CHAP.

X.

1819.

7.

ful effects

of a paper

currency.

What rendered this great contraction of the circulating medium so crushing in the ancient world was, that they were wholly unacquainted, except for a brief period during Discovery the necessities of the second Punic War, with that marand wonder- vellous substitute for it-a paper currency. It was the Jews who first discovered this admirable system, to facilitate the transmission of their wealth amidst the violence and extortions of the middle ages; and it is, perhaps, not going too far to assert that, if it had been found out, and brought into general use, at an earlier period, it might have averted the fall of the Roman Empire. The effects of a scarcity of the precious metals, therefore, were immediately felt in the diminished wages of labour and price of produce, and increasing weight of debts and taxes. A paper currency, adequately secured and duly limited, obviates all these evils, because it provides a REPRESENTATIVE of the metallic currency, which, when the latter becomes scarce, may, without risk, be rendered a SUBSTITUTE for it. Thus the ruinous effects of a contraction of the circulating medium, even when most violent, may be entirely prevented, and the industry, revenue, and prosperity of a country completely sustained during the utmost scarcity, or even entire absence, of the precious metals. It was thus that the alarming crisis of 1797, which threatened to induce a national bankruptcy, was surmounted with ease, by the simple device of declaring the Bank of England notes, like the treasury bonds in the second Punic War, a legal tender, not convertible into cash till the close of the war; and that the year 1810, when, from the demand for gold on the Continent, there was scarcely a guinea left in this country, was one of general prosperity and the greatest national efforts recorded in its annals.

As paper may with ease be issued to any extent, either by Government or private establishments authorised to circulate it, it becomes an engine of as great danger, and attended with as destructive effects, when it is

X.

8.

of a paper

ed.

unduly multiplied as when it is unduly contracted. It CHAP. is like the blood in the human body, whose circulation sustains and is essential to animal life drained away, or 1819. not adequately fed, it leads to death by atrophy; unduly Advantages increased, it proves fatal by inducing apoplexy. To circulation, preserve a proper medium, and promote the circulation duly limitequally and healthfully through all parts of the system, is the great object of regimen alike in the natural frame and the body politic. Issued in overwhelming quantities, as it was in France during the Revolution, it induces such a rise of prices as destroys all realised capital, by permitting it to be discharged by a mere fraction of its real amount; contracted to an excessive degree, either by the mutations of commerce or the policy of Government, it proves equally fatal to industry, by lowering the money price of its produce, and augmenting the weight. of the debts and taxes with which it is oppressed.

A paper currency, when perfectly secure, and hindered by the regulations under which it is issued from becoming redundant, may not only, in the absence of gold and silver, supply its place, but in its presence almost supersede its use. "If," says Adam Smith, "the gold and silver in a country should at any time fall short, in a country which has wherewithal to purchase them, there are more expedients for supplying their place than almost any other commodity, If provisions are wanted, the people must starve; if the materials for manufacture are awanting, industry must stop; but if money is wanted, barter will supply its place, though with a good deal of inconvenience. Buying and selling upon credit, and the different dealers compensating one another once a month or year, will supply it with less inconveniency. A wellregulated paper money will supply it, not only without inconveniency, but in some cases with some advantage."1 1 Wealth of Experience may soon convince any one that this latter b.4. observation of Mr Smith is well founded, and that a duly regulated paper is often more convenient and serviceable

Nations,

1819.

CHAP. that one entirely of specie. Let him go into any bank X. at a distance from London, and he will find that they will give him sovereigns to any extent without any charge; but that for Bank of England notes, or a bill on London, they will, in one form or other, charge a premium and if he has any doubt of the superior convenience of bank-notes over specie for the transactions of life, he is recommended to compare travelling in England with £500, in five English notes, in his waistcoat pocket, with doing so in France with the same sum in napoleons in his portmanteau.

9.

standard of

value?

The question is often asked, "What is a pound?" and What is the Sir Robert Peel, after mentioning how Mr Locke and Sir Isaac Newton had failed, with all their abilities, in answering it, said that he could by no possible effort of intellect conceive it to be anything but a certain determinate weight of gold metal. Perhaps if his valuable life had been spared, and he had seen the ounce of gold selling in Australia at £3 to £3, 10s. instead of £3, 17s. 101d., the mint price, he would have modified his opinion. In truth, a pound is an abstract measure of value, just as a foot or a yard is of length; and different things have at different periods been taken to denote that measure, according as the conveniency of men suggested. It was originally a pound weight of silver; and that metal was till the present century the standard in England, as it still is in most other countries. When gold was made the standard, by the Bank being compelled by the Act of 1819 to pay in that metal, the old word, denoting its original signification of the less valuable metal, was still retained. During the war, when the metallic currency disappeared, the pound was a Bank of England pound-note the standard was thus paper, for gold was worth 28s. the pound, from the demand for it on the Continent. Since California and Australia have begun to pour forth their golden treasures, the standard has practically come again to be silver, as the precious metal

X.

1819.

which is least changing in value at this time. The CHAP. proof of this is decisive ;-the ounce of gold is selling (1853) for £3 to £3, 10s. at Melbourne; gold is measured by silver, not silver by gold. In truth, different things at different times are taken to express the much-coveted abstract standard; and what is always taken is that article in general circulation which is most steady in value and most generally received.

10.

of variations

None but those practically acquainted with the subject can conceive how powerfully, and often rapidly, an Vast effect extension or contraction of the currency acts upon the in the curgeneral industry and fortunes of the country. All other rency. causes, in a commercial state, sink into insignificance in comparison. "The judicious operations of banking," says Mr Smith, "enable the trader to convert his dead stock into active and productive stock. The first forms a very valuable part of the capital of the country, which produces nothing to the country. The operation of banking, by substituting paper in room of a great part of the gold and silver, enables the country to convert a great part of dead stock into active and productive stock-into stock which produces something to the country. The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, does not itself produce a single pile of either. The judicious operations of banking enable the country to convert, as it were, a great part of its highways into good pastures and corn-fields, and thereby increase considerably the annual produce of its land and labours."1 To this it may be added, that so great is the effect of an increase of the paper circulation, and conse- b. ii. c. 2. quently of the expansion of the credit, industry, and enterprise of a commercial state, that a country which has dead stock, as Mr Smith says, of the value of twenty thousand millions, may find the value of all its articles of merchandise enhanced or diminished fifty per cent by

VOL. II.

2 B

Wealth of

Nations,

X.

1819.

CHAP. the expansion or contraction of the currency to the extent of ten millions sterling. Such an addition or subtraction is to be compared, not to the entire amount of its realised wealth, but to the amount of that small portion of it which forms its circulating medium, upon which its prosperity depends; just as the warmth of a house is determined, not by the quantity of coals in the cellar, but by what is put upon the fires. Such an addition to the wealth of a state may be as nothing to the value of its dead stock, but it is much to the sum total of its circulating medium.

11.

effect takes

place.

It is not in the general case immediately that this When this great effect of an expansion or contraction of the currency acts upon the price of the produce and the remuneration of the labour of the country: months may sometimes elapse after the augmented issues go forth from the bank before their effects begin to appear upon prices and enterprise; years, before these effects are fully developed. But these effects are quite certain in the end an expansion never fails by degrees to stimulate, a contraction to depress. The reason of the delay in general is, that it takes a certain time for the augmented supplies of money and extended credit to flow down from the great reservoirs in the metropolis, from whence it is first issued, to the country banks which receive it, and through them upon their different customers, whose speculation and industry it develops. There is no immediate connection between augmented supplies of money, whether in gold, silver, or paper, and a rise in the price of commodities, or between their diminution and a fall; it is by the gradual process of stimulating enterprise, and increasing the demand for them in the one case, and diminishing it in the other, that these effects take place; and either is the work of time. When matters approach a crisis, however, and general alarm prevails, any operations on the currency are attended with effects much more rapidly, and sometimes instantaneously. Several instances of this will appear in the sequel of this History.