Francis Horner (1803)
First Published: 1803
Source: Edinburgh Review, Vol. II ([No. IV] July 1803), Art. XI (pp. 402-421). 'Thoughts on the Restriction of Payments in Specie at the Banks of England and Ireland'. By Lord King. London, May 1803. pp. 106. 8vo.
Transcription/Markup: Steve Palmer
Public Domain: Marxist Internet Archive 2008. This work is completely free.
This sensible and instructive publication contains the substance of what was urged in Parliament, by Lord King, against the last renewal of the Bank Restriction Bills. His reasoning coincides, at least in its general outline, with that of Mr Boyd's well known pamphlet: setting out with the strong presumptions which might have led us to expect an excessive issue of paper, and confirming that probability by a reference to the price of bullion, and the rate of foreign exchange. We must acknowledge, however, that the argument is presented by Lord King in a more corrected form, as well as with more candour. And the interval of experience that has now elapsed, has furnished him with a larger body of evidence, and a variety of additional illustrations.
Though from the very first, there could be no doubt of the impolicy and injustice of the restriction; yet, at the date of Mr Boyd's letter, the measure was too recent to warrant a confident opinion with regard to its particular influence on prices. It was, in its kind, quite novel and unexampled; and its operation was necessarily affected by many complicated circumstances. But now, it may be affirmed, that of all the political experiments which the temerity of statesmen ever hazarded, there is not another which has been more fairly tried than this, or of which the result has been ascertained with greater certainty. We have had an opportunity of observing the operation of the measure, under many varieties of situation, and where almost every circumstance has been successively varied, by which it might either have been counteracted or assisted; in war and in peace, in famine and in plenty, with a favourable and with an unfavourable balance of trade, during a languid stagnation of our manufactures, and amidst the spirit and heat of speculation. Throughout all these changes, one uniform effect may be perceived; which, with the evidence by which it is proved, and the reasonings by which it is explained, is very ably and perspicuously described by Lord King. For the information of our readers, on this most interesting subject, we shall make an abstract of his publication; because it is highly important that the public should at length entertain a correct opinion, with respect to those laws which have vitiated the currency of this country. We shall endeavour to convey the substance of his reasonings, without meaning to confine ourselves to his language, or to the precise order in which he has arranged the different steps of the argument.
It does not appear to have ever been doubted by any of the writers on political economy, that an enlargement of paper currency, beyond the growing demands of trade, has exactly the same operation in raising prices, as a multiplication of the precious metals. There is this difference, indeed, between the two cases, that the one is a local effect merely, whereas the other extends over the whole commercial world; and that the latter is produced gradually, scarcely becoming sensible till after the lapse of a considerable period of time; whereas the former may take place very quickly, and has actually been known to take place very quickly in more instances than one. It is evident, that every such rise in the money price of commodities, is, in other words, a fall in the commodity price, or exchangeable value of money. It is likewise established by experience, and before actual experience might have been inferred from the nature of the thing, that every such depreciation of the value of the circulating medium, is accompanied with much inconvenience and distress. These are the more severe, the shorter the period of time is within which the depreciation has been effected. The value of monied capital is diminished, and the livelihood is injured, of all those persons whose income is limited to a fixed sum of money. If a considerable depreciation takes place within a short period of time, the grossest injustice likewise must unavoidably ensue, with regard to the performance of all contracts previously agreed on. It is on all these accounts of high political importance, that the circulating medium of every country should preserve a steady and uniform value; and this it can never do, unless the effective currency, which is a quantity compounded of the actual amount, and of the rate of circulation, preserves permanently the same proportion to the demands of commerce.
Every banking company or private banker, by whom paper is issued, lies under great temptations of issuing it to excess; in the same manner as other traders are liable to overstrain their credit, or to overstock the market. Besides the direct profit which a bank derives from the circulation of its notes, they afford facilities, which the most cautious banker cannot always refuse, either to his own speculations, or to those of his confidential correspondents. In point of fact, nothing can be more certain, than that these temptations often get the better of all their prudence. But while our currency remained in its natural and sound condition, the excess of paper circulation could never be carried so far as to have any general and public effect upon prices. By means of the instant convertibility into specie, the superfluous paper was very speedily returned back upon the issuer, as soon as it began to undergo the smallest degree of depreciation. But the condition of our currency, can no longer be considered as sound or natural, when the convertibility into specie is dispensed with; and, after this check is removed, there is no longer any limit of the excess to which paper, while it retains the confidence of the country, may be carried. Mr Thornton, in his excellent work, has explained in what manner the higher branches of national currency regulate and limit the rest; gold and silver, all paper circulation; and the paper of the Bank of England that of all the country banks. If to the present suspension of cash payments at the Bank of England, another law were added, relieving the country banks from the obligation of converting their notes into those of the Bank of England, there would no longer exist any check to the emission of country paper; and there would be no bounds to the excess in which every banker might indulge, so long as his credit and solvency were unimpaired. Even in such an extreme case, however, the country paper would not possess a more extensive licence than that which the paper of the Bank of England enjoys at present; and the effectual salutary limitation to which the country paper is at present subjected, is founded exactly upon the same principle with that which formerly controuled the Bank of England, under the obligation of converting its notes into specie. From the moment that the unwise law of 1797 discharged the Bank from this most necessary obligation, nothing remained to controul its discretion, or to impose any boundary to the extent of its paper circulation. The directors of this company are at all times susceptible of the same temptations to which other traders are exposed; they have been known sometimes to yield to these, even under the checks and controuls of the ancient system; and now that all these are removed, it would be in the highest degree credulous and absurd to expect that they will decline the opportunity of increasing the profits of their stock. These profits, it is well known, arise principally from the circulation of their notes.
It is from the operation of gold and silver, in confining paper within its proper bounds, that the constant and immediate convertibility of notes into specie is rendered an indispensable condition, in every sound system of currency. This is a principle in the theory of money, which has hitherto been very imperfectly understood, even by those who, in other respects, have explained it most fully. To the deficiency of all our systematic writers upon this point, we are inclined to ascribe the opposite extremes of error, which with equal confidence, and equal loudness, are maintained, respecting the present state of our circulating medium, In the provinces, among our landed proprietors, and from that description of our parliamentary representatives, we still, as of old, hear most ignorant declamations against country banks, and all paper currency. In the great commercial cities, and especially in the metropolis, opinions are gravely avowed, by persons who ought to be acquainted at least with the details of the money trade, that the precious metals are altogether unnecessary, even as a part of circulation; and that the provisional law of 1797 should be established as a permanent system. If the former sentiment may be classed among the expiring prejudices of the vulgar, this visionary scheme betrays no less ignorance of political economy, and in its practical tendency is much more pernicious. It is not, however, to be treated as a doctrine entirely new, or as for the first time suggested by the existing circumstances of this country. If authority could yield any support to so palpable an error, the sanction might be found of other names, than it will probably be able to produce in the present day. An idea of this sort runs through the Querist of Bishop Berkeley, not the least remarkable production of that acute genius; from whose fame it cannot be considered a derogation, that, among many original and valuable views upon a science then almost uncultivated, some errors are to be found, from which we are not completely guarded by all the discoveries and experience of subsequent times. He appears to have conceived, that all circulation is alike a circulation of credit, whether metal or paper be employed as the medium; and that as coined metals were, in the progress of mankind from barbarism, substituted for barter, so, in a farther stage of improvement, a paper medium is to be substituted for coin. If the question were solely, Whether it may be stated in the abstract as at all practicable, to carry on the business of internal commerce by a medium of circulation merely conventional, neither possessing intrinsic value itself, nor immediately convertible into a commodity of intrinsic value? we should answer this question in the affirmative. The practicability is sufficiently proved, by the experiment which has been made in this country; and there existed no reason, a priori, to doubt its possibility. But the real and important question is a very different one: How far this practicable scheme is, by motives of expediency, and after a full view of its operation, recommended to be actually carried into practice? To this we have no less hesitation in pronouncing a negative, upon the principle which has already been explained. A perfect system of currency must be composed both of specie and paper.
The introduction of paper money, the most refined, perhaps, of all the expedients to which the relations of society have given birth, was not only an immense step in the progress of commerce, but may be considered as having marked an epoch in the history of mankind. But the essential benefit of the invention does not consist, as Berkeley supposed, in forming an entire substitution for metallic currency; but, in saving a certain portion of so costly an article, and, what is of far greater consequence, in facilitating exchanges between places remote from each other, and economizing the time and the labour of large payments. Specie, however, as possessing intrinsic value, must still be considered as the ultimate element into which the currency of the country may at all times be resolved; and is the true basis upon which the fabric of paper circulation must be solidly reared. If the whole currency is merely conventional, no check operates against an excessive issue, and consequently no security exists for the permanent value of the medium of exchange. That permanency can only be secured, by making the conventional representative of value constantly and readily convertible into real value; constantly and readily convertible into gold and silver; because these preserve more steadily than other commodities, an uniform value. Upon the principle, which we have endeavoured to explain, the excess of paper circulation would be converted into whatever commodity the paper was made convertible, provided that commodity was of intrinsic value. But it cannot be rendered convertible into some commodities with the same convenience, as into others; nor would the restraint upon excessive issue operate, in every case, with the same degree of efficacy and regularity. As the precious metals form the most convenient measure of value and medium of exchange, when the whole circulation is effected by a medium of intrinsic value; for the same reasons, they are better fitted than any other commodity to be the basis of a conventional currency, and to form that real value into which every portion of it may at all times be immediately converted. Permanency of value, from age to age, is the point of first importance in the medium of circulation. And while the currency of a nation consists, either wholly of the precious metals, or of a paper system founded on, and secured by the principle of convertibility, its value cannot be considerably depreciated except, along with the currency of the whole commercial world, by the discovery of new mines of extreme fertility; an event so rare, as to have occurred only once within the period of historical memory, and that at the epoch when the two hemispheres of the earth were first revealed to each other.
The preceding observations are sufficient, we trust, to shew, that when a national Bank, whose notes form the chief branch of currency, is relieved from the obligation of payments in cash, the only controul is then removed which limits the issue of paper to what is actually required by trade. That with such an opportunity, and such a licence, no Bank will ever long resist the temptation of high profits and extraordinary gains, there are very obvious reasons to presume; yet it is a matter of some nicety to make out, in a particular instance, a distinct proof of the fact of undue issue. It is a case of that sort which scarcely admits of direct evidence. Even when we can obtain faithful documents of the amount of notes in circulation during a series of successive periods, we are not fully entitled to consider a progressive increase of amount as conclusive, unless that increase be very great indeed: because the quantity of currency required by the trade of a country varies with the rate of circulation; that rate of circulation differs with the different kinds of currency, and in each kind is liable to be accelerated or retarded by the various fluctuations of demand and of credit. Nor does a high and growing state of prices afford any more satisfactory proof of an undue excess in the quantity of circulating medium; because the state of prices is a very complex subject, and is known to us very vaguely; and because the same increase, which an excess of currency would occasion, may be produced by many other causes, such as a failure of produce or supply, or an accumulation of taxes, the operation of all which is so complicated together, that it is difficult to assign to any one its proper portion of the whole joint effect. Fortunately, however, there are two very simple and satisfactory tests, by which the fact of an excessive currency may be ascertained. The nature of these we took an opportunity of explaining in a former article of this Review, at a time when we did not yet think that sufficient evidence was laid before the public to apply the inference, with conclusive certainty, to the conduct of the Bank of England.
When the circulating medium of a country has suffered a depreciation, whether it proceeds from the debasement of a metallic currency, or from the discredit, or from the excess, of a paper currency, the currency price of gold and silver bullion must rise, at the same time, with that of all other commodities. This fact is usually expressed by saying, that the market price of bullion exceeds its mint price. When the market price of bullion comes to exceed its mint price, in consequence of a depreciation of currency, the rate of foreign exchange will suffer a nominal and apparent fall. The domestic currency has sunk in its bullion value, while foreign currencies remain unaltered; the proportion, therefore, of the bullion value of the former, to that of the latter, is changed. But though this proportion is changed, the ancient numbers, expressing it, are still adhered to by merchants. There will thus be a great difference between the computed rate of exchange, and its real rate; and whether the actual difference be in favour of, or against, the country whose currency is depreciated, the apparent rate will always be computed so much more against it, or so much less in its favour, in proportion to the degree of that depreciation. The use of these two tests, in ascertaining the fact of a depreciated currency, may be explained by several remarkable instances. Before the reformation of the silver coin in King William's time, we are informed by Dr Smith, the exchange between England and Holland, computed according to the standard of their respective mints, was 25 per cent. against England; but the value of the current coin of England was, at that time, rather more than 25 per cent. below its standard value. Before the reformation of our gold coin in 1772, the market price of bullion exceeded the mint price, and the rate of foreign exchange was depressed; even the exchange with France was 2 or 3 per cent. against England. It is understood that, at that time, the French coin, though worn, was not so degraded as the English, and was, perhaps, 2 or 3 per cent. nearer its standard. Very soon after the recoinage in 1772, the market price of bullion fell to the mint price, and there was a corresponding improvement in the course of exchange; the difference turned immediately in favour of England, and against France. The issue of assignats, during the Revolution, depreciated the currency of France in a greater degree than was ever known in any other instance. In the course of little more than two years, accordingly, the exchange between London and Paris fell between 60 and 70 per cent. to the disadvantage of the latter place: and would probably have fallen still more, by the operation of new issues of assignats, if the war had not interrupted the commercial intercourse of the two countries.
It is not, indeed, from every rise in the market-price of bullion above its mint price, or from every fall in the course of foreign exchange, that we are entitled to infer a depreciation of currency. A temporary excess of the market-price of bullion above its mint price may be produced, without any peculiarity in the state of currency, by a failure in the supply of bullion from the mines, by a great demand for it either at home or from abroad, and, above all, by what is called an unfavourable balance of trade. The high market-price, which these circumstances occasionally for a short time produce, may be farther augmented and prolonged, if the expences of foreign warfare, and the remittance of foreign subsidies, are aggravated by a failure of the most necessary produce. It was from this view of the subject, that, when we examined the valuable publication of Mr Thornton, we deemed it proper to suspend our opinion, with respect to the operation of Bank of England paper upon prices, until the various causes of foreign expenditure might be considered as having completed their full effect; while, at the same time, we declared that the question would be solved to our conviction, if the excess of the market-price of bullion should continue, after the balance of trade was restored in favour of this country. In the same manner, it is somewhat difficult to discriminate, whether an unfavourable course of exchange is real or only apparent. When it is only a few degrees below par, and has been observed only for a short period of time, it is scarcely possible to determine whether it is a real difference from an unfavourable balance of trade, pr an apparent difference from a depreciation of our currency. But the longer the period of time is, during which even a small difference continues, the greater does the presumption always become, that it is only an apparent difference; and this presumption would be remarkably strengthened, if the difference were against a country which formerly enjoyed a favourable balance of trade, of which the manufactures and foreign commerce had suffered no diminution, but had advanced in prosperity, and which had recently adopted a change in the system of its currency, that might possibly lead to depreciation. It must farther be observed, that, how short soever the period may be during which the course of exchange is observed, if the difference from par is very great, and exceeds a certain limit, there is then every reason to believe that a certain portion at least of this difference is only apparent, and must be ascribed to a depreciation of currency. No person can imagine, for a moment, that, when the exchange against Paris was almost 70 per cent. under par, that the whole of this immense difference, or that more than a very small portion of it, was real, and arising from the balance of trade. Nor does any one believe that the present exchange of 16 per cent. against Dublin, which is nearly twice as great as the usual difference, does not in part originate in a recent depreciation of the currency of Ireland. There is, indeed, a natural and necessary limit to the real difference of exchange, as occasioned by the balance of trade. This difference never can exceed, as Lord King has observed, 'what will be sufficient to pay the expences and profit of the merchant who exports precious metals to restore the balance.' The same thing was long ago pointed out by Sir William Petty; who informs us, that, about the year 1672, 15 per cent. was given for the remittance of money from Ireland into England: and the remark which he subjoins, admits of an exact application to present circumstances :-`Although, in truth, exchange can never be naturally more than the land and water carriage of money between the two kingdoms, and the insurance of the same upon the way, if the money be alike in both places.' Lord King farther states, that this expence will probably seldom exceed 8 per cent. from London to the continent of Europe; which may' therefore be considered as the utmost limit of an unfavourable exchange, in a regular state of things.
From the foregoing observations, which we have insensibly protracted to an unexpected length, it may be concluded, in general, (and this general conclusion we may be prepared to apply to such particular instances as shall present themselves,) that, where a steady excess of the market price of bullion above its mint price, and a great depression of the course of exchange, are permanent amidst the variation of all those circumstances which influence the balance of trade, the two effects must be referred to one common cause, a depreciation of currency. Without any farther proof, the inference is just and satisfactory. But if it be farther fortified by direct evidence and official documents, either of a fraudulent debasement of coin, or of an unwonted augmentation in the issue of paper, the conclusion becomes irresistable to every understanding, that does not set all evidence and demonstration at defiance.
The amount of Bank of England paper in circulation, prior to the suspension of cash payments, was, upon an average of three years ending in December 1795, 11,975,573 £. For a considerable time after that measure had been resorted to, the Directors appear to have acted with caution and forbearance, as if not yet sure of their ground, and doubtful of the success of the experiment on which they were about to venture. To supply the place of the guineas that were thrown out of circulation, an additional quantity of small notes was no doubt necessary: which Mr Thornton has probably estimated too highly when `he states the amount at two millions; because it was not found immediately necessary to issue so large an amount. Until the year 1799, however, the issue of bank notes did not much exceed thirteen millions. But about the middle of that year, as we find from the accounts laid before Parliament, the notes in circulation amounted to 13,759,940 £.; and, before the end of the year, exceeded fourteen millions. In the course of the succeeding year, they were increased about a million and a half more. Our readers will recollect, that Mr Thornton endeavours to shew that the issues of the bank did not exceed the average sum to which they amounted before the law of restriction. He admits, that in December 1800 they were proved to amount to 15,450,970 £.; but then he observes, that the Governor of the Company stated, in the following spring, to the House of Commons, that they had drawn in about a million and a half of that sum; so that, when the two millions of small notes were also deducted, there remained a sum almost exactly equal to the average of issues before the restriction. When we examine, however, the accounts which have from time to time been laid before Parliament, we find, so far from this being a correct statement of the fact, that in spring 1801, the issue of notes amounted to 16,365,206 £.; which was still farther increased in the summer of 1802, to 16,747,300 £. According to the last account presented to the House of Commons, the Bank of England notes in circulation amounted to 16,108,560 £. If we compare this sum with the above average of three years, ending in December 1795, even after we add to the latter the whole two millions of which Mr Thornton speaks, and which seems a very large allowance, the present issue from the Bank will be found to exceed that which formerly was convertible into specie, by something less than one-sixth of the whole. If we consider the quick circulation which paper admits of, and the increase which an accelerated rate of circulation gives to the effective powers of currency, this addition of almost one-sixth, must be regarded as an immense augmentation of the mass of efficient currency.
While the issue of Bank of England notes was moderate and restrained, the market-price of bullion (particularly of silver bullion, which is a more certain standard than gold, because a more regular article of commerce) continued very nearly the same as its established price in our mint; sometimes rising a little above that, and sometimes falling a little below it, but speedily returning towards it from each deviation. In the summer of 1799, however, about the same time with the great increase of bank paper, a rapid and extraordinary advance took place in the market-price of bullion. That of silver rose at once to 5s. 8d., almost 10 per cent. above the mint price. It continued to rise along with the progressive increase of notes; and in 1801, when they exceeded sixteen millions, it was as high as 6s., more than 16 per cent., and even as 6s. Id. more than 17 per cent. above the mint price.
While the issue of Bank of England notes was moderate and restrained, the rate of exchange with Hamburgh continued in favour of this country, being from 3 to 5 per cent. above par. But in the summer of 1799, about the same time with the great increase of Bank paper, a very rapid fall took place. It fell at once to 32, about 8 per cent. below par; and continued to fall almost regularly, though not quite so regularly as the price of bullion rose, along with the progressive increase of notes. At the commencement of 1801, when they exceeded sixteen millions, the exchange with Hamburgh was as low as 29 £. 10s., almost 16 per cent. below par.
These facts are highly curious and important; important to our own country in the present juncture, on account of the conclusion which they enforce respecting a most important object of national policy; important to the economist of every country and age, from the new light which they throw on one of the most difficult subjects in his science. The detail of these facts may be accurately considered, in a set of excellent tables which Lord King has subjoined to his work; and which, from their construction in parallel columns, exhibit, more distinctly than we have been able to describe, the remarkable correspondence between the variations in the quantity of Bank notes, and the variations in the price of bullion and rate of exchange. During the late suspension of hostilities, the exchange was somewhat improved, though it still continued apparently unfavourable to England; and the market price of bullion fell in some degree, though it still remained considerably above the mint price. These effects must be ascribed to the beneficial influence, even of a momentary pacification, upon the commercial relations of this country; and from all former experience, it may with confidence be inferred, that, had there not been an actual depreciation of our currency, the market price of bullion would have been on a level with its mint price; and the computed exchange, instead of being against us, would have appeared, as doubtless the real balance was, greatly in our favour. It is very ingeniously observed by Lord King, with reference to the state of things at the date of his publication
'We have, at the present time, a striking instance of an exchange with the Continent at par, and in an improving state; while the price of bullion is between 9 and 10 per cent. higher than the mint price. This extraordinary difference is rendered intelligible by supposing Bank notes to be depreciated, and the real balance of trade very different from the nominal, but by no other hypothesis.' p. 35.
We have already alluded to the remarkable state of the exchange between Dublin and London. While that with the Continent has been so uniformly unfavourable, as we have described it, the exchange with Dublin has been all along increasing in favour of this country. But this exception in point of fact, forms an additional illustration and proof of the general principle. In the former regular state of things, while the obligation of converting paper into specie subsisted, the ordinary difference of exchange between London and Dublin was 8 per cent. against the latter. But this has undergone a material alteration, since the Bank of Ireland, as well as that of England, received a licence of issuing paper free from that obligation. If the Bank of Ireland had been more moderate in its abuse of this licence than the Bank of England, it is obvious that the currency of the former would have suffered a less depreciation than that of the latter, and there would consequently have been an apparent diminution in the difference of exchange. On the other hand, if the Bank of Ireland has been more extravagant in its abuse of that licence than the Bank of England, the currency of the former must have suffered a still greater depreciation than that of the latter, and there will consequently have been an apparent increase in the difference of exchange. Now, the actual case is, that there has been a very great increase in the difference of exchange; and, agreeably to that correspondence which the preceding reasonings entitle us to expect, the issue of notes from the Bank of Ireland has been greatly more enlarged than that of the Bank of England. For the detection of this fact, and of most reprehensible conduct on the part of the Directors of the Bank of Ireland, the public is indebted to the intelligence and activity of Lord King; upon whose motion, in the month of February last, the following document, which we insert entire, was laid before Parliament.
`Account of the Amount of Bank of Ireland Notes in circulation at different periods, (including Bills under 5 £.) presented to the House of Lords, pursuant to an order dated February 1803. (p. 106.)
In the space of six years, it is thus proved, the paper currency of the Bank of Ireland has been augmented from 621,917 £. to 2,633,864 £.; and its notes at present in circulation exceed, more than four times, the amount of what were in circulation when the act of restriction was passed. During the same period the price of silver in Dublin has experienced a great advance, having varied from 6s. 6d. to 7s. Irish currency; an increase which, estimating the mint price at 5s. 7d., is from 14 to 20 per cent. The rate of exchange between Dublin and London has been also remarkably affected; the difference having progressively increased from 81, the ordinary difference, to 10, 12, 14, and even 16, to which it has risen since the publication of the present work. This proof, of the depreciation of the Bank of Ireland notes, has not been confined to the course of exchange with London; but is felt in the transactions of Dublin with many of the provincial towns, where those notes have not acquired a general circulation, the currency still consisting either of specie or of country notes. In consequence of this, and of the depreciated condition of the Dublin currency, there is an actual difference of exchange between Dublin and those towns. In Belfast, for instance, this is the case; and when a payment is there made in Bank of Ireland notes, an additional sum is paid proportional to the discount. To these statements of Lord King, we may add a fact exactly of the same nature, which has recently come to our knowledge; that when there is a money-transaction betwixt this country and those parts of the north of Ireland, where the notes of the National Bank are not in general circulation, the difference of exchange, instead of being computed at 15 or 16 per cent. as against Dublin, does not exceed 8 per cent., which was the ordinary exchange with Dublin, before the measure of restriction was resorted to. 'It is impossible, (our author observes), under such circumstances, to acquit the Directors of the Bank of Ireland of the charge of gross misconduct, even upon the ground of supposed ignorance and inexperience. An important trust, which, upon mistaken principles of political necessity, was committed to this corporate body by Parliament, for the public benefit, appears to have been perverted to the private interest of the proprietors of their stock.'-p. 53. The remedy which Lord King has proposed, for the cure of these disorders, appears extremely simple, and founded on the justest principles of political economy. While the Bank of England continues to enjoy the restriction, that of Ireland cannot, with any propriety or justice, be directed to resume the ancient system of payments in specie. But, as a temporary expedient, an obligation upon the Bank of Ireland to pay upon demand, in notes of the Bank of England, would unquestionably impose upon the Irish Directors the necessity of restraining the issue of their paper, and of reducing it at least to the standard of English currency.
From the preceding mass of evidence, so harmoniously consistent with all the deductions of general principle, our readers, we trust, are prepared with us to pronounce, that the fact of a depreciation of our currency originating in excess, is completely established. To our mind, at least, the reasonings and statements of Lord King appear now quite decisive. We mean, decisive as to the actual consequences of the measure of 1797, and its pernicious influence upon the system of circulation. For of the impolicy of that measure, we never for a moment entertained a doubt. To have apprised the public of that, it was quite sufficient, that the most intelligent and best informed persons owned themselves unable at the time to descry its probable effects; and that it was in itself a violent interference of the Legislature, forcing the arrangements of commerce out of their accustomed and natural course. Nothing can be more judicious than the concluding observations of Lord King:
`A due regard to general rules, and especially to the great rules of property, forms a most important part of the duty of a legislator. They are the foundations of all private and political security; and the only means by which great principles can be effectually protected against rash speculation and hasty and inconsiderate judgments. A strict adherence to these rules, and a deep sense of their value and importance, is the great characteristic which distinguishes civilized nations, and which marks the progress of political knowledge and improvement. It has, in general, distinguished the legislative proceedings of our own country, and may be justly regarded as one of the principal causes of our national prosperity and greatness. Yet a more extraordinary deviation from all general rules has never occurred, than in that change in the system of our paper currency, which commenced in the Act of Suspension of 1797, and is still continued. A law to suspend the performance of contracts has been suffered to remain in force upwards of six years. A power has been committed to the Directors of the Bank, which is not entrusted by the constitution even to the Executive Government; a power of regulating, in a certain degree, the standard of the currency of the kingdom, and of varying this standard at their pleasure. A precedent has been established, by which, upon any suggestion of temporary expediency, the whole personal property and monied interests of the country may be committed to the discretion of a commercial Body not responsible to the Legislature, and not known to the Constitution.
`This extraordinary measure, which originated in embarrassment and temporary difficulties, has been suffered to continue from mere inadvertence. Neither the Public nor the Legislature appear to have considered to what consequences such proceedings ultimately tend. Had Parliament been called upon to authorise any of those direct frauds upon the currency which have often disgraced arbitrary governments; had it been recommended to them to raise the denomination, or to diminish the value of the current coin, there can be no doubt that such a proposal would have been rejected with indignation. Yet an abuse of the same nature has been established by law in this country. The power of reducing the value of the currency, by a silent and gradual depreciation, is more dangerous, from the very circumstance of its being less direct, and less exposed to observation.
`The true interests of government and the people are not really at variance. No advantage can possibly be obtained by the former, under any emergency, from any change in the system of currency, by which the public is injured. After the first momentary relief, government, so far from deriving any benefit from such violations of established rules, is obliged, like other consumers, to increase its expences, to multiply its loans and taxes, and to adapt its revenue to the enhanced price of labour and commodities. But this is only a small part of the evils that have uniformly been experienced by those nations which have had frequent recourse to such expedients. The abuse increases in strength, and a return to the former system is rendered more difficult by delay; public credit suffers; the revenue and resources fail; and what was at first a mere temporary accommodation, becomes finally a permanent cause of national weakness and decay. The case which is here supposed is extreme; but every instance of a discretionary power, by which the currency may be depreciated, has this tendency, and may ultimately produce these effects.' pp. 83-86.
We have purposely abstained from interrupting the deduction of the principal argument, by an allusion to any collateral views or incidental topics, in which we feel ourselves disposed to differ from the author, or to criticise his mode of statement. It is proper that we should now explain very briefly the few objections which have occurred to us.
He has not, perhaps, adhered with exact precision to the distinction, of which, in the abstract, he seems aware, between the two sorts of depreciation; the one originating from excess, the other from discredit: For he appears to apprehend, that the excess alone of Bank of England notes might at length produce a discount between them and gold coin; (p. 37. & p. 81.) This seems inaccurate. It must be recollected, that paper cannot become permanently excessive, until gold and silver coin have been in a great measure thrown out of the channel of circulation. Every superfluous issue is, for some time, counteracted, in its influence on prices, by a displacement and exportation of an equivalent portion of precious coin: And when these are at length so much thrown out of circulation, that the fresh emissions of paper produce an uncorrected influence upon prices, the currency must then be considered, with regard to every sensible effect, as consisting entirely of paper. What remains of precious coin, forms, comparatively, no part of the circulating medium. Now, it is only between two different kinds of currency, bearing a sensible proportion to each other, that a discount can be established; a discount between the two different currencies of one place, being exactly the same thing as the course of exchange between the currencies of two different places. When a discount is established between the two currencies of one and the same place, it must proceed from a discredit or want of confidence in one of them; in consequence of which, two money-prices are recognized for all commodities, and the precious coins remain still in the channel of circulation, notwithstanding continued emissions of paper. We have little doubt that the discount at Dublin originated in this manner.
In the course of this author's liberal remarks on country banks, he gives an opinion in favour of that law which formerly prohibited the issue of notes under the value of five pounds. We are rather inclined to doubt the policy on which this prohibition was founded. The authority of Dr Smith indeed is with Lord King; but the principle of commercial freedom has such firm hold of our conviction, that, to warrant any exception from it, we should require much stronger reasons than are furnished upon this point by either of these writers.
Lord King has stated, rather too absolutely, perhaps, (p. 15. and p.23.), that the circulating medium of a nation bears no proportion to its wealth and trade. It is quite true, that the number of exchanges bears no ratio to the mere quantity or amount of circulating medium; because the quantity required varies, as we have often observed, with the rate or velocity of circulation. But the amount of circulating medium, and the rate of circulation, may be taken together, and considered as forming a complex quantity; and then there can be no doubt that this complex quantity bears a ratio to the number and value of exchanges. This ratio, it is evident, may be fixed and constant, though the two component parts of that complex quantity are perpetually varying; because, while trade continues the same, they must vary inversely as each other. Nor does it affect the truth of this proposition, as thus stated abstractedly, that the present resources of political arithmetic do not yet enable us to assign the ratio.
Lord King has endeavoured to strengthen that part of his argument, which is founded on the unfavourable state of foreign exchange, by a theory which, as far as we know, is quite new; that, in the present commercial relations of Great Britain, the real course of exchange with the Continent must necessarily and permanently be in our favour. The great trade with the East Indies and China is carried on almost entirely by an exportation of silver to Asia, and this trade is possessed almost exclusively by Great Britain. We must therefore draw from the rest of the western world, that supply of this precious metal which is annually consigned to the east. Our direct commerce with Spain and Portugal is inadequate to this purpose: we must derive the supply, therefore, from the several nations of the Continent, among whom the annual produce of the mines is distributed from Portugal and Spain. This bullion we can only purchase by an exportation either of produce or of manufactured goods; our exports of these, to those nations, must therefore constantly exceed our import of goods and produce from the same nations. The balance of trade with the Continent is thus, it is said, necessarily and permanently in our favour; and of course, likewise, the difference of exchange. The plausibility of this theory at first caught our assent; but, on farther consideration, we were led to suspect that it involves a fallacy. It does not follow, because our imports always consist partly of bullion, that the balance of trade is therefore permanently in our favour. Bullion is a commodity for which, like every other, there is a varying demand; and which, exactly like any other, may enter the catalogue either of imports or exports; and this exportation or importation of bullion will not affect the course of exchange in a different way from the exportation or importation of other commodities. The real course of exchange, between two countries, depends upon the state of their reciprocal credits and debits. When the real difference is in favour of this country, it must be occasioned by the demand abroad for bills being greater than the supply; and that difference is no other than the premium which is paid for bills, in consequence of the competition. This excess in the demand abroad above the supply of such bills, proceeds from an excess of the debts due to us, above the debts due by us; that is, from an excess of our whole exports above our whole imports. The balance thus due to us, and which cannot be liquidated by means of bills, may either be discharged by sending bullion to this country, or may be allowed to remain for a time unpaid. So long as it remains a permanent debt, the price of bills will continue high, that is, the course of exchange will continue in our favour. If the balance be discharged by an actual transference of bullion, the supply of bills abroad will then become equal to the demand, and exchange will be at par. But even when it has the effect of liquidating such a balance, bullion is only sent to this country, because there is an effectual demand for it, which allows the importation; and it liquidates that balance in no other way than an equal import of any other commodity, for which there had been a demand, would have done. The state of exchange, therefore, does not depend upon the bullion trade, more than upon that of any other commodity; it depends entirely on the balance of debts. Provided the whole exports are no more than equal, during a given period of time, to the whole imports, the exchange will be at par, although a great part, the greater part, or even the whole of those imports, may have consisted of bullion. Let it be supposed, for example, that the commerce between Britain and Portugal had consisted wholly of woollen cloths exported from Britain, and of nothing but bullion directly imported from Portugal, provided the whole quantity of woollen cloth exported was no more than equal in value annually, to the whole quantity of bullion imported, and that the reciprocal purchases were made upon the same terms, in respect of the length of credit, the real exchange would have remained steadily at par, though we imported nothing but bullion; and if, on the other hand, our import of bullion had exceeded our export of woollen cloth; or if the Portuguese merchant had granted a more indulgent credit than he received from Britain, the course of exchange would then have been permanently against this country, although we imported nothing but bullion. That there is a steady influx of bullion into this country, both for our own consumption, and for the supply of our Asiatic trade; and that the course of exchange, until the year 1799, was steadily in favour of this country with almost the whole of the Continent; are facts which appear to us quite unconnected with each other. That favourable difference of exchange ought, perhaps, to be considered as having been partly apparent and partly real. That portion of it which was only apparent, was owing to the excellent state of our currency (for the gold coin regulated the rest), compared with the currencies of the Continent, most of which were much more degraded below their respective standards. That portion which was a real difference of exchange in our favour, and which therefore indicated a balance of debts in our favour, was owing to that credit which the merchants of England are enabled, by their great capitals and skill, to extend to the traders of almost all foreign countries. This appears to us a more correct explanation of the fact, than that which is suggested by Lord King. For the purposes, however, of his general argument, the fact alone is enough, that, in the present commercial relations of Britain, the real difference of exchange is almost permanently in our favour. This corroborates all the other arguments which have been adduced to shew, that nothing but a derangement and depreciation of our currency can explain the appearance, continued since 1799, of an exchange against us.
We cannot permit ourselves to dismiss this work, without expressing our approbation, both of the style and of the temper in which it is written. So great perspicuity is not often attained, upon a subject in its nature intricate and abstruse; but it is still more rare, upon a subject connected with the topics of political difference, to preserve such entire candour. The calmness with which the argument is pursued, and the clearness with which it is stated, might render this pamphlet a model for similar publications. In almost all the general principles, that are collaterally introduced for the sake of illustration, the author is liberal and accurate; nor was an apology for these digressions in the smallest degree necessary. On the contrary, we have always thought, that such writers as undertake to inform the public mind upon measures of temporary interest, render themselves doubly and eminently useful, when they seize every opportunity of expounding those more extensive truths, which, though in possession of the learned, are not yet insinuated into popular conviction.-It is by innumerable repetitions of this sort, that an impression may at length be made, even on vulgar understandings, in favour of an enlightened policy; and the assent of the multitude habituated to the results of that genuine philosophy, whose high aim is to emancipate mankind from practical error, and to ameliorate their political condition.
1. See our First Volume, p. 179.
2. See our First Volume, p. 178.
3. See our First Volume, p. 190.
4. See Numbers 426, 439, 441, and 445, of the Querist, a work originally published in 1735.
5. Vol. I, p. 184, and p. 200.
6. Wealth of Nations. II 215.
7. Id. I. 62. and II. 215.
8. Lord King, p. 37.
9. p 31.
10. Political Survey of Ireland, p. 71.