creditor D, both of London. The complexity of real transactions does not affect the principles on which they are founded ; and to whatever extent Glasgow might be indebted to London, or London to Glasgow, the only disadvan- tage under which either of them would in consequence be placed, would be the unavoidable one of paying the expense of remitting the balance of debt. Natural Limit to Fluctuations in the Exchange. The expense of transmitting money from one place to another forms the natural limit to fluctuations in the exchange. If 20s. sufficed to cover the expense and risk attending the transmission of 100 from Glasgow to Lon- don, it would be indifferent to a Glasgow merchant, whether he paid one per cent, premium for a bill of exchange on London or remitted money di- rect to that city. If the premium were less than one per cent, it would Fluctuations. 25 be clearly his interest rather to make his payments by means of bills of exchange than by remittances ; and that it could not exceed one per cent, is obvious, for every individual would rather directly remit money, than incur an unnecessary expense, by purchasing a bill on London at a greater premium than would suffice to cover the expense of a money remittance. If, owing to the badness of the roads, to disturbances in the country, or to any other cause, the expense of remitting money from Glasgow to London should be increased, the difference in the rate of exchange between them might also proportionally be increased. But in every case, the extent to which this difference could attain would necessarily be limited by, and could not for any considerable period exceed, the cost of making remittances in cash. Exchange transactions become more complex, when one place, as is very often the case, discharges its debts to another by means of bills drawn on a third place. Thus, although London should owe nothing to Glasgow, if Glasgow be indebted to London, London to Manchester, and Manchester to Glasgow, Glasgow would either wholly or partially discharge its debt to London by a bill drawn on Manchester. It would wholly discharge it, provided the debt due to Glasgow in Manchester was equivalent to the debt due by Glasgow to London. But if this be not the case, Glasgow must either remit money to London to discharge the balance of debt, or bills drawn on some other place indebted to her. Transactions in inland bills of exchange are almost entirely conducted by bankers, who charge a certain rate per cent, for their trouble, and who, by having a credit in those places to which they are in the habit of remitting bills, are enabled, on all occasions, to supply the demands of their custom- ers. In Great Britain, London, because of its intimate connection with other parts of the country, occasioned partly by its immense commerce, partly by its being the seat of government, and the place to which the rev- enue is remitted, and partly by its currency consisting of Bank of England paper, for which the paper currency of the countiy banks is rendered ex- changeable, has become the great focus in which all the money transactions of the empire centre, and in which they are ultimately adjusted. In consequence of these various circumstances, but chiefly of the demand for bills on London to remit revenue, and of the superior value of Bank of England currency, the exchange between London and the other parts of the country is invariably in its favor. Bills on London, drawn in Edinburgh and Glasgow, were formerly made payable at forty days' date, which is equivalent to a premium of about one-half per cent.; but owing to the greater facility of communication, this premium is now reduced to twenty days' interest, or to about one-fourth of one per cent. Bills for remitting the revenue from Scotland are now drawn at thirty days ; previously to 1819 they were drawn at sixty days. What has been already stated is sufficient to show that, however well fitted bills of exchange may be for facilitating the operations of commerce, and saving the trouble and expense attending the transportation of money, it is impossible to adjust mercantile transactions by their means, except in BO far as the accounts mutually balance each other. A real bill of ex- change is merely an order entitling the holder to receive payment of a debt previously contracted by the person on whom it is drawn. It is essential 26 Essay on Exchange. to the existence of such a bill that an equivalent amount of debt should first be due. And hence, as the amount of the real bills of exchange drawn on any number of merchants cannot exceed the amount of their debts, if a greater sum be owing them than they owe to others, the balance, it is obvious, must either be paid in money, or by the delivery of some sort of commodities. If, as in the example just given, Glasgow owe London 100,000, while London only owes Glasgow 90,000, a reciprocal transfer of debts may be made to the extent of 90,000. But the Glasgow merchants cannot discharge the additional 10,000 by means of bills drawn on London; for, by the supposition, London only owed them 90,000, and they have already drawn for its amount. The balance, therefore, must be discharged by an actual money payment, or by the delivery of some species of commodity, or by bills drawn on some third party who may be indebted to Glasgow. Fictitious Bills of Exchange. We do not mean by this to insinuate that there are no fictitious bills of exchange, or bills drawn on persons who are not really indebted to the drawer, in the market. In every commercial country, bills of this de- scription are always to be met with ; but they are only a device for ob- taining loans, and do not, and can not, transfer real debts. A merchant in London may form a connection with a merchant in Glasgow, and draw bills of exchange upon him, payable a certain number of days after date, which the latter may retire by selling in Glasgow an equal amount of bills drawn upon his correspondent in London. The merchants who purchase, or the bankers who discount these bills, really advance their value to the drawers, who, as long as they continue, by means of this system of draw- ing and redrawing, to provide funds for their payment, continue in fact to command a borrowed capital equal to the amount of the fictitious paper in circulation. It is clear, however, that the negotiation of such bills has no effect in the way of transferring and settling the real bona fide debts reciprocally due between any two or more places. Fictitious bills mutually balance each other. Those drawn by London on Glasgow are exactly equal to those drawn by Glasgow on London, for the one set is drawn to pay the other, the second destroys the first, and the result is nothing. The method of raising money by the discount or sale of fictitious bills has been severely censured by Dr. Smith, as entailing a ruinous expense on those engaged in it, and as being resorted to only by projectors or per- sons of suspicious credit. When fictitious bills are drawn at two months' date, it is common, in addition to the ordinary interest of five per cent., to charge a commission of one-half per cent., which must be paid every time the bill is discounted, or, at least, site times in the year. The total expense of money raised in this way could not, therefore, supposing the transaction to be always on account of the same individual, be estimated at less than eight per cent, per annum ; and the payment of so high a rate of interest on borrowed capital, in a country where the ordinary rate of mercantile profit is only supposed to average from six to ten per cent., could not fail to Foreign Exchange. 27 be generally productive of ruin to the borrower. It seldom happens, how- ever, that in transactions carried on by means of fictitious bills, the whole charge for commission falls on one individual. Loans obtained in this way are almost always on account of two or more persons. Thus, at one time, a fictitious bill may be drawn by A of London, on B of Glasgow ; and, in this case, the Glasgow merchant will, before the bill becomes due, draw upon his London correspondent for the proceeds of the bill, including interest and commission. At another time, however, the transaction will be on account of B of Glasgow, who will then have to pay commission to his friend in London ; so that each party may, on the whole, as Mr. Thornton has observed, gain about as much as he pays in the shape of commission. It is often extremely difficult to distinguish between a fictitious bill and one which has arisen out of a real mercantile transaction. Neither does it seem to be of any very material importance. The credit of the persons whose names are attached to the bills offered for discount, is the only real criterion by which either a private merchant or a banker can judge whether he ought to negotiate them. The circumstance of a merchant offering consid- erable quantity of accommodation paper for discount, ought, unquestionably, if discovered, to excite suspicions as to his credit. But unless in so far as the drawing of fictitious bills may be held to be indicative of overtrading, or of a deficiency of capital to carry on the business in which the party is engaged, there does not appear to be any good reason for refusing to dis- count them. These few observations will, perhaps, suffice to explain the manner in which transactions between different parts of the same country are settled by means of bills of exchange. They are, in general, extremely simple. The uniform value of the currency of a particular country renders all comparison between the value of money at the place where the bill is drawn and negotiated with its value where it is to be paid, unnecessary ; while the constant intercourse maintained amongst the different commercial cities of the same kingdom, by preventing those derangements to which the intercourse between distant and independent countries is always sub- ject, prevents those sudden fluctuations which so frequently occur in the market price of foreign bills of exchange. We shall therefore leave this part of our subject, and proceed to investigate the circumstances which in- fluence the course of exchange between different and independent countries. CHAPTER II. FOREIGN EXCHANGE. THE price of foreign bills of exchange depends entirely on two circum- stances : first, on the value of the currency at the place where they are made payable, compared with the value of the currency at the place where they 28 Essay on Exchange. are drawn ; and, secondly, on the relation which they supply of bills in the market bears to the demand. If the real and nominal value of the currencies of the different nations having an intercourse together remained invariable, such fluctuations in the price of bills of exchange as arise from the first of these circumstances would be altogether unknown, but as the comparative value of the pound sterling, dollar, franc, guilder, florin, etc., is subject to perpetual variation, the price of bills of exchange must vary accordingly. Such variations, however, as proceed from this cause, affect merely their nominal, or rather numerical value. It is those only which arise from variations in the supply and demand for bills, or, which is the same thing, in the payments a coun- try has to make compared with those it has to receive, that can be considered as real; and hence the distinctions of nominal, real, and computed exchange. The first depends on alterations in the value of the currencies compared together ; the second depends on the supply of bills in the market compared with the demand ; and the third, or computed exchange, depends on the combined effects of the other two. For the sake of perspicuity we shall treat of these separately. Supposing every country to be in possession of its proper supply of bullion, the exchange may be said to be nominally affected by the amount of the difference between the market and mint price of bullion, and to be really affected by any deviation from par ex- ceeding or falling short of that difference. NOMINAL EXCHANGE. Bullion being everywhere recognized as the standard currency of the commercial world, the comparative, value of the currencies of particular countries must depend, 1st, on the value of bullion in those countries; and, 2dly, on the quantity of bullion contained in their coins, or on the quantity of bullion for which their paper money, or other circulating media, will exchange. Circumstances which regulate the Value of Bullion in different Countries. I. The real price of commodities being always proportioned, not merely to the cost of their production, but also to the cost of their conveyance from where they have been produced to where they are to be made use of, it follows that if the trade in the precious metals were perfectly free, and if the commodities produced in different countries were nearly all equally well fitted for exportation, the value of bullion in different countries would be chiefly regulated by their respective distances from the mines. Thus, on the supposition that neither England nor Poland had any other com- modities except corn to exchange with the South Americans for bullion, it is evident that the precious metals would possess a greater value in Poland than in England, because of the greater expense of sending so bulky a commodity as corn the more distant voyage, and because of the greater expense of conveying the gold to Poland. If Poland, however, had sue- Value of Bullion. 29 ceeded in carrying her manufactures to a higher pitch of improvement than England, her merchants might be able, notwithstanding the disadvan- tage of distance, by exporting commodities possessed of great value in small bulk, and on which the expense of freight would be comparatively trilling, to sell bullion on cheaper terms than those of England. But if, as is actually the case, the advantages of skill and machinery were possessed by England, another reason would be added to that derived from her less distance from the mines, why gold and silver should be less valuable in England than in Poland, and why the money price of commodities should be higher in the former. (Ricardo, Principles of Political Economy, etc., 1st ed. p. 175.) Hence, after nations have attained to different degrees of excellence in manufacturing industry, the value of bullion in different countries no longer depends entirely on their distance from the mines. But, whatever variations a different progress in the arts may occasion in the value of bullion in different countries, it is certain that it must always be less val- uable in those into which it is imported, than in those where it is produced. Bullion, like every other commodity, is exported to find, not to destroy its level. And unless its value in Europe exceeded its value in America by a sum sufficient to cover the expenses attending its importation, and to yield the ordinary rate of profit to the importer, we should not, although the mines of Mexico and Peru were infinitely more productive, import from them a single ounce of bullion. It is obviously incorrect, therefore, to lay down as a general proposition, " that the par of exchange between two countries is that sum of the currency of either of the two, which, in point of intrinsic worth, is precisely equal to a given sum of the other, that is, contains precisely an equal weight of gold and silver of the same fineness." {Bullion Report, p. 22, 8vo. ed.) For a given quantity of gold and silver is not always, as is here assumed, of the same intrinsic value in different countries. It may not, indeed, differ very materially among nations in the immediate vicinity of each other, and which are all destitute of mines. But although, to use a familiar illustration, the value of sugar approaches nearly to a level in the great trading cities of Europe, it cannot surely be maintained that its value in the West Indies is the same with its value in Bourdeaux or Liverpool, or that the exchange would be really at par, if a bill which cost a hundred hogsheads of sugar in London only brought a hundred in Jamaica. Now this is precisely the case with bullion. Though the value of gold and silver, as compared with corn, labor, etc., may, and indeed must, vary very considerably among the different European nations, these variations are only the necessary result of their different progress in industry, and of the different quality of their cultivated lands, etc. Such differences of price are in the natural order of things ; and bullion has only found its proper level when a quantity has been introduced into those countries which excel in manufactures, sufficient to raise the price of their corn and labor. These variations have, therefore, no effect on the exchange. An ounce of bullion in one country, notwithstanding this difference of price, will, because of the facility of intercourse, be very near equivalent to an ounce of bullion in another ; and supposing the trade in the precious metals to be perfectly free, the exchange will be at true par when bills are negotiated on this 30 Essay on Exchange. footing. But when we compare the values of the precious metals in distant countries, and especially in those where they are produced, with those into which they are imported, it is obvious they must differ considerably. Gold and silver, like iron, coal, etc., are necessarily cheaper in countries possessed of extraordinarily productive mines, than in those possessed only of mines of a secondary degree of fertility, or when they have to be entirely im- ported from abroad. And the exchange between such places is not at true par, unless adequate allowance be made for this difference of value. Thus, if, because of the expense of carriage, the value of bullion in Great Britain is five per cent, greater than in Rio Janeiro, a hundred ounces of pure gold in Rio Janeiro, would not be worth a hundred ounces of pure gold in London, but five per cent, less ; and the exchange would be at true par when bills for a hundred and five ounces of standard bullion, payable in Rio Janeiro, sold in London for a hundred ounces. The differences in the value of the precious metals in different countries have not been confined to those depending on their respective distances from the mines, or on their different progress in the arts. The opinion formerly so very prevalent, that gold and silver were the only articles that constituted real wealth, induced almost every commercial nation to fetter and restrict their exportation, and to adopt a variety of measures intended to facilitate their importation. But these regulations, even when most rigorously enforced, have been singularly ineffectual ; the great value and small bulk of the precious metals rendering it not only extremely advan- tageous, but also comparatively easy, clandestinely to export them when- ever their relative value declined. " When," says Dr. Smith, " the quantity of gold and silver imported into any country exceeds the effectual demand, no vigilance of government can prevent their exportation. All the sanguinary laws of Spain and Portugal are not able to keep their gold and silver at home. The continual importa- tions from Peru and Brazil exceed the effectual demand of those countries and sink the price of these metals below their price in the neighboring countries. If, on the contrary, in any particular country their quantity fell short of the effectual demand, so as to raise their price above that of the neighboring countries, the government would have no occasion to take any pains to import them. If it were even to take the pains to prevent their importation, it would not be able to effect it. Those metals, when the Spartans had got wherewithal to purchase them, broke through all the barriers which the laws of Lycurgus opposed to their entrance into Lacedremon. All the sanguinary laws of the customs are not able to prevent the importation of teas of the Dutch and Gottenburg East India Companies, because somewhat cheaper than those of the British Company. A pound of tea, however, is about a hundred times the bulk of one of the highest prices, 1 6s., that is commonly paid for it in silver, and more than two thousand times the bulk of the same price in gold, and is consequently just so many times more difficult to smuggle." (Wealth of Nations, vol. ii. p. 149.) But, however ineffectual as a means of entirely preventing the egress of the precious metals, the restrictions on their exportation have nevertheless contributed to occasion some slight variations in their value in different countries. The risk incurred by the clandestine exporters of bullion from Quantity of Bullion. 31 Spain is supposed to be equivalent to about two per cent.; or, which is the same thing, it is supposed that the restrictions maintain such an excess of gold and silver in that country as to sink their value two per cent, below their value in countries having a free trade in bullion. In calculating the true par of exchange between Spain and other countries, this circumstance must be taken into account. For to whatever extent the value of bullion in one country may be reduced below its value in those with which it maintains an intercourse, the nominal exchange must necessarily be unfa- vorable to that extent. All restraints on the exportation of the precious metals were abolished in Great Britain in 1819. Their effect for many years previous could not be estimated at above one-fourth per cent. It consequently results, that whatever occasions a rise or fall in the value of the precious metals in a particular country, must proportionally affect its nominal exchange with other countries. If more coin, or convert- ible paper, circulated in Great Britain, compared with the business it has to perform, than what circulates in other countries, its relative value would, in consequence, be diminished. Foreign bills would sell for a premium, the amount of which would be precisely equal to the excess of the value of the precious metals in the foreign market, caused by their redundancy in the home market ; and, on the other hand, in the event of the currency becoming relatively deficient, its value would be proportionally increased ; bills drawn on foreign countries would sell at a discount, the amount of which would measure the excess of the value of the currency of this over that of other countries. r nf estimating the Quantity of Bullion contained in the Coins of different Countries. II. In estimating the quantity of bullion contained in the currencies of different countries, a particular coin of one country, such as the British pound sterling, is selected as an integer, or standard of comparison, and the proportion between it and the coins of other countries, supposing them to be of their mint standard weight and fineness, is ascertained by experiment. A par of exchange is thus established, or rather it is ascertained that a certain amount of the standard currency of a particular country contains precisely as much gold or silver of the same fineness, as is contained in the coin or integer with which it has been compared. This relation,or par, as it is technically termed, is considered invariable; and allowance is made for subsequent variations in the quantities and purity of the bullion con- tained in the currencies of countries trading together, by rating the exchange at so much above or below par. In mercantile language, that country, by a comparison with one or other of whose coins the par of ex- change has been established, is said to give the certain for the uncertain, and conversely. Thus, in the exchange between London and Paris, London and Hamburg, etc., London gives the certain, or the pound sterling, for an uncertain or variable number of francs, florins, etc. Hence, the higher the exchange betAvecn any two countries, the more is it in favor of that which gives the certain, and the lower, the more is it in favor of that which gives the uncertain. 32 Essay on Exchange. Effects of Variations in the Value of Metallic Currency on Hie Exchange. On the supposition, which is very near the truth, that twenty-five francs contain the same quantity of standard bullion as a pound sterling (twenty- five francs, twenty centimes, is the exact par), and supposing also that the value of bullion is the same in both countries, the exchange between Lon- don and Paris will be at par, when a bill drawn by a merchant in the one on his correspondent in the other sells at that rate ; that is, when a bill of exchange for 2,500 or 25,000 francs payable in Paris, sells in London for 100, or 1000, and vice versa. It is but seldom, however, that the coins of any country correspond exactly with their mint standard ; unless when newly issued, they are all either more or less worn ; and whenever this is the case, an allowance corresponding to the difference between the actual value of the coins and their mint value must be made, in estimating " the sum of the existing currency of either of two countries which contains pre- cisely the same quantity of bullion as is contained in a given sum of the other" Thus, if the one pound sterling were so worn, clipped, rubbed, etc., as not to contain so much bullion as twenty-five francs, but ten per cent, less, the exchange between London and Paris would be at real par when it was nominally ten per cent, against London. It is necessary to observe, that it is here supposed that the clipped or degraded money exists in such a degree of abundance as only to pass current at its bullion value. If the quantity of clipped money were sufficiently limited, it might, not- withstanding the diminution of weight, pass current at its mint value ; and then the par would have to be estimated, not by its relative weight to foreign money, but by the mint price of bullion. This is a principle which must be constantly kept in view. And if, on the other hand, the pound sterling was equal to its mint standard, while the franc was ten per cent, less, the exchange between London and Paris would be at real par when it was nominally ten per cent, against Paris and in favor of London. If the currency of both countries were equally reduced below the standard of their respective mints, then it is obvious there would be no variation in the real par. But whenever the currency of countries trading together is de- preciated in an unequal degree, the exchange is nominally in favor of that country whose currency is least depreciated, and nominally against that whose currency is most depreciated. It is almost unnecessary to refer to the history of exchange, to show the practical operation of this principle ; and we shall content ourselves with selecting the following, from an infinite number of equally conclusive instances. In a pamphlet printed in 1604, but written in 1564, it is mentioned, that when Henry VIII. degraded the several species of coin then current, there began to be " some disorder " in the price of all wares and commodities, which Edward VI. attempted to remedy by diminishing still farther the quantity of pure silver contained in each coin ; the consequence was, that the English pound sterling, which heretofore exchanged abroad for twenty-six Flemish schillings, became worth no more than thirteen Flemish schillings. the price of English commodities being at the same time proportionally increased. (Mr. John Smith's Memoirs of Wool, vol. i. p. 105, 8vo. ed.) Relative Values. 33 Previously to the great recoinage in the reign of William III., silver being at that time a legal tender, the nominal exchange between England and Holland, calculated according to the standard of their respective mints, was twenty-five per cent, against England ; but inasmuch as English silver coins were then, owing to rubbing and clipping, depreciated more than twenty-five per cent, below their mint value, the real exchange may, not- withstanding, have been in favor of England. The circumstance of the nominal exchange having become favorable to this country as soon as the new coin was issued, renders this conjecture extremely probable. ( Wealth of Nations, vol. ii. p. 215.) Before the reformation of our gold coin in 1774, the guinea contained so much less than its standard weight as to be degraded from two to three per cent, when compared with the current French coins, and the exchange be- tween England and France was computed to be two or three per cent. against this country. Upon the reformation of the gold coin, the exchange rose to par. The Turkish government, in the course of the last forty years, has made three great alterations in the value of its coin. Before these frauds were committed, the Turkish piastre contained nearly as much silver as the English half-crown ; and, in exchange, the par was estimated at eight piastres to the pound sterling. The consequence of these repeated adulterations has been, the reduction of the silver in the piastre to one half, and a fall in the exchange of 100 per cent.; bills on London having been bought in Turkey, in 1803, at the rate of sixteen piastres for every pound sterling. II est impossible d'indiquer exactement le pair- des mon- noies Turques. On voit des pieces du meme nom, et frappees la meme annee, qui different de 100 pour cent, dans leur valeur intrinseque. (Storch, Cours cTEconomie Politigue, torn vi. p. 336.) Now, although it is not absolutely certain that these fluctuations in the nominal exchange were entirely owing to the alterations in the value of the coin, because the real exchange, or that which depends on the abundance or scarcity of bills in the market, might not be constant ; yet the exact correspondence of the fall of exchange with the acknowledged degradation of the coin, renders it more than probable that it proceeded almost entirely from that degradation. ( Observations on the Principles which regulate the Course of Exchange, by William Blake, Esq., p. 41.) Effects of Variations in the Relative Value of Gold and Silver on the Exchange. When one country uses gold as the standard of its currency and another silver, the par of exchange between them is affected by every variation in the relative value of these metals. When gold rises in value compared with silver, the exchange becomes nominally favorable to that country which has the gold standard, and vice versa. And hence, in estimating the state of the exchange among countries using different standards, it is always neces- sary to advert to the comparative values of the metals selected for stand- ards. " For example," to use the words of Mr. Mushet, " if 34 schillings 11 grotes and of Hamburg currency be equal in value to a pound sterling, or |^ of a guinea, when silver is at 5s. 2d. per oz., they can no longer be so 34 Essay on Exchange. when silver falls to 5s. Id. or 5s. an oz., or when it rises to 5s. 3d. or 5s. 4d.; because a pound sterling in gold being then worth more or less silver, is also worth more or less Hamburg currency. " To find the real par, therefore, we must ascertain what was the relative value of gold and silver when the par was fixed at 34s. lljg. Hamburg currency, and what is their relative value at the time we wish to calcu- late it. " For example, if the price of standard gold was 3 17s. 10^-d. per oz., and silver 5s. 2d., an ounce of gold would then be worth 15.07 ounces of silver, and twenty of our standard shillings would then contain as much pure silver as 34s. 11 grotes and Hamburg currency. But if the ounce of gold were 3 17s. lO^d., and silver 5s. (which it was on 2d January, 1798), the ounce of gold" would then be worth 15.57 ounces of silver. If 1 sterling at par, therefore, be worth 15.07 ounces of silver, then, at 15.57, it would be at three per cent, premium ; and three per cent, premium on 34s. HJd. is 1 schilling, 1 grote and $, so that the par, when gold is to silver as 15.57 to 1, will be 36 schillings, 1 grote and T ^. The above cal- culation will be more easily made by stating as ' 15.07 : 34-1 1J : : 15.57 : 36-l T '^.' " (An Inquiry into the Effects produced on the National Currency by the Bank Restriction Bill, etc., by Robert Mushet, Esq.; second edition, p. 94.) Effect of Seignorage on the Exchange. As it is by their intrinsic worth as bullion that the values of the coins of particular countries are estimated in exchange, two coins of equal weight and purity are reckoned equivalent to each other, although the one should have been coined at the expense of the state, and the other charged with a seignorage, or duty on its coinage. Coins on which a seignorage is charged, may, if not issued in excess, pass current in the country where they are coined, at a value so much higher than their value in bullion ; but they will not pass at any higher value in other countries. Previously to 1817, no seignorage had for a very long period been de- ducted from either the gold or silver coins of Great Britain ; but in the great recoinage of that year, the value of silver was raised from 5s. 2d. to 5s. 6d. an ounce, or nearly in the proportion of 63 per cent. The gold coins, however, are still coined free of expense, and no variation has been made in their standard. The British mint proportion of silver to gold is now as 14^^ to 1 ; that is, one ounce of standard gold bullion is render- ed exchangeable for 14 1 ? , J 8 7 rr ounces of standard silver. In France, the mint proportion of the two metals is as 15 to 1 ; a seignorage being exacted to nearly ^d. per cent, on gold, and 1 per cent, on silver. Effect of Variations in the Value of Paper Currency on the Exchange. But the principal source of fluctuations in the nominal price of bills of exchange is to be found in the varying value of the paper currency of commercial countries. The disorders which universally arose in rude ages from the diminution of the quantity of standard bullion contained in the Paper Currency. 35 coins of different countries are now reproduced in another form, and often to a still more ruinous extent, in the depreciation of their paper currency. The impossibility of retaining a comparatively large quantity of coin or bullion, or of convertible paper, in a particular country, effectually limited the issues of the Bank of England previously to the Restriction Act of 1797, and sustained the value of our currency on a par with that of other countries. When the bank issued less paper than was necessary for this purpose, the value of the currency becoming relatively great, it became profitable to import bullion, and to send it to the mint to be coined. And, on the other hand, when the bank issued too much paper, and thereby de- pressed its value relatively to gold, it became profitable to demand payment of its notes, and thereafter to export the specie thus obtained either in the shape of coin or as bullion. In this way the bank was compelled to limit its issues when excessive, and, consequently, to put a stop to the demand for gold, by rendering its paper of equal value. Had the Bank of England, subsequently to the restriction, issued only such quantities of paper as were required to sustain its value on a par with the value of gold, the act of 1797 would not have occasioned any real difference in our monetary system. But, after the bank had been released from the obligation to pay its notes, it was not to be expected that it should be very careful about limiting their number. The restriction enabled the directors to exchange bits of engraved paper, worth perhaps not more than five shillings a quire, for as many, or the value of as many, hundreds of thousands of pounds. And under such circumstances, the only thing to be wondered at is, not that paper money became depreciated, but that its value was not more degraded, that a still greater quantity of bank-notes were not forced into circulation. A country with an inconvertible paper currency, of which an undue quantity has been issued, is in the same situation as a country would be in were it possessed of a redundant gold and silver currency, and subjected to laws prohibiting the melting or exportation of the coin, that were carried into full effect. Such a currency is necessarily confined to the country where it is issued ; it cannot, when too abundant, diffuse itself generally amongst others. The level of circulation is destroyed ; and the value of the currency becoming less than the value of the currency of other coun- tries, the nominal exchange is rendered proportionally unfavorable. Supposing that nothing but silver coin of the standard weight and purity (twenty-five francs of which would exchange for a pound sterling of the British mint standard) circulates at Paris, and that the circulating medium of London is composed entirely of paper only worth half its nominal value, or which is depreciated 100 per cent. ; in that case the exchange between London and Paris would be at real par, when it was nominally cent, per cent, against London. Double the amount of such depreciated London currency would be required to purchase a bill of exchange on Paris where the currency retained its value, while half the former amount of Parisian currency would now sufBce to purchase a bill payable in London. A depreciation of this sort would have exactly the same effects as an equal reduction in the value of metallic money. While paper money, depreciated 100 per cent., consti- tuted our legal currency, a pound note, instead of being worth 25 francs, would only be worth 12^ ; and the nominal or numerical value of the bills 36 Essay on Exchange. of exchange negotiated between this country and France would be regu- lated accordingly ; that is, a bill of exchange for 100 or 1000, payable in London, would sell in Paris for 1,250 or 12,500 francs, and conversely. If, while the currency of London remained steady at 100 per cent, below its mint value, Parisian currency should, either from the coins becoming deficient in weight, or because of an inordinate issue of paper money, become also depreciated, the nominal exchange would be rendered propor- tionally less unfavorable to London. On the hypothesis that the currency of Paris is depreciated 50 and that of London 100 per cent., the nominal exchange would be 50 per cent, against the latter, and so on. Thus it ap- pears that the nominal exchange between any two or more places will always be adjusted according to the value of their currencies ; being most favorable to that country whose currency approaches nearest to its mint standard, and most unfavorable to that whose currency is most degraded. Exchange between Great Britain and Ireland subsequent to 1797. The state of exchange between Great Britain and Ireland, subsequently to the restriction on cash payments in 1797, furnishes a striking proof of the effects which inordinate issues of paper have in depressing the exchange. The nominal value of the Irish shilling having been raised from 12d. to 13d. or, which is the same thing, 108 6s. 8d. of Irish money having been rendered only equal to 100 British money, it followed that when the ex- change between Great Britain and Ireland was at 81 per cent, against the latter it was said to be at par. In the eight years previous to 1797, when the paper currency both of England and Ireland was convertible into gold, the exchange between London and Dublin fluctuated from 7^ to 9 per cent.; that is, from % per cent, in favor of Dublin, to per cent, against it. In September, 1797, it was so low as 6 per cent., or 2^ per cent, in favor of Dublin. The amount of Bank of Ireland notes in circulation in January, 1797, was only 621,917 ; but in April, 1801, they had increased to 2,286,471, and the exchange was then at 14 per cent., or 5 2. per cent. against Dublin. In 1803, the Bank of Ireland notes in circulation averaged 2,707,956, and in October of that year, the exchange rose to 17 per cent.; that is, to 8| per cent, against Dublin ! The fact of the exchange between London and Dublin having fluctuated so very little from real par, for eight years previous to the restriction, shows that the circulating medium of Great Britain and Ireland had then been adjusted nearly according to the wants of the two countries. But, in these circumstances, it was evidently impossible, supposing the value of British currency to remain stationary, that the quantity of Irish bank paper could be nearly quintupled in the short space of six years, without render- ing the currency of Ireland comparatively redundant, and sinking its value below that of England. Had the Bank of England increased its notes nearly in the same ratio as the bank of Ireland, then, as the currency of both countries would have been equally depreciated, the exchange between London and Dublin would have continued at par. But while the notes of the Bank of Ireland were increased from 621,917 to 2,707,956, or in the proportion of 1 to 4.3, those of the Bank of England were only increased Great Britain and Ireland. 37 from 9,181,843 (their number on January 7th, 1797), to 16,505,272, or in the proportion of 1 to 1.8. If the Bank of England had not made this addition to its issues, the exchange would obviously have been still more unfavorable to Dublin. In the debates on the Bullion Report, it was contended that the increase of Bank of Ireland paper could not be the cause of the exchange becoming unfavorable to Dublin, inasmuch as it had again become favorable to the latter, after the issues of the Bank of Ireland had been still farther increased. Nothing, however, can be more inconclusive than such reasoning. To give it the least weight, it must be shown that the currency of Great Britain had in the interim retained its value, or that it had not been depreciated to the same extent as that of Ireland. Unless this be established, the cir- cumstance that the exchange between London and Dublin came to par while as many notes of the Bank of Ireland circulated as in the period of its greatest depression, will not authorize us to conclude that the increase of Irish bank paper was not the cause of the fall in the exchange previ- ously to 1804. For it is obvious that the depreciation of Irish bank paper might be going on subsequently to 1804 ; and yet, supposing English bank paper had been depreciated still more rapidly, the exchange would become more favorable to Dublin. This is merely supposing the circumstances which took place in the first six years of the restriction to be reversed in the second six. Let us examine how the fact stands. We have seen that, in 1803, when the exchange was nominally ten per cent, against Dublin, the issues of the Bank of England amounted to 16,505,272, and those of the Bank of Ireland to 2,707,956. And by referring to the account of the issues of the Bank of Ireland from 1797 to 1819, it will be seen that, in 1805, 1806, 1807, and 1808, they were rather diminished; and that, in 1810, they only amounted to 3,251,750, being an increase of not more than 543,794 in the space of seven years, or at the rate of two and six-sevenths per cent per annum ; but in the same period (from 1803 to 1810), the issues of the Bank of England had increased from 16,505,272 to 22,541,523, or at the rate of five per cent, per annum. But this is not all. According to Mr. Wakefield (Account of Ireland, vol. ii. p. 171), who has left no subject untouched which could throw light on the state of Ireland, there were fifty registered bankers in that country in 1804, and only thirty-three in 1810, of which fourteen were new houses, thirty -one of the old establishments having disappeared ; " and I believe," says Mr. Wakefield, "/or the most part failed. " This extraordinary di- minution of the country paper of Ireland for the reduction of the issues was at least proportional to the reduction in the number of banks must have greatly raised its value, and would have countervailed a very great increase in the issues of the national bank. Now the very reverse of all this took place in Britain. In 1800, there were 386 country banks in this country ; and in 1810, this number, instead of being diminished, as in Ireland, had increased to 721, having at least three times the number of notes in circulation in the latter as in the former period. It appears therefore that when, in the period between 1797 and 1804, the quantity of paper in circulation in Ireland was increased, and consequently its value depressed, faster than in England, the exchange between London and Dublin became proportionally unfavorable to the latter ; and, on the 38 Essay on Exchange. other hand, it appears that when, in the six years subsequent to 1804, the paper currency of England was increased more rapidly than the paper currency of Ireland, its relative value was diminished and the nominal exchange became more favorable to Dublin. This is sufficiently conclusive ; but there is still more decisive evidence to show that the unfavorable exchange of Dublin upon London in 1802, 1803, 1804, etc., was entirely owing to the comparative redundancy or deprecia- tion of Irish bank paper. The linen manufacturers, weavers, etc., and the majority of the other inhabitants of a few counties in the north of Ireland, being at the period of the restriction strongly disaffected' towards govern- ment, almost unanimously refused to receive bank notes, either in payment of commodities or as wages. The landlords having also stipulated for the payment of their rents in specie, the consequence was, that a gold cur- rency was maintained in the north of Ireland long after it had been entire- ly banished from the southern part of the island. If, therefore, the depressed state of the exchange between London and Dublin had been occasioned, as was contended by the advocates of the restriction, by an unfavorable balance of trade between Ireland and Great Britain, or by remittances from the former on account of absentee landlords, etc., it would have been equally depressed between London and the commercial towns in the north- ern counties. But, so far from this being the case, in December, 1803, when the exchange of Dublin on London was at sixteen and one-fourth per cent., that of Belfast on London was at five and one-fourth : or, in other words, at the same time that the exchange between Dublin and London was about eight per cent, against Ireland, the exchange between Belfast, which had a gold currency, and London, was about three per cent, in its favor. Nor is this all. There was not only a difference of eleven per cent, in the rate of exchange between Dublin and London, and Belfast and London, but the inland exchange between Dublin and Belfast was, at the same time, about ten per cent, in favor of the latter ; that is, bills drawn in Dublin, and payable in the gold currency of Belfast, brought a premium of ten per cent. ; while bills drawn in Belfast, and made payable in the paper currency of Dublin, sold at ten per cent, discount. Further infor- mation on this interesting subject may be obtained from the very able Re- port of the Committee of the House of Commons, appointed in 1804, to inquire into the state of the circulating paper in Ireland, its specie, etc., and the state of the exchange between it and Great Britain ; in Sir Henry Parnell's excellent pamphlet on the same subject ; and in the pamphlets of Lord King, Mr. Huskisson, etc. It is unnecessary to refer to the history of the French assignats, or of the paper currency of the continental powers generally, and of the United States, to corroborate what has been advanced. Such of our readers as wish for detailed information as to these points may have recourse to the fourth volume of the Cours d' Economic, Politique of M. Storch, where they will find an able and instructive account of the effects produced by the issues of paper on the price of bullion and the exchange, in almost every country of Europe. They are, in every case, precisely similar to those now stated. It only remains to determine the effects of fluctuations in the nominal exchange, on the export and import trade of the country. Export and Import Trade. 39 Inquiry into the Effects of Fluctuations in the Nominal Exchange on Export and Import Trade. When the exchange is at par, the operations of the merchant are regu- lated entirely by the difference between foreign prices and home prices. He imports those commodities which can be sold at home for so much more than their price abroad as will indemnify him for the expense of freight, insurance, etc., and yield an adequate remuneration for his trouble, and for the capital employed in their importation ; and he exports those whose price abroad is sufficient to cover all expenses, and to afford a similar profit. But when the nominal exchange becomes unfavorable to a particular coun- try, the premium which its merchants receive on the sale of foreign bills has been supposed capable of enabling them to export with profit in cases where the difference between the price of the exported commodities at home and abroad might not be such as would have permitted their expor- tation had the exchange been at par. Thus, if the nominal exchange were ten per cent, against this country, a merchant who had consigned goods to his agent abroad would receive a premium of ten per cent, on the sale of the bill ; and if we suppose freight, insurance, mercantile profit, etc., to amount to six or seven per cent., it would at first sight appear as if our merchants might, in such circumstances, export commodities although their price at home were three or four per cent higher than in other countries. If, on the other hand, the nominal exchange were in our favor, or if bills on this country sold at a premium, it would appear as if foreigners would then be able to consign goods to our merchants, or our merchants to order goods from abroad, when the difference of real prices was not such as would of itself have led to an importation. But a very little consideration will convince us that fluctuations in the nominal exchange can have no such effect. That fall in the value of the currency which renders the exchange unfavorable, and causes foreign bills to sell at a premium, must equally increase the price of all commodities. And hence, whatever might be the amount of the premium which the ex- porter gained by the sale of the bill drawn on his correspondent abroad, it would do no more than indemnify him for the enhanced price of the goods exported. Mercantile operations are in such cases conducted precisely as they would be were the exchange really at par; that is, by a comparison of the real prices of commodities at home and abroad ; meaning, by real prices, the prices at which they would be sold, provided there were no de- preciation of -the currency. If those prices be such as to admit of expor- tation or importation with a profit, the circumstance of the nominal exchange being favorable or unfavorable will make no difference whatever on the transaction. " Suppose," says Mr. Blake, who has very successfully illustrated this part of the doctrine of exchange, " the currencies of Hamburg and London being in their due proportions, and therefore the nominal exchange at par, that sugar, which, from its abundance in London, sold at 50 per hogshead, from its scarcity at Hamburg would sell at 100. The merchant in this case would immediately export. Upon the sale of his sugar, he would draw a bill upon his correspondent abroad for 100, which he could at once convert 40 Essay on Exchange. into cash by selling it in the bill market at home, deriving from this trans- action a profit of 50, under deduction of the expenses of freight, insurance, commission, etc. Now, supposing no alteration in the scarcity or abun- dance of sugar in London and Hamburg, and that the same transaction were to take place after the currency in England had been so much increased that the prices were doubled, and, consequently, the nominal exchange 100 per cent, in favor of Hamburg, the hogshead of sugar would then cost 100, leaving apparently no profit whatever to the exporter. He would, however, as before, draw his bill on his correspondent for 100 ; and, as foreign bills would bear a premium of 100 per cent, he would sell this bill in the English market for 200, and" thus derive a profit from the trans- action of 100 depreciated, or 50 estimated in undepreciated currency, deducting, as in the former instance, the expense of freight, insurance, commission, etc. "The case would be precisely similar, mutatis mutandis, with the importing merchant. The unfavorable nominal exchange would appear to occasion a loss amounting to the premium on the foreign bill which he must give in order to pay his correspondent abroad. But if the difference of real prices in the home and foreign markets were such as to admit of a profit upon the importation of produce, the merchant would continue to import, notwithstanding the premium ; for that would be repaid to him in the advanced nominal price at which the imported produce would be sold in the home market. " Suppose, for instance, the currencies of Hamburg and London being in their due proportions, and therefore the nominal exchange at par, that linen which can be bought at Hamburg for 50 will sell here at 100. The importer immediately orders his correspondent abroad to send the linen, for the payment of which he purchases at 50 a foreign bill in the English market, and on the sale of the consignment for 100 he will derive a profit amounting to the difference between 50 and the expense attend- ing the import. " Now, suppose the same transaction to take place without any alteration in the scarcity or abundance of linen at Hamburg and London, but that the currency of England has been so augmented as to be depreciated to half its value; the nominal exchange will then be 100 per cent, against England, and the importer will not be able to purchase a 50 foreign bill for less than 100. But as the prices of commodities here will have risen in the same proportion as the money has been depreciated, he will sell his linen to the English consumer for 200, and will, as before, derive a profit amounting to the difference between 100 depreciated, or 50 estimated in undepreciated money, and the expenses attending the import. u The same instances might be put in the case of a favorable exchange ; and it would be seen in the same manner that nominal prices and the nominal exchange being alike dependent on the depreciation of currency, whatever apparent advantage might be derived from the former would be counterbalanced by a loss on the latter, and vice versa" ( Observations, etc-, p. 48.) It appears, therefore, that fluctuations in the nominal exchange have no effect on export or import trade. A fall in the exchange, obliges the coun- try to which it is unfavorable to expend a larger nominal sum in discharg- Effect of Fluctuations. 41 ing a foreign debt than would otherwise be necessary ; but does not oblige it to expend a greater real value. The depression of the nominal exchange can neither exceed nor fall short of the comparative depreciation of the cur- rency. If the depreciation of British currency amounted to 10 or 100 per cent, the nominal exchange would be 10 or 100 per cent, against us ; and we should be compelled, in all our transactions with foreigners, to give them 22s. or 40s. for what might otherwise have been procured for 1. But as neither 22s. nor 40s. of paper, depreciated to the extent of 10 or 100 percent., would be more valuable than 1 of undepreciated paper, payment of a foreign debt might, it is evident, be as easily made in the one currency as in the other ; and mercantile transactions would, in such circumstances, be conducted exactly as they would have been had the currency been un- depreciated and the nominal exchange at par. It is necessary, however, before dismissing this part of our subject, to examine the effects of fluctuations in the nominal exchange on the importa- tion and exportation of bullion. In certain cases they form an exception to the general principle we have been endeavoring to elucidate. Effects of Fluctuations in the Nominal Exchange on the Trade in Bullion. If the nominal exchange were unfavorable to a country which had en- tirely discarded the precious metals from its circulation, Mr. Blake's opinion that the fall of the exchange has no effect on the export and import of bullion, more than of any other commodity, would be perfectly well founded. In this case, the price of all sorts of commodities, and of bullion among the rest, would be increased precisely according to the depreciation of the currency ; and the merchants who should, under such circumstances, attempt to export bullion, would find that its increased price in the home market would be exactly equivalent to whatever premium they might gain by the sale of the bills drawn on their agents abroad for its price. But when the nominal exchange becomes unfavorable to a country whose currency con- sists entirely of the precious metals, or partly of them and partly of paper, a different effect is produced. In this case, the depreciation necessarily adds to the stock of bullion in the country. For as soon as the currency has been depreciated to such an extent as to render the excess of the market above the mint price of bullion sufficient to cover the very trifling expenses attending the melting of the coin, and to afford some little remuneration for the trouble of the melters, they immediately set about converting it into bullion. If, indeed, it were possible to realize a greater profit by the exportation than by the fusion of the coins, they would not be converted into bullion, and, of course, its real price would continue stationary. But this is very seldom the case. The operation of melting is so extremely simple, and requires so very little ap- paratus, that it may, in almost every instance, be earned on at a less ex- pense than would be necessary to export the coins. The cost attending the conveyance of gold to Paris varies, in a season of peace, from one to two per cent. ; while a profit of one-fourth or one-half per cent, is sufficient to indemnify the melters of guineas or sovereigns. It is obvious, therefore, that of the two modes of restoring the value of 42 Essay on Exchange. the currency when it becomes depreciated or relatively redundant, that of fusion will be generally resorted to in preference to exportation. Should the redundancy of the currency be inconsiderable, all the addition which the operations of the melters could make to the supply of bullion, would most probably be insufficient to occasion any perceptible fall in its real price. But, in every case in which the redundancy or depreciation of the currency is considerable, the fusion of the coined money never fails to increase the quantity of bullion beyond the effectual demand, and, consequently, to oc- casion a fall in its real price, and to render it a profitable article of export. The demand for bullion, though it must always vary with the varying wealth and riches of the community, fluctuates very little in periods of limited dura- tion ; and no considerable addition can ever be made to the stock on hand in a particular country, without sinking its value and causing its egress. Mr. Blake contends that this exportation of bullion is the effect of the melting of the coin, and not the cause of it ; and in so far he is certainly right. But we do not see how this in the least strengthens his opinion, that fluctuations in the nominal exchange, even in those cases in which the currency consists either wholly or partially of the precious metals, have no influence on the export and import of bullion. Surely, it is impossible to deny that the fusion of the coin, of which Mr. Blake admits the exportation of bullion is a necessary consequence, is occasioned by redundancy of the currency, or by the same cause which occasions an unfavorable nominal exchange. Bullion, therefore, forms an exception, and it is the only one, to the general principle that a fall in the value of the currency, or an unfavorable nominal exchange, has no effect on importation or exportation. But this exception does not take place except in those cases in which the currency consists either in whole or in part of the precious metals. When the cur- rency consists entirely of paper, or of any commodity other than gold or silver, its depreciation has no influence whatever on the importation of bullion. CHAPTER HI. REAL EXCHANGE. HAVING thus endeavored to trace the effects which variations in the value of the currencies of countries maintaining an intercourse together have on the exchange, we now proceed to consider how far it is influenced by fluc- tuations in the supply and demand for bills. To facilitate this inquiry, we shall exclude all consideration of changes in the value of money ; or, which is the same thing, we shall suppose the currencies of the different coun- tries having an intercourse together to be all fixed at their mint standards, and that each has its proper supply of bullion. When two nations trade' together, and each purchases from the other Balance of Payments. 43 commodities of precisely the same value, their debts and credits will be equal, and of course the real exchange will be at par. The bills drawn by the one are, in such a case, exactly equivalent to those drawn by the other, and their respective claims may be adjusted without the transfer of bullion, or other valuable produce. But it very rarely happens that the debts reciprocally due by any two countries are equal. There is almost always a balance owing on one side or other ; and this balance must affect the exchange. If the debts due by London to Paris exceeded those due by Paris to London, the competition in the London market for bills on Paris would, because of the comparatively large sum which our merchants had to remit to France, be greater than the competition in Paris for bills on London ; and, consequently, the real exchange would be in favor of Paris and against London. Limit to Fluctuations in the Real Exchange. The expense of the transfer of bullion from one country to another con- stitutes the limit within which the rise and fall of the real exchange be- tween them must be confined. In this respect, as in most others, transactions between foreign countries are regulated by the very same principles which regulate those between different parts of the same country. We have already shown how the fluctuations in the real exchange between London and Glasgow could never exceed the expense of transmitting money be- tween those cities. The same principle holds universally. Whatever may be the expense of transmitting bullion the money of the commercial world between London and Paris, Hamburg, New York, etc., it is im- possible that the real exchange of the one on the other should, for any considerable period, be depressed to a greater extent. For a merchant will not pay a greater premium for a bill to discharge a debt abroad, than would suffice to cover the expense of transmitting bullion to his creditor. Hence it appears that whatever has a tendency to obstruct or fetter the intercourse among different countries, must also tend to widen the limits within which fluctuations in the real exchange may extend. This enables us to account for its varying so much more in time of war than in time of peace. The amount of the bills drawn on a country engaged in hostilities is, from various causes which we shall afterwards notice, liable to be sud- denly increased, though it is certain that whatever may be the amount of the bills thus thrown upon the market, the depression of the exchange can- not, for any length of time, exceed the expense of conveying bullion from the debtor to the creditor country. But during war this expense is in- creased ; the charges on account of freight, insurance, etc., being then necessarily augmented. It appears from the evidence annexed to the Report of the Bullion Committee, that the expense of conveying gold from London to Hamburg, which, prior to the war, only amounted to two or two and a half per cent., had, in the latter part of 1809, increased to about seven per cent. ; showing that the limits within which fluctuations in the real exchange were confined in 1809, were about three times as great as those within which they were confined in 1793. This principle also enables us to account for the greater steadiness of the real exchange between countries in the immediate vicinity of each other. 44 Essay on Exchange. The expense of transmitting a given quantity of bullion from London to Dublin or Paris, is much less than the expense of transmitting the same quantity from London to New York or Petersburg. And as fluctuations in the real exchange can only be limited by the cost of transmitting bullion, they may consequently extend much farther between distant places than between those that are contiguous. Inquhy into the Circumstances which give rise to a favorable or an unfavorable Balance of Payments. It will now be proper to investigate the circumstances which give rise to a favorable or an unfavorable balance of payments, and to appreciate their effects on the real exchange, and on the trade of the country in general. As this is one of the most important inquiries in the whole science of polit- ical economy, it will require to be discussed at some length. The Fact that the Value of the Imports exceeds that of the Exports does not warrant the Conclusion that the Balance of Payments is unfavorable. A very great, if not the principal, source of the errors into which practi- cal merchants, and the majority of writers on the subject of exchange, have been betrayed, appears to have originated in their confounding the sum which imported commodities are worth in the home market, with the sum which they cost in the foreign market. It is obviously, however, by the amount of the latter only, that the balance of payments, and conse- quently the real exchange, is influenced. A cargo of iron, for example, which cost 1000 free on board at Gottenburg, might be worth 1200 or 1300 when imported into England ; but the foreign merchant would not be entitled to draw on London for more than its original cost, or 1000. It is clear, therefore, on the slightest consideration, that the circumstance of the value of the imports exceeding the value of the exports, does not au- thorize the conclusion that the balance of payments is unfavorable. A favorable or an unfavorable balance depends entirely on the sum due to foreigners for commodities imported from abroad being less or more than the sum due by them for the commodities they have purchased ; but it has nothing to do with the prices eventually obtained for the imported or ex- ported commodities. The great object of the mercantile system of commercial policy, a sys- tem which still continues to preserve a considerable influence in this and in every other country in Europe, is the creation of a favorable balance of payments, and consequently of a favorable real exchange, by facilitating exportation and restricting importation. It is foreign to the object of this article to enter into any examination of the principles of this system, except in so far as they are connected with the subject of exchange ; but we hope to be able to show, in opposition to the commonly received opinions on the subject, that, under ordinary circumstances, the value of the imports must always exceed the value of the exports ; and that this excess of importa- tion has not, speaking generally, any tendency to render the real exchange unfavorable. Value of Exports. 45 In Countries carrying on an Advantageous Commerce, the Value of the Imports must always exceed the Value of the Exports. It is . the business of the merchant to carry the various products of the different countries of the world from those places where their value is least to those where it is greatest ; or, which is the same thing, to distribute them according to the effective demand. It is clear, however, that there could be no motive to export any commodity, unless the commodity which it was designed to import in its stead was of greater value. When an English merchant orders a quantity of Polish wheat, he calculates on its selling for so much more than its price in Poland as will be sufficient to pay the ex- pense of freight, insurance, etc ; and to yield, besides, the common and or- dinary rate of profit on the capital employed in the business. If the wheat did not sell for this sum, its importation would obviously occasion a loss to the importer. No merchant ever did or ever will export, but in the view of importing a greater value in return. And so far from an excess of ex- ports over imports being any criterion of an advantageous commerce, it is quite the reverse ; and the truth is, notwithstanding all that has been said and written to the contrary, that, unless the value of the imports exceeded that of the exports, foreign trade could not be carried on. Were this not the case, were the value of the exports always greater than the value of the imports, merchants would lose on every transaction with foreigners, and the trade with them would either not exist at all, or, if begun, would be speedily relinquished. In England, the rates at which exports and imports are valued were fixed so far back as 1696. But the very great alteration that has since taken place, not in the value of money only, but in the cost of most part of the commodities produced in this and other countries, has rendered this official valuation, though valuable as a means of determining their quantity, of no use whatever as a criterion of the true value of the imports and exports. To obviate this defect, an account of the real or declared value of the exports is annually prepared from the declarations of the masters, and laid before parliament. There is, however, no such account of the imports ; and, owing to the difficulties which high duties throw in the way, it is perhaps impossible to frame one with anything like accuracy. It has also been alleged, and apparently with some foundation, that merchants have not unfreqnently exaggerated the value of articles entitled to drawbacks on exportation : but the recent extension and improvement of the warehous- ing system, and the decrease in the number of drawbacks, must materially lessen whatever fraud or inaccuracy may have arisen from that source. Iii'lced, as most articles are charged with an ad valorem duty of 10s. pet- cent, on exportation, the fair presumption is, that their value will be underrated. We believe, however, that the declared value of the ex- ports comes pretty near the truth, at least sufficiently so for all practical purposes. But if perfectly accurate accounts could be obtained of the value of the exports and imports, there can be no manner of doubt that in ordinary years the latter would always exceed the former. The value of an ex- ported commodity is estimated when it is shipped, before its value is increased by the expense incurred in transporting it to the place of its 46 Essay on Exchange. destination ; but the value of the commodity imported in its stead is esti- mated after it has arrived at its destination, and, consequently, after it has been enhanced by the cost of freight, insurance, importer's profit, etc. It is of very little importance, in so far at least as the interests of com- merce are concerned, whether a nation act as the carrier of its own imports and exports, or employ others. A carrying nation appears to derive a comparatively large profit from its commercial transactions ; but this excess of profit is nothing more than a fair remuneration for the cap- ital it employs, and the risk it incurs, in transporting commodities from one country to another. Were the whole trade between this country and France carried on in British bottoms, our merchants, in addition to the value of the goods exported, would also receive the cost of their carriage to France. This, however, would not occasion any loss to that country. The French merchants must pay the freight of the commodities they import; and if the English can afford it on cheaper terms than their own countrymen, there is no good commercial reason, though there may be others of a different kind, why they should not employ them in pref- erence. In the United States, the value of the imports, as ascertained by the custom-house returns, always exceeds the value of the exports. And although our practical politicians have been in the habit of considering the excess of exports over imports as the only sure criterion of an advantage- ous commerce, " it is nevertheless true, that the real gain of the United States has been nearly in proportion as their imports have exceeded their exports." Pitkin on the Commerce of the United States, 2d ed. p. 280. The great excess of American imports has been in part occasioned by the Americans generally exporting their own surplus produce, and consequently receiving from foreigners, not only an equivalent for their exports, but also for the cost of conveying them to the foreign market. "In 1811," says the author just quoted, "flour sold in America for nine dollars fifty cents per barrel, and in Spain for fifteen dollars. The value of the cargo of a vessel carrying 5000 barrels of flour, would therefore be estimated, at the period of its exportation, at 47,500 dollars ; but as this flour, would, because of freight, insurance, exporter's profits, etc., sell in Spain for 75,000 dollars, the American merchant would be entitled to draw on his agent in Spain for 27,500 dollars more than the flour cost in Amer- ica, or than the sum for which he could have drawn, had the flour been exported on account of a Spanish merchant. But the transaction would not end here : the 75,000 dollars would be vested in some species of Spanish or other European goods fit for the American market ; and the freight, insur- ance, etc., on account of the return cargo would perhaps increase its value to 100,000 dollars ; so that in all, the American merchant might have im- ported commodities worth 52,500 dollars more than the flour originally sent to Spain." It is as impossible to deny that such a transaction as this is advantageous, as it is to deny that its advantage consists entirely in the excess of the value of the goods imported over the value of those exported. And it is equally clear that America might have had the balance of pay- ments in her favor, though such transactions as the above had been multi- plied to any conceivable extent. Instead, therefore, of endeavoring to fetter and restrict the trade with Excess of Imports. 47 those countries from which we should otherwise import a greater value than we exported, we ought to give it every possible facility. Every man considers that market as the best in which he is able to obtain the highest price, or the greatest value in exchange, for his goods ; why then should he be excluded from it ? Why compel a merchant to dispose of a cargo of muslin for 10,000 rather than 12,000 ? The wealth of a state is made up of the wealth of individuals ; and we have yet to learn that any more effectual method of increasing individual wealth can be devised, than to permit every person to make his purchases in the cheapest, and his sales in the dearest, market. Erroneous Notions relative to the Balance of Trade have been the Cause of the Restric- tions which have annihilated the Trade with France. It would be difficult to estimate the mischief which absurd notions rela- tive to the balance of trade have occasioned in almost every commercial country. In Great Britain, they have been particularly injurious. It is principally to the prevalence of prejudices to which they have given rise, that the restrictions imposed on the trade between this country and France are to be ascribed. The great, and indeed the only argument insisted on by those who prevailed on the legislature to declare the trade with France a nuisance (Prohibition Act, 1st William and Mary), was founded on the fact, that the value of the imports from that kingdom considerably exceeded the value of the exports. The balance was termed a tribute paid by Eng- land to France ; and it was sagaciously asked, what had we done that we should be obliged to pay so much money to our deadly enemy ? It never occurred to these wise persons, that no merchant would import any com- modity from France, unless it brought a higher price in this country than the commodity exported in its stead ; and that the profit of the merchant, or, which is the same thing, the national gain, would depend on this excess of price. The reason assigned for prohibiting the trade affords the best proof of its having been a lucrative one. There cannot, indeed, be a doubt, that an unrestricted freedom of intercourse between the two countries would be of the greatest service to both. The peculiarities in the soil and climate, and in the national character of the people of Great Britain and France enable the one to produce various species of raw and manufactured commodities at a cheaper rate than they can be produced by the other. If we were allowed freely to purchase and import, under moderate duties, the silks, the wines, and the brandies of France, those things which we can supply cheaper than our ingenious neighbors would be taken in payment. An extensive market would thus be created for a vast variety of articles, and a natural and powerful stimu- lus would be applied to the industry of both countries. Nobody denies that the trade with America, Portugal, and the Baltic is advantageous ; and if so, why is the trade with France to be considered as prejudicial ? Supposing the' trade between the two countries were perfectly free, does any one imagine that our merchants would export or import any commod- ity to or from France, provided they could either sell or buy it on better terms anywhere else ? If the restrictions on the French trade be not 43 Essay on Exchange. really injurious, that is, if the trade with France be either a losing or a less advantageous one than that with other countries, we may rest assured that the throwing it open would not make a single individual en- gage in it. As the real price of commodities is always proportioned, not only to the expense of their production, but also to the expense necessarily incurred in conveying them to the place where they are to be consumed, it is plain that a nation which prohibits trading with the countries in her vicinity must pay a higher price for her imported commodities, and be obliged to exact a higher price for those which she exports, than would be necessary were she able to procure the one or to dispose of the other in her imme- diate neighborhood. If the same sort of wine could be bought at Bour- deaux equally cheap as at Lisbon, the difference of freight would enable it to be sold cheaper in London. It is this principle, in fact, which renders the home trade peculiarly advantageous. The parties engaged in it live near each other, and consequently each obtains the commodity of which he stands in need at its cheapest rate, and without being obliged to pay any great additional sum on account of carriage. When, therefore, we restrict the trade with countries in our immediate vicinity, we act in the teeth of that very principle which is, in every other case, admitted to be advantageous. We compel such of our people as purchase foreign com- modities, to buy them at a comparatively high price ; while, by raising the price of the commodities we export, the market for them is injuriously con- tracted. But the partisans of the exclusive or mercantile system will perhaps tell us, that they do not mean to contend that it is profitable to export a greater value than is imported, but that by exporting an excess of raw and manu- factured commodities the balance of payments is rendered favorable, and that this balance (which they consider as representing the entire net profit made by the country on its transactions with foreigners) is always paid in bullion. Favorable or unfavorable Balance not always received or paid in Bullion. It will, however, be easy to show that this statement is altogether erro- neous ; that a balance, whether on the one side or the other, is seldom or never cancelled by means of bullion ; and that this balance is not a meas- ure, and has in fact nothing to do with the profit or loss attending foreign commercial transactions. 1. So long as the premium on foreign bills is less than the expense at- tending the transit of bullion from a country which has an unfavorable real exchange, no merchant ever thinks of subjecting himself to an unneces- sary expense, by exporting bullion to pay a foreign debt. But though the premium on foreign bills had increased, so as to equal the cost of exporting the precious metals, for it cannot exceed this sum, it does not by any means follow that they would therefore be exported. That depends entirely on the fact, whether bullion be, at the time, the cheapest exportable commod- ity, or, in other words, whether a remittance of bullion be the most advan- tageous way in which a debt may be discharged. If a London merchant Favorable or unfavorable Balance. 49 owe 100 in Paris, he sets about finding out the cheapest method of paying it. On the supposition that the real exchange is two per cent, below par, and that the expense of remitting bullion, including the profit of the bullion merchant, is also two per cent, it will be indifferent to him whether he pay 2 of premium for a bill of 100 payable in Paris, or incur an ex- pense of 2, by remitting 100 worth of bullion directly to that city. If the prices of cloth in Paris and London be such, that it would require 103 to purchase and send as much cloth to Paris as would sell for 100, he would undoubtedly prefer buying a bill or exporting bullion. But if, by incurring an expense of 101, the debtor be able to send as much hard- ware to Paris as would sell for 1 00, he would as certainly prefer paying his debt by an exportation of hardware. By doing so, he saves one per cent, more than if he bought a foreign bill or remitted bullion, and two per cent, more than if he exported cloth. If there had been any other commodity that might have been exported with more advantage, he would, of course, have used it in preference. . It is obvious, therefore, that the exportation of bullion is regulated by precisely the same principles which regulate the export and import of other commodities. It is exported, when its exportation is most advantage- ous ; that is, when it is less valuable at home and more valuable abroad, than any other commodity ; and it cannot be otherwise exported. The balance of payments might be a hundred millions against a country, with- out depriving it of a single ounce of bullion. No merchant would remit 100 worth of gold or silver from England to discharge a debt in Paris, if he could invest 98, 99, or any smaller sum in any other species of mer- chandise, which, exclusive of expenses, would sell in France for 100. Those who deal in the precious metals are, we may depend upon it, as much under the influence of self-interest as those who deal in coffee or indigo. But who would attempt to discharge a foreign debt, by exporting coffee which cost 100, if he could effect the same object by sending abroad indigo which cost only 97 ? No person in his senses would export a hat to be sold for 20s. provided he could sell it at home for a guinea ; nor would any person export an ounce of bullion, if its. value were not less in the exporting than in the importing country, or if there were any other commodity whatever that might be exported with greater advan- tage. 2. It is in vain to contend that, by permitting an unrestricted freedom of trade, one country might become indebted to another, which had no demand for any sort of ordinary merchandise, and which would 'only accept of cash or bullion in exchange for its exports. Such a case never did and never will occur. A nation which is in want of money must also be in want of other things ; for men only desire money because of its being the readiest means of increasing their command over the necessaries and en- joyments of life. The extreme variety, too, in the soil and climate, in the machinery, and in the skill and industry of the artisans belonging to differ- ent countries, must always occasion a considerable difference in the prices of their products. And until the cost of production be equalized, there must always be a foreign demand for those commodities which can be pro- duced cheaper at home than abroad ; and until the desire to accumulate be banished from the human breast, there must always be an inclination to 50 Essay on Exchange. send commodities from those countries where their exchangeable value is least to where it is greatest. 3. In treating of the nominal exchange, we endeavored to show, that it is impossible that any country should be able, for any length of time, to import or export a greater quantity of bullion than may be necessary to preserve the value of bullion in it, in its proper relation to the bullion of other countries ; or, which is the same thing, to have the real exchange either permanently favorable or unfavorable. But though this principle be strictly true in reference to its aggregate exchanges, it is incorrect when the state of its exchange with one country only is considered. Great Britain, for example, may constantly have the exchange in her favor with Portugal, provided she have it constantly, and to an equal extent, against her with the East Indies, or some other country. " She may," to use the words of Mr. Ricardo, " be importing from the North the bullion which she is export- ing to the South. She may be collecting it from countries where it is rela- tively abundant, for others where it is relatively scarce, or where, from some particular causes, it is in great demand. Spain, who is the great importer of bullion from America, can never have an unfavorable exchange with her colonies ; and as she must distribute the bullion she receives among the different nations of the world, she can seldom have a favorable exchange with the countries with which she trades." See Reply to Mr. BosanqueCs Observations on the Report of the Bullion Committee, p. 17 ; one of the best pamphlets that has ever been published on the subject of ex- change. It was by this principle that Lord King ingeniously, and we think suc- cessfully, accounted for the nearly continued favorable exchange between this country and Hamburg, from 1770 to 1799. His Lordship showed that the importation of bullion from Hamburg and other countries was only equivalent to the quantity exported to the East Indies and consumed at home ; that the demand corresponded to the supply ; and that its value remained pretty stationary. The extraordinary influx of bullion into this country from the Continent, at the era of the bank restriction in 1797, and the very favorable state of the exchange, were undoubtedly owing, in a very great degree, to the reduction in the issues of bank paper, and to the diminution of the gold currency caused by the hoarding of guineas, etc. In 1797 and 1798, above Jive millions of guineas were coined at the mint ; and this extraordinary demand for gold is of itself abundantly suf- ficient to account for the very favorable exchange of that period, and for the length of time which it continued. But, at the same time that the de- mand for gold bullion for the mint was thus increased, the demand for silver bullion, for the purpose of exportation by the East India Company, had also been proportionally augmented. In 1795, the quantity exported on account of the Company, and of private persons, amounted to only 151,795 ounces. In 1796 to 1797 290,777 962,880 In 1798 to 1799 3,565,691 7,287,327 From this period the exportation of silver to the East Indies was very much reduced ; and, in the years in which the exchange was most unfavor- able, it had almost entirely ceased. Foreign Trade. 51 Instead, therefore, of the extraordinary importation of bullion from Hamburg in 1797 and 1798 affording, as Mr. Bosanquet and others have supposed, a practical proof of the fallacy of the opinion of those who con- tend that it is impossible for any length of time to destroy the natural equality in the value of bullion in different countries, it is a striking exam- ple of its truth. Without this influx, bullion in this country could not have maintained its proper value, as compared with that of other countries. We imported it, because, owing to the reduction of the paper currency, and the increased exports by the East India Company, its value was rendered higher here than on the Continent ; and, consequently, because the conti- nental merchants found it advantageous to send bullion to us, in the same manner as they would have sent corn, or any other commodity for which there happened to be an unusual demand in Great Britain. For, however favorable the real exchange between Hamburg and London might have been to the latter, we should not have imported a single ounce of bullion, had it not been, at the time, the most advantageous article with which Hamburg could discharge its debt to London. 4. In the absence of all other arguments, it would be sufficient to state, that it is physically impossible that the excess of exports over imports, as indicated by the custom-house returns, should be paid in bullion. Every country in the world, with the single exception of the United States, has its apparently favorable balance ; and of course, if they really existed, they would have to be paid by an influx of bullion from the mines correspondent to their aggregate amount. It is certain, however, that the entire produce of the mines, though it were increased in a tenfold proportion, would be insufficient for this purpose ! This of itself is decisive of the degree of credit which ought to be attached to the commonly received opinions on this subject. 5. In the last place, the profit on transactions with foreigners does not consist in the quantity of bullion imported from abroad, but in " the excess of the value of the imports over the value of the exports." If, in return for exported commodities worth ten or twenty millions, we import such as are worth fifteen or thirty, we shall gain 50 per cent, by the transaction, though the exports should consist entirely of bullion, and the imports of corn, sugar, coffee, etc. It is a ridiculous prejudice that would make us import bullion rather than any other commodity. But whatever the parti- sans of the exclusive system may say about its being a preferable product, a merchandise par excellence, we may be assured that it will never appear in the list of exports or imports, while there is any other commodity with which to carry on trade that will yield a larger profit. Effect of Fluctuations in the Real Exchange on Foreign Trade. Thus it appears that the excess of exports over imports, instead of being any proof of an advantageous commerce, is distinctly and completely the reverse ; that a commercial country may, and almost always does, import commodities of greater value than it exports, without rendering itself indebted to foreigners ; and that when a balance of debt has been contracted, that is, when the sum payable to foreigners for imported com- 52 Essay on Exchange. modities is greater than the sum receivable from them for exported com- modities, the balance will not be paid by sending bullion from the debtor to the creditor country, unless it be at the time the most profitable article of export. We have, in the previous chapter, shown that fluctuations in the nominal exchange have no effect on foreign trade. "When the currency is depreci- ated, the premium which an exporter derives from the sale of the bill drawn on his correspondent abroad, is barely equivalent to the increase in the price of the goods exported, occasioned by the depreciation. But when the premium on a foreign bill is not a consequence of a fall in the value of money, but of a deficiency in the supply of bills, there is no rise of prices, and under such circumstances the unfavorable exchange undoubtedly op- erates as a stimulus to exportation. As soon as the real exchange di- verges from par, the mere inspection of a price current is no longer sufficient to regulate the operations of the merchant. If it be unfavorable, the premium which an exporter receives on the sale of bills must be included in the estimate of the profit he is likely to derive from the transac- tion. The greater that premium, the less will be the difference of prices necessary to make him export. And hence an unfavorable real exchange has exactly the same effect as a bounty on exportation equal to the premi- um on foreign bills. But for the same reason that an unfavorable real exchange increases exportation, it proportionally diminishes importation. When the ex- change is really unfavorable, the price of foreign commodities brought to our markets must be so much under their price at home, as not merely to afford, exclusive of expenses, the ordinary profit on their sale, but also to pay the premium which the importer must give for a foreign bill, if he remit one to his correspondent, or for the discount, added to the invoice price, if the latter draw upon him. A much less quantity of foreign goods will therefore suit our markets when the real exchange is unfavor- able ; and fewer payments having to be made abroad, the competition for foreign bills is diminished, and the real exchange rendered propor- tionally favorable. In the same way, it is easy to see that a favorable real exchange must operate as duty on exportation, and as a bounty on importa- tion. It is thus that fluctuations in the real exchange have a necessary tendency to correct themselves. They can never, for any considerable period, exceed the expense of transmitting bullion from the debtor to the creditor country. But the exchange cannot continue permanently favor- able or unfavorable to this extent. When favorable, it corrects itself by restricting exportation and facilitating importation ; and when unfavorable, it produces the same effect by giving an unusual stimulus to exportation, and by throwing obstacles in the way of importation. The true PAR forms the centre of these oscillations; and though the thousand circum- stances that daily and hourly affect the state of debt and credit, prevent the ordinary course of exchange from being almost ever precisely at par, its fluctuations, whether on the one side or the other, are confined within certain limits, and have a constant tendency to disappear. The natural tendency which the exchange has to correct itself is power- fully assisted by the operations of the bill merchants. Foreign Trade. 53 The Operations of the Bill Merchants have a Tendency to lessen Fluctuations in th? Real Exchange. England, for example, may owe an excess of debt to Amsterdam, yet as the aggregate amount of the debts due by a commercial country, is generally balanced by the amount of those which it has to receive, the deficiency of bills on Amsterdam in London will most probably be countervailed by a proportional redundancy of them in some other quarter. Now, it is the business of the merchants who deal in bills, as of those who deal in bullion or anything else, to buy them where they are cheap, and to sell them where they are dear. They therefore buy up the bills drawn by other countries on Amsterdam, and dispose of them in London ; and by so doing, prevent any great fall in the price of bills on Amsterdam in those countries in which the supply exceeds the demand, and any great rise in Great Britain and those countries in which the supply happens to be defi- cient. In the trade between Italy and this country, the bills drawn on Great Britain amount almost invariably to a greater sum than those drawn on Italy. The bill merchants, however, by buying up the excess of the Italian bills on London, and selling them in France, Holland, and other countries indebted to England, prevent the real exchange from ever be- coming very much depressed. A large Foreign Expenditure has no Permanent Effect on the Exchange. An unusual deficiency in the supply of corn, or of any other article of prime necessity, the demand for which could not be immediately con- tracted by causing a sudden augmentation of the imports from abroad, ma- terially affects the state of debt and credit with foreign countries, and depresses the exchange. In time of war, the balance of payments is liable to be still further deranged ; the amount of the bills drawn on a country carrying on foreign hostilities, being increased by the whole expense of its armaments abroad, and of subsidies to foreign powers. But neither the conjoined nor separate influence of both or either of these causes can exert any permanent influence over the exchange. A sudden increase in the accustomed supply of bills must, in the first instance, by glutting the mar- ket, occasion their selling at a discount ; but this effect can only be of temporary duration. The unusual facilities which are then afforded for the exportation of manufactured produce to the foreign market, and the diffi- culties which are thrown in the way of importation, never fail speedily to bring the real exchange to par. In a period of profound peace we may, by exporting an excess of raw or manufactured produce, overload the foreign market, and occasion such a decline in the price of British goods abroad, as to render the imported less valuable than the exported commodities with which' they have been pur- chased. But such a state of things speedily effects its own cure. The distress which it necessarily occasions leads to an immediate diminution of exports ; and the supply of British commodities in the foreign market being thus rendered more nearly commensurate with the demand, they of course sell for an adequate profit ; and the value of the imports again 54 Essay on Exchange. exceeds, as it always ought to do, the value of the exports. But whenever a country has a large foreign expenditure to sustain, its exports are pro- portionally augmented. Such an expenditure can only be discharged either by the government directly sending abroad an equivalent amount of commodities, or by means of bills of exchange drawn against produce exported by private individuals. Supposing the foreign expenditure of Great Britain during the late war to have amounted to ten or twenty millions a year, it is evident we must have annually exported an equal amount of the produce of our land, capital, and labor, for which payment would be received, not, as in ordinary cases, by a corresponding importa- tion of foreign commodities, but from the treasury at home. This is strictly true, even though it were admitted that the expenditure had in the first instance been entirely discharged by remittances of bullion ; for the increased supply of bullion which was thus required could be obtained only by an equally increased exportation of other produce to the countries possessed of mines, or from which it could be advantageously imported. Foreign expenditure, by increasing exports precisely in proportion to its own amount, is incapable of exerting any permanent effect on the ex- change. Thus it appears that a really great excess of exports, instead of being any criterion of increasing wealth at home, is only a certain indication of great expenditure abroad. " When," says Mr. Wheatley, " the exports exceed the imports, as they must do when there is a large foreign expendi- ture, the equivalents for the excess are received abroad in as full and ample a manner as if the produce which they purchased were actually imported and entered in the custom-house books, and afterwards sent to the seat of war for consumption. But from the circumstance of its not being inserted in the custom-house entries as value received against the produce exported for its payment, the latter is deemed to constitute a favorable balance, when it is in reality exported to liquidate a balance against us/' (Wheatley On the Theory of Money, p. 219.) di'tse of the Rise of the Exchange in 1815 and 1816. But however conclusive this reasoning may appear, it has nevertheless been contended, that it is at variance with the fact ; and that the rise of the exchange in autumn, 1814, and its restoration to par in 1816, when the restriction on cash payments at the bank was in full operation, is a practical and convincing proof that its previous depression had not been a conse- quence of the depreciation of the currency, but of the excessive supply of bills on London in the foreign market, occasioned by the expensive contest in which we were then engaged. According to our view of the matter, however, this fact leads to a precisely opposite conclusion. It is of no use to tell us that the exchange came to par while the restriction act was unre- pealed. It was never contended that the fact of such law being in existence had any effect on the currency. The restriction was justly condemned, because it enabled the Bank of England to deluge the country with paper. If the bank had never abused that power, if the proprietors had sacri- ficed their own individual interests to those of the public, and had con- Cause of the Rise of Exchange. 55 stantly kept their paper on a level with bullion, the restriction act, though unwise, would, as to consequences, have been the same as if it had never existed. The question is not, therefore, whether the exchange came to par while the restriction continued, but whether it came to PAR while as many notes circulated as in the period of its greatest depression ? If this could be shown, and if it could also be shown that the effective demand for paper had not, at the same time, been proportionally increased, the argument would be conclusive ; and we should be compelled to admit that a great comparative increase of paper money has no tendency to diminish its value, or to render the nominal exchange unfavorable. But it would be worse than idle to set about proving, by argument, a fact so notorious as the prodigious diminution of bank paper, in 1814, 1815, and 1816. In that period, above 240 country banks stopped pay- ment ; and ninety-two commissions of bankruptcy were issued against these establishments ; being at the rate of one commission against every seven and a half of the total number of banks existing in 1813! The Board of Agriculture estimated that, in the county of Lincoln alone, above three millions of bank paper had been withdrawn from circulation ; and the total diminution of the currency during the three years in ques- tion has seldom been estimated at less than from sixteen or twenty millions, though it probably amounted to a great deal more. Mr. Horner, the accu- racy and extent of whose information cannot be called in question, made the following statement on this subject, in his place in parliament. " From inquiries he had made, and from the accounts on the table, he was convinced that a greater and more sudden reduction of the circulating medium had never taken place in any country than had taken place since the peace in this country, with the exception of those reductions that had taken place in France after the Mississippi scheme, and after the destruc- tion of the assignats. The reduction of the currency had originated in the previous fall of the prices of agricultural produce. That fall had pro- duced a destruction of country-bank paper, to an extent which would not have been thought possible, without more ruin than had actually ensued. The Bank of England had also restricted its issues. As appeared by the accounts recently presented, the average amount of its currency was not, during the last year, more than between 25,000,000 and 26,000,000 ; while two years ago it had been nearer 29,000,000, and at one time even amounted to 31,000,000. But without looking to the diminution of Bank of England paper, the reduction of the country paper was enough to account for the rise which had taken place in the exchange." Here, then, is the cause of the exchange coming to par in 1815 and 1816. It had nothing to do with the cessation of hostilities, but was en- tirely a consequence of the increased value of our currency, caused by the sudden reduction of its quantity. Instead, therefore, of being at variance with the principles we have been endeavoring to elucidate, this fact affords the strongest confirmation of their perfect correctness. And having been sanctioned by the fullest experience, they may be considered as beyond the reach of cavil and dispute. An objection of a different sort has been made, by a very able economist, to another part of the theory maintained in this chapter, of which it may here be proper to take some notice. 56 Essay on Exchange. CHAPTER IV. UNFAVORABLE REAL EXCHANGE. Refutation of the Opinion that during an unfavorable Real Exchange, Commodities of Great Value and Small Bulk are Exported in Preference to others. WHEN the exchange becomes unfavorable, the premium procured by the sale of the bill drawn on a foreign merchant, to whom bullion has been consigned, is no greater than would be obtained by consigning to him coffee, tea, sugar, indigo, etc., of equal value. An unfavorable real exchange permits a merchant to export commodities which could not be exported were the real exchange at par, or favorable ; but the advantage still re- mains, of exporting those commodities in preference, whose price in the country from which they are exported, compared with their price in the country into which they are imported, is lowest. Suppose, for example, that the expense of transmitting bullion from this country to France is three per cent. ; that the real exchange is four per cent, against us ; that the price of bullion is the same in both countries ; and that coffee, exclu- sive of the expenses of carriage, is really worth four per cent, more in France that in England. In such a case, it is obvious, the exporter of bullion would realize only a profit of one per cent., while the exporters of coffee would realize, inclusive of the premium on the sale of the foreign bill, a profit of seven per cent. And hence the opinion maintained by Colonel Torrens ( Comparative Estimate, etc.) that when the exchange be- comes unfavorable, those commodities which contain the greatest value in the smallest bulk, or on which the expense of carriage is least, would be exported in preference, appears to rest on no good foundation. The prices of the commodities which nations trading together are in the habit of exporting and importing, are regulated not merely by the cost of their production, but also by the expense necessarily incurred in carrying them from where they are produced to where they are consumed. If Great Britain were in the constant habit of supplying France with corn and bullion, the average price of corn in France, because of the expense required to convey it from this country, would plainly be from ten to fifteen per cent, higher than in Britain ; while, because of the comparative facility with which bullion might be transported from the one to the other, its value in Paris would not exceed its value in London more than one or two per cent. Now, supposing that when the prices of both corn and bullion in Great Britain and France are adjusted according to their natural proportions, the real exchange becomes unfavorable to us ; it is clear, that this fall in the exchange gives no more advantage to the exporters of bullion than to those of corn. The rise in the price of foreign bills does not increase the expense attending the exportation of corn or bullion. It leaves the cost of producing and transporting these commodities exactly Unfavorable Real Exchange. 57 where it found it. During the depression of the exchange, the exporters of both articles derive a premium from the sale of the bills drawn on their foreign correspondents. But there can be no inducement to export bullion in preference to corn, unless the real price of bullion should increase more rapidly in France, or decline more rapidly in Great Britain, than the real price of corn. Whatever, therefore, may be the depression of the exchange, the mer- chant invariably selects those commodities for exportation, which, exclusive of the premium, yield the greatest profit on their sale. If bullion be one of these commodities, it will of course be exported ; if not, not. Bullion, however, of all commodities, is that of which the value approaches nearest to an equality in different countries, and hence it is the least likely to be exported during an unfavorable exchange. The demand for it is compara- tively steady, and no great surplus quantity could be imported into one country without reducing its value, or exported from another without rais- ing its value, so as to unfit it either for exportation or importation. A very small part only of an unfavorable balance is ever paid in bullion. The operations of the bullion merchant are chiefly confined to the distribution of the fresh supplies which are annually dug from the mines proportionally to the effective demand of different countries. Its price is too invariable, or, which is the same thing, its supply and demand are too constant, to admit of its ever becoming an important article in the trade between any two countries, neither of which possesses mines. In corroboration of this argument, we may mention that, according to the official statement laid on the table of the House of Commons, it appears that the expenses incurred by this country on account of the armies acting in Portugal and Spain during the following years, were as under : In 1808 1809 1810 1811 2,903,540 2,450,956 6,066,021 8,906,700 In 1812) 1813/ 1814 31,767,794 13,000,000 Of which, according to the same official statement, only the following sums were remitted in coin or bullion : In 1808 1809 1810 2,861,339 461,926 697,675 In 1811 1812) 1813 j 748,053 3,284,435 Of the sum of five millions voted to our allies in 1813 and 1814, not more than 300,000 was sent in bullion, the rest being made up by the exportation of manufactured goods and military stores. (Edinburgh Review, vol. xxvi. p. 154.) The high market price of gold and silver in 1809. 1810, etc., could not, therefore, be owing to the purchases made by government, for they were not greater than the sums exported by the East India Company in 1798 and 1799, and in 1803, 1804, and 1805, when there was scarcely any perceptible rise in the price of bullion. The immense additions made to the paper currency of the country in 1809, 58 Essay on Exchange. 1810, etc., sunk its value compared with bullion, and was the true cause of the unfavorable nominal exchange of that period. COMPUTED EXCHANGE. Having thus endeavored to point out the manner in which variations in the comparative value of the currencies of nations trading together, and in the supply and demand for bills, separately effect the exchange, it now only remains to ascertain their combined effect. It is on this that the com- puted or actual course of exchange depends. The, Computed Exchange Represents eitlter the Sum or the Difference of the Reed and Nominal Exchange. From what has been already stated, it must be obvious, that when the nominal and real exchange are both favorable or both unfavorable, the computed exchange will express their sum; and that when the one is favorable and the other unfavorable, it will express their difference. When, for example, the currency of Great Britain is of the mint standard and purity, and the currency of France five per cent, degraded, the nominal exchange will be five per cent, in favor of this country. But the real exchange may, at the same time, be either favorable or unfavorable. If it be also favorable to the extent of one, two, three, etc., per cent., the computed exchange will be six. seven, eight, etc., per cent, in favor of this country. And, on the other hand, if it be unfavorable to the extent of one, two, three, etc., per cent., the computed exchange will be only four, three, two, etc., per cent, in our favor. When the real exchange is in favor of a particular country, provided the nominal exchange be equally against it, the computed exchange will be at par, and vice versa. A comparison of the market with the mint price of bullion affords the best criterion by which to ascertain the state of the exchange at any par- ticular period. When no restrictions are imposed on the trade in the precious metals, the excess of the market over the mint price of bullion affords a pretty accurate measure of the depreciation of the currency. If the market and mint price of bullion at Paris and London exactly corre- sponded, and if the value of bullion was the same in both countries, the nominal exchange would be at par ; and whatever fluctuations the computed exchange might exhibit, must, in such a case, be traced to fluctuations in the real exchange, or, which is the same thing, to the supply and de- mand for bills. If, when the market price of bullion in Paris is equal to its mint price, it exceeds it ten per cent, in London, it is a proof that our currency is ten per cent, depreciated, and consequently the nominal ex- change between Paris and London must be ten per cent, against the latter. Instead, however, of the computed or actual course of exchange being ten per cent, against London, it may be against it to a greater or less extent, or in its favor. It will be more against it, provided the real exchange be also unfavorable, it will be less against it, provided the real exchange be in favor of London, though to a less extent than the adverse nominal ex- change, and it will be in favor of London, should the favorable real Computed Exchange. 59 exceed the unfavorable nominal exchange. Thus, if while British cur- rency is ten per cent, depreciated, -and French currency at par, the com- puted or actual course of exchange between Paris and London were twelve or fifteen per cent, against the latter, it would show that the real exchange was also against this country to the extent of two or three per cent. And if, on the other hand, the computed exchange was only five or six per cent, against London, it would show that the real exchange was four or five per cent, in its favor, and so on. It has already been shown, that, in so far at least as the question of ex- change is involved, the differences in the value of bullion in different countries are limited by the expense of its transit from one to another. And hence, by ascertaining whether a particular country exports or im- ports bullion to or from other countries, we are able to determine its com- parative value in these countries. Suppose, for example, that the expense of conveying bullion from this country to France, including the profits of the bullion dealer, is two per cent. ; it is clear, inasmuch as bullion is only exported to find its level, that whenever our merchants begin to export it to France, its value there must be two per cent, greater than in England ; and, on the contrary, when they import bullion from France, it must be two per cent, more valuable here than in France. In judging of the ex- change between any two countries, this circumstance must always be at- tended to. If no bullion be passing from the one to the other, we may conclude that its value is nearly the same in both ; at all events, it is cer- tain that the difference of its value is not greater than the expense of tran- sit. On the supposition that the entire expense, including profit, etc., of conveying bullion from Rio Janeiro to London is five per cent., and that the London merchants are importing bullion, then it is clear, provided the real exchange be at par, and that the currency of both cities is at the mint standard, that the nominal, or, which in this case is the same thing, the computed exchange, will be five per cent, in favor of London. But if the currency of London be five per cent, depreciated, or, in other words, if the market price of bullion at London be five per cent, above its mint price, the computed exchange between it and Rio Janeiro, supposing the real exchange to continue at par, will obviously also be at par. It may therefore be laid down as a general rule, that as soon as bullion begins to pass from one country to another, the expense of transit, provided the mint and market price of bullion in the exporting country correspond, will indicate how much the value of bullion in it falls short of its value in the country into which it is imported ; or, which is the same thing, will be equal to its unfavorable nominal exchange ; and that, when the market exceeds the mint price of bullion in the exporting country, the expense of transit added to this excess will give the total comparative reduction of the value of the precious metals in that country. The converse of this takes place in the country importing bullion. When its currency is of the mint standard, the expense of transit measures the extent of its favorable nominal exchange ; but when its currency is relatively redundant or degraded, the difference between the expense of transit and the excess of the market above the mint price of bullion, will measure the extent of the favorable or unfavorable nominal exchange. It will be favorable when the deprecia- tion is less than the expense of transit, and unfavorable when it is greater. 60 Essay on Exchange. State of the Exchange between Great Britain and the Continent from 1809 to 1815. From 1809 to 1815 inclusive, Great Britain continued to export gold and silver to the Continent. During this period, therefore, we must add the expenses attending its transit to the excess of the market over the mint price of bullion, in order to ascertain the true relative value of British cur- rency, and the state of the real exchange. Mr. Goldsmid stated to the bullion committee that, during the last five or six months of the year 1809, the expense of transporting gold to Holland and Hamburg, inclusive of freight, insurance, exporter's profit, etc., varied from four to seven per cent. But at the same time the relative value of bullion in Britain was at five and a half (medium of four and seven) per cent, below its value in Hamburg, the market price of gold bullion exceeded its mint price to the extent of sixteen or twenty per cent, or eighteen per cent, on a medium ; so that the currency of this country, as compared with the currency of Hamburg, which differed very little from its mint standard, was really de- preciated to the extent of twenty-three and a half per cent. Now, as the computed or actual course of exchange varied, during the same period, from nineteen to twenty-one per cent, against London, it is clear that the real exchange could not be very different from par. Had the computed exchange been less unfavorable, it would have shown that the real exchange was in favor of London ; had it been more unfavorable, it would, on the contrary, have shown that the real exchange was decidedly against London. Causes of the Exportation of Bullion in 1809, 1810, etc. Provided an accurate account could be obtained of the expense attending the transit of bullion from this country to the Continent during the subse- quent years of the war, we have no doubt it would be found, notwithstand- ing the extraordinary depression of the nominal, that the real exchange fluctuated very little from par ; and that the exportation of gold and silver was a consequence, not of the balance of payments being against this coun- try, but of its being advantageous to export bullion, because of its being less valuable here than on the Continent. No person will contend that, in 1809, 1810, etc., there was such a redundancy of gold or silver currency in this country as to sink the relative value of these metals. Any such supposition is altogether out of the question. During the period referred to, the precious metals were sent out of the country, because the deprecia- tion of the paper currency exceeded the cost of the transit of bullion ; and hence, because it was every body's interest to pay their debts in the depre- ciated currency, and to export that which was undepreciated to other coun- tries where there was no law to prevent its passing at its full value as coin, or in which there was a greater demand for bullion. It is indisputably certain that, if our paper currency had been sufficiently reduced, the supply of gold in the kingdom in 1809, 1810, etc., compared with the demand which must, under such circumstances, have been experienced, was so very small, that, instead of exporting, we should have imported the precious metals from every country in the world. Unfavorable Exchange. 61 The unfavorable Exchange during the latter Years of the War, no Cause of the Extra- ordinary Exportation of British Produce to the Continent. It has been very generally supposed, that the extraordinary exportation of British goods to the Continent during the latter years of the war, was in a great measure owing to the depression of the exchange. But, in so far as this depression was occasioned by the redundancy or depreciation of the currency, it could have no such effect. It is impossible, indeed, to form any opinion as to the influence of fluctuations in the computed exchange on export and import trade, without previously ascertaining whether they are a consequence of fluctuations in the real or nominal exchange. It is only by an unfavorable real exchange that exportation is facilitated ; and it may be favorable at the very moment that the computed exchange is decidedly unfavorable. " Suppose," to use an example given by Mr. Blake, " the computed exchange between Hamburg and London to be one per cent, against this country, and that this arises from a real exchange which is favorable to the amount of four per cent, and a nominal exchange unfavor- able to the extent of five per cent; let the real price of bullion at Hamburg and London be precisely the same, and, consequently, the nominal prices different by the amount of the nominal exchange of five per cent. ; now, if the expenses of freight, insurance, etc., on the transit of bullion from Hamburg are three per cent., it is evident that a profit would be derived from the import of that article, notwithstanding the computed exchange was one per cent, against us. In this case, the merchant must give a premium of one per cent, for the foreign bUl, to pay for the bullion : 100 worth of bullion at Hamburg would therefore cost him 101, and the charges of importation would increase the sum to 104. Upon the subsequent sale, then, for 105 of depreciated cur- rency in the home market, he would derive from the transaction a profit of 1. This sum is precisely the difference between the real exchange and the expenses of transit, that part of the computed exchange which depends on the nominal producing no effect ; since whatever is lost by its unfavorable state is counterbalanced by a corresponding inequality of nominal prices." (Observations, etc., p. 91.) In the same manner it may be shown, that, though the computed be favorable, the real exchange may be unfavorable ; and that, consequently, it might be really advantageous to export, when it is apparently advantageous to import. But it would be tedious to multiply instances, which, as the intelligent reader will readily conceive, may be infinitely varied, and which have been sufficiently ex- plained. The real cause of the extraordinary importation of British produce into the Continent in 1809, 1810, etc., notwithstanding the anti-commercial sys- tem of Napoleon, is to be found, not in the state of the exchange ; for, inas- much as that was occasioned by a fall in the value of the currency, it could have no effect whatever, either in increasing or diminishing exportation ; but in the annihilation of the neutral trade and our monopoly of the commerce of the world. The entire produce of the east and west was placed at our disposal. The continental nations could neither procure colonial produce nor raw cotton for the purposes of manufacturing, except directly from Eng- 62 Essay on Exchange. land. British merchandise was thus rendered almost indispensable ; and to this our immense exportation, in spite of all prohibitions to the contrary, is to be ascribed. (See Edinburgh Review, No. Ixiii. p. 50.) CHAPTER V. NEGOTIATION OF BILLS OF EXCHANGE. In conducting the business of exchange, a direct remittance is not always preferred. When a merchant in London, for example, means to discharge a debt due by him hi Paris, it is his business to ascertain, not only the state of the direct exchange between London and Paris, and, conse- quently, the sum which he must pay in London for a bill on Paris equivalent to his debt, but also the state of the exchange between London and Hamburg, Hamburg and Paris, etc. ; for it frequently happens that it will be more advantageous for him to buy a bill on Hamburg, Amster- dam, or Lisbon, and to direct his agent to invest the proceeds in a bill on Paris, rather than remit directly to the latter. This is termed the ARBITRATION of exchange. An example or two will suffice to show the principle on which it is conducted. Arbitration of Exchange. Thus, if the exchange between London and Amsterdam be 35s. Flemish per pound sterling, and between Paris and Amsterdam Is. 6d. Flemish per franc, then hi order to ascertain whether a direct or indirect remittance to Paris would be most advantageous, we must calculate what would be the value of the franc in English money if the remittance were made through Holland ; for, if it be less than that resulting from the direct exchange, it will obviously be the preferable mode of remitting. This is determined by stating, as 35s. Flem. (the Amsterdam currency in a pound sterling) : Is. 6d. Flem. (Amsterdam currency in a franc) : : 1 : lOd. the propor- tional or arbitrated value of the franc. Hence if the English money or bill of exchange, to pay a debt in Paris, were remitted by Amsterdam, it would require lOd. to discharge a debt of a franc, or l to discharge a debt of 24 francs : and, therefore, if the exchange between London and Paris were at twenty-four, it would be indifferent to the English merchant whether he remitted directly to Paris, or indirectly via Amsterdam ; but if the exchange between London and Paris were above twenty-four, then a direct remittance would be preferable ; while if, on the other hand, the direct exchange were less than twenty-four, the indirect remittance ought as plainly to be preferred. " Suppose," to borrow an example from Dr. Kelly ( Universal Cambist, vol. ii. p. 137), " the exchange of London and Lisbon to be at 68d. per milree, and that of Lisbon on Madrid 500 rees per dollar, the arbitrated Negotiation of Bills. 63 price between London and Madrid is 34d. sterling per dollar ; for as 1000 rees : 68d. : : 500 rees : 34d. But if the direct exchange of London on Madrid be 35d. sterling per dollar, then London, by remitting directly to Madrid, must pay 35d. for every dollar ; whereas, by remitting through Lisbon, he will pay only 34d. ; it is, therefore, the interest of London to remit indirectly to Madrid through Lisbon. On the other hand, if London draws directly on Madrid, he will receive 35d. sterling per dollar ; whereas, by drawing indirectly through Lisbon, he would receive only 34d. ; it is, therefore, the interest of London to draw directly on Madrid. Hence, the following rules : " 1. Where the certain price is given, draw through the place which produces the lowest arbitrated price, and remit through that which pro- duces the highest. " 2. Where the uncertain price is given, draw through that place which produces the highest arbitrated price, and remit through that which pro- duces the lowest." In COMPOUND ARBITRATION, or when more than three places are concerned, then, in order to find how much a remittance passing through them all will amount to in the last place, or, which is the same thing, to find the arbitrated price between the first and the last, we have only to repeat the different statements, in the same manner as in the foregoing ex- amples. Thus, if the exchange between London and Amsterdam be 35s. Flem. for 1 sterling; between Amsterdam and Lisbon 42d. Flem. for 1 old crusade ; and between Lisbon and Paris 480 rees for 3 francs, what is the arbitrated price between London and Paris ? In the first place, as 35s. Flem. : 1 : : 42d. Flem. : 2s. sterling, = 1 old crusade. Second, as 1 old crusade, or 400 rees : 2s. sterling : : 480 rees : 2s. 4|d. sterling, = 3 francs. Third, as 2s. 4i sterling : 3 francs : : 1 sterling : 25 francs the arbi- trated price of the pound sterling between London and Paris. This operation may be abridged as follows : 1 sterling. 1 sterling == 35s. Flemish. 3i shillings Flem. 1 old crusade. 1 old crusade = 400 rees. 480 rees == 3 francs. 35 X 400 X 3 4200 Hence = 25 francs. 480 X 34 = 168 This abridged operation evidently consists in arranging the terms so that those which would form the divisors in continued statements in the Ride of Three are multiplied together for a common divisor, and the other terms for a common dividend. Arithmetical books abound with examples of such operations. The following account of the manner in which a very large transaction was actually conducted, by indirect remittances, will sufficiently illustrate the principles we have been endeavoring to explain. 64 Essay on Exchange. In 1804, Spain was bound to pay to France a large subsidy ; and, in order to do this, three distinct methods presented themselves : 1. To send dollars to Paris by land. 2. To remit bills of exchange directly to Paris. 3. To authorize Paris to draw directly on Spain. The first of these methods was tried, but it was found too slow and ex- pensive ; and the second and third plans were considered likely to turn the exchange against Spain. The following method by the indirect or circular exchange was therefore adopted. A merchant, or banquier, at Paris, was appointed to manage the opera- tion, which he thus conducted : He chose London, Amsterdam, Hamburg, Cadiz, Madrid, and Paris, as the principal hinges on which the operation was to turn ; and he engaged correspondents in each of these cities to sup- port the circulation. Madrid and Cadiz were the places in Spain from whence remittances were to be made $ and dollars were, of course, to be sent to where they bore the highest price, for which bills were to be pro- cured on Paris, or on any other places that might be deemed more advan- tageous. The principle being thus established, it only remained to regulate the extent of the operation, so as not to issue too much paper on Spain, and to give the circulation as much support as possible from real busi- ness. With this view, London was chosen as a place to which the opera- tion might be chiefly directed, as the price of dollars was then high in England, a circumstance which rendered the proportional exchange advan- tageous to Spain. The business was commenced at Paris, where the negotiation of drafts issued on Hamburg and Amsterdam served to answer the immediate demands of the state ; and orders were transmitted to these places to draw for the reimbursements on London, Madrid, or Cadiz, according as the course of exchange was most favorable. The proceedings were all con- ducted with judgment and attended with complete success. At the com- mencement of the operation, the course of exchange of Cadiz on London was 36d. ; but, by the plan adopted, Spain got 39^d., or above eight per cent., by the remittance of dollars to London, and considerable advantages were also gained by the circulation of bills through the several places on the Continent. (Kelly's Cambist, vol. ii. p. 168; Dubost's Elements of Commerce, 2d edit., p. 218. Usance Days of Grace. Bills of exchange are made payable at sight ; at a certain specified time after sight, or after date ; or at usance, which is the usual term allowed by the custom or law of the place where the bill is payable. Generally, however, a few days are allowed for payment beyond the term when the bill becomes due, which are denominated days of grace, and which vary in different countries. In Great Britain and Ireland, three days of grace are allowed for all bills except those payable at sight, which must be paid as soon as presented. The following is a statement of the usance and days of grace for bills drawn by London on some of the principal commercial cities. History and Advantages of Bitts of JExchange. 65 [m\}d. m\\s. 'oi t- ^tfj^c ' 1 ^^"* . * CO i-c CO IM 2 | o s'5 m ~- i IN w od'^t-- 01 '*'*^''' 71 ' 10 1 t _., Ol O D t> i i t>- CO ^S^ cot0r ' < '*'*'* I-H CO VI i r co"i-rS *> > o m ; o Q j 1 . i^. ^ o in o co ^SS WOTi< ^ "* O O | ii "1^0 (M oo *coini I^D CO rHCOINCOtO-c:i> S * C3 & "2 " r . &3 iptp *Si*fS 5^2 N-H O O> 'S.S 03 - a as ^ rt g" O 2 -^ 03 J - s !?i* 1. 8 "1131 fr 11= '* c *3 w *" >* Ifill^l ||s||||l ,-e-g S3 8 * --, OT 3 g 03 a a 2 S S-t - 3 02 " a _9 Q ^ .^sc S eJ &2 153 O S4S C3 S S3 ' ,J_ Ml W- H<5 S 8 AN ESSAY ON MONEY, WITH REMARKS ON COINS, BULLION, METALLIC AND PAPER CURRENCY, SEIGN- ORAGE, DEGRADATION OF THE STANDARD, &c. ; TOGETHER WITH COPIOUS TABLES OF THE WEIGHT, VALUE, &c., OF THE COINS OF VARIOUS NATIONS. BT J. B. McCULLOCH. CHAPTER I. CIRCUMSTANCES WHICH LED TO THE USE OF MONEY. PRINCIPAL PROPER- TIES THAT EVERY COMMODITY USED AS SUCH OUGHT TO POSSESS. NOT A SIGN OR A MEASURE OF VALUE, BUT A REAL EQUIVALENT. Circumstances leading to the Use of Money. MONEY is a term used to designate whatever commodity the inhabit- ants of any particular country accept, either voluntarily or by compul- sion, as an equivalent for their labor, and for whatever else they have to dispose of. A country in which the division of labor was unknown, and where every individual or family directly produced the commodities necessary for his or their consumption, would have no exchanges, and consequent- ly no money. But after the division of labor has been established, the introduction of money becomes necessary, or, at least, highly advantage- ous. A very small part only of a man's wants is then directly supplied by his own labor. The greater part is indirectly supplied by exchanging that part of the produce of his labor which exceeds his own consumption, for such parts of the produce of other men's labor as he has occasion for, and they are willing to part with. Every man thus lives by ex- changing, or becomes in some measure a merchant, and the society it- self grows to be what is properly a commercial society. " But when the division of labor first began to take place, this power of exchanging must frequently have been very much clogged and em- barrassed in its operations. One man, we shall suppose, has more of a certain commodity than he himself has occasion for, while another has less. The former, consequently, would be glad to dispose of, and the latter to purchase, a part of this superfluity. But if this latter should chance to have nothing that the former stands in need of, no exchange can be made between them. The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each 80 Money. be willing to purchase a part of it ; but they have nothing to offer in ex- change except the different productions of their respective trades, and the butcher is already provided with all the bread and beer which he has immediate occasion for. No exchange can, in this case, be made between them. He cannot be their merchant, nor they his customers ; and they are all of them thus mutually less serviceable to one another. To avoid the inconvenience of such situations, every prudent man, in every period of society, after the establishment of the division of labor, must naturally have endeavored to manage his affairs in such a manner as to have at all times by him, besides the peculiar produce of his own in- dustry, a certain quantity of some one commodity or another, such as he imagined few people would be likely to refuse in exchange for the produce of their industry." (Wealth of Nations, Vol. I., p. 43, Mc- Culloch's ed.) This commodity, whatever it may be, is money. Commodities used as Money in Different Countries. An infinite variety of commodities have been used as money in differ- ent countries and states of society. Those nations who chiefly subsist by the chase, such as the ancient Russians, and the greater part of the Indians who now occupy the uncultivated portion of America, use the skins of wild animals as money. In a pastoral state of society, cattle are most commonly used for that purpose. Homer tells us that the armor of Diomede cost only nine oxen, whilst that of Glaucus cost only one hundred. (Ilia. lib. 6, lin. 235.) The etymology of the Latin word (pecunia) signifying money, and of all its derivatives, proves that cattle (peons') had been the primitive money of the Romans. They had also been used as such by the ancient Germans ; for their laws uniform- ly fix the amount of the penalties to be paid for particular offences in cattle. (Storch, in loco citato.) In remoter ages corn was very gen- erally used in agricultural countries as money ; and even now it is by no means uncommon to stipulate for corn rents and wages. Other com- modities have been used in different countries. Salt is said to be the common money of Abyssinia (Wealth of Nations, Vol I., p. 45) ; a species of shell called cowries, gathered on the shores of the Maldive Islands, are used in smaller payments throughout Hindustan, and form the only money of extensive districts in Africa. Dried fish forms the money of Iceland and Newfoundland, and sugar of some of the West India Islands ; and Dr. Smith mentions that there was at the period of the publication of the " Wealth of Nations," a village in Scotland where it was customary for a workman to carry nails as money, to the baker's shop or the ale-house. (Wealth of Nations, Vol. I. p. 45.) Defects of these Commodities. But these commodities are universally deficient in some of the principal requisites which every commodity used as money ought to possess. Prod- ucts must frequently be brought to market worth only half an ox, or half a skin ; but as an ox could not be divided, and as the division of a skin would deprive it of the greater part of its value, it would be impossible to Money. 81 exchange them for such money. Divisibility is not, however, the only indispensable requisite in a commodity used as a medium of exchange. It is necessary that it should admit of being kept for an indefinite period without deteriorating ; that it should, by possessing great value in small bulk, be easily transported ; and that one piece of money, of a certain denomination, should always be precisely equivalent to every other piece of money of the same denomination. But none of the commodities above named as having been used as money possesses these properties. Though cattle had been sufficiently divisible, they could neither be preserved, nor transported from one place to another, without a great deal of trouble and expense ; while, owing to the difference in their qualities, one ox might be worth two or three oxen of an inferior species. It is plain, therefore, that they could not serve as money except in a very rude state of society, when the arts were almost unknown, and when the rearing of cattle formed the principal employment. Corn was sufficiently divisible ; but its bulk was far too great in proportion to its value to admit of its easy transportation, and it was also of very different and not easily appreciated qualities. Salt, sugar, shells, and fish, are all liable to insuperable ob- jections. The values of equal quantities of all of them differ very great- ly ; some of them cannot be divided, and others cannot be preserved or transported without great loss. But the commodities in question were deficient in a still more important particular. Their value was not sufficiently invariable to permit of their being advantageously used as money. They were not durable com- modities, nor was it possible to adjust their supply so as to avoid sudden fluctuations of price. The occasional abundance and scarcity of pasture has a powerful influence on the price of cattle, which is still more serious- ly affected by the prevalence o/" epidemical diseases, and other contin- gencies. The fluctuations in the price of corn, arising from the varia- tions of the seasons, are too striking and obvious to require to be pointed out. And in the islands where cowries are picked up, a strong gale from a particular point of the compass has frequently, in a few hours, sunk their value considerably. It was impossible, therefore, that such com- modities could ever be either generally or permanently used as money in civilized societies. ,No person would willingly exchange the produce of his industry for a commodity which might, in a few weeks, or even days, lose a third or a- half of its value. Gold and Silver the fittest Materials for Money, and first used in the shape of Bars or Ingots. The desire of uniting the different qualities of invariability of value, divisibility, durability, facility of transportation, and perfect sameness, doubtless formed the irresistible reasons which have induced mankind, in every civilized society, to employ gold and silver as money. The value of these metals is certainly not invariable, but it changes only by slow degrees ; they are divisible into any number of parts, and have the sin- gular property of being easily reunited, by means of fusion, without loss ; they do not deteriorate by being kept ; and, from their firm and compact 82 Money. texture, they are very difficult to wear ; their cost of production, espe- cially of gold, is so considerable, that they possess great value in small bulk, and can, of course, be transported with comparative facility ; and an ounce of pure gold or silver, taken from the mines in one quarter of the world, is precisely identical .with an ounce of pure gold or silver dug from the mines in any other quarter. No wonder, therefore, when almost all the qualities necessary to constitute money are possessed in so eminent a degree by the precious metals, that they have been used as such, in civilized societies, from a very remote era. They became universal money, as M. Turgot has observed, " not in consequence of any arbitrary agreement among men, or of the intervention of any law, but by the nature and force of things." A considerable period must, however, have elapsed after the introduc- tion of the precious metals into commerce, before they were generally used as money. But, by degrees, the various qualities, which so pe- culiarly fit them for this purpose, would become obvious ; and every indi- vidual, in consulting his own advantage, would endeavour to exchange a part, at least, of the produce of his industry for commodities which could be easily concealed or carried about, which did not deteriorate by being kept, and of which he could give a portion equal in value to the value of any other commodity he might afterwards wish to obtain. When first brought to market, gold and silver, like copper, iron, or any other metal, were in an unfashioned state, in bars or ingots. A sheep, an ox, a bushel of wheat, &c., was then bartered for a piece of gold or sil- ver, exactly as it would have been bartered for iron, copper, cloth, or any other commodity. The parties first agreed upon the quality of the metal to be given for the goods, and the quantity, which the possessor of the metal had bound himself to pay, was next ascertained by weight. Nor is this a mere conjectural statement, advanced in a later age to explain appearances, and resting on probability only. Aristotle (Polit., lib. i. cap. 9) and Pliny (Hist. Nat., lib. xxxiii. cap. 'A) tell us, that such was, in fact, the original method by which the precious metals were exchanged in Greece and Italy ; and the sacred writings prebent us with a striking and remarkable example of the prevalence of the same primitive practice in the East. We are there told that Abraham weighed four hundred shekels of silver, and gave them in exchange for a pie?,e of ground he had purchased from the sons of Heth. (Genesis, chap, zxiii. ver. 16.) It is also mentioned, that this silver was " current money mth the mer- chant,' 1 '' an expression which evidently refers to its quality only. For, had it been coined, or marked with a stamp, indicating its weight and fine- ness, it would have been unnecessary to have weighed it. These ancient practices still subsist hi various countries. In many parts of China, gold and silver do not circulate as coin under the authority of a public stamp, but their value is always ascertained by weight. When exchanged, they are cut into pieces, supposed to be nearly proportioned to the value of the commodity they are to be given for ; and the pieces are then weighed to ascertain their precise value. This practice is also prevalent in Abys- sinia and Tonquin. (Goguet, De POrigine des Loix, fyc., torn. i. p. 268, 4to edit. See also Park's Travels, vol. i. p. 464, 8vo edit.) Money. 63 Before the art of metallurgy was well understood, the baser metals were frequently used as money. Iron was the primitive money of the Lacedaemonians, and copper of the Romans. But both iron and copper deteriorate by being kept ; and, besides this defect, the rapid improve- ment of the arts, and the consequent reduction of their price, speedily rendered their bulk in proportion to their value too great to permit of their continuing to be used as money. Copper, however, is still advan- tageously used in the form of tokens, convertible into silver in very small payments. In Great Britain, copper pence and halfpence are at present rated at about seventy -two per cent, above their real value ; but as the issue of them is exclusively in the hands of government, and as they are legal tender to the extent of one shilling only, in any one payment, this over- valuation has not, for reasons which we shall afterwards explain, had any bad effect. (See Memorandum on the Silver Coinage of 1817, by the Master of the Mint, p. 378 of the Appendix to the Lords' Report on the Resumption of Cash Payments by the Bank.) Coinage of Gold and Silver. The trouble and inconvenience attending the weighing of the quantity of metal in every exchange of gold and silver for commodities, must have been early experienced. But the greatest obstacle to the use of un- fashioned metals as money, would undoubtedly be found in the difficulty of determining their quality, or the degree of their purity, with sufficient facility and accuracy. The operation of assaying is one of great nicety and delicacy ; and, notwithstanding all the assistance derived from modern art, it is still no easy matter to ascertain the precise degree of purity of a particular piece of metal. In early ages, such an operation must have been performed in a very clumsy and bungling manner. It is most probable, indeed, that when the precious metals were first used as money, their quality was appreciated only by their weight and color. A very short experience would, however, be sufficient to show the extreme in- exactness of conclusions derived from such loose and unsatisfactory cri- teria ; and the devising of some method by which the fineness of the metal might be easily and correctly ascertained, would very soon be felt as indispensable to the general use of gold and silver as money. Such a method was not long in presenting itself. It was early discovered, that, to ascertain the purity of the metal, and also to avoid the trouble and ex- pense of weighing it, no more was necessary than to mark each piece with a stamp, declaring its weight and fineness. Such seem to have been the various steps which led the ancients to the introduction of coined money (Goguet, De POrigine des Loix, fyc., torn. i. p. 269) ; an inven- tion of the very greatest utility, and which has, perhaps, contributed more than any other to facilitate commerce, and to accelerate the progress of civilization and the arts. Advantages of Coined Money. Coined Money not a Sign or a Measure of Value. " Without some article of known exchangeable value, such as coin, readily received as an equivalent for other things, the interchange of 84 Money. commodities must have been very limited, and, consequently, the divisions of labor very imperfectly established. Now, money obviates these evils, and, by a twofold operation, augments production. In the first place, it saves all that time and labor which, while the intercourse between man and man is carried on by barter, must frequently intervene before a per- son can be supplied with the quantity of the commodity which he wants. In the second place, and in consequence of its saving the time and labor which must otherwise be spent in effecting exchanges, it multiplies the transactions of mercantile industry, and thus allows the divisions of em- ployment to be more thoroughly established. By the first operation, it disengages a very considerable portion of labor from an unproductive occupation, and enables it to receive a more useful direction. By the second operation, it increases in a very high degree the productive powers of the labor already usefully employed. It assists eveiy man in availing himself of the skill and dexterity which he may have acquired in any particular calling, and promotes cultivation in a manner suitable to the climate and soil of different districts, and of different countries. And by both these operations, coined money increases, to an extent not easy to be calculated, the wealth of civilized communities." (Torrens On the Pro- duction of Wealth, p. 305.) But, whatever may be the advantages attending the use of coined money, and they are great and obvious, it is necessary to observe, that its introduction does not affect the nature of exchanges. Equivalents are still given for equivalents. The exchange of a quarter of corn for an ounce of pure, unfashioned gold bullion, is undeniably as much a real barter, as if it had been exchanged for an ox, or a barrel of beer. But supposing the metal to have been formed into a coin, that is, marked with a stamp indicating its weight and fineness, it is plain that circumstance could have made no change in the terms of the barter. The coinage saves the trouble of weighing and assaying the bullion, but it does nothing more. A coin is merely a piece of metal of a known weight and fine- ness ; and the commodities exchanged for it are always held to be of equal value. And yet these obvious considerations have been very gen- erally overlooked. Coined money, instead of being viewed in the same light as other commodities, has been looked upon as something quite mys- terious. It was said to be both a sign and a measure of value. In truth, however, it is neither the one nor the other. A sovereign is not a sign, it is the thing signified. A promissory note, payable at some stated period, may not improperly be considered as the sign of the specie to be paid for it ; but that specie is itself a commodity possessed of real ex- changeable worth. It is equally incorrect to call money a measure of value. Gold and silver do not measure the value of commodities, more than the latter measure the value of gold and silver. Every thing possessed of value may either measure, or be measured by, every thing else possessed of value. When one commodity is exchanged for another, each measures the value of the other. If the quartern-loaf were sold for a shilling, it would be quite as correct to say, that a quartern-loaf meas- ured the value of a shilling, as that a shilling measured the value of a quartern-loaf. Money. 85 Use of Gold and Silver as a Standard for estimating the Relative Value of Com- modities. Proof of the Non-existence of an Abstract or Ideal Standard. The quality of serving as a measure of value is, therefore, equally in- herent in every commodity. But the slow degrees by which the precious metals change their value, renders them peculiarly well fitted for forming a standard by which to compare the values of other and more variable commodities. To this standard reference is almost always made in esti- mating the value of the products of every civilized country. We do not say that one man is worth a thousand acres of land, and that another is worth a thousand sheep ; but we ascertain for how much gold or silver the land and the sheep would exchange, and then say that their propri- etors are worth so much money. In this, however, there is certainly nothing mysterious. We merely compare the value of one commodity with the value of another ; and as com or money has been found to be the most convenient standard of comparison, the value of all other com- modities is usually estimated in it. It is obvious, from this statement, that the terms of the exchange of one commodity, or set of commodities, for another, may be adjusted, with reference to money, without any money being actually in the possession of either of the parties making the exchange. If a horse, for example, had commonly sold for ten pieces of silver, an ox for five pieces, and a sheep for one piece, it would mark their relative values to each other, and the animals might be exchanged on this footing without the intervention of money. The frequent recurrence of transactions of this kind seems to have given rise to the notion of an abstract or ideal standard of value. Thus, instead of saying that a horse is worth ten pieces of silver, an ox five pieces, and a sheep one piece, it has been contended that it might equally have been said that they were respectively worth ten points or units, five points or units, and one point or unit ; and that, as the propor- tional values of commodities might be as clearly expressed in these ar- bitrary terms as in money, or any commodity possessed of real value, the use of the latter, as a standard, might be advantageously dispensed with, and a set of abstract terms adopted in its stead. This, however, is com- pletely mistaking the nature and object of a standard. A standard is not intended to mark the known relations between different commodities, but to enable us easily to discover those which are unknown. Now, although the series of arbitrary terms may serve extremely well for the first of these purposes, it is utterly impossible that they can ever serve for the second. This, however, is exclusively the object of a standard ; and it is quite plain that nothing can be used as such which is not possessed of the same properties as the things with which it is to be compared. To meas- ure length, a standard must have length ; to measure value, it must have value. The value of commodities is ascertained by separately comparing their cost with the cost of money, and we express their relation to each other by simply stating the result of our inquiries ; that is, by mentioning the number of livres, of pounds, or of fractions of a pound, they are respec- tively worth. And, when any new commodity is offered for sale, or when 86 Money. any change is made in the cost of an old one, we ascertain their relation to the rest, by merely comparing them with a livre or a pound. It is plainly impossible, however, that we could have done this, had the terms livre, or pound, been purely arbitrary, and referable to no really valuable article. We might as well tiy to estimate distances by an imaginary inch, or an imaginary foot, as to estimate prices or values by an imagin- ary shilling, or an imaginary sovereign. When we say that an ox is worth five pounds and a sheep only one, we really mean no more than that, when an ox and a sheep are compared together, that is, when the one serves as a standard by which to estimate the value of the other, one ox is found to be worth five sheep. But, suppose that we wish to ascertain what is the relative value of some other commodity ; of a pound of tea, for example ; to oxen or sheep, of what use would it be to be told that one ox was worth five sheep, or that, when the value of an ox was repre- sented by the imaginary term " five pounds," the value of a sheep was represented by the imaginary term " one pound ?" It is not the relation between oxen and sheep, but the relation between these animals and tea, that we are desirous of learning. And, although this relation may be learned by comparing the cost of producing oxen and sheep with the cost of producing tea, or by ascertaining for how much of some other commod- ity an ox, a sheep, or a pound of tea will respectively exchange, it is obvi- ous it could never be learned by comparing them with a set of arbitrary terms or symbols ! It would not, in truth, be more absurd to attempt to ascertain it by comparing them with the hieroglyphics on an Egyptian sarcophagus. Nothing that will not exchange for something else, can ever be a standard, or measure of value. Commodities are always com- pared with commodities, and not with abstract terms. Men go to market with real values, and not with the signs of values in their pockets. And it is to something possessed of real worth, to the gold contained in a sov- ereign and not in the word sovereign, that they always have referred, and must continue to refer, in estimating value. The following passage of Montesquieu has often been referred to in proof of the existence of an ideal standard : " Les noirs de la cote d'Afrique ont un signe des valeurs sans monnoie ; c'est un signe pure- ment ideal fonde sur le degre d'estime qu'ils mettent dans leur esprit a chaque marchandise, a proportion du besoin qu'ils en ont ; une certaine denree, ou marchandise, vaut trois macutes ; une autre, six macutes ; une autre, dix macutes ; c'est comme s'ils disoient simplement trois, six, dix. Le prixse forme par la comparaison quails font de toutes les marchandises entre elles : pour lors, il n'y a point de monnoie particuliere, mais chaque portion de marchandise est monnoie de P autre" (Esprit des Loix, livre xxii. cap. 8.) But, instead of giving any support to the notion of an abstract standard, this passage might be confidently referred to in proof of its non-exist- ence. Had Montesquieu said that the blacks determined the values, or prices, of commodities, by comparing them with the arbitrary term macute, the statement, though false, would have been at least in point. But he says no such thing. On the contrary, he states distinctly, that the relative values of commodities (marchandises) are ascertained by comparing them Money. 87 with each oilier (entre elles), and that it is merely the result of the com- parison that is expressed in arbitrary terms. So much for the weight to be attached to this statement, supposing it to be well founded. The truth is, however, that the term macute is not really arbitrary, and employed only to mark an ascertained proportion, but that it has a reference to, and is, in fact, the name of an intrinsically valuable commodity. " On a bien dit," says 1'Abbe Morellet, " que ce mot maeute etoit une expression abstraite et generate de la valeur, et cela est vrai au sens ou nous 1'expliquerons plus bas ; mais on n'a pas re- marque que cette abstraction a ete consequente et posterieure & 1'emploi du mot macute pour signifier une marchandise, une denree reelle a laquelle on avoit longtems compare toutes les autres. " Macute en plusieurs lieux de la cote d'Afrique, est encore le nom d'une certaine etoffe : 4 Chez les negres de la cote d'Angola," 1 dit le vo- yageur Angelo, t les macutes sont des pieces de nattes d'une aune de long '; Jobson dit aussi que les macutes sont une espece d^etoffe. " Les etoffes ont toujours ete 1'objet d'un besoin tres-pressant chez des peuples aussi barbares, depourvus de toute espece d'industrie. Les nattes en particulier leur sont de la plus grande necessite. Elles sont divisees en morceaux peu considerables et d'une petite valeur ; elles sont tres- uniformes dans leurs parties, et les premieres qu'on a faites auront pu etre semblables les unes aux autres, et d'une bonte egale, sous la me me denomination ; toutes ces qualites les ont rendu propres a devenir la me- sure commune des valeurs." (Prospectus d'un Nouveau Dictionnaire de Commerce, p. 121.) The following extract from Park's Travels gives an example of a simi- lar kind : " In the early intercourse of the Mandingoes with the Europe- ans, the article that attracted most notice was iron. Its utility in forming the instruments of war and husbandry made it preferable to all others ; and iron soon became the measure (standard) by which the value of all other commodities was ascertained. Thus a certain quantity of goods, of whatever denomination, appearing to be equal to a bar of iron, constituted, in the trader's phraseology, a bar of that particular merchandise. Twenty leaves of tobacco, for instance, were considered as a bar of tobacco ; and a gallon of spirits (or rather half spirits and half water) as a bar of rum ; a bar of one commodity being reckoned equal in value to a bar of another commodity. As, however, it must unavoidably happen, that, according to the plenty or scarcity of goods at market, in proportion to the de- mand, the relative value would be subject to continual fluctuation, greater precision has been found necessary ; and, at this time, the current value of a single bar of any kind is fixed by the whites at two shillings sterling. Thus, a slave, whose price is .15, is said to be worth 150 bars." ( Trav- els in the Interior of Africa, 8vo edit., vol. i. p. 39.) In common mercantile language, the giving of money for a commodity is termed buying, and the giving of a commodity for money, selling. Price, unless when the contrary is particularly mentioned, always means the value of a commodity rated in money. Having thus endeavoured to explain the circumstances which led to the introduction of money, and to show what it really is, and what it is not, 88 Money. we shall now proceed to investigate the laws by which its value is regu- lated. It is chiefly from the prevalence of erroneous opinions on this sub- ject, that the theory of money has been so much misunderstood. CHAPTER II. CIRCUMSTANCES WHICH REGULATE THE EXCHANGEABLE VALUE OF MONET. THIS branch of our subject naturally divides itself into two parts : 1st. An inquiiy into the principles which regulate the exchangeable value of money when the power to supply is not monopolized ; and, 2d. An inquiry how far these principles are liable to be affected by the operation of monopoly. Cost of Production regulates the Value of Money, when the Power of Supply is not monopolized. I. There does not now seem to be much room for difference of opinion respecting the circumstances that regulate the value of the precious met- als, and their distribution throughout the various countries of the globe. Bullion is a commodity, on the production of which competition operates without restraint. It is not subjected to any species of monopoly, and its value in exchange must, therefore, be entirely regulated by the cost of its production, that is, by the quantity of labor required to bring a given quantity of it to market. If, in every stage of society, it required precisely the same quantity of labor to produce a given quantity of bullion, its value would be invariable ; and it would constitute a standard by which the variations in the exchange- able value of all other commodities could be correctly ascertained. But this is not the case either with bullion or any thing else. And its value fluctuates in the same way as that of other commodities, not only accord- ing to the greater or less productiveness of the mines from which it is extracted, but also according to the comparative skill of the miners, and the improvements of machinery. M. Say has, in his work on Political Economy, a chapter " De la valeur que la qualite d'etre monnoie ajoute a une marehandise." But a little reflection will convince us, that M. Say is mistaken, and that the circum- stance of the precious metals being used as money cannot affect their value. M. Say reasons on the common hypothesis, that an increase of demand is always productive of an increase of value, an assumption totally at variance with principle and fact. Value depends upon the cost of pro- duction ; and it is obvious that the cost of producing a commodity may be diminished, whilst the demand for it is increasing. This is so plain a proposition, as hardly to require to be substantiated by argument. And a reference to the case of cotton goods, the price of which has, notwithstand- Money. 89 ing the vast increase of demand, been constantly on the decline during the last half century, is enough to convince the most skeptical of the extreme erroneousness of M. Say's conclusion. But, with regard to the particular case of the precious metals, it is clear the capital devoted to the production of gold and silver must yield the common and ordinary rate of profit ; for, if it yielded more than that rate, there would be an influx of capital to the mining business ; and, if it yielded less, it would be with- drawn, and vested in some more lucrative employment. And hence, though the demand for gold and silver should, from the adoption of some other commodity as an instrument of exchange, gradually become less, the value of the precious metals would not, on that account, be reduced. A smaller supply would, indeed, be annually brought to market, and a portion of the capital formerly engaged in the mining, refining, and pre- paring of the metals, would be disengaged ; but as the whole stock thus employed yielded only the average rate of profit, the portion which is not withdrawn must continue to do so ; or, which is the same thing, gold and silver must still continue to sell for the same price. It is no doubt true, that where mines are, as they almost always are, of different degrees of pro- ductiveness, any great falling off in the demand for bullion might, by ren- dering it unnecessary to work the inferior mines, enable the proprietors of the richer mines to continue their work, and to obtain the ordinary rate of profit on their capitals, by selling bullion at a reduced price. In this case the value of bullion would be really diminished ; but it would be dimin- ished, not because there was a falling off in the demand, but because there was a greater facility of production. On the other hand, an increased demand for bullion, whether it arose from the general suppression of paper money, or from a greater consumption of gold and silver in the arts, or from any other cause, would not, unless it were necessary, in order to procure the increased supply, to have recourse to less produc- tive mines, be accompanied by any rise of price. If the mines from which the additional supplies were drawn were less productive than those already wrought, more labor would be necessary to procure the same quantity of bullion, and, of course, its price would rise. But, if no such increase of labor was required, its price would remain stationary, though a thousand times the quantity formerly required should be demanded. After gold and silver have been brought to market, their conversion into coin or manufactured articles, depends entirely on a comparison of the profits that may be derived from each operation. No bullion would be taken to the mint if it would yield a greater profit by sending it to a silversmith ; and no silversmith would work up bullion into plate, if he could turn it to greater account by converting it into coin. The value of bullion and coin must, therefore, in countries where the expenses of coin- age are defrayed by the state, nearly correspond. When there is any unusual demand for bullion in the arts, coin is melted down ; and when, on the contrary, there is any unusual demand for coin, plate is sent to the mint, and the equilibrium of value maintained by its fusion. It appears, therefore, that whilst competition operates without restraint on the production of gold and silver, they are, like all other things, pro- duced under similar circumstances, valuable only in proportion to the 90 Money. cost of their production ; that is, in proportion to the quantity of labor necessarily expended in bringing them to market. And hence, while they constitute the currency of the commercial world, the price of com- modities, or their value compared with gold or silver, will vary, not only according to the variations in the exchangeable value of the commodities themselves, but also according to the variations in the value of the gold or silver with which they are compared. The Proportion between the Supply and Demand regulates the Value of Money, when the Power of Supply is monopolized. II. But if competition were not allowed to operate on the production of the precious metals, if they could be monopolized and limited in their quantity, their exchangeable value would no longer be regulated by the same principles. If, after the limitation, they still continued to be used as money, and if, in consequence of the improvement of society, manu- factured commodities and valuable products should be very much multi- plied, the exchanges which this limited amount of money would have to perform would be proportionably increased ; and, of course, a proportion- ably smaller sum would be appropriated to each particular transaction ; or, which is the same thing, money prices would be diminished. When- ever the supply of money is fixed, the amount of it, given in exchange for commodities, must vary inversely as the demand, and can le affected by nothing else. If double the usual supply of commodities be brought to market in a country with a limited currency, their money price will be reduced a half; and if only half the usual supply be brought to market, it will be doubled ; and this, whether the cost of their production be increased or diminished. Produce is not then exchanged for money, on the ground that it is a commodity capable of being advantageously used in the arts, or that an equal quantity of labor has been expended on its production ; but because it is the universal equivalent used by the society, and that, as such, it will be willingly received for the produce belonging to others. The remark of Anacharsis, the Scythian, that gold and silver coins seemed to be of no use but to assist in numeration and arithmetic (Hume's Essay on Money), would, if confined to a strictly limited currency, be as just as it is ingenious. Sovereigns, livres, dollars, &c., would then really con- stitute mere tickets or counters, for computing the value of property, and transferring it from one individual to another. And as small tickets, or counters, would serve for this purpose quite as well as large ones, it is unquestionably true, that a debased currency may, by first reducing, and then limiting its quantity, be made to circulate at the value it would bare if the power to supply it were unrestricted, and if it were possessed of the legal weight and fineness ; and, by still further limiting its quantity, it might be made to pass at any higher value. Thus it appears, that whatever may be the material of the money of any country, whether it consist of gold, silver, copper, iron, leather, salt, cowries, or paper, and however destitute it may be of all intrinsic value, it is yet possible, by sufficiently limiting its quantity, to raise its value in exchange to any conceivable extent. Money. 91 Suppose the money of Great Britain consists of 50,000,000 or 60,000,000 of one pound notes, and that we are prevented from increasing or dimin- ishing this sum, either by issuing additional notes or coins, or by with- drawing the notes already in circulation ; it is obvious that the quantity of commodities for which such notes would exchange, would increase or diminish precisely according to the increase or diminution of the com- modities brought to market. If we suppose that ten times the amount of products that were offered for sale when the limitation of the cur- rency took place, are offered for sale ten or twenty years afterwards, and that the rapidity of circulation has continued the same, prices will have fallen to one-tenth of their former amount ; or, which is the same thing, the exchangeable value of the paper money will have increased in a tenfold proportion ; and, on the other hand, if the products brought to market had diminished in the same proportion, the exchangeable value of the paper money will have been equally reduced. The principles we have now stated are of the utmost importance to a right understanding of the real nature of money. Previously to the publi- cation of Mr. Ricardo's Principles of Political Economy, every writer of authority maintained, that the value of money depended entirely on the relation between its amount and the demand. But this is true only of a gold or silver currency when its quantity is limited, and of a currency formed of materials having little intrinsic worth, as paper, when its quan- tity is limited, and it is not made convertible, at the pleasure of the holder, into some more valuable commodity, the production of which is under no restraint. It is obvious, indeed, without any reasoning on the subject, that the value of a currency that costs little or nothing, can only depend on the proportion which its amount bears to the commodities brought to market, or to the business it has to perform. And wherever a currency of this kind, or a limited gold currency, is in circulation, the common opinion, that the prices of commodities are regulated exclusively by the proportion between the quantity of them brought to market, and the supply of money, and that any considerable increase or diminution of either will proportionally affect prices, is quite correct. It is altogether different, however, with a currency consisting of gold or silver, or of any other commodity possessed of considerable value, and the supply of which may be increased to an unlimited extent by the operation of unrestricted competition. The fluctuations in the supply of, and demand for, such money, have no permanent effect on its exchangeable value ; this depends exclusively on the comparative cost of its production. If a sovereign commonly ex- changes for a couple of bushels of wheat, or a hat, it is because the same labor is required for its production as for that of either of these commodi- ties; while, if with a limited and inconvertible paper money, they exchange for a one pound note, it would be because such was the proportion which, as a part of the mass of commodities offered for sale, they bore to the supply of paper or money in the market. This proportion would, it is evi- dent, be not only immediately, but permanently, affected by an increase or diminution either of paper or commodities. But the relation which commodities bear to a freely supplied metallic currency, could not be 92 Money. permanently changed, except by a change in the cost of producing the commodities or the metals. Our readers must not conceive from what is now stated, that we mean to contend that the value of gold or silver is never affected by variations of supply and demand. Such an opinion would be altogether erroneous. At the same time it must be admitted, that their value is much less affect- ed by such variations, than that of almost any other commodity. Their great durability precludes the possibility of any sudden diminution of their quantity, while the immense surface over which they are spread, and the various purposes to which they are applied, prevent any unusual produc- tiveness of the mines from speedily lowering their value. An extraordi- nary event, such as the discovery of America, or the establishment of an intercourse between a country where bullion bore a high value, and one where its value, from the greater facility of its production, was compara- tively low, would, by causing a sudden exportation and importation, raise its value in the one country, and sink it in the other. But such events must necessarily be of very rare occurrence. And although the different productiveness of the mines, to which, in the progress of society, recourse must be had, and the successive improvements in the art of mining and working metals, must render the value of gold and silver very different at distant periods, it is abundantly uniform to secure us against all risk of sudden and injurious fluctuations. Such are the circumstances which regulate the value of money ; first, when the power to supply it is not subjected to any species of monopoly ; and, second, when it is monopolized and limited. In the former case, its value depends, like that of all other commodities, on the cost of its production ; while, in the latter case, its value is totally unaffected by that circumstance, and depends entirely on the extent to which it has been issued, compared with the demand. The conclusions deducible from the fundamental principle we have thus endeavoured to establish, are of the utmost importance. A metallic currency, on the coinage of which a high seignorage or duty was charged, and a paper currency not convertible into the precious metals, were occa- sionally seen to circulate at the same value with a metallic currency of full weight, and which had been coined at the expense of the state. But no rational or consistent explanation of these apparently anomalous results could be given until the effects produced by limiting the supply of money had been accurately appreciated. Now, however, that this has been done, all these difficulties have disappeared. The theory of money has been per- fected, and we are enabled to show what, under any given circumstances, would be the effect of imposing a seignorage, or of issuing an inconverti- ble paper currency. Seignorage, strictly speaking, means only the clear revenue derived by the state from the coinage ; but it is now commonly used to express every deduction made from the bullion brought to the mint to be coined, whether on account of duty to the state, or of the expense of coinage (properly brassage]. We always use the phrase in its more enlarged sense Money. 93 CHAPTER III. A MODERATE SEIGNORAGE ON COINED MONEY SHOWN TO BE ADVANTAGEOUS. PRINCIPLES WHICH SHOULD REGULATE ITS AMOUNT. Reasons why a Seignorage should be imposed on Coined Money. THE government of almost every country has retained the power of coining exclusively in its own hands. In antiquity this privilege was re- served merely to prevent the confusion that must attend the circulation of coins of different denominations, were individuals permitted to issue them at pleasure, and to give the public greater security, that the stamp should truly indicate the weight and fineness of the metal. (Le Blanc, Traite Historique des Monnoyes de France, p. 90, ed. Amst. 1692.) But in more modern times it has been used, not only as a means of affording a better guarantee to the public, but also of increasing the revenues of the state. As to the expediency of this, however, much difference of opinion has existed. It has been contended that the state ought in no circum- stances to charge any duty on coined money ; and that the expenses of the mint should always be defrayed by the public. In this opinion we cannot concur; and it appears to us that the reasoning of Dr. Smith, in favor of a moderate seignorage, is quite unanswerable. No good reason has yet been given why those who want coins should not have to pay the ex- penses of manufacturing them. Coinage, by saving the trouble and expense attending the weighing and assaying of bullion, indisputably adds to the value of the precious metals. It renders them fitter to perform the func- tions of a circulating medium. A sovereign is of greater value than a piece of pure unfashioned gold bullion of the same weight ; and for this plain reason, that while it is equally well adapted with the bullion for be- ing used in the arts, it is better adapted for being used as money, or in the exchange of commodities. Why, then, should government be prevented from charging a seignorage, or duty on coins, equal to the expenses of the coinage, or, which is the same thing, to the value which it adds to the bullion ? Those who contend that the state ought to defray the expense of the coinage, might, with equal cogency of reasoning, contend that it ought to defray the expense of manufacturing gold and silver teapots, vases, &c. In both cases the value of the raw material, or bullion, is in- creased by the cost of workmanship. And it is only fair and reasonable, that those who carry bullion to the mints, as well as those who carry it to the jewellers, should have to pay the expenses necessarily attending its conversion into coin. But there are other reasons why a seignorage, to this extent at least, ought to be exacted. Wherever the expenses of coinage are defrayed by the state, an ounce of coined gold or silver, and an ounce of gold or silver bullion, must be very nearly of the same value. And, hence, whenever it becomes profitable to export the precious metals, coins, in the manufac- 94 Money. ture of which a considerable expense has been incurred, are sent abroad indifferently with bullion. It has, indeed, been attempted, by prohibiting the exportation of coins, to prevent the loss that may thus be occasioned ; but these efforts have proved singularly ineffectual, and have, indeed, been abandoned in this and most other countries. Admitting, however, that it were possible, which most certainly it is not, to prevent, or at least, materially limit, the clandestine exportation of coins, it is conceded on all hands to be quite nugatory to attempt to prevent their conversion into bullion. In this there is almost no risk. And the security with which their fusion can be effected, and the trifling expenses attending it, will always enable them to be melted down and sent abroad whenever there is any unusual foreign demand for the precious metals. This exportation would, however, be either prevented or materially diminished by the imposition of a seignorage or duty, equal to the expense of the coinage. The coins being, by this means, rendered more valuable than bullion, would be kept at home in preference : and if, as Dr. Smith has observed, it became necessary on any emergency to export coins, they would, most likely, be reimported. Abroad, they would be only worth so much bull- ion, while at home they would be worth this much, and the expense of coinage besides. There would, therefore, be an obvious inducement to bring them back, and the supply of currency would be maintained at its proper level, without its being necessary for the mint to issue fresh coins. Besides relieving the country from the useless expenses attending the coinage of the money exported to other countries as an article of com- merce, the imposition of a moderate seignorage would either totally pre- vent, or at least lessen, that fusion of the heavier coins, which always takes place whenever a currency becomes degraded or deficient in weight. Previously to the great recoinage in 1773, the quantity of bullion contained in the greater number of the gold coins in circulation was reduced nearly two per cent, below the mint standard ; and, of course, the price of gold bullion, estimated in this degraded currency, rose two per cent., or from 3 17s. and 10d., its mint price, to <4. This, however, was too minute a difference to be taken into account in the ordinary business of buying and selling. And the possessors of coins fresh from the mint, or of full weight, not obtaining more produce in exchange for them than for the lighter coins, sent the former to the melting-pot, and then sold them as bullion. But it is easy to see that this fusion would have been effectually prevented had the coins been loaded with a seignorage of two per cent. The heavy coins could not then have been melted without losing the value given them by the seignorage ; and this being equal to the excess of the market price of bullion above the mint price, nothing would have been gained by the melters. Had the seignorage been less than the average degradation of the coin, or two per cent. ; had it, for example, been only one per cent., all those coins whose value was not more than one per cent, degraded below their mint standard, might have been melted ; but if the seignorage had exceeded two per cent, no coins whatever could have been melted until the degradation had increased to the same or a greater extent. This reasoning proceeds throughout on the supposition that the coins on Money. 95 which the seignorage is charged are not issued in excess. If they were, the above-mentioned consequences would not follow. Their too great multiplication might sink them even below their value as bullion, and oc- casion their immediate fusion or exportation. So long, however, as the state only coins the bullion brought to the mint by individuals, there is no risk of this happening. No one, we may depend upon it, will ever carry bullion to that establishment, and pay the expenses of its coinage, unless the coins be thereby rendered so much more valuable than the unfashioned metal. Should the government choose to buy bullion, and coin money on its own account, it might, by a little attention, easily avoid all over-issue. Sup- pose the seignorage were two per cent., then any given weight of coins of the mint standard ought, provided the currency be not redundant, to purchase two per cent, more than the same weight of bullion. So long, therefore, as this proportion is preserved between coined money and bull- ion, it shows that the proper supply of currency has been issued. If the value of the coins decline below this limit, too many of them must have got into circulation ; and, if, on the contrary, their value increase, the sup- ply is too limited, and an additional quantity may be advantageously issued. If the Supply of Coins could be sufficiently limited, a high Seignorage might be exacted. It is easily seen, from the principles already established, that it is not necessary that the charge for seignorage should be limited to the mere ex- penses of coinage. It may, without injury to any individual, be carried considerably farmer. Provided the amount of the coins on which a seign- orage is imposed, be limited to the amount that previously circulated in the country, its imposition, to whatever height it might be carried, would not effect their exchangeable value. The state having the exclusive priv- ilege of coining, no additional supply of money could be brought to market. And supposing the business of society to continue the same ; that is, supposing the same quantity of commodities are brought to market, and exchanged for the same amount of coins of the same denomination, it is clear prices could not be in any way affected. Invariability of value is the great desideratum in money ; and provided this be maintained, as it always may be, by properly limiting the quantity in circulation, it is of no consequence whether the weight of the coins be increased or diminished. A hat that had previously to the imposition of the seignorage sold for a sovereign would still fetch one. The sovereign, it is true, has been dimin- ished in size ; but as its value is increased in proportion to this diminu- tion, and as small coins are equally well adapted to serve every purpose of a circulating medium as those that are larger, society would not suffer any inconvenience from that circumstance. It is certain, indeed, that if the monopoly were not rigorously enforced, or if individuals were permitted to issue supplies of money from private mints, free from the charge of seignorage, the increase of quantity would speedily sink the value of the whole coins in circulation to a level with the cost of those 96 Money. produced on the lowest terms ; so that the coins on which a high seignor- age had been charged would not be more valuable than those exempted from that charge. But, wherever the supply of money is limited, and competition excluded, this principle ceases to operate, and its value is then dependent upon the proportion which the total quantity in circulation bears to the total demand. This principle is further elucidated in a very able article on seignorage, by Mr. Tooke, printed in the Appendix (p. 180) to the Lords' Report o/1819. Difficulty of limiting sufficiently the Supply of Coins, and Necessity of imposing only a moderate Seignorage. It must not, however, be concealed, that if it were attempted to charge a very high seignorage, it would be extremely difficult to limit the supply of coins. The inducement to counterfeit money would, under such cir- cumstances, be very greatly increased, while the chances of detection would be very much diminished. It would not then be necessary, in order to derive a profit from counterfeit coins, that they should be manufactured of a baser metal. The saving of a heavy charge on account of seignorage might of itself afford a sufficient profit ; and this could be derived, though the metal contained in the forged coins were of the standard purity. But, though it might, for this reason, and most probably would, be quite impos- sible to limit the supply of currency, and consequently to sustain its value, were an exorbitant seignorage charged, the same difficulty would not stand in the way of a moderate one. The nefarious business of counter- feiting could not be carried on, did it not yield a sufficient premium to the forgers to indemnify them for the risks and odium to which they are ex- posed. A seignorage less than this would be no encouragement to the issue of counterfeit coins. And though it might be difficult to form any very precise estimate of what this premium might be, it is pretty certain it would not be under from four to five per cent. Amount of the Gold Coinage since the Accession of James II. It appears from an account inserted in the Appendix to the Report drawn up by the Lords in 1819, that new gold coins, of the value of 74,501,586 had been issued by the mint between the 1st January, 1760, and the 13th April, 1819. To this sum we have to add nearly fifty millions since issued, making in all an issue of about one hundred and twenty-four, or one hundred and twenty-five millions of gold coins since the accession of George III. But the seignorage was remitted in the reign of Charles II. ; and it appears from theaccounts published by Mr. Ruding and others, that ,28, 172, 149 of new gold coins were issued in the period between the accession of James II. ( 1685) and the demise of George II. ; so that, in all, upwards of one hundred and fifty-two millions of gold coins have been coined at the expense of the state, and issued since the remission of the seignorage. We shall be considera- bly within the mark, if we estimate the average annual expense attending this coinage at 12,000. Lord Liverpool states, that the entire expense of the mint, from 1777 to 1803, amounted to .488,441, which gives an av- Money. 97 erage expenditure of ^18,786 a year. (Liverpool On Coins, p. 156.) And, on this supposition, it will be found that the expense of the coinage of gold only has amounted, during the one hundred and fifty-two years which have elapsed since the accession of James II., to i 1,824,000. But, if a low seignorage of no more than three or four per cent, had been charged on the gold coins, it would have produced four and a half or six millions ; a sum which might have been collected without injury to any individual, and which, besides defraying the entire expenses of the coinage, would have left a considerable surplus revenue. Expense of the Coinage of Gold and Silver. History of Seignorage in England. In his evidence before the Lords' Committee in 1819, Mr. Mushet stated, that, with the improved machinery now in use in the mint, gold coin could be manufactured for about 10s. percent. (Minutes of Evidence, p. 207.) And the expense of the manufacture of the silver coin may, we believe, be taken at about three times as much, or one and a half per cent. In France the coinage of gold costs 0'29 per cent., and silver T50 per cent.; in Russia the gold costs 0'85, and the silver 2-95 per cent. (Storch, torn, vi., p. 74.) The precise period when a seignorage began to be charged upon Eng- lish silver coins has not been ascertained. It must, however, have been very early. Mr. Ruding mentions, that in a mint account of the 6th Henry III., one of the earliest he had met with, the profit on 3,898 Os. 4d. of silver coined at Canterbury, is stated to be < 97 9s., being exactly 6d. a pound, of which the king had 60 18s. 3d., and the bishop the residue. (Annals of the British Coinage, vol. i., p. 179, 4to. ed.) In the 28th Edward I. the seignorage amounted to Is. 2d. per pound : 5d. being allowed to the master of the mint, to indemnify him for the expenses of coinage, and 9d. to the crown as its profit. Henry VI. increased the master's allowance to IQd. and Is. 2d., and the king's to Is. and 2s. In the reign of Edward IV. the seignorage varied from 4s. 6d. to Is. 6rf. It was reduced to Is. in the reign of Henry VII. ; but was prodigiously aug- mented in the reigns of his successors, Henry VIII. and Edward VI., whose wild and arbitrary measures produced, as will be afterwards shown, the greatest derangement of the currency. During the lengthened reign of Elizabeth, the seignorage varied from Is. Gd. to 2s. per pound ; at which sum it continued, with very little variation, until the 18th of Charles II. (1666), when it was totally remitted. From this period down to 1817 no seignorage was charged on the sil- ver coin ; but a new system was then adopted. Silver having been un- derrated in relation to gold in the mint proportion of the two metals fixed in 1718, heavy silver coins were withdrawn from circulation, and gold only being used in all the larger payments, it became, in effect, what silver had formerly been, the standard of the currency. The act of 56th George III., regulating the present silver coinage, was framed, not to interfere with this arrangement, but so as to render silver entirely subsidiary to gold. For this purpose it is made legal tender only to the extent of 40s. ; and 66s. instead of 62s. are coined out of a pound of troy, the 4*. 98 Money. retained as a seignorage, which, therefore, amounts to 6^f- P er cent. The power to issue silver is vested exclusively in the hands of government ; who have it, therefore, in their power to avoid throwing too much of it into circulation, and, consequently, to prevent its fusion, until the market price of silver shall have risen to above 5s. 6d. an ounce. This arrangement was censured in the debates on the question of re- turning to cash payments in 1819. It was contended, that the overvalua- tion of silver with respect to gold would render it the interest of every debtor to discharge his debts with silver, and that the gold coins would in consequence be driven from circulation, and exported to other countries. The result has shown that this opinion was altogether erroneous. Debt- ors cannot discharge their debts by silver payments, for it is only legal tender to the extent of 40s. ; and no creditor can be compelled, or would be disposed to take it inpayment of a larger debt, except at its real value. Those who wish for a further elucidation of this subject, may refer to Mr. Mushet's evidence in the Appendix to the Lords' 1 Report " On the Ex- pediency of the Bank's resuming Cash Payments," where it is discussed at great length, and in the most able manner. In the 18th of Edward III., the period when we begin to have authentic accounts of the gold coinage, a pound troy of gold bullion was coined into florins, of the value of <15. Of this sum only ^13 16s. 6d. were given to the person who brought the bullion to be coined : .1 3s. 6d. being re- tained as seignorage, of which 3s. 6d. went to the master, and^l to the king. But it appears, from the mint indentures, that the seignorage on the coinage of nobles for the same year amounted to only 8s. 4d. And, from this remote period to the accession of the Stuarts, with the exception of the coins issued in the 4th and 5th Edward IV. and the 34th, 36th, and 37th Henry VIII., the total charge of coining a pound weight of gold bull- ion seldom exceeded 7s. or 8s. money of the time. In the 2d James I., a pound weight of gold bullion was coined into <40 10s. ; a seignorage of - i, 40,000 00 Total, ,411,117 10 9 Mr. Ruddiman conjectures, apparently with considerable probability, that the value of the Scotch gold coins, and of the silver coins not brought in, amounted to about as much more. Much suspicion was entertained of the measure of a recoinage ; and that large proportion of the people who were hostile to the Union, and did not believe that it would be per- manent, brought very little money to the bank. A few only of the hoard- ed coins have been preserved, the far greater part having either been melted by the goldsmiths, or exported to other countries. (Preface to Anderson's Diplomata, p. 176.) Of Ireland. IRISH MONEY. The gold and silver coins of Great Britain and Ireland are now the same, and have been so for a considerable period. The rate, however, at which these coins used to circulate in Ireland, or their nomi- nal value as money of account, was 8 per cent, higher than in Great Britain. This difference of valuation, though attended with considerable inconvenience in adjusting the money transactions between the two coun- tries, subsisted from 1689 till 1825, when it was put an end to. For an account of the various species of metallic money which have at different times been current in Ireland, we must refer our readers to Mr. Simons's Essay on Irish Coins (originally printed at Dublin, in 1749, in 4to., and reprinted with some additions in 1810) ; a work pronounced by Mr. Hud- ing to be " the most valuable of all the publications on the coinage of any part of the United empire." (Annals of the Coinage, Preface, vol. i. p. 11.) Money. 123 Of Germany, <]rc. MONEY OF GERMANY, SPAIN, &c. A similar process of degradation had been universally carried on. " In many parts of Germany, the florin, which is still the integer, or money of account of those countries, was originally a gold coin, of the value of about 10s. of our present money (old coinage). It is now become a silver coin of the value of only 2Qd. ; and its present value, therefore, is only equal to a sixth part of what it was formerly. In Spain, the maravedi, which was in its origin a Moorish coin, and is still the money of account of that kingdom, was in ancient times most frequently made of gold. Le Blanc observed that, in 1220, the mar- avedi weighed 84 grains of gold, equal in value to about 14s. (old coinage) of our present money. But this maravedi, though its value is not quite the same in all the provinces of Spain, is now become a small copper coin, equal in general to only ffi z of an English penny ! In Portugal, the re, or reis, is become of no greater value than ^/ T of an English pen- ny ; it is so small that, in estimating its value in other coins, it is reckoned by hundreds and thousands. The moeda, or moidore, is equal to 4,800 reis ; and this little coin has now, in fact, no existence but in name. Such has been the fate of all these coins, and such is the present state of their depreciation." (Liverpool, On Coins, p. 111.) Of Russia. Raising of the Value of the Coin. RUSSIAN MONEY. The following, according to M. Storch, are the fluctuations in the weight and value of the rouble, or money unit of Rus- sia, since 1700. Wfiaht nf Value in Cur- Years. tteRoubi rent Roubles toie. -j. Ig21 Zolot. Dolia. Roll. Cop. Year 1700, . . ..-,:.. 11 40 2 70 From 1700 to 1718, . . . 5 67 1 35 " 1718 " 1731, . . . . 4 83 1 15 " 1731 " 1762, ... 5 16 1 22A " 1762 " 1821, .... 4 21 10 The principle of degradation has not, however, been uniformly acted upon. The quantity of bullion contained in coins of the same denomina- tion has sometimes, though rarely, been increased, and creditors enriched at the expense of their debtors. This method of swindling his subjects is said to have been first practised by Heliogabalus. The Roman citizens being bound to pay into the imperial treasury a certain number of pieces of gold, or aurei, the emperor, whose vices have become proverbial, to in- crease his means of dissipation, without appearing to add to the weight of the taxes, increased the quantity of metal contained in the aureus ; and thus obtained, by a fraudulent trick, what he might not have obtained by a fair and open proceeding. (Lamp. Vita. Alex. Severi, ca,p. 39. Per- haps Heliogabalus took the hint from Licinius, a freedman of Julius Caesar, who, in his government of the Gauls under .Augustus, divided the year into 124 Money. fourteen months instead of twelve, because the Gauls paid a certain monthly tribute. Dion Cassius, lib. 72.) In France, the value of the coins has been frequently raised. During the early part of the reign of Philip le Bel, who ascended the throne in 1285, the value of the coin had been reduced to such an extent as to occasion the most violent complaints on the part of the clergy and landholders, and generally of all that portion of the public whose incomes were not increased proportionably to the re- duction in the value of money. To appease this discontent, and in com- pliance with an injunction of the pope, the king at length consented to issue new coins, of the same denomination with those previously current, but which contained about three times the quantity of silver. This, how- ever, was merely shifting an oppressive burden from the shoulders of one class to those of another, less able to bear it. The degraded money hav- ing been in circulation for about sixteen years, by far the largest propor- tion of the existing contracts must have been adjusted with reference to it. No wonder, therefore, that debtors should have felt indignant at the shameful act of injustice done them by this enhancement of the value of money, and have refused to make good their engagements, otherwise than in money of the value of that which had been current when they were entered into. The laboring class, to whom every sudden change in the value of money is injurious, having joined the debtors in their opposition, they broke out into open rebellion. " The people," says Le Blanc, " be- ing reduced to despair, and having no longer any thing to care for, lost the respect due to the edict of his Majesty ; they pillaged the house of the master of the mint, who was believed to have been the chief adviser of the measure, besieged tho temple, in which the king lodged, and did all that an infuriated populace is capable of doing." (Traite Historique des Monnoyes de France, p. 190.) The sedition was ultimately sup- pressed ; but it is not mentioned whether any abatement was made, by authority, from the claims of the creditors in the contracts entered into when the light money was in circulation. It seems probable, however, from what is elsewhere mentioned by Le Blanc (Introduction, p. 30), that such was really the case. Increase of the Value of the English Coins in the Reign of Edward VI. The history of the French coinage affords several instances similar to the very remarkable one we have now brought under the notice of our readers ; but, in England, the new coinage in the last year of the reign of Edward VI. is the only instance in which the value of money has been augmented by the direct interference of government. Previously to the accession of Henry VIII., the pound of standard silver bullion, containing lloz. 2dwts. of pure silver, and 13dwts. of alloy, was coined into thirty- seven shillings and sixpence. But Henry not only increased the number of shillings coined out of a pound weight of silver, but also debased its pu- rity. The degradation was increased under his son and successor, Ed- ward VI., in the fifth year of whose reign, seventy-two shillings were coined out of a pound weight of bullion ; but as this bullion contained only three ounces of pure silver to nine ounces alloy, twenty of these shillings were Money. 125 only equal to 4s. 7f d. of our present money, including the seignorage. (Folkes's Table of English Coins, p. 34.) It appears, from the procla- mations issued at the time, and from other authentic documents, that this excessive reduction of the value of silver money had been productive of the greatest confusion. A maximum was set on the price of corn and other necessaries ; and letters were sent to the gentlemen of the different coun- ties desiring them to punish those who refused to carry their grain to mar- ket. But it was soon found to be quite impossible to remedy these disor- ders otherwise than by withdrawing the base money from circulation. This was accordingly resolved upon ; and, in 1552, new coins were is- sued, the silver of which was of the old standard of purity, and which, though less valuable than those in circulation, during the early part of the reign of Henry VIII., were above four times the value of a targe propor- tion of the coins of the same denomination that had been in circulation for some years before. It is certain, however, that such a rise in the value of money could not have taken place without occasioning the most violent commotions, had all the coins previously in circulation been debased. Equal injustice, it must be remembered, is always done to the poorest, and not least numer- ous class of society, by increasing the value of money, that is done to the wealthier classes by depressing it But, though government had been disposed to sanction so enormous an invasion of the right of prop- erty, it is altogether impossible that the country could have submitted to have had 400 or 450 per cent, added to its taxes and other public burdens, by a legerdemain trick of this kind, or that individuals would have con- sented to pay so much more than they had originally bargained for. In- stead of deserving praise for accomplishing such a measure, Edward VI., who began the reformation of the coins, and Elizabeth, by whom it was completed, would have justly forfeited the esteem of their subjects, and lost all their popularity. The truth is, however, that little or no change had been made, during all this period, in the value of the gold coins ; and there is, besides, abundance of evidence to show, that many of the old silver coins had remained in circulation. Now, as there is no mention made of the issue of the new coins having been attended with any incon- venience, it is nearly certain, as Mr. Harris has remarked, that, during the period of the debasement of the standard, individuals had regulated their contracts chiefly with reference to the gold or old silver coins ; or, which is the same thing, that " they had endeavoured, as well as they could, to keep by the standard, as it had been freed in the preceding times.' 1 '' (Harris, On Coins, part ii. p. 3.) We have been thus particular in examining this measure, because it has been much referred to. It is plain, however, that it can give no support to the arguments of those who appeal to it as affording a striking proof of the benefits which they affirm must'always result from restoring a debased or degraded currency to its original purity or weight. Invariability of value is the great desideratum in a currency. To elevate the standard after it has been for a considerable period depressed, is really not a meas- ure of justice, but the giving a new direction to injustice. It vitiates and falsifies the provisions in one set of contracts, in order properly to adjust those in some other set. 126 Money. This, however, as already remarked, is the only instance in which the government of England has ever interfered directly to enhance the value of money. In every other case, where they have tampered with the standard, it has been to lower its value, or, which comes to the same thing, to reduce their own debts and those of their subjects. Pernicious Effects of a Reduction of the Standard. It is unnecessary to enumerate in detail the various bad consequences that must have resulted from these successive changes in the standard of value. But, it deserves to be remarked, that an arbitrary reduction of the standard does not afford any real relief to the governments by whom it is practised. Their debts are, it is true, reduced proportionally to the re- duction in the value of the currency, but their revenues are, at the same time, reduced in the same proportion. A piece of money that has been degraded will not exchange for the same quantity of commodities that it previously did. To whatever extent the standard may be reduced, prices are very soon raised to the same extent. If the degradation be 10 per cent., government, as well as every one else, will, henceforth, be com- pelled to pay ^110 for commodities previously obtainable for 100. Hence to bring the same real value into the coffers of the treasury, it is necessary that taxation should be increased whenever the standard is di- minished ; a measure always odious, and sometimes impracticable. But a diminution of revenue is not the only bad effect which govern- ments experience from reducing the standard of the currency. A state which has degraded its money, and cheated its creditors, is unable to bor- row again on the same favorable terms as if it had acted with good faith. We cannot expect to enjoy the reputation of honesty at the same time that we are openly pocketing the booty earned by duplicity and fraud Those who lend money to knaves always stipulate for a proportionally high rate of interest. They must not only obtain as much as may be ob- tained from the most secure investments, but they must also obtain an ad- ditional rate or premium, to cover the risk they run in transacting with those who have given proofs of bad faith, and on whose promises no reli- ance can be placed. A degradation of the standard of value is, therefore, of all others, the most wretched resource of a bankrupt government. It will never, indeed, be resorted to, except by those who are alike unprinci- pled and ignorant. " It occasions," says Dr. Smith, " a general and most pernicions subversion of the fortunes of private people ; enriching, in most cases, the idle and profuse debtor at the expense of the frugal and indus- trious creditor ; and transporting a great part of the national capital from the hands which were likely to increase and improve it, to those which are likely to dissipate and destroy it. When it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes neces- sary for an individual to do so, a fair, open, and avowed bankruptcy, is always the measure which is both least dishonorable to the debtor, and least hurtful to the creditor. The honor of a state is surely very poorly pro- vided for, when, in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at Money. 127 the same time so utterly pernicious." ( Wealth of Nations, vol. iv. p. 42.) Some of the bad consequences resulting from a change in the value of money might, indeed, be obviated, by enacting, that the stipulations in all preceding contracts should be made good, not according to the present value of money, but to its value at the time when they were entered into. This principle, which is conformable to the just maxim of the civil law ( Valor monetce considerandus atque inspiciendus est, a tempore contractus, non autem a tempore solutionis), was acted upon, to a certain extent, at least, by the kings of France, during the Middle Ages. Ordonnances of Philip le Bel, Philip of Valois, and Charles VI., issued subsequently to their having increased the value of money, or, as the French historians term it, returned from the foible to the forte monnoie, are still extant, in which it is ordered, that all previous debts and contracts should be settled by reference to the previous standard. But though the same reason ex- isted, it does not appear that any such ordonnances were ever issued when the value of money was degraded. It is obvious, indeed, that no govern- ment could derive any advantage whatever from reducing the value of money, were it to order, as it is in justice bound to do, that all existing contracts should be adjusted by the old standard. Such a measure would reduce the revenue without reducing the incumbrances of the state ; whilst, by establishing a new standard of value, and unsettling all the notions of the public, it would open a door for the grossest abuses, and be productive of infinite confusion and disorder in the dealings of individuals. The odium and positive disadvantage attending the degradation of me- tallic money, appear to have at length induced most governments to abstain from it. But they have only renounced one mode of playing at fast and loose with the property of their subjects, to adopt another and a still more pernicious one. The injustice which was formerly done by diminishing the quantity of bullion contained in the coins of different countries, is now perpetrated with greater ease, and to a still more ruinous extent, by the depreciation of their paper currency. In the last volume of the Cours d Economic Politique of M. Storch, there is a very instructive account of the paper money of the different continental states. We can confidently recommend it as containing much useful information. From 1601 to 1797, on Changes made in the Standard. In the long period from 1601 to 1697, no change was made in the standard of money in this country. A project for enfeebling the standard had indeed been entertained, both in 1626 and 1695 ; but, in the former instance, it was quashed by the celebrated speech addressed by Sir Robert Cotton to the Lords of the Privy Council, and in the latter by the opposi- tion of Mr. Montague, then Chancellor of the Exchequer, in the House of Commons, and by the impression made by the writings of Mr. Locke, by whom the injustice of the scheme was admirably exposed, out of doors. It was reserved for Mr. Pitt to set aside a standard which had been pre- served inviolate for nearly two centuries. The Order in Council of the 25th February, 1797, and the acts of Parliament by which it was followed up, 128 Money. effected a total change in our ancient monetary system ; and, instead of the old standard, gave us the self-interested views and opinions of twenty' four irresponsible individuals. The circulation of Bank of England pa- per was secured, by its being exclusively issued in payment of the interest of the public debt, and by its also being received as cash in all payments into the exchequer ; but no attempt was made to sustain the value of this paper on a par with the value of gold or silver. Full power was given to the directors of the Bank to raise or depress the value of money, as their interest or caprice might suggest. They were enabled to exchange unlim- ited quantities of scraps of engraved paper, of the intrinsic worth, perhaps, of 5s. a quire, for as many, or the value of as many, hundreds of thou- sands of pounds. And, in such circumstances, our only wonder is, not that paper money became depreciated, but that its value was not more reduced, and that a still greater quantity of bank-notes were not thrust into circu- lation. Effect of the Restriction in 1797 in degrading the Value of Bank Paper. Extra- ordinary Resolution of the House of Commons. For the first three or four years after the restriction, the directors, una- ware, perhaps, of the nature of the immense power placed in their hands, seem to have regulated their issues nearly on the same principles that had regulated them while they were obliged to pay in coin. It appears from the Tables of the Price of Bullion, published by order of the House of Commons, that until 1801 bank-notes were on a par with gold. In 1801 and 1802, however, they were at a discount of from 8 to 7- per cent. ; but they again recovered their value ; and from 1803 to 1809, both inclu- sive, they were only at a discount of 2 13s. 6d. per cent. But in 1809 and 1810, the directors appear to have totally lost sight of every principle by which their issues had previously been governed. The average amount of bank-notes in circulation, which had never exceeded 17^- mill- ions, nor fallen short of 16 millions, in any one year, from 1802 to 1808, both inclusive, was in 1809 raised to 18,927,833; and, in 1810, to 22,541,523. The issues of country bank paper were increased in a still greater proportion ; and, as there was no corresponding increase in the business of the country, the discount on bank-notes rose from 2 13s. 6d., in 1809, to 13 9s. 6d. per cent, in 1810. The recommendation to return to cash payments, contained in the Report of the Bullion Commit- tee, presented to the House of Commons in 1810, appears to have given a slight check to the issues of the Bank. All apprehensions from this quarter were, however, speedily dissipated ; for in May, 181 1, when guineas were notoriously bought at a premium, and bank-notes were at an open discount, as compared with gold bullion, of upwards of ten per cent, the House of Commons not only refused to fix any certain period for reverting to cash payments, but actually voted a resolution, declaring that the pro- missory notes of the Bank of England had hitherto been, and were then, held to be, in public estimation, equivalent to the legal coin of the realm. This memorable resolution ; a resolution which took for granted that a part was equal to a whole ; that 90 and 100 were the same thing ; Money. 129 Bankruptcy of the Country Banks in 1814, 1815, and 1816, Cause of the Rise in the Value of Bank Paper. This memorable resolution ; a resolution which took for granted that a part was equal to a whole ; that 90 and 100 were the same thing ; relieved the bank from all uneasiness respecting the interference of Par- liament, and tempted the Directors to increase the amount of paper in cir- culation. The consequence was, that in 1812, it was at an average dis- count of 20i ; i n 1813, of 23 ; and, in 1814, of 25 per cent. This was the maximum of depreciation. The importation of foreign corn, subse- quent to the opening of the Dutch ports in 1814, having occasioned a great decline of the price of the principal article of agricultural produce, pro- duced an unprecedented degree of distress, first among the farmers, and latterly among the country bankers. It is estimated that, in 1814, 1815, and 1816, no fewer than 240 private banking companies either became altogether bankrupt, or, at least, stopped payment ; and the reduction that was thus occasioned in the quantity of bank notes in circulation, raised their value so rapidly, that, in October, 1816, the discount was reduced to 1 Ss. Id. per cent. In 1817 and 1818, the average discount on bank paper, as compared with gold, did not exceed 2 13s. 2 5 A.D. Anno Regni. s V. i| || il! | ! ll f* 2 e -9-i-t *>ij II S-go "g 1 * s ! !.-* s' fit t- C< 5?=" ^cS 5, *i a.3?3 oz.dts. s.d. s.d. s. d. s. d. 1066 Conquest, 11 2 100 1280 8 Edward L <( it 1 010 19 1 3\ 1300 28 " " ii n 1 3 1 2j 19 , . 1344 18 Edward HI. ii n 103 013 19 1 85 1349 23 " " ii ii 126 1 3 I 1 3 128 1356 30 " " ii ii 1 5 10 1 4 2 1 5 91 1394 18 Richard IL it ii 150 10 142 1 5 9^ 1401 3 Henry IV. ii ii 1 5 10 1 4 2 1 5 91 1421 9 Henry V. ii n 1 10 010 190 1 10 llf 1425 4 Henry VL ii ii 1 10 1 190 1 10 111 1464 4 Edward IV. ii ii 1 17 6 046 1 13 15 2J 1465 5 " " ii ii 1 17 6 046 1 13 15 2s 1470 49 HenrvVL n n 1 17 6 020 1 15 6 17 105 1482 22 Edwa'rdlV. it n 1 17 6 1 6 1 16 18 4? 1483 1 Rich. HI it it 1.17 6 016 1 16 18 45 1485 1 Henry VII. it ii 1 17 6 016 1 16 18 45 1509 1 tfenryVIIL n it 1 17 6 010 1 16 6 18 111 1527 18 " " ii ii 200 1 Of 1 18 11 18 ll| 250 010 240 2 14 1543 34 " " 10 280 080 280 2 4 4j 1545 36 " " 6 280 200 2 16 2 11 9 1546 37 " " 4 280 440 300 2 15 6 1547 1 Edward VL 4 280 440 300 2 15 6 1549 3 " " 6 3 12 400 340 2 19 2 1551 5 " " 3 3 12 ii ii ti 11 300 (C ii ii ii 1552 6 " " 11 1 300 1 2 19 2 19 3; 1553 1 Mary, 11 300 010 2 19 2 19 6 1560 2 Elizabeth, 11 2 300 016 2 18 6 2 18 6 1600 43 " " n it 320 020 300 300 H it ii ii 1604 2 James L ii ii 320 026 2 19 6 2 19 6 1626 2 Charles L it n 320 020 300 300 1666 18 Charles II. n n 320 000 3 2, 320 1717 3 George I. it ii 320 000 320 320 1816 56 George HI. ii n 360 040 Money. 133 ENGLISH MONEY. ACCOUNT OF THE ENGLISH GOLD COINS ; SHEWING THEIR VALUE ; THE SEIONOR- AGE OR PROFIT UPON THE COINAGE, AND THE PRICE PAID TO THE PUBLIC BY THE MINT, FOR THE POUND TROY OF STANDARD GOLD, PROM THE CONQUEST TO THE YEAR 1816. (THIS AND THE TWO FOLLOWING TABLES ARE TAKBN FROM PART II. OF ESSAYS ON MONEY, EXCHANGES, AND POLITICAL ECONOMY, by Henry James.) GOLD. 6 7 8 ' 9 10 ij V o 4 i's'^ S "2 =3 S 1 A. D. Anno Regni. $t s'S s? u s fc i |!K j Is *~ t^i o oS*> | a "i s> .2 a 0> S S v> >~ ia o 2> . .S~ R-Q i s !> Kji a; II Hi! ifO 1 1 cTts. gns. d. s. d. s. d. s. d. 1066 1280 Conquest, 8 Edward I. OQ it U . 1300 1344 2v 18 Edward III. 23 3j 13 3 4 084 13 15 12 10 8 1349 23 " " 33 1 23 I 33 . . . . . 1552 6 " " 23 3JU 36 029 86 17 3 . cc u 32 ) 33 030 83 17 83 17 1553 1560 1 Mary, 2 Elizabeth, 23 3j 23 3i 36 36 030 050 36 17 35 15 33 8 M c< 22 33 040 32 16 83 16 1600 43 " " 23 3j 36 10 10 36 . M cc cc c< 23 33 10 10 33 83 1604 2 James 1. 32 37 4 1 10 35 14 86 14 1626 2 Charles I. cc cc 41 1 1 6 39 18 7 89 18 7 1666 18 Charles II. cc u 44 10 000 44 10 44 10 1717 3 George I. cc cc 46 14 6 000 46 14 6 46 14 6 1816 56 George III. cc cc 46 14 6 000 46 14 6 46 14 6 64 134 Silver Coins. ENGLISH MONEY. ACCOUNT OP THE QUANTITY OP FINE SILVER COINED INTO 20s. OR THE POUND STERLING; THB QUANTITY OP STANDARD SILVER, OF lloz. 2dicts. FINE, AND ISdtcts. ALLOY, CON- TAINED IN 20s. OR THE POUND STERLING, AND THE QUANTITY OF STANDARD SILVER WHICH WAS DE- LIVERED TO THB MINT, BY THB PUBLIC, FOR 20s. OF SILVER MONEY, IN THE DIFFERENT REIGNS, FROM THE TIME OF EDWARD L TO THE REIGN OF GEORGE III. AND AN ACCOUNT OF THE PROPORTIONATE VALUE OF FINE GOLD TO FINE SILVER, ACCORDING TO THE NUMBER OF GRAINS CONTAINED IN THE COINS. CALCULATED IN GRAINS AND lOOOt/i PARTS TROY WEIGHT. SILVER. 5 *>0 3ij !* 13 fi *| fc : 8 fe "2 **** ip *B .H l|.s A.D. Anno Regni. -III V w *J ^fl 4!l VS'S 1*1 |^8 O 1 ** *Q El ill II tfc-3 2 S SP 5.8 1)0 - s> ^0 "M "** S tO Q 'C ^ O aS t 0* *3 V^ (N "S ^S "w *^ . 2 ^ s ??? i*f J *<; -S , o tS. FINE, AND l^dlttS. ALLOY, CONTAINED IN 20*. OR THB POUND STERLING, AND THE Q.UANTITY OF STANDARD GOLD WHICH WAS DELIVERED TO THE HINT, BY THE PUBLIC, FOB 20s. OP SILVER MONEY, IN THE DIFFERENT REIGNS, FROM THE TIMS op EDWARD I. TO THB REIGN OF GEORGE HI. AND AN ACCOUNT OP THE PROPORTIONATE VALUE OP FINE COLD TO FINE SILVER. ACCORDING TO THE PRICE PAID BY THE MINT TO THE PUBLIC. CAL- CULATED IN GRAINS AND lOOOlA PARTS TROY WEIGHT. GOLD. 5 .5 o ? f !. "13 o v 3".^ 2 s? ill K *-3 *"* be | J i ~ ** 1 8-1 9 fl ^ ** " A. D. Anno Regni ^1 8" Jl* C4 &*! til !!| w * i Hi *t| * * 3 . i> & y J Js""2 * o S |I|f 1 C S 3 "S Grains. Grain*. Grains. Gold to Silver. t Iflfifi Conouest i\j\j\j 1280 8 Edward I. ' ^ t , . '. '. '. 1344 18 Edward EL 40T998 445*080 459*625 1 tO 12-479 1349 23 " " 383*705 418-588 436*777 I " 11-741 1356 30 " " 358*145 390-682 399*561 1 " 11*286 1401 3 Henry IV. 358*125 390*682 397*303 1 " H'350 1421 9 Henry V. 322*312 351 613 356-963 1 " 10*527 1464 4 Edward IV. 257*850 281*291 319*648 1 " 10*331 1465 5 " " 238-750 260-454 273-109 1 " 11-963 1470 49 Henry VL 238-750 260*454 268-202 1 " 11-446 1482 22 Edward IV. 238*750 260*454 264'869 1 " 11*429 1509 1 Henry VIIL 238-750 260*454 261-909 1 " 11*400 1527 18 " " 2KT149 229*253 230*630 1 " 11*455 1543 34 ' " 191-666 209*090 218*181 1 " 12*000 1545 36 " " 176'000 192-000 209*454 1 " W714 1546 37 " " 160-000 174*645 209*454 1 " 10*000 1547 1 Edward VL 160-000 174*545 183-732 1 " 11*400 1549 3 " " 155-294 169*412 174*645 1 " 11*250 1 Vil 5 " " LiJtJ 1 u ti it n 160-000 174-545 , ^ 1552 6 " " 160-000 174*545 175*342 1 " 11*186 1553 1 Mary, 159-166 173-636 174*369 1 " 11*198 1560 2 Elizabeth, 160-000 174*545 175-609 I " 11*815 1600 43 " " 157'612 171*940 174-645 1 " 11*100 1604 2 James I. 141*935 154*838 161*344 1 " 1ST109 1626 2 Charles I. 128*780 140*487 144-255 1 " 13*431 1666 18 Charles II. 118*651 129*438 129*438 1 " 14*485 1717 3 George I. IIS^OOI 123*274 123'274 1 " 15*909 1816 56 George III. 113*001 123*274 123'274 . . 66 136 Money. SCOTS MONEY. ACCOUNT OF THE NUMBER OF POUNDS, SHILLINGS, AND PENNIES SCOTS. WHICH HAVE BEEN COINED OUT OF ONE POUND WEIGHT OF SlLVER, AT DIFFERENT TIMES ; WITH THE DE- GREE Of PURITY OF SUCH SILVER, OR ITS FINENESS FROM THE TEAR 1107 TO THE YEAR 1601. (From Cardonnell's NUJIISMATA SCOTLE, p. 24.) A. D. Anno Rtgni. Purity. Attoy. Value of money coined out of a, Ib. of silver. From oz. pw. oz. pw. 9. d. 1107 Alexander I. ~J David I. William to Alexander II. 11 2 18 1 Alexander III. 1296 John Baloil, From I 1306 to ^Robert L 11 3 18 1 1 1329 j 1366 David II. 38 11 2 18 150 1377 39 11 2 IS 194 From 1 1371 I Robert n. 11 2 18 194 to 1390 J 1393 Robert IE. 4 11 2 18 1 12 1424 James I. 19 11 2 18 1 17 6 1451 James II. 15 11 3 18 3 4 1456 20 11 2 18 4 16 1475 James IE. 16 11 2 18 704 1484 24 11 2 18 700 1488 1489 James IV. \ H 11 2 18 700 1529 James V. 16 11 i e 9 12 1544 Mary, 3 11 e 1 9 12 1556 14 11 9 1 13 1565 23 11 1 18 1567 James VL 1 11 1 13 1571 5 9 3 16 14 1576 10 8 4 16 14 1579 13 11 1 22 1581 15 11 1 24 1597 31 11 1 30 1601 35 11 1 36 ENGLISH COINAGE. The first Coinage in England was under the Romans at Camulodunum, or CbJ- cheater. English Coin was of different shapes, as square, oblong, and round, until the middle ages, when round Coin only was used. 1257. The first Gold Coin struck. \357. Gold Florin struck. Edward III. 494, Old Sovereigns first minted. 503. Shillings first coined. 1553. Crowns and Half-Crowns. 560. Irish Shillings. 631. Modern Milling introduced. 665. Half-pence and Farthings. 67 1673. Guineas first corned. 1673. Double Guineas " 1673. Five Guineas '' 1673. Half-Guineas " 1716. Quarter-Guineas. 3Geo. m 1797. Seven Shilling Pieces Coined. 1797. Two- Penny Copper Pieces " 1816. Sovereigns. New Coinage. Money. 137 SCOTS MONEY. ACCOUNT OF THE NUMBER OP POUNDS, SHILLINGS, AND PENNIES SCOTS, WHICH HAVE BEEN COINED OUT OF ONE POUND WEIGHT OP GOLD ; WITH THE DEGREE OF THEIR PURITY, AND THE PROPORTION THAT GOLD BORE TO THE SILVER. A.D. Anno Regm. Fineness. Alloy. Value of the. coin coined out of one, pound of gold. Pound of pure gold wft0 1,411,300 1,375,900 1,362,700 5,070,500 r,.r,7!t,7" 4,905,000 4,363,600 -- Trs. 1830 ls:;t IS.T, Large Notes. U8&600 1,684,400 1,000,600 1,623,400 moo Small Notes. 1.886400 1219,000 1,472.300 1,363,300 1^40,800 1/187(400 Post Bill*. I Total ATer. i tendvJi -i 1,147,700 1,036,000 1,038,900 82,700 768,600 638,200 8,918,000 4,068,100 4,016,600 3,634,600 8.638,900 8,429,800 188 Paper-Xoney. CHAPTER VHI. FOREIGN BANKS. IT would far exceed our limits to enter into any detailed statements with respect to the banks and banking systems of foreign countries ; we shall, therefore, confine ourselves to a brief notice of such banks as have been most celebrated, or are at present of the greatest importance. Bank of Venice. The Bank of Venice was the most ancient bank in Europe. Neither its date nor the circumstances which led to its establishment are exactly known. Historians inform us that in 1171, the republic, being hard pressed for money, levied a forced contribution on the richest citizens, giving them in return a perpetual annuity at the rate of four per cent. An office was established for the payment of this interest, which, in the sequel, be- came the Bank of Venice. This might be effected as follows : The inter- est on the loan to government, being paid punctually, every claim register- ed in the books of the office would be considered as a productive capital ; and these claims, or the right of receiving the annuity accruing thereon, must soon have been transferred, by demise or cession, from one person to another. This practice would naturally suggest to holders of stock the simple and easy method of discharging their mutual debts by transfers on the office books, and, as soon as they became sensible of the advantages to be derived from this method of accounting, bank-money was invented. The Bank of Venice was essentially a deposit bank. Though estab- lished without a capital, its bills bore at all times an agio, or premium, above the current money of the republic. The invasion of the French, in 1797, occasioned the rum of this establishment. Bank of Amsterdam. The Bank of Amsterdam was founded in 1609, on strictly commercial principles and views, and not to afford any assistance, or to commix with the finances of the state. Amsterdam was then the great entrepot of the commerce of the world, and of course the coins of all Europe passed cur- rent in it. Many of them, however, were so worn and defaced as to re- duce their general average value to about nine per cent, less than their mint value ; and, in consequence, the new coins were immediately melted down and exported. The currency of the city was thus exposed to great fluctuations ; and it was chiefly to remedy this inconvenience, and to fix the value or par of the current money of the country, that the merchants of Amsterdam established " a bank " on the model of that of Venice. Its first capital was formed of Spanish ducats, or ducatoons, a silver coin which Foreign Banks. 180 Spain had struck in the war with Holland, and with which the tide of com- merce had enriched the country it was formed to overthrow ! The bank afterwards accepted the coins of all countries, worn or new, at their intrin- sic value, and made its own bank-money payable in standard coin of the country, of full weight, deducting a " brassage " for the expense of coin- age, and giving a credit on its books, or " bank-money," for the deposits. The Bank of Amsterdam professed not to lend out any part of the specie deposited with it, but to keep in its coffers all that was inscribed on its books. In 1672, when Louis XIV. penetrated to Utrecht, almost every one who had an account with the bank demanded his deposit, and these were paid off so readily, that no suspicion could exist as to the fidelity of the administration. Many of the coins then brought forth, bore marks of the conflagration which happened at the H6tel de Ville, soon after the establishment of the bank. This good faith was maintained till about the middle of the last century, when the managers secretly lent part of their bullion to the East India Company and government. The usual " oaths of office " were taken by a religious magistracy, or rather by the magis- tracy of a religious people, that all was safe ; and the good people of Holland believed, as an article of their creed, that every florin which circu- lated as bank-money, had its metallic constituent in the treasury of the bank, sealed up, and secured by oaths, honesty, and good policy. This blind confidence was dissipated in December, 1790, by a declaration that the Bank would retain ten per cent, of all deposits, and would return none of a less amount than 2,500 florins. Even this was submitted to and forgiven. But four years afterwards, on the invasion of the French, the bank was obliged to declare that it had advanced to the States of Holland and West Friesland, and the East India Company, more than 10,500,000 florins, which sum they were unable to make up to their depositors, to whom, however, they assigned their claims on the States and the Company. Bank-money, which previously bore an agio of five per cent., immediately fell to sixteen per cent, below current money. This epoch marked the fall of an institution which had long enjoyed an unlimited credit, and had rendered the greatest services. The amount of the treasure in the vaults of the bank, in 1755, was estimated by Mr. Hope at 33,000,000 of florins. (Storch, Cows ^Economic Politique, torn, iv.) Sank of Hamburg. The Bank of Hamburg was established in 1619, on the model of that of Amsterdam. It is a deposit bank, and its affairs are managed according to a system that insures the fullest publicity. It receives no deposits in coin, but only in bullion of a certain degree of fineness. It charges itself with the bullion at the rate of 442 schillings the mark, and issues at the rate of 444 schillings, being a charge of four-ninths, or nearly one-half per cent, for its retention. It advances money on jewels to three-fourths ot value. The city is answerable for all pledges deposited with the bank ; they may be sold by auction if they remain one year and six weeks w out any interest being paid. If the value be not claimed within three 190 Paper-Money. years, it is forfeited to the poor. This bank is universally admitted to be one of the best managed in Europe. Bank of France. !s>4, f-j evn/fC~*9 AHiw* A/yiW C?t^s-iu The Bank of France was founded in 1803. The exclusive privilege of issu- ing notes payable to bearer was granted to it for 40 years. The capital of the bank consisted at first of 45,000,000 francs, but it was subsequently increased to 90,000,000 francs, divided into 90,000 shares, or actions, of 1,000 francs each. Of these shares, 67,900 are in the hands of the public ; 22,100, being purchased up by the bank, form part of her capital. The notes issued by the bank are for 1,000 and 500 francs. The dividend varies from six to ten and a half per cent., the latter being its amount in 1837 ; and there is, be- sides, a reserve retained from the profits which is vested in the five per cents. A bonus of 200 francs a share was paid out of this reserve to the shareholders in 1820. No bills are discounted that have more than three months to run. The customary rate of discount is four per cent., but it varies according to circumstances. The discounts in 1834 amounted to 306,603,000 francs, but they vary materially from year to year, and are sometimes more than double this amount. The bank is obliged to open a compte courant for every one who requires it ; and performs services for those who have such accounts, similar to those rendered by the private banks of London to their custom- ers. She is not allowed to charge any commission upon current accounts, so that her only remuneration arises out of the use of the money placed in her hands by the individuals whose payments she makes. This branch of the business is said not to be profitable. There are about 1,600 accounts current at the bank ; and of the entire expenses of the establishment, amounting to about 900,000 francs a year, two-thirds are said to be incurred in this department. The bank advances money on pledges of different kinds, such as foreign coin or bullion, government or other securities, etc. It also undertakes the care of valuable articles, as plate, jewels, bills, title- deeds, etc. The charge is one-eighth per cent, of the value of each deposit for every period of six months or under. The average circulation of bank notes in 1834 was 207,321,000 francs, the price of a share of the bank's stock on the 8th of January, 1838, was 2,555 francs, a proof that its condition is believed to be eminently flourishing. The administration of the bank is vested in a council general of twenty members, viz. seventeen regents, and three censors, who are nominated by two hundred of the principal proprietors. The king appoints the governor and deputy governor. The first must be possessed of an hundred and fifty, and the latter of fifty shares. A compte rendu is annually published, and a report by the censors, which together give a very full exposition of the affairs of the bank. The institution is flourishing, and enjoys unlimited credit. (For further details with respect to the Bank of France, see Storch, Cours d'Economie Politigue, Paris, 1823, torn. iv. pp. 168-180 ; and the Comptes Bendus of the different years.) For further information as to continental banks and paper-money, the reader is referred to the interesting chapter on that subject in the fourth volume of the Cours d'Economie Politique of M. Storch, and to M'Cul- loch's Commercial Dictionary. Banking in the United States. CHAPTER IX. BANKING IN THE UNITED STATES. THE system of banking in the United States has recently attracted a great deal of attention in this country. The Bank of the United States was incorporated by Congress in 1816, with a capital of 35,000,000 dol- lars, for the issue of notes and the transacting of ordinary banking business. Its head office was in Philadelphia, but it had branches that carried on an extensive business in most considerable towns of the Union. The charter was limited to twenty years' duration ; and the question, whether it should be renewed, was debated with extraordinary vehemence in all parts of America. The late president, General Jackson, was violently opposed to the reincorporating of the Bank, and rejected a bill for that purpose, that had been sanctioned by the other two branches of the legislature. A ma- jority of congress having come round to the president's views, the charter was allowed to expire. It has since, however, received a new charter from the State of Pennsylvania. But this merely enables it to carry on business in that State ; though it may obtain, and has in fact already obtained, leave from some of the other States to establish branches within their limits. It is, however, no longer a national or government bank ; but it is now, as formerly, the first moneyed institution of the new world, and hi this respect, indeed, is second only to the Bank of England. "We cannot help thinking that the American government acted through- out the whole of this affair on the most erroneous views. Banking hi America is, if possible, in a still worse condition than hi England ; and there can hardly be a doubt that the establishment of the Bank of the United States was of signal service to the republic, by affording a currency of undoubted solidity, readily accepted in all parts of the Union, and by its operating as a salutary check on the conduct of other banks. General Jackson, and the party of which he was the head, have, or affect to have, a great horror of paper-money. But it would be practising too much on the patience of our readers, were we to endeavor to prove by argument the great utility, not to say necessity, of a paper currency of some sort or other, to all great commercial countries like the United States. To suppose that it should be altogether dispensed with, is as absurd as it would be to suppose that they should dispense with their unproved roads and carriages. A wise statesman should not attempt to suppress what is indispensable, but should exert himself to obviate its defects, and to make it as suitable as it can be made to the objects in view. This, however, General Jackson and his party have not done. On the contrary, they declared war against the only unexceptionable bank in the Union, and to injure it gave full scope to the rest. Hence, instead of obviating any one of the gross defects in- herent in the existing banking system, the proceedings of General Jackson have aggravated and multiplied them in no common degree ; and it is now infected with every vice that it seems possible can belong to banking. The American banks are all joint-stock associations. But instead of the 192 Paper-Money. partners being liable, as in England, for the whole amount of the debts o\ the banks, they are in general liable only for the amount of their shares, or for some fixed multiple thereof. It is needless to dwell on the tempta- tion to commit fraud held out by this system, which has not a single coun- tervailing advantage to recommend it. The worthlessness of the plan on which the banks were founded was evinced by the fact, that between 1811 and the 1st of May, 1830, no fewer than a hundred and sixty-five banks became altogether bankrupt, many of them paying only an insignificant dividend ; and this exclusive of a much greater number that stopped for a while, and afterwards resumed payments. The wide-spread mischief re- sulting from such a state of things has led to the devising of various com- plicated schemes for insuring the stability and prudent management of banks ; but as they all involve regulations which it is impossible to enforce, they are practically worse than useless. In Massachusetts, for example, it is provided that no bank for the issue of notes can go into operation in any way, until at least half its capital stock be paid in gold and silver into the bank, and be actually existing in its coffers, and seen in them by inspectors appointed for that purpose ; and the cashier of every bank is bound to make specific returns once a year of its debts and assets, on being required to do so by the Secretary of State. But our readers need hardly be told, that these elaborately contrived regulations are really good for nothing, unless it be to afford an easy mode of cheating and defrauding the public. Instances have occurred of banks having borrowed an amount of dollars equal to half their capital for a single day, and of such dollars having been examined by the inspectors appointed for that purpose, and reported by them, and sworn by a majority of the directors, to be the first instalment paid by the stockholders of the bank, and intended to remain in it. ( Gouge's Paper-Money and Banking in the United States, part ii. p. 157.) We do not of course imagine that such disgraceful instances can be of common occurrence ; but what is to be thought of a system which permits a company for the issue of paper-money, founded on such an abominable fraud, to en- ter on business with a sort of public attestation of its respectability ? The publicity, too, to which the American banks are subject is injurious rather than otherwise. Those who are so disposed may easily manufacture such returns as they think most suitable to their views ; and the more respecta- ble banks endeavor, for a month or two previously to the period when they have to make their returns, to increase the amount of bullion in their cof- fers, by temporary loans and all manner of devices. The whole system is, in fact, bottomed on the most vicious principles. But it is unnecessary, after what occurred in 1836 and 1837, to insist further upon the gross and glaring defects of American banking. Perhaps no instance is to be found in the history of commerce, of such a wanton over-issue of paper as took place in the United States in 1835 and 1836. The result is known to every body ; the revulsion to which this over-issue necessarily led having, in May, 1837, compelled every bank in the Union, without we believe a single exception, to stop payments. Owing to the privilege claimed by the different States, and exercised without interruption from the Revolution downwards, it is, we fear, impos- sible to effect the suppression of local paper in America, or to establish a paper currency which should at all times vary in amount and value, as Banking in the United States. 193 if it were metallic. But the States have it in their power to do that which is next best ; they may compel all banks which issue notes to give security for their issues. This, though it would not prevent destructive oscillations in the amount and value of the currency, would, at all events, prevent those ruinous and ever-recurring stoppages and bankruptcies of the issuers of paper-money, that render the American banking system one of the severest scourges to which any people was ever subjected. Com- mon sense and experience alike demonstrate the inefficacy of all the regu- lations enacted by the American legislature to prevent the abuse of bank- ing. It is in vain for them to lay it down that the issues shall never exceed a certain proportion of the capital of the bank, etc. Such regulations are all very well, provided the banks choose to respect them ; but there are no means whatever of insuring their observance ; and their only effect is to make the public look for protection and security to what is altogether impotent and worthless for any good purpose. The suppression of local issues is indispensable, in order to make a paper currency what it ought to be. If, however, this be impossible in America, there is nothing left but to take security from the issuers of notes. All schemes for the improve- ment of banks, by making regulations as to the proportion of their issues, and advances to their bullion, capital, etc., are downright delusion and quackery. 194 Paper-Money. 5 rr 09 CO 8 2 3 b - ^ L I- 9 2 ox ss w 5 U5 N CM Q OS 00 t- OS I- r-< OS CO CO CS O OO O> * * i-l O O> 03 d I-I IN I ^ COO C4 ^ it rH kO O iH D t- 'H CO 00 T* O3 CO IO iH CO Tit CJ N r-l N t- iH " oooor-i *O ~ t 'V* ^ T ~V^ ^'-^ CM ffcf^co" of csToo" 588SSS -LOSt-rHt- *3 Jl QO "C^^OiOr-*t- ^CCOOu5i p i-^ *CD i-?r*t^< -*"cf i-Tr COCO lO CO O 00 <* CO CO -^ r-4 CO T* f-l .jCCO ' ' - * a New Work on Banking. 1 LAWSON'S EARLY HISTORY OF BANKING. Contained in the Bankers' Magazine, 1851 - 52. THE HISTORY OF BANKING ; WITH A COMPREHENSIVE ACCOUNT OF THE ORIGIN, RISE, AND PROGRESS OF THE BANKS OF ENGLAND, IRELAND, AND SCOTLAND. By WILLIAM JOHN LAWSON. London : Richard Bentley. WITHIN the last few years, and even since the establishment of our Magazine, the literature of bank- ing has assumed a different character from that which it previously presented. The race of currency essayists has given place to the historians and statists. We are no longer inundated by pamptilels on the national debt and new systems of currency ; and the old race of writers, who exhausted their own powers and their readers' patience in endeavoring to solve the problem, when the national debt would or could be extinguished, have now given place to a more interesting class of authors, who make facts and statistics the groundwork of their labors. We say nothing in disparagement of the old currency pamphleteers. Although they materially assisted in rendering "the currency question" a bugbear to those who had no hobby of their own on the subject, they did good service in the cause of truth by keeping the question continually before the public; and it would ill become those who are now benefit- ing by their labors, to disparage their exertions. But we confess we would rather have a few such works as Francis's "History of the Bank of England," and the volume before us, than many hundred volumes of the essays on banking and the currency which have previously been issued. Mr. Lawson has given us a very interesting volume, as his contribution to the History of Banking. He has taken great pains to make his work accurate ; and as it is the result of many years' labor and re- search, it possesses a higher value than could be claimed for a more ephemeral publication. He presents us with a good general view of the state of banking, and incidentally of commerce also, from the earliest periods to the present time; and he has interwoven his facts so pleasantly with anecdotal narrative, that the work will be found interesting by all classes of readers. London Bankers' Magazine. THE HISTORY OF BANKING ; WITH A COMPREHENSIVE ACCOUNT OF THE ORIGIN, RISE, AND PROGRESS OF THE BANKS OF ENGLAND, IRELAND, AND SCOTLAND. By WILLIAM J. LAWSON. From the London Spectator, September 23, 1830. THIS volume has a wider range than some late books on banks and banking, or than iuown title would imply. Taxes, and coin to pay them with, have existed in this country since the time of the Roman*. As soon as there is sufficient order in society (lawless as it still may be) to warrant the journey* of a commercial traveller, the money-changer springs up in large towns ; for without him a man might be In the position of Midas, and starve with gold and silver in his possession, or be fleeced more completely by the amateur than by the regular dealer, as indeed is usually the case. How credit original** i* not easily told ; its beginning, like other indispensable acts, is lost in the lapw of age*. But credit proper-goods " upon tick " - perhaps arose nillywilly ; those took " who had the power," and *aii- fied their conscience with a promise to pay. Banking proper the deposit of valuable* for security, la be returned on demand originated in trust, in the confidence the depositor felt in the honor of the per- son trusted. A money-order was perhaps antecedent to the money-changer, and if not anterior to ing itself, was anterior to it as a general accomplishment; a ring or other token answering the purpose of'the modern check. The bill of exchange has been attributed by many, including David Hume, li- the persecution of the Jews during the Middle Ages. That it had an Oriental origin I* probable, but the Lawsori's History of Banking. thing itself must have been nearly contemporary with distant trade and deposited valuables. When the first money-order was transferred by the necessity or convenience of the holder, there was essentially a bill of exchange, though a modern lawyer or bill-broker might say no, on account of its want of form. As nations grew richer, trade increased, and law as a parallel cause was better enforced ; credit, de- posits, and that substitute for ready money, a bill of exchange, increased too ; till the money-changer and goldsmith passed into the banker, and the law of bills and bankers' checks was established on the usages of trade. To effect this, took many ages in all countries ; banking was practised in Italy some centuries before it was established in England ; efforts were made by far-seeing men or by premature pro- jectors to force public banks in England, more than half a century before the wants of the general public permitted success. The real growth of the system, when society was ripe for it, is read in the history of the house of Smith, Payne, and Smith. Of all these topics of ancient coins and coinage, primitive money-changing, bills of exchange, and banking in this country Mr. Lawson gives what he calls a comprehensive account ; but which strikes us as being rather a succinct summary, for it is not distinguished by much grasp or completeness. These things are followed by an elaborate history of the Bank of England, more legal and commercial than personal and anecdotal. English private banking in town and country succeeds to the story of the the Bank; next comes an account of the modern Joint-Stock Banks ; and then the history of Scotch and Irish banking. Of late years several works upon banking have appeared, whose main subject was similar to Mr. Lawson's ; so that its leading outlines are not very new. Its greater range of topics and its peculiar treatment, however, give it some variety and even subordinate novelty. It is not so light as Francis's " History of the Bank of England," and some other books limited to stories, anecdotes, and strange in- cidents. If not so informing about the arcana of banking business, or so homogeneous in its treatment, as Gilbart's "History of Banking," its topics are somewhat loftier, involving ministerial and Parlia- mentary events. Mr. Lawson himself is a practical banker, who has lived since he left the Blue-Coat School in the at- mosphere of the " shop." His attention has been directed to the traditions of the craft, with which he varies his narrative. CIRCULAR TO BANKING INSTITUTIONS. THE Publisher of the Bankers 1 Magazine gives notice that the following important and interesting works will be embodied in " T/ie Bankers' Magazine and Statistical Register" for the year beginning July, 1851, and ending June, 1852 : I. New Varieties of Gold and Silver Coins and Bullion, with important details relating to the Coinage, Rules of the Mint, &c. By JACOB R. ECKFELDT and W. E. DUBOIS, Assayera of the United States Mint. II. The American Law of Banking. A Synopsis of the Decisions of the higher Courts of every State in the Union, upon the subjects of Banking, Bills of Exchange, Promissory Notes, Damages on Bills, Usury, Notaries Public, &c. The decisions of eih State will be arranged by themselves, com- mencing with Maine; to be followed in order by New Hampshire, Vermont, Massachusetts, Connecti- cut, New York, &c. HI. History of Banking and Currency. By W. J. LAWSON, Esq. A recent English Work. IV. Historical Sketches of the Early Currency among the American Colonies. V. Gilbart's Practical Treatise on Banking, concluded. The Second American Edition of this work, entire (470 pages), may be had of booksellers throughout the United States. The Bankers' Magazine is now published monthly, 84 pages, octavo, at Five Dollars per annum. By .he new postage law of the United States, the postage on this work is essentially reduced. The editor desires all communications and subscriptions to be forwarded per mail, and not by Express, J. SMITH ROMANS,. EDITOR BANKERS' MASAZINB, 111 Washington Street, Boston TO BANK OFFICERS. ONE HUNDRED DOLLARS PREMIUM Will be given by the editor of the Bankers' Magazine, for the best Article under the following head : Suggestions to Young Cashiers on the Duties of their Profession. CONDITIONS. 1. Communications will be received that have been written by the Presidents, Cash- iers, or other officers of Banks ; and from none others. 2. Communications intended for the Prize Essay, should be sealed and forwarded to the Editor of the Bankers' Magazine, so as to reach him on or before November 15th, accompanied by a sealed Note, containing the name of the writer. 3. The Committee of Adjudication will be named in the November No. They will decide as to the merits of the respective communications, without knowing the names of the Authors. 4. Communications will be received until November loth; and the article that shall be decided to be the best, will be inserted in the January No. of the Bcmkert' Magazine. 5. The Editor reserves to himself the privilege of publishing, at other periods, the Articles that shall be rejected by the Committee. It is suggested to those Bank Officers who are disposed to write for the Premium, that the article should not make more than twenty -five, nor less than ten, printed pages of the Banker's Magazine. ADDRESS- J. SMITH HOMANS, EDITOR BANKERS' MAGAZINE, 111 Washington St., Boston, or 50 Wall St., .Veto York. NOTICE. The following Nos. of the Bankers' Magazine mre out of print. Those persons who have one or more of the Nos. and do not wish to keep them, will confer a favor on the Publisher by sending such Nos. to him. Fifty cents will be allowed for either of the following, payable in works issued by the undersigned, 3. SMITH HOMANS, BO-JTOX. Viz: July, August, September, October, 1319; October, 1816; Jinu iry, March, April, July, 1817. We have concluded to Stereotype the present Volume of the Banker*' Magaiine, and therefore omit the Stock Tables which were issued in 1853. Copious information upon the subject of Stocks and Stock Operations will be found in Willis A Go's Bn'r Note List, published at J1.59 per annum. FIVE BANKING BOOKS FOR FIVE DOLLARS. Recent works on Banking, for the use of Presidents, Cashiers, Tellers, and other Bank Officers, and for Directors of Banks, Insurance Companies, Public Libraries *c. : 1. Gilbart on Banking, from the fifth London Edition, 1 vol. 8ro.. 470 pp. J2.50 2. McCulloch's Essays on Exchange, Interest, Money, Coins and Bullion, . .7-5 3. The Banker's Common Place Book * 4. Chronicles and Characters of the Stock Exchange, 75 5. The Bankers' Almanac for 18-51 Lawsorfs History of Banking. THE EARLY HISTORY OF BANKING. THE HISTORY OF BANKING ; WITH A COMPREHENSIVE ACCOUNT OF THE ORIGIN, RISE, AND PROGRESS OF THE BANKS OF ENGLAND, IRELAND, AND SCOTLAND. By WILLIAM JOHN LAWSON. "The Bank of England is to the Agriculture, Commerce, and Finance of Great Britain, a SUN; and the CIRCULATION of so many millions of its paper is the BASIS on which its convenience, property, and safety have hitherto rested." SIR FRANCIS BARING. The whole of this work will be contained in the Bankers' Magazine for 1351 -52. CONTENTS. - CHAPTER I. INTRODUCTION. Gold and Silver substitutes for Barter. William the Conqueror introduces into England the terms Pounds, Shillings, and Pence. A Review of the Prerogatives of the Crown in the Matter of the Coinage. ' Early Establishment of Mints. Origin of the term Sterling. Early Standard of our Coins. Encouragement of the Coinage by Charles the Second. John Roelier and Thomas Simon. Trial Piece arid Petition of the latter. Attempt to deteriorate the Coinage by Charles the First. Trial of the Fix. CHAPTER II. ORIGIN OP BANKS IN ENGLAND. First Establishment of the Exchequer. Its Functions as a Bank. Nature of Exchequer Bills. Revenues of the Crown originally paid in Kind. The Brotherhood of St. Thomas a-Becket incorporated. The Merchants of the Steel Yard incorporated. Some Account of the Cambium Regis, or Royal Office of Exchange Antiquity of the Company of Moneyers. Exchanges as originally practised by the Jews. Introduction of the Jews into England by William the Conqueror. Their Functions as Bankers. Their Expulsion. Origin of the term Bankrupt. Introduction of the Lombards into Eng- land as Bankers. Many of them banished. First Legalizing of Interest of Money by Act of Parlia- ment. Variations in the Rate of Interest. Sir Josiah Child's Description of the Effect of Lowering the Rate of Interest. CHAPTER III. ON BILLS OF EXCHANGE. Introduction of Bills of Exchange. First Use made of them in England. Form of a Bill in the year 1235. Copy of a Bill in 1589. Modern Form introduced by the Goldsmiths. Negotiating of Foreign Bills a Royal Prerogative. legalizing of Bills of Exchange, 9 and 10 William the Third. Nature of Bills of Exchange. Difference between Bank-Notes and Bills of Exchange. Difference be- tween Bankers' Bills and Mercantile Bills of Exchange. On Days of Grace. On Foreign Bills and Contents. Exchanges. Contrast between the Trade of England with America, and that of other Countries Blackstone's Definition of a Bill of Exchange -Sir John Bayley on Bills of Exchange, Promissory Notes, and Checks. The Laws and Customs respecting them. The late Mr. Rothschild. Mr. ROM and " Rothschild's Pillar." CHAPTER IV. FOUNDATION OF THB BANK OP ENGLAND. Origin of the Bank of England. - Debates in Parliament respecting the Ban*. -Act for establishing the Bank passed 1694 Directors chosen. Commence active Operations at Grocers' Hall in the Poultry. Petition to the House of Commons to dissolve the Bank rejected. Difficulties of the infant Bank. Advertise for Customers. Issue Sealed Bills bearing Interest. Obtain the exclusive Privilege of Banking in 1708. First Issue of Bank Post Bills. Singular Trial respecting a Bank-Note. First Execution for Forgery of Bank-Notes, 1758. A Military Force first sent to guard the Bank. Unclaimed Dividends the Subject of Dispute between the Government and the Bank. Settlement of the Question. First Issue of Five-Pound Notes. Difficulties of the Bank in 1795. Alarming State of their Affairs. Order in Council authorising the Bank to refuse Gold for its Notes. Issue of One and Two Pound Notes. Report on the Affairs of the Bank. Proposals for a new Bank. The Bank con tribute 200,000 towards the Expense of the War. CHAPTER V. CONTINUATION OF THB HISTORY op TH BANK. Bank obtain a Renewal of their Charter to 1833. Consideration given for the same. A Bank Clerk defrauds the Corporation of 300,000. His Trial and ingenious Defence. Bank issue Spanish Dollars. Bullion Committee 1810. Penalty for Selling Gold Coin. Bank issue 3t. and It. Gd. Silver Tokens. Act withdrawing the Tokens. Issue of New Coin of Gold and Silver. Summary of the Acts on the Restriction of Cash Payments. Peel's Bill. Consequences thereof. Panic among the Bankers. Description of the Panic. by a Bank Director. Schemes and Bubbles of 1824 and 182S. Opposition of the Bank to the Government Proposition to improve the Banking System. Act legalizing the Forma- tion of Joint Stock Banks. Establishment of Branches by the Bank of England. Correspondence on renewing the Charter, 1833. Result thereof. Regulations of the Bank rendered impracticable Loan of 20,000,000 to Emancipate the Slaves. Renewal of the Bank Charter, 1844. Opinions respecting the Bank being the sole Bank of Issue. Copy of the Act 7 and 8 Vic. cap. 32. CHAPTER VI. ON TBI BUSINESS OP ram BANK. The Bank commence Business in Grocers' Hall. Build a new Bank. Description of the Building, and its subsequent Enlargement. Allowance made to the Bank by Government. Retirement of Mr. Abraham Newland. Commissioners appointed to improve the Style of Bank Notes. How manufac- tured. A singular Trial caused by a Note. Account of outstanding Bank-Notes in 1832. The Thou- nand-Pound Note and the Bank Clerk. Losses sustained by the Bank. Great Profits of the Bank, and whence derived. Description of the Dead Weight. Business of the Bank. How divided. Number of Persons officially employed. Annual Election of all the Officer* of the Bank. Class of Proprietors from whom Directors are chosen. Uniform Integrity of Directors In the Discharge of their Duty. Scale of Votes at General Courts. Management of the Aflairs of the Bank exclusively !n the Directors. Mode of declaring Dividends on Bank Stock. The Bank compelled to publish a Stau of their Affairs Nature of the Transactions of the Bank with the Exchequer, as described by Abra- ham Newland. -Origin and Progress of the National Debt. Dr. Price on Reversionary Annuiito. Stockbrokers. Speculating in the Funds. Bulls, Bears, and Lame Ducks. Origin of the Sinking Fund, and its final Extinction. - Mode of providing for the Dividends by Government -General Plan of Business. The late Mr. Rippon, Chief Cashier of the Bank. Contents. CHAPTER X. ON IRISH BANKING. Flourishing State of Ireland in the Time of James the First. Injurious Restrictions on the Trade of Ireland. The Woollen Manufactures of Ireland suppressed by the English Government. Affecting Address from Ireland to England on the Commercial Restraints of the former. Absenteeism, a Crying Evil in Ireland. Coining of Irish Money in the Reign of King John. Shameful Depreciation of the Currency by King James the Second. Another Attempt made to lessen the Value of the Coin by Wood. Dean Swift and Drapier's Letters. The Principal Merchants in Dublin petition the Irish House of Commons for Permission to establish a Bank in 1695. Its Rejection. Another Attempt in 1720 to form a Bank alike unsuccessful. Curious Resolutions passed by the Irish Parliament on rejecting this Bank. On the Laws of Partnership in Ireland. Absurd Legislative Restrictions imposed on Bankers. Some Account of the Failure of several Irish Banks previous to the Formation of the Bank of Ireland. Abstract of the Act establishing the Bank of Ireland. The Bank Purchase the Parliament-House. A Description of the same. Profits of the Bank of Ireland. Opposition of the Bank to the Forma- tion of Joint Stock Banks. Signal Instance of their Hostility to a Bank. The Burning of Beresford'a Notes. Monts de Pieie. Loan Societies. Pawning Money. Issues of I.O.U.'s. The Killar- ney Banker and the Saddle. Disgraceful State of the Banking Interest. Irish Banks and Joint Stock Banks. The Bank of Ireland and the Provincial Bank. CHAPTER XI. ON SCOTCH BANKINO. Heads of Monasteries the first Bankers in Scotland. Heriot, Banker to King James. Paterson, the Founder of the Bank of England, establishes the Scottish Darien Company. Jealousy of the English, and consequent Ill-Success of the Project. State of Scotland, before and after the Union. Early Coin- age of Scotland. Holland's Account of the Formation of the Bank of Scotland. Abstract of the Act of the Scottish Parliament establishing the Bank. Comparison between this Act and that for estab- lishing the Bank of England. Proposals made to the Bank to issue Stamped Brass Coin or Wooden Tallies. Issue of One- Pound'Notes by the Bank in 1701. Union of Scotland with England. The Equivalent Fund. The Commissioners for the Disposal of this Fund petition for a Charter of Incorpora- tion as a Bank, which was subsequently granted under the title of the Royal Bank. Jealousy of the Bank of Scotland, who soon after suspend Payments. Arrangements made with their Note-holders. The Bank called the British Linen Company established. The Pretender and the Edinburgh Banks. Establishment of Private Banks in Scotland. Optional Bank-Notes suppressed. Details of Scotch Banking. Amount of Deposits in Scotch Banks. Attempt to withdraw the One-Pound Note Circula- tion of Scotland. Sir Walter Scott's Opposition to the Measure under the Signature of Malachi Mala- growther. His Arguments answered. The Attempt abandoned in Consequence of the Report of a Committee of the House of Commons. Small Amount of Gold in Circulation in Scotland. Account of the Failure of Scotch Banks. Laws relating to Bills of Exchange peculiar to Scotland. Conclusion. MR. LAWSON has given us a very interesting volume, as his contribution to the History of Banking. He has taken great pains to make his work accurate; and as it is the result of many years' labor and re- March, it possesses a higher value than could be claimed for a more ephemeral publication. He present* us with a good general view of the state of banking, and incidentally of commerce also, from the earliest periods to the present time: and he has interwoven his facts so pleasantly with anecdotal narrative, that the work will be found interesting by all classes of readers. London Bankers' Magazine, August, 1850. ( The Bankers 1 Magazine contains the following elaborate Essay on Exchange by J. R. McCulloch, ESJ.) ESSAY ON EXCHANGE. Bv J. R. McCULLOCH. CONTENTS. CHAPTER I. ON INLAND EXCHANGE. Circumstances which determine the price of Inland Bills. Natural limit to fluctuations in the exchange. Fictitious bills of exchange. CHAPTER n. FOREIGN EXCHANGE. Circumstances which regulate the value of bullion in different coun- tries. Manner of estimating the quantity of bullion in different coins. Effect of variations in the value of metallic currency on the exchange. Effect of variations in the relative value of gold and silver. Effect of variations^ in the value of paper currency on the exchange. Effect of fluctuations in the nominal exchange on export and im- port trade. Effect of fluctuations in nominal exchange on the trade in bullion. CHAPTER III. REAL EXCHANGE. Limit to fluctuations in the real exchange. Circumstances which give rise to a favorable or unfavorable balance of payments. The fact that the value of imports exceeds that of the exports does not warrant the conclusion that the balance is unfavorable. In countries carrying on an advantageous commeice, the value of imports must always exceed the value of the exports. Erroneous notions relative to the balance of trade. ^ Favorable or unfavorable balance not always paid in bullion. Effect of fluctuations in the real exchange on foreign trade. Operations of the bill-merchants lessen fluctuations. A large foreign expenditure has no permanent effect on exchange. Causeof the rise of exchange in 1815 and 1816. CONTENTS. CHAPTER IV. UNFAVORABLE REAL EXCHANGE. Refutation of the opinion, that, din-ing an unfavorable real exchange, commodities of great value and small bulk are exported in preference to others. Computed exchange represents either the sum or the difference of the real and nominal exchange. State of the exchange between Great Britain and the Continent from 1809 to 1815. Causes of the exportation of bullion in 1809, 1810, &c. The unfavorable exchange during the latter years of the war no cause of the extraordinary exportation of British produce to the Continent. CHAPTER V. NEGOTIATION OF BILLS OF EXCHANGE. Arbitration of exchange. Usance days of grace, Amsterdam, Rotterdam, Antwerp, Hamburg, Altona, Dantzic, Paris, Bordeaux, Bremen, Barcelona, Geneva, Madrid, Cadiz, Bilboa, Gibraltar, Leghorn, Leipsic, Genoa, Venice, Vienna, Malta, Naples, Palermo, Lisbon, Oporto, Rio Janeiro, Dublin. CHAPTER VI. HISTORY AND ADVANTAGES OF BILLS OF EXCHANGE. The origin, progress, commercial effect, political effects, and general importance of bills of exchange. CHAPTER VII. LAWS AND CUSTOMS RESPECTING BILLS OF EXCHANGE. Requisites of a bill or note. General explanatory rules and usages. Business hours. Rules of giving notices. Effect of inevitable accident. How to act when a bill is lost. Effect of usury. Effect of gaming. Effect of forgery. Effect of vitiation. Acceptance by procuration. Conditional acceptance. In- dorsements. Duties of drawee. Duties of payee or holder. Effect of bankruptcy. Accommodation paper. Cross paper. CHAPTER VIII. MONEYS OF ACCOUNT. Table containing the value of the moneys of account of different places, expressed in pence and decimals of pence, according to the mint price both of gold and silver in England ; that is, ,3 17s. IQ^d. per ounce for gold, and 5s. %d, per ounce for silver. Par of exchange between England and the following places, viz. Amsterdam, Hamburg, Paris, Madrid, Lisbon, Leghorn, Genoa, Naples, and Venice ; the same being computed from the intrinsic value of their principal coins, by comparing gold with gold, and silver with silver, ac- cording to their mint regulations, and to assays made at the London and Paris mints. (Presented by Dr. Kelly to the committee of the House of Lords on the expediency of the Bank's resuming cash payments.) *** The whole of this Essay is contained in " The Bankers' Magazine for 1850." Published monthly at five dollars per annum. J. Smith Homans, 111 Washington Street, Boston. ESSAY ON MOJVEY. BY J. R. McCULLOCH, ESQ. AOTHOR OP "rax DIM10HABT OP OOMMKRCE," "PRINOTUM OF POLITICAL ECOWOMT," id. (The whole of this Essay will be contained in the Bankers' Magazine for 1850. Published monthly, five dollars per annum.) CONTENTS. CHAPTER I. ORIGIN OF MONET. Circumstances which led to the use of money. Principal properties that every commodity used as such ought to possess. \ Not a sign or a measure of value, but a real equivalent. On the commodities used as money in different countries. On the defects of these commodities. Gold and silver the fattest materials for money, and first used in the shape of bars and ingots. On the coinage of gold and silver. Advantages of coined money. Coined money not a sign, or a meas- ure, of value. Use of gold and silver as a standard for estimating the relative value of commodities. Proof of the non-existence of an abstract or ideal standard. CHAPTER II. THE EXCHANGEABLE VALUE OF MOICET. The cost of production regulates the value of money, when the power of supply is not monopolized. The proportion between the supply and demand regulates the value of money, when the power of supply is monopolized. ALPHABETICAL INDEX CHRONICLES AND CHARACTERS STOCK EXCHANGE. Alnon, Remnrks on the National Debt, 83 Annuities, Policy of, . 85 A<<:ill, Mr., on reducing the National Debt, 87 Baily, Francis, Defence of the Brokers, . . . . . . 72,81 Bank of England, First Charter, 27th July, 1694, . .9 First payment of Government dividends, ... 23 " Directors of, from 1694 to 1847, 156 " " Dividends of, from 1694 to 1849, . . 101 Barbicr, Mr., on the National Debt, 87 Bill-clay and Co., Bankers, Operations of, . . . . . f 10-1 Baring and Goldsmid, Anecdotes of, 61,7.") Barings, Sketch of the House of, 7.~> Barnard, Sir John, Opposition to the Stock Exchange, 2 '.'> " Act against Stock Gambling, . . 27 Blackboard, Notices of the, 55, 120 Blunt, Sir John, Originator of the South-sea Bubble, 23 Bollnnd, James, Execution of, for forgery, 119 Bolinghroke, Remarks on the National Debt of England, . . . . 82, 84 Botviparte, Policies on the life of, 71) Bo wring, and the Greek Loan, K'O Bridgewater Canal, ....*. 90 Brokers, Acts against, 71 Change Alley, Origin of, 10 Charitable Corporation Frauds in London, 19 Chatham, Lord, Opinions of Change Alley, 57 Clayton, Sir Robert, notice of, 8 Cochrane, Lord, Fraud of, 80 Consols, Highest and Lowest Prices of, for 120 years, .... 153 Daniels, Joseph Elkin, Fraud of, , 69 Douglas, Heron, & Co., of London, Failure of, 39 Dunhar. Speculations of, 118 East India Company, Stock of, . . 9, 18 " " Restriction of its Dividends, 37 Elizabeth, (Queen,) Numerous Monopolies granted by, .... 8 165 Alphabetical Index. Equitable Loan Company, Charter of, . . . Exchequer Bills, First Fraud in, .... Exchange Alley, Anatomy of, j^ Fofdyce, Alexander, Fraud of, , Foreign Loans contracted, Fox, Charles James, Anecdote of, r t % Frauds and Forgeries, . 32,40,69,77,80,100,119 Furness, Sir Henry, Anecdote of, . 1 1 French Revolution, Effects of the, C4 Germany, Attempted Loan for, .. ^ ...... 36 Gideon, Sampson, the Jew Broker, . .. 33 118 Goldsmid, Abraham and Benjamin, '-..,*, i . . . . . 59 " Suicide of, . ' ," ''' . . . 60 Gordon, Lord George, Anecdote of, , . ~ . . . . . . 59 Gray, Thomas, Plan for Roads, . ^ A . . 92,94 Greece, Loan to, . . . . ' . . . . . 104 (Juatcm.ila, Loan to, by English Capitalists, 103 Guise, Count de, Notice of, . . . . . ,. . . 119 Guy, Thomas, Anecdote of, . . . 12, 25 Hebrew Brokers, Number limited to Twelve, 42 Hume, David. Remarks on the National Debt, ....... 84 Hume, Joseph, and the Greek Loan, ........ 105 Johnstonc, Cochrane, Fraud of, ......... 80 Joint Stock Companies, Speculations in, , 73 Life Insurance, Notices of, 125,127 * " Indisputable Company, -,. 127 " Policies on Diseased Lives, . . . . . 128 u Fraudulent Companies, . . . . . 130 Liverpool and Manchester Railroad, . 93 Loans to Contincntial Powers, . . . .. : . .104,115 " New, Frauds, &., 44,154 " Since 1793, and Rates of Interest, 154 Lopez, Manassez, Punishment of, 29 Lotteries, Invention of, ' 49 " Employed by the State, for Revenue Purpoies, . .< 47 " Evils of, and Frauds in, - . " Abolition of, M " Effects of, Loyalty Loan, Subscriptions to, . ...' Mnrlborough's (Duke of) Victories, Effects of, McGregor, Gregor, Notice of, . 100 Mining Companies, Speculations in, ^.-; Moneyed Interest, Origin, Extravagance, and Folly of the, . National Debt (The), Kemarks on, ! * M " " Proposal to reduce the Interest on, . " Increase of, 1740-1766 . ' v ' " " Curious Proposition to paj off, %* " Review of, Smith, Paine, Hervey, Graham, on, I Fum 166 New-castle, Duke of, Notice of, Petty, Sir Henry, Proposal for a Sinking Fund, . ESSAY ON INTEREST, BY J. R. M C CULLOCH. (Published in the Bankers' Magazine for 1850.) CONTENTS. PAGE SKETCH of the rates of interest adopted by various nations. . . 1 The rate of interest varies according to the security for the re- payment of the principal and the duration of the loan. . . 3 On the interference of government in adjusting the rate of in- terest . . .5 Effect of the usury laws in Rome. ...... 8 History of the laws regulating the rate of interest in England, Scotland, and Ireland .9 Comparison between the market rate and the statutory rate of interest from 1714 to 1793. . . . . . . .11 Pernicious effects of laws to regulate interest. . . . .15 The usury laws do not protect the prodigal and unwary. . 16 There were no usury laws in Holland 17 On the legal rate of interest in France, Hamburg, Russia, Aus- tria, Leghorn, Spain, and the United States 18 Usury laws do not reach the government. . . . .19 Error of some writers on the subject of a low rate of interest. . 20 ESSAYS ON EXCHANGE, INTEREST, MONEY, AND OTHER SUBJECTS BY J. R. McCULLOCH, AUTHOR OF " THE DICTIONARY OF COMMERCE," &C. I. ON INTEREST AND THE EFFECT OF THE USURY LAWS. H. ON FOREIGN AND DOMESTIC EXCHANGE. III. ON MONEY, COINS, BULLION, CURRENCY, SEIGNORAGE, &C WITH COPIOUS TABLES OF COINS AND MONEYS OF ACCOUNT. BOSTON: WM. CROSBY AND H. P. NICHOLS, 111 WASHINGTON STREET. 1850. THE BANKER'S ALMANAC, For 1 8 5 2 . WILL BE PUBLISHED DECEMBER IST, 1851, Containing in addition to the matter in the Almanac for 1851 : I New Law of New York establishing the Bank Department. II New Insurance Law of the State of New York. III. ...New Safety Fund Law of the State of New York. IV. ...Free Banking Law of the State of Massachusetts, adopted May, 1851. V List of the Banks of the United States ; Location of each; Names of President and Cashier of each ; and Capital of each. 150 Pages Octavo,* Paper Covers, Price One Dollar, per mail, will be duly executed. Orders received J. SMITH HOMANS, Publisher Bankers' Magazine, 111 Washington Street, Boston. l|ig The first edition of GILBART'S PRACTICAL TREATISE ON BANKING, being out of print, a second edition was issued early in Jnne. Copies supplied by all booksel- lers throughout the United States. lUr The Third Edition of THE BANKERS' COMMON PLACE BOOK, is now ready. One of the most useful volumes for Bank Officers and Directors, Brokers and Mer- chants. Price, Fifty Cents. ttoular to Banking Institutions. The Publisher of the Bankers' Magazine gives notice that the following important and interesting works will be embodied in " The Bankers' Magazine and Statistical Reg- ister," for the year beginning July 1851, and ending June 1852 : I. New varieties of Gold and Silver Coins and Bullion. 1. Recent Coins of the World. 2. Recent Counterfeit Coins 3. Gold from California. 4. Recapitulation of the Net Mint Values of Gold and Silver Coins, issued within twenty-five years. 6, Silver from Lake Superior. 6. Table of Correspond- ence between Penny Wrights and Grains, and the decimal fractions of a Troy Ounce. 7. Comparison of American and Foreign \Veights used for Precious Metals. 8. Hulk and Packing of Precious Metals. 9. Determination of the Value of a Specimen of Gold or Silver in its Native Hock or Gaugue. 10. Transaction of llusiness at the Mint. By JACOB K. ECKFELDI and W. E. DUBOIS, Assayers of the United States Miu.. II. The American Law of Banking. A Synopsis of the Decisions of the higher Courts of every State in the Union : upon the subjects of Banking, Kills of Exchange, Promissory Notes, Damages on Bills, Usury, Notaries Public, &c. The decisions of each State will be arranged by themselves, com- mencing with Maine; to be followed in order by New Hampshire, Vermont, Massachusetts, Connecti- cut. New York, &c. III. History of Banking and Currency ; By W. J. LAWSON, Esq. ; a recent English Work. IV. Historical Ske:ches of the Early Currency among the American Colonies. V. Gitbart's Practical Treatise on Banking concluded. The second American edition of this work tntire (470 pages) may be had of Booksellers throughout the U.S. The Bankers' Magazine is now published monthly, 84 pages, octavo, at Five Dollars per annum. By the new postage law of the United States, the postage on this work is essentially reduced. Publishers who give insertion of this notice to the amount of Five Dollars, will be entitled to a copy of the Banker's Magazine for one year. The editor desires all communications and subscriptions to be forwarded per mail, and not by express. J. SMITH HOMANS, EDITOR BANKERS' MAGAZINE, 111 Washington Street, Boston. Editors who receive the Banker's Magazine are requested to copy the above. Just Published. Price, 50 Cents. THE BANKER'S COMMON-PLACE BOOK, 137 Pages, duodecimo; containing I. A Treatise on Banking. By A. B. Johnson, Esq., President Onta- rio Bank, Utica. II. Ten Minutes' Advice on Keeping a Banker. By J. W. Gilbart, Esq., of the London and Westminster Bank. III. Byles on the Law of Bills of Exchange. IV. Remarks on Bills of Exchange. By J. Ramsay M'Cullocb, Esq. V. Forms of Bills of Exchange, in Eight European Languages. VI. Forms of Notice of Protest, with Remarks. VII. Synopsis of the Bank Laws of Massachusetts, in force Jan. 1851. VIII. Decisions of the Supreme Judicial Court of Massachusetts, in refer- ence to Banking. Persons who reside at a distance can receive the work per mail ; postage paid to any part of the U. S. Price, fifty cents each, or two copies for one dollar. Postage stamps may be remitted as cash at all times for fractional sums of a dollar. "Many excellent works on banking, and a still greater number of article! on banking, In magazine* and other periodical publications, have appeared In America We have before us one of no common merit. It is entitled A Treatise on Banking The Duties of a Banker, and hi* Personal H* quUitm therefor. By A. B. Johnson, President of the Ontario Branch Bank, at Utica, in the State of New York. " The first part' The Bank 'contains a clear exposition of tome important principles of banking and currency, and a comparison between the Safety Fund system and the Free Bank system estab- lished in New York. " The second part' The Banker ' is of a highly practical character ; and it shows that howtTer widely the banks of England and of America may differ in their principles, the fields of cheir opera- tions, their constitutions, and their privileges, yet the practical operalioos, the qualifications of their bankers, the dangers to which they are exposed, and the means necessary to success, are ninth the game in both countries. " Our readers will doubtless observe that nituiy of the lessons inculcated in the above quotation* are similar to those that have often appeared in our pages, either in original contributions or ID ex- tracts from works that we have reviewed. This coincidence in the views of English and American bankers is a confirmation of their soundness. We like the sentiment,*' While a banker adheres with regularity to known forms of business and settled principles, Providence U guarantee for bis success." We believe that in almost every case the failure of a bank has arisen from a disregard of sound principles. Whether or not a bank follows, In its practical administration, the ICMOU of ex- perience, is of much more importance to success than whether It consist* of fix or seven hundred partners. The management of a bank is of more Importance than it* constitution." London Cank- ers' Magazine. ^ The author of one of the ablest works on banking in this country, never probably owned a hun- dred dollars worth of bank stock, or had as much in deposlte in any bank during hi* natural life. We may point, however, to an honorable exception in the perron of A. B. Johnson, E/q , the Pml- dent of the Ontario Branch Bank. Mr. Johnson is not only a rich man, but an able and accomplished writer on banking, finance, currency, and general literature. He is moreover, a model bank manager. His clear head, stndlon* habits, and fyttenatin method in business matters, would be inferred from his writing* by tboM who art not acquainted with hto habits and character. The best writers in England on the subject of Banking practical, theoretical and historical Gil- bart, Bell, Lawson, Francis, &c., are all either bank manager* or bank clerk*. Kogers and Tapper, the poet and the proverbial philosopher are banker*. N. Y. Mirror. Boston, Jpast anb Jpre0ent. JUST PUBLISHED, SKETCHES OP BOSTON, PAST& PRESENT AND OF SOME FEW TOWNS IN ITS VICINITY. " Honor to the Past, Gratitude for the Present, and Fidelity to the Future." One Volume, 18mo. pp. 370. Price, in Paper Covers, Fifty cents ; in Muslin, with a Map of Boston, One Dollar. One Hundred and Twenty- Four Engravings! THE TRADE SUPPLIED BY PHILLIPS, SAMPSON & CO. CONTENTS. Boston in the Times of the Pilgrims, Prominent Incidents in the History of Boston, *The Churches of Boston, The Bridges and Ferries of Boston, Faneuil Hall, Faneuil Hall Market, Grand Junction Railroad, Asylum and Farm School, The Islands in Boston Harbor, Boston in Districts, East Boston, *The Theatres, *Cochituate Water "Works, The New City Jail, The Eye and Ear Infirmary, *The Boston Athenseum, *The New Custom-House, The Club-House, The Boston Society of Natural History, *The New Court-House, The New Almshouse, The State's Prison, Massachusetts General Hospital, The McLean Asylum for the Insane, The State- House, Massachusetts Historical Society, Provident Association for Savings, The Banks in Boston, Hancock House, Boston Common, Perkins Institution for the Blind, The Public Schools of Boston, History of the Public Schools, Conclusion. PART SECOND. THE VICINITY OP BOSTON. I ROXBURT. II LYNN, III. ... WATEHTO WN. IV CHARLESTOWN, V LOWELSL, VI. ...BROOKLINE, VII. . .CAMBRIDGE, Harvard College, Faculties of Harvard College, The Medical School, The Botanic Garden, Dane Law School, The Theological School, The Observatory, Lawrence Scientific School, Library of the University, Christ Church, Washington's Head-Quarters, The Riedesel House, Mount Auburn, Fresh Pond. *VIH...WALTHAM. * These subjects are copiously i^lustiated with Engravings. Copies per mail, postage free to all parts of the United States, owe dollar. J. SMITH ROMANS, Boston. illis & oro'0 Sank Note Cist, AND COUNTE11FEIT DETECTOR, PUBLISHED MON^HTY^Tr^i.so PER ANNUM. This Journal contains an accurate account of all the Counterfeits of Bank Notes throughout the Union: corrected up to the day of Publication. Also, copious Tables of the Prices of Stocks at the Boston Brokers' Board, Notices of the Money Market, of Coins, Exchange, Bullion, &*. COPIES MAILED TO ORDER. CONTENTS OF THE JUNE NUMBER. 1. All the New Counterfeits throughout the United States. 2. Notes on the Money Market; Rates for Money; Foreign Exchange; Domestic Exchange; Uncurrent Money ; New Stocks; Virginia State Credit ; Albany Loan. 3. Cali- fornia Gold with engravings of the new Fifty Dollar Coin and Three Cent Coin. 4. American Gold at the English Mint. 5. New Banks in Virginia; Free Banking. 6. New York Free Banks ; Coin ; Securities, &c. 7. Finances of Massachusetts ; Bank Tax, &c. 8. The New Metropolitan Bank at New York. 9. Free Banking in Massachusetts and New York ; Losses from Free Banks ; Bank Failures ; Redemption. 10. Stock Market for last week in April. CONTENTS OF THE JULY NUMBER. 1. Money Market for last week in June ; New Stock Operations ; Manufactures ; Cotton Exports ; New Banks in Massachusetts ; Maine Banks. 2. Counterfeits for the month of June; Boston, New York, itfew Jersey, &c. 3. New Bank Cap- ital of all the Banks authorized by Acts of 1851, in this Commonwealth; all paid in ; and those unpaid. 4. Banks in Baltimore ; Expiration of Charters. 5. New Bank Law establishing Bank Commissioners in Massachusetts, 1851. 6. A Review of the London Money Market for May. 7. Sale of Rail Road Bonds in New York, June, 1851. 8. New Banks in Connecticutt ; New York; Ver- mont; Rhode Island. 9. Mills of Lowell, &c. ; Losses sustained, 1851. 10. Miscellaneous. Hidden Gold ; Funded Debt of Maryland ; Canada Bills ; New England Cotton Mills ; American Stocks in London ; Bank of France ; Private Coinage in California. 11. The Mills of Lowell. Capital of each ; No. of Spin- dles ; No. of Looms ; No. of Males and Females employed in each. Showing also the consumption of Cotton and Wool, weekly ; No. of yards made, dyed and printed, weekly ; annual consumption of coal, charcoal, firewood, oil, starch, and flour in each mill ; and the general aggregates. Also showing the date when each company commenced operations ; current ; ^alue of stock in the market, &c. These tables will be found quite complete, and were lately compiled. CONTENTS OF THE AUGUST NUMBER. 1. Money Market for the last week in July, with account of Stock Operations ; . Manufactures ; New Banks in Massachusetts. 2. Sub-Treasury Statement for June, 1851. 3. Report on the Failure of the State Bank at Morris. 4. Import* of Dry Goods at New York. 5. Redemption at the Suffolk Bank for each year, 1834 to 1851.. 6. Stock Operations for the Month of June. 7. Commercial Progress of the States. 8. All the new Counterfeits in New England, &c. ; Arrest of Forgers and Counterfeiters. 9. Quotations of all the Stocks at the Boston Exchange Board, viz. Government Securities, State Securities, City Securities, Railroad Bonds and Stocks, Insurance Companies, Manufacturing Companies, Boston Banks, Miscellaneous Stocks. I3T Subscribers to the Bankers' Magazine are recommended to examine the Bank Note List, which furnishes reliable information relating to Stocks of all kinds. WILLIS Ac CO., BOSTON. POSTAGE, within 500 miles, 9 cts. per Quarter ; between 500 and 1500 miles, 18 cts. per Quarter, payable in adruno THE BANKERS' MAGAZINE, AND EDITED BY J. SMITH HOMANS. "No expectation of forbearance or indulgence should be encouraged. Favor and benev- olence are not the attributes of good banking. Strict justice, and the rigid performance of contracts are its proper foundation." "The Revenue of th State is THE STATE : in effect, all depend upon it, whether for support or for reformation." OCTOBER, 1851. -CONTENTS. I The Supply and Consumption of Gold and Silver. (From tJie London Economist.) II Lawson's Early History of Banking. Introduction of Hills of Exchange; First Use made of them in England; Form of a Bill in the Year 1235; Copy of a Bill in 15S9 ; Modern Form introduced by the Goldsmiths ; Negotiation of Foreign Bills a Royal Prerogative; Legalizing of Bills of Exchange, 9 and 10 Will. 1IL ; Nature of Bills of Exchange; Difference between Bank-Notes and Bills of Ex- change; Difference between Banker's Bills and Mercantile Bills of Exchange; On Days of Grace ; On Foreign Bills and Exchanges ; Contrast between the Trade of England with America and that of other Countries; Blackstone's Defi- nition of a Bill of Exchange ; Sir John Bayley on Bills of Exchange ; Promissory Notes and Checks ; The Laws and Customs respecting themj The late Mr. Roths- child ; Mr. Rose and "Rothschild's Pillar." III. ...On the Export of Gold to Europe, commercially considered. IV....Gilbart's Practical Treatise on Banking. SECT. ?. The Irish Ranks; The Hibernian Bank ; The Banks of Belfast ; The Laws of Currency in Ireland ; The Exchanges between the Banks. SECT. 8. The Moral and Religious Duties of Banking Com- panies. V New Varieties of Gold and Silver Coin and Bullion, (continued ) By J. R. Eckfeldt and William E. Dubois, of the U. S. Mint. 5. Silver from Lake Superior; 6. Ta- ble of Correspondence between Pennyweights and Grains, and the Decimal Frac- tions of a Troy Ounce; 7. Comparison of American and Foreign Weights used for Precious Metals ; 8. Bulk and Packing of Precious Metals; 9. Determination of the Value of a Specimen of Gold or Silver in its Native Rock ; 10. Transac- tion of Business at the Mint ; 11. Shipments of Gold to California. VI.... Notices of New Books. VII. ..Editorial Correspondence. VIII.. Miscellaneous. The Position of St. Louis; The American Institute; The Standing Armies of Europe; Bankers' Checks; Albany City Bank ; Canada Decimal Car- rency ; A Dream of the Past; Bank Taxes ; Maryland Public Debt; The Money Pressure; Life Insurance. IX Bank Statistics. Ohio. X Bank Items. New Banks ; New Appointments. XI. . .Notes on the Money Market for September. BOSTON: PUBLISHED MONTHLY, BY J. SMITH HOMANS, 111 WASHINGTON STREET. 60 WALL STREET, NEW YORK. See Second and Last Pages of Cover. University of California Library Los Angeles This book is DUE on the last date stamped below. Phone Renewals 310/829-9188 REC'D LD-' A 000105391 7 11