Free Banking (Vol. I) Nineteenth Century Thought

Free Banking Volume I Nineteenth Century Thought

Edited by

Lawrence H. White Associate Professor Department of Economics University of Georgia, USA

An Elgar Reference Collection

The International Library of Macroeconomic and Financial History Series Editor: Forrest H. Capie Professor of Economic History and Head of the Department of Banking and Finance The City University Business School, London

1.

Major Inflations in History Forrest H. Capie

2.

Multinational and International Banking Geoffrey Jones

3.

Monetary Regime Transformations Barry Eichengreen

4.

Financing Industrialization (Volumes I and II) Rondo Cameron

5.

Financial Crises (Volumes I and II) Michael Bordo

6.

Price Controls Hugh Rockoff

7.

Protectionism in the World Economy Forrest H. Capie

8.

Commodity Monies (Volumes I and II) Anna J. Schwartz

9.

Debt and Deficits (Volumes I, II and ill) Lakis C. Kaounides and Geoffrey E. Wood

10. Central Banking in History (Volumes I, II and ill) Michael Collins 11. Free Banking (Volumes I, II and ill) Lawrence H. White Future titles will include: War Finance Larry Neal Stock Market Crashes and Speculative Manias

Free Banking Volume I

© Lawrence H. White 1993. For copyright of individual articles please refer to the Acknowledgements. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited Gower House Croft Road Aldershot Hants GUll 3HR England Edward Elgar Publishing Company Old Post Road Brookfield Vermont 05036 USA

British Library Cataloguing in Publication Data Free Banking. - (International Library of Macroeconomic & Financial History;No.ll) I. White, Lawrence H. II. Series 332.1

ISBN 1 85278 597 7 (3 volume set)

Printed in Great Britain at the University Press, Cambridge

Contents Acknowledgements Introduction

PART I

PART U

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THE BRITISH FREE BANKING SCHOOL 1. Robert Mushet (1826), An Attempt to Explain from Facts the Effect of the Issues of the Bank of England upon Its Own Interests, Public Credit, and Country Banks, London: Baldwin, Cradock, & Joy, 180-207 2. Thomas Hodgskin (1827), 'Money', Popular Political Economy, London: Charles Tait, 178-218 3. G. Poulett Scrope (1832), 'The Rights of Industry and the Banking System' (excerpt), Quarterly Review, 47, July, 439-57 4. Samuel Bailey (1840), 'On Joint-Stock Banks, and Country Issues', A Defence of Joint-Stock Banks and Country Issues, London: James Ridgway, 1-100 5. James William Gilbart (1841), 'The Currency: Banking', Westminster Review, XXXV, 89-131

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AMERICAN FREE BANKING THOUGHT 6. Richard Hildreth (1840), Banks, Banking, and Paper Currencies, Parts 1, 2 and 3, Boston: Whipple and Damrell, 109-13, 117-99

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3 31 72

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PART UI LATER BRITISH WRITERS 7. Herbert Spencer (1858), 'State-Tamperings with Money & Banks', Westminster Review, XIU, 210-32 8. O.E. Wesslau (1887), in Bancroft Cooke (ed.), Rational Banking (/he Remedy for Depression in Trade) Versus Bank Monopoly, London: Elliot Stock, 37-64

350

Name Index

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327

Acknowledgements The editor and publishers wish to thank the following who have kindly given permission for the use of copyright material.

Greenwood Publishing Group, Inc. for excerpts: Richard Hildreth (1840), Banks, Banking, and Paper Currencies, Part 1, Chapter XXV, 109-13; Richard Hildreth (1840), Banks. Banking. and Paper Currencies, Parts 2 and 3, 'Argument for Open Competition in Banking' and 'An Apology for One-Dollar Notes', 117-99.

Every effort has been made to trace all the copyright holders but if any have been inadvertently overlooked the publishers will be pleased to make the necessary arrangement at the first opportunity. In addition the publishers wish to thank the library of the London School of Economics and Political Science, the Syndics of Cambridge University Library and the Photographic Unit of the University of London Library for their assistance in obtaining these articles.

Introduction The question of free banking - or laissez-faire in money - raises theoretical, historical and normative issues more fundamental than those confronted in ordinary modern discussions of monetary and banking policy. Ordinary discussions focus on secondary details and marginal adjustments. They take it for granted that a government monetary authority (a central bank) will continue to provide a basic fiat money, and that a government regulatory system will continue to decide what banks may do. Discussions of free banking, by contrast, consider non-governmental money and banking frameworks that are radically distinct from present arrangements. They contemplate the consequences of allowing unrestricted money issue by private banks, and of having a monetary system without a government central bank. The lineage of free banking thought extends back to the work of Adam Smith, as Sidney Checkland's essay (Volume II, Chapter 1) makes clear. In the nineteenth century, vigorous debate greeted legislative proposals to establish government-sponsored banks (like the second Bank of the United States) or to reinforce the central banking status of existing governmentsponsored banks (like the Bank of England). Central banking was clearly not yet taken for granted. Many economists shared a predisposition toward laissez-faire in economic policy. Although those who applied laissez-faire ideas to money and banking (as represented by the first six chapters of Volume I, and as discussed by the first five chapters of Volume II) were never the majority, they were a major force in the British and American debates over monetary institutions early in the century. By the end of the century (Volume I, Chapters 7 and 8) they had been relegated to fringe status. The fringe status of free banking thought persisted for the first seven decades of the twentieth century. With the decline of laissez-faire views on economic policy generally, defences of laissez-faire money and banking between 1900 and 1970 (Volume ill, Chapters 1 and 9) were especially scarce. The only noteworthy academic contributors to free banking thought were Ludwig von Mises (1978 [1928]) and Vera Smith (1990 [1936]), the latter providing a survey of the nineteenth-century debates in a doctoral dissertation written under F.A. Hayek. In addition there were a few rather isolated non-academic contributors, most notably Henry Meulen (1917, 1934) and E.C. Riegel (1944, 1978 [1954]).1 At the University of Chicago during this period, home to a well-known tradition of classical liberal economic thought stretching from Frank Knight and Henry Simons in the 1930s to Milton Friedman and George Stigler in the 1970s, the leading authorities considered money and banking to be exceptions to the desirability of free markets (Simons, 1948, pp. 161-2; Mints, 1950, pp. 4-7). They supported government monopoly of note-issue, and offered a , lOOper cent reserve plan' for the restriction of deposit banking. In 1957 Gary Becker offered a brief 'Proposal for Free Banking' that in retrospect represented an important departure from the 100 per cent reserve plan toward greater appreciation for laissez-faire (though it too argued for retaining government monopoly of note-issue). Becker's paper evidently circulated around the University of Chicago - it was cited by Milton Friedman (1960, p. 108, n. 10) in the course of an influential statement of a non-Iaissez-faire monetary and banking framework

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that drew principally on Simons and Mints - but it remained unpUblished until now (Volume III, Chapter 2). Research on free banking questions has expanded tremendously since 1970. The proximate stimulus for most academic research is the work of other researchers, and I discuss below the specific developments in monetary theory that set the stage. Friedman and Schwartz (1986) cite three broad cvrrents in the economics profession generally that have helped promote free banking thought: (1) the emergence of public choice theory, with its skeptical view of government; (2) the 'rational expectations revolution', with its emphasis on studying the structure of policy regimes; and (3) the revival of Austrian economics, with its attention to institutional orders fonned spontaneously without central design. The most important realworld event in the background has undoubtedly been the poor performance of existing central banking regimes, especially the disturbingly high inflation rates of the 1970s and the painful disinflation of the early 1980s. These three volumes reprint the majority of what I consider to be the key articles of the earlier and modem free banking literatures. The modem theoretical literature is marked by a number of sharp controversies. I have an obvious intellectual stake in several of these controversies, and personal judgements have no doubt biased my selection of articles. But I have tried to include both sides of the debates that have occurred in print. I have avoided articles that are available in other collections. In particular, James A. Dorn and Anna J. Schwartz (1987) include at least eight relevant policy essays (Chapters 11-18) in their volume on monetary refonn, Dorn (forthcoming) another half-dozen more, and Kevin Dowd (1992b) assembles 11 chapters on free banking history.

The Nineteenth-Century Literature The English financial crises of 1825, 1836-37 and 1839, and the rechartering of the Bank of England in 1833 and 1844, fuelled a large pamphlet literature and volumes of Parliamentary testimony on alternative monetary institutions as causes of and potential cures for business cycles. Three major schools of thought emerged in a classic debate that has influenced monetary thinking around the world and to this day. The Banking School advanced a non-monetary theory of the cycle. The Currency School charged the banking system, but especially the country banks, with enlarging cycles by expanding pro-cyclically. The Free Banking School held that the Bank of England, by over-expanding and later having to contract to safeguard its reserves, both initiated and drove the business cycle. The country banks, closely constrained by competition, were innocent. Where the Banking School held the Bank of England blameless, and the Currency School proposed to strengthen its monopoly and fasten a policy rule upon it, the Free Banking School argued that the English monetary system could be made self-regulating by eliminating the Bank of England's monopoly over the London circulation. 2 The first five chapters of Volume II provide the first collection of Free Banking School works ever assembled. A complete bibliography of the School's writings between 1825 and 1845 would include at least 40 pamphlets and journal articles, but the five items included here are among the most important. The concluding chapters of Robert Mushet's 1826 book provide an early and influential analysis of the Bank of England's role in generating boom

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and bust. Thomas Hodgskin, in the chapter on money from his 1827 economics text for working men, applies a laissez-faire philosophy widely enough to include a defence of private coinage. G. Poulett Scrope, though he diverged from the School in some respects (he was something of an inflationist with a weak allegiance to the gold standard), offers in his 1832 article one of the most sophisticated accounts of the market processes at work regulating the circulation of each issuer in a free banking system. Samuel Bailey's 1840 pamphlet, reprinted here in full, combines criticism of the Bank of England with defence of the English joint-stock banks (newly formed after reform legislation lowering legal barriers to their entry was passed in 1826 and 1833). Bailey (1840, p. 99) makes the proto-Hayekian3 argument that only competition, and not any system of deliberate central management, could provide 'the nice adjustment of the currency to the wants of the people' . James William Gilbart' s 1841 review article demonstrates the distinctiveness of the Free Banking School's position, as he criticizes the theories and proposals of authors both from the Banking School (Thomas Tooke) and from the Currency School (Samuel Jones Loyd). The American debate over free banking during this period was similarly inspired by business cycles and by legislation to recharter the government's bank (specifically, the 1832 bill to recharter the second Bank of the United States, vetoed by Andrew Jackson). The American debate was seldom as theoretically sophisticated as the British, and American writers were accordingly more prone to cite their British counterparts than the reverse. As George Selgin and I indicate in our secondary account of the Jacksonian era (Volume II, Chapter 4), the leading American proponents of free banking were John McVickar, William Leggett, Henry C. Carey and Richard Hildreth. The work of Hildreth (1840) is the most detailed and sophisticated of this group, and two long extracts from his second book have been chosen to represent American thought. American writers continued to discuss free banking in the late nineteenth century (see Selgin and White, 1990, Volume II, Chapter 5). They made few theoretical innovations, focusing instead on criticism of the national banking regulations imposed during the Civil War. The most comprehensive restatements of the case for free banking were those by William Brough (1895, 1898). British free banking writers similarly focused, from 1845 onward (Fetter, 1965, pp. 251-5), on restatement of principles and criticism of Peel's Act of 1844. Their ranks are represented here by Herbert Spencer's 1858 essay and an excerpt from O.E. Wesslau's 1887 monograph (Volume I, Chapters 7 and 8). Tyler Cowen and Randall Kroszner (1987, Volume II, Chapter 2), survey a diverse group of writers from the 1896-1917 period, crediting them with having anticipated certain ideas in the modern literature that collectively have been dubbed 'the new monetary economics' , particularly the idea that laissez-faire would separate the medium of account from the medium of exchange. (The 'new monetary economics' is represented by Volume ill, Chapters 9-20.) Scott Sumner (1990; Volume II, Chapter 3) persuasively challenges many of Cowen and Kroszner's characterizations of the views of two principal members of the group, namely Arthur Kitson and Henry Meulen.

The 'Free Banking' Era in the United States The modern reconsideration of historical experiences with systems of plural private note-issue

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began with Hugh Rockoff's 1974 article. Like Benjamin Klein's article on 'The Competitive Supply of Money' of the same year, which also appeared in the Journal of Money, Credit, and Banking, Rockoffs summarized a doctoral dissertation written at the University of Chicago. But neither article cites the other, and Rockoffs early work (1974, 1975a, 1975b) does not appear to have been motivated by its broader implications for laissez-faire monetary regimes. Rockoff dispels the misconceptions that (1) the 'free banking' laws passed by various American state governments in the 1837-60 period instituted laissez-faire, and (2) the laws typically led to 'wildcat' banking and other disastrous consequences. The laws did allow freer entry, but notes had to be secured by specified government bonds, so that 'it was a far cry from pure laissez-faire' (Rockoff, 1991, p. 75). Wildcat banking was rare, and in states where it did occur it was actually encouraged by poorly designed bond-security provisions. Little research followed Rockoffs work until interest in alternative monetary regimes had been rekindled. Robert King (1983) examines the record of New York State after first surveying the key theoretical questions raised by the idea of laissez-faire in money. Arthur Rolnick and Warren Weber (1983) explicitly motivate their account of four states' experiences by its relevance to modern debates over the stability oflaissez-faire banking. Rolnick's research agenda has perhaps been influenced by the work of his colleague Neil Wallace at the Federal Reserve Bank of Minneapolis. Rolnick and Weber's article reprinted below represents only a small sample of their output on the US free banking era (1982, 1983, 1984, 1985, 1986, 1988). Other noteworthy, recent and published work on the topic includes articles by Rolnick's student Andrew J. Economopoulos (1986, 1988, 1990) and by Kenneth Ng (1988). Rockoff (1986, 1991) has summarized the normative and positive lessons from this literature to date.

Other Experiences

Proponents of free banking in the nineteenth century did not point to the 'free banking' systems of the United States as models to be emulated, but pointed instead to the relatively unrestricted banking systems of Scotland (1716-1844), New England (1820-60) and Canada (1817-1914). Other episodes of banknote competition took place in Sweden, Switzerland, France, Ireland, Spain, Latin America, parts of China and Australia. In all, there appear to have been at least 60 countries or colonies that allowed note-issue by competing private banks, subject to varying degrees of regulation (for a list see Schuler, 1992). Only two such cases (Scotland and France) are represented below because several article-length histories remain unpUblished, while a number of others are readily available in a highly recommended collection of essays edited by Kevin Dowd (1992b). Two key books on the history of a leading free banking system are those on Scottish banking by Sidney Checkland (1975a) and Charles Munn (1981). My critique of the empirical relevance of the legal restrictions theory (White, 1987) draws heavily on these two sources, as do the comment by Tyler Cowen and Randall Kroszner (1989) and my replies to critics (White, 1990, 1991) debating how closely the Scottish episode represented laissez-faire. Richard H. Timberlake (1987) and Eugene N. White (1990) broaden our range of evidence by examining episodes of private money-issue under rather exceptional circumstances, in coal-mining communities and during the French Revolution.

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Private Clearinghouses An important line of historical research has begun to investigate the capability and institutional mechanisms for self-regulation in a competitive banking system. Munn (1975) tells the story of the origins of the Scottish note-exchange system, often praised in the nineteenth century for regulating the note-issue of the Scottish banks. Timberlake (1984), Gary Gorton (1985), Donald J. Mullineaux (1987), and Gorton and Mullineaux (1987) examine the roles of clearinghouse institutions as private regulatory agencies. These studies indicate that more than simply the price system (or what Gorton and Mullineaux call 'the market') has operated to discipline banks, and to insulate the banking system against panics, at least in the cases of the Suffolk system of antebellum New England and the US National Banking system. Selgin and White (1988) and Steven Horwitz (1990, 1992) suggest that many of the 'hierarchical' aspects of clearinghouse institutions in these cases are attributable to legal restrictions peculiar to the United States, whereas Mullineaux (1988) attributes them to enforcement and incentive problems inherent to banking.

Modern Theory and Policy No collection of articles alone can fully represent the modern free banking literature. More so than in other topic areas of economics, many of the pioneering contributions have been made in books and monographs rather than in articles. The articles on theoretical and policy issues in Volume III often cite the important works by Kevin Dowd (1988a, 1989), David Glasner (1989), Charles Goodhart (1988) and George A. Selgin (1988a). I apologise to these authors for under-representing their importance in the following collection; this reference to their books is intended as partial compensation. I would also mention my own books (White, 1984a, 1989a) here, except that I have already clearly over-represented myself in the selection of articles. The most important author not represented below is F .A. Hayek, whose two monographs (1976, 1978) issued the first prominent challenge in the postwar era to state control over the provision of money. The modern free banking literature cannot be traced to anyone seminal article or monograph. Vera Smith's (1936 [1990]) important book, and the history-of-thought articles in Volume II, Chapter 1, make it clear that economists have been debating these questions periodically at least since Adam Smith's time. As the first four parts of Volume III indicate, there are at least four strands within the modern theoretical literature, respectively discussing (a) 'traditional' free banking systems with a distinct base money, (b) competing non-commodity base monies, (c) competitive payments systems without base money, and (d) the 'legal restrictions' theory of money.

Free Banking with a Distinct Base Money In a traditional banking system, bank-issued money can be redeemed for a more basic money. In an ideal free banking system of the traditional sort, the banking system is not politically regulated and the quantity of basic money is not politically manipulated. Most nineteenth-

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century proponents of free banking (see Vera Smith, 1990 [1936]; White, 1984a; White and Selgin, 1990; Selgin and White, 1990), and early twentieth-century proponents (Mises, 1978 [1928]; 1981 [1912]), took it for granted that the basic money would be gold or silver coin. Drawing from the arguments of these writers and from the historical evidence they cited, my own work (White, 1984a, 1989a) has likewise focused on the features of free banking on a metallic standard, which I consider the most plausible outcome oflaissez-faire in money (Selgin and White, 1987; White, 1989b). The idea of free banking on a metallic standard has an obvious kinship with defences of the gold standard that stress its potential for automatic and non-political regulation of the money supply (Rothbard, 1962; Salerno, 1983; Sennholz, 1985), though not with the sometimes appended proposal that banks be required by law to hold 100 per cent gold reserves against their demand liabilities (see White, 1989a, pp. 156-7; White, 1992). Selgin (1987, 1988a, 1988b) argues that allowing decentralized money-issuers to choose their own reserve levels not only saves resources but also improves the macroeconomic performance of the monetary system. Restoring gold or silver to the role of monetary standard and reserve medium is not logically necessary for the system to have a distinct and unmanipulated basic money. Milton Friedman (1984), Richard Timberlake (1986) and George Selgin (1988a) have proposed free banking on a permanently frozen base of fiat dollars. Critics worry that an unregulated fractional-reserve banking system is prone either to serious fraud (Friedman, 1960; Cooper, 1989), pro-cyclical over-expansion of the quantity of bankissued money (Goodhart, 1988, p. 50), or contagious banking panics whose remedy requires government deposit insurance or a government lender of last resort (Diamond and Dybvig, 1983; Bordo, 1990). Historical studies (cited below) belie the first worry. Selgin (1987a, 1988a, 1992) and Dowd (l988b, 1988c, 1989) address the second and third of these worries with both historical evidence and theoretical arguments.

Competitive Non-commodity Base Money An important impetus to the literature on 'private fiat money', as Bart Taub (1985) calls it, was the debate in the late 1960s on monetary optimality. Monetary economists, originally concerned with the inefficiency of the US government policy prohibiting interest on demand deposits, tried to state precisely the conditions for efficiency or optimality in the holding of money balances. The question naturally arose as to whether competition would produce optimal results in the market for money balances, just as (under the right conditions) it produces optimality in competitive markets for ordinary consumption goods. Paul Samuelson (1968, 1969) influentially argued the 'nonoptimality of money holding under laissez-faire': the right conditions do not hold for competition to produce monetary optimality, he claimed, because money-holding involves an externality. Our individual efforts to economise on holding money end up restricting the value of everyone's money and make us all less wealthy than we could be. Milton Friedman's (1969) analysis of 'the optimum quantity of money' essentially coincided with Samuelson's. Among the several rebuttals to Samuelson, Robert Clower's articles (1969, 1970) are perhaps the most effective in showing that Samuelson's externality argument is logically incoherent. Clower indicated only in passing that Samuelson had not really specified an institutional setting

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consistent with laissez-faire in money. Phil Gramm (1974) also mentioned but did not fully develop this point. It was left to Benjamin Klein (1974), in an article based on his University of Chicago dissertation, to attempt to spell out what laissez-faire in fiat money would mean at the level of the individual money-issuing firm. As Taub (1985, p. 193) notes, Friedman (1969) did not connect the optimal supply of money with private competitive supply. In fact Friedman in an earlier work (1960, p. 7) had argued that the competitive supply of non-commodity base money was not feasible. It would lead to an infinite price level, because any individual issuer would keep printing dollars so long as a 10 dollar bill (or a 10-to-whatever-power dollar bill) was worth more than the paper on which it was printed. Klein (1974, pp. 429-31) points out that Friedman's argument, by implicitly assuming that anyone has the right to print indistinguishable 'dollars', neglects a critical feature of market competition, namely firms' enforceable brand names in their products. (This point was also made by Earl Thompson [1974].) In effect Klein brings to Chicago-school monetary theory a lesson from Chicago-school property-rights and industrial organization theory: suboptimal outcomes reflect poorly specified property rights. Friedman's own views have evolved significantly over the years, under the influence of research on public choice and to some extent on free banking. His 1960 monograph must now be contrasted with his 1984 article proposing a form of free banking, and with his 1986 article (co-authored with Anna J. Schwartz) explicitly reconsidering the question of government's proper monetary role. The central question of Klein's article is whether a profit-maximizing firm issuing a nonredeemable money will live up to a promise to preserve the money's purchasing power, or will instead choose to cash in its reputation for the one-shot profit available from over-issuing the money. Hayek (1978) never really considers this question. Taub (1985) restates it as the question of the 'dynamic consistency' of a policy of preserving the money's value, and brings a rational expectations model to bear. Lance Girton and Don Roper (1981) argue that competition would in fact compel a money-issuing firm to 'offer a goods-back guarantee', i.e. to make its money redeemable, so as to be bound by an enforceable contract. I concur with their view (White, 1989b, p. 383).

Competitive Payments Systems Without Base Money If money-issuing firms under laissez-faire do indeed offer a goods-back guarantee, in what

good or goods would they redeem their money? A group of authors, beginning with Fischer Black (1970), have contemplated non-traditional systems in which the redemption media would be non-money assets, so that no base money would exist. The only money would be bankissued or 'inside' money. Henry Meulen (1934) and E.C. Riegel (1944, 1954 [1978]) were neglected forerunners of some aspects of these ideas. 4 A more influential precursor to the development of pureinside-money models was the 'New View' of money and banking associated with James Tobin (1963; for a secondary account see Glasner, 1989, pp. 171-5). Tobin argued that under competitive conditions the quantity of bank-issued money is subject to a 'natural economic limit' determined by the interaction of demand (depositor preferences) and supply (cost conditions in banking). Though this analysis was meant to apply to banking in a traditional

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base-money setting, Tobin's critics argued that it slighted the distinctiveness of base money as the system's nominal scalar. Tobin (1969, p. 26) went on to claim that, absent legal ceilings on the interest rates paid on currency and deposits, 'there would be no room for monetary policy to affect aggregate demand'. Black (1970, p. 10) endorses this view, and elsewhere (Black, 1987) argues that monetary policy is passive even in our current monetary system. Black's 1970 article went apparently unnoticed for a decade, except for self-citations and a critical comment by George Benston (1972). During this decade the real-world deregulation of banking stimulated the interest of economists in the conceptual endpoint of the process. Eugene Fama (1980) made Black's article, together with articles by Tobin (1963) on the 'New View' and Harry Johnson (1968) on optimal money holding, the taking-off point for his own analysis of an unregulated banking system from the perspective of finance theory. Fama differs from Black in recognizing the uniqueness of base money as the nominal scalar in our current system, but argues that in principle the payments services provided by banks need have no connection to the numeraire good. Leland Yeager (1968, 1978), arguing from a monetarist perspective, was one of the sharpest critics of the applicability of Tobin's 'New View' and related passive-money-supply doctrines to a money and banking system of the current kind. But precisely because of his long-held understanding of the significance of the quantity of base money in our current system, particularly the role of monetary disturbances in driving inflation and business cycles (Yeager, 1956), Yeager has long had an interest in alternative monetary systems (Yeager, 1962), and has now been attracted to the possibility of a system without base money. (I and others used to call such a system 'cashless', meaning 'devoid of base money', but Yeager [1989] objects that this term misleadingly suggests the absence of hand-to-hand currency.) Crediting Black, Fama and Robert Hall (1982) for various constituent ideas, Robert Greenfield and Leland Yeager (1983, 1989; also Yeager, 1983) propose a competitive payments system without base money principally in the hope that monetary disequilibrium can be eliminated by abolishing base money. The unit of account in this system must obviously be something other than a unit of base money. A natural candidate, also endorsed by Dowd (1988a, 1989) and Glasner (1989), is a bundle of goods whose purchasing power is stable in terms of some significant price index. Critics of this proposal for' separation' of the unit of account from any medium of exchange or redemption (White, 1984b, 1986; O'Driscoll, 1985; McCallum, 1985; Hoover, 1988) have raised a number of questions about whether the Greenfield-Yeager system is feasible, efficient, or would naturally prevail under laissez-faire.

The Legal Restrictions Theory In a distinct line of development, a group of monetary economists centred around Neil Wallace has also concluded that a laissez-faire payments system could lack a base money of the current sort, although they have never detailed the alternative institutional arrangements they envision. As Gerald P. o 'Driscoll, Jr. (1985, p. 11) notes, there is an affinity between Wallace's theory that the demand for base money of the present-day sort rests on legal restrictions and Black's view that laissez-faire implies a world without money. Wallace (1983, 1987) believes that non-interest-yielding currency would not survive the competition it would meet under

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laissez-faire (assuming that nominal interest rates are not close to zero) from interest-yielding payable-to-the-bearer bonds. In this view the rate-of-return discrepancy between government currency and bonds today is due to legal restrictions against private currency issue. Wallace's conclusion is driven by an arbitrage argument: financial intermediaries free to issue currencylike liabilities would bid away any rate-of-return spread between their assets and their liabilities that was wider than the costs of intermediation (which Wallace estimates to be about 1 to 2%). An unpublished early work by Bryant and Wallace (1980, p. 1) indicates that the legal restrictions theory grew out of a larger project, one that encompasses Wallace's (1980) wellknown work on the overlapping generations model of money, namely the New Classical macroeconomics project 'to render monetary theory subject to standard modes of analysis' . The New Classical critique of the older Keynesian monetary and macroeconomic theory is well known: Keynesian models are inconsistent with standard microeconomics, and are populated by agents who fail to recognize the regime under which they live (they lack 'rational expectations'). By alerting economists to the importance of studying alternative monetary regimes, the 'rational expectations revolution' has unintentionally played a vital role in stimulating interest in free banking research generally. With a nod to John Hicks (1935), legal restrictions theorists consider it a crucial task of monetary theory to explain why people hold an asset (money) that is dominated in rate of return. But where Hicks sought an explanation in 'frictions', Bryant and Wallace (1980, p. 3) believe that 'adequate modeling of the frictions that inhibit the operation of the law of one price has indeed proved refractory'. In particular, they find serious defects in partial-equilibrium macroeconomic models like Tobin's (1969), and general-equilibrium models with transactions costs like Heller and Starr's (1976) and their own earlier work (Bryant and Wallace, 1979). A satisfactory theory of transaction costs not being available, they advocate instead trying to study money using the zero-transactions-costs or perfect-arbitrage approach of finance theory. Against the predictions derived from the legal restrictions theory, Fama (1983) and I (White, 1987) argue that non-interest-bearing currency can survive, and historically has survived even under laissez-faire with interest on other assets above 2 %, because computation and transactions costs make the interest on small-denomination currency not worth collecting. Wallace (1987) and Bryant (1989) respond that competitive currency issue might instead eliminate the rateof-return discrepancy by driving nominal interest rates on all other assets down close to zero. This implies (assuming that the real rate of interest is not affected) that currency issuers would denominate their liabilities in an appropriately appreciating numeraire. Warneryd (1990) objects that the social adoption of such a numeraire is not automatic.

Policy Implications One of the most important recent critiques of free banking is Charles Goodhart's (1988) argument that private clearinghouse regulation inadequately addresses enforcement and incentive problems, creating a 'natural' need for the development of a government central bank. But does history actually show us central banks developing naturally, i.e. without government intervention? Friedman and Schwartz (1986, p. 54) remind us that Vera Smith's (1936 [1990], p. 148) conclusion was unequivocally no: 'A central bank is not a natural product of banking development. It is imposed from outside or comes into being as a result

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of Government favours. ' Few will regard this fact alone as sufficient evidence for a positive or negative verdict on the desirability of central banking. Governments around the world certainly have had their reasons for imposing central banks (that is, for monopolizing the issue of basic money and nationalizing clearinghouse functions), and for restricting the issue of money by private banks. But have they had good reasons, grounded in the welfare of moneyusers? Are there any good reasons? Modern neoclassical economists have two standard rationales for government involvement in the provision of a good: externalities or natural monopoly. Roland Vaubel (1984, 1985) confronts head-on the question of whether either of these rationales applies in the case of money. With respect to basic money, he finds that the externality or public-goods argument for imposing a common government money reduces to a natural monopoly argument, and points out that natural monopoly cannot justify barriers to entry by private producers. With respect to bank-issued money, as Friedman and Schwartz (1986, p. 49) note, Vaubel seems to allow that confidence externalities (like contagious bank runs) might justify government providing deposit insurance or acting as a lender of last resort. Martin F. Hellwig (1985) emphasizes the problem of dynamic inconsistency with competing non-commodity base monies, the problem also analysed by Taub (1985). With respect to bank-issued money, Hellwig (1985, pp. 585-6) finds that economists cannot draw welfare conclusions for or against laissez-faire. Possible problems of information asymmetry and moral hazard mean that 'we simply do not know very much about how competition among inside monies works' and that 'it is unclear whether government intervention is harmful or useful'. Hellwig does not consider any historical evidence on how competition among inside monies has in practice worked, e.g. on ways bankers and their customers have tried to minimize information asymmetry and moral hazard problems. Nor does he consider any evidence on whether government intervention has in practice proven harmful as compared with laissezfaire. These questions are taken up by the subsequent two articles. Friedman and Schwartz (1986, p. 40) emphatically conclude from their wide reading of monetary history that government intervention has indeed been harmful - destabilizing and efficiency-reducing - on net. They doubt that government will remove itself from the monetary arena, however. Richard E. Wagner (1986) offers a complementary public-choice analysis of both points: why government fails to provide good money, and why it deliberately persists. Unlike his fellow public-choice theorists H. Geoffrey Brennan and James M. Buchanan (1981), Wagner does not take it for granted that the market will 'fail' in the provision of money unless government intervenes.

Notes 1. For secondary accounts of Mises' and Meulen's writings see White (1992) and Dowd (1992a). 2. This paragraph draws on White (1984a, pp. 53-4). For other accounts of the debate that also emphasize the question of free banking versus central banking see Smith (1990 [1936]) and Schwartz (1987). 3. F.A. Hayek (1988, pp. 14-15) in fact calls Bailey 'an acute economic thinker of the nineteenth century' and quotes his statement (1840, p. 3) that detailed business decisions require 'minute knowledge of a thousand particulars which will be learned [sic; Hayek has 'learnt'] by nobody but him who has an interest in knowing them'.

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4.

xvii

Yeager (1989), however, has on at least one occasion adopted Riegel's 'valun' (short for 'value unit') as a name for the unit of account.

References Bailey, S. (1840), A Defence ofJoint-stock Banks and Country Issues, London: James Ridgway. Reprinted below, Vol. I. Becker, G. (1957), 'A Proposal for Free Banking', unpublished ms. Reprinted below, Vol. III. Benston, GJ. (1972), 'Controls on Banking and "a World Without Money''', Journal of Bank Research, 3 (4), Winter, pp. 59-61. Black, F. (1970), 'Banking and Interest Rates in a World Without Money: the Effects of Uncontrolled Banking', Journal of Bank Research, 1 (3), Autumn, pp. 9-20. Reprinted below, Vol. III. Black, F. (1987), Business Cycles and Equilibrium, Oxford: Basil Blackwell. Bordo, M.D. (1990), 'The Lender of Last Resort: Alternative Views and Historical Experience', Federal Reserve Bank of Richmond, Economic Review, January/February, pp. 18-29. Brennan, H.G. and Buchanan, J.M. (1981), Monopoly in Money and Inflation, London: Institute of Economic Affairs. Brough, W. (1895), The Natural Law of Money, New York: G.P. Putnam's Sons. Brough, W. (1898), Open Mints and Free Banking, New York: G.P. Putnam's Sons. Bryant, J. (1989), 'Interest-bearing Currency, Legal Restrictions, and the Rate of Return Dominance of Money', Journal of Money, Credit, and Banking, 21 (2), May, pp. 240-45. Reprinted below, Vol. III. Bryant, J. and Wallace, N. (1979), 'The Inefficiency of Interest-bearing National Debt', Journal of Political Economy, 87, April, pp. 365-8l. Bryant, J. and Wallace, N. (1980), 'A Suggestion for Further Simplifying the Theory of Money', Unpublished ms., Federal Reserve Bank of Minneapolis and University of Minnesota. Checkland, S.G. (1975a), Scottish Banking: a history, 1695-1973, Glasgow: Collins. Checkland, S.G. (1975b), 'Adam Smith and the Bankers', in A.S. Skinner and T. Wilson (eds), Essays on Adam Smith, Oxford: Clarendon Press, pp. 504-23. Reprinted below, Vol. II. Clower, R. (1969), 'What Traditional Monetary Theory Really Wasn't', Canadian Journal of &onomics, 2, May, pp. 299-302. Clower, R. (1970), 'Is There an Optimal Money Supply?', Journal of Finance, 25, May, pp. 425-33. Cooper, R.N. (1989), 'Is Private Money Optimal?', Cato Journal, 9 (2), Fall, pp. 393-7. Cowen, T. and Kroszner, R. (1987), 'The Development of the New Monetary Economics', Journal of Political Economy, 95, June, pp. 567-90. Reprinted below, Vol. II. Cowen, T. and Kroszner, R. (1989), 'Scottish Banking Before 1844: a Model for Laissez-faire?', Journal of Money, Credit and Banking, 21, May, pp. 221-3l. Reprinted below, Vol. II. Diamond, D.W. and Dybvig, P.H. (1983), 'Bank Runs, Deposit Insurance, and Liquidity', Journal of Political &onomy, 91, June, pp. 401-19. Dom, J.A. (ed.) (forthcoming), Alternatives to Government Fiat Money, Boston: Kluwer Academic Publishing. Dom, J.A. and Schwartz, A.J. (eds) (1987), The Search for Stable Money, Chicago: University of Chicago Press. Dowd, K. (1988a), Private Money: The Path to Monetary Stability, London: Institute of Economic Affairs. Dowd, K. (1988b), 'Automatic Stabilizing Mechanisms Under Free Banking' , Cato Journal, 7, Winter, pp.643-59. Dowd, K. (1988c), 'Option Clauses and the Stability of a Laisser Faire Monetary System', Journal of Financial Services Research, 1, pp. 319-33. Reprinted below, Vol. III. Dowd, K. (1989), The State and the Monetary System, New York: Philip Allan. Dowd, K. (l992a), 'The Monetary Economics of Henry Meulen', Journal ofMoney, Credit, and Banking, 24, May, pp. 173-83. Dowd, K. (ed.) (1992b), The Experience of Free Banking, London: Routledge.

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Economopoulos, AJ. (1986), 'The Impact of Reserve Requirements on Free Bank Failures', Atlantic Economic Journal, 14, pp. 76-84. Economopoulos, AJ. (1988), 'lliinois Free Banking Experience' , Journal ofMoney, Credit, and &nking, 20, pp. 249-63. Economopoulos, A.I. (1990), 'Free Bank Failures in New York and Wisconsin: a portfolio analysis', Explorations in Economic History, 27, pp. 421-41. Fama, E. (1980), 'Banking in a Theory of Finance', Journal of Monetary Economics, 6 (1), January, pp.39-57. Fama, E. (1983), 'Financial Intermediation and Price Level Control', Journal of Monetary Economics, 12, July, pp. 7-28. Fetter, F.W. (1965), The Development of British Monetary Onhodoxy, 1797-1875, Cambridge: Harvard University Press. Friedman, M. (1960), A Program for Monetary Stability, New York: Fordham University Press. Friedman, M. (1969), 'The Optimum Quantity of Money', in The Optimum Quantity of Money and Other Essays, Chicago: Aldine. Friedman, M. (1984), 'Monetary Policy for the 1980s', in J.H. Moore (ed.), To Promote Prosperity, Stanford: Hoover Institution Press. Friedman, M. and Schwartz, A.J. (1986), 'Has Government any Role in Money?', Journal of Monetary Economics, 17 (I), January, pp. 37-62. Reprinted below, Vol. III. Gilbart, J.W. (1841), 'The Currency: Banking', Westminster Review (American edn), 35, pp. 45-67. Reprinted below, Vol. I. Girton, L. and Roper, D. (1981), 'Theory and Implications of Currency Substitution', Journal ofMoney, Credit, and Banking, 13 (I), February, pp. 12-30. Reprinted below, Vol. III. Glasner, D. (1989), Free Banking and Monetary Policy, Cambridge: Cambridge University Press. Goodhart, C. (1988), The Evolution of Central Banks, Cambridge: MIT Press. Gorton, G. (1985), 'Clearinghouses and the Origins of Central Banking in the United States', Journal of Economic History, 45, June, pp. 277-84. Gorton, G. and Mullineaux, D.I. (1987), 'The Joint Production of Confidence: Endogenous Regulation and Nineteenth Century Commercial-bank Clearinghouses', Journal of Money, Credit, and Banking, 19, November, pp. 457-68. Reprinted below, Vol. II. Gramm, W.P. (1974), 'Laissez-faire and the Optimum Quantity of Money', Economic Inquiry, 12, March, pp. 125-33. Greenfield, R.L. and Yeager, L.B. (1983), 'A Laissez Faire Approach to Monetary Stability', Journal of Money, Credit, and Banking, 15 (3), August, pp. 302-15. Reprinted below, Vol. m. Greenfield, R.L. and Yeager, L.B. (1986), 'Competitive Payments Systems: Comment', American Economic Review, 76, September, pp. 848-9. Reprinted below, Vol. m. Greenfield, R.L. and Yeager, L.B. (1989), 'Can Monetary DiseqUilibrium be Eliminated?', CatoJournal, 9 (2), Fall, pp. 405-21. Hall, R.E. (1982), 'Explorations in the Gold Standard and Related Policies for Stabilizing the Dollar', in R.E. Hall (ed.), Inflation: Causes and Effects, Chicago: University of Chicago Press. Hayek, F.A. (1976), Choice in Currency, London: Institute of Economic Affairs. Hayek, F.A. (1978), Denationalisation of Money, 2nd edn, London: Institute of Economic Affairs. Hayek, F.A. (1988), The Fatal Conceit: The Errors of Socialism, London: Routledge. Heller, W.P. and Starr, R.M. (1976), 'Equilibrium with Non-convex Transactions Costs: Monetary and Non-monetary Economies', Review of Economic Studies, 43, June, pp. 195-215. Hellwig, M.F. (1985), 'What Do We Know About Currency Competition?', ZeitschriJtjUr WinschaJtsund SozialwissenschaJten, 5, pp. 565-88. Reprinted below, Vol. III. Hicks, J. (1935), 'A Suggestion for Simplifying the Theory of Money', Economica, n.s., 2, pp. 1-19. Hildreth, R. (1840), Banks, Banking, and Paper Currencies, New York: Whipple & Darnrell. Excerpt reprinted below, Vol. I. Hodgskin, T. (1827), Popular Political Economy, London: Charles Tait. Chapter 8 reprinted below, Vol. I. Hoover, K.D. (1988), 'Money, Prices and Finance in the New Monetary Economics', Oxford Economic Papers, 40, pp. 150-67.

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Horwitz, S. (1990), 'Competitive Currencies, Legal Restrictions, and the Origins of the Fed: Some Evidence from the Panic of 1907', Southern Economic Journal, 56 (3), January, pp. 639--49. Reprinted below, Vol. II. Horwitz, S. (1992), Monetary Evolution, Free Banking, and Economic Order, Boulder: Westview Press. Johnson, H.J. (1968), 'Problems of Efficiency in Monetary Management', Journal of Political Economy, 76, September/October, pp. 971-90. Kahn, J.A. (1985), 'Another Look at Free Banking in the United States', American Economic Review, 75 (4), September, pp. 881-5. Reprinted below, Vol. II. King, R. (1983), 'On the Economics of Private Money', Journal of Monetary Economics, 12, May, pp. 127-58. Reprinted below, Vol. II. Klein, B. (1974), 'The Competitive Supply of Money' , Journal of Money, Credit, and Banking, 6 (4), November, pp. 423-53. Reprinted below, Vol. III. McCallum, B.T. (1985), 'Bank Deregulation, Accounting Systems of Exchange, and the Unit of Account: a Critical View', Carnegie-Rochester Conference Series on Public Policy, 22, Autumn, pp. 135-60. Meulen, H. (1917), Industrial Justice Through Banking Reform, London: Richard James. Meulen, H. (1934), Free Banking: an Outline of a Policy of Individualism, London: Macmillan. 2nd edn of Meulen (1917). Mints, L. (1950), Monetary Policy for a Competitive Society, New York: McGraw-Hili. Mises, L. von (1978 [1928]) 'Monetary Stabilization and Cyclical Policy', in Percy L. Greaves (ed.), On the Manipulation of Money and Credit, trans. Bettina Bien Greaves, Dobbs Ferry, NY: Free Market Books. Mises, L. von (1981 [1912]), The Theory of Money and Credit, Indianapolis: Liberty Classics. Mullineaux, D.J. (1987), 'Competitive Monies and the Suffolk Bank System', Southern Economic Journal, 53, April, pp. 884-98. Reprinted below, Vol. II. Mullineaux, D.J. (1988), 'Competitive Monies and the Suffolk Bank System: Reply', Southern Economic Journal, 55, July, pp. 220-23. Reprinted below, Vol. II. Munn, C.W. (1975), 'On the Origins of the Scottish Note Exchange', Three Banks Review, 107, pp. 45-60. Reprinted below, Vol. II. Munn, C.W. (1981), The Scottish Provincial Banking Companies, 1747-1864, Edinburgh: John Donald. Mushet, R. (1826), An Attempt to Explain from Facts the Effect of the Issues of the Bank of England upon Its Own Interests, Public Credit, and Country Banks, London: Baldwin, Cradock & Joy. Excerpt reprinted below, Vol. I. Ng, K. (1988), 'Free Banking Laws and Barriers to Entry in Banking, 1836-1860', Journal of Economic History, 48, December, pp. 877-89. O'Driscoll, G.P. Jr. (1985), 'Money in a Deregulated Financial System', Federal Reserve Bank of Dallas, Economic Review, May, pp. 1-12. O'Driscoll, G.P. Jr. (1986), 'Deregulation and Monetary Reform', Federal Reserve Bank of Dallas, Economic Review, July, pp. 19-3\. Reprinted below, Vol. III. Redlich, F. (1947), The Molding of American Banking: Men and Ideas, Part I, 1781-1840, New York: Hafner. Chapter 7 reprinted below, Vol. II. Riegel, E.C. (1944), Private Enterprise Money: A Non-Political Money System, New York: Harbinger House. Riegel, E.C. (1978 [1954]), Flight from Inflation: the Monetary Alternative, Los Angeles: Heather Foundation. Rockoff, H. (1974), 'The Free Banking Era: a Re-Examination', Journal of Money, Credit, and Banking, 6 (2), May, pp. 141-67. Reprinted below, Vol. II. Rockoff, H. (l975a), The Free Banking Era: A Re-examination, New York: Arno Press. Rockoff, H. (1975b), 'Varieties of Banking and Regional Economic Development in the United States', Journal of Economic History, 35, March, pp. 16O-8\. Rockoff, H. (1986), 'Institutional Requirements for Stable Free Banking', Cato Journal, 6 (2), Fall, pp. 617-34. Rockoff, H. (1991), 'Lessons from the American Experience with Free Banking', in F. Capie and G.E. Wood (eds), Unregulated Banking: Chaos or Order?, London: Macmillan.

Free Banking I Rolnick, A. and Weber, W.E. (1982), 'Free Banking, Wildcat Banking, and Shinplasters', Federal Reserve Bank of Minneapolis, Quarterly Review, 6, Fall, pp. 10-19. Rolnick, A. and Weber, W.E. (1983), 'New Evidence on the Free Banking Era', American Economic Review, 73 (5), December, pp. 1080-91. Reprinted below, Vol. II. Rolnick, A. and Weber, W.E. (1984), 'The Causes of Free Bank Failures: a Detailed Examination', Joul7Ull of Monetary Economics, 14 (3), November, pp. 267-91. Rolnick, A. and Weber, W.E. (1985), 'Banking Instability and Regulation in the U.S. Free Banking Era', Federal Reserve Bank of Minneapolis, Quarterly Review, 9, Summer, pp. 2-9. Rolnick, A. and Weber, W.E. (1986), 'Inherent Instability in Banking: the Free Banking Experience', Cato Joul7Ull, 5 (3), Winter, pp. 877-90. Rolnick, A. and Weber, W.E. (1988), 'Explaining the Demand for Free Bank Notes', Joul7Ull o/Monetary Economics, 21 (1), January, pp. 47-71. Rothbard, M.N. (1962), 'The Case for a 100 Per Cent Gold Dollar', in L. Yeager (ed.), In Search of a Monetary Constitution, Cambridge: Harvard University Press. Salerno, J.T. (1983), 'Gold Standards: True and False', Cato Joul7Ull, 3, Spring, pp. 239-67. Samuelson, P. (1968), 'What Classical Monetary Theory Really Was', Canadian Joul7Ull of Economics, 1, February, pp. 1-15. Samuelson, P. (1969), 'Nonoptimality of Money Holding Under Laissez-faire', Canadian JOUI7UlI of Economics, 3, May, pp. 324-30. Schuler, K, (1992), 'The World History of Free Banking', in K. Dowd (ed.), The Experience of Free Banking, London: Routledge. Schwartz, A.J. (1987), 'Currency School, Banking School, Free Banking School', in J. Eatwell, M. Milgate and P. Newman (eds), The New Palgrave Dictionary ofEconomics, New York: Stockton Press. Scrope, G.P. (1832), 'The Rights of Industry and the Banking System', Quarterly Review, 47, July, pp. 407-57. Excerpt reprinted below, Vol. I. SeIgin, G.A. (1987), 'The Stability and Efficiency of Money Supply under Free Banking', JOUI7UlI of Institutional and Theoretical Economics, 143 (3), September, pp. 435-56. Reprinted below, Vol. III. Selgin, G.A. (1988a), The Theory of Free Banking, Totowa, NJ: Rowman and Littlefield. Selgin, G.A. (1988b), 'Accommodating Changes in the Relative Demand for Currency: Free Banking vs. Central Banking', Cato Joul7Ull, 7 (3), Winter, pp. 621-41. Selgin, G.A. (1992), 'Bank Lending "Manias" in Theory and History', JOUI7UlI of Financial Services Research, 6 (2), August, pp. 169-86. Selgin, G.A. and White, L.H. (1987), 'The Evolution of a Free Banking System', Economic Inquiry, 25 (3), July, pp. 439-57. Reprinted below, Vol. III. Selgin, G.A. and White, L.H. (1988), 'Competitive Monies and the Suffolk Bank System: Comment', Southern Economic Joul7Ull, 55, July, 215-19. Selgin, G.A. and White, L.H. (1990), 'Laissez-faire Monetary Theorists in Late Nineteenth Century America', Southern Economic Joul7Ull, 56 (3), January, pp. 774-87. Reprinted below, Vol. II. Sennholz, H. (1985), Money and Freedom, Spring Mills, PA: Libertarian Press. Simons, H. (1948), Economic Policy for a Free Society, Chicago: University of Chicago Press. Smith, V. (1990 [1936]), The Rationale of Central Banking, Indianapolis: Liberty Press. Spencer, H. (1858), 'State Tampering with Money and Banks', Westminster Review, 69, n.s. 13, January, pp. 210-32. Reprinted below, Vol. I. Sumner, S. (1990), 'The Forerunners of "New Monetary Economics" Proposals to Stabilize the Unit of Account', JOUI7UlI of Money, Credit, and Banking, 22 (1), February, pp. 109-18. Reprinted below, Vol. II. Taub, B. (1985), 'Private Fiat Money with Many Suppliers', JOUI7UlI of Monetary Economics, 16 (2), September, pp. 195-208. Reprinted below, Vol. III. Thompson, E. (1974), 'The Theory of Money and Income Consistent with Orthodox Value Theory', in G. Horwich and P.A. Samuelson (eds), Trade, Stability and Macroeconomics, New York: Academic Press, pp. 427-53. Timberlake, R.H. (1984), 'The Central Banking Role of Clearinghouse Associations' , JOUI7UlI ofMoney, Credit, and Banking, 16 (1), February, pp. 1-15. Reprinted below, Vol. II.

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Timberlake, R.H. (1986), 'Institutional Evolution of Federal Reserve Hegemony', Cato Journal, 5, Winter, pp. 743-63. Timberlake, R.H. (1987), 'Private Production of Scrip-money in the Isolated Community', Journal of Money, Credit, and Banking, 19 (4), November, pp. 437-47. Reprinted below, Vol. II. Tobin, J. (1963), 'Commercial Banks as Creators of Money' , in D. Carson (ed.), Banking and Monetary Studies, Homewood, IL: Irwin, pp. 408-19. Tobin, J. (1969), 'A General Equilibrium Approach to Monetary Theory', Journal of Money, Credit, and Banking, 1 (1), February, pp. 15-29. Vaubel, R. (1984), 'The Government's Money Monopoly: Externalities or Natural Monopoly?', Kyklos, 37 (1), pp. 27-58. Reprinted below, Vol. III. Vaubel, R. (1985), 'Competing Currencies: the Case for Free Entry', ZeitschriftfUr Wirtschafts- und SoZialwissenschaften, 5, pp. 547-64. Reprinted below, Vol. III. Wagner, R. (1986), 'Central Banking and the Fed: a Public Choice Perspective', Cato Journal, 6 (2), Fall, pp. 519-38. Reprinted below, Vol. III. Wallace, N. (1980), 'The Overlapping Generations Model of Fiat Money' , in J. Kareken and N. Wallace (eds), Models of Monetary Economies, Federal Reserve Bank of Minneapolis, pp. 49-82. Wallace, N. (1983), 'A Legal Restrictions Theory of the Demand for "Money" and the Role of Monetary Policy', Federal Reserve Bank of Minneapolis, Quarterly Review, Winter, pp. 1-7. Reprinted below, Vol. m. Wallace, N. (1987), 'A Suggestion for Oversimplifying the Theory of Money', Economic Journal, 98 (390), conference supplement, pp. 25-36. Reprinted below, Vol. III. Wiirneryd, K. (1990), 'Legal Restrictions and Monetary Evolution', Journal of Economic Behavior and Organization, 13 (1), January, pp. 117-24. Reprinted below, Vol. III. Wesslau, O.E. (1887), Rational Banking (the Remedy for Depression in Trade) Versus Bank Monopoly, London: Elliot Stock. Chapters 6-10 reprinted below, Vol. I. White, E.N. (1990), 'Free Banking During the French Revolution', Explorations in Economic History, 27, pp. 251-76. Reprinted below, Vol. II. White, L.H. (1984a), Free Banking in Britain: Theory, Experience, and Debate, 18{)(}-45, Cambridge: Cambridge University Press. White, L.H. (1984b), 'Competitive Payments Systems and the Unit of Account', American Economic Review, 74 (4), September, pp. 699-712. Reprinted below, Vol. III. White, L.H. (1986), 'Competitive Payments Systems: Reply', American Economic Review, 76 (4), September, pp. 850-53. Reprinted below, Vol. III. White, L.H. (1987), 'Accounting for Non-interest-bearing Currency: a Critique of the Legal Restrictions Theory of Money', Journal of Money, Credit, and Banking, 19, November, pp. 448-56. Reprinted below, Vol. III. White, L.H. (1989a), Competition and Currency, New York: New York University Press. White, L.H. (1989b), 'What Kinds of Monetary Institutions Would a Free Market Deliver?', Cato Journal, 9 (2), Fall, pp. 367-91. White, L.H. (1990), 'Scottish Banking and the Legal Restrictions Theory: a Closer Look', Journal of Money, Credit, and Banking, 22 (4), November, pp. 526-36. Reprinted below, Vol. II. White, L.H. (1991), 'Banking Without a Central Bank: Scotland Before 1844 as a "Free Banking" System', in F. Capie and G.E. Wood (eds), Unregulated Banking: Chaos or Order?, London: Macmillan, pp. 37-62. White, L.H. (1992), 'Mises on Free Banking and Fractional Reserves', in J. Robbins and M. Spangler (eds), A Man of Principle: Essays in Honor of Hans F. Sennholz, Grove City, PA: Grove City College Press. White, L.H. and Selgin, G.A. (1990), 'Laissez-faire Monetary Thought in Jacksonian America', in D. Moggridge (ed.), Perspectives on the History of Economic Thought, vol. 4, Aldershot, UK: Edward Elgar. Reprinted below, Vol. II. Yeager, L. (1956), 'A Cash-balance Interpretation of Depressions', Southern Economic Journal, 22, April, pp. 438-47. Yeager, L. (ed.) (1962), In Search ofa Monetary Constitution, Cambridge: Harvard University Press. Yeager, L. (1968), 'Essential Properties of a Medium of Exchange', Kyklos, 21, pp. 45-69.

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Yeager, L. (1978), 'What are Banks?', Atlantic Economic Journal, 6 (4), December, pp. 1-14. Yeager, L. (1983), 'Stable Money and Free-Market Currencies', Cato Journal, 3 (1), Spring, pp. 305-26. Yeager, L. (1989), 'A Competitive Payments System: Some Objections Considered', Journal of Post Keynesian Economics, 11 (3), Spring, pp. 370-77.

Part I The British Free Banking School

[1] Excerpt from Robert Mushet, An Attempt to Explain from Facts the Effect of the Issues of the Bank of England Upon Its Own Interests, Public Credit, and Country Banks, 180-207

CHAPTER X. Recapitulation of the prindples attempted to be established jn the foregoing chapters.

IN the foregoing pages, I have endeavoured to establish the following principles: 1. That in a country with a paper currency, payable in gold on demand, any undue or unnecessary extension of its amount, such as would not be called for in the ordinary course of commercial transactions, and never would be made if the whole currency were metallic-but such as may be made by loans to Government, purchase of Exchequer bills, on loans, mortgage, or on stock-will lead to a reduction of the current rate of interest, an unnatural rise in the price of Government funds, and a general spirit of gambling in all money securities. 2. That if the currency of the country were entirely metallic, or the proportion of paper the lesser quantity of the two, we might be less subject to such violent and extensive fluctuations in the value of property, so productive of ruin and distress to the community, and rendering it a matter of doubt whether as a nation we derive any advantage from the substitution of a paper for a metallic circulation.

4

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181

3. That under a system of cash payments, the Rank of England could not add to the amount of the currency, beyond the legitimate demands of the country, or such as would be demanded if the whole circulation was metallic; unless she resorted to loans to Government, or on mortgage, purchase of Exchequer bills, or loans an stock; and that when she has recourse to such measures, so completely at variance with the soundest principles of banking, it is followed by an extension of the circulation of country bankers, in a far greater proportion than the increase to the basis of the currency, in the first instance, by the extension of the issues of the Bank of England; and sooner or later will produce a demand for gold on the Bank, so as to force her to a contraction of the currency -endangering her own safety, destroying the credit of the commercial community, and the banking estahlishments of the country. That when the Bank of England is obliged suddenly to contract its issues, either to preserve its gold, or to augment its amount, it may be followed by such a contl'action of the country circulation as for a length of time to keep the bullion value of our currency much higher than in other countries, and causing a fall of prices from diminished consumption, the want of confidence, and the means of exchanging commodities, that bears no true relation for the time to the state of the foreign exchallge~ 011 tile mal'lcet price of gold, as ap-

5

Free Banking I

pears to have been the case in

H~2(),

1821, and

18224. That while the Bank of England possesses

the monopoly of the currency-paper as well as metallic, by the existing regulations of the Mint she has the power of regulating the current rate of interest, which would otherwise be regulated by the current rate of profits on coinage; that under the operation of this monopoly, she may acquire an extent of treasure, which in the end may be attended with such a supposed sacrifice of her pro~ fits, by loss of interest, as to induce her to adopt measures to free herself from the encumbrance, and lead to very great fluctuations in the value of money and property generally. Lastly.-From the undue or unnecessary increase of the currency, which could not take place if the whole were metallic, we have the origin and sole cause of' general speculations and overtrading, which proceed with its increase, and in their progress demand or require new additions to the circulation and credit; and, from the conse~ quent facility of obtaining credit, may far outstrip the actual increase of the currency; a state of things that cannot be prolonged beyond the safety of the Bank, which again depends on the stodL of her treasure: the issues are then contracted, this is followed hy the contraction of the wuntry circulation, credit is destroyed, and sudtlCllly our markets assume tIll' appearance uf low

6

Free Banking I

pikes, over-production, or imlefil'ii.e supply.f. If thIs

principle is applied to tile contraction of our Cllrl'ency in 1815 and IHI6, with the low prices that followed; its extension in 1817 and 1818, and the general speculation, overtrading, and high prices, that succeeded; and again, to its cont.-actioll in 1819, 1820, 1821, and 1822, and the general COIllplaint of abundance of foreign and home pl'oduce, and low prices that continued throughout these years; and lastly, to the increase of the curl"ency in 1824 and part of 1825, with the accompanyillg" rage of speculation, overtrading, and high prices that followed, we see the establishment of the principle in all its forms and effects. In the opinion of Mr. Tooke, general speculation and overtrading may take place in a country where the currency is purely metallic, and instances the extensive failures in Hamburgh in 1798. But it must be remembered, that these failures were subsequent to, and I have hardly a doubt were consequent upon, a very sudden and violent contraction of the currency of England in 1797, and extended throughout the whole of 1798, as a reference to the then foreign exchanges will confirm. It is more than probable that the exten" High prices are not necessarily favourable to speculation and over-trading, but on the contrary, low, and rising I,rices; which imply a new relation between commodities and currency, from an increase of the latter. The cvils of such a system arc not wnlined to England, but must protillt'C a corresponding effect Oil thc l'ommcrciul relations and credit of every country with which Eng:lalld holds intcrc(lnr~l'.

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184 sive speculations in Hamburgh, which failed in 1798, had their origin in the extended currency and high prices of England in 1795 and 1796. In these years we had also our speculations and overtrading, and they were checked by the necessity imposed on the Bank to diminish its issues. The failure of credit in England would extend to Hamburgh, as a matter of course; Hamburgh at that time being most extensively connected with us in commerce. If we refer to the state of the money market in Hamburgh, in December last, we shall find, even with her purely metallic currency, that the state of her public credit was not different from our own ; but it was in this case also, as in 1798, subsequent to, or accompanying, the state of public credit in England.* If these are legitimate conclusions, it would appear, that the evils of our paper currency are not confined to England; and are far more extensive than has hitherto been conceived or admitted; and may be an argument, stronger than any yet produced, for remodelling our system of paper currency, and, if not abolishing it altogether, to confine it within such limits, as to diminish, as much as possible, the chances of its producing such extensive mischief. '" By recent accounts from Paris, we have been informed of extensive failures on their Stock Exchange; but these failures have been subsequent to the contraction of the circulation in England.

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CHAPTER XI. Proposed remedies for the regulation of our currency.

I SHAI.L now proceed to state such remedies as may enable us to avoid in future the evils that seem to be inseparable from the present system of our currency. It is necessary to begin with the Bank of England, as I think the cause of the late failure in commel'cial credit has in a great measure, if not altogether, been traced to her measures for unnecessarily, unless for her own interest, increasing the amount of the currency. I would, therefore, take the power from her of lending to G0vernment on Exchequer bills, on mortgage, or on stock. None of them seems consistent with the legitimate principles of banking. It would be desirable also, and I think it very practicable, for the Government to raise money at any time on Exchequer bills, for the arrears of the consolidated fund, without doing so through the medium of the Bank. If the Government would establish in the city a banking-house--call it the Exchequer and Treasury Banking-house, where every public accountant would have his accounts, by which the Treasury would at all times have the balances of every public account at command (which balam:cs

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186

amount on an average to from four to five millions) they could, through the means of theil' own bankers, raise money in the public market at the current rate of interest, Such a plan as this would avoid all interference with the current business of the Bank. If she retained the management of the natiolJal debt, the Treasury and Exchequer bankers would pay over to her the intel'est due quarterly, and no more intimate connection need exist. The Treasury and Exchequer bankers, according to the balance of cash on hand, could apply it to the purchal'e of Exchequer bills, and so diminish the charge of interest to the Exchequer. The profit which the Bank now makes on these balances would be transferred to the public, and would do more than pay the expences of the banking establishment. The result would be the same as if the Treasury kept the accounts of all its servants, and made a profitable use of the balance in hand. As it has been proved, and I hope satisfactorily, that our paper currency is in an undue proportion to its metallic basis, I would propose that the Bank of England should not issue notes below the value of 20l. If this became the general regulation for all banks issuing promissory notes, it might bring back our currency to the state it was in a few years previous to the suspension of cash payments in 1797, when our gold currency was estimated lJy LUI'd Liverpool, Mr. Rose, ami others, at ii'oUl

9

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IH7 twenty-five to thirty millions. That stich a measure would not entirely prevent the variations in the value of money, inseparable from the use of a paper currency and so injurious to the public welfare, I am willing to adDlit. The nearer the approximation to a currency entirely metallic, the more steady and uniform ",ill its value be; and perhaps the essential interests of the community would be consulted by prohibiting the circulation of any promissory note below the value of 501. giving the bank of England the power, for the convenience of the country, to issue Bank post bills for sums of 10/. and upwards. If these regulations were adopted, I would propose that the trade in coined money should be perfectly free; that the Mint, according to the plan I had the honour to propose before the Committee of the House of Lords on the Affairs of the Bank in 1819, should possess a fund, which would enable her, immediately on the quality of the bullion being ascertained by assay (and in no case should this exceed forty-eight hours) coined money would be given in exchange for it. I have already endeavoured to show how important and essential such a regulation is to the interests of the community, and the probability, that if such a regulation had been co-existent with Mr. Peel's bill, we should have escaped from the long continued ruinous prices that followed the

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188 measures of the Bank before and after the resump· tion of cash payments. I would further propose, for the general convenience of all classes, but particularly the lower, that an addition of three or four millions should be made to the silver currency at the rate of half a million per annum. The silver currency in the country can never be said to be proportioned to the wants of the community unless every labourer throughout the kingdom can receive his weekly wages in the current coin of the realm. That this is not, and has never been, the case in this country, I think I may safely affirm. On the contrary, we have had 58. and 28. 6d. notes, and checks upon provision shops, and meetings between masters and servants in public houses for the payment of wages, taking from the labourer the power of spending his wages where he pleases, and the advantages of a ready money purchase. The tendency of such a system is to render the labourer more dependant and degraded than he would otherwise be, and in point of fact it must operate, more or less, as a tax on his wages. I am satisfied that an abundant silver currency would add decidedly to the morality, comfort, and independence, of the labouring classes of the communit.y. The profit which the government would deri\Te from these progressive annual coinages (which can be suspended on the first appearance of excess),

11

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IH9 would defray the greater part of the charges of the Mint establishment. With regard to the circulation of the country bankers, I would propose, first, that the banking system should be thrown open to within sixty-five miles of London, as agreed upon by the Government and the Bank in 1822,* but that they should issue no notes of lower denominations than the Bank of England. If joint stock banking companies followed the freedom of the trade, there would be sufficient security for the public, and the power of overissuing considerably reduced by the paper currency being confined within narrower limits. That portion of the currency from a 11. note up to twenty or fifty, whatever may be the limit, will hereafter, being metallic, form the solid capital of those who think it their interest to follow the profession of banking. This portion of their capital bankers will lend at interest in the discount of bills, as formerly; but as it is a real and substantial capital, it will not be liable to the same changes from scarcity to abundance, or from abundance to scarcity, as if it were entirely paper. The effect of this plan would be, to give great solidity to our banking system; it would be men of real and substantial capital that would embark in the business, and the public would be freed from the • Since this was written this desirable point has been arranged between the Bank and Government.

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190 ruin OilS consequences that follow an extension and contraction of the paper circulation. A really useful system of paper currency. that !IIystem in fact that enables a nation to apply a portion of her metallic capital to other and productive purposes, ought to be the aim of the Government. If that portion of capital, whatever it may be, can be saved, without producing ruinous speculations and overtrading, it will be beneficial; but if it is attempted to save more capital, by the substitution of paper, than the nature of the system will bear, and subject the community to much more extensive loss by the attempt, it proves something bad in the system: it becomes a question, then, what are the proportions of paper and coin, if any, that can be maintained beneficially in a country, so as not to cause a greater destruction of capital, by speculations and overtrading, than the saving which re~lUlts from the substitution of paper for gold. This is the true mode of estimating the advantages and disadvantages of a mixed currency, such as we have in this country. Supposing the whole CUl'reDcy of the three kingdoms to be fifty millions. If twenty-five millions of gold and twenty-five millions of paper do not keep us free from the evils of a greatly varying value in money, we ought to try any other proportion, greater of gold, and less of paper. If every proportion fail in giving us a fixity of prices, such as would result from a purely metallic currency, ht'IWficial to all, and injllriom to none': we oug-ht

/3

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191

at once to come to the resolution of having no other than a metallic currency. Tn other words, make England as the county of Lancashire. An opinion prevails, and I think an erroneous one, that if we were to abolish our paper currency, neither rent nor taxes, of course the interest of the national debt, could be paid. We have attempted to prove that all the advantage to be derived from our paper currency, as a substitution for gold, is the profitable use of that capital for which the paper is a substitute. If this is five, ten, or twenty millions, then the reproduction of that capital, with a profit, is the limit, as it is the maximum, of the actual advantage of our paper currency. Inasmuch as it is an increase to the amount of the productive capital of the country, in so far it assists in the payment of taxes, but no further. Taxes are never paid from currency, though paid in currency. It is from the profits of capital alone that taxes are paid, and currency is the medium by which they are paid. It is of no consequence, therefore, whether the currency is all paper, or partly paper and metallic, or entirely metallic, as far as the payment of rent and taxes are concerned. There has been attributed to the paper currency of this country a sort of magic power, by which wealth has been created and the Government revenue collected, to a much greater extent than it could otherwise have been done, by which the intel'est of the nat.ional debt

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192 has been paid, and without which landlords could not have received their rents; and the inference drawn is, that if the paper currency was restricted in amount, or entirely abolished, the Government could not carry on the affairs of the nation, and landlords could not receive their rents. In this conclusion I cannot agree. If the paper currency at any time has kept prices in this country above their bullion value, which is admitted was the case during a considerable period of the restriction on cash payments, rents would also rise. The restoration of the currency to its Mint value would restore prices to their bullion value, and rents would fall to their proper level, but the landlord would sustain no further injury. The rise of rents from a depreciated currency was not all gain to the landlord, for the purchasing power of his rents was reduced in value from the rise in price of all the articles of consumption. When rents, on the other hand, fall to their bullion value, the loss to the landlord is more nominal than real. General prices are lower, and his diminished amount of rent can command a greater amount of the necessaries of life. I have thought it necessary to state thus much of the principles of currency, before noticing what regulations it may be advisable to introduce with regard to the circulation of the country banks. This subject has deservedly occupied a great

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deal of public attention of late, and several plans have been proposed with the view of introducing health and stability into this portion of our circulation. The assimilating of the country banks of England to those of Scotland has been urged as a remedy (or the evils of the present system. That the introduction of joint stock and chartered banking companies into England would be attended with great advantage, no one will deny-that is acquainted with the stability of the Scotch banks. It would operate as a complete protection to the holders of notes against the insolvency of any of the banks. Here the benefit would end; and great as it manifestly is, I think it the lesser of the two evils that exist in the present country banking system of England. The extensive dis.. tress at this moment felt throughout England, from the discredit and insolvency of the country bankers, has its origin in the power of adding largely and unduly to the amount of the currency. This evil was not confined to England. Scotland has had her currency augmented to the level of England; has had her joint stock speculations and overtrading; has also had her circulation contracted, and public credit impaired; her labourers thrown out of employment, and a general stagnation in trade. The only difference in the two cases is the distress and loss that the lower classes of England have sustained from being the holders of the notes o

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194 of such banks as have become insolvent. But even this distress, great and lamentable as it may be, is not to be compared with the far greater misery that afflicts the population in both countries, from the want of employment that follows the destruction of credit and capital during the stagnation of buying and selling. The poor must suffer until general confidence is restored; and supply and demand resume their ordinary level. The introduction, therefore, of the Scotch system of banking into England, though much superior to that now existing, would be no effectual remedy for the greater evils of our present paper currency, inasmuch as it would not take away the power of adding suddenly and largely to the currency, or diminish the necessity arising from the use of that power, of ~uddenly and extensively contracting the circulation. Another plan has been proposed in the Scotsman's newspaper, 17th of December last. The writer states, that " the repeal of the injurious and absurd restriction which has obtained for more than a century in England, by which more than six individuals are prevented from entering into any co-partnery for the issue of notes, has been suggested as a remedy for the evils complained of. But though this repeal would, by allowing the formation of great joint stock banking companies, possessed of adequate capital, be a very great improvement on the existing system, we are very far

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indeed from thinking that it would of itself be sufficient. There must always be infinitely more hazard in conducting the business of banking in a highly commercial country like England, than in Scotland; and nothing can be more absurd than to argue, that because few of the Scotch banks have failed, they would therefore succeed equally well in England. There is more speculation in Lancashire in a single week than there is in Scotland in a twelvemonth; and the risk incurred by the banking establishments there must be proportionably great. The fact is, that no company, whether it consists of sir, or si:r hundt'ed thousand partners, ought to be permitted to issue notes at pleasure. For you can have no security that they will not abuse the power to do so; at the same time, that it is certain that the ruin occasioned by the bankruptcy of any establishment will most commonly be directly proportioned to the number of its partners, and the credit and confidence it has enjoyed. To insure the public against the bad faith or the imprudent conduct of the issuers of paper money, it has always appeared to liS to be quite indispensable that a law should be enacted, compelling all individuals or associations who issue notes to hold a certain amount of Government securities proportioned to their issues,as a guarantee for the payment of their paper. There may he some difference of opinion as to the limit at which this proportion ought to he fixed. but we do not o 2

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196 think it ought to be less than two thirds of the total amoullt of the stamps issued to them. It is to no purpo&e to contend that this would be laying banking companies under any improper restraint. Had the freedom they have hitherto enjoyed been productive of no bad consequences, they would have had some grounds for protesting against being subjected to any restriction; but after the wide-spread mischief, and destruction of individual fortunes, caused by their misconduct and want of capital, Ministers are not only warranted, but they are called upon by a just regard to the public interests, to interfere to put down the present system. Besides, it must be remembered that the bankers will get the same rate of interest on the funded property that is got by other individuals; while the obligation to hold it will have the effect to exclude all persons who are not possessed of capital from the trade, and will prevent those who are possessed of capital from improperly extending their issues. Neither do we attach any weight to the objection of those who contend that this measure would be opposed to the principle of the freedom of industry; for, though generally true, this is a principle that does not hold universally. It is, for example, admitted on all hands, that in order to prevent the confusion that would arise from the currency of coins of different values, but of the same denomination, it is expedient that Government should interfere to prohibit the circulation of

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197 private tokens, and of all coins which have not been struck at the public Mint. But if such a regulation be, as it most certainly is, expedient, why should it not also be expedient to endeavour to secure the public against loss from the issue of worthless paper money. Women, mechanics, J.. bourers, and individuals of all descriptions. who are no wise qualified to judge of the stability of different banking companies, are all dealers in money; and they have a clear and undoubted right to expect protection and security from such an obvious cause of loss as the granting of permission to everyone who chooses to send notes into circulation." This plan has for its object the protection of the public, who are the holders of the notes of the English country bankers, from any 16ss in case of the insolvency of any of the banks. In this respect, the plan would be productive of the same effects as the joint stock banking companies of Scotland; and beyond this security, the writer does not seem to have any other object in view; and admitting that it would be a guarantee to the public, which I think it would, it is clear, that it is obtained by a sacrifice of a portion of the rate of interest on banking capital in England, to which Scotland and the Bank of England are not subject. It is, I think, objectionable. The writer justifies the principle of his plan, because, in his

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198 opinion, there must necessarily be more hazard in conducting the banking tion of their bullion, suddenly cramped the whole of the commercial transactions of the country." Mr Tooke is the only witness who questions this doctrine; and he makes aamissions which, we think, completely overthrow his own opinions. In answer to the question No. 3297, proposed by Mr Burne, " What is it then that does affect prices 1" he answers, " The cost of production limiting the Bupply on the one hand, and the pecuniary means of the conBurner limiting the demand on the other." We should infer from this, that the increase of the currency would give increased pecuniary means to the purchasers, and hence cause an increased demand that would tend to advance prices. Again, in reply to No. 3300. proposed by Mr Warburton," Suppose the supply of the precious metals in the world to be increased, and to go on doublin~ and trebling, and so on, would not the prices of commodities estImated on the precious metals go on doubling and trebling, and so on, in proportion to the increase of the precious metals '/ -Yes, they will, undoubtedly; and I took for granted that we were speaking of alterations in prices as distinct from those of bullion value in the commercial world."

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THE CURRENCY:

Now, if an increase in the quantity of money in the whole wol'ld would cause an advance or prices in the whole world, then we sill)lIid infer that an increase in the quantity of money in any pa-rtlcuial' countt'y would cause an advance in the prices of commodities in that country. It matters not, as far as regards the objects of this inquit'y, whether commodities are said to get dearer or money to get cheaper. If the same commodity will exchange for a greater quantity of money, the price is advanced. . In these replies Mr Tooke seems to have intimated the way ill which an increase of money tends to advance prices; that is, by increasing the demand, an increase of money ~ive9 men the means and the inclination of purchasing an additIOnal quant.ity, either for consumption or speculation, and the increased demand advances the price. It is no objection to this doctrine to say, that prices may advance from other causes than an increase of the currency; no doubt they may. But this is not the question. The question is, whether the abllndance of money is not one cause. It should be recollected, too, that money always acts intermediately. When money is abundant, people me more disposed to make purchases or engage ill speculation; but the particular direction in which the money may be employed, depends upon a variety of circumstances. Thus, Mr Tooke states, that the fall of prices which took place in the latter end of 1836, arose from large importations; but WE' may ask, was not the previolls abundance of money the cause of those large importations? Again, it has been maintained that the panic of 1836 arose from the expansion of American credit; but, we may ask, was not the abundance and cheapne~s of money one cause of that e.lCpansion of credit 1 Money always operat.es, in the first instance, by producing a moral effect; by a moral effect, we mean an effect upon the minds of men. Mr Norman says, he thinks very little of the moral effect of an increase in the quantity of money; and yet, in a subsequent part of his examination, he admits that a contraction of the currency produces caution, and this incrt'ases the tightness in the money market. Now, what is caution bula moral effect 1 and, if a moral effect be produced bv the scarcity of money, why not by its abundance 1 In fact, fluctuations in the currency can produce no physical effects without, in the first place, producing a moral effect. Abundance of money makes men buoyant, sanguine and enterprizing, and hence they go into.speculation. The feeling becomes contagious, and sOllletimes a whole nation goes mad. On the other hand, a scarcity of money tnakes men cautious, timid and apprehensive,

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195

93

and hence they prepare for the worst that can come upon them. In consequence of these mental afiections, fluctuations in the currency.often produce greater eH'ects than the mere amount of the fluctuation would lead us to expect. We conclude, then, than an abllndance of money has a tcndency to raise the prices of commodities; and we think it 110 objection to this doctrine to say, that, in some cases, there have been increased issues of money without a general advance of prices; for sometimes these increased issues may not be employed in commerce, but be employed in domestic investments or foreign securities, Nor do we think it any objection to this doctrine to prove, that the advance ill the price of any particular commodity may sometimes be accounted to I' by somc peculiar circumstances connected with that commodity. We believe this is gcnerally the fact. Speculators and merchants have always some peculiar reason fOl'dealing in onc commodity rathel' than another; but the facility of obtaining the money is the moving cause of the speculation, and the price of each commodity will advance according to the quantity of money that is brought to bear on that particular market. But when we contend that an increase in the quantity of money has a tendency to raise the prices of commodities, we must be understood to mean that the quantity of commodities remain the same as before. If there be an increased quantity of commodities brought to market, and money is drawn out from the banks to circulate these additional commodities, it will not cause any advance in price. We cannot better explain our meaning than by referring to the case of Ireland. The evidence given before the Parliamental'Y Committee of 1826 fully explains the state of trade in that country. The corn trade and the bacon trade commence in the months of t:>eptember and October. FrOID these months, until the following January, the notes in circulation continue to increase, and from that period they gradually diminish. This process is as follows :-A person goes from London with 1,0001. to engage in the Irish corn trade. He may obtain from the Provincial Bank, in Broad-street, a letter of credit upon one ofits branches (say COl'k) for 1,000/.: he will receive it at the branch in provincial bank notes, which he will distribute among the farmers in the purchase of corn. The farmers will keep these notes in their possession until the end of the year, when they have to pay their rent. The dealer having shipped his 1,0001. worth of corn, may draw a bill upon London for the amount, which he may discount at the brunch, and thus obtain another J,OOO/.

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THE CURRENCY:

with which he may purchase another supply of corn, and he may repeat this operation as often as he pleases. The farmers will keep these notes in their possession until January, when the agents came round to collect the rents. The agents will receive these notes from the farmers, and take them to the bank for a letter of credit on London or Dublin, which they will remit to the landlord. Thus we find there is a large increase in the circulation; but as this is caused by the increased qliantities of commodities brought to market, it has no effect upon prices. The price of corn in Ireland is governed by the price at which it can be sold in England. If the price be high, a larger amount of notes will be drawn out of the bank: but the increased issue of notes is not the cause of the high price, but the high price is the cause of the increase of the notes. Confirmatory of this statement, we have extracted from the returns attached to the evidence an account of the circulation of notes in Ireland on the first week in September and in the last week in December for the years 1837, 1838, and 1839. Circulation of the Bank of Ireland, of the Bank of Ireland branches, and of the joint-stock banks in Ireland, in the fi1'8t week of September and the last week in December of the years 1837, 1838, and 1839. Total Bank of Ireland Circulation of Branche•• Bank of Ireland.

September Decpmber September December September December

-

1837 1837 1838 1838 1839 1839

2,940,400 3,265,700 3,067,900 3,474,500 2,980,700 3,192,200

Joint-stock Banks.

1,066,600 1,342,300 1,275,600 1,695,600 1,217,400 1,464,000

1,524,476 2,204,286 1,881,085 2,972,034 1,987,068 2,629,205

-

We observe, too, by these returns, that the circulation of Scotla~d i~ uniformly at its lowest point in March, and its highest pomt m November. The country circulation of England is usually the highest in April and the lowest in August. It cannot ~e supposed that t~e prices of all commodities vary every year III the s~me proportIOn. The circulation of the English country banks, Itke those of Irl;lland nnd of Scotland, is operated upon by local demands; and hence the issues of country banks have no effect upon prices. While, on the other hand, ihe notes of the Bank of England, being issued against deposits of gold, or in

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95

purchase of Government Stock or Exchequer Bills, must have a tendency, by increasing the demand, to cause an advance in the lrices of commodities. I . Our next inquiry is-In what way does an extension or contraction f!ftlte CU1'1'ency operate upon tile Foreign Exchange$. The foreign exchanges are regulated mainly by the balance of trade. Ifwe import more commodities than we export, we must pay the balance in the precious metals. Money may aho be exported for other purposes than as payment for commodities imported; such as for subsidies to other powers, as rents to absentee landlords, or for permanent investment in foreign securities. Now, then, in what way can an expansion of the currency render the exchanges unfavourable? If this extension of the currency raise the prices of' commodities, as we have seen it will, its tendeucy will be to encourage importation, as 10reigners will find this a good mal'ket for their goods. It will at the same time check exportation, as foreigners will not be disposed to purchase our commodities at an advanced price. ThIS will cause the balance of payments to be against us. Besides, the increased quantity of money put into circulation will lower the rate of interest, and hence many parties may send money abroad to be invested in the foreign funds, in order to obtain a higher rate of interest than can be obtained at home. There are many other indirect ways in which an alteration in the amount of the currency affects the foreign exchanges. "3769. Mr. lVar/Ju1'ton. Would the raising of the rate of interest produce any effect upon the exchanges, unless it occasioned a diminution in the application for discounts, and therefore in the amount of the circulation 7-It would produce a decided effect upon the ex.. ohanges, at the same time that there would in all probability be an increase ill the amount of the issues through the medium of discounts; the effect upon the exchanges of a rise in the rate of interest would be that of inducing foreign capitalists to abstain from callin~ for their funds from this country, to the same extent as they otherWise might dQ, and it would operate at the same time in diminishing the inducements to caritalists in this country to invest in foreign securities, or to hold foreign securities, and it might induce them to part with foreign securities, in order to make investments in British stocks or shares. It would likewise operate in restraining credits from the merchants in this country by advances on shipments outwards, and it would have the effect of causing a larger proportion of the importations into this country to be carried on upon foreign capital.Tooke:'

We see, then, that an alteration in the quantity of the, cur-

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96

THE CURIlENCY:

renr.y will affect the foreign exchanges in two ways. An increase in the quantity will tend to advance the prices of commodities, and thus check exportation, and encourage importation; and it will lower the rate of interest, and thus cause a transfer of capital for investment in foreign securities. Seeing, then, that we have the power of thus influencing the exchanges, the question arises, ought we, as a general principle of action, to make use of this power? It strikes us at once that this is an operation altogether at variance with the ordinary functions of money. The design of money is to effect the exchanges of commoditIes-to operate as a measure of value between different commodities, and thus to show their relative values. And it ought not only to show the relative value of different commodities at the s.amc time, but also the value of the same commodity at different times. All writers on monetary science have hdd that the measure of value ought to be free from change; and they state that the precious metals were originally selected for this reason, because they possessed more than any other commodity the quality of permanency. It seems as necessary to have a standard of value as a standard of weight or of measure. And were the yard measure or the bushel measure to be perpetually changing, it could not produce greater confusion or injustice than if the standard of value were perpetually changing. On this ground it has been contended that corn would be n very improper standard of value; for as, annually, the crops vary very much, an arlic.le that is worth one bushel of corn this year may be worth two bushels the next. But if the quantity of money were to be increased or diminished from year to year, with the view of influencing the exchanges, then it would become as improper a standard of value as corn. Indeed, during the last few yeats, the quantity of gold in the Bank of England has fluctuated more than the produce of the harvests. There are various cir;' cumstances that influence the prices of commodities; such as an increase Ol' a diminution 01' the supply-a state of peace or war-the opening of new markets-the discovery of cheaper modes of production, or the substitution of a scarce commodity. Now it seems proper that these legitimate causes of an alteration of prices should not be counteracted by an artificial operation on the currency: the natural price of a commodity is an indication of the relative quantity in the market; and when the price a,dvances, it is notice, to the consumers to reduce their consumptIon. Suppose, for 1I1stance, we had a scanty harvest, the price of corn would of course advance i this advance of price would

199

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induce many people, from motives of economy, to diminish their consumption, and to use instead cheaper kinds of food; and thus the quantity on hand would be eked out to the next harvest. But suppose the quantity of money were to be forcibly contracted, and corn kept as cheap in this season of scarcity as it had been in the pl'evious year, then consumption would not be diminished; the whole stock might soon be exhausted, and, before the next harvest, the nation might starve. Thus, artificial operations on the currency might contract the effect of the natural causes of alteration in prices, and also, by operating unequally on different commodities. might derange their relative values. III. Our next inquiry is- What ejJect is p7'oduced on tlte curre1lc!} by tile substitution of" paper money? The following question was put to Mr. Loyd:"2654, What, in your opinion, is the sound principle according to which the circulation should be re~ulated ?-A metallic currency, I conceive, by virtue of its own intrmsic value, will regulate itself; but a paper cunency, having no intrinsic value, requires to be Bubjected to some artificial regulation respecting its amount. The use of paper currency is resorted to on account of its greater economy and convenience, but it is important that that paper currency should be made to conform to what a metallic currency would be, and especially that it should be kept of the same value with the metallic currency, by being kept at all times of the same amount. Now, the influx and efRux of gold is the only sUl'e test of what would have been the variations of a metallic currency, and, therefore, I conceive that that constitute! the only proper rule by which to regulate the fluctuations of a paper currency." It is assumed in this reply that paper is a substitute for coin; that the forty millions of bank notes now circulating in England, Scotland and Ireland· represent forty millions of sovereigns; and that were the notes abolished, their place would be supplied by an importation of forty millions of gold. These points remain to be proved. We are inclined to believe with Sir Robert Peel, that were these notes abolished, theil' place would be supplied chiefly by bills of exchange, or some other description of paper money. Secondly, it is assumed that a purely metalhc circulation would perpetually vary in amount, according to the fluctuations in the foreign exchanges; that were six millions of gold imported. it would add six millions to the amount of the currency; and, on the other hand. if six millions of gold were exported, it would lessen the VOL,

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currency by six millions; this, too, remains to be proved. Even if gold bullion were used as currency, we see no reason why all the O"old bullion in the country should be used as money. Gold is an ~ticle of trade, and why, therefore, should every additional quantity imported be added to the quantity used as money. Hut we do not lise bullion as money, but coin; and it is cleal' that bullion cannot be used as money until it is coined. The privilege of coining money belongs to the sovereign. France has a silver currency; does this increase or diminish in quantity according to the exportation or importation of silver'l So far from this being the case, Fmnce has been adduced as a proof of the permanency attending a metallic currency. What proof thcn havc we that, were our currency purely metallic, it would increase and diminish in quantity according to the fluctuations of the exchanges? Thirdly, it is next assumed that a paper currency ought to be so regulated as to make it correspond ill quantity with the assumed fluctuations in a metallic currency. If it could be proved that a purely metallic currency would perpetually fluctuate with the foreign exchanges, so far from regarding such a state of things as a state of perfection to which the nation ought to aspire, we should regard it as a calamity that would call loudly for legislative remedy. Granting, however, that this would be the case, are we bound to make the paper currency correspond exactly to the supposed changes of a metallic clilTency? It seems a great advantage to have a currency that is capable of expanding and contracting in all the localities throughout the kingdom, exactly as the wants of trade may require. And why should we forego these advantages merely to make our paper currency correspond with the supposed changes of a metallic currency. without any satisfactory proof that the paper currency supplies the place of a. metallic currency, 01' that a metallic currency would undergo these changes?

IV. Ought Deposits ill tlte Bank

of England to he regarded as

MOlley?-

In discllssing this question it will be necessary to inquire, 1st. Whether deposits. perform the office of currency. and to what extent? 2nd. Whether there is any difference between the deposits in the Bank of England and those in other banks? 3rd. Whether the fluctuations in the deposits in the Bank of England are a fair criterion by which to judge of her

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previous issues? 4th. Whether the Bank of England is justified in employing her deposits? 5th. What is the influence of deposits u pall the prices of commodities? 1st. Do Deposits IJerj'arm thejilllctiolls a[Currellcy, and to what ertellt?-We use the word currency as synonymous with the word money, ami including only coin and notes payable on demand. The ambiguity of the· word currency is perhaps the main cause of the difference of opinions that have been expressed on this subject. If the word currency include only bank notes and coin, then deposits are not currency j but if the word be extended so as to include deposits, then the word currency becomes a generic term, and includes various species of currency, as a coin-currency, a note-currency, and a deposit-currency. But this alteration in the meaning of the word would not make any alteration in the question, whether the deposits performed the same functions as bank notes? Mr Loyd says that deposits are not currency. "Money," says Mr Loyd, "is marked by certain distinguishing characteristics which deposits do not possess." The question is not, whether deposits and circulation are, in their own nature, in every respect alike, but whether they do not perform the same functions? Now it is undeniable that in some respects they uo. If two persons keep an account at the same bank, a debt due from one to the other may be discharged by a transfer in the banker's books. And when a number of bankers meet together and settle their accounts at the clearing-house, this amounts to nearly the same thing, as fiU' as regards their transactions with each other, as ifall these bankers formed only one bank, for the amount of bank notes with which they settle their balances must be small as compared with the total amount of the payments. But are we justified by this in considering the whole amount of deposits in the Bank of England as so much currency? We think not. .. Circulation," it has been said, ., are notes out of the Bank, and deposits are notes in the Bank, and, therefore, they are both currency." This is sheer mystification. A deposit is a loan. We do not deposit money in a bank in the same way as we would deposit a horse in a livery stable, with the expectation of receiving the same again when we call for it. A Bank deposit is a loan to the Bank, but as this loan is transferable, it ruay in this way perform some of the functions of money. But the extent to which this is done must be measured, not by the amount of the deposits, but by the amount of the transfers. 2nd. The next inquiry is, Whetller there is any differenc,

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between the Deposits ill the Bank of Englalld (lnd those in ollter Ba1lks, with regard to their etficiellcy ill performing thefu1Icliolls '!f Currency?-We think not. It seems to us that the deposits in all banks, whether issuing or non-issuing, are upon the snme level in this respect. Some of the witnesses contended that when deposits are made in a banker's own notes they nre then currency. but not otherwise. There appears to be 110 foundation for this distinction. Deposits, under whatever circumstances they may have originated, must all ha\'e the same characteristics and capabilities. The extent to which they perform the functions of currency depends upon the extent of the sums that are transferred from one class of depositors to another. Those deposits only are thus transferred which arc payable on demand. This class of deposits, therefore, can only be considered as currency, and that not to t.he extent they are capable of being employed, hut to which they are actually employed. One class of the deposits in the Bank of England consist of the Bank notes lodged by the London bankers in the evening and drawn out the following morning. These nre clearly circulation, and classing them with deposits at all is a mere matter of book keeping. Mr Horsley Palmer considered that nearly a third or a fourth of the deposits in the Bank might be regarded as circulation. 3rd. A third inquiry is, Whether the rise or fall of the Deposits is any criterion b,lJ which to judge of the increased or diminished issues of the Bank?-This is, in fact, the practical applicatlon of the doctrine respecting the identity of deposits and circulation. Those who accuse the Bank of England of excessive issue in the year 1835 contend that the deposits should be taken into account and regarded as money. On the other hand, the defenders Of the Bank of England say, look at the circulation-there is a positive diminution-and you have no right to look at the deposits. Now we contend that deposits are not money, though some portion of them may perform the functions of money. But, nevertheless, we feel constrained to admit that the deposits are a means of measuring the liberality of the Bank of England with regard to her issues. All the deposits must consist of gold or Bank notes. Now if we take any two periods, and find that at each of those periods the amount of the circulation and of the bullion are the same, but that the deposits have increased, it is an undeniable evidence that between those periods the Bank must have increased her issues. It is a mere subterfuge to say that deposits may arise from loans or from the discount of bills. Granting the loan

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01' the discount was, 011 the part of the Bank, an act of issue for notes to that amount. If the Bank grant loans or discount hills, the party may do what he pleases with the notes he thus obtains. If he lodge them on deposit, it is a voluntary act. ~n increase of deposits, cateris paribus, shows an increase of Issue. A diminution of deposits, catel'is parious, shows a diminution of issue. 4th. Another inguiry is, Whet Iter tile Balik of ElI u!a"d ouu/lt to make lise of Iter Deposits ?-We reply yes, provid~d the demand be made by the public; but the Bank ought not to anticipate the demand or to issue hel' notes merely because she ant!cipates or fears that the circulation may become too much contracted. It is not likely that deposits will ever be lodged to the extent of causing an undue contraction of the currency. But should this be the case, the increased value of money would immediately cause the deposits to be again withdrawn, or else would increase the demand for discounts. In the questions refening to the advances on the West India Loan it is presumed that the deposits were made in the first inst&nce, and that afterwards the Bank invested this money in securities. The facL is the reverse. The Bank issued her notes on securities in the first instance, and then these notes were lodged on deposits. Where the Bank made the payment on the loan the increase of securities and of deposits was of course simultaneous. It appeared that these advances were made chiefly on bills of exchange. Had the Bank 1I0t made her advances at a low rate of interest these bills would lui.ve been discounted. But no one would discount a bill at four per cent. if they could obtain a loan upon it until it became due at three and a half per cent. Had the Bank not made these advances at all, the increase of deposits by the earlier payments on the loan might have been re-Issued before the later payments became due, and thus all the payments might have been made without causing an undue contl'action of the cUJ'J'ency. 5th. A further inquiry is, What e.ffect the Deposits in tIle Bank of England have upon the prices of commodities ?-Mr Hume asked Mr Loyd, "Is it your opinion that it is the circulation alone that affects the prices of commodities and the rate of interest, and that the deposits have no influence whatever upon them 1" Mr Loyd replied, .. It is not my opinion that the circulation is the only thing that affects the prices of commodities and the rate of interest." This reply leaves that portion of the question which refers to the influence of deposits wholly unanswered. Subsequently, in reply to a question from the

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chairman, he states, " I conceive that f1 uctuations in the amount of the deposits will not necessarily produce corresponding fluctuations in the prices of articles." It may be observed that Mr Loyd does not say that fluctuations in deposits will not produce fluctuations In prices, nor that they wi\1 not produce corresponding fluctuations in prices, but that they do not necessarily produce corresponding fluctuations. We leave our readers to conjecture what are Mr Loyd's opinions on the subject. It seems to us quite obvious that when the deposits are increased by the overflowing of the circulation, those deposits must have a very considerable influence upon prices. We have stated that an increased circulation affects prices by occasioning an increased demand. Now if a party lodges his notes in the Bank on deposit, with a view of employing them as soon as he can find a profitable investment, they will clearly have the same effect upon prices as though he retained them in his own possession. The extent to which prices may thus be effected will depend upon the amount which the depositors have the power and the inclination to employ in the purchase of commodities, and also upon the exertions they may make to obtain suitable investments. To illustrate these propositions, let it be supposed that a man sells 1,000/. stock, and receives for it a 1,0001. Bank of England note; this gives him a power of rurcha~e to the extent of 1,000/. He may buy cotton or tea, or American bonds, or anything he likes, to the extent of 1,000/. If he is anxious to layout his 1,0001., and goes about in•. quiring the prices of these commodities, and making biddings for them, that will tend to advance the prices of these things, even though he makes no purchase. The more biddings for an article at an auction, the higher the price will advance, though there can be but one purchaser. But if he is not anxious to spend his 1,000/., and makes no effort to do so, he will not advance prices; and this will be equally the case, whether he keep the I,OOOl. in his pocket or lodge it in the Bank of England; but, in the former case, it will be called "circulation:' and in the latter case, it will be called" deposits." When he has made a purchase, of course he draws out his "deposit" (if he had lodged it in the Bank), and then his 1,000l. again becomes" circulation." But suppose that, instead of lodging it in the Bank of England, he lodged his 1,0001. with a private banker; in this case, as in the former, he would retain the power of purchase to the extent of 1,0001., and the 1,000l. note would, in the

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returns of the Bank of England, be called .e circulation." But the banker would not lock up the 1,0001. in his till. He would keep, perhaps, 2001. in his till, and invest the remaining 8001. in discounting bills, or in some other securitiei>. Here we immediately see a difference. When he lodged his 1,0001. in the Bank of England, it increased the deposits to that extent, and he had a power of purchase to the amount of 1,000l.; when he took it from the Bank of England, and lodged it in a private bank, he still retained the same power of purchase; but, in addition to this power, 800l. of the money went into active circulation as currency, and 2001. remained as dead circulation in the banker's till. But the Bank of England may employ these deposits as well as the private banker, and will not be under the necessity of keeping any reserve in her till, as she can payoff the deposit in her own notes. In this case, the depositor will have the power of purchase to the extent of 1,0001., and the Bank will have increased her circulation as well as her deposits by 1,000/. Again, suppose the circulation is at its proper amount, and the Dank should purchase a million of Exchequer bills, the notes thus put in circulation not finding immediate employment, might be returned to the Bank, and be lodged on deposit. Here there woultl be no increase in the circulation, but an increase of a million in the deposits. A power of purchase, to the extent of a million sterling, would have been created by the Bank, and the efforts of the depositors to make the most advunta~eous investments would have the effect of advancing the prices of commodities and of stimulating a spirit of speculation ; and should the Bank consider this increase in the deposits a sufficient reason for adding another million to the circulation, this additional million might also come back and be added to the deposits; thus a power of purchase to the extent of two millions would be created, and a spirit of speculation would be still further promoted, without any addition ill the monthly returns to the amount of the circulation.

V. Ought Bills of Exelwuge to be regarded as Cun'eney? With regard to bills of exchange, we hold the same opinion as with regard to deposits; we think they perform the functions of currency to the extent of the actual transfers. The one case is the transfer of a loan-the other is the transfer of a debt, and either one 01' the other may be employed to make a purchase. or discharge an obligation. It is sllrprising to us that any gentleman connected with Manchester can express any

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doubt as to the power of hills of exchange to disch~rge the functions of cUl'rency. Only a few years ago, about ninetenths of the transactions at Manchester were settled by bills of exchange. It was stated by Mr Lewis Loyd, in 1826, that the circulating medium of Manchester consisted of nine-tenths bills of exchange, and one-tenth Bank notes and gold; at present the circulation of the Manchester branch of the Bank of England is above 1,500,000l. As the bills of exchange have diminished, the Bank notes have increased. We shall, perhaps, be told that it bill of exchange is not a Bank note. We know that; but it is notorious to every merchant and tradesman in the kingdom that a bill of exchange often performs the same functions as a Bank note, and at the clearing house every day a large amount of bills arc discharged by being exchanged against othet' bills, Mr Attwood seemed desirous to show that bills of exchange bave a very extensive influence upon prices. We doubt the soundness of this sentiment. Legitimate bills do not precede but follow the transactions on which they arc based, and have no more effect on prices than the notes issued by the country banks; but kites, Ot' accommodation bills, drawn for the purpose of raising capital, have the same effect upon prices as an Issue of notes by the Bank of England for the purchase of stock or bullion; they increase the demand for those commodities in the purchase of which this capital is employed, and hence raise the price; these accommodation bills are most numerous when money is abundant, as they can then be most readily discounted, and there is then afloat a greater spirit of speculation. Mr Leatham has attempted to calculate the amount of bills in circulation, or more properly speaking, in existence, during each year. He, through I.ord Morpeth, obtained a return of the number of stamps issued from 1835 to 1839 inclusive, and based his calculations on the supposition that each bill was circulated for half the amount which the stamps would cover, which was considerably under the amount. From the experience of his own bank, compared with that of the principal discount offices in London, he found, that the average date of bills, including foreign and inland, was three months. He then took the whole stamps for a year, and divided them by four, which gave the amount circulating at one time. By a similar induction, he estimat~d foreign bills at one-sixth of the English, though the pro}>ortlon was rather greater; and he took the same average for bish bills in the years where no official returns had been made.

The following is his Statement of the Bill circulation of Great Britain and Ireland, during the years under-mentioned : 1815.

-

Bill Stamjs for Great Britain, creating the sum Estimate Irish Bills _ _ _ _ _ Foreign Bills - - - -

-

-

-

Total

-

-

Average amount in circulation at one time

-

I

1824.

I

1825.

1826-7.

-

£.

£.

£.

232,429,800 38,738,300 45,194,683

£.

477,493,100 79,582,183 92,845,880

260,379,400 43,396,566 50,629,327

207,347,400 34,557,833 40,317,072

649,921,163

316,362,783

354,405,293

282,222,305

-

162,480,290

79,090,695

88,601,323

70,555,576

----

~

Z

~

~

;;

The following is a similar return for the last five years:

~

1835.

--

British Bills - - - - - Irish Bills - - - - Estimated amount of Foreign Bills _ _ Bills created by Bankers compounding for Stamps

-

Total

-

-

Average amount in circulation at one time

-

-

I

1836.

1837.

1838.

£.

£.

£.

£.

355,288,900 59,155,607 69,420,406 2,078,560

333,268,600 54,179,165 6/5,012,080 2,624,600

341,947,400 54,359,464 66,500,577 2,696,600

394,203,000 55,615,722 75,479,120 3,196,000

405,403,051

485,943,473

455,084,445

465,504,041

528,493,842

101,350,7621121,485,868

113,771,111

116,376,010

132,123,460

£.

~

~.

.......

1839.

294,775,269 51,109,061 57,914,721 1,604,000

~

b:!

>

.... o

C•.-,

~

'-l

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This table, even if correct, which we very much doubt, gives us bllt little informatiol\ as to the extent to which these hills A large portion of them, perform the functions of currency. probably, are drawn hy tradesmen on their customers, and discounted with a bankel', in whose hands they remain till they become due. Here there is only one transfer. Few bills in the present day have more than three or four indorsements. Ml' Lewis Loyd stated, in 1826, that he had seen bills with 120 indorsements. We qUt'stion if such a bill could now be found, even in Manchester. The extent tQ which bills of exchange perform the functions of currency depends not merely upon the amount of the bills in existence, but also upon the number of times they are transferred.'*' We now proceed to the second part of our subject: to in£) uire. What plans Itave been proposed for tlte administration of tlte currency?

I. In the first place we must notice that of Mr Horllley Palmer. I t is thus described by himself:" The principle, with reference to t.he period of a full cUl'rency, and consequently par of exchange, by which the Bank has been guided in the regulation of its issues, always exccptin~ special circumstances, has been to retain an investment in securitIes, bearing interest, to the extent of two-thirds of their liabilities, the remaining one-third being held in bullion and coin; the reduction of the circulation, so far as may be dependent upon the Dank, being' subsequently solely affected by the foreign exchange!:! or by internal extra demand. Mr Horsley Palmer's plan seems to us to be liable to several objections. First, It is founded on the principle that the amonnt of money in a country ought to be increased or diminished according as the foreign exchanges happen to be favourable or unravourable. Thus, all the gold and silver imported is to have the same effect as though it were instantaneously converted into coin and circulated throughout the country. Against these importations of bullion the Bank of England is to issue her notes, and th us for awhile we are to have all the prar.tical evils that would result fl"Ol1l an inconvertible paper currency. The prices of commodities will risespeculations will abound- foreign investments take placeand the exchanges become unfavourable again when gold is required for exportation-t.he coffers of the Bank of England are exhau~ted, and convulsion ensues. This plan. therefore. most effectually ensures a frequent recurrence of pressures and • See Mr Tooke's evidence, No. 3278-3280.

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panics. We may find SOlUe proof of this in the fact, that we have had two panics of no short duration within the eight years that have elapsed since the plan was first announced. Secondly, Supposing the plan were good in principle, the stock of gold is very inadequate. It requires, that at the time of t\ full currency, that is, when the exchanges have been for a 10llg time favourable, and are just ahout to turn, the Bank shall have treasure to the extent of one-third of her liabilities. This is the largest amount she is expected to hold, and to this amount she is expected to attain only after treasure has been flowing into her coffers for a period so long as to be about to cease. Of the total inadequacy of' such an amount to meet the drain that is sure to take place on the return of the tide, we have had abundant proof. MI' Palmer himself seems to acknowledge that the amount of gold is too small, though he modestly intimates, that if the Bank should keep a larger amount of treasure, it ought to be at the expense of other parties. Severa) of the witnesses accused the Bank of having departed from the rule laid down in 1832; but Mr Palmer contends that the rule has been observed, "taking into account the extraordinary circulUstances that have intervened." Indeed, as Mr Palmer, in laying down the rule, introduced the clause, " always excepting special circumstances," and as the Bank herself is the judge of those special circumstances, it would be difficult to convict her of any violation of the rule. The conduct of the Bank, however, in regard to the East India deposits, the West India Loan, and the sending of gold to America, are acknowledged to be departures from the rule, and seem to be impelled by no necessity, and wholly unwarranted by any consideration connected with the public good. 1st. Ea,~t iitdia LOlllI.-The East India Company had a 1llr~e sum of money as a depollit in the Bank of England. ThlH money the Company was about to withdraw, and lend· in the London money market. To prevent this, the Bank of England engaged to allow two per cent. on the deposit, and then lent the money to the bill-brokers at three per cent. The Bank Directors contend that this was a proper transaction, for, had they not increased the circulation by this amount, the East India Company would have done so. This, however, is no justification. If the East India Company, by withdrawing tile deposit, had unduly increased the circulation, and redueed the market rate of interest, it would have been the duty of the Bank Directors to have counteracted this operation. But so far from doing this, they themselves, for the sake of one per cent. profit, became the agents for this undne expansion

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of the cil'culation, although it was contrary to their rules of business, and in violation of the principles by which they professed to be governed," 2nd. The West India Loan.-The conduct of the Dllnk with regard to the 'Vest India Loan is alleged to be one cause of the crisis of 1836-7. This was a loan of' fifteen millions, raised for the purpooe of indemnifying the holdel's of slaves in the West Indies. We think that under any circumstances, the taking of fifteen millions from the accustomed channels of circulation, and distributing it in masses to persons who would naturally seek other modes of investment, would have a tendency to produce a speculative feeling in the public mind, and to raise 'the prices of shares in joint-stock and othel' companies. So far, therefore, as this feeling arose fr0111 the circumstances of the loan, no blame is chargeable on the Bank of' England; but the charge against the Bank is, that, instead of repressing, she assisted this speculative feeling, by makin{?: advances: not ~nly upon a ~eposit of the scrip, but upon stock and all other kmds of secul'ltlCs, and that these advances were made at unusual times, continued for a long period, and at a reduced rate of interest. That the Bank did mal,e advances of this kind, and was opened to applications for further advanceR, are facts that cannot be questioned. The only question is, as to the effect which they produced; and when we find that a rage for speculation seized the public mind immediately after these liberal advanceR, we seem justified in supposing that this spirit of speculation \Vas the effect of these liberal advances. 'Ve think it no refutation of this charge to say that the circulation of notes was not increased, for in the first place the notes that were advanced were· returned immediately in payments on the loans, and hence they became public deposits. And, secondly, the fact that the Bank was open to application for advances, would of itself have the effect of sti mutating speculation. Every person who held stock, Exchequer bills, &c. knew that he could get advances from the Bank of England whenever he required them. Hence he llli~ht take shares in new companies, or engage in new undertakings with confidence. The money required for these pl'ojects, in the first instance, is always small, as' the capital is paid up by instalments, and hence no great advances were required from the Dank. The spirit of' speculation, when once excited, is always contagious, and ultimately becomes uncontl'ollable. The causes to which the panic of 1836-7 ha.ve been ascribed • See Ml' Page's Evidence, No. 916-919.

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by the advocates of the Bank of England, were themselves, as we cOJlceive, the effects of those facilities of obtaining money which thc Balik harl afforded. It has been ascribed to the investments in forcign loans; but if money had not been rendered EO plelltifu I, would those investments have taken place? It has been ascribed to the credits granted by the American llOlIsesj but was it not the abundance of money that gave the American bills so much currency among the bankers and London hill-brokers? It has been ascribed to the formation of new joint-stock banks. But the joint-stock banks were themselves an effect (and, as we think, a beneficial effect) of the spirit of speculation which then prevailed. As a proof of this, the drain for gold commenced in April, 1836, at which period only two of' the new joint-stock banks of issue had come into operat ion.· 3rd. The sendillg of goM to America.-The next departure from 1\11' Palmer's principle was the sending of a million of gold to ,\merica in t.he year 1838. This is confessedly a departure from the principle which permitted the public to act upon the gold. But like all other departures from principle, it is said to be justified by the peculiar circumstances of the case. America wanted gold, and we had an abundance; and while we were sending gold to America we were receiving it from France, so, according to Mr Norman, OUl' stock was not diminished. But mark the effect on our circulation. For the million of gold we sent to America we had previously issued a million of Bank notes. Hence was an increase to our circulation. Having sent this gold to America, the Bank replaced it by taking another million frol11 France, for which anothel" million of BUlIk notes was issued, and thus the circulation was still further increased. For the million exported to America the Bank would receive bills, falling due at probably about four months from the time the gold was exported. During this interval the increased circulation was operating most injuriously by stimulating to foreign investments, and thus laying the foundation for the pressure of 1839. In the year 1835 the Bank of E\1gland made money cheap, in opposition to the plan of Mr Horsley Palme.". The Bank Directors, therefore, and not M r Palmer's plan, must be considered responsible for the pressure that occurred in 1836. But in 1837 and 1838 money was made cheap, in conformity with the plan; and by the end of the latter year the stock of gold was about the third of the liabilities. In this case the • See Mr Page's evidence, No. 929-943.

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plan was acted npon, and the consequence was, that it produced the pressure of 1839. In both these cases the cause of the evil was cheap money. The only facts adduced in favour of Mr Palmer's system are taken from t.he history of the currency from 1830 to 1832. Mr Loyd has adduced the same facts in support of his own system. It is curious that these facts should be adduced to prove the truth of two contradictory systems. And it is still more singular, that the facts themselves should be matter of dispute. The evidence of Mr Tooke has taken from both Mr Palmer and Mr Loyd-every advantage they may claim from this period in behalf of' their respective systems.

I I. 1'he plan of making the amount qf the circulation fluctuate in exact correspondellce wittt tlte amount of gold in tlte Balik qf England. This rule does not differ from Mr Palmer's in regard to the expansion of the circulation, but only in regard to the contraction. Mr Palmer's rule allows the g'old to diminish as the liabilities of the Bank, including notes and deposits together, shall diminish-but this rule requires that the diminution of gold shall be in exact proportion to the circulation alone. This rule was first announced to the public by Colonel Torrens, in his letter to Lord Melbourne, published in the early part of 1837, but its more prominent advocate recently has been M1' Loyd. The advocates of this system say it is better than that of Mr Horsley Palmer'lS. This, if correct, is not much in its favour. It has this evil, in common with Mr Palmer's, that it not only admits, but insllres on expansion of the currency to any extent that gold may be imported. Mr Loyd contends that a contraction of the currency, immediately on the commencement of a drain, would check the drain, and consequently the contraction would not be so severe as if it .were longer delayed. No one has ever denied that a contractlOn of the currenoy has a tendency to check an un· favourable course of exchange; but a contraction of the currency is always an evil, and upon this system it would become an evil that must periodically and necessarily occur. The currency ought to be so regulated as to prevent a drain. The causes of a drain may arise either from a depreciation of the currency, that is to say, from a general rise in the prices of commodities, arising from an excessive issue of' money, or from an unfavourable balance of trade. The latter cause cannot at all times be guarded against, but the former may. The plan now proposed, however, so far from guarding against this evil,

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ensures its frequent recurrence. Mr Loyd states, that the highest point of high prices and speculation is always subsequent to the highest point of the expansion of the currency. There is no doubt of that. In the order of time an effect. must always follow the cause. llut why permit this expansion 1 Had this expansion been prevented, consequent excitement would have been prevented. But this system, by making the circulation expand or contract, as the gold may ebb or flow, ensures an expansion of the currency every time the course of the exchange may cause a flowing in of gold. When a drain of gold a\'lses frolll an unfavourable balance of trade, without any depreciation of the currency, then the drain will stop when the balance is paid. In this case Colonel Torrens seems willing, for awhile, " to suspend his obedience to principle," but MI· Loyd is inexorable.'" This plan is thus open to the following objections: 1. Upon this plan there must be a perpetual increase and diminution in the stock of gold, consequently a perpetual increase [Iud diminution in the amount of the currency. The increase in the alllount of the currency would raise prices and stimulate speculation. The diminution in the amount of the currency would reduce prices and produce distress. And thus there must be a constant alteration from high prices to low prices-and again from low prices to high prices-from specuculation to distress-and from distress to speculation. We have stated that the objections against both Mr Palmer and Colonel Torrens's plan is, that, during a favourable course of exchange, the currency will be unduly expanded, and hence prices will advance, interest fall, and speculations abound. The committee do not appear to have directed their inquiries to this part of the subject; and even some of the questions put by the chairman seem to recognize the principle that the Bank is justified in extending her circulation when the exchange is favourable. We consider this pl·inciple to be the main cause of the recent panics; and even the advocates of the system seem to shirk the defence of this part of its operation. They appear anxious to discuss only the beneficial effects of a contraction of the circulation. And even on this part of the sYlltem they seem to shrink from a defence of its necessary effects. According to the quotation we have made from Mr Loyd's pamphlet, the whole of this system must fall to the ground, unless it be true that fluctuations in the currency have an effect upon prices, and yet in his evidence he hesitates .. See Mr Loyd's evidence, No. 2751-2752.

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to admit that a contraction of the currency will produce a fall prices. "2755. A contraction in the currency operates by checking the export of bullion, and encouraging the export of goods?-Yes, certamly. . . "2756. Then that which precedes this. state of thin~s is II. rcduction of prices ?-That is true, certainly, upon princIple; it is the necessary effect of the contraction of circulation in ultimately reducin~ prices that constitutes the certainty with which we rely upon the pI'mciple; but at the same time, practically speaking, I think it is very possible that that effect may be anticipated by a speculative action upon the exchanges; and I think it not at all improbable that you migllt have an effect produced upon the exchanges without a preceding effect upon prices." We should gather from this answer that the doctrine is true lIpon principle. but not true in fact. It must. however, either be true or not true. If it be not true, then, according to Mr Loyd, fluctuations in the currency can produce no effect 011 the foreign exchange. If the doctrine be true. then alternate expansions and contractions of the currency, muat produce alternate rise and fall of prices. We should like to see how Mr Loyd and Colonel Torrens would extricate themselves from the horns of this dilemma.· 2. But depression of prices and their attendant miseries may not be experienced only when the foreign exchanges are unfavourable. Excessive caution, an apprehension of war, or political feeling may cause a domestic demand for gold. and this would cause for a while a contractiop of the currency as severe as that which would arise from an unfavourable exchange, and as the Bank Directors would have no discretionary power. but would be required" to adhere to principle" by giving gold for notes or notes for gold. they could do nothing to assuage these calamities. According to Mr Loyd, a drain, from whatever cause it may arise, must be met by a contraction of the currency. Mr Palmer, in laying down his rule, put in a saving clause-It except under special circumstances," but Mr Loyd makes no exceptions. . 3. To carry this system into operation, would require a separation of the issuing department from the other der.artments of the business of the Bank, and this would cause stIlt further inconveniences. The management of the issuing department would be exceedingly simple. The office of the directors would be a complete sinecure, and for any thing they would have to III

• See Mr Gilbart's ' Inquiry,' page ]9-22,

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do, their places might be as well supplied by four-and-twenty broomsticks. A few cashiers to exchange gold for notes, or lIotes for gold, would be all the establishment required j and, could M I' Babbage be induced to construct a " self-acting" machine to perform these operations, the whole business of the cnrrency department might be carried on without human agency. But the deposit department would req uire more attention. "It is in the nature of banking business," says M I' Loyd, " that the amount of its deposits should vary with a variety of circumstances, and as the amount of deposits varies, the amount of that in which those deposits are invested (viz. the securities) must vary also. It is therefore quite absurd to talk of the Bank, in its character of a bunking concern, keeping the amount of its securities invariable." As, therefore, the deposits might vary, the Bank would be a buyer or a seller of government securities, and as these variations are sometimes to a very large amount, th~ fluctuations in the price of the public funds and of Exchequer Bills would be very considerable. Thus the property of those who held these securities would be always changing. Ap;ain, the deposits would be withdrawn chiefly ill seasons of pressure, and the Bank would then be compelled to sell her securities. But suppose the scarcity of money should be so great that the securities would be unsaleable even at a reduced price, how then could the Bank payoff her deposits 1* Supposing, however. this functional separation to be established, what security we ask is there for its continuance? 'Vonld it not, like Mr Horsley Palmer's system, be considel'ed very beautiful until it should be tried, and then be immed iately abandoned? Should the directors of the deposit department be unable to sell their securities, and consequently unable to payoff thei'r deposits, is it likely that the directors of the currency departmellt would let the deposit department stop payment, and thus bring immediately a universal panic, and consequentlya domf'stic demand for gold upon themselves 1 4.• If the currency were administered upon this principle, the Bank would be unable to grant assistance to the commercial and manufacturing classes in seasons of calamity. Mr Loyd exclaims, " Let not the borrowers of money, government, and COlllmerce, approach, with theil' dangerous and seductive influences, the creatol' of money." nut with all deference to Mr Loyd, we contend that it is the province of a bank to afford assistance to trade and commerce in seasons of pressure. Mr Loyd, as a. practical bankel', would no doubt afford assistance • Sec the evidellce of 1\11' Tooke, No, :1813. VOl .. XXXV. No, I,

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to his own customers in such seasons; and if this be the province and duty of a private banker, the duty is more imperative on a public banking company, and more imperative still on a bank, invested by the Legislature with peculiar privileges for the public good. Mr Loyd says, ., Let the Bank afford this assistance out of her own funds." But under Mr Loyd's system, she could grant assistance only by selling securities; and what relief would she aHord by selling securities with one hand, and lending out .the money with the other? Besides, is it certain that, under such a pressure as Mr Loyd's system must occasionally produce, these securities would be saleable at even any price? "But," says Ml' Loyd, "individuals may afford this assistance." In seasons of pressure few individuals have more ample funds than what are necessary for the supply of their own wants. The case. of the loan of MOO,OOOI. to the bank of the United States last year proves nothing. The parties had discounted bills which could not be paid when due, and they had the choice of holding these unpaid biIls or of taking bonds with additional security and a higher tate of interest for the amonnt. But this was no proof of the abundance of capital, nor of the capability of individuals to support public credit in all cases, without the assistance of the Bank of England. When the distress is caused by a contraction of the currency, it can only be removed by an increased issue of notet!. And there are many cast's, such for instance as that of the Northern and Central Bank, in which assistance can only be effectually rendered in this manner. We Were sorry to observe that some members of the committee uttered, and the witnesses admitted, the sentiment, that under any circumstances, the Bank was bound to take care of herself, and to secure the convertibility of her notes, whatever distress it might produce in the country. We are no advocates for an inconvertible paper currency, but we can easily conceive national calamities much greater than a suspension of cash payments On the part of the Bank. And we must deliberately condemn the principle, that when the Bank has brought herself into difficulties by her own mismanagement she has a right to extricate herself by ruining the country. We consider that any system of administering the currency, which prohIbits the banking institutions of the country from granting relief to the commercial and manufacturing classes, must be unsound. We should condemn such 8. system at once, even if we could not detect the fallacies on which it W8S founded. In political economy we can judge of principles only by their practical effects-and any system which produces

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these effects lllllst be unsound. When seasons of c!llamity occur, it is not for the national bank to exclaim sauve qui peut. They ought to co-operate with the Government in attempting to relieve the distress and to preserve the tranquillity of the country. Ill. The next plan is that of Mr Loyd. This is an addition to that of Colonel Torrens; the lutter plan merely requires that the Bank of England shall make her circulation correspond with her stock of gold. and presumes that this contraction on the part of the Bank of England will cause a similar contractioll on the part of the country banks. But Mr Loyd's plan is the abolition of all the country issues, and the establishment of one bank of issue. not only ill England. but also in Scotland and Ireland. We have called this plan .vIr Loyd's; but it was first announced to the public by Mr Norman, in a pamphlet he published in the beginning of 1~38; but the proposition attracted little notice until it was adopted and advocated by Mr Loyd. This plan is of course liable to all the objections that may be advanced rlgainst the plan of Colonel Torrens, and also to additional objections, from the greater extension of its field of operation, and from its interference with existing institutions. 1. Although the whole tenor of i\h Loyd's pamphlet is in favour of one bank of issue. yet in his examination he seems to avoid the question: indeed, we may observe in general that Ml' Loyd is by no means l'emarkable for giving direct answel'S to the questions put by the committee. "29'28. YOII\, principles would lead to the establishment of a single issuing body if you thought the country prepared for it; is that the view that the Committee are to understand you to entel·tain? -In endeavo\ll'illg to come to a clear understanding of a difficult and compJicalcn sllhject, I upprellelltl that the true course always is, fir!;t, c1eal'Iy to lIIulcl'stauu and asccrtain what it is that principle in its pure alld austl'uct form I'equil'es; secondly, haviug formed a distinct view upon that point, then to consider what qualifications a regard to eXisting illtel'ests, or to other considCl'utions of expediency, may require; awl thirdly, to consider how fal' the principle 011 thp. one haud, and the considerations of expediency on the other hand, can be reconciled with each otller; 01' if they cannot be altogether reconciled, what tolel'ably satisfactory compromise can be proposed."

We differ entirely fro111 Mr Loyd as to the mode of conducting this investigation. Political Economy has no abstract principles. It is not a mathematical but a moral science. All its doctrines are deductions from f~\Cts, and the only evidence by which they can be supported is derived f!'Om observation. experiencel and analogy. To assume a priQri the existence of

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an abstract, self-evident principle, and then to )'equire all the lll'actical measures to conform to this principle, is to adopt a course of investigation wholly at variance with the nature of the science. Aud here we may remark; that some of the members of the Committee seem to have entertained no very COHeet ideas of the nature of the evidence adapted to the investigation in which they were engaged, and hence the cross-examination of some of the witnesses parl.ook more of a legal than of a philosophic charactel'. '1'0 prove that two historical events sustain the relation of cause and effect, all that can be done is to show that the two events occlII'red ·in due order of time, and that there was a natural adaptation in the one to.produce the other. 'Chus if the Bank of England be charged with pl'oducin~ the panic of 1836, it will be necessary to prove, first, that the bank granted unusual facilities to the borrowers of money in 1835; second, that n. pressure occurred in 1836; third, that there was a natural adaptation in the facilities granted by the bunk in ] 835 to produce such a pressure as that which occllrred ill 1836, I f these thl'ee points are established, the charge must be considered as proved. Should an honourable member be unconvinced by this evidence he IHllst remain Ilncollvinced, for the case admits of no highel' pl'oof. 2. Mr Loyd states that he is not prepared to propound any plan for carrying his own principles into effect. He stated this several times in the course of his examination, and Mr Norman made statements to the same efIect.."" Thus we find that 1\'h Loyd and IVh Norman gi\'c to their own theories the name of .. principles," and assume that these principles al'e unquestionably" sound;" and that all other opiuions are to be condemned or approved according to the degree in which they conform to these "sound pl'iuciples." But when askE'd to show how these sound principles can be applied so as to pl'oduce any practical good, they tell us that they have never considered the subject, and that they have no plan to propose. Were n. mechanical philosopher to advise us to destroy all the steam engines througllout the country, nnd to erect a " self-acting" machme in the centre of London fOl' the }Hll'pOSe of performing in a bettel' llIanllel' all those scrvices which are llOW effecting by a valiety of machines, he would be expected to show how such a machine could be constructcd; how its power could be extended throllO'hout the country, and under what regulations its operations ~ould be applied to the • See Mr Norman's evidence, No, 2002·2008,

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variolls districts so as to perform the work of the numel'OllS local engines: and if he were to reply, that he had paid no attention to these points, and had no plan to propose, he would excite but little disposition to destl'OY the existing machinery, however eloquently he might descant upon th-e soundness of his principles. 3. In order to pl'ove the propriety of establishing one bank of !ssue, it became necessary to bring chargcs against the existmg country banks. l\h Loyd, therefore, accuses the country hanks of not regulating their issues 80 as to make theil' circulation correspond with the stock of gold in the Bank of England. The rule thus laid down for their government is ably exposed in the 'Defence of Joint Stock Banks and Country Issues.' " 1. It is deficient in fulncsf! and }H'eCISlou, leaving ns at Il. 103s to tell the exact law of variatIOn intended; whethel' the country issues are to be increased and diminished by the same amonnt as the bullion in the Bank of England, 01' in some othel' ratio not indicated, 2, 'l'he rule is impracticable from the time at wllich the diI'ective information reaches the parties rcquired to act upon it, as wcll as fl'om the vagueness of the statements fUI'nished. 3. If it were observed both by the Bank of England and the country banks, the consequence would pe a double cffect in palpable violation of the very principle on which it is professedly founded. 4. If it had been acted upon during the past yeal' it would have subjected the eountJ'y issues to aU the vicissitudes of the bullion in the Bank of England, which in about ten monthil ranged fJ'om 9,336,OOOl. to 2,522,0001." Mr Loyd states, that olle evil of the principle of competition is, that when one bankCl' contracts his circulation, the neighbouring bankers increase theil' issue, in ol'der to fill up the vacuum which is thus Cl'catcll. If this were the fact, it is difficult to conceive how the total cil'culation of the country could evel' be reduced. Uut, nevertheless the fact is, that the total circulation docs Val'Y, not only from year to year, but fi'om month to month. The chal'ge of excessive competition has been more directly brought against the joint stock banks. If, thel'efore, the private bankers reduced theil' circulation, the joint slock banks would, of course, seize the opportunity of extending theirs. Now, how stands the fact? The avel'Uge circulation of the private bankers in March, 1839, was 7,340,7931., and, bv March, 1842, it was reduced to 6,190,3061. Now, upon Mr Loyd's pl'inciple, a large increase should have taken place in the issues of the joint stock banks; and had we not the returns of the actual amount, we cO\lld not disprove

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Mr Loyd's opinion; but, on refening to these returns, we find that the joint stock circulation in March, ] 839, wae 4,617,ti061., and in March, ] 840, it was 3,89&,748/. So far from an increase, here is a reduction, and that, too, in nearly the same pl'oportion as that of the private bankers. 4. The principal obstacles to the establishment of one bank of issue are thus enumerated by Mr Gilbart. : " We think the country banks of issue will bavc no difficulty in showing that numerous issuel's are a check upon each other by the system of exchanges, which cannot apply to a single issuer-that, were there a single issuel', there woulll bc 110 greatel' security against undue fluctuations in the amount of currency than in thc case of numerous issuers-that a currency conducted on the principle of being regulated by the foreign cxchanges is wholly unsuitable to om' agricultural, manufacturing, and mining operations-that a currency administered by one bank of issue could not be distributed a!l at present, in a manner adapted to the local circumstances and districts of the country-that the assistance no\v ~iven to trade and industry by countJ'y bankers would be much curtailed 01' attended with heavier charges to the parties, operating as a tax upon the middle classes of the community-and that in some district" bank", 01' branches of banks, would be discontinued from inability to pay their expenscs in case they had no longel' the profit upon the issue of notes, and 11lOse districts would thus be deprived of all banking accommodation. It may also bc maintained that a sole bank of issuc wou1