THE UNIVERSITY
OF ILLINOIS
LIBRARY
33^
BS7 5
V/IO
LIBRARY
OF THE
UNIVERSITY OF ILLINOIS
THE HIGH PRICE
OF
BULLION,
A PROOF OF
THE DEPRECIATION
OF
BANK NOTES.
THIRD EDITION,
WITH ADDITIONS.
BY DAVID RICARDO.
LONDON :
Printed by Harding $ Wright, St. Juhn'ssquare,
FOR JOHN MURRAY, 32, I LEET-STREF.T,
1810.
INTRODUCTION.
THE writer of the following pages lias
already submitted some reflections to the at-
tention of the public, on the subject of paper-
currency, through the medium of the Morning
Chronicle. He has thought proper to repub-
lish his sentiments on this question in a form
more calculated to bring it to fair discussion ;
and his reasons for so doing-, are, that he has
seen, with the greatest alarm, the progressive
depreciation of the paper-currency. His fears
have been augmented by observing, that by a
great part of the public this depreciation is
altogether denied, and that by others, who ad-
mit the fact, it is imputed to any cause but
that which to him appears the real one. Be-
fore any remedy can be successfully applied to
an evil of such magnitude, it is essential that
there should be no doubt as to its cause. The
writer proposes, from the admitted principles
of political economy, to advance reasons, which,
in his opinion, prove, that the paper-currency
of this country has long been, and now is, at a
IV INTRODUCTION.
considerable discount, proceeding from a su-
perabundance in its quantity, and not from
any want of confidence in the Bank of England,
or from any doubts of their ability to fulfil
their engagements. He does this without re-
luctance, being fully persuaded that the coun-
try is yet in possession of the means of resto-
ring the paper-currency to its professed value,
viz. the value of the coins, for the payment of
which it purports to be a pledge.
He is aware that he can add but little to the
arguments which have been so ably urged by
Lord King, and which ought long before this
to have carried conviction to every mind ; but
he trusts, that as the evil has become more
glaring, the public will not continue to view,
without interest, a subject which yields to no
other in importance, and in which the general
welfare is so materially concerned.
Dec. 1, 1809.
HIGH PRICE OF BULLION,
A PROOT OF
THE DEPRECIATION OF BANK NOTES,
T
J_ HE precious metals employed for circulating the
commodities of the world, previously to the establish-
ment of banks, have been supposed by the most ap-
proved writers on political economy to have been di-
vided into certain proportions among the different ci-
vilized nations of the earth, according to the state ot
their commerce and wealth, and therefore according
to the number and frequency of the payments which
they had to perform. While so divided they pre-
served every where the same value, and as each coun-
try had an equal necessity for the quantity actually in
use, there could be no temptation offered to either for
their importation or exportation.
Gold and silver, like other commodities, have an
intrinsic value, which is not arbitrary, but is depend -
( 2 )
ent on their scarcity, the quantity of labour bestowed
in procuring them, and the value of the capital em-
ployed in the mines which produce them.
" The quality of utility, beauty, and scarcity,'*
says Dr. Smith, " are the original foundation of the
<e high price of those metals, or of the great quan-
" tity of other goods for which they can every where
cc be exchanged. This value was antecedent to, and
<c independent of their being employed as coin, and
" was the quality which fitted them for that employ-
ce ment."
If the quantity of gold and silver in the world em-
ployed as money were exceedingly small, or abund-
antly great, it would not in the least affect the pro-
portions in which they would be divided among the
different nations — the variation in their quantity-
would have produced no other effect than to make
the commodities for which they were exchanged com-
paratively dear or cheap. The smaller quantity of
money would perform the functions of a circulating
medium, as well as the larger. Ten millions would
be as effectual for that purpose as one hundred mil-
lions. Dr. Smith observes, cc that the most abund-
" ant mines of the precious metals would add little to
" the wealth of the world. A produce of which the
re value is principally derived from its scarcity is ne-
ff cessarily degraded by its abundance."
If in the progress towards wealth, one nation ad-
vanced more rapidly than the others, that nation"^
would require and obtain a greater proportion of the
( 3 )
money of the world. Its commerce, its commodities,
and its payments, would increase, and the general
currency of the world would be divided according to
the new proportions. All countries therefore would
contribute their share to this effectual demand.
In the same manner if any nation wasted part of
its wealth, or lost part of its trade, it could not re-
tain the same quantity of circulating medium which
it before possessed. A part would be exported, and
divided among the other nations till the usual propor-
tions were re-established.
While the relative situation of countries continued
unaltered, they might have abundant commerce with
each other, but their exports and imports would on
the whole be equal. England might possibly im-
port more goods from, than she would export to,
France, but she would in consequence export more to
some other country, and France would import more
from that country ; so that the exports and imports
of all countries would balance each other ; bills of
exchange would make the necessary payments, but no
money would pass, because it would have the same va-
lue in all countries.
If a mine of gold were discovered in either of
these countries, the currency of that country would
be lowered in value in consequence of the increased
quantity of the precious metals brought into circula-
tion, and would therefore no longer be of the same
value as that of other countries. Gold and silver,
whether in coin or in bullion, obeying the law which
r. 2
( 4 )
regulates all other commodities, would immediately
become articles of exportation ; they would leave the
country where they were cheap, for those countries
where they were dear, and would continue to do so,
as long as the mine should prove productive, and till
the proportion existing between capital and money in
each country before the discovery of the mine, were
again established, and gold and silver restored every
where to one value. In return for the gold exported,
commodities would be imported ; and though what is
usually termed the balance of trade would be against
the country exporting money or bullion, it would be
evident that she was carrying on a most advantageous
trade, exporting that which was no way useful to her,
for commodities which might be employed in the ex-
tension of her manufactures, and the increase of her
wealth.
If instead of a mine being discovered in any coun-
try, a bank were established, such as the Bank of
England, with the power of issuing its notes for a
circulating medium ; after a large amount had been
issued either by way of loan to merchants, or by ad-
vances to government, thereby adding considerably
to the sum of the currency, the same effect would
follow as in the ca^e of the mine. The circulating
medium would be lowered in value, and goods would
experience a proportionate rise. The equilibrium be-
tween that and other nations would only be restored
by the exportation of part of the coin.
The establishment of the bank and the consequent
( s )
issue of its notes therefore, as well as the discovery of
the mine, operate as an inducement to the exportation
either of bullion or of coin, and are beneficial only
in as far as that object may be accomplished. The
bank substitutes a currency of no value for one most
costly, and enables us to turn the precious metals
(which, though a very necessary part of our capital,
yield no revenue, ) into a capital which will yield
one. Dr. A. Smith compares the advantages attend-
ing- the establishment of a bank to those which would
be obtained by converting our highways into pastures
and corn-fields, and procuring a road through the air.
The highways, like the coin, are highly useful, but
neither yield any revenue: Some people might be
alarmed at the specie leaving the country, and might
consider that as a disadvantageous trade which re-
quired us to part with it ; indeed the law so considers
it by its enactments against the exportation of specie ;
but a very little reflection will convince us that it is
our choice, and not our necessity, that sends it
abroad; and that it is highly beneficial to us to ex-
change that commodity which is superfluous, for
others which may be made productive.
The exportation of the specie may at all times be
safely left to the discretion of individuals, it will not
be exported more than any other commodity, unless
its exportation should be advantageous to the country.
If it be advantageous to export it, no laws can ef-
fectually prevent its exportation. Happily in this
case, as well as in most others in commerce s
( 6 )
there is free competition, the interests of the indivi-
dual and that of the community are never at vari-
ance.
Were it possible to carry the law against melting or
exporting of coin into strict execution, at the same
time that the exportation of gold bullion was freely
allowed, no advantage could accrue from it, but great
injury must arise to those who might have to pay,
possibly, two ounces or more of coined gold for one of
uncoined gold. This would be a real depreciation of
our currency, raising the prices of all other commo-
dities in the same proportion as it increased that of
gold bullion. The owner of money would in this
case suffer an injury equal to what a proprietor of
corn would suffer, were a law to be passed prohibiting
him from selling his corn for more than half its mar-
ket value. The law against the exportation of the
coin has this tendency, but is so easily evaded, that
gold in bullion has always been nearly of the same
value as gold in coin.
Thus then it appears that the currency of one coun-
try can never for any length of time be much more
valuable, as far as equal quantities of the precious
metals are concerned, than that of another ; that ex-
cess of currency is but a relative term ; that if the
circulation of England were ten millions, that of
France five millions, that of Holland four millions,
&c. &c. whilst they kept their proportions, though
the currency of each country were doubled or trebled,
neither country would be conscious of an excess of
currency. The prices of commodities would every
( 7 )
where rise, on account of the increase of currency,
but there would be no exportation of money from
either. But if these proportions be destroyed by
England alone doubling her currency, while that of
France, Holland, &c. &c. continued as before, we
should then be conscious of an excess in our currency,
and for the same reason the other countries would feel
a deficiency in theirs, and part of our excess would be
exported till the proportions of ten, live, four, &c.
were again established.
If in France an ounce of gold were more valuable
than in England, and would therefore in France pur-
chase more of any commodity common to both coun-
tries, gold would immediately quit England for such
purpose, and we should send gold in preference to
any thing else, because it would be the cheapest ex-
changeable commodity in the English market ; for if
gold be dearer in France than in England, goods must
be cheaper j we should not therefore send them from
the dear to the cheap market, but, on the contrary,
they would come from the cheap to the dear market,
and would be exchanged for our gold.
The Bank might continue to issue their notes, and
the specie be exported with advantage to the country,
while their notes were payable in specie on demand,
because they could never issue more, notes than the va-
lue of the coin which would have circulated had there
been no bank.*
* They might, strictly speaking, rather exceed that quantity,
because as the Bank would add to (lie currency of the world, Eng.
land would retain its share of the increase,
( 8 )
If they attempted to exceed this amount, the ex-
cess would be immediately returned to them for
specie ; because our currenc}', being thereby diminish-
ed in value, could be advantageously exported, and
could not be retained in our circulation. These
are the means, as I have already explained, by which
our currency endeavours to equalize itself with the cur-
rencies of other countries. As soon as tiiis equality
was attained, all advantage arising from exportation
would cease ; but if the Bank assuming, that because
a given quantity of circulating medium had been ne-
cessary last year, therefore the same quantity must be
necessary this, or for any other reason, continued to
re-issue the returned notes, the stimulus which a re-
dundant currency first gave to the exportation of the
coin would be again renewed with similar effects ;
gold would be again demanded, the exchange would
become unfavourable, and gold bullion would rise,
in a small degree, above its mint price, because it is
legal to export bullion, but illegal to export the coin,
and the difference would be about equal to the fair
compensation for the risk.
In this manner if the Bank persisted in returning
their notes into circulation, every guinea might be
drawn out of their coffers.
If to supply the deficiency of their stock of gold
they were to purchase gold bullion at the advanced
price, and have it coined into guineas, this would not
remedy the evil, guineas would be still demanded,
but instead of being exported would be melted and
( 9 )
sold to the Bank as bullion -at the advanced price.
" The operations of the Bank/' observed Dr. Smith,
alluding to an analogous case, <c were upon this ac-
tc count somewhat like the web of Penelope, the work
rc that was done in the dav was undone in the ni'o-ht "
The same sentiment is expressed by Mr. Thornton :—
" Finding the guineas in their coffers to lessen every
" dav, they must naturally be supposed to be desirous
" of replacing them by all effectual and not extra va-
ff gantlv expensive means. They will be disposed, to
" a certain degree, to buy gold, though at a losing
" price, and to coin it into new guineas ; but they
cc will have to do this at the very moment when manv
f( are privately melting what is coined. The one par-
" ty will be melting and selling while the other is
" buying and coining. And each of these two con-
" tending businesses will now be carried on, not on
cc account of an actual exportation of each melted
" guinea to Hamburgh, but the operation or at least
ce a great part of it will be confined to London ; the
" coiners and the melters living on the same spot, and
" giving constant employment to each other.
" The Bank," continues Mr. Thornton, " if we
u suppose it, as we now do, to carry on this sort of
" contest with the melters, is obviously waging a very
" unequal war ; and even though it should not be
" tired early, it will be likely to be tired sooner than
€< its adversaries."
The Bank would be obliged therefore ultimately to
adopt the only remedy in their power to put a stop to
( 10 )
the demand for guineas. They would withdraw part
of their notes from circulation, till they should have
increased the value of the remainder to that of gold
bullion, and consequently to the value of the curren-
cies of other countries. All advantage from the ex-
portation of gold bullion would then cease, and there
would be no temptation to exchange bank-notes for
guineas.
In this view of the subject, then, it appears, that
the temptation to export money in exchange for goods,
or what is termed an unfavourable balance of trade,
never arises but from a redundant currency. But
Mr. Thornton, who has considered this subject
very much at large, supposes that a very unfavourable
balance of trade may be occasioned to this country by
a bad harvest, and the consequent importation of corn;
and that there may be at the same time an unwilling-
ness in the country, to which we are indebted, to re-
ceive our goods in payment ; the balance due to the
foreign country must therefore be paid out of that
part of our currency, consisting of coin, and that
hence arises the demand for gold bullion and its in-
creased price. He considers the Bank as affording
considerable accommodation to the merchants, by sup-
plying with their notes the void occasioned by the
exportation of the specie.
As it is acknowledged by Mr. Thornton, in many
parts of his work, that the price of gold bullion is
rated in gold coin ; and as it is also acknowledged by
him, that the law against melting gold coin into bul-
( » )
lion and exporting it is easily evaded, it follows, that
no demand for gold bullion, arising from this or any
other cause, can raise the money price of that commo-
dity. The error of this reasoning proceeds from not
distinguishing between an increase in the value of
gold, and an increase in its money price.
If there were a great demand for corn its money
price would advance; because, in comparing corn with
money, we in fact compare it with another commo-
dity ; and for the same reason, when there is a great
demand for gold its corn price will increase ; but in
neither case will a bushel of corn be worth more than
a bushel of corn, or an ounce of gold more than an
ounce of gold. An ounce of gold bullion could not, what-
ever the demand might be, whilst its price was rated in
gold coin, be of more value than an ounce of coined
gold, or 31. 17s. 10|rf.
If this argument should not be considered as con-
clusive, I should urge, that a void in the currency, as
here supposed, can only be occasioned by the annihi-
lation or limitation of paper currency, and then it
would speedily be filled by importations of bullion,
which its increased value, in consequence of the dimi-
nution of circulating medium, would infallibly attract
to the advantageous market. However g^eat the scar-
city of corn might be, the exportation of money would
be limited by its increasing scarcity. Money is in
such general demand, and in the present stace of ci-
vilization is so essential to commercial transactions,
that it can never be exported to excess ; even in a war
( 12 )
such as the present, when our enemy endeavours to
interdict all commerce with us, the value which the
currency would bear from its increasing scarcity,
would prevent the exportation of it from being car-
ried so far as to occasion a void in the circulation.
Mr. Thornton has not explained to us., why any
unwillingness should exist in the foreign country to
receive our goods in exchange for their corn ; and it
would be necessary for him to shew, that if such an
unwillingness were to exist, we should agree to indulge
it so far as to consent to part with our coin.
If we consent to give coin in exchange for goods,
it must be from choice, not necessity. We should not
import more goods than we export, unless we had a
redundancy of currency, which it therefore suits us to
make apart of our exports. The exportation of the coin
is caused by its cheapness, and is not the effect, but
the cause of an unfavourable balance : we should not
export it, if we did not send it to a better market, or
if we had any commodity which we could export more
profitably. It is a salutary remedy for a redundant
currency; and as I have already endeavoured to
prove, that redundancy or excess is only a relative
term, it follows, that the demand for it abroad arises
only from the comparative deficiency of the currency
of the importing country, which there causes its supe-
rior value.
It resolves itself entirely into a question of interest.
If the sellers of the corn to England, to the amount
I will suppose of a million, could import goods which
( 13 )
cost a million in England, but would produce, when
sold abroad, more than if the million had been sent in
money, goods would be preferred ; if otherwise, money
would be demanded.
It is only after a comparison of the value in
their markets and in our own, of gold and other
commodities, and because gold is cheaper in the
London market than in their 's, that foreigners pre-
fer gold in exchange for their corn. If we dimi-
nish the quantity of currency, we give an addi-
tional value to it : this will induce them to alter
their election, and prefer the commodities. If I
owed a debt in Hamburgh of 100/., I should endea-
vour to find out the cheapest mode of paying it. If
I send money, the expence attending its transportation
being, I will suppose 5/., to discharge my debt will
cost me 105/. If I purchase cloth here, which, with
the expences attending its exportation, will cost me
106/., and which will, in Hamburgh, sell for 100/.,
it is evidently more to my advantage to send the
money. If the purchase and expences of sending hard-
ware to pay my debt, will take 107/., I should prefer
sending cloth to hardware, but I would send neither
in preference to money, because money would be the
cheapest exportable commodity in the London market.
The same reasons would operate with the exporter of
the corn, if the transaction were on his own account.
But if the Bank, iC fearful for the safety of their esta-
blishment," and knowing that the requisite number of
guineas would be withdrawn from their coffers at the
( 14 )
mint price,, should think it necessary to diminish the
amount of their notes in circulation, the proportion
between the value of the money, of the cloth, and of
the hardware, would no longer be as 105, 106, and
107 ; but the money would become the most valuable
of the three, and therefore would be less advantage-
ously employed in discharging the foreign debt.
If, which is a much stronger case, we agreed to
pay a subsidy to a foreign power, money would not be
exported whilst there were any goods, which could
more cheaply discharge the payment. The interest of
individuals would render the exportation of the money
unnecessary.*
Thus then specie will be sent abroad to discharge a
debt only w hen it is superabundant ; only when it is
the cheapest exportable commodity. If the Bank
were at such a time paying their notes in specie, gold
would be demanded for that purpose. It would be
obtained there at its mint price, whereas its price as
* This is strongly corroborated, by the statement of Mr. Rose,
in the House of Commons, that our exports exceeded our imports
by (I believe) sixteen millions. In return for those exports no
bullion could have been imported, because it is well known, that the
price of bullion having been during the whole year higher abroad
than in this country, a large qnantity of our gold coin has been ex-
ported. To the value of the balance of exports, therefore, must be
added the value of the bullion exported. A part of the amount
may be due to us from foreign nations, but the remainder must be
precisely equal to our foreign expenditure, consisting of subsidies
to our allies, and the maintenance of our fleets and armies on fo-
reign stations.
( 15 )
bullion would be something above its value as coin,
because bullion could, and coin could not, be legally
exported.
It is evident, then, that a depreciation of the circu-
lating medium is the necessary consequence of its re-
dundance ; and that in the common state of the na-
tional currency this depreciation is counteracted by
the exportation of the precious metals.*
*It has been observed, in a work of great and deserved repute, the
Edinburgh Review,}: that an increase in the paper currency will
only occasion a rise in the paper or currency price of commodi-
ties, but will not cause an increase in their bullion price.
This would be true at a time when the currency consisted wholly
of paper not convertible into specie, but not while specie formed
any part of the circulation. In the latter case the effect of an in-
creased issue of paper would be to throw out of circulation au
equal amount of specie ; but this could not be done without adding
to the quantity of bullion in the market, and thereby lowering Up-
value, or in other words, increasing the bullion price oj commo-
dities. It is only in consequence of this fall in the value of the
metallic currency, and of bullion, that the temptation to export them
arises ; and the penalties on melting the coin is the sole cause of
a small difference between the value of the coin and of bullion, or
a small excess of the market above the mint price. But exporting
of bullion is synonymous with an unfavourable balance of trade.
From whatever cause an exportation of bullion, in iichange for
commodities, may proceed, it is called (I think very incorrectly)
an unfavourable balance of trade.
It is highly essential to a due understanding of this subject, that
we should accurately distinguish between cause and effect. In the
work to which I have already alluded, it is said, $ ii When the
" local rise of the price of goods consists in the actual increase of
I Vol. 1, page 183. § Page 181.
( 16 )
Such, then, appear to me to be the laws that regu-
late the distribution of the precious metals through-
out the world, and which cause and limit their circu-
lation from one country to another, by regulating their
value in each. But before I proceed to examine on
these principles the main object of my enquiry, it is
necessary that I should shew what is the standard mea-
sure of value in this country, and of which, therefore,
our paper currency ought to be the representative,
because it can only be by a comparison to this stan-
dard that its regularity, or its depreciation, may be
estimated.
" their bullion price, a real fall of the foreign exchange will gene-
" rally take place, and will occasion, by the demand for bullion to
u be exported, a fluctuating excess of the market price above the
" mint price of gold." Here, and in many other parts of the same
article, the fall in the exchange, or the unfavourable balance of
trade, is stated to be the cause of the excess of the market above
the mint price of gold, but to me it appears to be the effect of such
excess. An increase of paper currency we have just seen, lowers
the value of gold bullion but raises its money price. It is the fall-
in its value which causes its exportation, and therefore the fall of
the exchange.
When the circulation consists wholly of paper, any increase in
its quantity, will raise the money price of bullion without lowering
its value, in the same manner, and in the same proportion, as it
will raise the prices of other commodities, and for the same reason
will lower the foreign exchanges ; but this will only be a nominal,
not a real fall, and will not occasion the exportation of bullion,
because the real value of bullion will not be diminished, as thert
will be no increase to the quantity in the market.
( n )
No permanent * measure of value can be said to
exist in any nation, while the circulating medium con-
sists of two metals, because they are constantly sub-
ject to vary in value with respect to each other. How-
ever exact the conductors of the mint may be, in pro-
portioning the relative value of gold to silver in the
coins, at the time when they fix the ratio, they cannot
prevent one of these metals from rising, while the
other remains stationary, or falls in value. Whenever
this happens, one of the coins will be melted to be sold
for the other. The great Mr. Locke,, Lord Liver-
pool, and many other writers, have ably considered
this subject, and have all agreed, that the only remedy
for the evils in the currency proceeding from this
source, is the making one of the metals only, the stan-
dard measure of value. Mr. Locke considered sil-
ver as the most proper metal for this purpose, and
proposed that gold coins should be left to find their
own value, and pass for a greater or lesser number of
* Strictly speaking, there can be no permanent measure of value.
A measure of value should itself be invariable; but this is not the
case with either gold or silver, they being subject to iluctuations as
well as other commodities. Experience has indeed taught us, that
though the variations in the value of gold or silver may be considera-
ble, on a comparison of distant periods, yet for short spaces of time
their value is tolerably fixed. It is this property, among their other
excellencies, which fits them better than any other commodity for
tin- ues of money. Either gold or silver may therefore, in the
point of view in which we are considering them, be. called a rate.
sure of \alue.
( 18 )
shillings, as the market price of gold might vary with
respect to silver.
Lord Liverpool, on the contrary, maintained that
gold was not only the most proper metal for a gene-
ral measure of value in this country, but that, by the
common consent of the people, it had become so, was
so considered by foreigners, and that it was best suit-
ed to the increased commerce and wealth of England.
He, therefore, proposed, that gold coin only should
be a legal tender for sums exceeding one guinea, and
silver coins for sums not exceeding that amount. As
the law now stands, gold coin is a legal tender for
all sums ; but it was enacted in the year 1774, '" That
" no tender in payment of money made in the silver
<c coin of this realm, of any sum exceeding the sum of
cc twenty-five pounds at any one time, shall be reputed
" in law, or allowed to be legal tender within Great-
ic Britain or Ireland, for more than according to its
" value by weight, after the rate of 5s. 2d. for each
><r ounce of silver." The same regulation was revived
in 1798, and is now in force.
For many reasons given by Lord Liverpool, it ap-
pears proved beyond dispute, that gold coin has been
for near a century the principal measure of value, but
this is, I think, to be attributed to the inaccurate deter-
mination of the mint proportions. Gold has been
valued too high ; no silver, therefore, can remain in
circulation which is of its standard weight.
If a new regulation were to take pUce, and s^ver to
be valued too high., or ( which is the same thing) if
( 19 )
the market proportions between the prices of gold and
silver were to become greater than those of the mint,
gold would then disappear, and silver become the
standard currency.
This may require further explanation. The relative
value of gold and silver in the coins is as 15t| ? to 1.
An ounce of gold which is coined into 31. 17s. lOltf.
of gold coin, is worth, according to the mint regula-
tion, I^t^t ounces of silver, because that weight of
silver is also coined into 31. 17s. lOfrf. of silver coin.
Whilst the relative value of gold to silver is in the
market under 15 to 1, which it has been for a great
number of years till lately, gold coin would necessarily
be the standard measure of value, because neither the
Bank, or any individual, would then send 15-r£ + ozs.
of silver to the mint to be coined into 3l. 17s. lOjrf.
v\hen they could sell that quantity of silver in the
market for more than 31. Vis. \0{d. in gold coin, and
this they could do by the supposition, that less than 15
ounces of silver would purchase an ounce of gold.
But if the relative value of gold to silver be more
than the mint proportion of \.d- g ^io 1, no gold would
then be sent to the mint to be coined, because as ei-
ther of the metals arc a legal tender to any amount,
the possessor of an ounce of gold would not send it to
the mint to be coined into 31. 17s. IQid* of gold coin.
whilst he could sell it, which he could do in such case,
for more than 31. 17,v. \0\d. of silver coin. Not only
would not gold be carried to the mint to be coined,
but the illicit trader would melt the gold coin, .and sell
c 2
( 20 )
it as bullion for more than its nominal value in the
silver coin. Thus then gold would disappear from
circulation, and silver coin become the standard mea-
sure of value. As gold has lately experienced a con-
siderable rise compared with silver, (an ounce of stan-
dard gold, which, on an average of many years, was
of equal value to 14! ozs. of standard silver, being
now in the market of the same value as 151 oz.) this
would be the case now were the Bank Restric-
tion-bill repealed, and the coinage of silver freely al-
lowed at the mint, in the same manner as that of gold ;
but in an act of parliament of 39 Geo. III. is the fol-
lowing clause : —
u Whereas inconvenience may arise from any coinage of silver
" until such regulations may be formed as shall appear necessary ;
u and whereas from the present low price of silver bullion, owing
" to temporary circumstances, a small quantity of silver bullion
" has been brought to the mint to be coined, and there is reason to
" suppose that a still further quantity may be brought ; and it is
" therefore necessary to suspend the coining of silver for the pre-
(l sent ; be it therefore enacted, That from and after the passing of
" this act, no silver bullion shall be coined at the mint, nor shall
c< any silver coin that may have been coined there be delivered, any
" law to the contrary notwithstanding."
This law is now in force.
It would appear, therefore, to have been the inten-
tion of the legislature to establish gold as the standard
of currency in this country. Whilst this law is in
force, silver coin must be confined to small payments
only, the quantity in circulation being barely sufficient
for that purpose. It might be for the interest of a
( 21 )
debtor to pay his large debts in silver eoin if he could
get silver bullion coined into money ; but being pre-
vented by the above law from doing so, he is necessa-
rily obliged to discharge his debt with gold coin.
which he could obtain at the mint with gold bullion to
any amount. Whilst this law is in force, gold must
always continue to be the standard of currency.
Were the market value of an ounce of gold to be-
come equal to thirty ounces of silver, gold would
nevertheless be the measure of value, whilst this pro-
hibition continued in force. It would be of no avail,
that the possessor of 30 ounces of silver should know
that he once could have discharged a debt of 3/. 17*.
l0\d. by procuring ID-^omices of silver to be coined
at the mint, as he would in this case have no other
means of discharging his debt but by selling his 30
oz. of silver at the market value, that is to say, for
one ounce of gold, or 31. 17s. lOid. of gold coin.
The public has sustained, at different times, very seri-
ous loss from the depreciation of the circulating me-
dium, arising from the unlawful practice of clipping
the coins.
In proportion as they become debased, so the prices
of every commodity for which they are exchangeable
rise in nominal value, not excepting gold and silver
bullion : accordingly we find, that before the re-coin-
age in the reign of King William the Third, the silver
currency had become so degraded, that an ounce of
silver, which ought to be contained in sixty -two pence,
( m )
sold for seventy-seven pence ; and a guinea, which
was valued at the mint at twenty shillings, passed in
all contracts for thirty shillings. This evil was then
remedied by the re-coinage. Similar effects followed
from the debasement of the gold currency, which were
again corrected in 1774 by the same means.
Our gold coins have, since 1774, continued nearly
at their standard purity ; but our silver currency has
again become debased. By an assay at the mint in
1 798, it appears that our shillings were found to be
twenty-four per cent., and our sixpences thirty-eight per
cent, under their mint value ; and I am informed, that
by a late experiment they were found considerably more
deficient. They do not, therefore, contain as much
pure silver as they did in the reign of King William.
This debasement, however, did not operate previously
to 1798, as on the former occasion. At that time both
gold and silver bullion rose in proportion to the de-
basement of the silver coin. All foreign exchanges
were against us full twenty per cent., and many of
them still more. But although the debasement of the
silver coin had continued for many years, it had nei-
ther, previously to 1798, raised the price of gold or
silver, nor had it produced any effect on the exchanges.
This is a convincing proof, that gold coin was, du-
ring that period, considered as the standard measure of
value. Any debasement of the gold coin would then
have produced the same effects on the price of gold
and silver bullion, and on the foreign exchanges, which
( 23 }
were formerly caused by the debasement of fhe silver
coins*.
While the currency of different countries consists of
the precious metals, or of a paper money, which is at
all times exchangeable for them ; and while the me-
tallic currency is not debased by wearing:, or clipping-,
a comparison of the weight, and degree of fineness of
their coins, will enable us to ascertain their par of ex-
change. Thus the par of exchange between Holland
and England is stated to be about eleven florins, be-
cause the pure silver contained in eleven florins is
equal to the pure silver contained in twenty standard
shillings.
This par is not, nor can it be, absolutely fixed ; be-
cause, gold coin being the standard of commerce in
England, and silver coin in Holland, a pound sterling,
or |4- of a guinea, may at different times be more or
less valuable than twenty standard shillings, and there-
fore more or less valuable than its equivalent of eleven
florins. Estimating the par either by silver or by
gold will be sufficiently exact for our purpose.
If I owe a debt in Holland ; by knowing the par of
exchange, I also know the quantity of our money
which will be necessary to discharge it.
* When the gold coin was debased, previously to the re»coiuage in
177 1, cold and silver bullion rose above their mint prices, and till
immediately on the gold coin attaining its present perfection. The
exchanges were, owing to the same causes, from beiug unfavourable
rendered favourable
( 2* )
If my debt amount to 1 100 florins, and gold have not
varied in value, 100/. in our pure gold coin will pur-
chase as much Dutch currency as 'is necessary to pay
my debt. By exporting the 100/. therefore in coin,
or (which is the same thing) paying a bullion mer-
chant the 100/. in coin, and allowing him the expences
attending its transportation, such as freight, insurance,
and his profit, he will sell me a bill which will dis-
charge my debt ; at the same time he will export the
bullion, to enable his correspondent to pay the bill
when it shall become due.
These expences then are the utmost limits of an un-
favourable exchange. However great my debt may
be, though it equalled the largest subsidy ever given
by this country to an ally ; while I could pay the bul-
lion-merchant in coin of standard value, he would be
glad to export it, and to sell me bills. But if I pay
him for his bill in a debased coin, or in a depreciated
paper-money, he will not be willing to sell me his bill
at this rate ; because if the coin be debased, it does
not contain the quantity of pure gold or silver which
ought to be contained in 100/., and he must therefore
export an additional number of such debased pieces of
money, to enable him to pay my debt of 100/., or its
equivalent, 1100 florins. If I pay him in paper-mo-
ney; as he cannot send it abroad, he will consider whe-
ther it will purchase as much gold or silver bullion as
is contained in the coin for which it is a substitute :
if it will do this, paper will be as acceptable to him as
coin ; but if it will not, he will expect a further pre-
( 25 )
nnnm for his bill, equal to the depreciation of the
paper.
While the circulating medium consists, therefore,
of coin undebased, or of paper-money immediately ex-
changeable for undebased coin, the exchange can
never be more above, or more below, par, than the
expences attending the transportation of the precious
metals. But when it consists of a depreciated paper-
monev, »t necessarily will fall according to the degree
of the depreciation.
The exchange will, therefore, be a tolerably accu-
rate criterion by which we may judge of the debase-
ment of the currency, proceeding cither from a clip-
ped coinage, or a depreciated paper-money.
It is observed by Sir James Stuart, " That if tlic
* foot measure was altered at once over all England,
" by adding to it, or taking from it, any proportional
" part of its standard length, the alteration would be
" best discovered, by comparing the new foot with
" that of Paris, or of any other country, which had
" suffered no alteration.
" Just so, if the pound sterling, whicli is the En-
" glish unit, shall be found any how changed ; and if
" the variation it has met with be difficult to ascertain,
" because of a complication of circumstances ; the best
" way to discover it will be to compare the former
" and the present value of it. with the money of other
" nations which has suffered no variation This the
" exchange will perform with the greatest exact*
" ness."
( 26 }
The Edinburgh reviewers, in speaking of Lord
King's pamphlet, observe, that " it does not follow
" because our imports always consist partly of bullion,
" that the balance of trade is therefore permanently in
" our favour. Bullion/' they say, " is a commodity, for
" which, as for every other, there is a varying de-
" mand ; 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 any other commodi-
iS ties."
No person ever exports or imports bullion without
first considering the rate of exchange. It is by the
rate of exchange that he discovers the relative value
of bullion in the two countries between which it is
estimated. It is therefore consulted by the bullion-
merchant in the same manner as the price-current is
by other merchants, before they determine on the ex-
portation or importation of other commodities. If
eleven florins in Holland contain an equal quantity of
pure silver as twenty standard shillings, silver bullion,
equal in weight to twenty standard shillings, can
never be exported from London to Amsterdam whilst
the exchange is at par, or unfavourable to Holland.
Some expence and risk must attend its exportation,
and the very term par, expresses that a quantity of
silver bullion, equal to that weight and purity, is to
he obtained in Holland by the purchase of a bill of
exchange, free of all expence. Who would send bul-
3
( 27 )
lion to Holland at an expcncc of three or four percent,
when, by the purchase of a bill at par, he in fact ob-
tains an order for the delivery to his correspondent in
Holland, of the same weight of bullion which he was
about to export ?
It would be as reasonable to contend, that when the
price of corn is higher in England than on the Con-
tinent, corn would be sent, notwithstanding all the
charges on its exportation, to be sold in the cheaper
market,
Having already noticed the disorders to which a
metallic currency is exposed, I will proceed to consi-
der those which, though not caused by the debased
state of either the gold or silver coins, are neverthe-
less more serious in their ultimate consequences.
Our circulating medium is almost wholly composed
of paper, and it behoves us to guard against the de-
preciation of the paper currency with at least as much
vigilance as against that of the coins.
This we have neglected to do.
Parliament, by restricting the Bank from paying in
specie, have enabled the conductors of that concern to
increase or decrease at pleasure the quantity and amount
of their notes ; and the previously existing checks
against an over-issue having been thereby removed,
those conductors have acquired the power of increas-
ing or decreasing the value of the paper currency.
In tracing the present evils to their source, and
proving Iheir existence by an appeal to the two uner-
( 29 )
ring tests I have before mentioned, namely, the rate
of exchange and the price of bullion, I shall avail
myself of the account given by Mr. Thornton of the
conduct of the Bank before the restriction, to shew
how clearly they acted on the principle which he has
expressly acknowledged, viz. that the value of their
notes is dependent on their amount, and that they as-
certained the variation in their value by the tests I
have just referred to.
Mr. Thornton tells us, ""That if at anytime the
u exchanges of the country became so unfavourable
" as to produce a material excess of the market above
" the mint price of gold," [here the cause is mistaken
for the effect] rf the directors of the Bank, as appears
f{ by the evidence of some of their body, given to
i( parliament, were disposed to resort to a reduction of
" their paper, as a means of diminishing or removing
" the excess, and of thus providing for the security
*' of their establishment. They moreover have at all
* c times," he says, ec been accustomed to observe some
" limit as to the quantity of their notes for the same
* c prudential reasons." And in another place : "When
" the price which our coin will fetch in foreign coun-
" tries, is such as to tempt it out of the kingdom, the
•* directors of the Bank naturally diminish, in some
" degree, the quantity of their paper through an anxi-
" ety for the safety of their establishment. By di-
iC minishing their paper, they raise its value ; and in
" raising its value, they raise also the value in Eng-
( 29 )
•'*" land, of the current coin which is exchanged for it.
" Thus the value of our gold coin conforms itself to the
" value of the current paper, and the current paper is
<c rendered by the Bank -directors, of that value which
" it is necessary that it should bear in order to prevent
" large exportations ; — a value sometimes rising a little
" above, and sometimes falling a little below, the price
" which our coin bears abroad."
The necessity which the Bank felt itself under to
guard the safety of its establishment, therefore, always
prevented, before the restriction from paying in specie,
a too lavish issue of paper money.
Thus we find that, for a period of twenty-three
years previously to the suspension of cash payments in
1797, the average price of gold bullion was
SI. 17s. l\d. per oz. about 2{d. under the mint price;
and for sixteen years previously to ]774, it never was
much above 4Z. per oz. It should be remembered
that during these sixteen years our gold coin was de-
based by wearing, and it is therefore probable that
M. of such debased money did not weigh as much as
the ounce of gold for which it was exchanged.
Dr. A. Smith considers every permanent excess of
the market above the mint price of gold, as refcrrible
to the state of the coins. While the coin was of its
standard weight and purity, the market price of gold
bullion, he thought, could not greatly exceed the
mint price.
Mr. Thornton contends that this cannot be the only
( so )
cause. " We have/' he says, " lately experienced
f( fluctuations in our exchanges, and correspondent
ec variations in the market, compared with the mint
*' price of gold, amounting to no less than eight or ten
ee per cent. ; the state of our coinage continuing in all
e( respects the same." Mr. Thornton should have re-
flected that at the time he wrote, specie could not be
demanded at the Bank in exchange for notes ; that this
was a cause for the depreciation of the currency which
Dr. Smith could never have anticipated. If Mr.
Thornton had proved that there had been a fluctu-
ation of ten per cent, in the price of gold, while the
Bank paid their notes in specie, and the coin was un-
debased, he would then have convicted Dr. Smith of
<e having treated this important subject in a defective
et and unsatisfactory manner."*
But as all checks against the over-issues of the
Bank are now removed by the act of parliament,
which restricts them from paying their notes in specie,
they are no longer bound by C( fears for the safely of
* An excess in the market above the mint price of gold or silver
bullion, may, whilst the coins of both metals are legal tender, and
there is no prohibition against the coinage of either metal, be
caused by a variation in the relative value of those metals ; — but an
excess of the market above the mint price proceeding from this
cause will be at once perceived by its affecting only the price of
one of the metals. Thus gold would be at or below, while silver
was above, its mint price, or silver at or below its mint price, -whilst
gold was above.
In
( 31 )
their establishment," to limit the quantity of their
notes to that sum which shall keep them of the same
value as the coin which they represent. Accordingly
we find that gold bullion has risen from Si. 17s. lid.
the average price previously to 1797, to 4/. lO.s. and
has been lately as high as 4/. 13s. per oz.
We may therefore fairly conclude that this differ-
ence in the relative value, or, in other words, that
this depreciation in the actual value of bank-notes has
been caused by the too abundant quantity which the
Bank has sent into circulation. The same cause
which has produced a difference of from fifteen to
twenty per cent, in bank-notes when compared wilh
In the Litter end of 1795, when the Bank had considerably more
notes in circulation than either the preceding or the subsequent
year, when their embarrassments had already commenced, when
they appear to have resigned all prudence in the management of their
concerns, and to have constituted Mr. Pitt sole director, the prfce
of gold bullion did for a short time rise to 4/. 3s. or 4L 4s. per
oz. ; but the directors were not without their fears for the conse-
quences. In a remonstrance sent by them to Mr. Pitt, dated October
1795, after stating, " that the demand for gold not appearing likelv
" soon to cease," and "that it had excited great apprehension lithe
'* court of directors," they observe, '* The present price of gold
u being 4/. 3s. to 4/. 4*. per ounce, and our guineas being to be
" purchased at 3/. 175. 10j</., clearly demonstrates the grounds of
il our fears; it being only necessary to state those facts to the
u Chancellor of the Exchequer.'" It is remarkable that no price
of gold above the mint price is quoted during the whole year in
Wetenhall's li^t. In December it is there marked 31. 17a. 6il.
32 )
gold bullion, may increase it to fifty per cent. There
can be no limit to the depreciation which may arise
from a constantly increasing quantity of paper. The
stimulus which a redundant currency gives to the expor-
tation of the coin, has acquired new force, but cannot,
as formerly, relieve itself. We have paper monej' only in
circulation, which is necessarily confined to ourselves.
Every increase in its quantity degrades it below the
value of gold and silver bullion, below the value of
the currencies of other countries.
The effect is the same as that which would have
been produced from clipping our coins.
If one-fifth were taken off from every guinea, the
market price of gold bullion would rise one-fifth
above the mint price. Forty-four guineas and a half
(the number of guineas weighing a pound, and there-
fore called the mint price, ) would no longer weigh a
pound, therefore a fifth more than that quantity, or
about 56/., would be the price of a pound of gold,
and the difference between the market and the mint
price, between 56/. 'and 46/. 14s. 6<r/., would measure
the depreciation.
If such debased coin were to continue to be called
by the name of guineas, and if the value of gold bul-
lion and all other commodities were rated in the de-
based coin, a guinea fresh from the mint would be said
to be worth 1/. 5s. and that sum would be given for it
by the illicit trader ; but it would not be the value of
the new guinea which had increased, but that of the
( 33 )
debased guineas which had fallen. This would im-
mediately be evident, if a proclamation were issued,
prohibiting the debased guineas from being current
but by weight at the mint price of 3/. 17s. lOfrf. ; this
would be constituting the new and heavy guineas, the
standard measure of value, in lieu of the clipped and
debased guineas. The latter would then pass at their
true value, and be called 17 or 18 shi lings-pieces. So
if a proclamation to the same effect were now enforced,
bank-notes would not be less current, but would pass
only for the value of the gold bullion which they
would purchase. A guinea would then no longer be
said to be worth 1/. 5s. but a pound note would be
current only for 16 or 17 shillings. At present gold
coin is only a commodity, and bank-notes are the
standard measure of value, but in that case gold coin
would be that measure, and bank-notes would be the
marketable commodity.
" It is," says Mr. Thornton, r< the maintenance of
" our general exchanges, or, in other words, it is the
4 agreement of the mint price with the bullion price
" of gold, which seems to be the true proof that the
" circulating paper is not depreciated." fc
When the motive for exporting gold occurs, while
the Bank do not pay in specie, and gold cannot therefore
be obtained at its mint price, the small quantity that
can be procured will be collected for exportation, and
bank-notes will be sold at a discount for gold in pro-
portion to their excess. In saying however that gold
is at a high price, we are mistaken ; it is not gold, it
n
-/ ( 34 )
is paper which has changed its value. Compare an
ounce of gold, or 31. 17s. 10k/. to commodities, it
bears the same proportion to them which it has before
done ; and if it do not, it is referrible to increased
taxation, or to some of those causes which are so con-
stantly operating on its value. But if we compare
the substitute of an ounce of gold, 31. 17s. \0id. in
bank-notes, with commodities, we shall then discover
the depreciation of the bank-notes. In every market
of the world I am obliged to part with 47. 10s. in
bank-notes to purchase the same quantity of commo-
dities which I can obtain for the gold that is in
31. 17s. \0\d. of coin.
It is often asserted, that a guinea is worth at Ham-
burgh 26 or 28 shillings ; but we should be very much
deceived if we should therefore conclude that a guinea
could be sold at Hamburgh for as much silver as is
contained in 26 or 28 shillings. Before the alteration
in the relative value of gold and silver, a guinea would
not sell at Hamburgh for as much silver coin as is
contained in 21 standard shillings ; it will at the pre-
sent market price sell for a sum of silver currency,
which, if imported and carried to our mint to be* coin-
ed, will produce in our standard silver coin 21s. bd*
It is nevertheless true, that the same quantity of
silver will, at Hamburgh, purchase a bill payable in
London, in Bank-notes, for 26 or 28 shillings. Can
there be a more satisfactory proof of the depreciation
of our circulating medium ?
* The relative value of gold and silver is on the Continent nearly
the same as in London.
( 35 )
It is said, that, if the Restriction-bill were not in
force, every guinea would leave the country.*
This is, no doubt, true; but if the Bank were to di-
minish the quantity of their notes until they had in-
creased their value fifteen per cent., the restriction
might be safely removed, as there would then be no
temptation to export specie. However long it may be
deferred, however great may be the discount on their
notes, the Bank can never resume their payments in
specie, until they first reduce the amount of their notes
in circulation to these limits.
The law is allowed by all writers on political eco-
nomy to be a useless barrier against the exportation of
guineas ; it is so easily evaded, that it is doubted whe-
ther it has had the effect of keeping a single guinea
more in England than there would have been without
such law. Mr. Locke, Sir J. Stuart, Dr. A. Smith,
Lord Liverpool, and Mr. Thornton, all agree on this
subject. The latter gentleman observes, " That the
{< state of the British law unquestionably serves to dis-
" courage and limit, though not effectually to hinder,
e< that exportation of guineas which is encouraged by
rt an unfavourable balance of trade, and perhaps
" scarcely lessens it when the profit on exportation
" becomes very great." Yet after every guinea that
can in the present state of things be procured by the
* It must be meant that eYery guinea in die J&uk w oukl teare tht
country; the temptation of fifteen per cent, i^ amply sufficient to
send those out which can be collected from tin* circulation.
( 36 )
illicit trader, has been melted and exported, he will
hesitate before he openly buys guineas with bank-notes
at a premium, because, though considerable profit
may attend such speculation, he will thereby render
himself an object of suspicion. He may be watched
and prevented from effecting his object. As the pe-
nalties of the law are severe, and the temptation to
informers great, secrecy is essential to his operations.
When guineas can be procured by merely sending a
bank-note for them to the Ea.ik, the law will be easily
evaded ; but when it is necessary to collect them openly
and from a widely diffused circulation, consisting al-
most wholly of paper, the advantage attending it must
be very considerable before any one will encounter the
risk of being detected.
When we reflect that above sixty millions sterling-
have been coined into guineas during his present Ma-
jesty's reign, we may form some idea of the extent to
which the exportation of gold must have been carried.
— But repeal the law against the exportation of gui-
neas, permit them to be openly sent out of the coun-
try, and what can prevent an ounce of standard gold in
guineas from selling at as good a price for bank-notes,
as an ounce of Portugueze gold coin, or standard
gold in bars, when it is known to be equal to them in
fineness ? And if an ounce of standard gold in gui-
neas would sell in the market, as standard bars do now,
at 47. 10s. per oz., or as they have lately done at
4/. 13s. per oz., what shopkeeper would sell his goods
at the same price either for gold or bank-notes indif-
( 57 )
ferently? If the price of a coat were 31. 17s. lOhl.,
or an ounce of gold, and if at the same time an ounce
of gold would sell for 4/. 13s., is it conceivable that it
would be a matter of indifference to the tailor whether
he were paid in gold or in bank-notes ?
It is only because a guinea will not purchase more
than a pound-note and a shilling, that many hesitate to
allow that bank-notes are at a discount. The Edin-
burgh Review supports the same opinion ; but if my
reasoning be correct, I have shewn such objections to
be groundless.
Mr. Thornton has told us that an unfavourable
trade will account for an unfavourable exchange ; but
we have already seen that an unfavourable trade, if
such be an accurate term, is limited in its effects on
the exchange. That limit is probably four or five per
cent. This will not account for a depreciation of fif-
teen or twenty per cent. Moreover Mr. Thornton has
told us, and I entirely agree with him, ',' That it may
" belaid down as a general truth, that the commercial
lf exports and imports of a state naturally proportion
" themselves in some degree to each other, and that
" the balance of trade therefore cannot continue for a
" very long time to be either highly favourable, or
" highly unfavourable to a country." Now the low
exchange, so far from being temporary, existed be-
fore Mr. Thornton wrote in 1802, and has since been
progressively increasing, and is now from fifteen to
twenty per cent, against us. Mr. Thornton must
therefore according to his own principles attribute it
( 38 )
to some more permanent cause than an unfavourable
balance of trade, and will, I doubt not, whatever his
opinion may formerly have been, now agree that it is
to be accounted for only by the depreciation of the
circulating medium.
It can, I think, no longer be disputed that bank-notes
are at a discount. While the price of gold bullion is
47. 10s. per oz., or in other words, while any man will
consent to give that which professes to be an obliga-
tion to pay nearly an ounce, and a sixth of an ounce
of gold, for an ounce, it cannot be contended that
47. 10s. in notes and 4/. 10s. in gold coin are of the
same value.
An ounce of gold is coined into 31. 17s. 10$& ; by
possessing that sum therefore I have an ounce of gold,
and would not give 47. 10s. in gold coin, or notes
which I could immediately exchange for 4/. 10s., for
an ounce of gold.
It is contrary to common sense to suppose that such
could be the market value, unless the price were esti-
mated in a depreciated medium.
If the price of gold were estimated in silver indeed,
the price might rise to 47., 5/., or 10/. an oz. and it
would, of itself, be no proof of the depreciation of
paper currency, but of an alteration in the relative
value of gold and silver. I have, however, I think
proved, that silver is not the standard measure of value,
and therefore not the medium in which the value of
gold is estimated. But if it were ; as an ounce of
gold is only worth in the market 151 oz. of silver, and
1
( « )
as 15£ ounces of silver is precisely equal in weight,
and is therefore coined into 80 shillings, an ounce of
gold ought not to sell for more than 4/.
Those then who maintain that silver is the measure
of value, cannot prove that any demand for gold
which may have taken place, from whatever cause it
may have proceeded, can have raised its price above
-il. per oz. All above that price must, on their own
principles, be called a depreciation in the value of
bank notes. It therefore follows, that if bank-notes
be the representative of silver coin, then an ounce of
gold, selling as it now does for 4/. 10s. sells for an
amount of notes which represent 17! ounces of silver,
whereas in the bullion market it can only be exchanged
for 15y ounces. Fifteen ounces and a half of silver
bullion are therefore of equal value with an engage-
ment of the Bank to pay to bearer seventeen ounces
and a half.
The market price of silver is at the present time
5s. 9 l zd. per oz. estimated in bank-notes, the mint price
being only 5s. 2d., consequently the standard silver in
100/. is worth more than 112/. in bank notes.
But bank-notes, it may be said, are the representa-
tives of our debased silver coin, and not of our stand-
ard silver. This is not true, because the law which
1 have already quoted declares silver to be a legal ten-
der lor sums only not exceeding '25/. except by weight.
If the Bank insisted on paying tlie holder of a bank-
note of 1000/. in silver coin, they would be bound
either to give him standard sjher of full weight, or
( 40 )
debased silver of an equal value, with the exception
of 25Z. which they might pay him in debased coin.
But the 1000Z. so consisting of 975Z. pure money, and
25/. debased, is worth more than 11 \2l. at the present
market value of silver bullion.
It is said that ths amouat of bank-notes has not in-
creased in a greater proportion than the augmentation
of our trade required, and therefore cannot be exces-
sive. This assertion would be difficult to prove, and
if true, no argument but what is delusive could be
founded on it. In the first place, the daily improve-
ments which we are making in the art of economizing
the use of circulating medium, by improved methods
of banking, would render the same amount of notes
excessive now, which were necessary for the same state
of commerce at a former period. Secondly, there is
a constant competition between the Bank of England
and the country-banks to establish their notes, to the
exclusion of those of their rivals, in every district where
the country banks are established.
As the latter have more than doubled in number
within very few years, is it not probable that their ac-
tivity may have been crowned with success, in dis-
placing with their own notes many of those of the
Bank of England ?
If this have happened, the same amount of Bank of
England notes would now be excessive ; which, with
a less extended commerce, was before barely sufficient
to keep our currency on a level with that of other
countries. No just conclusion can therefore be drawi)
( 41 )
from the actual amount of bank-notes in circulation,
though the fact, if examined, would, I have no doubt,
be found to be, that the increase in the amount of
bank-notes, and the high price of gold, have usually
accompanied each other.
It is doubted, whether two or three millions of
Bank-notes (the sum which the Bank is supposed to
have added to the circulation, over and above the
amount which it will easily bear,) could have had
such effects as are ascribed to them ; but it should be
recollected, that the Bank regulate the amount of the
circulation of all the country banks, and it is proba-
ble, that if the Bank increase their issues three mil-
lions, they enable the country banks to add more than
twelve millions to the general circulation of England.
The money of a particular country is divided
amongst its different provinces by the same rules as
the money of the world is divided amongst the different
nations of which it is composed. Each district will
retain in its circulation such a proportionate share of
the currency of the country, as its trade, and conse-
quently its payments may require, compared to the
trade of the whole ; and no increase can take place in
the circulating medium of one district, without being
generally diffused, or calling forth a proportionable
quantity in every other district. It is this which keeps
a country-bank nolc always of the same value aa a
Bank of England note. If in London, where Bank of
England notes only are current, one million be added
to the amount in circulation, the currency will be-
( 42 )
come cheaper there than elsewhere, or goods will be
come dearer. Goods will, therefore, be sent from
the country to the London market, to be sold at the
high prices, or which is much more probable, the
country banks will take advantage of the relative de-
ficiency in the country currency, and increase the
amount of their notes in the same proportion as the
Bank of England had done ; prices would then be
generally, and not partially affected.
In the same manner, if Bank of England notes be
diminished one million, the comparative value of the
currency of London will be increased, and the prices
of goods diminished. A Bank of England note will
then be more valuable than a country-bank note, be-
cause it will be wanted to purchase goods in the cheap
market ; and as the country banks are obliged to gi\e
Bank of England notes for their own when demanded,
they would be called upon for them till the quantity
of country paper should be reduced to the same pro-
portion which it before bore to the London paper,
producing a corresponding fall in the prices of all
goods for which it was exchangeable.
The country banks could never increase the amount
of their notes, unless to fill up a relative deficiency in
the country currency, caused by the increased issues
of the Bank of England*. If they attempted it, the
* They ifiight, on some occasions, displace Dank of England notes,
but that consideration does not affect the question which we ar«
npw disQiissiug.
( 43 j
same check which compelled the Bank of England
to withdraw part of their notes from circulation
when they used to pay them on demand in specie,
would oblige the country banks to adopt the same
course. Their notes would, on account of the in-
creased quantity, be rendered of less value than the
Bank of England notes, in the same manner as Bank
of England notes were rendered of less value than the
guineas which they represented. They would there-
fore be exchanged for Bank of England notes until
they were of the same value.
The Bank of England is the great regulator of the
country paper. When they increase or decrease the
amount of their notes, the country banks do the san^e;
and in no case can country banks add to the general
circulation., unless the Bank of England shall have
previously increased the amount of their notes.
It is contended, that the rate of interest, and not the
price of gold or silver bullion, is the criterion by which
we may always judge of the abundance of paper-
money ; that if it were too abundant, interest would
fall, and if not sufficiently so, interest would «»se. It
can, I think, be made manifest, that the rate of interest
is not regulated by the abundance or scarcity of
money, but by the abundance or scarcity of that part
of capital, not consisting of money.
" Money/' observes Dr. A. Smith, " the great
" wheel ot° circulation, the great instrument of com-
" 'merer, like all other instruments of trade, though
" it makes a part, and a very valuable part of the eapi-
3
( 44 )
" tal, makes no part of the revenue of the society to
'* wfiich it belongs ; and though the metal pieces of
" which it is composed, in the course of their annual
" circulation, distribute to every man the revenue
"'which properly belongs to him, they make them-
f f selves no part of that revenue.
Ci When we compute the quantity of industry which
•'the circulating capital of any society can employ,
f 1 we must always have regard to those parts of it
** only which consist in provisions, materials, and
/" finished work : the other, which consists in money,
/ rc and which serves only to circulate those three, must
" always be deducted. In order to put industry into
''motion, three things are requisite: — materials to.
'■' work upon, tools to work with, and the wages or
' r recompense for the sake of which the work is done.
" Money is neither a material to work upon, nor a
"tool to work with; and though the wages of the
<f workman are commonly paid to him in money, his
". real revenue, like that of all other men, consists not
" in money, but in money's worth ; not in the metal
" pieces, but what can be got for them."
And in other parts of his work, it is maintained,
that the discovery of the mines in America, which so
greatly increased the quantity of money, did not lessen
the interest for the use of it : the rate of interest being
regulated by the profits on the employment of capital,
and not by the number or quality of the pieces of
metal, which arc used to circulate its produce.
Mr. Hume has supported the same opinion. The
( « )
value of the circulating medium of every country bears
some proportion to the value of the commodities which
it circulates. In some countries this proportion is
much greater than in others, and varies, on some oc-
casions,, in the same country. It depends upon the
rapidity of circulation, upon the degree of confidence
and credit existing between traders, and above all, on
the judicious operations of banking. In England so
many means of economizing the use of circulating
medium have been adopted, that its value, compared
with the value of the commodities which it circulates,
is probably (during a period of confidence*) reduced
to as small a proportion as is practicable. What that
proportion may be has been variously estimated.
No increase or decrease of its quantity, whether
consisting of gold, silver, or paper-money, can increase
or decrease its value above or below this proportion.
If the mines cease to supply the annual consumption
of the precious metals, money will become more valua-
ble, and a smaller quantity will be employed as a cir-
culating medium. The diminution in the quantity
will be proportioned to the increase of its value. In
like manner, if new mines be discovered, the value of
the precious metals will be reduced, and an increased
quantity used in the circulation ; so that in either case
the relative value of money, to the commodities which
it circulates, will continue as before.
* In the following observations, I wish to he understood, at
supposing always the same degree of confidence and credit to exist.
( 46 )
If, whilst the Bank paid their notes on demand in
specie, they were to increase their quantity, they would
produce little permanent effect on the value of the cur
reney, because nearly an equal quantity of the coin
would be withdrawn from circulation and exported.
If the Bank were restricted from paying their notes
in specie, and all the coin had been exported, any ex-
cess of their notes would depreciate the value of the
circulating medium in proportion to the excess. If
twenty millions had been the circulation of England
before the restriction, and four millions were added to
it, the twenty-four millions would be of no more value
than the twenty were before, provided commodities had
remained the same, and there had been no correspond-
ing exportation of coins ; and if the Bank were suc-
cessively to increase it to fifty, or a hundred millions,
the increased quantity would be all absorbed in the
circulation of England, but would be, in all cases, de-
preciated to the value of the twenty millions.
I do not dispute, that if the Bank were to bring a
large additional sum of notes into the market, and
offer them on loan, but that thev would for a time af-
feet the rate of interest. The same effects would fol-
low from the discovery of a hidden treasure of gold
or silver coin. If the amount were large, the Bank,
or the owner of the treasure, might not be able to lend
the notes or the money at four, nor perhaps, above three
per cent. ; but having done so, neither the notes, nor
the money, would be retained unemployed by the bor-
rowers ; they would be sent into every market, and
( « )
would every where raise the prices of commodities,
till they were absorbed in the general circulation. It
is only during the interval of the issues of the Bank,
and their effect on prices, that we should be sensible
of an abundance of money ; interest would, during
that interval, be under its natural level ; but as soon
as the additional sum of notes or of money became
absorbed in the general circulation, the rate of interest
would be as high, and new loans would be demanded
with as much eagerness as before the additional issuer.
The circulation can never be over-full. If it be
one of gold and silver, any increase in its quantity
will be spread over the world. If it be one of paper,
it will diffuse itself only in the country where it is is-
sued. Its effects on prices will then be only local and
nominal, as a compensation by means of the exchange
will be made to foreign purchasers.
To suppose that any increased issues of the Bank can
have the eifect of permanently lowering the rate of in-
terest, and satisfying the demands of all borrowers, so
that there will be none to apply for new loans, or that a
productive gold or silver mine can have such an effect,
is to attribute a power to the circulating medium which
it can never possess. Banks would, if this were pos-
sible, become powerful engines indeed. By creating
paper money, and lending it at three or two per cent,
under the present market rate of interest, the Bank
would reduce the profits on trade in the same propor-
tion ; and if they were iufficiently patriotic to lend
their notes at an interest no higher than necessary to
( 48 )
pay the expences of their establishment, profits would
be still further reduced ; no nation, but by similar
means, could enter into competition with us, we should
engross the trade of the world. To what absurdities
would not such a theory lead us ! Profits can only be
lowered by a competition of capitals not consisting of
circulating medium. As the increase of Bank-notes
dues not add to this species of capital, as it neither in-
creases our exportable commodities, our machinery, or
our raw materials, it cannot add to our profits nor
lower interest*.
When any one borrows money for the purpose of
entering into trade, he borrows it as a medium by
which he can possess himself of ce materials, provi-
sions, &c." to carry on that trade; audit can be of
little consequence to him, provided he obtain the quan-
tity of materials, &c. necessary, whether he be obliged
to borrow a thousand, or ten thousand pieces of mo-
ney. If he borrow ten thousand, the produce of his
manufacture will be ten times the nominal value of
what it would have been, had one thousand been suf-
ficient for the same purpose. The capital actually
* I have already allowed that the Bank, as far as they enable us
to turn our coin into u materials, provisions, &c." have produced
a national benefit, as they have thereby increased the quantity of
productive capital ; but I anuhere speaking of an excess of their
notes, of that quantity which adds to our circulation without effect-
ing any corresponding exportation of coin, and which, therefore,
degrades the notes below the value of the bullion contained in the
ooin which they represent.
( « )
employed in the country is necessarily limited to the
amount of the " materials, provisions, &c." and
might be made equally productive, though not with
equal facility, if trade were carried on wholly by bar-
ter. The successive possessors of the circulating me-
dium have the command over this capital : but howe-
ver abundant may be the quantity of money or o^
bank-notes; though it may increase the nominal prices
of commodities ; though it may distribute the produc-
tive capital in different proportions ; though the Bank,
by increasing the quantity of their notes, may enable A
to carry on part of the business formerly engrossed by
B and C, nothing will be added to the real revenue
and wealth of the country. B and C may be injured,
and A and the Bank may be gainers, but they will
gain exactly what B and C lose. There will be a vio-
lent and an unjust transfer of property, but no benefit
whatever will be gained by the community.
For these reasons lam of opinion that the funds are
not indebted for their high price to the depreciation of
our currency. Their price must be regulated by the
general rate of interest given for money. If before
the depreciation I gave thirty years' purchase for land,
and twenty-five for an annuity in the stocks, I can
after the depreciation give a larger sum for the pur-
chase of land, without giving more years' purchase,
because the produce of the land will sell for a greater
nominal value in consequence of the depreciation ;
but as the annuity in the funds is paid in the depre-
ciated medium there can be no reason why I should
£
( 50 )
give a greater nominal value for it after than before
the depreciation.
If guineas were degraded by clipping to half their
present value, every commodity as well as land would
rise to double its present nominal value ; but as the in-
terest of the stocks would be paid in the degraded
guineas, they would, on that account, experience no
rise.
The remedy which I propose for all the evils in
our currency, is that the Bank should gradually de-
crease the amount of their notes in circulation until
they shall have rendered the remainder of equal value
with the coins which they represent, or, in other words,
till the prices of gold and silver bullion shall be brought
down to their mint price. I am well aware that the
total failure of paper credit would be attended with
the most disastrous consequences to the trade and com-
merce of the county, and even its sudden limitation
would occasion so much ruin and distress, that it would
be highly inexpedient to have recourse to it as the
means of restoring our currency to its just and equi-
table value.
If the Bank were possessed of more guineas than
they had notes in circulation, they could not, without
great injury to the country, pay their notes in specie,
while the price of gold bullion continued greatly above
the mint price, and the foreign exchanges unfavour-
able to us. The excess of our currency would be ex-
changed for guineas at the Bank and exported, and
would be suddenly withdrawn from circulation.
( 51 )
Before therefore they can safely pay in specie,
the excess of notes must be gradually withdrawn from
circulation. If gradually done, little inconvenience
would be felt ; so that the principle were fairly ad-
mitted, it would be for future consideration whether the
object should be accomplished in one year or in five.
I am fully persuaded that we shall never restore our
currency to its equitable state, but by this preliminary
step, or by the total overthrow of our paper credit.
If the Bank directors had kept the amount of their
notes within reasonable bounds ; if they had acted up
to the principle which thejj have avoived to have been
that which regulated their issues zvhen they were
obliged to pay their notes in specie, namely, to limit
their notes to that amount Which should prevent ihc
excess of the market above the mint price of gold,
we should not have been now exposed to all the evils
of a depreciated, and perpetually varying currency.
Though the Bank derive considerable advantage
from the present system, though the price of their
capital stock has nearly doubled since 1797, and
their dividends have proportionally increased, I am
ready to admit witli Mr. Thornton, that the directors,
as monied men, sustain losses in common with others
by a depreciation of the currency, much more serious
to them than any advantages which they may reap
from it as proprietors of Bank stock. I do therefore
acquit them of being influenced by interested motives,
but their mistakes, if they are such, are in their effects
quite as pernicious to the community
( 52 )
The extraordinary powers with which they are en-
trusted, enable them to regulate at their pleasure the
price at which those who are possessed of a particular
kind of property, called money, shall dispose of it.
The Bank directors have imposed upon these holders
of money all the evils of a maximum. To-day it is their
pleasure that 4/. 10s. shall pass for 31. 17s. 10fd., to-
morrow they may degrade 4/. 15s. to the same value,
and in another year 10Z. may not be worth more. By
what an insecure tenure is propert} r consisting of mo-
rtey or annuities paid in money held ! What security
has the public creditor that the interest on the public
debt, which is now paid in a medium depreciated fif-
teen per cent , may not hereafter be paid in one de-
graded fifty per cent. ? The injury to private cre-
ditors is not less serious. A debt contracted in 1797,
may now be paid with eighty-five per cent, of its
amount, and who shall say that the depreciation will
go no further ?
The following observations of Dr. Smith on this
subject are so important, that I cannot but recommend
them to the serious attention of all thinking men.
/■' The raising the denomination of the coin has been
" the most usual expedient by which a real public bank-
fC ruptcy has been disguised under the appearance of
'/ a pretended payment. If a sixpence, for example,
" should, either by act of parliament or royal procla-
<( mation, be raised to the denomination of a shilling,
" and twenty sixpences to that of a pound sterling,
'f the person who under the old denomination had bor-
( 53 )
" rowed twenty shillings,, or near four ounces of sil-
" ver, would, under the new, pay with twenty six-
" pences, or with something less than two ounces. A
" national debt of about a hundred and twenty mil-
" lions, nearly the capital of the funded debt of Great
f * Britain, might in this manner be paid with about
" sixty-four millions of our present money. It would
" indeed be a pretended payment only, and the crc-
" ditors of the public would be defrauded often shil-
" lings in the pound of what was due to them. The
" calamity too would extend much further than to the
" creditors of the public, and those of every private
" person would suffer a proportionable loss ; and this
c without any advantage, but in most cases with a
" great additional loss, to the creditors of the public.
" If the creditors of the public indeed were generally
u much in debt to other people, they might in some
(C measure compensate their loss by paying their cre-
' ' ditors in the same coin in which the public had paid
' f them. But in most countries the creditors of thepub-
" lie are, the greater part of them, wealthy people, who
" stand more in the relation of creditors than in that of
" debtors towards the rest of their fellow-citizens. A
" pretended payment of this kind, therefore instead of al-
" leviating, aggravates in most cases the loss of the ere-
" ditors of the public ; and without any advantage
" to the public, extends the calamity to a great mim-
" ber of other innocent people. It occasions a gcue-
" ral, and most pernicious subversion of the fortunes of
" private people; enriching in most cases the idle and
( Mr )
u profuse debtor at the expence of the industrious and
" frugal creditor, and transporting a great part of the
'•' national capital from the hands which are likely to
cc 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
<c manner as when it becomes necessary for an indivi-
" dual to do so, a fair, open, and avowed bankruptcy
<f is always the measure which is both least dishonour-
fC able to the debtor, and least hurtful to the creditor.
/' The honour of a state is surely very poorly provided
(C 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 the same time so
ce extremely pernicious."
These observations of Dr. Smith on a debased mo-
ney, are equally applicable to a depreciated paper cur-
rency. He has enumerated but a few of the disastrous
consequences which attend the debasement of the cir-
culating medium, but he has sufficiently warned us
against trying such dangerous experiments. It will
be a circumstance ever to be lamented, if this great
country, having before its eyes the consequences of a
forced paper circulation in America and France, should
persevere in a system pregnant with so much disaster.
Let us hope that she will be more wise. It is said
indeed that the cases are dissimilar : that the Bank of
England is independent of government. If this were
true, the evils of a superabundant circulation would
not be less felt ; but it may be questioned whether a
( 55 )
Bank lending many millions more to government than
its capital and savings, can be called independent of
that government.
When the order of council for suspending the cash
payments became necessary in 1797, the run upon the
Bank was, in my opinion, caused by political alarm
alone, and not by a superabundant, or a deficient
quantity (as some have supposed) of their notes in
circulation*.
This is a danger to which the Bank, from the na-
ture of its institution, is at all times liable. No pru-
dence on the part of the directors could perhaps have
averted it : but if their loans to government had been
more limited ; if the same amount of notes had been
issued to the public through the medium of discounts ;
they would have been able, in all probability, to have
continued their payments till the alarm had subsided.
At any rate, as the debtors to the Bank would have
been obliged to discharge their debts in the space of
sixty days, that being the longest period for which any
bill discounted by the Bank has to run, the direc-
tors would in that time, if necessary, have been ena-
bled to redeem every note in circulation. It was then
owing to the too intimate connection between the Bank
and government, that the restriction became necessary ;
it is to that cause too that we owe its continuance.
To prevent the evil consequences which may attend
* At that period the price of gold L.j>t steadily under i'< mint
price.
[ 56 )
the perseverance in this system, we must keep our eyes
steadily fixed on the repeal of the Restriction-bill.
The only legitimate security which the public can
possess against the indiscretion of the Bank is to oblige
them to pay their notes on demand in specie ; and this
can only be effected by diminishing the amount of
bank-notes in circulation till the nominal price of gold
be lowered to the mint price.
Here I will conclude ; happy if my feeble efforts
should awaken the public attention to a due consider-
ation of the state of our circulating medium. I am
well aware that I have not added to the stock of in-
formation with which the public has been enlightened
by many able writers on the same important subject.
I have had no such ambition. My aim has been to
introduce a calm and dispassionate enquiry into a ques-
tion of great importance to the state, and the neglect
of which may be attended with consequences which
every friend of his country would deplore.
finis.
r ,//
PRACTICAL
k NERVATIONS
REPORT
[ON-COMMITTEE,
VRLES BOSANQUET, Esq.
>ND EDITION, CORRECTED,
WITH
A SUPPLEMENT.
LONDON :
J. M. RICHARDSON, 23, CORNHJLL,
ITE THE ROYAL EXCHANGE.
1810.