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John Stuart Mill's book Principles of Political Economy is
full of treasures. Here's Book III, Chapter XIII, "Of an
Inconvertible Paper Currency."
Read
Principles of Political Economy online.
In this extended discussion, Mill shows that you can have a gold
standard currency without "convertibility." You just have to adjust
the supply appropriately. However, the opportunity for mischief is
such that these systems are prone to corruption and failure. For
that reason, I recommend convertibility today. However, I think that
you can't run a proper gold standard system, even with
convertibility, if you don't understand the proper operating
mechanisms. Learning about how to run a system without
convertibility is an essential step in understanding the correct
operating mechanisms.
January
15,
2012:
...
Gold Standard Technical Operating Discussions 2: More Variations
target="_blank" January
8,
...
2012: Some Gold Standand Technical Operating Discussions
Book III, Chapter XIII
Of an Inconvertible Paper Currency
III.13.1
§1. After experience had shown that pieces of paper, of no
intrinsic value, by merely bearing upon them the written profession
of being equivalent to a certain number of francs, dollars, or
pounds, could be made to circulate as such, and to produce all the
benefit to the issuers which could have been produced by the coins
which they purported to represent; governments began to think that
it would be a happy device if they could appropriate to themselves
this benefit, free from the condition to which individuals issuing
such paper substitutes for money were subject, of giving, when
required, for the sign, the thing signified. They determined to try
whether they could not emancipate themselves from this unpleasant
obligation, and make a piece of paper issued by them pass for a
pound, by merely calling it a pound, and consenting to receive it in
payment of the taxes. And such is the influence of almost all
established governments, that they have generally succeeded in
attaining this object: I believe I might say they have always
succeeded for a time, and the power has only been lost to them after
they had compromised it by the most flagrant abuse.
III.13.2
In the case supposed, the functions of money are performed by a
thing which derives its power for performing them solely from
convention; but convention is quite sufficient to confer the power;
since nothing more is needful to make a person accept anything as
money, and even at any arbitrary value, than the persuasion that it
will be taken from him on the same terms by others. The only
question is, what determines the value of such a currency; since it
cannot be, as in the case of gold and silver (or paper exchangeable
for them at pleasure), the cost of production.
III.13.3
We have seen, however, that even in the case of a metallic currency,
the immediate agency in determining its value is its quantity. If
the quantity, instead of depending on the ordinary mercantile
motives of profit and loss, could be arbitrarily fixed by authority,
the value would depend on the fiat of that authority, not on cost of
production. The quantity of a paper currency not convertible into
the metals at the option of the holder, can be arbitrarily fixed;
especially if the issuer is the sovereign power of the state. The
value, therefore, of such a currency is entirely arbitrary.
III.13.4
Suppose that, in a country of which the currency is wholly metallic,
a paper currency is suddenly issued, to the amount of half the
metallic circulation; not by a banking establishment, or in the form
of loans, but by the government, in payment of salaries and purchase
of commodities. The currency being suddenly increased by one-half,
all prices will rise, and among the rest, the prices of all things
made of gold and silver. An ounce of manufactured gold will become
more valuable than an ounce of gold coin, by more than that
customary difference which compensates for the value of the
workmanship; and it will be profitable to melt the coin for the
purpose of being manufactured, until as much has been taken from the
currency by the subtraction of gold, as had been added to it by the
issue of paper. Then prices will relapse to what they were at first,
and there will be nothing changed except that a paper currency has
been substituted for half of the metallic currency which existed
before. Suppose, now, a second emission of paper; the same series of
effects will be renewed; and so on, until the whole of the metallic
money has disappeared: that is, if paper be issued of as low a
denomination as the lowest coin; if not, as much will remain as
convenience requires for the smaller payments. The addition made to
the quantity of gold and silver disposable for ornamental purposes,
will somewhat reduce, for a time, the value of the article; and as
long as this is the case, even though paper has been issued to the
original amount of the metallic circulation, as much coin will
remain in circulation along with it, as will keep the value of the
currency down to the reduced value of the metallic material; but the
value having fallen below the cost of production, a stoppage or
diminution of the supply from the mines will enable the surplus to
be carried off by the ordinary agents of destruction, after which,
the metals and the currency will recover their natural value. We are
here supposing, as we have supposed throughout, that the country has
mines of its own, and no commercial intercourse with other
countries; for, in a country having foreign trade, the coin which is
rendered superfluous by an issue of paper is carried off by a much
prompter method.
III.13.5
Up to this point, the effects of a paper currency are substantially
the same, whether it is convertible into specie or not. It is when
the metals have been completely superseded and driven from
circulation, that the difference between convertible and
inconvertible paper begins to be operative. When the gold or silver
has all gone from circulation, and an equal quantity of paper has
taken its place, suppose that a still further issue is superadded.
The same series of phenomena recommences: prices rise, among the
rest the prices of gold and silver articles, and it becomes an
object as before to procure coin in order to convert it into
bullion. There is no longer any coin in circulation; but if the
paper currency is convertible, coin may still be obtained from the
issuers, in exchange for notes. All additional notes, therefore,
which are attempted to be forced into circulation after the metals
have been completely superseded, will return upon the issuers in
exchange for coin; and they will not be able to maintain in
circulation such a quantity of convertible paper as to sink its
value below the metal which it represents. It is not so, however,
with an inconvertible currency. To the increase of that (if
permitted by law) there is no check. The issuers may add to it
indefinitely, lowering its value and raising prices in proportion;
they may, in other words, depreciate the currency without limit.
III.13.6
Such a power, in whomsoever vested, is an intolerable evil. All
variations in the value of the circulating medium are mischievous:
they disturb existing contracts and expectations, and the liability
to such changes renders every pecuniary engagement of long date
entirely precarious. The person who buys for himself, or gives to
another, an annuity of 100l., does not know whether it will be
equivalent to 200l. or to 50l. a few years hence. Great as this evil
would be if it depended only on accident, it is still greater when
placed at the arbitrary disposal of an individual or a body of
individuals; who may have any kind or degree of interest to be
served by an artificial fluctuation in fortunes; and who have at any
rate a strong interest in issuing as much as possible, each issue
being in itself a source of profit. Not to add, that the issuers may
have, and in the case of a government paper, always have, a direct
interest in lowering the value of the currency, because it is the
medium in which their own debts are computed.
III.13.7
§2. In order that the value of the currency may be secure from
being altered by design, and may be as little as possible liable to
fluctuation from accident, the articles least liable of all known
commodities to vary in their value, the precious metals, have been
made in all civilized countries the standard of value for the
circulating medium; and no paper currency ought to exist of which
the value cannot be made to conform to theirs. Nor has this
fundamental maxim ever been entirely lost sight of, even by the
governments which have most abused the power of creating
inconvertible paper. If they have not (as they generally have)
professed an intention of paying in specie at some indefinite future
time, they have at least, by giving to their paper issues the names
of their coins, made a virtual, though generally a false, profession
of intending to keep them at a value corresponding to that of the
coins. This is not impracticable, even with an inconvertible paper.
There is not indeed the self-acting check which convertibility
brings with it. But there is a clear and unequivocal indication by
which to judge whether the currency is depreciated, and to what
extent. That indication is, the price of the precious metals. When
holders of paper cannot demand coin to be converted into bullion,
and when there is none left in circulation, bullion rises and falls
in price like other things; and if it is above the Mint price, if an
ounce of gold, which would be coined into the equivalent of 3l. 17s.
101/2d., is sold for 4l. or 5l. in paper, the value of the currency
has sunk just that much below what the value of a metallic currency
would be. If, therefore, the issue of inconvertible paper were
subjected to strict rules, one rule being that whenever bullion rose
above the Mint price, the issues should he contracted until the
market price of bullion and the Mint price were again in accordance,
such a currency would not be subject to any of the evils usually
deemed inherent in an inconvertible paper.
III.13.8
But also such a system of currency would have no advantages
sufficient to recommend it to adoption. An inconvertible currency,
regulated by the price of bullion, would conform exactly, in all its
variations, to a convertible one; and the only advantage gained,
would be that of exemption from the necessity of keeping any reserve
of the precious metals; which is not a very important consideration,
especially as a government, so long as its good faith is not
suspected, needs not keep so large a reserve as private issuers,
being not so liable to great and sudden demands, since there never
can be any real doubt of its solvency. Against this small advantage
is to be set, in the first place, the possibility of fraudulent
tampering with the price of bullion for the sake of acting on the
currency; in the manner of the fictitious sales of corn, to
influence the averages, so much and so justly complained of while
the corn laws were in force. But a still stronger consideration is
the importance of adhering to a simple principle, intelligible to
the most untaught capacity. Everybody can understand convertibility;
every one sees that what can be at any moment exchanged for five
pounds, is worth five pounds. Regulation by the price of bullion is
a more complex idea, and does not recommend itself through the same
familiar associations. There would be nothing like the same
confidence, by the public generally, in an inconvertible currency so
regulated, as in a convertible one: and the most instructed person
might reasonably doubt whether such a rule would be as likely to be
inflexibly adhered to. The grounds of the rule not being so well
understood by the public, opinion would probably not enforce it with
as much rigidity, and, in any circumstances of difficulty, would be
likely to turn against it; while to the government itself a
suspension of convertibility would appear a much stronger and more
extreme measure, than a relaxation of what might possibly be
considered a somewhat artificial rule. There is therefore a great
preponderance of reasons in favour of a convertible, in preference
to even the best regulated inconvertible currency. The temptation to
over-issue, in certain financial emergencies, is so strong, that
nothing is admissible which can tend, in however slight a degree, to
weaken the barriers that restrain it.
III.13.9
§3. Although no doctrine in political economy rests on more
obvious grounds than the mischief of a paper currency not maintained
at the same value with a metallic, either by convertibility, or by
some principle of limitation equivalent to it; and although,
accordingly, this doctrine has, though not till after the
discussions of many years, been tolerably effectually drummed into
the public mind; yet dissentients are still numerous, and projectors
every now and then start up, with plans for curing all the
economical evils of society by means of an unlimited issue of
inconvertible paper. There is, in truth, a great charm in the idea.
To be able to pay off the national debt, defray the expenses of
government without taxation, and in fine, to make the fortunes of
the whole community, is a brilliant prospect, when once a man is
capable of believing that printing a few characters on bits of paper
will do it. The philosopher's stone could not be expected to do
more.
III.13.10
As these projects, however often slain, always resuscitate, it is
not superfluous to examine one or two of the fallacies by which the
schemers impose upon themselves. One of the commonest is, that a
paper currency cannot be issued in excess so long as every note
issued represents property, or has a foundation of actual property
to rest on. These phrases, of representing and resting, seldom
convey any distinct or well-defined idea: when they do, their
meaning is no more than this—that the issuers of the paper must have
property, either of their own, or entrusted to them, to the value of
all the notes they issue: though for what purpose does not very
clearly appear; for if the property cannot be claimed in exchange
for the notes, it is difficult to divine in what manner its mere
existence can serve to uphold their value. I presume, however, it is
intended as a guarantee that the holders would be finally
reimbursed, in case any untoward event should cause the whole
concern to be wound up. On this theory there have been many schemes
for "coining the whole land of the country into money" and the like.
III.13.11
In so far as this notion has any connexion at all with reason, it
seems to originate in confounding two entirely distinct evils, to
which a paper currency is liable. One is, the insolvency of the
issuers; which, if the paper is grounded on their credit—if it makes
any promise of payment in cash, either on demand or at any future
time—of course deprives the paper of any value which it derives from
the promise. To this evil paper credit is equally liable, however
moderately used; and against it a proviso that all issues should be
"founded on property," as for instance that notes should only be
issued on the security of some valuable thing expressly pledged for
their redemption, would really be efficacious as a precaution. But
the theory takes no account of another evil, which is incident to
the notes of the most solvent firm, company, or government; that of
being depreciated in value from being issued in excessive quantity.
The assignats, during the French Revolution, were an example of a
currency grounded on these principles. The assignats "represented"
an immense amount of highly valuable property, namely the lands of
the crown, the church, the monasteries, and the emigrants; amounting
possibly to half the territory of France. They were, in fact, orders
or assignments on this mass of land. The revolutionary government
had the idea of "coining" these lands into money; but, to do them
justice, they did not originally contemplate the immense
multiplication of issues to which they were eventually driven by the
failure of all other financial resources. They imagined that the
assignats would come rapidly back to the issuers in exchange for
land, and that they should be able to reissue them continually until
the lands were all disposed of, without having at any time more than
a very moderate quantity in circulation. Their hope was frustrated:
the land did not sell so quickly as they expected; buyers were not
inclined to invest their money in possessions which were likely to
be resumed without compensation if the Revolution succumbed: the
bits of paper which represented land, becoming prodigiously
multiplied, could no more keep up their value than the land itself
would have done if it had all been brought to market at once: and
the result was that it at last required an assignat of six hundred
francs to pay for a pound of butter.*41
III.13.12
The example of the assignats has been said not to be conclusive,
because an assignat only represented land in general, but not a
definite quantity of land. To have prevented their depreciation, the
proper course, it is affirmed, would have been to have made a
valuation of all the confiscated property at its metallic value, and
to have issued assignats up to, but not beyond, that limit; giving
to the holders a right to demand any piece of land, at its
registered valuation, in exchange for assignats to the same amount.
There can be no question about the superiority of this plan over the
one actually adopted. Had this course been followed, the assignats
could never have been depreciated to the inordinate degree they
were; for—as they would have retained all their purchasing power in
relation to land, however much they might have fallen in respect to
other things—before they had lost very much of their market value,
they would probably have been brought in to be exchanged for land.
It must be remembered, however, that their not being depreciated
would pre-suppose that no greater number of them continued in
circulation than would have circulated if they had been convertible
into cash. However convenient, therefore, in a time of revolution,
this currency convertible into land on demand might have been, as a
contrivance for selling rapidly a great quantity of land with the
least possible sacrifice; it is difficult to see what advantage it
would have, as the permanent system of a country, over a currency
convertible into coin: while it is not at all difficult to see what
would be its disadvantages; since land is far more variable in value
than gold and silver; and besides, land, to most persons, being
rather an encumbrance than a desirable possession, except to be
converted into money, people would submit to a much greater
depreciation before demanding land, than they will before demanding
gold or silver.*42 *43
III.13.13
§4 Another of the fallacies from which the advocates of an
inconvertible currency derive support, is the notion that an
increase of the currency quickens industry. This idea was set afloat
by Hume, in his Essay on Money, and has had many devoted adherents
since; witness the Birmingham currency school, of whom Mr. Attwood
was at one time the most conspicuous representative. Mr. Attwood
maintained that a rise of prices, produced by an increase of paper
currency, stimulates every producer to his utmost exertions, and
brings all the capital and labour of the country into complete
employment; and that this has invariably happened in all periods of
rising prices, when the rise was on a sufficiently great scale. I
presume, however, that the inducement which, according to Mr.
Attwood, excited this unusual ardour in all persons engaged in
production, must have been the expectation of getting more
commodities generally, more real wealth, in exchange for the produce
of their labour, and not merely more pieces of paper. This
expectation, however, must have been, by the very terms of the
supposition, disappointed, since, all prices being supposed to rise
equally, no one was really better paid for his goods than before.
Those who agree with Mr. Attwood could only succeed in winning
people on to these unwonted exertions by a prolongation of what
would in fact be a delusion; contriving matters so, that by a
progressive rise of money prices, every producer shall always seem
to be in the very act of obtaining an increased remuneration which
he never, in reality, does obtain. It is unnecessary to advert to
any other of the objections to this plan than that of its total
impracticability. It calculates on finding the whole world
persisting for ever in the belief that more pieces of paper are more
riches, and never discovering that, with all their paper, they
cannot buy more of anything that they could before. No such mistake
was made during any of the periods of high prices, on the experience
of which this school lays so much stress. At the periods which Mr.
Attwood mistook for times of prosperity, and which were simply (as
all periods of high prices, under a convertible currency, must be)
times of speculation, the speculators did not think they were
growing rich because the high prices would last, but because they
would not last, and because whoever contrived to realize while they
did last, would find himself, after the recoil, in possession of a
greater number of pounds sterling, without their having become of
less value. If, at the close of the speculation, an issue of paper
had been made, sufficient to keep prices up to the point which they
attained when at the highest, no one would have been more
disappointed than the speculators; since the gain which they thought
to have reaped by realizing in time (at the expense of their
competitors, who bought when they sold, and had to sell after the
revulsion) would have faded away in their hands, and instead of it
they would have got nothing except a few more paper tickets to count
by.
III.13.14
Hume's version of the doctrine differed in a slight degree from Mr.
Attwood's. He thought that all commodities would not rise in price
simultaneously, and that some persons therefore would obtain a real
gain, by getting more money for what they had to sell, while the
things which they wished to buy might not yet have risen. And those
who would reap this gain would always be (he seems to think) the
first comers. It seems obvious, however, that for every person who
thus gains more than usual, there is necessarily some other person
who gains less. The loser, if things took place as Hume supposes,
would be the seller of the commodities which are slowest to rise;
who, by the supposition, parts with his goods at the old prices, to
purchasers who have already benefited by the new. This seller has
obtained for his commodity only the accustomed quantity of money,
while there are already some things of which that money will no
longer purchase as much as before. If, therefore, he knows what is
going on, he will raise his price, and then the buyer will not have
the gain, which is supposed to stimulate his industry. But if, on
the contrary, the seller does not know the state of the case, and
only discovers it when he finds, in laying his money out, that it
does not go so far, he then obtains less than the ordinary
remuneration for his labour and capital; and if the other dealer's
industry is encouraged, it should seem that his must, from the
opposite cause, be impaired.
III.13.15
§5. There is no way in which a general and permanent rise of
prices, or in other words, depreciation of money, can benefit
anybody, except at the expense of somebody else. The substitution of
paper for metallic currency is a national gain: any further increase
of paper beyond this is but a form of robbery.
III.13.16
An issue of notes is a manifest gain to the issuers, who, until the
notes are returned for payment, obtain the use of them as if they
were a real capital: and so long as the notes are no permanent
addition to the currency, but merely supersede gold or silver to the
same amount, the gain of the issuer is a loss to no one; it is
obtained by saving to the community the expense of the more costly
material. But if there is no gold or silver to be superseded—if the
notes are added to the currency, instead of being substituted for
the metallic part of it—all holders of currency lose, by the
depreciation of its value, the exact equivalent of what the issuer
gains. A tax is virtually levied on them for his benefit. It will be
objected by some, that gains are also made by the producers and
dealers who, by means of the increased issue, are accommodated with
loans. Theirs, however, is not an additional gain, but a portion of
that which is reaped by the issuer at the expense of all possessors
of money. The profits arising from the contribution levied upon the
public, he does not keep to himself, but divides with his customers.
III.13.17
But besides the benefit reaped by the issuers, or by others through
them, at the expense of the public generally, there is another
unjust gain obtained by a larger class, namely by those who are
under fixed pecuniary obligations. All such persons are freed, by a
depreciation of the currency, from a portion of the burthen of their
debts or other engagements: in other words, part of the property of
their creditors is gratuitously transferred to them. On a
superficial view it may be imagined that this is an advantage to
industry; since the productive classes are great borrowers, and
generally owe larger debts to the unproductive (if we include among
the latter all persons not actually in business) than the
unproductive classes owe to them; especially if the national debt be
included. It is only thus that a general rise of prices can be a
source of benefit to producers and dealers; by diminishing the
pressure of their fixed burthens. And this might be accounted an
advantage, if integrity and good faith were of no importance to the
world, and to industry and commerce in particular. Not many,
however, have been found to say that the currency ought to be
depreciated on the simple ground of its being desirable to rob the
national creditor and private creditors of a part of what is in
their bond. The schemes which have tended that way have almost
always had some appearance of special and circumstantial
justification, such as the necessity of compensating for a prior
injustice committed in the contrary direction.
III.13.18
§6. Thus in England, for many years subsequent to 1819, it was
pertinaciously contended, that a large portion of the national debt
and a multitude of private debts still in existence, were contracted
between 1797 and 1819, when the Bank of England was exempted from
giving cash for its notes; and that it is grossly unjust to
borrowers (that is, in the case of the national debt, to all
tax-payers) that they should be paying interest on the same nominal
sums in a currency of full value, which were borrowed in a
depreciated one.*44 The depreciation, according to the views and
objects of the particular writer, was represented to have averaged
thirty, fifty, or even more than fifty per cent: and the conclusion
was, that either we ought to return to this depreciated currency, or
to strike off from the national debt, and from mortgages or other
private debts of old standing, a percentage corresponding to the
estimated amount of the depreciation.
III.13.19
To this doctrine, the following was the answer usually made.
Granting that, by returning to cash payments without lowering the
standard, an injustice was done to debtors, in holding them liable
for the same amount of a currency enhanced in value, which they had
borrowed while it was depreciated; it is now too late to make
reparation for this injury. The debtors and creditors of to-day are
not the debtors and creditors of 1819: the lapse of years has
entirely altered the pecuniary relations of the community; and it
being impossible now to ascertain the particular persons who were
either benefited or injured, to attempt to retrace our steps would
not be redressing a wrong, but superadding a second act of
wide-spread injustice to the one already committed. This argument is
certainly conclusive on the practical question; but it places the
honest conclusion on too narrow and too low a ground. It concedes
that the measure of 1819, called Peel's Bill; by which cash payments
were resumed at the original standard of 3l. 17s. 10½d., was
really the injustice it was said to be. This is an admission wholly
opposed to the truth. Parliament had no alternative; it was
absolutely bound to adhere to the acknowledged standard; as may be
shown on three distinct grounds, two of fact, and one of principle.
III.13.20
The reasons of fact are these. In the first place, it is not true
that the debts, private or public, incurred during the Bank
restriction, were contracted in a currency of lower value than that
in which the interest is now paid. It is indeed true that the
suspension of the obligation to pay in specie did put it in the
power of the Bank to depreciate the currency. It is true also that
the Bank really exercised that power, though to a far less extent
than is often pretended; since the difference between the market
price of gold and the Mint valuation, during the greater part of the
interval, was very trifling, and when it was greatest, during the
last five years of the war, did not much exceed thirty per cent. To
the extent of that difference, the currency was depreciated, that
is, its value was below that of the standard to which it professed
to adhere. But the state of Europe at that time was such—there was
so unusual an absorption of the precious metals, by hoarding, and in
the military chests of the vast armies which then desolated the
Continent, that the value of the standard itself was very
considerably raised: and the best authorities, among whom it is
sufficient to name Mr. Tooke, have, after an elaborate
investigation, satisfied themselves that the difference between
paper and bullion was not greater than the enhancement in value of
gold itself, and that the paper, though depreciated relatively to
the then value of gold, did not sink below the ordinary value, at
other times, either of gold or of a convertible paper. If this be
true (and the evidences of the fact are conclusively stated in Mr.
Tooke's History of Prices) the foundation of the whole case against
the fundholder and other creditors on the ground of depreciation is
subverted.
III.13.21
But, secondly, even if the currency had really been lowered in value
at each period of the Bank restriction, in the same degree in which
it was depreciated in relation to its standard, we must remember
that a part only of the national debt, or of other permanent
engagements, was incurred during the Bank restriction. A large part
had been contracted before 1797; a still larger during the early
years of the restriction, when the difference between paper and gold
was yet small. To the holders of the former part, an injury was
done, by paying the interest for twenty-two years in a depreciated
currency: those of the second, suffered an injury during the years
in which the interest was paid in a currency more depreciated than
that in which the loans were contracted. To have resumed cash
payments at a lower standard would have been to perpetuate the
injury to these two classes of creditors, in order to avoid giving
an undue benefit to a third class, who had lent their money during
the few years of greatest depreciation. As it is, there was an
underpayment to one set of persons, and an overpayment to another.
The late Mr. Mushet took the trouble to make an arithmetical
comparison between the two amounts. He ascertained, by calculation,
that if an account had been made out in 1819, of what the
fundholders had gained and lost by the variation of the paper
currency from its standard, they would have been found as a body to
have been losers; so that if any compensation was due on the ground
of depreciation, it would not be from the fundholders collectively,
but to them.
III.13.22
Thus it is with the facts of the case. But these reasons of fact are
not the strongest. There is a reason of principle, still more
powerful. Suppose that, not a part of the debt merely, but the
whole, had been contracted in a depreciated currency, depreciated
not only in comparison with its standard, but with its own value
before and after; and that we were now paying the interest of this
debt in a currency fifty or even a hundred per cent more valuable
than that in which it was contracted. What difference would this
make in the obligation of paying it, if the condition that it should
be so paid was part of the original compact? Now this is not only
truth, but less than the truth. The compact stipulated better terms
for the fundholder than he has received. During the whole
continuance of the Bank restriction, there was a parliamentary
pledge, by which the legislature was as much bound as any
legislature is capable of binding itself, that cash payments should
be resumed on the original footing, at farthest in six months after
the conclusion of a general peace. This was therefore an actual
condition of every loan; and the terms of the loan were more
favourable in consideration of it. Without some such stipulation,
the Government could not have expected to borrow, unless on the
terms on which loans are made to the native princes of India. If it
had been understood and avowed that, after borrowing the money, the
standard at which it was commuted might be permanently lowered, to
any extent which to the "collective wisdom" of a legislature of
borrowers might seem fit—who can say what rate of interest would
have been a sufficient inducement to persons of common sense to risk
their savings in such an adventure? However much the fundholders had
gained by the resumption of cash payments, the terms of the contract
insured their giving ample value for it. They gave value for more
than they received; since cash payments were not resumed in six
months, but in as many years, after the peace. So that waving all
our arguments except the last, and conceding all the facts asserted
on the other side of the question, the fundholders, instead of being
unduly benefited, are the injured party; and would have a claim to
compensation, if such claims were not very properly barred by the
impossibility of adjudication, and by the salutary general maxim of
law and policy, "quod interest reipublicæ ut sit finis
litium."
Notes for this chapter
41.
[Until the 6th ed. (1865) the paragraph ended with "five hundred
francs to pay for a cup of coffee."]
42.
Among the schemes of currency to which, strange to say, intelligent
writers have been found to give their sanction, one is as follows:
that the state should receive, in pledge or mortgage, any kind or
amount of property, such as land, stock, &c., and should advance
to the owners inconvertible paper money to the estimated value. Such
a currency would not even have the recommendations of the imaginary
assignats supposed in the text; since those into whose hands the
notes were paid by the persons who received them, could not return
them to the government, and demand in exchange land or stock which
was only pledged, not alienated. There would be no reflux of such
assignats as these, and their depreciation would be indefinite.
43.
[In the 2nd ed. (1849) was inserted the following section, which did
not disappear till the 5th ed. (1862):
"§ 4. One of the most transparent of the fallacies by which the
principle of the convertibility of paper money has been assailed, is
that which pervades a recent work by Mr. John Gray, Lectures on the
Nature and Use of Money: the author of the most ingenious, and least
exceptionable plan of an inconvertible currency which I have
happened to meet with. This writer has seized several of the leading
doctrines of political economy with no ordinary grasp, and among
others, the important one, that commodities are the real market for
commodities, and that Production is essentially the cause and
measure of Demand. But this proposition, true in a state of barter,
he affirms to be false under a monetary system regulated by the
precious metals, because if the aggregate of goods is increased
faster than the aggregate of money, prices must fall, and all
producers must be losers; now neither gold nor silver, nor any other
valuable thing, 'can by any possibility be increased ad libitum, as
fast as all other valuable things put together:' a limit, therefore,
is arbitrarily set to the amount of production which can take place
without loss to the producers: and on this foundation Mr. Gray
accuses the existing system of rendering the produce of this country
less by at least one hundred million pounds annually, than it would
be under a currency which admitted of expansion in exact proportion
to the increase of commodities.
"But, in the first place, what hinders gold, or any other commodity
whatever, from being 'increased as fast as all other valuable things
put together?' If the produce of the world, in all commodities taken
together, should come to be doubled, what is to prevent the annual
produce of gold from being doubled likewise? for that is all that
would be necessary, and not (as might be inferred from Mr. Gray's
language) that it should be doubled as many times over as there are
other 'valuable things' to compare it with. Unless it can be proved
that the production of bullion cannot be increased by the
application of increased labour and capital, it is evident that the
stimulus of an increased value of the commodity will have the same
effect in extending the mining operations, as it is admitted to have
in all other branches of production.
"But, secondly, even if the currency could not be increased at all,
and if every addition to the aggregate produce of the country must
necessarily be accompanied by a proportional diminution of general
prices; it is incomprehensible how any person who has attended to
the subject can fail to see that a fall of price, thus produced, is
no loss to producers: they receive less money; but the smaller
amount goes exactly as far, in all expenditure, whether productive
or personal, as the larger quantity did before. The only difference
would be in the increased burthen of fixed money payments; and of
that (coming, as it would, very gradually) a very small portion
would fall on the productive classes, who have rarely any debts of
old standing, and who would suffer almost solely in the increased
onerousness of their contribution to the taxes which pay the
interest of the National Debt."]
Book III. Chapter XIII. Section 6
44.
[Until the 5th ed. (1862) the text ran: "from 1819 to the present
time, it has been... contended," and "the answer" was spoken of in
the present tense.]
Book III. Chapter XIV. Section 1
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