Popular Political Economy: Four Lectures Delivered at the London Mechanics' Institution

Chapter VIII

MONEY.

“MONEY,” to use the definition of Dr. Smith, “is the instrument or means by which every individual in the society has his subsistence, conveniences, and amusements regularly distributed to him in their proper proportions.” It is, in fact, only the instrument for carrying on buying and selling, and the consideration of it no more
forms a part of the science of political economy, than the consideration of ships or steam-engines; or of any other instruments employed to facilitate the production and distribution of wealth. It is different from all other instruments, in respect to its being used by the whole community; and not being exclusively the property of any individual. It affords also a very instructive proof of the manner in which the general laws of nature operate on the minds of individuals, producing a uniformity of conduct, equal in regularity to any of the movements of the planets. Governments have meddled incessantly with money, which in our time has been the fruitful parent of intricate discussions and painful changes. Money has accordingly attracted much learned attention: and the principles which regulate it have been the subjects of much dispute. On these accounts it is worthy of a brief notice, though having of itself no stronger claims to be treated of in political economy than any of the other instruments or merchandizes useful to man. Into the history of the alterations made in it by our government, or into an examination of the conflicting opinions and schemes of theoretical writers and practical dabblers in legislation, I have no wish to enter; and I shall, therefore, confine my observations to the
natural circumstances which gave occasion to the invention,
first of metallic, and
afterwards of paper money, and which regulate the quantity and value of both.

I have already mentioned the natural circumstance of all commodities being produced in unequal periods, while the wants of the labourer must be supplied daily. This circumstance influences the conduct of mankind at all times and places, after a division of labour has been
introduced. In the rudest state of society, the fisherman or hunter may obtain a supply of food in one excursion, but the maker of bows and arrows, canoes or stone hatchets, must employ some days to complete his task. So at present, the produce of the baker, the butcher, or the shoemaker, can be brought to market in a few hours, while the farmer, the tanner, or the grazier, must wait weeks, months, or even years, before he can offer his produce for sale. This inequality in the time necessary to complete different commodities, would cause the hunter or the baker to have a surplus of game or bread, before the maker of bows and arrows, or the grazier, had any commodity completed to give for the surplus game or bread. No exchange could be made; the bow maker or the grazier, must be also a hunter and a baker; and division of labour, could its advantages have been conjectured, would only have been regarded as the visionary scheme of some hot-brained enthusiast. The obvious utility of division of labour suggested the means of getting over this difficulty, which consisted in the invention of money.

“One man,” says Dr. Smith, ”
we shall suppose has
more of a certain commodity than he himself has occasion for, while another has less. The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each of them be willing to purchase a part of it. But they have nothing to offer in exchange except the different productions of their respective trades; and the butcher is already provided with all the bread and beer which he has immediate occasion for. No exchange can in this case be made between them. He cannot be their merchant, nor they his customers; and they are all of them less mutually serviceable to each other.” “To obviate this difficulty,” Dr. Smith adds, “each of them would endeavour to obtain possession of some
(additional) commodity, which he knew would be received by others at all times and places;”
*57 this commodity is money.

The language used by Dr. Smith might almost make us suppose that he regarded the invention of money as a chance occurrence; or, at least, that he had not formed any accurate idea of those specific circumstances which give rise to the employment of some one commodity as money, whenever the division of labour is introduced. Those circumstances are inequalities in the periods necessary to production, inequalities in the value of indivisible commodities, and one man not producing what another desires, while he desires what that other possesses. Owing to these natural circumstances, labourers cannot possibly supply their mutual wants by barter. The invention of money, therefore, or the employment of some one commodity as a measure of the value, or means of exchanging all commodities,
is a natural and necessary step in the progress of society; is introduced by division of labour, being essential to the continuance of this practice; is as equally useful, therefore, as it, and as generally adopted.

METALLIC MONEY will first engage our attention, and we shall consider only the precious metals. For although some particular commodity, as a measure of the value of other commodities, has been used since the beginning of history, and amongst most of the nations of the earth, just as they have all had some measure of capacity and of linear extent; yet, as one nation selects a yard and another
2 metre as the measure of length, so different commodities have been employed as money at different times and places. In the early ages of the world, the articles most generally useful, such as cattle, salt, iron, cloth,
*58 and in cold climates, among the ancient Russians for example, furs,
*59 were used as money; in the West Indies, sugar; in New-foundland, salt fish; and in some parts of Africa, small shells,—have been the currency. On the western coasts of this continent it is still customary, as it was formerly
in Virginia, to reckon in rolls of tobacco or bars of iron; and in Bornou, Major Denham informs us in his recent travels, that
gubkas, or narrow strips of cloth, constitute its money. The precious metals, however, or gold and silver, are now, and have been for ages, the money not only of all Europe, but of the greater part of Asia, Africa, and America, and they are willingly received at the islands of the Pacific Ocean. As natural circumstances dictate the use of some one commodity as a measure of the value of others, or as a means of exchanging them, so we may be sure that the preference universally given to the precious metals, has its source in some obvious natural circumstances.

These natural circumstances are the peculiar properties of the metals, and they are stated by Mr. M’Culloch to be,
first, the capacity of almost infinite divisibility, so that they can be made to represent commodities of almost every degree of value;
second, great durability, so that they are not deteriorated by time;
third, great value in small bulk, so that they can be cheaply transported;
fourth, sameness, so that pieces of metal of the same size and denomination, are always equal to one another; and
fifth,, steadiness in value, without which they would not serve to measure the value of other commodities. It is not affirmed that the value of gold and silver is invariable, but it is less variable than that of most other things. The other qualities mentioned also belong, in a higher degree, to the precious metals than to any other known substances; and these qualities have operated with such uniformity on the mind of man, at all times and places, that they have always induced him to act in a uniform
manner, and employ the precious metals as money. The power of the mightiest conqueror the world ever saw, lasted only for his life; and his influence extended only over a very limited space, while the use of the precious metals as money, has been known for many centuries, and is now nearly universal. The employment of them as money, therefore, and it ought never to be forgotten, began, like division of labour, without the interference of any legislature. Metallic money is not like an army of ruffian soldiers, the offspring of law, and the creature of governments, it is something instinctively adopted by the human race. “It has not been,” says the philosophic Turgot, “in consequence of any agreement among men, or by the intervention of any law, but by the nature and force of things, that the precious metals have become universal money.”

It is sometimes supposed that money and wealth are synonymous, which is indeed true of individuals, but not of nations. During the late war, for example, when the notes of the Bank of England were declared by the legislature to be good and sufficient money, the precious metals were nearly banished from circulation. Notwithstanding the loss of our gold and silver, and notwithstanding a more profligate waste of public treasure than even the subjects of our most extravagant government ever before witnessed, the nation increased in population, power, and wealth. An individual gets all the money he can, and is said to be rich in proportion as he possesses or can procure a great deal of it; but the wealth of nations is exclusively measured by the conveniencies, comforts, and luxuries enjoyed by all their inhabitants. The money possessed by an individual
may be called his wealth, because he can buy with it whatever he wants; the money in any one country will in general circulate as money only there, and the bullion, like cloth or corn, will only buy commodities from other countries, or exchange for them in proportion to its intrinsic value. We can hardly suppose, as natural circumstances dictate the employment of some one commodity as a measure of the value of others, and forcibly recommend the adoption of the precious metals for this purpose, that the quantity of money possessed or required by any country at any one time, is not also regulated by some natural circumstance. As money is not the offspring of legislation, so it is not by laws that its quantity or value are regulated. Two natural circumstances which exist quite independent of governments, though they interfere with and derange them; viz. the
quantity of labour required to obtain or purchase the precious metals and other commodities, and the number of exchanges to be completed in any given time and place, always determine the relative value of these metals to all other commodities, and what quantity of them must be in circulation.

As all commodities are exclusively the produce of labour, there is no other rule, and can be no other rule, for determining their relative value to each other, but the quantity of labour required to produce each and all of them. This circumstance establishes between the precious metals and all other commodities a
natural relation, subject only to such variations as may be caused by an increased difficulty or facility of procuring any one commodity, including the precious metals. I do not say that governments cannot alter and disturb this relation; that they may not, by prohibitions
or bounties, enhance the difficulties of procuring some certain commodities; and that they may not, by particular taxes, derange the proportions in which they would naturally exchange for each other; but I say different quantities of labour are
naturally necessary to procure, and different degrees of difficulty are
naturally met with in procuring all commodities, and these different quantities of labour, these different degrees of difficulty, establish in our minds a natural relation of value between all commodities, including the precious metals, which, thought it may vary, exists at all times and places, quite independent of any human laws whatever. The precious metals, therefore, have a settled value, both in relation to each other, and in relation to all other commodities, which is always determined by the quantity of labour necessary to produce each and all of them.
*60

Thus when the harvest is short, the quantity of labour employed in preparing the ground and gathering in the crops, being about the same as if the harvest were abundant, more labour than usual has been employed in producing a given quantity of corn, and corn accordingly rises in value in relation to all other commodities. The apprehensions of scarcity may intervene
and raise this price far beyond what remunerates the agriculturist for his labour; but, independent of this apprehension, the corn would necessarily rise in value, because more labour had been expended on a given quantity. On the same principle, it is well known that the successive improvements introduced into the manufacture of all metallic articles and most articles of clothing within the last century, having diminished the quantity of labour necessary to produce them, they have all fallen in value. On the same principle also, the discovery of America lowered the value of the precious metals throughout Europe. The consequence of that discovery was to supply us with gold and silver, particularly the latter, by means of less labour than was necessary to obtain them from the mines of Europe. Accordingly, gold and silver in a few years fell so much in value, that the period of the discovery of America has become a remarkable era in the history of political economy, as well as in the more extensive history of mankind. After that period it became necessary throughout Europe, to give more than three times as much silver as was before given for corn.
*61This alteration was co-extensive with the use of the precious metals as money; and confirms to demonstration the statement, that their value in relation to other commodities is determined by natural circumstances.

Having established this principle, we see clearly another principle which determines the quantity of money required in any country. Gold and silver are used for many other purposes besides money; and they are expensive articles. As money they facilitate the exchanges
which are necessary to the continuance of division of labour. Miners will not supply these metals without an adequate payment, and other men will not pay miners unless they require the precious metals. Their want of money is regulated by the number of exchanges to be made or the quantities of goods to be bought and sold; and thus the
quantity of money required at any time and place, is always determined by the number of exchanges to be made. Of course the relative value of the precious metals to other commodities determines how much of them must be given for other things; and the number of sales to be made within a given period, determines, as far as money is the instrument for effecting those sales,—the quantity of money required.

Governments may indirectly, but not directly influence the quantity of business, and thus the quantity of money necessary in a country. They may for example, by exorbitant taxation check all industry, and extinguish many productive enterprises, but producing nothing themselves, they have no power whatever to increase business; and, therefore, no power to influence or determine the quantity of money required in any country. At all times, however, they have endeavoured to regulate both the value of the precious metals when used as coin, and the quantity of money in circulation. Not to enter any further into the history of their proceedings than is necessary to explain the principle and source of their interference, I shall here only remark, that whenever they have by their regulations departed from the standard established by the natural circumstances just pointed out, the tendency of things to regulate themselves by these natural circumstances
is so much more powerful than all the restraints of the legislator, that sooner or later it has mastered his laws, and occasioned frightful convulsions in property.

When the precious metals were first used as money, they were always weighed like any other commodity; a practice still continued in China and some other countries, and still adopted in all countries with foreign coin. “Abraham,” we are told, ”
weighed to Ephron the silver which he had named in the audience of the sons of Heth, four hundred shekels of silver, current money with the merchant.”
*62 “The revenues of the ancient Saxon Kings of England are said to have been paid, not in money but in kind, that is, in victuals and provisions of all sorts. William the Conqueror introduced the custom of paying them in money. This money, however, was for a long time received at the Exchequer by
weight, and not by tale.”
*63 At present, if we carry foreign coins, or even guineas, to a money changer, he weighs them to determine their value. The plan of dividing the metals into small pieces, certifying the weight and value of each piece by a stamp or mark, was an after invention; the utility and conveniency of which, as a means of telling everybody that the metal was genuine, and what it was worth, must soon have forced themselves into notice. The visible characteristics of the precious metals are possessed by other substances, and it requires the art of the goldsmith or assayist to ascertain their genuineness. For every man to go through this process in buying and selling would be impossible; and even to weigh each piece of metal, would be almost
an endless task. By the bullion being assayed in large quantities, then divided into small portions, each portion being marked to signify that it contains a certain weight of metal of a specific fineness, individuals were spared the trouble of assaying and weighing the metals. Such a process is therefore very useful, and accordingly
coining has been introduced wherever the precious metals have been employed as money.

Governments having perceived the use which might be made of taking this process into their own hands, forbad individuals to coin money, and declared themselves the only lawful coiners. From money being used by the whole society also, it is not the peculiar business of any one individual to regulate and arrange it, though I have no doubt, had the matter not been interfered with, that in the progress of society there would have arisen a class of labourers deserving the confidence of society, whose exclusive business it would have been to have supplied metallic, as such a class of men now supply paper money. It having been supposed, however, in this as in numberless similar cases, that unless the legislature made regulations, there would be only disorder and confusion, governments accordingly assumed the power of coining. Moreover, those who are allowed to coin money must necessarily enjoy the public confidence, which governments have generally done,—whether justly or not, the reader must determine for himself,—or they have been able to compel obedience to their decrees, and having assumed the power to coin, were either trusted or obeyed. To me there seems no other grounds for governments taking on themselves the charge of providing the community with coined money.

Coining, the reader will recollect, does not and cannot alter the natural relation of value which exists between the precious metals and all other commodities, except that it adapts them better to perform the functions of money, adding to their utility, and giving them a slight increase of value in proportion to the labour of assaying and coining them. We should immediately see the absurdity of any endeavour to alter the relative value of commodities, were the attempt made with any thing but money. If the government, for example, should decree that an ox should be given for a sheep, and a sheep for a hat or a pair of stockings, its folly would be laughed at, its unjust interference would excite our indignation, and its decrees would be despised and disobeyed. The same would be the case with all other similar commodities; and what is there then in the nature of gold and silver which should release them from this general law, and enable governments by a fiat of theirs, to establish a relation of value between them and other things which does not naturally exist? There is nothing; and when it has been ascertained, for example, that a piece of gold as large as a sovereign is equal in value to a quantity of silver containing twenty shillings; or when it has been resolved to coin gold into pieces weighing a certain number of grains, the King’s head, and the royal arms, or whatever else may be the chosen marks, are only intended to testify this fact to the community, on the authority of the sovereign. It is a declaration that the piece of gold is worth twenty shillings. Formerly it was the custom to mark on each coin its weight and value, in relation to some other commodity, and this good custom is still kept up in some of the nations on
the Continent. A piece of gold in France, though called a
Napoleon, or a
Louis d’or, tells you, or told you on the reverse side, up to a late period,—for the present government has substituted the lilies of the Bourbons for the words of common sense,—that it was worth twenty pieces of silver or francs. In this country the people are informed by a proclamation of the value of the coin; and his Majesty’s head, and the royal arms, or Britannia, or George and the Dragon, are substituted for some plain expressions which we can all understand.

When the reader is aware that governments have no power to alter the natural relation of value between the precious metals and other commodities, and that they have only assumed the power of certifying this relation by issuing coin, in order, as they say, to guard the people against imposition and fraud, he will form a correct opinion of their honesty, honour, and trustworthiness, when he also recollects or is informed, that all governments have frequently used this power to delude and defraud their subjects. They have either mixed the precious metals with baser materials, or they have divided them into smaller pieces, certifying at the same time by their public seals, or by the busts of their chiefs, that the coin remained of the same value. It would carry me a great deal too far, were I to enter into a history of the proceedings of the different governments of Europe in debasing the coin of their respective dominions, endeavouring to cheat their subjects by tricks unworthy of the meanest sharpers:—though I know not if the whole history of the erring confidence of mankind affords a more instructive lesson; and I must content myself, therefore, with mentioning the single example of the English
pound and penny, which had been so adulterated by successive governments, that when Dr. Smith wrote, they contained about one-third only of the quantity of metal they originally contained.
*64 It has been quite in vain, however, that governments have tried to give a value to their coin different from that of the precious metals they contained, settled as that is in our minds, by what Dr. Smith calls the “higgling of the market;” or rather by the labour required to procure them and all other commodities. Whether they have altered the denomination of the coin, while the quantity of metal in it has remained the same; or whether they have lessened the quantity or deteriorated the quality, and have preserved the same denomination; all the efforts of successive governments here and on the Continent, to keep the public coin in circulation at a fictitious value, have been quite fruitless: and whether the standard were a
pound as in England, a
livre as in France, a
florin as in Austria, it has always come, in a very short period, to exchange for the value of the precious metal it contained, and no more. The universality of this fact establishes to demonstration the uniformity as well as the universality of that law which settles and determines in the minds of all men, at all times and places, the natural relation of value between all commodities.

Were it suitable to enter in this short treatise into
the question whether governments should have the power of coining money or not; and were the question worth discussion, which it hardly seems to be; for
paper-money issued by private individuals, whatever may be the opinions and practices of legislators on the subject, will unquestionably supersede, even to a greater degree than at present, metallic money,—I think I could shew, as money is not, like an order of nobility or a regiment of dragoons the invention and creature of governments, that they have no occasion to regulate the
coinof any country. I am sure I could satisfy every reasonable man, that no individuals are so utterly and completely unfit for this purpose as those who possess and exercise political power. Experience tells us, that of all false coiners, none have so sported with the confidence of mankind, under the pretence of protecting them from false coiners, as governments. By making alterations in the coin, they have altered all the relations of property, and have produced longer confusion and more varied misery in every country of Europe, than could by any possibility have been caused by their subjects resolving not to submit to their power. In practice, moreover, the question seems already settled. To supply the necessary quantity of bullion is unquestionably a far more important part of the whole process than assaying it and certifying its value by a stamp. As the rule, our government never interferes with the supply of bullion; leaving it to individuals, who import or export bullion according to the state of the markets. The mint merely stamps what they bring, most injudiciously charging them nothing for the labour of coining; and taxing the nation for the benefit of those who deal in money. It would seem therefore, both in theory
and practice, that the best way of keeping the metallic currency of any country steady in value, and to have a proper quantity in circulation, is to allow both bullion and coin to be freely imported and exported like all other commodities, and freely dealt with by all classes and conditions of men, like the equally useful articles of hats and shoes.
*65

In all the works of Nature we may observe a delightful uniformity of purpose, a harmony in executing that purpose which never permits any collision, and a completeness which leaves to our finite understandings nothing to be desired. There are never any harsh interruptions of the general order: and as natural circumstances dictate in one stage of society the use of the precious metals as money, regulating both their value and quantity, it would be inconsistent with that general order to imagine that Nature ceases her instructions at this point, and leaves the numberless other circumstances connected with a safe and sound currency to be regulated by chance, or by the ignorant
presumption of ambitious men. Though money is sometimes supposed to be the invention of statesmen, and to require their control more than the other parts of that wonderful system of combined production which takes place in civilized society, I know no part of it which affords, better than money, an illustration of the important fact, that this system is regulated in its minutest details by natural circumstances. Money, we have seen, is a universal, and therefore a natural invention; and the precious metals are universal or natural money. Their value is determined by that natural law by which labour produces all wealth, and is the sole measure of value: and having a determinate natural value in relation to other commodities, the quantity of them required at any time and place is regulated by the quantity of produce to be exchanged, or of commodities to be bought and sold. A certain chemical proportion in alloying the metals must be observed, to make them answer the purpose of money in the best manner, and mathematical laws dictate into what aliquot parts they ought to be divided; though hitherto these latter circumstances have formed no part of the scientific researches of those who have discussed the theory of money, or have vainly attempted to regulate it by their decrees.

In tracing the origin of money, I have mentioned its chief utility. It aids production, by facilitating barter and contributing to division of labour. “hen money,” says M. Storch, “supplies the place of all other commodities, every man can more readily give himself up to one exclusive occupation; rejecting all other means of providing for his wants, than that of procuring, by the sale of his own produce, as much money as possible, being fully assured that with money
he can buy every thing else.” As a man can dispose of small portions of produce that is corruptible, for what is incorruptible, he is under no temptation to throw it away; and thus the use of money adds to wealth, by preventing waste. The disadvantages sometimes eloquently attributed to it by poets and moralists, arise not from the convenient use of stamped pieces of gold and silver, but from the passions of men; they are examples of profusion or ambition, of fraud or avarice, or of the power possessed by some over the labour of others, of which money is only the sign, the representative, and the servant.

Paper money of the former description has been issued by almost every government of Europe, either directly by its authority, or by some bank, the funds of which it has appropriated to its own use, while it has forcibly kept the notes of the bank in circulation. On the Continent, the sovereigns have generally issued their own paper, for the express purpose of supplying their wants by this mode of levying a tax on their subjects; or as a substitute for metallic coin. In this country the government, after borrowing the funds of the Bank, passed a law to make its notes a legal tender, and relieved it from the responsibility of paying in specie. So far it acted on the same arbitrary principles
as the governments of the Continent. It converted the Bank into a state machine for emitting and keeping in circulation a forced and depreciated paper money. The reasons which should make us refuse to governments the privilege of coining money, have tenfold force against their becoming bankers and issuers of paper money of any description. “The payment of their notes depends,” says Mr. Storch, “on the will of the government, which cannot be compelled, like individuals, to fulfil its engagements.”
*66 However they may debase the coin, it still possesses some value, and cannot be issued in boundless excess; but paper money, which cannot be exchanged for specie, is quite valueless: and as there can be no limit to its issue, it confers on the individuals who possess the government a boundless power of working mischief.

The invention of this sort of paper money is of great antiquity, and its use is of wider extent than the reader may probably suppose. “It was invented,” says Mr. Storch, “long before the first bank of circulation was established. That of Saint George of Genoa, the most antient we know of, was not founded till 1407, while Koblai, the grandson of Genghis Khan, introduced paper money into China towards the end of the thirteenth century,—an example which was immediately imitated by his cousin Kaigatou, the Khan of Persia. Both were, however, soon obliged to abolish it, in consequence of the great disorders it produced in their respective states. I do not on this account,” Mr. Storch continues, “pretend to affirm that paper money was invented among the Mongols; on the contrary, the invention was so easily made, that it was probably
brought into use long before this period. Since that time,” he adds, “the Chinese government has again introduced paper money into its dominions, and I possess a Chinese
assignat, which was given me by a Russian traveller on his return from China.”
*67 It seems also, from the same author’s statements, that paper money is used in Turkey.

Paper money issued by governments is, therefore, very extensively known, and has been long in use. Of this description of paper money I have only to say, that it never is issued but for the purpose of surreptitiously and fraudulently levying a tax on the people. It is a complete cheat and a nuisance; and from the period when it was invented by the Tartar robber Koblai, it being the worthy offspring of Mongol rapacity, till the acts of the last session of our Parliament, or its authorised issue of Exchequer bills during the present session, paper money, issued, regulated, or controlled by governments, has ever been as at first, and in all countries, as in China and Persia, a source of innumerable disorders.

Commercial paper money is something very different; promissory notes to pay certain sums of money at specific periods, are probably the most ancient species of commercial paper money, and must have come into use almost as early as the invention of writing and the beginning of trade. The merchant who undertakes a long voyage, or the manufacturer who plans an extensive project, requires the means of subsistence and of continuing his operations till his produce can be brought to market. He accordingly borrows the goods which he needs daily, or the money to buy them, promising
payment at some specific time, or when his own produce is sold. Persons are willing to supply him with this accommodation, because his future produce will be his only means of payment, and in fact the only commodities produced to exchange for what he immediately requires, and of course the only market for it. Such was probably the origin of promissory notes, and, in their most legitimate form, they are merely a happy invention, like metallic money, for exchanging commodities requiring different periods to complete them; which, without such an invention, could never have constituted the market for each other, and neither of which, consequently, would ever have been produced. It is, however, to be considered as chiefly resulting from those long commercial undertakings, which extend over months or years before they produce any thing for sale, of which there are no examples in the infancy of society.

All trade, though nominally transacted by money, is in fact the exchange of one commodity for another. The London merchant buys wine at Oporto for so many
milreas, and the Portuguese merchant orders cloth from London to the amount of so many
pounds sterling; but in fact, the wine pays for the cloth, and the cloth for the wine. The Portuguese merchant obtains from his neighbour, the wine-grower, for a proper consideration, an order to receive the price of his wine from the London importer, or the latter procures from the cloth-manufacturer an order to receive the price of his cloth from the Portuguese importer; and, by such an order, each of these merchants is enabled to pay his creditor, on the spot where he lives, without using money. The order to receive such a sum is called a bill of exchange. In
fact, therefore, the cloth is bartered for the wine, money being used to reckon the value of each without any being transmitted, or even employed to effect the payment.

Those who received promissory notes or held bills not yet due, might require to make purchases or payments when they had no money. In this case they would make over the notes or the bills to their creditors, pledging their credit as the credit of the issuers of the promissory notes, or of the acceptors of the bill, was already pledgd for its payment; and thus both promissory notes and bills of a long date would pass through many hands, and be the means of making many payments before they were finally discharged. In general all
bona fide commercial bills and notes originated in a well-founded expectation of having the means at a subsequent period, by the production or sale of commodities, to take them up, or pay them. At least, they were in the vast majority of cases duly honoured, and thus they came to be considered as of equal value to the money they were to entitle the holder to receive at a
certain time or place. As long as they are so considered, and as long as they are in circulation, or passing from hand to hand, they perform all the functions of money.

”
Bills of exchange,” says Mr. Burgess, “have long ceased to be merely an instrument of commerce to render perfect a mercantile transaction between country and country, and
internal bills have become gradually more and more a part of our circulation; they have ceased to be so currently used by the manufacturers in payment of small sums under ten pounds as they were thirty or forty years ago, owing to the high rates of stamps upon small sums. Bills above the value of ten pounds form now as completely a part of the currency as bank of England notes. They are used to pay for minerals—for all kinds of raw produce used in manufactures—for all the principal articles of food or clothing, and recently, in some cases, for mere labour. If a butcher in the north of England buys cattle, he pays for them partly in these bills, and partly in country bank notes. If a miller buys corn, or a mealman or a baker flour, he does the same. If a Yorkshire wool-buyer purchase wool of the farmers in the country, or in Northumberland, or in Lincolnshire, he pays for it partly in these bills, partly in country bank notes, or sometimes wholly in one kind, and sometimes wholly in the other. In the manufacturing districts of Yorkshire and Lancashire, no man, generally speaking, thinks of paying for any commodities above the value of ten pounds, otherwise than by a bill after date. This practice is now very general through the northern and midland
counties, and is increasing in other parts.
*68” “A bill at three months is considered in Lancashire and part of Yorkshire, which as regards bills is almost half the kingdom, to be a money payment.
*69” Mr. Burgess then proceeds to make some conjectures as to the amount of such bills which are continually in circulation. The data on which he proceeds seem worthy of confidence, and he concludes that the amount of such bills continually in circulation, continually performing the functions of money, is not less than three hundred millions STERLING. Whether this statement be strictly accurate or not, it cannot be doubted by any man in the least conversant with the present mode of managing business, that bills and promissory notes issued and circulated by manufacturers, merchants and traders, do at present constitute by far the greater part of the circulating medium, understanding by that the instrument used for buying and selling, of this commercial and enterprising country.

This species of money is comparatively of such modern origin, and has grown up with such great rapidity, that governments have not yet thought of regulating its issue except by levying a stamp duty on bills and notes; we are all therefore fully sensible that this valuable instrument is not the offspring of legislation. It may be even doubted if there be any
possibility either to regulate or control it by law without such an interference with private business as would not be tolerated. Whether the few presumptuous beings who call themselves, and who get a multitude of beings as unwise as their masters are presumptuous, to call them the
state, sanction the issue of commercial paper money or not; whether they permit bankers’ notes for every sum, or limit them to a specific amount, paper money must and will form the principal part of the circulation in every well-peopled and industrious country. It grows up in all countries, for it is in use in every part of the civilized world, unwilled by the legislature and almost unknown to it; and seems as necessary a step in progressive improvement as that metallic currency, which it has already superseded to a vast extent, and seems destined almost wholly to supersede. It is not a question of theory, whether paper can be substituted for gold and silver; it is not a proposed arrangement of some individuals, or of the legislature, to employ paper for metallic money; it is not a scheme of some hot-brained projector, but it is found in practice and by general agreement, that by far the greater number of exchanges can be and are actually made without using metallic money. The costly commodities of gold and silver may therefore be dispensed with in the progress of society, and all the labour necessary to keep a money of the precious metals in circulation, amounting to several millions sterling per annum, in this country alone, may, by the happy invention of commercial paper money, be directed to produce commodities adapted to supply our animal wants or add to our enjoyments.

The promissory notes issued by bankers, commonly
known by the name of bank notes, are only one particular kind of commercial paper money. Properly speaking, they no more fall to be considered in the science of political economy, than the promissory notes or bills of any other class of traders. They form altogether, including the Bank of England notes, and all the bank notes issued by private bankers, not above the sixth part of the commercial paper money of the country. Why they should have so exclusively attracted the attention of politicians, and why they should have been the subjects of so much censure, while every other description of paper money, particularly that authorised by governments, the very worst of all, should have been unnoticed or praised, cannot be accounted for on any scientific principles. But this being the fact, I propose very briefly to explain the origin and utility of private bankers, and of the bank notes issued by them; from which we may probably learn, that they are a necessary part of that great social system of production which is not the offspring of legislation; and they therefore do not require, in any manner or degree, to be regulated by the legislator.

With the exception of banks expressly established by governments, like the Bank of Assignats, at St. Petersburg, and the Bank of Stockholm,—and of banks incorporated and authorised by governments, to which they have granted exclusive privileges, like the Bank of England, it is plain that the existence of such a class of tradesmen as bankers can no more be attributed to any act of the legislature, than the existence of such separate classes as farmers and merchants. As men multiplied, and division of labour was extended, one class of men came to deal only in money, as another
class deals only in wine, or in Manchester goods. As trade extended, the exchanges between different states, and different parts of the same states, became more frequent, and many transmissions of money or bills of exchange became necessary. This species of business fell into the hands of those who dealt exclusively in money. In consequence, it was soon found convenient to employ them in settling all accounts between merchants living at different places, and even at the same place. From the extensive connexion they formed by this employment, they came to know, better than any other men, the mercantile character and credit of merchants and manufacturers: they were, therefore, enabled to lend out money to advantage; and most of the persons who had money to lend, placed it in their hands for this purpose. They accordingly became, and still are, the chief agents in supplying money or capital to those who engaged in useful undertakings, the produce of which could not be immediately brought to market. Thus arose that class of men called bankers, who are still very important, and have long been very useful labourers. We may be satisfied of their utility by observing, that they are found in every part of Europe, and that all classes and conditions of tradesmen and dealers
voluntarily employ them. They first sprang up in Italy, then the most enterprising and civilized part of the world; they came from that country to this,—Lombard Street, the great seat of our banking establishments, deriving its name from them,—and at present, while theirs is a branch of business almost extinct in Italy, it is established in every town of this country, now the great seat of commercial enterprise, and the farthest advanced in the
natural system of co-operating production. Their business results naturally, therefore, from division of labour, and is extended as men multiply. Being only one small, though a necessary branch of this vast system, why should their proceedings or business be in any manner regulated by the legislative authority, which had no hand in establishing, and is unable to extend division of labour?

In fact, there is only one small part of their business with which our government does interfere, viz. the issuing of promissory notes. Let us look, therefore, at its natural origin. They receive money in deposit, and they lend money. They are, as the rule, therefore, persons of established credit, and worthy of confidence; and their promissory notes, on account of their transacting all the money transactions of the neighbourhood, are naturally much more acceptable than those of any other tradesmen. Instead, therefore, of lending money to a merchant or manufacturer to buy commodities, they lent him their credit. They exchanged the large promissory notes or bills of other tradesmen, for their own small promissory notes. To the merchant, on account of their established credit, these small notes were as valuable as gold. The bankers have confidence in the individual to whom they lend money, for the whole length of time his bills are to run; and their promissory notes are, to all other persons, better than his, on account of their general credit, and on account of being made
payable at sight; while the large commercial bills drawn on account of commodities not yet in the market, are always made payable at some specific and distant time. Bank notes grew out of bills of exchange and promissory notes, and only differ from
other species of commercial paper money, in being the promissory notes of a particular class of tradesmen deserving general credit; and in general having the great advantage of being payable at sight. The circumstances which led to the invention of them are made so palpable by these gradual steps, and they are obviously so useful, being adopted without the interference of the legislature,—and, generally, adopted in proportion as the community advances in opulence,—that we can, I think, have no hesitation in supposing them also to be a necessary part of the great natural system of co-operative production. I see no scientific reason, therefore, why the issuing of promissory notes by bankers should in any respect or degree be regulated, controlled, or influenced by the legislature.

The astonishing extent to which the practice is carried of settling accounts and making payments, without the intervention of money, can hardly be known to the great majority of the community. In London there is a place called the Clearing House, at which the clerks of the different banking-houses meet at one specific time every day, to balance all accounts between these houses; and as almost all merchants and dealers of every description make all their payments by means of bills payable at some banker’s, or by checks drawn on a banker; as they all have their money paid into a banker’s, and as a considerable quantity of business originating in the country is transacted or settled for in town, not only by far the larger quantity of all the payments of every description arising from the trade of the metropolis, but also from the trade of a large part of the country, are made by the London bankers; the consequence is, that they have daily immense sums to
pay to each other. In 1810, according to evidence given before the Bullion Committee, the amount settled on ordinary days at the London Clearing House, between the different bankers, was at least five millions sterling; and on settling days, at the Stock Exchange, this amount was frequently fourteen millions. By means, however, of the clerks of the different banking-houses meeting at the Clearing house, and only paying the balance of their respective accounts, 220,000
l. was the whole amount of money or bank notes required to pay the enormous sum of five millions sterling daily. The bankers of the metropolis are the agents for paying the greater part of the bills in circulation; so that, in fact, the chief money transactions of all England are settled by the insignificant sum just mentioned. Even this, it is supposed on good grounds, may and will be dispensed with. Such is a specimen of the natural and vast system of co-operating production; which, unknown and unmarked by us, is continually extended, and continually simplified. So much nonsense is spoken in Parliament, and written in the world at large, about bankers and bank notes, that it is right to add, that this beneficial simplification is the result of banking, and of employing commercial paper-money.

Briefly to enumerate the advantages of bank paper-money. It seems to me to be such a useful instrument for supplying the daily wants of those whose products require a long time to perfect them, that it can no more be dispensed with, as society advances, than weights and scales. It is cheaper than coin; and the profits made by bankers in the first instance, arose from their substituting a cheap for a dear instrument.
Such profit, however, can only be large while the process of getting rid of the coin is going forward, which must in its own nature ever be very gradual. By no possibility could paper be made all at once to supply the place of the precious metals among a people accustomed to the latter as coin. Among a people once accustomed to paper-money, and who have again had a metallic currency forced on them, it may, if circumstances permit, be suddenly substituted for gold. This process of getting rid of the coin, and replacing it, our government has renewed almost periodically; at one moment ruining bankers, and at another tempting cupidity to turn banker, by the prospect of enormous profits; permitting the issue of country bank notes for small sums in 1822, and forbidding it in 1826; while before 1836 it will most probably again be permitted. In the measures which have been adopted or recommended as to issuing bank notes, it would be difficult to find a single scientific principle. They are directly and completely adverse from the regular progressive and steady march of civilization.

The quantity of money, it has been explained, required at any time in society, depends on the quantity of business. Now this necessarily varies with the seasons. To keep money as much as possible steady in its value, the quantity should vary with the business to be done. As the rule, bankers only issue their notes by discounting
bona fide commercial bills, which are the best possible data for judging of the quantity of business. The issue of bank notes varying with the amount of bills discounted, they being also in all cases returned to the banker, if he put too many in circulation, is, perhaps, the best method which can be imagined or devised
to make the quantity of money in society vary with the quantity of business. Thus bank notes, when the issue of them is freely permitted, when no corporations are endowed by the legislature with exclusive privileges, when the issues of every banker are checked and controlled by the watchfulness of rival bankers, tend continually to prevent all those fluctuations in prices which are occasioned by alterations in the relation between the quantity of business to be transacted, and the quantity of money in circulation.

The characters on paper-money are legible, and every man capable of reading may tell its value; but to know whether coin be good or not, requires the skill of the assayist. Bank notes are on this account also better than coin. That they have been frequently forged seems to me, in almost all cases, the result of the Bank of England monopoly. Notes issued by private bankers, who control and check each other, are rarely or
never forged. Their circulation is so limited as to space, and they are, in the natural course of business, so frequently returned to the issuer, that to forge them, with any prospect of advantage, is almost impossible. Of the credit due to a country banker, whose notes supply the place of money only in his own immediate neighbourhood, almost every man in whose hands they fall can judge; so that it is hardly too much to suppose if the whole business of banking were left, like the business of making hats and clothes, perfectly free, if there were no government and national banks, that bank notes could neither be forged nor issued to excess.
*70

I beg the reader will recollect that I have only endeavoured to ascertain the natural origin of commercial paper-money, and that I mean the above observations only to apply to that species of paper-money which grows up among the productive classes
of society from the division of labour. That both government and commercial paper-money have in our time been productive of incalculable mischief, it would be madness to deny. We have seen nominal prices rise and fall twenty per cent. within a few years,—the variations having been caused by an improper issue of paper-money. Whole hecatombs of unfortunate wretches have been sacrificed on the altars of the law for imitating the names of those who were abusing public confidence to a much greater degree than their victims who suffered the penalty of death for their guilty avarice. Debts have been augmented or lessened, and all money contracts substantially violated. One class has been defrauded to enrich another; and the whole course of business has been diverted from its usual channels. No man has in consequence been certain of the amount of his income for two successive years; and confusion, dismay; and terror, such, perhaps, as were never witnessed in any country not overrun by a victorious enemy, nor devastated by some great natural calamity, have been caused in this, year after year, by an alteration in the quantity and value of paper-money. If such evils were inseparable from the invention, whatever may be its natural advantages, they would be far outweighed by its social disadvantages, and it would be impossible to condemn paper-money too strongly. But the reader will find in the Wealth of Nations, in Mr. M’Culloch’s admirable article entitled money, in the Supplement to the Encyclopædia Britannica, and in Mr. Storch’s book, numerous examples of governments having caused, by
tampering with metallic coin, “a greater and more universal revolution in the fortunes of private persons,” to use
the language of Dr. Smith on this subject, “than could have been occasioned by a great public calamity.” In consequence, however, of the present extended use of paper-money, governments have latterly, and since the publication of Dr. Smith’s book, always effected the same unhallowed purposes, by tampering with paper-money; and the present generation feeling only present evils—regardless, apparently, or ignorant of the economical history of Europe—has attributed those fluctuations to the instrument itself, which have been caused by the manner in which it has been abused by the
venerated governments of Europe. Such fluctuations, caused by similar conduct, frequently occurred when the whole circulation of Europe consisted only of coin.

If from the abuse of paper-money we are to condemn its use, nothing will escape our censure. What can be more lovely or consoling than religion, and what has been perverted to more detestable purposes? In its name are continually practised base hypocrisy, blasphemous iniquity, and shameless plunder. With the perversion of a beautiful natural contrivance, with the wrong-headed speculations of ignorant and designing men, with the gambling and fraud of scheming projectors, with the ignorant cupidity of kings and statesmen, the natural science of national wealth has nothing more to do than to point out in what manner their conduct is opposed to its principles; though we must all lament that infatuation in mankind, which refuses to take counsel from experience, and continues, after repeated proofs of deceit, fraud, and treachery, to place confidence where confidence never was merited. Declining on all occasions to examine in detail the effects
of social regulations, I cannot explain the circumstances which have led in this country to the perversion of paper-money. I agree, however, fully with Dr. Smith, “that private and local banks, and private and local bank notes, which may be called natural, as contra-distinguished from legislative paper-money, are attended with the most advantages, and the fewest dangers.” From the conduct of the governments of England, Russia, Austria, France, Denmark, and Sweden, with respect to paper-money—of which an impartial and not unfavourable account is given in Mr. Storch’s book—it is plain, that national and government bank-paper, ought on no account to be tolerated. Governments have no commodities on the way to the market, which is the natural guarantee of all paper-money; they cannot be compelled to make payment, and they can know nothing of individuals, which knowledge is the only secure foundation for giving them credit.

Much has of late been said against Country bankers, and I readily admit, they deserve censure; but whoever takes into due consideration the vast extension of business within the last fifty years, and the great demand for bank notes, in consequence of the political state of the country, giving immense profits to bankers, will find numberless excuses for their conduct, which cannot be made for other classes of tradesmen, who have effected equal mischief by the circulation of their paper-money. Banking, or at least the issuing of bank notes, is, as it were, a new business, and while the temptations to engage in it have been very great, the correct methods for carrying it on have been imperfectly known. And after all that has been said against country bankers, their issues of late have been far from extravagant. It
is proved, for example, by parliamentary documents, that the issues of the Bank of England have been trebled in amount since the year 1792, while the amount of the issues of Country bankers were less, immediately prior to the late revulsion in the latter end of 1825, by seven millions, than they were in 1814, and less by four millions than in 1807.
*71 Nothing but colossal power can work colossal mischief, and if that revulsion and consequent distress were in any degree caused by paper-money, they were so vast and extensive, that nothing less than the immense power of the Bank of England, which did actually vary the amount of its issues one-sixth within a few short months, could have caused them. Whatever may have been the real object of the Acts of Parliament passed in the year 1826, to put a stop to the issuing of bank notes for one and two pounds, because Mr. Canning supposed, very ridiculously, that country bankers were usurping the king’s prerogative of coining money, their effects have been to injure country and local banks, which are the best kind, and to augment the power of the Bank of England, which has already done inconceivable mischief. They are a direct violation of the principles of free trade, which the ministers profess; but as the Bank of England is under the control of government, those Acts have added to the power which it before possessed over the currency of the country. By tampering with it, the government has already inflicted vast misery on us, and no man can expect, from this added power, any other result than increased mischief.
*72

That issuing bank notes and the business of banking, must be conducted on some settled principles to make them advantageous, is quite certain; but to expound those principles, is the duty of the persons who write on the
art of banking. As both the value and quantity of metallic money are regulated by natural circumstances, as the quantity of paper-money necessary is determined by the number of exchanges to be made, there is reason to believe, that the whole business of issuing bank notes is subject in its minutest details, to controling natural circumstances, many of which, whether theoretically known or not, are already acted on.
There can be no doubt, for example, that there is a point at which it becomes disadvantageous to substitute paper for coin. Some persons of good judgment have stated, that one pound is below this point; and this principle, though it has not been either scientifically or practically ascertained, has been made the basis of legislation. Banking, however, let us never forget, with the issuing of bank notes, is altogether a private business, and no more needs to be regulated by meddling statesmen, than the business of paper making. In fact, the impertinent interference of law-makers, their pretended wise regulations, but in reality their tricks and frauds, with the currency, have been the causes of all the evils we have suffered within the last century from variations in the value of metallic and paper money; and nothing can rescue mankind from such desperate fluctuations in prices, as have of late afflicted all the countries of Europe, but allowing, both the coining of metallic and the issuing of paper money, to find, under the controlling influence of natural circumstances, their proper course and just level.