THE unity of the Note means a monopoly of the currency. A monopoly of the currency means a power of altering the Rate of Interest, and the Measure of Value, in an abnormal manner.

There are three distinct forms in which a Paper currency can be established. I. As issued by the State. II. By a single Bank of Issue. III. By several Banks of Issue either restricted in number, or established on the principle of freedom and competition.

In deciding which of these systems is the best, there are two main points to be kept in view. Firstly, the validity of the Note that is to say, its constant acceptability by the community as a valid tender in payments, and other transfers of capital. Secondly, the steadiness of the Measure of Value, in which all contracts are made, and all business is carried on: so that when a man engages to pay a certain sum of money, that sum, when the time of payment arrives, shall possess neither more nor less value (as measured by goods or other property) than it did at the time when the contract was made.

A perfect system of currency ought to attain both of these objects fully. And the best system is that which attains both of these objects in the greatest degree. Let us apply this test to the three forms of note-issues above described.

I. A State-currency attains the first of these objects-namely, the validity of the note-fully. Statenotes are necessarily a valid tender at all times and under all circumstances. The State expenditure is made in these notes, and the State taxes are paid in these notes. They thus possess a value independent of their being convertible into the precious metals. Whether there is

much specie in the country, or none at all, these notes are always a legal tender. Hence the validity of such a form of currency is perfect and unquestionable.

But a State-currency does not insure the other requisite-namely, the unchangeableness of the measure of value. To maintain unchanged the measure of value (i. e., the value of the currency) two points must be attended to. 1. The currency must not be increased while the monetary requirements of the community remain unchanged, otherwise the measure of value will be depreciated. 2. The currency must not remain at the same amount when the monetary requirements of the country are increased, otherwise the measure of value will be enhanced. Under a right monetary system, the amount of the currency and the requirements of the community will always be commensurate, the currency in such a case increasing or diminishing according to the natural law of supply and demand.

But a State-currency is not necessarily based upon this principle. The weak point of a State-currency is, that the amount of the noteissues has no necessary connection with the monetary requirements of the community; and therefore of itself gives no security for the maintenance of the measure of value. The peculiar defect of a State-currency is its liability to excessproducing a depreciation of the measure of value.

It is possible, of course, to conceive a case in which a State-currency might be inadequate to the monetary wants of the community. This might happen if the State-issues were restricted to the amount of each year's taxation. The monetary transactions of a community are

regulated in extent partly by the amount of taxation, partly by the condition of trade. But the monetary requirements of trade and the amount of taxation are not mutually dependent; and a currencysystem which is regulated by the latter only, cannot be adjusted for both. Hence, under a State - currency, strictly limited to the amount of the year's taxation, the measure of value might be enhanced,-in consequence of there being no provision for an enlargement of the currency when an increase takes place in the monetary requirements of trade.

But, as a matter of fact, the tendency of a system of State-issues is quite the other way. It is al ways prone to run into excess. In exceptional times-for example, in time of war-the Government cannot cover all its expenditure by means of taxation. It must have recourse to loans. And it is quite reasonable that, in the life of a nation, the exceptional seasons of war should borrow from the normal seasons of peace: just as a merchant in bad years must have recourse to a portion of the profits which he makes in ordinary times. But instead of contracting loans, a Government which has free power to issue State-money has every inducement to meet the extra expenditure by means of an increased issue of its notes. In this way the State obtains the required sum without having to pay interest for it. This may be called a forced loan; strictly speaking, it is taxation in a disguised form. If the extra issues of notes were really accompanied by an increase in the monetary requirements of the community, no depreciation of the currency would take place; and the result would be a pure gain alike to the Government and to the community. And no doubt an increase of the monetary require ments of the country generally does, to a certain extent, occur in

these exceptional times; the very increase of the Government expenditure of itself occasioning an increased requirement for currency. Moreover, if the general trade of a country be not diminished (and sometimes it is not) by the occurrence of war, then the war of itself, by creating a new branch of trade, augments the monetary requirements of a community, and tends to absorb the extra issues, of State - currency. But, however these causes may lessen the depreciation of the currency which naturally ensues from an extra issue of paper-money by the Government (in lieu of contracting loans), they are seldom or never so potent as to prevent a depreciation of the measure of value. is a serious objection to a Statecurrency because, although the community may lose no more (in the end it generally loses less) in this way than if a loan were contracted, the temporary alteration in the measure of value inflicts great hardship upon individualscreditors losing, and debtors gaining; and when such a system is carried to the length it has been recently in America, a widespread spirit of gambling is generated, which is inimical to the interests of honest industry, and demoralising in its effects upon the community at large.

This

In fine: a system of State-currency insures in the most perfect manner the validity of the note, but it does not insure the maintenance of the measure of value. That is to say, a State-currency renders the Note at all times a valid tender, but it does not insure that the value of the note, relatively to goods and other kinds of property, shall be always the same.

II. A single Bank of Issue. Such establishments exist in a composite form-partly private, and partly as a State Bank. The Bank of France is of this kind. The Bank of England, although essentially a private bank, and acting as such, is so

favoured by State privileges, and fettered by State restrictions, that it is really of this kind also. In such cases, there is an anomaly which bids defiance to precise criticism. But let us treat the Single Bank of Issue as a private establishment, as the Bank of England essentially is, and in accordance with which view it regulates its operations. And let us apply to it the two tests which we have specified, the fulfilment of which is requisite in a perfect system of

currency.

Firstly, as regards the validity of the note. It is obvious that the notes of a private bank cannot possibly surpass, and rarely equal, in validity those issued by the State. However perfect may be the credit of a private bank, and even though it possess the sole power of issuing notes, still it is bound to give specie for its notes on demand; whereas State-notes circulate, and must be accepted, quite irrespective of their convertibility into specie.

Secondly, as to insuring the maintenance of the measure of value-i. e., of the currency. A single bank of issue, although a private establishment, might do this; for it is in direct relation with trade and the monetary requirements of the community. As these requirements increase, the bank's issues may increase; when they diminish, its issues will of necessity diminish. They must diminish in the latter case, because the public will not take more notes than they require; but in the former case, whether or not the note-issues of the Bank increase in accordance with the requirements of the community depends partly on the condition of the bank at the time, and partly upon the motives which regulate its action. Let us consider these two points.

A private bank is bound to insure the constant convertibility of

its notes. If the bank is above suspicion, practically no danger at all arises to the bank upon this ground. As long as a bank is known to be thoroughly solvent, no demand is ever made upon it for payment of its notes in specie.* Nevertheless a bank must guard to some extent against the possibility of such a demand arising. Such a demand, it is true, as regards a bank which possesses the confidence of the public, is quite trifling; at the most, it never amounts to one-tenth of the note-issues in the case of the Bank of England, or one-fifteenth in the case of the Bank of France. In fact, as experience has shown, the notes of both of these banks circulate freely even at times when the Bank's stock of specie, wherewith it has to meet all its liabilities, is not more than a million sterling. But the Banks of England and of France are liable to a drain of specie from which a purely State bank of issue is exempt. They are liable to pay their deposits as well as their notes in specie. Hence, under the system of a single private bank of issue, an embarrassment arises whenever a demand for payment of deposits in specie occurs. The bank must attend alike to the convertibility of its notes and to the payment of its deposits in specie. And as the only (or almost the only) portion of its deposits of which payment is demanded in specie is that which is produced by its discounting of bills or advances upon securities, it must either restrict these loans or else provide itself with the requisite amount of specie for carrying on its business safely. But as a single bank of issue has necessarily a monopoly of the currency, it is tempted to shirk its own duty by throwing the burden upon the community. Accordingly, as a matter of fact, the Bank of England (and in a lesser degree the Bank of France), whenever an unusual de

mand for gold arises, takes no steps to provide itself with specie at its own expense, but charges higher rates for its loans: thereby altering the rate of interest and the measure of value the maintenance of which at a steady level is, as we have said, one of the two prime requisites of a perfect currencysystem.

Thus, however perfect may be the validity of the note under the system of a single bank of issueeven though it equal (and it can never surpass) that of a State-currency-such a system gives no security for the maintenance of the measure of value and the rate of interest. On the contrary, the fact of a single bank of issue being a private establishment, naturally induces it to raise the rate of interest as high as it possibly can. And the fact that such a bank has a monopoly of the currency-of the means of lending capital-gives it free scope to act in accordance with its own interests, irrespective of those of the community. The State has no motive in restricting the currency, and thereby raising the rate of interest. It does not receive deposits, liable to be called for in specie; nor does it deal in the discounting of bills, which would give it a motive for keeping the rate of interest high. Thus a State-system of currency is free from one of the embarrassments which beset banks; and it is free also from the motive which banks have in raising the value of the commodity in which they deal. The State benefits most when the community benefits most. In exceptional times, the State is tempted to alter the measure of value by issuing more notes than are called for by the monetary requirements of the community; but under no circumstances has it any inducement to enhance the value of the currency by imposing arbitrary restrictions upon the issue of its notes. A single bank of issue, on the contrary, has this inducement.

Its first aim is to make the largest amount of profit it possibly canof course, at the expense of the community; and the monopoly which it enjoys enables it to act upon this principle unchecked, and sometimes to a most serious extent.

III. Plurality of note-issues. If the notes of a single bank of issue rarely equal, and cannot possibly surpass, in validity State - notes, a currency which is composed of the note-issues of many separate banks must be still less perfect in this respect. Every bank is liable to lose the confidence of the public and to experience a run for deposits, which endangers also the validity of its notes-a liability from which the State, of course, is free. On this account the greater the number of banks of issue the weaker (per se) is the basis of the currency. It is more easy to establish firmly in public opinion the credit of one bank than of many. So that, in the case of a single bank of issue (as notably in the case of the Bank of France), a smaller amount of specie is needed to secure convertibility than in the case of many banks of issue. It is true-as we have pointed out before-that the note-issues of a solvent and wellcredited bank hardly, as a matter of fact, constitute any part of its liabilities: seeing that no one wishes to cash notes save from loss of confidence in the bank which issues them; and that when an unusual external demand for gold arises, the drain is not made by cashing notes (by the tedious and impracticable process of collecting notes, and then taking them to the Bank to be exchanged for gold), but by getting discounts. Nevertheless it is indisputable that the credit and solvency of a single bank of issue can be more firmly secured than the credit of many such banks. And hence it follows that, as regards the validity of the note, as well as the economy of specie, the system of a single bank of issue is

preferable to that of a plurality of banks of issue.

Thus, as regards one of the two prime requisites of a perfect currency-system, the preference must be given to a single bank of issue. But as regards the other requisite namely, the maintenance of the currency, and the rate of interest, in their normal condition-an entirely opposite judgment must be given. The value of money-as of every other commodity-depends upon the law of supply and demand; and the only way in which the supply can be regulated on natural conditions, is by means of free competition. A private monopoly of the supply of currency is as pernicious a thing as a private monopoly of the supply of corn or of any other commodity. Indeed it is Indeed it is much worse. Hence the system of a single bank of issue is fundamentally vicious, and most injurious to the community. All banks, we repeat-and this is our cardinal principle-ought to have equally the means of employing their capital and utilising their credit. The capital at the disposal of each bank, of course, is different-so also is the extent of its credit,-but each bank ought equally to have the means of employing its resources. Whether these means should consist of notes of its own, or notes supplied from another source, we shall consider in the sequel; but it is already obvious, that to make the banks of a country dependent upon a Single Bank for a supply of the means (notes) of carrying on their business, is to subject the measure of value and the rate of interest to unnatural conditions, by conferring upon this single bank a monopoly, and converting all the other banks into mere satellites and dependants, thereby preventing that free competition which is indispensable to keep the rate of interest at its natural level.

Thus each of the three systems which we have passed in review has its peculiar defects. In a State

currency we have to guard against over-issues, and consequent alteration of the measure of value through depreciations of the note. In the case of a Single Bank of Issue, we have specially to guard against the action of monopoly, in unduly enhancing the value of money on loan, and (thereby) of the currency at large. Under a system of Freedom of Issues, we must take means to secure the validity of the Note.

If, then, there is to be a diversity of note-issues, what is the best means of insuring their validity? If, on the other hand, the unity of the note is to be established, in what hands is this exclusive right of issue to be placed, so as to avoid the evils of a monopoly? To give the sole power of issuing currency to a private bank, will never do. If the currency is to be supplied from one source only, that source ought to be the State. Nevertheless, if the measure of value is to be kept steady, some other system than that of State-issues must be called into play.

If the measure of value is to remain steady, or subject only to natural fluctuations, this must be accomplished by means of a system which responds freely to the monetary requirements of the community. The value of money, like that of all other commodities, depends upon the amount of the supply and the extent of the demand. If the amount of money in a country remains the same at a time when the monetary requirements of the community (owing to increase of population and trade, or any other cause) experience an increase, then the value of the currency will be altered, all business will be deranged, and all contracts vitiated. In like manner, if the amount of the currency be diminished, while the monetary requirements of the community continue as before, the same result will ensue; the value of money will be raised, and prices lowered. In either case, the same quantity of goods or land, houses or