Money and the Mechanism of Exchange
By William Stanley Jevons
In preparing this volume, I have attempted to write a descriptive essay on the past and present monetary systems of the world, the materials employed to make money, the regulations under which the coins are struck and issued, the natural laws which govern their circulation, the several modes in which they may be replaced by the use of paper documents, and finally, the method in which the use of money is immensely economized by the cheque and clearing system now being extended and perfected.This is not a book upon the currency question, as that question is so often discussed in England. I have only a little to say about the Bank Charter Act, and upon that, and other mysteries of the money market, I refer my readers to the admirable essay of Mr. Bagehot on
“Lombard Street,” to which this book may perhaps serve as an introduction. [From the Preface]
First Pub. Date
New York: D. Appleton and Co.
Westminster (authorized) edition.
The text of this edition is in the public domain. Picture of William Stanley Jevons: Photogravure after a photograph of W. Stanley Jevons, taken by Maull & Co., London., courtesy Liberty Fund, Inc.
- Chapter I. Barter
- Chapter II. Exchange
- Chapter III. The Functions of Money
- Chapter IV. Early History of Money
- Chapter V. Qualities of the Material of Money
- Chapter VI. The Metals as Money
- Chapter VII. Coins
- Chapter VIII. The Principles of Circulation
- Chapter IX. Systems of Metallic Money
- Chapter X. The English System of Metallic Currency
- Chapter XI. Fractional Currency
- Chapter XII. The Battle of the Standards
- Chapter XIII. Technical Matters Relating to Coinage
- Chapter XIV. International Money
- Chapter XV. The Mechanism of Exchange
- Chapter XVI. Representative Money
- Chapter XVII. The Nature and Varieties of Promissory Notes
- Chapter XVIII. Methods of Regulating a Paper Currency
- Chapter XIX. Credit Documents
- Chapter XX. Book Credit and the Banking System
- Chapter XXI. The Clearing-House System
- Chapter XXII. The Cheque Bank
- Chapter XXIII. Foreign Bills of Exchange
- Chapter XXIV. The Bank of England and the Money Market
- Chapter XXV. A Tabular Standard of Value
- Chapter XXVI. The Quantity of Money Needed by a Nation
The English System of Metallic Currency
I now come to describe in more detail the system of metallic currency which has existed in England for more than half a century, and which seems to be the best of all as regards the principles on which coins of three different metals are combined into composite legal tender. The legal regulations under which the English coinage is issued and circulated, can be ascertained with ease and certainty, thanks to the Act of Parliament (33 Victoria, ch. 10), which Mr. Lowe caused to be passed to simplify and consolidate the statutes on the subject.
English Gold Coin.
The English sovereign is the principal legal tender and the standard of value. It is defined as consisting of 123.27447 grains (7.98805 grams) of English standard gold, composed of eleven parts of fine gold, and one part of alloy, chiefly copper. The sovereign ought, therefore, in theory, to contain 113.00160 grains, or 7.32235 grams, of pure gold. But as it is evidently impossible to make coins of any precise weight, or to maintain them of that weight when in circulation, the weight stated is only that standard weight to which the mint workmen should aim to attain as closely as possible, both in each individual piece, and in the average.
From the weight of the sovereign we deduce the mint price of gold. For if we divide the number of grains in the sovereign into the number of grains —namely, 480—in the troy ounce, we ascertain exactly how many sovereigns and portions of a sovereign the mint ought to return for each ounce delivered in. This we find to be 3.89375, which is equivalent to £3 17
d. It comes to exactly the same thing to say in terms of the old mint indentures that twenty-pounds’ weight troy of gold are to be coined into 934 sovereigns, and one half-sovereign. I have heard of people who protested against the government fixing the price at which gold should be bought and sold by the mint, and who yet allowed that the sovereign must have some fixed weight. But the fixed price is convertible with the fixed weight, and
vice versâ. Either follows from the other.
In practice the weight of a coin is always a matter of limits, and there must be limits both for the weight as sent out and that at which it can legally remain in circulation. The
remedy is the technical name for the allowance made to the mint-master for imperfection of workmanship, and is defined by the Act as two-tenths of a grain (0.01296 gram). Thus the mint cannot legally issue a sovereign weighing less than 123.074 grains, or more than 123.474 grains. Since the fineness of the gold, again, can never be adjusted exactly to the standard of eleven parts in twelve, or 916.66 in a 1000, a remedy of two parts in 1000 is allowed in this respect. It is understood that the English mint succeeds in working well within the remedy both of weight and fineness.
Every sovereign issued from the mint in accordance with these regulations, and bearing the impress authorized by the Queen, is legal tender, and must be accepted by a creditor in discharge of a debt to that amount, provided that it has not been reduced by wear or ill-treatment below the weight of 122.50 grains (7.93787 grams). If a sovereign of less than this
least current weight be tendered to any person, he is presumed by the law to detect the deficiency, and is bound to cut or deface the coin, and return it to the tenderer, who must bear the loss. If the coin so defaced should prove not to be below the limit, then the defacer has to receive it and bear the loss arising from his mistake. Any justice of the peace may decide disputes arising concerning light sovereigns in a summary manner.
The only other gold coin actually issued is the half-sovereign, of which the standard weight and remedy are exactly half those of the sovereign, the remedy in fineness the same as in the sovereign, and the least current weight 61.1250 grains (3.96083 grains). The Coinage Act also legalizes the issue of two- and five-pound gold pieces, the weights and remedies in weight being corresponding multiples of those of the sovereign. Coins of the value of five and two guineas were struck by most of the English monarchs from the time of Charles II. to that of George III. Patterns of five- and two-pound pieces have been prepared under Queen Victoria; but gold coins of this size have not been issued in the present reign, nor is it desirable, for reasons stated in Chapter XIII., that they should be issued.
English Silver Coin.
The further subdivision of the pound is effected by token coins of silver and bronze, which are made of such weights that there is no danger of their metallic values rising above the metallic value of the gold coins for which they are legally equivalent. Previous to the year 1816, the troy pound of standard silver, containing 925 parts of fine silver and 75 parts of alloy in 1000, was coined into 62 shillings, so that each shilling would contain 92.90 grains of standard metal. Under these regulations gold was rated as 15.21 times as valuable as silver. As silver, however, may sometimes become more valuable relatively to gold, Lord Liverpool very wisely recommended in his letter to the king, that the weight of the shilling should be reduced. By the Act 56 Geo. III. ch. 68, it was ordered that the troy pound of silver should be coined into 66 shillings, a reduction of weight of about 6 per cent. The new Coinage Act maintains the chief provisions of that of 1816, so that the English shilling now has the weight of 87.27272 grains of standard silver (5.65518 grams), and the weights of all the other silver coins are exactly corresponding multiples or submultiples of this. The mint remedy in weight for the shilling is a little more than the third part of a grain, and in simple proportion for the other coins. The remedy in fineness is in all cases four parts in one thousand. The denominations of coins authorized are nine in number, namely, the crown, half-crown, florin, shilling, sixpence, groat, or fourpenny piece, threepence, twopence, and penny. All, except the crown, are coined in greater or less quantity, but the fourpence, twopence, and penny, are now only struck in very small quantities as Maundy money, which, after being distributed by the Queen annually in alms, appears to find its way into numismatic cabinets or to be melted down.
All such coins are legally current, irrespective of their weights, so long as they are not called in by proclamation, or so worn and defaced that the impress of the mint cannot be recognized. The coin in circulation is actually reduced in weight by abrasion to a considerable amount, often one-fourth or one-third of its original weight. Moreover, the fall in the value of silver relatively to gold reduces the metallic worth of the coins, so that no one can export them to foreign countries, or melt them for sale as bullion without losing from 10 to 30 per cent. of their nominal value.
It would obviously be a cause of grievance if a person could be obliged to receive unlimited amounts of this token money in discharge of a debt. Merchants might often have thousands of pounds worth of such coins thrown upon their hands, the full value of which could only be realized by gradually putting it into circulation again. It was therefore provided by the Acts of 1816 and 1870, that silver coin shall be a legal tender only to the amount of forty shillings in any one payment. This limit was chosen apparently because the two-pound piece was in 1816 regarded as the largest coin then in circulation, or likely to be issued.
English Bronze Coinage.
The final subdivision of the pound is effected by bronze pence, halfpence, and farthings, of which the weights when issued should be respectively 145.833, 87.500, and 43.750 grains. They are composed of an alloy of 95 parts by weight of copper, four parts of tin, and one part of zinc, being exactly the same kind of bronze as was previously employed by the French mints. The remedy in weight is one-fifth of one per cent., and as the coins are token money there is no least current weight. As the reasons against allowing them to be a legal tender for large sums are stronger than in the case of silver coin, it is enacted that bronze coins shall be a legal tender only to an aggregate amount of one shilling.
If a copper penny were now made to contain metal equivalent in value to the 240th part of a sovereign, its weight would be 871 grains, at the present market price of copper (£75 per ton). Thus the fractional coinage has been reduced in weight nearly to one-sixth part of what it would be as standard copper coin. The bronze of which the pence are made is worth, according to Mr. Seyd, 10
d. per troy pound, so that the metallic values of the coins are almost exactly one-fourth part of their nominal values. A considerable profit therefore accrues upon the coinage of bronze, amounting up to the end of 1871 to about £270,000; but the reduction of weight is altogether an advantage, and is probably not carried as far as it might properly be done.
Deficiency of Weight of the English Gold Coin.
It is the theory of the present English monetary law, as we have seen (p. 107) that every person weighs a sovereign tendered to him, and assures himself, before accepting it, that it does not weigh less than 122.5 grains. In former days it was not uncommon for people to carry pocket-scales for weighing guineas, and such scales may still be occasionally seen in old curiosity shops. But we know that the practice is entirely given up, and that even the largest receivers of coins, such as the banks and railway companies, and even tax-offices, post-offices, etc., do not pay the least regard to the law. Only the Bank of England, its branches, and a few government offices, weigh gold coin in England. The result is that a large part of the gold coinage is worn below the least current weight, and all persons of experience avoid paying old sovereigns to the Bank of England. Only ignorant and unlucky persons, or else large banks and companies which cannot otherwise get rid of light coin, suffer loss. The quantity of light gold coin withdrawn by the bank did not for many years exceed half a million a year; during the last few years it has varied from £700,000 to £950,000. As the average amount of gold coined annually is four or five millions, and the coins melted or exported are for the most part new and of full weight, it follows necessarily, that the currency is becoming more and more deficient in weight.
In 1869 I ascertained, by a careful and extensive inquiry, that 31½ per cent. of the sovereigns and nearly one-half of the ten-shilling pieces were then below the legal limit. The reader who has attended to the remarks on Gresham’s Law (p. 80), will see that no amount of coinage of new gold will drive out of circulation these depreciated old coins, because those who export, or melt, or otherwise treat the coins as bullion, will take care to operate upon good new ones.
Great injustice arises in some cases from this defective state of the gold currency. I have heard of one case in which an inexperienced person, after receiving several hundred pounds in gold from a bullion dealer in the city of London, took them straight to the bank of England for deposit. Most of the sovereigns were there found to be light, and a prodigious charge was made upon the unfortunate depositor. The dealer in bullion had evidently paid him the residuum of a mass of coins, from which he had picked the heavy ones. In a still worse case, lately reported to me, a man presented a post-office order at St. Martin’s-le-Grand, and carried the sovereigns received to the stamp-office at Somerset House, where the coins were weighed, and some of them found to be deficient. Here a man was, so to say, defrauded between two government offices.
It should be stated that the government made, in July, 1870, a slight effort to promote the withdrawal of light gold, by engaging to receive it through the Bank of England at the full price of £3 17
d. per ounce by weight, the price previously paid by the bank having been only £3 17
d., owing to the old sovereigns being a little below the standard in fineness. A certain increase in the amounts withdrawn has no doubt followed this measure; but the loss by deficiency in weight is still thrown upon the public, and as long as this is the case the withdrawal of light gold will continue inadequate to maintain the coinage at its standard weight.
Withdrawal of Light Gold Coin.
Some steps must soon be taken to remedy the increasing deficiency of weight of the gold coinage described above. The withdrawal may no doubt be effected in several ways. One method would be for the Queen to issue a proclamation calling in and prohibiting the circulation of all gold coins more than twenty or twenty-five years old, as it is mostly the older coins which are deficient in weight. Another method would be to oblige all revenue officers, postmasters, and others, under the control of government, to weigh all sovereigns presented to them. If necessary, the bankers of the kingdom generally might be obliged to weigh coin. But it is obvious that great trouble and inconvenience would arise from such measures. The progress of the post-office savings banks would be imperilled if every depositor of a pound were liable to be charged 2 per cent. for lightness. Considerable excitement and trouble followed the issue of the last proclamation of June, 1842, calling in light gold. To make the last holder of a coin pay for the whole cost of its circulation during thirty or forty years past, leads in many cases to gross injustice. The present law tends to throw the loss upon the poor, who have usually only one or two sovereigns at a time to pay, whereas rich people, having many, can avoid paying light gold at offices where it will be weighed.
I hold that the only thorough remedy is for the government to bear the loss occasioned by the wear of the gold, as it already bears that of the silver currency. The Bank of England should be authorized to receive all sovereigns
showing no marks of intentional damage or unfair treatment at their full nominal value, on behalf of the mint, which should recoin the light ones at the public expense. No one would then have any reason for keeping the light gold away from the bank; the currency would soon be purged of the illegally light coins, and would thenceforth be kept up strictly to the standard weight; all loss of time and trouble would be saved to individuals, a consideration which we should not lose sight of; and, lastly, no injustice would be done, as at present, to the last holder of a light sovereign.
In opposition to such a proposal it is usually urged, that encouragement would be given to the criminal practice of sweating or otherwise diminishing the weight of the currency. I answer that, on the contrary, it is the present state of things which gives the best opportunity for illegal practices, because it renders the population perfectly accustomed to handling old and worn coins. No one now actually refuses any gold money in retail business, so that the sweater, if he exists at all, has all the opportunities he can desire. I have met with sovereigns deficient to the extent of four to five grains, or 8
d. to 10
d., but they nevertheless circulate. If under a better system the gold currency consisted entirely of full-weight, fresh coins, with sharp, new, perfect impressions, attention would quickly be drawn to any coin which appeared to be worn or ill-treated in any degree. As the currency, too, would be constantly passing through the automaton weighing-machines of the Bank of England, without previously undergoing the operation of garbling by bullion brokers, sweated coins, if they existed at all, would soon be detected; whereas, according to the present system, the bank authorities have no opportunity of examining the whole coinage. It is the present state of things, then, which gives the best opportunity for tampering with the currency, though there is no evidence to show that fraudulent practices are carried on to any appreciable extent. Under the proposed new system such practices would be rendered almost impossible.
Supply of Gold Coin.
It is the theory of the English monetary law that every individual is entitled to take gold to the mint and have it coined gratuitously, all the expenses being borne by the public revenues. It is intended that the coin shall be rendered identical in value with an equal quantity of gold bullion, so that it shall, in short, be so much
certified bullion, and shall be reconvertible into ingots without loss. Though this theory is simple and sound in some respects, it is not perfectly carried into practice. The mint never engages to deliver coin in immediate exchange for gold sent for coining, so that there is a loss of interest during the uncertain interval of coinage. If, instead of sending gold directly to the mint, the owner pursues the customary mode of selling it to the Bank of England, he receives, according to the Bank Charter Act of 1844, only £3 17
d. per ounce, instead of the full mint price of £3 17
d. Moreover, it has been pointed out by Mr. E. Seyd, that, as the bank used to conduct their bullion business, there was a series of small charges or profits made for weighing, melting, assaying, the turn of the scale, the difference of the assay reports, etc., which amounted on the whole, including, the above charge of 1½
d. per ounce for demurrage, to 0.2828 per cent. on the value of the gold. The bank has since made some small improvements in the mode of conducting the business, but it may still be considered that the cost of converting gold bullion into sovereigns is about ¼ per cent.
Though every person whatever has the right, under the Coinage Act, of taking gold to the mint and having it coined free of charge and in order of priority without undue preference, no one ever does use the privilege, except the Bank of England. During an inquiry into the Bank Act in 1857, Mr. Twells stated that he had once sent £10,000 to the mint, and was afterwards surprised to find his firm of Spooner and Co., mentioned in a parliamentary paper as the only private firm that had ever done such a thing. The directors of the Bank of England have naturally acquired the monopoly of transactions with the mint, because they have to keep large stocks both of coin and bullion to meet the demands of the Issue Department and of their customers, including, directly or indirectly, the whole of the bankers of the United Kingdom. They can convert portions of their bullion into coin without any loss of interest or cost, whenever they find the stock of coin running down. They feel the monetary pulse of the whole community, and they have all the requisite appliances for the custody, assay, or exact weighing of bullion. Even those persons who need to possess large sums of gold often employ the bank to weigh, pack, and warehouse it, and the bank is always willing to do the work for fixed low charges. Hence it is most natural and convenient that the bank should act as the agent of the mint. Though the bank makes a certain profit out of the business, it is hardly earned at the cost of the public, but rather comes out of the economy with which the work is managed. It could in no way improve the currency of the country if every one who owned a few ounces of gold were to run with it to the mint, throwing upon the country the cost of melting and assaying insignificant ingots, and complicating the accounts and transactions of the mint.
Supply of Silver Coin.
On account of the absurd misapprehensions recently existing as to the scarcity of silver money, and the supposed right of private individuals to demand the coinage of silver, it may be well to describe exactly how the supply of silver coin is legally regulated and practically carried out. There is no law, statute, or common, which gives any private person, company, or institution, the right to take silver to the mint, and demand coin in exchange. Thus it is left in the hands of the Treasury and the mint to issue so much and such denominations of silver coins as they may think needful for the public service. This state of the law is perfectly right; because, as the silver coins are tokens, they cannot be got rid of by melting or exportation at their nominal values. If individuals were free to demand as much silver coin as they liked, a surplus might be thrown into circulation in years of brisk trade, which in a subsequent year of depressed trade would lie upon people’s hands.
Practically speaking, the mint is guided in the supply of silver coin by the Bank of England, not because this bank has by law any special powers, privileges, or duties in the matter, but because, in acting as the bank of banks, and the bank of government departments, it has the best opportunities of judging when more coin is wanted. Not only do all the London bankers draw silver coin from the Bank of England when they need it, but the same is done directly or indirectly by all the other bankers in the kingdom. A deficiency of silver coin in any county is shown by the stock of the local bankers running down. They replenish their stocks either from the nearest branch of the Bank of England or from their London agents, who again draw from the Bank of England. At other times or places, the bankers tend to accumulate a surplus of silver coin. Some banks in a large town may happen to have accounts with many shopkeepers, butchers, brewers, cattle-dealers, or dealers of one kind or another, who deposit silver coin in large quantities. Other banks may be largely drawn upon by manufacturers for the payment of wages, and may suffer from a deficiency of silver coin. It is a common practice, therefore, for bankers in any locality to assist each other by buying or selling superfluous silver coin as the case may require. If a superfluity of coin, however, cannot be got rid of in this way, it may be returned to the Bank of England or one of its branches. This bank indeed is in no way bound to provide or receive large sums in silver, and it therefore usually makes a small charge of about five shillings per hundred pounds to cover the trouble and risk. In consideration of this charge the bank bears the cost of transmission by railway, examines the coin for the detection of base pieces and the withdrawal of worn coin—which latter it sends to the mint for recoinage, and acts in general as the agent, of the mint.
Having the business so much in its hands, it is obvious that the department of the bank which manages the receipt and issue of silver coin can judge accurately when a fresh supply of coin is wanted. Before the stock runs too low notice is given to the mint, and money is usually advanced to the Master that he may purchase silver bullion for coinage. Under this system it is almost impossible for a deficiency of currency to arise without becoming known to the mint, and if, two or three years ago, the supply could not be made equal to the sudden demand, it was because the mint was not supplied by government with machinery adequate to the growing wants of the country. The existing system, in short, seems to be as nearly perfect as can be desired, provided that the mint be rebuilt and organized in such a manner as to enable it to meet any demand which the fluctuations of trade may occasion.
The Royal Mint.
While treating of the English system of metallic money, it is impossible to avoid expressing the wish that the House of Commons and the government will no longer delay a complete reconstruction of the Royal Mint. The mint factories, as they now stand, were very creditable to the generation which erected them; but it is needless to say that in the last fifty or seventy years we have immensely advanced, both in the art of constructing machinery and in our ideas of the arrangement and economy of manufactories. What should we think of a Cotton Spinning Company, which should propose to use a mill and machinery originally constructed by Arkwright, or to drive a mill by engines turned out of the Soho works in the time of Boulton and Watt? Yet the nation still depends for its coinage upon the presses actually erected by Boulton and Watt, although much more convenient coining presses have since been invented and employed in foreign and colonial mints.
The present mint workshops are quite inadequate for meeting the demands which may be thrown upon them by the increasing industry and wealth of the United Kingdom, not to speak of the British Empire. A few years ago it was impossible to turn out silver coin as quickly as it was required when trade was brisk, and, while one metal is being coined, there are no means of meeting the demand for other kinds of coin. As to the bronze coinage, it has generally to be obtained from Birmingham presses, and bronze blanks have also to be purchased at times. Even silver blanks have been obtained from Birmingham. The British mint ought to represent the skill and wealth of the British nation, and no petty considerations should be allowed to postpone so necessary a reform.
Nothing short of a complete reconstruction of the mint workshops will meet the requirements of the case. If this is to be done, much convenience and economy will arise from abandoning the large and valuable site upon Tower Hill, and erecting an entirely new mint in a more accessible position. The opinions of Mr. E. Seyd upon this subject are worthy of much attention.