The Bank Charter Act
Jonathan Duncan
CHAPTER VII.
Lord Overstone on the Defects of the Bank of England. Character of Imperial or National Money. Its Limitation and periodical redemption, rendering depreciation impossible. The Guernsey Market. American Independence due to paper Money. The power of Napoleon broken by paper Money. Prussia reinvigorated by paper Money, by Frederick the Great. Scotland enriched by paper Money. Commercial Money and Security Banks. Opinions of the first Sir Robert Peel. View of Mr. John Taylor on “Prices.” Gold at its market Price. Evidence of Mr. W. Brown, M.P., before the Lords Committee on the rate of discount. The late Sir Robert Peel’s defence of Usury. Answered by Mr. James Taylor. Arbitrary Limitation of Legal Tender. Opinion of Sir Josiah Child on interest of Money. The inverted pyramid of Gold. Error of Mr. James Hill. View of David Home. How markets are created and sustained. Mr. Cayley and the Governor of the Bank. The Fall of Rome. Sismondi. Michelet. Gibbon. Summary of Monetary Principles.
CERTAIN passages have been cited from the writings of Mr. Jones Loyd, on which adverse comments have been pronounced; but he has expressed other opinions which are sound and worthy of encomium. He uses the following language in reference to the incompatible functions which the Bank of England are required to discharge :—
“ The union of banking functions with those of issue; the obligation imposed on the manager of the circulation to supply the uncertain and fluctuating demands of Government on account of the public service; the existence of rival and competing (though subordinate) issuers, not directly subjected to the obligation of regulating their issues with reference to the state of the foreign exchanges; the application of the rule which the Bank has laid down for its guidance to the joint liabilities (deposits as well as circulation) instead of applying it to the circulation only; the too intimate connection of the manager of the circulation with commercial affairs, and the implied duty which arises out of its supporting public and private credit: to whatever extent in these respects our present system deviates from that which sound views would dictate, the blame cannot with any justice be exclusively thrown upon the Bank. They are the remaining traces of a false system which was established when questions of currency were less understood than they now are.* * * * * How is it possible that the proper relations between the paper issues and the bullion can be properly maintained whilst the Bank is liable to be compelled to issue on her deposit accounts, upon the discount of commercial bills, and for the supply of the public wants of Government? The consequence of uniting these, which are strictly banking operations, with a power of regulating the amount of the currency, which is a duty of a very different character, must be embarrassment to the party in whom these conflicting functions are united, and ultimately an abuse of all the power which is entrusted to her. * * * The connection of the Bank with commerce is the leading cause of its mismanagement of the circulation; and yet you complain that the Bank is unable to extend and complicate its relations in that respect. The manager of the circulation ought to have no connection with trade and commerce. If they are allowed to approach her, they are sure to undermine her principles, to seduce her from the path of duty, and to destroy her character.”[2]
Putting out of view the recommendation that the issues of notes should be regulated by the foreign exchanges, the incompatible functions of the manager of the circulation are strongly shown; it is most true that a national bank of issue should have nothing to do with trade and commerce, or discounts, or profits; it should stand aloof from all such operations, and be utterly independent of home transactions or foreign exchanges. A national bank should take for its motto,
—Fungar vice cotis que reddit acutum Exsors ipsa secandi.
It should resemble the whetstone, which sharpens, itself incapable of cutting.
On this branch of the subject we must quote one more passage from Mr. Loyd :
“ The profit to be derived from a paper circulation legitimately belongs to the government; and a permanent advance to it of a fixed sum, as representing that portion of the taxation which is beyond the reach of fluctuation, is an arrangement to which no valid objection can be urged.”[3]
Here it is difficult to understand what the writer really means. Who is to advance this paper circulation to the government? Who is to decide what amount is beyond the reach of fluctuation? Is the advanced paper to be based on gold, and convertible into the metal? And if convertible, is it to be at the mint or market price? And how are the profits to be indicated, and whence derived? These queries obviously suggest themselves, but Mr. Loyd does not even hint at any grounds on which an answer can be framed. He seems, however, to have some vague notion that the crown is entitled to some kind of equivalent for the prerogative it has surrendered to the Bank of England. This is a great concession for so confirmed a bullionist, but it seems rather to have escaped from him, than to be based on any broad principle. Having ourselves raised various objections to the system now enforced, it becomes us to propound a plan, and, having done so, to anticipate the more popular criticisms by which it may be assailed.
Character of Imperial or National Money.
National or imperial money, as the name imports, is that form of legal tender which derives all its conventional value from the authority of the state which calls it into existence. It is the monetary servant of the community, not its master. Its special function is to circulate at home, and it should be deprived of all power of travelling abroad. Being essentially a credit instrument, it need not possess any intrinsic value. To secure it against depreciation, provision should be made for its periodical redemption. Its proper limit is the amount of annual taxation voted by parliament. The method by which this legal tender would be brought into circulation is the following :— The crown would pay all its creditors with this money—as the army and navy, official salaries, pensions, the dividends of the fund-holders, and indeed every outlay which it incurred. As it would be legal tender from man to man, every recipient of it would be enabled to purchase with it what he desired to possess; it would discharge all fiscal duties, as customs and excise, and every description of tax. When paid back to the crown in liquidation of taxes, the notes would be cancelled, which would prevent the issues being cumulative from year to year; and they would be so received back at the same conventional value at which they were originally issued. A single case will illustrate the operation. Let the admiralty advertise for a supply of beef and pork, to be furnished to the victualling department of one of the royal dock-yards. Let it be assumed that the contract is taken for £100,000. The treasury gives that sum in national notes to the contractor, who lodges them with his banker. This being done, let a distiller go to the same banker, wanting his bill discounted for £100,000; the banker hands to him the £100,000 paid in by the victualling contractor, and with it the distiller discharges his duties to the excise. The notes are then forwarded to the treasury, where they are cancelled. Thus the government would get all that it wanted—provisions in the dockyard—first, by advancing national money to the contractor, and then receiving that money back in the form of taxes from the distiller. This would be effected without the intervention of a single ounce of gold, which would not be required. All other transactions would partake of a similar character. Soldiers and sailors would pay the butcher and baker with these national notes, and with them they would pay the tax gatherer. They would, in fact, pass from hand to hand as freely as sovereigns now pass, and for every purpose of buying and selling as sovereigns now pass, finally to be absorbed by the collectors of taxes. The security on which national money would be based, would be the whole property of the kingdom which called it into existence and put it into circulation.
Against such a system it is frequently but unreflectingly urged, that taxation might be indefinitely expanded through the facilities afforded by national paper money. Were this a valid objection, it could not apply to the monetary instrument, with whatever force it might be brought to bear against the construction of Parliament, for the amount of notes would be exactly proportioned to the amount of taxation voted by Parliament. An unskilful or unprincipled engine-driver might run a railway train down an embankment or over a bridge: this would be proof of the incapacity or criminality of the driver, but it would be no argument against the usefulness of railway travelling. The remedy would not be a return to stage coaches, but the dismissal of an untrustworthy servant. In like manner a Ministry that violated its duty ought to be cashiered.
But the vague dread of excessive and indefinitely augmenting taxation is groundless. National money is designed to express taxation; and, by its use, the prices of all produce would necessarily rise as much above the barter price as the scale of taxation demanded; therefore the purchasing power of money would fall proportionably to the rise of taxes, so that if the richer classes, who sit in Parliament and make the laws, wantonly increased the taxes, they would, precisely in the ratio of such increase, diminish the effective power of their own incomes. This is a conclusive answer to the objection.
National paper money would not bear any interest. At present when the Government wants money it borrows it from the Bank of England. This is the process. Government deposits with the Bank exchequer bills bearing interest, receiving in exchange Bank notes, that is an inferior for a superior security; for the exchequer bill is guaranteed by the whole property of the country, while the Bank note has no other basis than the credit of the Bank corporation. Thus the nation pays interest to the members of a joint stock corporation, which only exists by the permission of the nation, and that interest is an addition to taxation. National paper money would be in the nature of a small exchequer note, issued directly by the Crown, without the intervention of the Bank.
It must be observed that under this system taxes raised within the year would be wholly discharged within the year; consequently there never could be any outstanding liabilities, or any addition to the national debt.
National money would have much of the character of the postage stamp, which has no intrinsic value, but only a conventional value. Both are national credit instruments. Many small debts, fractional parts of a pound, are now paid in postage stamps, which thus become a currency. Why are they taken? Not for their intrinsic value, because they possess none, but for their conventional value; and on what does their conventional value rest? On faith—on the conviction that the Queen’s Head placed on a letter will carry it all through the United Kingdom. The stamp indicates the tax we pay to the Post Office, and the national paper money indicates the general aggregate tax we pay annually to the government. We get possession of both by giving a portion of our time or labour for them. It is idle to say that we give a copper penny for a postage stamp; for the question returns how do we get the penny? and the only answer is, by our labour.
The Guernsey Market
National paper money is an economical instrument. Skilfully used, it works wonders. As an illustration, the case of a market, constructed in the island of Guernsey, may be cited. The material wealth of that small island is computed at four millions sterling. Instead of borrowing money at interest to build the edifice, the inhabitants issued notes of their own, founded on their own credit. This was done by the authority of their local parliament or States. The estimated cost of the market was £4,000 [4222l. 1s. 9d., to be exact], and four thousand one pound notes were issued. These were paid to the contractor as the works proceeded; with these he paid the wages of those he employed; they in turn gave them to the shopkeepers for goods, the shopkeepers gave them to their landlords for rent, and they again re-distributed them among society. In this manner they were kept floating about, fulfilling the functions for which they were created. In due season the market was completed [on Friday, 11th of October, 1822.]. It contained eighty shops, which were let to butchers at five pounds a year; so that the annual rental was £400. At the end of the first year of tenancy four hundred of the one pound notes which had built the market, having been received as rent by the States, who were the owners of the national building reared up with the national money, were burnt in presence of the official authorities. The same operation was repeated from year to year for ten years; at the expiration of which period all the notes were redeemed, and, being cancelled, of course passed out of circulation. But the annual rent did not cease; it exists to this day, and is applied to local improvements. Thus a substantial reality was created out of a symbol; for it is plain that the market did not cost a farthing to any one of the Guernsey people. In the same manner bridges, railways, and canals may be constructed, without paying a farthing of interest to bullionists.
American Independence
Paper money established the independence of the United States. At the commencement of the war, Congress had no money. The internal commerce of the States being suppressed, the farmer could not sell his produce, and, of course, could not pay a tax. Congress had no resource but paper money. Not being able to lay a tax for its redemption, they could only promise that taxes should be laid for that purpose, so as to redeem the bills by a certain day. They did not foresee the long continuance of the war, the almost total suppression of their imports and exports, and other events which rendered the performance of their engagements impossible. The paper money continued for a twelvemonth equal to gold and silver, but the quantities which the Congress were obliged to emit for the purposes of the war, exceeded what had been the usual quantity of the circulating medium. In fact, no provision being made for its periodical redemption, this paper money became cumulative, since there was no tax by which it could from time to time be absorbed and cancelled. It began, therefore to become cheaper or depreciated, falling in its purchasing power, just as gold would be depreciated if it were doubled or trebled in quantity, or as silver became depreciated in Europe after the discovery of the South American mines. In two years it had fallen to two dollars of paper money for one of silver; in three years to four for one; in nine months more it fell to ten for one; and in the six months following, that is to say, by September, 1779, it had fallen to twenty for one. It continued to circulate and to depreciate till the end of 1750, when it had fallen to seventy-five for one. About that time the money circulated by the French army began to be sensibly felt in all the States north of the Potomac, and in those districts the paper disappeared from circulation. In Virginia and in North Carolina, it continued a year longer, within which it fell a thousand to one, and then expired, as it had done in the other States. These facts are taken from the personal memoir of President Jefferson, who makes this comment. “Foreigners, who do not, like the natives, feel indulgence for its memory, as of a being which had vindicated their liberties and fallen in the moment of victory, have been loud and still are loud in their complaints. A few of these have reason, but the noisiest of them are not the best of them.” The depreciation of the paper was the price which the Americans paid for their independence, and it was cheaply purchased at the cost of sixty-six millions of dollars, the amount of depreciation estimated by Jefferson.
Paper money broke the power of the first Napoleon at Leipsic. According to the historian Alison, “by a decree on the 30th September, 1813, from Peterswaldau in Germany, the allied sovereigns issued paper notes, guaranteed by Russia, Prussia, and England, which soon passed as cash from Kamskatka to the Rhine, and produced the currency, which brought the war to a successful issue. There was an evidence of the manner in which a paper circulation, based on a proper security, supports credit and supplies the want of specie at the decisive moment. Whereas, according to the present system, the paper would of necessity have been contracted, when the specie became scarce; credit would have been ruined at the critical period; and the vast armaments of the allies would have been dissolved for the want of funds for their support.”
Paper money enabled Frederick the Great to raise Prussia, exhausted by wars, from a state of prostration to wealth and power. That monarch issued land mortgage notes, called Pfenbriefe, bearing interest, but inconvertible so long as the interest was paid. With these monetary instruments he forced or fostered Prussian agriculture, and caused it to grow in strength and riches beyond any country in the world, except the United States. The Pfenbriefe were so good a security that they were readily negotiable even during all the wars of Napoleon.
Paper Money in Scotland
Paper money built every town and village in Scotland, constructed all its docks, harbours, roads, factories, opened out all its mines, and reclaimed the whole of its soil from primitive barrenness. The Scotch note is not only current in all the Scotch marts of trade, but penetrates into the remotest glens of the Highlands. It is received where the sovereign is rejected. Peel’s Act of 1845 now compels the banks of Scotland to hold gold when the note circulation exceeds £3,000,000; this gold is deposited in the cellars, and rarely unpacked from the barrels in which it is transmitted from the London mint. There is no demand for it, and the shopkeepers shun it, lest it be short of weight or counterfeit. They have faith in their own paper—a faith based on one hundred and fifty years experience. The monetary panics that have so often shaken the commercial establishments of England to their centres have passed innocuously over North Britain.
These historical facts are sufficient to show the utility of paper money, and that it possesses a power far superior to gold or silver. “A prince,” says Adam Smith, “who should enact that a certain proportion of the taxes should be paid in a paper currency of a certain kind, might thereby give a certain value to this paper money, even though the term of its final discharge and redemption should depend altogether on the will of the prince. If the Bank which issued this paper was careful to keep the quantity of it always somewhat below what could be easily employed in this manner, the demand for it might be such as to make it even bear a premium, or sell for somewhat more in the market than the quantity of gold or silver currency for which it was issued.” Here the principle of imperial or taxation money is not only conceded, but applauded; but the plan contended for here is very superior to that suggested by Adam Smith. The redemption of the notes would not depend on the will of the prince, but would be strictly provided for in the receipt of taxation, which would effectually prevent any depreciation through excess.
There is one remaining point which it is very important to notice. Bullionists ask of their opponents, “How will your note be worded? What are we to understand by your I promise to pay?” The answer is, that the taxation note would bear no such inscription, but the words —“I promise to receive this note in discharge of as many pounds of taxation as the note represents.” By this simple change of the formula the whole difficulty is surmounted, and the sting is extracted from the satire of the bullionists.
Commercial Money and Security Banks
From national money, limited from year to year to the annual amount of taxation, we now pass to the consideration of commercial money.
It being the prerogative of the crown to create and issue imperial legal tender for imperial purposes, it is the right of the people to create and issue commercial currency for the purposes of trade. As the former is the representative of taxes, so is the latter the representative of barter; and as all are privileged to barter as they please, so all are entitled to use such aids to barter as they deem most efficient. But though government is never justified in interfering, under the pretence of regulating the currency, which will always regulate itself if left alone; yet, to protect the simple against the wiles of the cunning, and give stability to credit, it is desirable that government should receive tangible securities from those capitalists who solicit an act of banking incorporation, in order that the solidity of their notes may be certified to the public. It is, therefore, proposed that all banks of issue should deposit, in the hands of the government, approved guarantees in land, consols, or in other indisputable securities, the legal title to ownership being attested by the law officers of the crown, and the value of the property by the actuaries of the crown. These preliminaries settled, the banks would then be permitted to issue commercial currency to the extent of one-half, two-thirds, or three-fourths of the securities deposited, the exact proportion being determinable by parliament. The notes of these banks would be made by government and numbered, and ought to be impressed with a distinctive die, similar to that used by newspapers; and both the amount of permitted issues, and the amount of securities should be printed on the face of the notes. No man of common sense would run on such a bank; there could be no excessive issues, and, therefore, no depreciation. If such a bank failed, it would be entirely owing to the imprudence of its directors; but, in such an event, every holder of the notes would be safe, as the government would have a power to sell the securities, and thus be enabled to pay to all such holders twenty shillings in the pound.
Opinions of the first Sir Robert Peel
In a letter addressed to both Houses of Parliament, dated 3rd April, 1826, after the dreadful panic, the first Sir Robert Peel expressed himself in favour of this system of SECURITY BANKS in the following terms :—
“ Having been long and extensively engaged in commercial dealings, I often witnessed a national embarrassment arising from a defective or impure currency, which resembled the present stagnation of trade; and I lament to observe that suffering and experience have failed in this instance of producing their usual good effects. In the enlarged scale of business carried on by this country, embracing a great variety of pursuits, a reliance on a metallic circulation ever did, and ever will, fail us. Gold, though in itself massy, often disappears in consequence of war or speculation; nay, the breath of rumour itself is sufficient to disperse it. Our domestic concerns are interrupted, and confidence lost, for want of an ample and approved medium of traffic. I am no friend to an unrestrained issue of paper money, and saw with concern, in the absence of a due quantity of specie, notes admitted into circulation, issued by persons of respectability possessing property, but evidently unable to meet a sudden and large demand upon them. More than two years ago I mentioned to a friend high in His Majesty’s councils, my fears of the mischiefs likely to ensue if this practice were not discontinued, accompanied with a suggestion to confine future issues of paper money, or tokens, to the Bank of England, and other competent bodies of men, who would give security in land, the public funds, canals, buildings, or other tangible property, amounting to at least one-half the value of their bills or notes in circulation. My proposition was not favoured with any notice; yet, had it been adopted, I am of opinion that most of the panic and distress now so severely felt in the nation would have been avoided. If such an arrangement in the banking system could be made available, gold would become less requisite, and the country would be supplied with a stationary medium of exchange originating with ourselves.”
This is the advice of a man of experience, who carried on business during the Restriction Act, accumulated an immense fortune, and founded a family. It was he who said in the House of Commons, “had there been no paper money there would have been no Sir Robert Peel.”
The system here propounded would give to every nation adopting it that “medium of exchange originating with themselves,” which Sir Robert Peel recommended. Imperial money for taxes and commercial money for trade, would render a nation independent of gold for all its internal transactions. Gold would then be restored to its natural character of a merchantable metal, a mere commodity, and, in common with all other commodities, it would find its proper price in the legal tender of every country under the law of supply and demand. To obtain clear ideas on the subject we must radically distinguish between the home and foreign trade, which require to be carried on with different monetary instruments, for the taxation price of goods is designed to take effect at home, and only at home; while the barter price must ever be the rule of foreign trade. Mr. John Taylor truly observes :—
“ The trade of England is now paralysed by our having only one kind of currency to represent both kinds of prices; whence it happens that while, on the one hand, our producers cannot obtain the necessary taxation prices for their commodities at home, so, on the other, they cannot afford to sell their commodities for so little as the natural price abroad. Having only one kind of currency to represent both prices, they cannot sell their goods for so much at home, and so little abroad, as they ought to do, and hence proceeds the distress.”
To put gold at its market price in England is to do no more than what is universally done in foreign commerce, where gold always finds its market price in the higgling of the exchanges. The intrinsic value of the metal out of which coins are struck is undisturbed, but the price of the coins or weight of metal varies at Paris, at Hamburg, at Amsterdam, &c., under the law of supply and demand. The authority of rulers cannot extend to regulate payments made in foreign countries, where they have no power or jurisdiction. Foreign merchants never consider the coins of any nation as money, but as commodities; they deal with other nations than their own on the pure principle of barter, taking no heed of their taxation, and merely calculate what weight of bullion of a certain fineness they shall receive for the goods they import and sell. What the legal tender may be among other countries is to them a matter of perfect indifference. They care not whether it be paper or oyster shells. During the war against the first Napoleon, when our paper pound would only buy or exchange for 16 or 17 francs, and even when the Berlin and Milan decrees were in force, England bought corn of France, and France clothed its soldiers with the woollen fabrics of Yorkshire.
Where is the authority, unless a most arbitrary and unjust one, that can fix the price of anything on earth? We ridicule the vain attempts of the French government, in the early part of the great revolution, to fix a maximum and minimum on corn and on other provisions, but we commit the folly of fixing the price of a merchantable metal, so soon as it is reduced into the state of coin. The only difference in the two cases is, that in the one it only required the space of a market day to prove the stupidity of the attempt, and in the other a series of years. The folly of those who submit to the system, and the criminality of those who perpetrate it, will strike a future age with amazement.
The Act of 1844 favours the most flagitious usury. It appears from the Lords’ Report on commercial distress (1848), that from the year 1704 to the 16th May, 1839, the rate of interest never exceeded five nor was below four per cent. In the pressure of 1839 the rate was raised to six per cent. for some months; but was reduced to five per cent. in January, 1840, and remained at four and five per cent. as before, until after the passing of the Act of 1844. The old system was abandoned in September, 1844, and the results are thus described by Mr. William Browne, one of the members for Lancashire, and head of the great Liverpool firm of Browne, Shipley, and Co. The following table exhibits the contrast between the years prior to 1847, and during that year of panic :—
Lowest Rate. Highest Rate. Difference.
1837 ........ 3¼ ........ 5½ ........ 2¼
1889 ........ 3¾ ........ 6½ ........ 2¾
1847 ........ 3¼ ........10 ......... 6¾
But Mr. Browne adds (and important indeed is the addition to those who were compelled to borrow money at usurious interest), “this does not give an accurate view of what the interest of money was in 1847, because persons frequently paid a commission which made it amount to ten, twenty, and thirty per cent., depending on the time the bill had to run, and the pressure of money at the moment.”
Sir Robert Peel’s Defence of Usury
Sir Robert Peel was a defender, nay, an admirer of usury. The following passages are extracted from the speech he delivered in the debate on Commercial Distress, 30th November, 1847 :—
“ Some hon. gentlemen, from whom I could have hoped better things, say that commerce cannot be conducted if we are to pay 10 per cent. for interest; and Government is blamed because people are compelled to pay 10 per cent. Why, what right has any man to pay for money more than money is worth? If money is worth 10 per cent., it will be asked, what law can prohibit such a rate of interest?”
The fallacy on which this justification of usury rests consists in money being compared to commodities, to which it bears no resemblance whatever. That coals or iron, cotton or indigo, ought to sell for what they would fetch in an open market, is quite reasonable, because the legislature imposes no arbitrary limit to their production; their quantity is permitted to increase or diminish under the lave of supply and demand, being wholly and exclusively ruled by the markets of consumption. Totally different is the case with metallic money. A law of nature, over which Parliament has no control, restricts the quantity of the raw material, gold, the yield of the mines never keeping pace with the increase of population or the expansion of trade. Moreover, whenever gold is exported as a profitable mercantile speculation, or is hoarded at home through panic, the Act of 1844 compels the Bank of England to contract its issues of notes. The rule is, no gold, no paper; no paper, no money; no money, no discounts, except on terms of extortion. This is the reason why interest rises; this is why the trading world are compelled to pay 10 per cent., and a commission of 20 to 30 per cent.; and it is clear that they are forced to pay it, under the penalty of bankruptcy, not for the fair and legitimate use of money, but on account of its artificial scarcity—a scarcity created by Act of Parliament for the benefit of usurers. If money were like everything else in the market, as Sir Robert Peel most falsely assumed, money would increase with the demand for it; but in violation of all sound principles, and of all honour and honesty, the Bank of England is commanded by the legislature to withhold money when it is most needed, and thus made the reluctant instrument of strangling trade. If the real working of this most iniquitous system were understood, these fraudulent and suicidal statutes would be instantly repealed by the indignant voice of plundered industry.
When bullion is coined into money, it ceases to be simply a commodity, but has superinduced upon it a monetary character. It no longer resembles other articles of commerce. This is happily illustrated by Mr. James Taylor :—
“ Under Peel’s law, gold does not resemble other articles of commerce in the principle which determines its exchangeable value, any more than the trump suit in the game of whist resembles the other three suits. It is well known that while the latter exchange on equal terms one with the other, the trump suit is endowed with supreme power, which makes its lowest number often possess a controlling power greater than the highest number of the other three suits. So, under Peel’s Bill, gold is endowed with a like controlling power over the value of all other commodities in this country.”
We must dwell a moment longer on this important branch of the subject. Suppose that in 1819 when the bill for returning to cash payments was enacted, parliament had decreed that a single gasometer should supply all London with gas; and at that time fixed the number of cubic feet of gas to be manufactured, ordering that that quantity should never be increased in any future time; what would be the consequence in 1856? Clearly that all the streets built since 1819 would be left without gas; or, if they received a supply, then the necessary consequence would be that many of the streets constructed prior to 1819 would be doomed to darkness. According to Sir Robert Peel, the directors of the gasometer would be justified in saying “gas ought to sell for what it is worth,” for if usury on money, limited by Act of Parliament is defensible, so also would be the usury on gas, limited by Act of Parliament. The same reasoning applies to every monopoly.
In 1846, Sir Robert Peel told the landowners that the area of the British soil could no longer feed the increased and increasing population, and that foreign corn must be introduced that the supply might equal the demand. In this respect he must be considered as an opponent to usury on corn. But with strange inconsistency he asserted, that though the gold mines had largely fallen off in their yield, (for at that date neither California nor Australia had displayed their auriferous wealth) while population and trade had increased, yet the radius of the supply of money ought not to be enlarged, but actually contracted. He shuddered at a famine of food, and exulted at a famine of money.
Why is interest paid for the use of money? Because money is always scarcer than the commodities which money circulates. If the volume of money was always equal to the volume of commodities, interest would disappear. Bills of exchange and promissory notes are really protests against the inadequateness of legal tender. Interest is a deduction from the profits of trade, and, in that sense, always tends to lower wages. Under this aspect usury, or excessive interest, becomes the assassin of industry and enterprise.
The canons of the Roman Catholic Church prohibited all usance or interest. The great French jurisconsult, Pothier, decides that the minutest coin beyond the sum lent, if added to the loan when repaid, constituted usury, and stamped the contract with crime. A legal rate of interest was first fixed in England in 1545, by the statute 37 Henry VIII. It was repealed by 5 and 6 Edward VI., but restored by Elizabeth. The rate was ten per cent. for a year. It was reduced by the 21 James I, c. 27, to eight per cent. The effects of the reduction are thus described by Sir Josiah Child :—
“ In 1635, within ten years after interest was brought down to eight per cent., there were more merchants to be found on ‘change with each a thousand pounds and upwards, than there were formerly, that is before 1600, to be found worth one hundred pounds each.”
Cromwell reduced the rate of interest to six per cent., and though, after the restoration, the money mongers pretended this was the act of an usurper, and therefore illegal, the parliament of Charles the Second sanctioned the law of the protector. Here, again, we may quote from that eminent mercantile authority, Sir Josiah Child, who thus comments on the statute of Cromwell or of Charles the Second :—
“ Now, since interest has been for twenty years at six per cent., notwithstanding our long civil wars, and the great complaints of the dullness of trade, there are more men to be found on ‘change now worth ten thousand pounds, than were then of one thousand pounds. Whichever way we take our measures, to me it seems evident that since our first abatement of interest, the riches and splendour of this kingdom are increased about four (I may say about six) times as much as they were. Our customs are much improved, and I believe above the proportion of six to one, which is not so much an advance in the rate of goods, as an increase of the bulk of trade. If we look into the country we shall find lands as much improved since the abatement of interest as trade in cities. I, and those I converse with, do perfectly remember that rents did not generally rise after the late abatement of interest, viz., in the years 1651 and 1652.”
This rate of six per cent. interest continued till the year 1714, when it was reduced to five per cent. by the 12th Anne, at which rate it continued till the repeal of the usury laws, which, with a restricted currency, has perpetrated the most flagitious plunder on all the industrious classes. “The great principle of a metallic currency,” says Mr. John Taylor, “slowness of increase, to which it owes its value, when viewed in contrast with the rapid increase of the numbers of mankind, to whom individually it will tend to exist in a constantly diminishing ratio, ought to be a reason, with a wise and paternal government, why payments should be made as much as possible in real money; and why the taking of usury, that is, any kind of increase in coin on a loan of the precious metals, should be prohibited.”
Under the system here advocated of national and commercial money—the former limited to the amount of annual taxation—the latter permitted to expand or contract according to the exigencies of trade—none of the evils described could occur. While the rate of interest is always liable to be excessive with metallic money, constantly liable to export and hoarding, it never could rise above a moderate scale with paper money, since there would be no arbitrary limitation to the supply, and the competition of rival issuers would keep interest steady at a fair level between the borrower and the lender.
The inverted Pyramid of Gold
Metallic money reduces the form of all monetary transactions into the shape of an inverted pyramid. At its pointed and narrow base lies gold; above that base, as the mathematical figure widens, are ranged promissory notes and bills of exchange, which constitute its superstructure. For the sake of illustration, let it be assumed that the golden basis is 30 millions of sovereigns, and that the credit transactions, represented by promissory notes and bills of exchange, amount to 300 millions; then the foundation is to the superstructure in the ratio of one to ten, since each million of gold sustains ten millions of paper. Take away one third of the basis, you remove 100 millions of credit securities, and produce what Mr. Loyd calls “convulsion and pressure;” take away another third, and you witness what that writer calls “stagnation and distress;” take away the remaining third, and you reach the state of national bankruptcy, barter. This figure of an inverted pyramid explains the rationale of panics.
We must now direct attention to the nature of markets, of which money is the distributive agent. On this most important, but little understood subject, we shall first cite the authority of the late Mr. James Mill :—
“ The production of commodities creates, and is the one and universal cause which creates, a market for the commodities produced. Let us but consider what is meant by a market. Is anything else understood by it than that something is ready to be exchanged for the commodity which we wish to dispose of? When goods are carried to market, what is wanted is somebody to buy. But, to buy, one must have wherewithal to pay. It is obviously, therefore, the collective means of payment which exist in the whole nation, that constitute the entire market of the nation. But wherein consist the collective means of payment of the whole nation? Do they not consist in its annual produce—in the annual revenue of the general mass of the inhabitants? But if a nation’s power of purchasing is exactly measured by its annual produce, as it undoubtedly is, the more you increase the annual produce, the more, by that very act, you extend the national market, the power of purchasing and the purchases of the nation. Whatever be the additional quantity of goods, therefore, which is at any time created in a country an additional power of purchasing, exactly equivalent, is at the same time instantly created; so that a nation can never be naturally overstocked either with capital or commodities, as the very operation of capital makes a vent for its own produce.”
Whoever allows his mind to dwell long enough on the proposition, will perceive that one half of the goods of a country universally form the market for the other half; for speaking always of aggregates, proportionate production is the natural consequence of effectual demand. It is, however, quite possible, and, indeed, it often happens, that the balance between supply and demand, in reference to a single commodity, may be disturbed; but such disturbance can never happen in reference to commodities in general.
“ The quantity of one commodity,” says Mr. Mill, “may easily be carried beyond its due proportion; but, by that very circumstance, it is implied that some other commodity is not provided in sufficient proportion.—What, indeed, is meant by a commodity’s exceeding the market? Is it not that there is a portion of it for which there is nothing that can be had in exchange ?—But of those other things, then, the proportion is too small. A part of the means of production, which had been applied to the preparation of this superabundant commodity, should have been applied to the preparation of those other commodities, till the balance between them had been established. Whenever this balance is properly preserved, there can be no superfluity of commodities—none for which a market will not be ready.”
This reasoning is perfectly sound in the abstract, and the conclusions to which it leads would be realized in practice if all commodities were exchanged by barter; and all taxes, rents, tithes, rates, and other public and private obligations, were paid in kind, or in that description of representative money which we have described; but both the reasoning and practice are falsified when the legal tender of a country consists of metallic money fixed in price. It is remarkable that the keen penetration of Mr. Mill overlooked this intrusive element, which completely vitiates the whole of his argument; and this will appear the more extraordinary to the reader after he has perused the next extract.
“ When money,” continues Mr. Mill, “is laid out of the question, is it not in reality the different commodities of the country, that is to say, the different articles of the annual produce, which are annually exchanged against one another ? Whether those commodities are in great quantities or in small—that is to say, whether the country is rich or poor, will not one half of them always balance the other half ? And is it not the barter of one half of them with the other which actually constitutes the annual purchases and sales of the country.”
It is perfectly true that when “money is laid out of the question,” all the consequences stated by Mr. Mill must occur; the market can never be overstocked; no case can arise of over production, or of over trading; there can be neither scarcities nor gluts; supply and demand will always be proportionate to each other. Hence the importance to every community of profoundly studying the nature and action of money. All experience tells us that the advantages of the industrial system described by Mr. Mill have never been realized; yet he demonstrates that they could never fail to be realized if all exchanges were effected by barter; but currency is the substitute of barter, an instrument designed to facilitate, not to obstruct exchanges. It is the mean to the end. Hence it follows that if the end is not attained, the failure must be ascribed to some defect in the mean, that is, the monetary system.
In a state of pure barter there can be no exchange of commodities, till at least two different kinds of commodities come into contact. As in a state of barter one-half of the goods form the market for the other half of the goods, so when legal tender is introduced, it becomes one half of every bargain. On this point we take the following extract from David Hume :—
“ It seems a maxim almost self-evident that the prices of everything depend on the proportion between commodities and money, and that any considerable alteration in either has the same effect, either of heightening or lowering the price. Increase the commodities, they become cheaper; increase the money, they rise in value; as, on the other hand, a diminution of the former and that of the latter have contrary tendencies. It is also evident that prices do not so much depend on the absolute quantities of commodities and that of money which are in a nation, as on that of the commodities which come or may come to market and of the money which circulates. If the coin be locked up in a chest it is the same thing with regard to prices as if it were annihilated; if the commodities be hoarded in magazines and granaries, a like effect follows. As the money and commodities in these cases never meet, they cannot affect each other. It is the proportion between the circulating money and the commodities in the market which determines prices.”
The Supreme Being has furnished for the use of man ample raw materials in the animal, vegetable, and mineral kingdoms, and endowed him with faculties to adapt them to his wants. He has implanted in man certain desires and appetites which prompt him to consume whatever is produced. These wants and desires create markets. To use the language of Mr. Thomas Attwood, “every man’s mouth is a market, and every man’s hand is a producer.” With a proper system of money, markets would always be emptied as soon as supplied; contract money, and the power of purchase is contracted. Now money is naturally active in a civilised country, if the pernicious hand of government does not interfere. Repose is foreign to its nature, and as it acts on property it creates markets, since it creates both supply and demand; for if money buys goods it is equally true that goods buy money. It is not for its own sake that men desire money, but for the sake of what they can purchase with money.
Money acts in a market simply as the instrument of distribution. It forms no part of the revenue of a market. As Adam Smith observes, “The great wheel of circulation is altogether different from the goods which are circulated by it. The revenue of the society consists altogether in those goods, and not in the wheel which circulates them.” If a road which usually conveys goods to a market becomes impassable, or a canal which in ordinary times renders the same service, is frozen, the market remains empty, because the instruments of supply fail; so also if the markets are full, and no money enters it, the market remains full, that is, stagnant, because the instrument of distribution fails. A fussy legislation attempts to create markets; it might spare its pains, since nothing but the natural wants and desires of mankind can create them; but a senseless legislation can destroy markets, and ever does so when it insists on metallic money. It might as reasonably insist that the bars of every railway should be constructed of gold, instead of iron.
It is desirable that the destructive action of bullionism on markets should be clearly understood, and the practical mode in which it operates. The mere description of an opponent of the system might be regarded with suspicion, and set down to special pleading, or to a desire of presenting a one-sided view of this controversy. We shall therefore transfer to these pages the searching questions put by Mr. Cayley to the Governor and Deputy-Governor of the Bank of England, in the Committee of Inquiry instituted in 1848 on the “Causes of Commercial Distress,” and the answers of those functionaries.
“ 3278. When the bank reserve is very low under the export of gold is it impossible to afford an inducement for a speedy return of gold without creating great pressure ? The means of getting back gold is by making money dear, and causing a fall generally in the price of commodities, which will bring back gold.
“ 3279. Then the means of attracting gold back to this country, after it has gone out, is to lower prices? Prices will fall in consequence of the increased value of money.
“ 3280. Under a great fall of prices the Bank is comparatively safe ? A great fall of prices has a tendency to bring capital into the country, and as bullion flows into the country it acts upon the reserve of the Bank and of all private bankers.[4]
“ 3281. But in order to attract gold into the country, the more forced sales there are, and the lower the prices, the safer the position of the Bank is ? The lower the price of commodities, the greater will be the tendency to the increase of the importation of the precious metals, and of the reserve of the Bank, and of the bankers generally.
“ 3282. Under that state of things, that is, a pressure arising from a fall of prices, in order to secure the return of gold, does not any accommodation afforded to the public rather tend to obstruct the fall of prices ? Yes.
“ 3283. The less accommodation under that state of things that is afforded to the public, the safer to the system ? That accommodation must of necessity, under that state of things, be reduced.
Here then it is confessed that bullionism destroys markets, and by those best conversant with the system—by the very men who ruled the Bank when the panic of 1847 arose; and their argument amounted to this, that it was expedient to destroy markets to ensure the convertibility of the note at a fixed price. It was under these circumstances that Mr. Cayley proposed the following amendment to one of the clauses in the report framed by Sir Charles Wood, then Chancellor of the Exchequer :—
“ It would greatly tend, in the opinion of your committee, and to the safety of the public, if there should prevail among the mercantile and working classes of the community, a clear perception of the position in which they stand under the Act of 1844. That they should distinctly understand that when the gold is exhausted in the coffers of the Bank every merchant and manufacturer is to suspend his operations, and every artisan and labourer is to remain idle, without work and without wages, until the gold be restored to the coffers of the Bank.”
This amendment was of course rejected as bullionism does not desire the truth to be published from the house tops.
In the inquiry instituted before the Lords’ Committee, in 1848, it was distinctly admitted that in raising or lowering the rate of discount the Bank of England threw overboard all national considerations, and looked solely to the interests of the shareholders in the corporation.
“ In regulating the rate of interest we look, of course, to the state of the reserve. We are either to increase or to diminish the amount of the reserve, as may be required, by raising or lowering the rate of interest, or by the sale or purchase of securities. Supposing the demand upon the bank, for instance, were considerable and more than the bank were able to afford, it would be necessary to put up the rate of discount. On the other hand, if the reserve of the bank was increasing, and it was not thought advisable to purchase securities, naturally the rate would be put down. The putting up or lowering the rate would be guided by the state of the reserve, reference being also had to the rate of interest in the market.”
The Fall of Rome
We have drawn a distinction between the SCIENCE OF SOCIETY AND THE SCIENCE OF POLITICAL ECONOMY, and contended that the latter should always be deemed subordinate to the former. The one deals with the interests of man, as a moral and intellectual being; the other confines its speculations to insentient matter. Political economy does indeed profess to teach the art both of the production and distribution of wealth, but on the latter head it has done little or nothing for the sons and daughters of toil. Indeed, as nations advance in what is popularly called civilization, there has ever been a tendency to concentrate riches in the hands of a few; and as the idle classes increase, they who produce most, consume least. It is this injustice that led to the downfall of all the great nations of antiquity, for if labour builds up a state, labour alone can sustain a state; degrade labour and you sap the foundations on which the superstructure rests. So it happened in ancient Rome in what are deemed its palmiest days of civilization.
“ During the entire ages of Trajan and the Antonines,” says Sismondi, “a succession of virtuous and philosophic emperors followed each other; the world was at peace; the laws were wise and well administered; riches seemed to increase; each succeeding generation raised palaces more splendid, monuments and public edifices more sumptuous, than the preceding; the senatorial families found their revenues increase; the treasury levied greater imposts. But it is not on the mass of wealth it is on its distribution, that the prosperity of states depends; increasing opulence continued to meet the eye, but man became more miserable; the rural population, formerly active, robust, and energetic, were succeeded by a foreign race; while the inhabitants of towns, sank in vice and idleness, or perished in want amidst the riches they had themselves created.”
Sismondi then shows the pernicious results of colossal accumulations :—
“During the long peace which followed the victories of Trajan and Marcus Aurelius, those colossal fortunes were accumulated, which, according to Pliny, ruined Italy and the Empire. A single proprietor, by degrees came to buy up whole provinces, the conquest of which had in former times furnished the occasion of many triumphs to the generals of the republic. While this huge capitalist was amassing riches, wholly disproportioned to the capacity of man, the once numerous and respectable, but now beggared middle class, disappeared from the face of the earth. In districts where so many brave and industrious citizens were to be seen in former times, alike ready to defend or cultivate their fields, were found to be nothing but slaves, who rapidly declined in number as the fields came to be exclusively devoted to pasturage. The fertile plains of Italy ceased to nourish its inhabitants; Rome depended entirely for its subsistence on the harvests which its fleets brought from Sicily, Africa, and Egypt. From the capital to the furthest extremity of the provinces, depopulation and misery in the country co-existed with enormous wealth in the towns. From this cause the impossibility of recruiting the legions with native Romans was experienced even in the time of Marcus Aurelius. In his war against the Quadi and Marcommani, which had been preceded by a long peace, he was obliged to recruit the legions with the slaves and robbers of Rome. It is impossible to give a stronger proof of the extent to which the enormous evil of the vast fortunes accumulated in the towns, and the entire ruin of industry in the country, had gone in the last days of the empire, than is to be found in the fact, that when Rome was taken by Alaric, in the year 404, after Christ, while Italy could furnish no force to resist the invaders, the capital itself contained seventeen hundred and sixty great families, many of them with incomes of £160,000 a year, equal to £300,000 of our money, whose expenditure maintained an urban population of one million two hundred thousand souls.”
One quotation more from the French historian Michelet, may serve to complete this picture of contrasted wealth and destitution, of Dives and Lazarus.
“The Christian emperors could not remedy the growing depopulation of the country any more than their heathen predecessors. All their efforts only showed the impotence of government to arrest that dreadful evil. Sometimes alarmed at the depopulation, they tried to mitigate the lot of the farmer, and shield him against the landlord; upon this the proprietor exclaimed he could no longer pay the taxes. At other times they abandoned the farmer, surrendered him to the landlord, and strove to chain him to the soil; but the unhappy cultivator perished or fled, and the land became deserted. Even in the time of Augustus, efforts were made to arrest the depopulation at the expense of morals, by encouraging concubinage. Pertinax granted an immunity from taxes to those who would occupy the desert lands of Italy, to the cultivators of the distant provinces, and to the allied kings. Aurelian did the same. Probus was obliged to transport from Germany men and oxen to cultivate Gaul. Maximin and Constantius transported the Franks and Germans from Picardy and Hainault into Italy; but the depopulation in the towns and country continued. The people gave themselves up to despair in the fields, as a beast of burden lies down beneath his load and refuses to rise. In vain the emperors strove, by offers of immunities and exempitons, to recall the cultivators to their deserted fields. Nothing could induce them to do so. The desert extended daily. At the commencement of the fifth century, there were in the HAPPY COMPANIA, the most fertile province of the empire, 520,000 jugera (320,000 acres) in a state of nature.”
Alluding to this desolated state, amounting to one eighth of the whole surface of the province, Gibbon expressly says— “As the footsteps of the barbarians had not yet been seen in Italy, the cause of this amazing desolation, which is recorded in the laws (Cod. Theod., l. xi. b. 38, c. 2) can be ascribed only to the administration of the Roman emperors.”
In these passages the evils of concentrated wealth are vividly illustrated. As wealth accumulated men decayed, not because wealth was accumulated, but because it was inequitably distributed. Not only had whole provinces become the property of an individual, but usury existed in so frightful a form that even the virtuous Brutus, when Proconsul of Sicily, received sixty per cent. for the loan of money; whence we may form a faint idea of the extortions of those who were more unscrupulous. What must have been the income of Agrippa, who, at his own expense, built the Pantheon, and supplied Rome with one hundred fountains, all ornamented with marble columns and statues ? The colleague of Cicero was proprietor of the whole island of Cephalonia, on which he built an entire city. In the time of Nero it was ascertained that six Romans were in possession of one-half of Africa; and it would be easy to mention the names of many others enjoying colossal fortunes. Now Pliny distinctly says that these immense agglomerations of wealth, which he also declares ruined Italy and the provinces, were due to the concentration of estates, which he terms “Latifundia,” and to usury. His word are— “Foenus hoc fecit et nummus percussus.” — “Usury did this and coined money.”
The legislation of Sir Robert Peel and Mr. Loyd tend to realise in England the same injustice and ruin which occasioned the downfall of Rome. In a recent memorable trial, it appeared that usury is now so extortionate, that attorneys (certainly not of a reputable class) take 60 per cent. on loans, and require the interest to be paid monthly, so that in eighteen months the accumulated interest equals the principal, while the debt remains undiminished.
The science of society affirms that since it is the privilege of industry to heap up wealth as its reward, so it ought to be the punishment of idleness to break down riches till they wholly disappear.
Such would inevitably be the case if the perception of interest were abolished. If we except some of the harder metals, perishableness is an inherent quality in commodities, and it is universally true in the vegetable kingdom; but when a government makes a contract for perishable commodities, and gives for them a monied equivalent, that monied equivalent, when it takes the form of a funded debt, becomes, or may become, imperishable. Thus the English are still paying interest on the gunpowder exploded in the wars of Marlborough, though the principal sum, representing its original cost, has been discharged over and over again. Thus usury confers immortality on debt, and every child born after the contraction of the debt is reared in the cradle of fiscal bondage. Thus monied classes are perpetuated by usury, as landed classes are perpetuated by primogeniture. These two laws are the parents of political privileges, and privilege necessarily demands exclusion as the condition of its own existence. The two forms of wealth, landed and monied, unite on behalf of privilege, and their alliance puts down and keeps down all the rest of the community who have neither acres nor gold. The legislation of Peel and Loyd has riveted the fetters of this form of servitude.
Summary of Monetary Principles
A brief summary of the leading principles attempted to be enforced in this work may not form an inappropriate termination.
1. Legal tender money is a mere token or symbol of value, which need not and ought not to possess intrinsic value.
2. It is the double instrument of fiscality and commerce; in the first character representing national taxation, in the second distributing commodities.
3. As the instrument of fiscality, its creation falls within the prerogative of the crown, but it ought to be limited from year to year to the annual amount of taxation, by observing which precaution it could never be excessive; and provision being made for its periodical redemption and extinction, it could never depreciate.
4. As an instrument of commerce, legal tender ought to expand or contract with the exigencies of trade; and though Government has no right to interfere with this kind of money under the pretext of “regulating its quantity,” yet, for the protection of the public, it ought to take landed, funded, or other unexceptional security from those banks to whom it gave a charter of incorporation. Those banks would not be allowed to manufacture their own notes, but would receive them from the Government.
5. Bread corn is the true standard of value; gold and silver are the measures of value.
6. Capital is accumulated labour; it does not consist exclusively in gold and silver, which are themselves mere commodities in the same sense as iron or coal, but in the aggregate of all commodities.
7. When gold or silver is coined, no additional value is conferred on the coin. Equal weights of coin or bullion, if of equal purity, are equivalent in value. But when a monied denomination is put on coin, its price is necessarily fixed, for that is the effect of a monied denomination.
8. Value expresses labour condensed or embodied in commodities; price denotes taxation and value combined.
9. Indirect taxation, by adding to the cost of production, without adding to the value of the product, ought to depreciate the pound of account,—that is to say, it ought to enfeeble its purchasing power in proportion to the rate of indirect taxation. This is the act of the Government, and shows no defect whatever in the monetary instrument.
10. As nations deal among themselves according to price, and with foreigners according to value, two distinct modes of exchange are required for the home and foreign trade, as pointed out by Plato.
11. Usury is not paid for the legitimate use of money, but is an extortion levied on account of its artificial scarcity.
12. There are no markets but what are created by our hands, in obedience to our necessities and desires. In all markets, legal tender money forms one half of every bargain.
THE END
1
Remarks, &c., p.101.
2
Letter to I.B. Smith, Esq., p. 21.
3
Remarks, p. 45.
4
Here the common error is made of confining “capital” to gold and silver, as if coals and iron were not capital in as positive a sense as those two metals.