A select collection of scarce and valuable tracts and other publications, on paper currency and banking : from the originals of Hume, Wallace, Thornton, Ricardo, Blake, Huskisson, and others ; with a preface, notes, and index

Front matter

CORNELL

UNIVERSITY

LIBRARY

Preface

This collection, of the most valuable of the English tracts and publications on paper currency and banks,, may be regarded as supplementary to the volume of tracts on metallic currency, printed for the Political Economy Club. It does not, however, contain any tract having especial.reference to paper money, properly so-called, that is, to notes which are legal tender without being convertible at the pleasure of the holder into certain amounts of coin. The value of this variety of paper currency depends on the extent to which it may be issued compared with the demand, or rather with the business it has to perform. Whether those by whom it is issued are in good or bad credit is immaterial. It obtains currency by its issuers having power to make it legal tender ; - and nothing more is required to sustain its value than that it should be issued in moderate quantities. The value of the assignats issued during the French Revolution was at first nearly equal to that of metallic money ; but the quantities of them thrown into circulation being rapidly and enormously increased, their value proportionally declined, till in the end they became all but worthless. And. such has invariably been the case wherever inconvertible paper notes have been made legal tender. In Eussia, Austria, and other states, which have resorted to this description of paper, its value has always been proportioned to the magnitude of the

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issues ; progressively declining with every addition to its amount, and increasing according as it is diminished. And it is obvious, though we had no experience to which to appeal, that such must be the case. A country has a certain number of payments to make in a given time ; and, ccBteris paribus, it follows, if the coins or notes employed in making these paynSents be doubled or trebled, that they will only pass at a half or a thi];d part of their former value.

With the exception of the period from 1797 down to 1819, the paper currency of Great Britain has always been convertible at pleasure into an equivalent amount of coin of the standard weight and purity. Our bank-notes are not, strictly

It

speaking, money, but only substitutes for money. Inasmuch, however, as no doubt is entertained of their immediate convertibility into coins, and as they perform some of the principal functions of the latter, and are in many respects more commodious, they are practically held to be money. To use the words of Lord Mansfield "these notes are not, like bills of exchange, mere securities or documents for debts, nor are so esteemed ; but are treated as money in the ordinary course and transactions of business, by the general consent of mankind ; and on payment of them whenever a receipt is required, the receipts are always given as for money not as for securities or notes."*

The promissory notes issued in the reign of Charles II, by the Goldsmiths of London, who then acted as private bankers, paved the way for those issued by the Bank - of England established in 1694. But it is a curious fact that the notes, both of the former and the latter, however convenient and well secured, were objects of great jealousy on their first appearance. The courts of law would not con-

* Chitty on Bills, &o., 8th ,ed. p. 565.

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sider them in the light of inland bills of exchange ; and ruled that no action could be maintained on a promissory note, which they held was merely an evidence of debt. So long as this doctrine prevailed the circulation of notes was much obstructed. And the obstruction continued till Parliament, impressed with a sense of the inconveniences thence arising, passed the Act 3 and 4 Annfe, c. 92, which conferred on promissory notes the same privileges that had been conferred on bills of exchange, and made them recoverable by action in like manner.

"When first established, the Bank of England, owing in part to the circumstances now alluded to, but more to the disordered state of the coin and the novelty of the institution, was involved in considerable difficulties. These, however, were speedily overcome, and for about a century the notes of the Bank, which were immediately convertible into coin, continued to circulate on a par with gold without any interference of any kind on the part of Government. The continuance of this equable system, and the unlimited confidence that was always placed in the ability of the Bank to fulfil her engagements, seem to be the principal reasons why, for a lengthened period, very few tracts or other publications appeared on the subject of paper currency and banking. But the previous scarcity was changed into abundance after the suspension of cash payments in 1797 had awakened the attention of the public to the subject; and still more after the publication of the Bullion Report in 1810. Few if any parliamentary papers ever occasioned so much controversy as the latter. It gave birth to myriads of pamphlets. But of these by far the greater number evinced the zeal rather than the knowledge of their authors. And with the exception of those of Messrs. Eicardo, Blake, and Hnskissouj most part of the others have fallen

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into an oblivion from which they do not deserve to be

rescued.

The circumstances now stated suffice to explain why we have reprinted so few tracts published previously to 1797. Others either do not exist, or are not entitled to any special notice. The first tract in this volume, or that on the " Currencies of the Plantations in America," published at Boston, in New England, in 1740, is however of the highest excellence. There was hardly a colony but what had issued large amounts of bills receivable as cash ; and as no effectual provision was made for the payment of these bills, while frequent additions were made to their amount, their value continued to decline, and the exchange with England to become more and more unfavourable " to the colonies. The history of these proceedings, and their pernicious influence are fully set forth in the tract now referred to. We have not learned the name of the author ; but whoever he may be, he has the merit of having very clearly exhibited, the principles that should be kept in view in the issue of paper money, and the abuses which follow from their being neglected.

Following this tract the reader will find extracts from Hume's Essays on Money and the Balance of Trade. They discover all his ingenuity and unrivalled felicity of illustration. But he had no clear idea of the fundamental distinction between paper money and bank-notes payable on demand at the pleasure of the holders. The former may sink far below the value of the sums they profess to represent ; and being legal tender, will most likely expel coin from circulation. But no such consequences can follow from the issue of bank-noteSj such as were then

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circulated in all parts of Great Britain. They were fully equivalent to tl^e gold which might be obtained in exchange for them the moment it was required. The latter was not forced abroad ; but a portion of it being rendered unnecessary by the employment of notes, which were found to be more commodious, was exported in exchange for commodities, which made a corresponding addition to the wealth and capital of the country. Hume, who survived the publication of thq^ Political Essays for about five and twenty years must have seen, in the extension of banking, and in the rapid progress of all sorts of improvements in Scotland after the peace of Paris in 1763, a practical refutation of his statements in regard to the mischievous influence of bank-notes.

The same confusion of paper money with notes payable on demand which suggested Hume's remarks, pervades the third tract in this volume, the " Essay on Paper Money and Banking," written by Patrick, the fifth Lord Elibank, and published with some other tracts in 1755. Its brevity is its principal recommendation. It is a poor performance, in which the errors of Hume are repeated without any portion of his philosophy, and is chiefly worth notice as showing the crude opinions that were then not unfrequently entertained by well-informed persons with regard to bank-notes. His Lordship supposes that the notes of the Scotch Banks, to which his tract specially refers, by adding to the currency and depreciating its value, had raised the price of labour and all sorts of produce " to the destruction of trade and manufactures." But it is obvious, for the reasons already stated, that their issue could have no such effect ; and instead of manufactures being destroyed or injured, they were then beginning to be carried on with an energy and success unknown at any previous period !

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The fallacy of the theories in regard to bank-notes, put forth by Hume and Lord Elibank has been clearly shown in the next tract in this volume, an " Essay on Banks and Paper Credit." It is extracted from a volume entitled " Characteristics of the Present State of Great Britain," which appeared in 1758. Though anonymous, it is believed, apparently on good grounds, to be the work of the Rev. Dr. Robert Wallace, one of the ministers of Edinburgh, and well known from his controversy with Hume in regard to the populousness of ancient nations. But though totally wrong in his theory and conclusions upon this latter subject, Wallace, entertained more correct opinions than his illustrious antagonist with respect to banks and public credit. The essay we have printed, is both liberal and ingenious; and the other essays in the volume from which it is taken are not unworthy of the reader's attention.

We have given in the Note on the Suspension of Cash Payments at the Bank of England, in 1797, a brief account of the circumstances which led to that measure. The novelty of the position in which the Bank and, with her, the paper currency of the country was then placed, powerfully excited the public attention, and led to much discussion both in and out of Parliament.

Of the tracts that appeared subsequently to this crisis, we have reprinted one on the " Utility of Country Banks," published in 1802. It gives what may be considered as being on the whole a just, though rather too favourable a view of these establishments. Of their importance, indeed as reservoirs into which the unemployed capital of the surrounding districts may be collected, and from which it may be readily distributed to those by whom it is

PBEFACE. XI

wanted, it is impossible to speak too highly ; while, by affording convenient places of deposit for the smallest savings, and conducting all sorts of pecuniary transactions, they promote a spirit of economy, and enable the business of the country to be transacted with infinitely greater facility and, at the same time, with a much smaller amount of money than would otherwise be necessary.

But these advantages may all be obtained without giving provincial banks the power to issue notes. This, in truth, is a privilege which has nothing whatever to do with the business of banking, and which they are all but certain to abuse. In saying this we do not wholly refer to the heavy losses which the public have often sustained from the discredit brought upon the currency by the mismanagement and failure of banks of issue ; for though that cause of loss might be to a considerable extent removed by taking sufficient security for the notes issued, it is impossible, unless their issue be confined to a single source, that their amount in circulation should be uniformily determined, as it ought to be, by the state of the exchange, or by the influx and efflux of bullion.

• But, though it overlooks the important principle now referred to, the tract on the Utility of Country Banks is a valuable publication. It helped to correct some of the erroneous notions that were previously current in relation to these establishments.

The essay on the " Utility of Country Banks" is followed by the " Enquiry into the Nature and Eflects of the Paper Credit of Great Britain," by Henry Thornton, Esq., M.P., published in 1802. This important work contains a much greater amount of useful information with respect to the pecuniary transactions carried on in the country than had

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previously been communicated to the public. Being an extensive merchant and a director of the Bank of England, Mr. Thornton, was placed in the most favourable position for becoming well acquainted with the various subjects of which he treats. His connexion with the Bank appears, however, to have biassed, though perhaps unconsciously, his judgment. His theoretical principles are, for the most part, sound, and are sometimes laid down with much precision. But when he comes to consider their application he interprets them so that his statements and reasonings have all an evident leaning in favour of the Bank ; and are intended to vindicate the suspension of cash payments and her subsequent proceedings. Although, however, we agree with Mr. Thornton in thinking that the suspension was necessary at the time when it was passed, he has not shewn that it should have been continued after the alarms of invasion, in which the drain for gold originated, had subsided ; and it is needless to add that he has wholly failed in shewing that there is or can be any real security other than their conversion into coin at the pleasure of the holder, for that limitation of the issue of bank-notes which he admits is indispensable to sustain their value. Mr. Thornton ascribes the fall of the exchange in 1800 and 1801 to payments abroad on account of the war and the heavy importations of corn caused by the scarcity. But these circumstances, though they might, and probably did, affect the real exchange, will in no degree account for the excess of the market over the mint price of bullion in those years. That excess, which sometimes exceeded 10 per cent., showed conclusively that the currency was depreciated to that extent. And it is plain, had the Bank been paying her notes in coin, that no such depreciation would have been possible. Their value and that of gold would then have

PREFACE. xm

been identicalj and there could not have been the smallest discrepancy between the mint and market price of the latter.

But, despite these and other grave errors, the practical character of Mr. Thornton's work, and the many interesting discussions which it embraces, render it a most valuable contribution to our commercial literature.

The suspension of cash payments in 1797, extended to Ireland as well as Great Britain. The directors of the Bank of Ireland did not, however, exercise the privilege of issuing notes with which they were thus intrusted with the same moderation as the directors of the Bank of England. On the contrary, during the same period (from the suspension till February, 1804) in which the issues of the Bank of England had increased in the ratio of 1 to 1"766, the issues of the Bank of Ireland had increased in the ratio of 1 to 4*802. In consequence, the exchange between Dublin and London, which, previously to the suspension^ diverged but slightly from par, became from 12 to_ 16 per cent, against the former. But at the very moment when the exchange between Dublin and London was so unfavourable to the former, the exchange between London and Belfast which, owing to peculiar circumstances, had a gold currency, was about 3 per cent, in favour of the latter ! We have explained this case more at large in a Note on the exchange between London and Dublin in 1804. It affords one of the most Striking examples to be found of the influence of over-issues of paper in depressing the exchange.

The Treatise of the first Earl of Liverpool on the Coins of the Realm, which appeared in 1805, is one of the most valuable of that class of publications. But Its bulk, and the

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fact of its having been reprinted within these few years, have prevented our giving it a place in these collections. We have, however, inserted in this volume that part of Lord Liverpool's work which refers to the paper currency of the kingdom. And it is eminently deserving of attention from the historical information which it embodies, as well as from its proper appreciation of the mischief which the suspension of cash payments could not fail to produce.

The next, and one of the ablest tracts in this volume, " The High Price of Bullion a Proof of the Depreciation of Bank Notes," appeared in 1810. It was written by Mr. Kicardo, and led the way in the memorable bullion controversy. From 1804 to 1808 inclusive, the market prlceof gold was nearly uniform at 4Z. an ounce, being 21. 14s. Gd. per cent, above the mint of 3/. 1 7s. lO^d an ounce, and shewing that the currency was depreciated to that extent. But in 1809 and 1810, the issues of the Bank of England and of the country banks were greatly increased; and in consequence the market price of gold rose in March 1809 to 4?. 10s. an ounce, shewing a depreciation of the currency of no less than 15/. lis. 4d. per cent. But the real cause of the rise of the market price of gold was then comparatively unknown • and the adverse exchange with which it was accompanied was ascribed to payments on account of the war, the interruption of trade, and so forth. In these circumstances Mr. Ricardo applied himself to the consideration of the subject ; and the result of his inquiries appeared in a series of letters in the Morning Chronicle, the first being published on the 6th September, 1809. They made a considerable impression and elicited various answers. This success and the increasing interest of the subject led Eicardo to embody them in a more enlarged and systematic form in the

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tract now reprinted. It issued from the press some considerable time previously to the appointment of the Bullion Committee, and is believed to have materially assisted in forwarding that important measure.

In this tract Ricardo showed that redundancy and deficiency of currency are only relative terms ; and that so long as the currency of a country consists partly of gold and silver coins, and partly of paper immediately convertible into such coins, its value can neither rise above nor fall below the value of the metallic currencies of other countries, by a greater sum than will suffice to defray the expence of importing foreign coin or bullion if the cur- . rency be deficient, or of exporting a portion of the existing supply if it be redundant. But when a country issues inconvertible paper notes (as was then the case in England), they cannot be exported to other countries in the event of their becoming redundant at home ; and whenever, under such circumstances, the exchange with foreign countries is depressed below par, or the market price of bullion rises above its mint price, more than the cost of sending coin or bullion abroad, it proves that too much paper has been issued, and that its value is depreciated from excess.*

In stripping these important conclusions of the irrelevant matter with which they had previously been encumbered, and making them readily appreciable, Ricardo contributed in no ordinary degree to perfect the theory of money.

Owing to the heavy and continued fall of the exchange, the question in regard to the depreciation of the currency, became of the greatest importance, and was taken up in the House of Commons. It was brought before that assembly by

* Sketch of the Life of Bicardo prefixed to his works.

XVI PREFACE.

Mr. Francis Homer, who moved on the 19th February, 1810, that a Select Committee be appointed to " Inquire into the Cause of the High Price of Gold Bullion, and to take into Consideration the State of the Circulating Medium and of the Exchanges between Great Britain and Foreign Parts." The motion wais agreed to ; and the Committee, which comprised some of the ablest men in the House, after due inquiry, presented their Report on the 8th of June.

The Bullion Report, which is reprinted in this volume, though not wholly exempt from theoretical errors, without any claim to originality, and not very skilfully composed, is nevertheless one of the most valuable papers that has ever proceeded from a Committee of the Legislature. It was principally written by Mr. Horner, who was Chairman of the Committee, portions of it being, however, contributed by Messrs. Thornton and Huskisson ; and to this divided paternity may be ascribed that want of sequence in its reasonings, and of uniformity in its style, that are so very observable. Having taken much evidence,* and entered at great length into an examination of the subject, the Committee came to the conclusion that the paper currency was depreciated from excess ; and they recommended as the only means by which the evil could be checked, and the value of paper maintained on a par with gold, that cash payments should be resumed within the space of two years.

Such being the character and recommendation of this famous Report, we need not wonder that its publication should have been the signal for a violent and long-continued

* The evidence of the Governor, Deputy-Governor, and such of the Bank Directors as came before the Committee, was anything but creditable to them. It was, in truth, a mere apology for the existing state of things, founded, for the most part, on erroneous assumptions and false or perverted theories.

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controversy. The principles laid down in it were said to be contradicted by the evidence. And besides being strenuously opposed by Government, and by the greater number of bankers, merchants, and practical men, they were assailed by a host of writers. But all the great authorities were on the side of the Bullionists. And in 1819 the triumph of sound principles was completed by the legislature reverting to cash payments at the old standard.

Among the pamphlets to which the state of the currency in 1810 gave birth, a very high place must be assigned to the " Observations on the Principles which regulate the course of Exchange, and on the present depreciated state of the Currency," by William Blake, Esq., F.R.S. "We have reprinted this tract, which gives within a moderate compass an extremely clear and satisfactory exposition of an important and at the same time complex and difficult subject. Mr.Blake has enumerated the various circumstances, whether arising out of the state of trade or of the currency, that determine the real, the nominal, and the computed or actual course of exchange. He has farther traced with equal skill and sagacity, the mode in which they respectively operate; and set their separate and combined influence in a very striking light.

The last tract in this volume, " The Question respecting the Depreciation of the Currency Stated and Examined," by William Huskisson, Esq., M.P., appeared in 1810. The author intended it should be at once an explanation and a defence of the doctrines laid down in the Bullion Keport. And these objects are most successfully accomplished. The doctrines referred to have nowhere been stated with greater,

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or, perhaps, equal clearness, or' in a wa^ more likely to recommend them to the public.

It would have been useless, even had our space permitted, to have made any additions to the tracts now brought together. They comprise a full exposition of the principles that determine the value of paper currency ; with an examination and refutation of the various objections, entitled to any consideration, that have been or may be made to these principles. But they do not inquire, or only briefly and perfunctorily, into the nature of the measures that should be adopted to give a practical and real effect to these principles. This is the grand monetary problem which is now (1857) before the country. Its satisfactory solution must, however, in great measure, depend on the principles established in this volume being properly understood and appreciated.