THE UNIVERSITY OF ILLINOIS LIBRARY 33 -2 'B&7 5 A LETTER ON TBE PRICE OF THE FUNDS, AS CONNECTED WITH ®i^e 3Battfe l^t^txitiim ^ct ADDRESSED TO , Esq. LOJVDOJV: PUBI.ISIIED BY J. M. RICHARDSON, 23, COUNHILV. 1818. [Price OncSliiHiup and S/xpcnre'] \v A LETTER, ^-c. Dear Sib, I CANNOT admit the opinion expressed in your letter of the 26th ult. ''that the Congress in Threadneedie Street, has much more to do with the price of the funds, than the Congress at Aix-la-Chapelle," and with your permission I will explain the grounds of my dissent. The question is in every point of view iraport- antj and, notwithstanding the recent discussions on currency in general, and the circulation of this country in particular, I must solicit your attention, whilst I briefly repeat those principles which appear to bear on it. Gold and silver have value in exchange, only ia proportion to the quantity and value of the [ 6 ] labour respectively required to obtain them from the mines, at the place where they are wanted. The supply of ordinary commodities obtain- able by human labour, may be influenced by the demand ; but the use to which gold and silver have been applied, creates a demand constant and unlimited. The general supply in consequence is regulated solely by the cost of production— if that at any time be less than the cost of producing the com- modities for which gold and silver exchange, the profits of mining are increased, an additional capital, and a greater number of hands are called to the employment, until the natural le- vel is restored. It is the additional quantity of labour required to obtain gold and silver, which has enabled those metals to supercede the use of iron, copper, &c. and become the universal measures of value, or the representatives of labour. Instead of assessing the value of the labour in each commodity exchanged, it is more conve- nient to refer the value of all commodities to the labour represented by a given quantity of the metals ; gold and silver, because they represent large quantities of labour, have obtained the preference in countries where commodities are numerous. [ 7 ] The gold* necessary to measure value, in any' country where it is in general use, is influenced by the number of commodities to be exchanged, and the quantity and value of the labour re- quired in the production of those commodities. An addition to the number of commodities, in any particular country, or a diminution in the quantity of gold^ the number of commodities remaining the same, causes an increase in the exchangeable value of gold. Gold in consequence rises when compared with other things. For a short time it rises beyond the value of the labour it represents: In England for exam- ple, the labour necessary to produce three yards of broad cloth, may, in fact, be of equal value to the labour represented by an ounce of gold; but, if the number of commodities were to be in- creased, and the quantity of gold remain the same; or, if commodities were to remain the same, and the quantity of gold be diminished, three yards of broad cloth might exchange for three quarters of an ounce of gold only. Fo- reign commodities would^ under the same cir- * I havfi thought preferable to use the word gold only in future, to avoid confusion, but of course the argumeuts ap- ply equally to gold and silver. [ 8 ] cumstances, experience a like diminution of va- lue in England, when exchanged for gold. Eight gallons of brandy, equal in value to the labour represented by an ounce of gold, w^ould exchange for three quarters of an ounce only. A foreigner wishing to obtain English broad cloth, would naturally inquire what commodity exchanged for it with the most profit, and ascertaining that gold exchanged to more advantage than brandy, he would send gold in preference ; self-interest would cause a repe- tition of similar operations, until gold came to its natural level, and exchanged for the same value of labour as it represented. On the contrary, a diminution of commodities, or an increase in the quantity of gold, commo- dities remaining the same, causes a fall in the exchangeable value of gold. For a short time it falls below the value of the labour it represents. Three yards of broad cloth might exchange for an ounce and a quarter of gold, and eight gallons of brandy for the same quantity ; the price of English broad cloth remaining the same in the foreign market, it would be more profitable for the merchant who imported [ 9 ] brandy, to take away gold, until as before, its value was reduced to the natural level. In time of peace and ordinary commerce, if the taxes be settled, supply and demand regu- late the circulating specie so admirably, that its increase or diminution is scarcely perceptible, and its influence on exportation or importation, is by no means considerable. When a new tax is laid on a commodity, it has the same effect as if an increase in the quan- tity of labour had become necessary for the pro- duction of that commodity. It raises its exchangeable value with reference to other commodities, and of course with refer- ence to gold. The price of three yards of broad cloth, for example, may be raised by a tax, from one ounce, to one ounce and a half of gold ; in con- sequence, when it is exchanged for gold, an in- creased quantity of that metal is required. The quantity of the commodity taxed may be diminished, but the capital employed in the pro- duction of it is then employed in producing something else; the general mass of commodities is not diminished, the exchangeable value of one only is increased; this necessarily makes addi- tional measures of value necessary, and requires [ 10 ] An importation of gold, in the same manner as an increase in the total quantity of commodities. From these principles, the following deduc- tions mjiy be drawn : 1st. The quantity and value of the labour re- quired to obtain gold from the mines, ultimately regulafes its real value all over the world. 2d. The quantity in any country, where it is in general use as a measure of value, is in- fluenced by the quantity and value of the com- modities to be exchanged, and increases or di- minishes as those commodities increase or di- minish. 3d, Every new fax on a commodity, by in- creasing the exchangeable value of that com- modity, requires an addition to the measures of value in the country where such tax is paid. These deductions, or, as they appear to me, axioms, suppose the trade in gold perfectly free ; and in order to simplify the statement, coining is not adverted to. All governments have exercised the privilege of stamping metals; and, in process of time, such , stamped pieces have circulated as measures of value, in the respective countries where the/ have been issued. [ 11 ] It is not necessary to my present purpose to inquire, how far, by limiting the quantify of the precious metals coined^ and not allowing the coin of any other realm to circulate, the value of a coinage might be raised, or tiie quantity of commodities for which it might be made to ex- change. When governments coin all the gold brought to them for that purpose, without seiniorage, coinage has very little effect. Nearly the same quantity of gold is employed in a coined, as would be employed in an un- coined state : when there is a diminution of com- modities, and consequently an excess of coin, it is exported; when there is an increase of com- modities, and consequently a deficiency of coin, gold is imported, and taken to the mint to be coined. By the laws of England, all gold taken to the mint is coined without charge ; and the Acts which disgrace our statute book, prohibiting its exportation when coined, are so easily evaded, that, in argument, it may be assumed no re- strictions' exist. The laws on this subject are now, I believe, nearly the same as when the Bank of England was established. [ 12 ] The first object of the Directors of that Bank was to circulate their promissory notes, which they endeavoured to do, by lending on good secu- rity, advancing to government, &c. &c. As gold, when used as coin, is required only to represent labour, any thing which men will- ingly receive to represent gold, answers the purpose of representing labour. The capital and respectability of the parties composing the Bank of England Company, gave bank notes this credit or power of representing gold; the prejudices of the people were gra- dually overcome, and a considerable quantity was circulated, the Directors taking care to keep a supply of gold, to enable them to fulfil their promise, of paying it on demand. According to the second axiom however, the country had already the quantity of gold neces- sary, for the exchange of its existing commo- dities. The notes issued by the Bank representing gold, and facilitating the exchange of commo- dities in the same manner, necessarily created an increase in the measures of value beyond what the number of commodities required ; gold, re- leased by its representative, was of course ex- ported to restore the natural level. [ 13 ] In time, it was ascertained that promissory notes answered all the purposes of internal com- merce ; and the increasing credit of the Bank of England, aided by the local credit and activity of the Country Banks, brought them into general use. Whenever an increase of commodities, or a new tax, required an increase to the measures of value in circulation, additional promissory notes were issued. On the contrary, whenever a diminution of commodities required a dimi- nished circulation, it was produced by returning such notes to the different banks, and ultimately demanding gold from the Bank of England, for the purpose of exporting it. The Directors, when they discovered any un- usual demand for gold, very properly contracted their issue of notes, and by this means kept cir. culation at its natural level. The issue of paper did not, in fact, increase the total quantity of circulation beyond what it would have been, had banks not been established, (supposing commodities and taxation to have been the same as at present) ; on the contrary, it is probable from the facility of transmission, and the plan of banking accounts, then first in- troduced, the total quantity of circulation was [ 14 ] less than would have been required, had it re- mained gold. It cannot be doubted but that paper, thus re- presenting and exchangeable for gold, is the most wise, convenient, and oeconomical, measure of value ever adopted bj man. It substitutes a cheap, for a dear commodity; it makes a large addition to the general capital of the country, by liberating the precious metals ; and it diminishes the immediate pressure of new taxes, by supplying the increased quantity of measures of value necessary, at a trifling expence. This well regulated circulation continued in England until the year 1797, when a large fo- reign expenditure and a variety of other con- curring causes, produced a diminution in the quantity of commodities, and as usual, a demand on the Bank for gold. This demand was answered, and the natural level of circulation would soon have been re- stored, but unfortunately there occurred at the same moment, a suspicion, unfavorable to the credit ot the Bank of England, and banks in general. The principles of paper circulation were then little understood ; men thought it unsafe to hold [ 15 ] promissory notes, and in consequence pressed to the Bank for gold. The Directors, on this occasion as heretofore, dimiuishcd the circulation, but acting from past experience, without adverting to the cause of the evil, they greatly exceeded the reduction ne- cessary, and by lessening their discounts consi- derably, occasioned individual embarrassment, increased the alarms of the commercial world, and materially added to the general distress. Gold, no longer required for exportation, but for security, became in universal demand ; and the Bank was almost drained, when govern- ment, by an Order in Council, restricted it from paying in specie, and the Act of Parliament soon after passed, the repeal or expiration of which> is now the subject of so much interest. This act made a vast change. As soon as the Bank ceased to pay its notes in gold, the power of the circulation to suit itself to the quanlity and value of commodities ceased : It could only increase or diminish at the pleasure of the Di- rectors. For some years, nevertheless, they acted ac- cording to the rules previously cslablished for the conduct of the Bank business, they were cau- tious what bills were discounted, and how far advances were made to government ; circulation [ 16 ] in consequence, continued at or very near its natural level. That it did not materially increase, beyond what the increase of commodities and taxation required, is evident from the price of gold, vt^hich rose but little above the mint price. In time, however, the certainty of not being- called on for gold produced relaxation, and the quantity of paper was greatly increased beyond what was necessary, to maintain circulation at its natural level.* The remaining gold coin disappeared, and the consequence of an over-abundant circula- tion followed, the surplus required employ- ment, money (to use the language of the Stock Exchange) became plenty, avast quan- tity of bills were created, not the result of bond fide mercantile transactions, but merely drawn for the purpose of being discounted; these bills gave facilities to extensive and most improvident speculations, and interfered with the ordinary disposition of the capital and trade of the country to its great and lasting detriment. The quantity still increasing, the same effect followed as would follow an increase in the * The uniform progress of this increase will be seen by ■ tlie account in the appendix A. [ 17 ] quantity of a circulation of gold, without aa increase of commodities. Three yards of broad cloth, instead of ex- changing for £S, 17s. lOJd. in paper, exchanged for ^4. lis. 7d. When this happens with a circulation of gold, (or paper exchangeable for gold on demand), it has been shewn that gold is exported until the quantity comes to its natural level ; this is not possible however, with paper, the quantity re- mains undiminished, and in consequence it has no power to recover its exchangeable value ; the credit of Bank of England notes was un- questioned, yet they gradually fell m exchange- able value below the level of our wretched silver coin, which very soon began to follow the gold ; and the nominal exchanges became permanently against us. In this state of things the Bullion Committee made its memorable report — this report and the discussion which followed did not indeed convince practical men, but the mind and talent of the country were so unequivocally declared, that the Directors of the Bank paused in their career, they have since once or twice resumed it, but the repeated discussions in and out of Parliament," have, most fortunately prevented any great [ 18 ] inf rpase in the quantity of Bank notes, not- withstanding the tremendous crisis we have passed. During three years of peace, commodities have rapidly increased, the Bank has however kept its circulation almost stationary, it was not in 1818morethan it was in 1815.* Its exchange- able value has in consequence risen consider- ably, gold has been at £4:. per oz. and would probably have been at par, had not the returning credit of Country Banks enabled them materially to increase their circulation, and diminish the space over which Bank of England notes cir- culated. At the moment I am writing gold (probably from this cause) has again risen to ^4. Is. 6d. per oz. The excess is therefore a^4. 13s. or in round numbers £o per cent, that is £\0j in paper is employed, where ^100 would be sufficient. Taking the Bank circulation at 27,000,000 five per cent on it is ^1,350,000, and when the Baiik pay in gold, all that can be permanently required, (should the general mass of commo- dities continue the same as at present ) is a re- duction of Bank notes to that amount, causiog * See appendixes A, B. [ 19 ] as of course it will, if made witli an avowed intention of resuming cash payments, a corres- ponding diminution in the circulation of Country Banks. This reduction may be easily accomplished without any diminution of commercial discounts, by the Bank of England selling gold to that amount, or cancelling the notes now pacing by Government, in liquidation of its debt. To assert that gold is wanted in the common transactions of life, is to talk contrary to every man's daily experience ; it may be truly said that for all the ordinary purposes of internal exchanges, gold is an incumbrance, where a sovereign and a one pound note exchange for exactly the same commodities, and the same quantity of uncoined gold, very few will perti- naciously require the former. Take away the profit on obtaining gold, by making paper of the same value, and the de- mand for it will cease. The Bank will soon be accustomed to the change, and if it be true, that it has at this time, twelve millions sterling of gold, no mate- rial diminution will be made in the profits of the Proprietors. If the Directors should unadvisedly refuse to give proper facilities to commerce, and en» [ 20 ] deavour to diminish their noles beyond the amount necessary to maintain the natural level of circulation^ the loss will fall only on the Bank ; the space over vt'hich their notes at present circulate will diminish^ and that space be filled up by the notes of Country Banks. It has happened hitherto, that whenever the Bank has exceeded the proper amount necessary for the districts where its notes circulate, an equal excess has been put forth by the Country Bankers in the districts where country notes cir- culate, until the whole circulation was brought to the same level ; self interest prompted this proceeding, and will equally prompt the issue of country notes to fill up any void occasioned by the want o£ Bank notes, in the districts where they have been accustomed >o circu- late ; so long as the issue of paper is attended with profit, it is contrary to every principle of commerce, to suppose it will not be sup- plied sufficiently to maintain circulation at its natural level, and for all the necessary pur- poses of business, the collection of the Revenue, &c, &c. No actual deficiency is found where measures of value are all goid, and it is not likely to occur, with a substitute so cheap as paper, and issued by so many channels. [ 21 ] Foreig-n Loans, the influx of Englishmen to the Continent, and other events, may cau?e ca- pital to leave the country, the general mass of commodilies may be diminished, the exchanges, and vhat is called the balance of trade, may be against us, circulation however will suppo.t its natural level, and unless its quantity is more than sufficient, there is no ground whatever for fearing that gold will be exported more than anj other commodity. Having now stated the principles which however complicated in action, and changed in appearance, ultimately govern circulaiion I come to the observation which caused this letter; I understand you to mean, that at the moment you write, the price of the funds depends more on the conduct of the Directors of the Bank of England than on tjie debates of the Congress; if they diminish the quantity of paper a fiiU will take place, if the} increase the quautity a rise. Had you given this opinion in December, when Cons«ds were at •''4, or even in May, when they were at 81, I should have agreed with you, that the diminution of paper necessary lo bring circulation to its naluial level, would have occasioned a depiessiou in the price of Con- [ 22 ] sols of about ef^ per cent, such an opinion would have been entirely in unison with the principles here laid down. In June and July last, however, you will remember, the probable expiration of the Bank Restriction Act became the subject of discussion in the City, and without any other visible cause, the prosperity of the country increasing, a revenue unusually productive. Consols fell to 74; a fall universally ascribed to an anticipation of the expected effects of that measure, and a fall much beyond what the measure itself, unin- fluenced by alarm, could have produced. This alarm is gradually subsiding ; for al- though the merchants who attended his Majesty's Ministers had no hope given thpm that the RC'^ striction Act would be continued, and although no reflecting man now thinks it will be con- tinued. Consols, have risen to 77 ; still however, the alarm operates, for allowing a^4 per cent to be the reduction, which would be caused by such a diminution of paper as is necessary to reduce circulation to its natural level, the price would then be 81, a price which appears to me, much lower than is consistent with any view of the situation of the country, financial or otherwise. Under these circumstances I come to the con- J [ 23 ] elusion, that, although the renewed discusf:ion« on the Bank Restriction Act may occasion some alarm and some fluctuations, yet, if the deli- berations at Aix-la-Chapelle be favourable ta the permanent continuation of peace, a consi- derable rise of the funds must ensue, notwith- standing that Act is allowed to expire in July next, as at present contemplated. I am. Dear Sir, Your very faithful Servant, * * * I^ndon, Oct.QAy 1818. To , 'Esct. ^Appendix A, AN ACCOUNT OF THE Average Amount of Bank Notes in Circulation, including Bank Post Bills; III each Half Year, from the 1st of January 1797, to the 1st of January 181f, inclusive, 1797: Jan. to June, July to Dec. f. 10,821,574 11,218,084 1808: Jan. to Juae, July to Dec. £. 16,953,787 17,303,512 1798: Jan. to June, July to Dec. 12,954,685 12,204,547 1809: Jan. to June, July to Dec. 18,214,026 19,641,640 1799: Jan. to June, July to Dec. 13,374,874 13,525,714 1810: Jan. to June, July to Dec. 20,894,441 24,188,605 1800 : Jan. to June, July to Dec, 15,009.457 15,311,824 1811: .Tan. to June, July to Dec. 23,471,297 23.094,046 1801 : Jan. to June, July to Dec. 16,134,249 15,487,555 1812. Jan. to June, July to Dec. 23,123,140 23,351,496 1802: Jan. to June, July to Dec. 16,284.052 10,571,726 1813 : Jan. to June, July to Dec. 23,939,693 24,107,445 1803: Jan. to June, July to Dec. 15,967,094 17,043,450 1814: Jan. to June, July to Dec. 25,511,012 28,291,832 1804 : ^ Jan. to June, July to Dec. 17,623,680 17,192,440 1815: Jan. to June, July to Dec. 27,155,824 26,618,210 1805: Jan. to June, July to Dec. 17,271,429 16,480,713 1816: Jan. to June, July to Dec. 26,468,28a 26,681,398 1800: Jan: to June, July to Dec. 16.941,887 16,641,761 1817: Jan, to June, July to Dec. 27,339,768 29,210,035 1807: Jan. to June, July to Dec. 16,724,368 16,687,438 WILL* I. DAWES, Acc'.Genl. Bank of England, April 18, 1819. Appendix B, AN ACCOUNT OF THE Total Weekly Amount of Bank Notes and Bank Post Bills in Circulation, From the 7th of April to the 24th of May 181S; Disiinguishinp: the Bank Post Bill?, the Amount of Notes iiuder the Value of Five Pounds, aud stating the Aggregate Amount of the Mhulc. 1818: Bank Notes of and upwards Bank Post Bills. Bunk Nolos under £5. AgRregate Amount. £. Jfe-. ^. i€. April 7 17,873,040 1,787,470 7,329,230 26,989,740 14 20,289,470 1,837,810 7,48(i,C70 29,013,950 21 19,932,190 1,823,100 7,401,010 29,216,300 28 19,(>49,810 1,817,030 7,438,090 28,905,533 May 5 19,288,080 1,779,580 7,399,030 28,466,690 L_. 18,718,320 1,755,740 7,370,570 27,844,630 _,9 18,786,130 1,743,250 7,319,510 27,848,890 24 18,061,340 1,700,110 7,371,350 27,132,800 W«. DAWES, Acct. Gen/. Bank ofEnf;land, 2d Jute, 1818. Printed by W.OlhdoD, 48, Kupert Street, Ho> market, Londoti. I LIBRARY OF THE UWVERSmf Of IlilHOIS \ UNIVERSITY OF ILLINOIS-URBANA 3 0112 062406761