The principles and practical operation of sir Robert Peel's bill of 1844 explained and defended

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Preface To The Second Edition

To the First Edition of my Tract on the Principles and Practical Operation of Sir Robert Peel's Act of 1844, the following additions have been made: —

I. A preliminary chapter on the question, whether Bank-notes^ immediately convertible into coin^ should be placed, in common with coin^ in the category of money; or, in common with cheques and bills of Exchange, in the category of credit ?

II. A critical examination of the chapter on "The Regulation of a Convertible Paper Currency/' in Mr. J. S. Mill's " Principles of Political Economy."

III. On the effect of the new supplies of gold upon the Australian currencies.

The length to which the reply to Mr. Mill has been carried demands some explanation.

As the mechanical divisions of employment comiv PREFACE TO THE SECOND EDITION.

pel US to receive the greater part of our physical enjoyments from the hands of others, so the intellectual divisions of employment constrain us to receive the greater portion of our opinions from the minds of others. The chemist adopts the Newtonian theory on the authority of the mathematician; the mathematician receives the discoveries of Davy and Faraday without repeating the experiments by which they were realized. On intricate questions, requiring long and patient investigation, the opinions even of the most enlightened class will have their origin, in a majority of cases, not in knowledge but in faith. Hence, principles are received upon trust, doctrines become creeds, authority is implicitly followed, and blind leaders are enabled to assume the guidance of the blind. Now the high and deserved reputation, as a profound and original thinker, which Mr. Mill has hitherto maintained, and the influence which his authority might be calculated to exert on public opinion, render it essential, at the present juncture, to inquire how far he may be qualified to decide upon the merits of the Act of 1844.

Mr. Mill has chosen to place himself on the same platform with Mr. Tooke; and he cannot fairly expect from the audience whose sufirages he seeks, a reception more favourable than that which is given to his co-candidate for a seat in the Parliament of Fame. Having identified himself with Mr. Tooke, his authority upon questions of monetary science

PREFACE TO THE SECOND EDITION. v

cannot be greater than the authority of Mr. Tooke. In estimating either, we estimate both.

What, then, is the authority of Mr. Tooke in monetary science ? One of his admirers — Mr. Lawson, the author of "Money and Morals" — has raised him to the level of Adam Smith, has hailed him as the ** Second Father of English Political Economy," and has boldly aflSrmed that hi^iscoveries are " the immoveable pillars upon which a true science of money must be built." But what is the authority of Mr. Lawson ? Mr. Lawson himself informs us that his first lessons in monetary sdence were derived from those "brilliant pamphlets in which the experience of the banker put on the scientific precision and polish of the schools." Nevertheless, through some imaccoimtable perversion of taste, after having drank at the pure well of science undefiled, he sought the muddy waters of a surface drainage, and turned from Overstone to Tooke. It is difficult to conceive how the pupil of Lord Overstone could have become the disciple of Mr. Tooke. But his conduct in embracing the " immoveable pillars," and in regarding Mr. Tooke as *' the Second Father of Political Economy," although unaccountable, was not without an example. Mr. Mill had previously pronoimced Mr. Tooke to be the highest authority in monetary science ; and had erected his theory of currency on the basis of the " immoveable pillars." The stability vi PREFACE TO THE SECOND EDITION.

of the structure must depend upon the strength of the foundation. The weight of Mr. Mill's authority must be measured by the solidity of the basis ' on which it is supported.

Now, the discoveries which in the estimation of Mr. Mill have placed Mr. Tooke at the head of monetary science, are as follows : —

I. That4a rise of prices is not preceded, but followed, by an increase in the amount of the circulation.

II. That an increase in the amount of the circulation is the effect, and not the cause, of a rise of prices.

I ' It will be seen upon a close examination^ that these vaunted discoveries, instead of being " immoveable pillars " on which a true science of money must be built, are but mirage-formations which a ray of analysis dissolves. • In a country not possessing mines of the precious metals, and having its currency regulated on the principle of metallic variation, as, under the provisions of the Act of 1844, the currency of this country is actually regulated, the only way in which the circulation can be increased is, by the action of a favourable foreign exchange. But a favourable exchange cannot be preceded by a rise of prices, for the obvious reason that a rise of prices above the ordinary level causes an adverse exchange, an exportation of bullion, and a contraction of the circulation. Neither is it possible that an increase in the amount of the circulation should be the effect

PREFACE TO THE SECOND EDITION. vii

and not the cause of an increase of prices^ for the obvious reason, that an increase in the amount of the circulation is the effect of a fall of prices below the par of exchange level. An abundant harvest renders the proportion of commodities greater in this than in other countries, lowers prices^ and causes a favourable exchange, an influx of bullion^ and an expansion of the circulation. On the other hand, a deficient harvest renders the proportion of commodities to money less in this than in other countries, raises prices^ and causes adverse exchange, export of bullion, and contraction of circulation. So long as the currency shall be regulated^ as it now is, on the principle of metallic variation, so long will its amount be governed by the state of the foreign exchanges; and so long as the amount of the currency shall be regulated by the exchanges, so long will a fall of prices be the antecedent of an expansion of the circulations and a rise of prices the antecedent, not of an increase, but of a diminution of the circulation. Mr. Tooke's vaunted discoveries are nothing more than gratuitous assumptions contrary to fact.

There is, however, a conceivable, I will not say a possible, process under the operation of which an increase in the amount of the circulation may become the effect of a rise of prices, and the theory of Mr. Tooke and Mr. Mill be verified by fact. This process I will endeavour to explain.

Tiii PREFACE TO THE SECOND EDITION.

A certain school of physiologists account for the existence of mites and maggots by the assmnption that they make themselves. Now, in order to account for the existence of an extension of the circulation under a rise of prices and adverse exchanges, we have only to generalize the reasoning of these physiologists, and to assume that sovereigns and bank-notes possess the property of spontaneous generation. According to this physiological theory, when a rise of prices occurred in England, dust and nuggets in California and Australia would dig themselves out of the earth, and crush themselves out of quartz, navigate themselves across the ocean, and, entering the Royal Mint, stamp themselves into standard coin. At the same time, paper would begin to manufacture itself, to write upon itself promises to pay, and to glide noiselessly and ghostlike into the till of the Bank.

Let no one attempt to dispose of this theory of currency self-creation by an incredulous smile. It should be regarded as a sound and legitimate theory. The hypothesis upon which it rests is the only conceivable hypothesis by which it can be made apparent that an extension of the circulation is the effect of a rise of prices. If the theory of currency self-creation be inconsistent with fact, Mr. Tooke's discoveries must be false. But the discoveries of the highest authority in monetary science — discoveries which have placed their author on a level with Adam mm

PREFACE TO THE SECOND EDITION. ix

Smith, and the correctness of which, as affirmed by Mr. Mill, has been established by elaborate research " on the mere ground of history," oisinnot be false. The ^discoveries cannot be controverted. The " pillars" are " immoveable." An hypothesis which accounts for phenomena which no other conceivable hypothesis can account for, must be received as legitimate Will any disciple of Mr. Tooke venture to overthrow the authority of his master by denying that coin and bank-notes possess the property of self-creation ?

That a brilliant but superficial writer — a dealer not in the science, but in the poetry of money — ^like the author of " Money and Morals/' should have become a disciple of Tooke after having been a pupil of Overstone, is a fact which it is sufficiently difficult to account for. How then can we comprehend the melancholy fact, that the author of "Unsettled Questions in Political Economy" should .have descended to the rank of those who receive as an established truth a pretended discovery which cannot be explained or defended, except upon the absurd assumption that currency creates itself? The solution of the problem may perhaps be found in the following passage, borrowed from a letter breathing the true spirit of advanced and enlightened science, addressed by Mr. Norman to Sir Charles Wood.

" The expansion of the various sciences, which has

X PREFACE TO THE SECOND EDITION.

taken place within a few years, cannot fail to give rise to serious reflection. Life is now not long enough to enable even the most studious man to obtain a reputation for encyclopaedical knowledge; and the time is rapidly approaching, when renown in the ranks of learning and philosophy will be reserved for him who has mastered one of the many branches into which each separate science will then have divided itself. This tendency to expansion, though more peculiarly remarkable in physics, is also very conspicuous in the moral sciences. Adam Smith probably thought that he had left but little of the domain of Political Economy unexplored ; the public attention, however, is now engrossed by questions connected with one single branch of the science, viz., the currency, so refined and intricate as to have eluded his observation."*

These views are at once original and instructive. Although we have some splendid specimens — a, Bacon, a Franklin, and a Brougham — of omniscientific genius, yet it is nevertheless true, that " renown in the ranks of learning and philosophy will be reserved for him who has mastered one of the many branches of science." Life is not now long enough to permit a single mind to produce bpth a Novum Organum and a Wealth of Nations. A gifted grasper after fame, who might have been a Bacon, or who might have been an Adam Smith, essaying, to be

* Letter to Sir Charles Wood, p. 7.

PREFACE TO THE SECOND EDITION. xi

both, is neither. The deepest waters shallow as they spread.

In the volume which I now offer to the public nothing has been added to nly former animadversions on the doctrines advanced by Mr. Janies Wilson. This has not arisen from any want of consideration for that able — and on questions not connected with the regulations of the currency — enlightened economist. I have hitherto regarded him as being, from his superior abilities, his access to official records, and his influential position, as the most formidable opponent of the Act of 1844; and I should have continued so to regard him, had not the errors into which, as I conceive, he has fallen, received af elaborate refutation from an authority whose access to the sources of official information is equal to his own, and who has investigated them with greater diligence, accuracy, and success. Mr. Arbuthnot, who had been private secretary to Sir Robert Peel during the passing of the Act of 1844, and to Sir Charles Wood during the discussions on the Act in 1847, has met Mr. Wilson on his own ground, and vanquished him with his own weapons. He has refuted the statistical arguments against the Act of 1844 as effectually as similar arguments against the resumption of cash payments were refuted forty years ago by Ricardo's reply to Bosanquet. In disposing of the statistical arguments against the Act, Mr. Arbuthnot has rendered invaluable service. As xii PREFACE TO THE SECOND EDITION.

he has justly stated in his recent publication, '^ without doubt statistical returns are invaluable to those who carefully study them. But the information they afford consists only 'of a great accumulation of facts; and as zealous controversialists have ever been prone to seize the first fact that suits their argument, so with the growth of statistics has sprung up the disposition to misapply them. Few have the opportunity of threading their way through the mass of details which it is necessary to investigate in order to detect a single error ; and some service may be rendered to truth and science by a patient inquiry into assertions and arguments which, though lightly adopted, are often specious and captivating. The object I have in view is to unravel the tangled web of fallacious reasoning, which is the .consequence, if not the cause, of a careless and confident reference to facts, and to prove that candid investigation will confirm the principles on which the Act of 1 844 is founded."*

In relation to the priaciples which I have attempted in this volume to explain and to defend, I have many obligations to acknowledge. First, and mainly, to Lord Overstone. His Lordship, in one of his lucid expositions at the Political Economy Club, propounded the doctrine, that the separate functions of issue and of discount should be intrusted to separate departments. The importance of such a separation flashed upon me. My mind dwelt upon it, and

• Sir Robert Peel's Act of 1844 Vindicated, p. 7.

PREFACE TO THE SBC50ND EDITION. xiii

the further explanations and suggestions of his Lordship convinced me that the principle of the separation of departments supplied the requisite complement to the theory of currency, as established by Adam Smith and Ricardo ; and that the practical application of that principle to the Bank of England was the only, means by which the convertibility of the circulation could be permanently secured.

In common with all who have taken ai^ interest, whether commercial or scientific, in the state of the currency, I am largely indebted to Mr. M^CuUoch, His Treatise upon Money, appended as a note to his edition of "The Wealth of Nations," is the most complete and correct which has hitherto been given to the public. The " Commercial Dictionary " has brought the results of science into every countinghouse in the kingdom. His latest labour — that of collecting and editing the tracts and letters of Lord Overstone — ha^ rendered an invaluable service to the cause of truth and science. The volume, comprising these admirable productions, will be preserved in the libraries of science, in juxtaposition with the " Report of the Bullion Committee," and with the congenial productions of Horner, Huskisson, and Ricardo, on the maintenance of our metallic standard.

To Mr. Pennington — one of the deepest and most original thinkers of our day — I was early indebted for valuable communications on subjects connected xiv PREFACE TO THE SECOND EDITION

with banking, and with the regulation of the currency, on the principle of metallic variation.

To the very able and instructive " Letter on the Monetary Pressure of 1847," addressed to Sir Charles Wood by Mr. Hubbard, I am indebted for the explanation I have given of the process by which the vast foreign debt incurred at that period was liquidated, without endangering the convertibility of the currency.

To the chapters on money, and the regulation of convertible paper currency, now presented to the public, I have appended a reprint of a tract entitled "The Economists Refuted," which I published in 1808. It has been out of print for many years ; and I may be expected to assign some reason for its present reappearance.

It is now very generally admitted that Adam Smith's explanation of the manner in which foreign trade enriches a nation was at once incomplete and erroneous. His theory of the benefit conferred by commerce was, tlmt it afforded an outlet for the surplus produce of a country, and enabled the capital employed in effecting international exchanges to replace itself with a profit ; and in accordance with this theory, he contended that the home trade is more advantageous than the foreign, because two capitals are replaced with a profit in the home trade, and only one in the foreign. Assuming the truth of this very imperfect and erroneous theory,

• PREFACE TO THE SECOND EDETIO!^. xv

Mr. Spence contended, in a very ingenious publication entitled '^Britain Independent of Commerce," that the decrees of the first Napoleon, excluding this country from commercial intercourse with continental Europe, could have no eflTect in diminishing the wealth of the nation, inasmuch as the capital disengaged from the foreign trade might be employed, with equal advantage, in extending the home trade. This doctrine was zealously expounded by Mr. Cobbett, and became very popular. Under these circumstances, I published ''The Economists Refuted ;" and explained, I believe, for the first time, the nature and extent of the advantages derived from trade. The principles which I propounded in "The Economists Refuted," Mr. Ricardo subsequently adopted in his great work on Political Economy and Taxation; and as my previous publication had been long out of print and forgotten, it was generally believed that it was reserved for Mr. Ricardo to correct the erroneous theory of Adam Smith, and to show that the benefit resulting from foreign trade consists of the increased production created by international divisions of employment.

I had shown that the increased production thus created was divided, in variable proportions, between the countries exchanging their respective productions. In the view of the question presented by Mr. Ricardo, the advantages derived from foreign trade were confined to only one of these countries. Mr.

xvi PREFACE TO THE SECOND EDITION. •

Ricardo's error was corrected by Mr. Pennington; and the correction, if I rightly remember, was adopted by Mr. James Mill in the third edition of his " Principles of Political Economy."

Such are the circumstances which have induced me to reprint, without alteration, my long-forgotten tract. My object in doing so is, to claim my right to be regarded as the original propounder of so much of the corrected theory of the Qature and extent of the advantages derived from foreign trade as may be comprised in the view which I ventured to present to

the public forty-nine years ago.

ROBERT TORRENS.

February, 1857.

Contents

vm im

CHAPTER I. On the Pbeliminaby Question, What is Money ?

PAOX

Chapter II

The Principles and Practical Operation of Sir Robert Peel's Act of 1844 Explained and Defended .

CHAPTER m.

Critical Examination of the Chapter on the Regulation OF A Convertible Currency in J. S. Mill's " Principles OF Poutical Economy "

Chapter IV

On the Effect of the Gold Discoveries upon the Currency OF THE Australian Colonies

Tract on the Foreion Divisions of Employment and International Exchange.

B

SIR ROBERT PEEL'S ACT OF 1844.

Chapter I. On The Preliminary Question, What Is Money ?

The select committee of the House of Commons on Banks of Issue, which was appointed in 1840, and over which Sir Charles Wood presided with such preeminent ability, devoted no inconsiderable portion of its time and attention to the inquiry, ^ what coilstitutes money ?" On this elementary question the most opposite opinions were maintained. Whiles Lord Overstone and Mr. Nornian maintained, in accordance with the principles established by Adam Smith and Bicardo, that the money or currency of the country consists of coin and of bank-notes immediately convertible into coin, Mr. Tooke and his followers advanced the novel . doctrine, that bank-notes immediately convertible into coin do not possess the properties of money ; that they are, in common with cheques and bills pf exchange, mere forms of credit ; and that to subject them to any legislative restrictions diflferent

4 WHAT IS MONEY ?

from those which are equally applicable to the other forms of credit with which they coincide, is erroneous in theory, and misciievous in practice. As the main arguments of the opponents of the Act of 1844 are based upon the doctrine thus advanced by Mr. Tooke, a preliminary inquiry into its validity seems desirable before proceeding to an explanation of the principles and practical operation of the Act..

Before we can frame a correct definition of the term money^ we must have a distinct perception of the several uses to which money is applied, and of the specific attributes with which it is invested. Now, money is employed as a measure of value, as a medium of exchange, and as an ultimate equivalent, by the tender and acceptance of which obligations are , legally discharged and transactions finally closed ; and • the attributes with which it is invested are derived fi'om the laws and usages of the civilised world. Hence it is apparent that any object which is appropriated either * by positive law, or by usage having the force of law ; to these several uses, comes under the denomination of money ; and that no objects or things save those which have been so appropriated can be included under that denomination. Money may therefore be defined as consisting of those tangible objects which can be passed from hand to hand, which law, or usage having the effect of law, has established as measures of value, as media of exchange, and as equivalents, by the tender and acceptance of which payments are made and transactions finally closed.

It is universally admitted that the several functions comprised in this definition are fulfilled by coin of legal weight and fineness. A pound sterling, which

ARE BANK-NOTES MONEY? 6

is nothing more than 123,274 grains of standard gold manufactured into coin, is both by law and usage the stendard unit by which, in this coontiy, the value of property is measured. In the transactions of the market, coin Of standard weight and fineness will at all times and under all circumstances be accepted as a medium of exchange and transfer. A payment in coin releases the debtor or purchaser from all further claim ; and an acceptance of payment in coin, while it deprives the creditor of all further claim, places in the hands of the vendor the full equivalent for which he had contracted. Whether regarded as the measure of value, as the medium of exchange, or as the ultimate equivalent by which transactions are finally closed, coin is money under its most perfect form. But coin, eminently qualified as it is to perform the functions, does not possess exclusively the character of money. That character is derived, not from, intrinsic qualities, but from imparted qualities ; and the law and usage which impart it to the precious metals, may equally impart it to other objects.

Are Bank-Notes Mon/ey ?

Is a bank-note, convertible into coin upon demand, money ? A brief consideration of this question will convince us that it must be answered in the afiBrmative. A Bank of England note, while convertible into coin, is a legal tender; is equivalent to coin, can be directly passed from hand to hand, and performs, in all the transactions of the market, fanctions identical with those which are performed by the coin it represents If coin is a measure of value, bank-notes immediately convertible into coin, and conse-

c i

6 ARE BAKE-NOTES MONET?

quently equivalent to tjolff, must also be a iqeasure of value. The measurement is performed with equal accuracy, whether we employ the metallfe staudaxd itself in the form of coin, or a perfect equivateutiiof that standard in the form of convertible. jH>te64 Again, ^a regards a medium of exchange, the coih vertiUe note is in some respects superior even to coin* In all the larger transactions of the market, bankruotes are employed, to the entire exclusion of coin^ as the medium or instrument by which property is trans* ferred. The same ms^ybe said with respect to tibe third essential characteristic of money — ^the power of effecting payments, discharging engagements, and ^nally closing transactions«^ In point of fact and e^« perience, this essential function of money is in ^1 transactions of magnitude performed more conveniently and more ^extensively by bank-notes than by coin. They have been made legal tender — ^they have been monetised by Act of Parliament. They measure value, they effect exchanges, und they finally close transactions, as perfectly as coin.. That merchaiits and bankers should have deliberately denied to them the character of money, would have been altogether incredible, had not the marvellous &ct been proclaimed and recorded by themselves.

Having ascertained that our bank-note circulation, while convertible into coin, is invested by law and usage with the attril^utes of money, wp proceed to consider whether these attributes are possessed. by paper currencies not convertible into coin. Mr. Tooke, while aflfirmipg that convertible notes are not money, (jontends that inconvertible notes issued by Governmept are money., Aocordiug to this doctrine,

ARE BAHK-NOTES MONEY? 7

convertibility demonetises, while inconvertibility monetises paper currencies. Previous to the suspension of cash payments, the potes of the Bank of England were not money, because they were convertible into coin ; after the suspension they became money, because they were not convertible inio coin ; and on the resumption of cash payments, the power of converting them into coin again divested them of the character of money.

Although the advocates of the Tookean principle involve themselves in a reductio ad abaurdum wi<h regard to convertible currency, they are perfectly correct in attributing to inconvertible currencies the character of money- To contend that an inconvertible currency does not possess the. essential attributes of money, would be tantamount to maintaining that, during the suspension of cash payments, England was destitute of a measure of value, of a medium of exchange, and of an equivalent by which, transactions could be closed. Numerous and strange, as are the fellacies into which, in dealing, with the. currency, superficial, thinkers are liab][e to fall, yet Ihis ultza- «bsurdity no one .could be found to i^pihbld. During the suspension of cash payments, the bank-note, was employed to meiasure values, to effect exchanges, and to close iraiisactions;. and. therefore, during, the suspension of cash payments, the iDConvectible bank-note possessed the essential attributes of money.

It has been a prevalent opinion, that money consists exclusively of the precious metalSi; and that, a paper circulation, whether issued by Gbvemmeat or by banks, whether convertible or inconvertible into coin, so far from possessing the essential attributes of

c2

8 ARB CHEQUES MONET?

money, is nothing more than a convenient fonn of credit by which the employment of actnal money is economised. This opinion is altogether erroneous. The precious metals are money, not on account of any essential properties inhering in themselves, but be: cause the laws and usages of the civilised world have invested them with the functions of measuring value, of &cilitating exchanges, of adjusting balances, and of finally fulfilling contracts. But the same law and usage which confers on the precious metals the char racter of money, might equally confer that character on any other object. In point of fiaiCt, various other objects, corn, cattle, bars of iron, nails, and shells^ have in different ages, and in different countries, been invested by law or by usage with the attributes of money.

Are Cheques Money f

When a portion of the money of the community is transferred firom the desks of its owners to banks, a new instrument of exchange is called into existence, namely, cheques drawn against deposits. Are then cheques money ? The .question must be answered in the negative. Cheques do not increase the quantity of money ; they merely transfer firom one individual to another a portion- of the money already in existence. The person who draws a cheque upon his banker for one hundred pounds, will have, as soon as the cheque is honoured, less money by one hundred pounds, while the receiver of the cheque will have more money by one hundred pounds than before. The drawer cannot have less until the instant upon which the receiver shall have more ; the

ARE CHEQUES MONEY? 9

i^ceiver cannot have more until the instant upon which the drawer shall have less. The act of transfer cannot by possibility increase the quantity transferred.

The first recipient of a cheque, instead of himself presenting it at the bank for payment, may pass it as a medmm of exchange and purchase to a third party, the third to a fourth, the fourth to a fifth, and so on indefinitely. It may, therefore, be asked, does not the cheque during this process supersede the use of coin and ban^-notes, and thus increase the quantity and become a component part of the money of the community ?

The question must be answered in the negative. Although cheques dispense with the passing of money fi'om hand to hand, they do not constitute any portion of its actual amount. They perform no function save that of ordering a payment. The drawer of a cheque for one hundred pounds must have a deposit or a credit for one hundred pounds with the bank on which he draws ; and it is the deposit or the credit, and not the cheque, which eflfects the payment. Without the deposit, the cheque would be worthless ; without the cheque, the deposit would possess the same purchasing and paying power as before. The only function which can be performed by the cheque is that of relieving the owner of the deposit from the inconvenience and loss of time he might suffer by going to the bank and drawing out his money in person.