|An inquiry Into The Currency Principle|
DISTINCTION OF CIRCULATION AS BETWEEN DEALER AND DEALER, AND BETWEEN DEALER AND CONSUMER.
It is of the greatest importance to a clear view of the working of the present system that the distinctive characters of the instruments of interchange should be observed and defined. Dr. Adam Smith has noticed the distinction, and has accordingly, in his views of the operation of paper money, steered clear of the confusion between currency and capital which pervades and disfigures nearly all modern reasonings on the subject.
"The circulation of every country," Dr. Smith observes, "may be considered as divided into two different branches the circulation of the dealers with one another, and the circulation between the dealers and the consumers. Though the same pieces of money, whether paper or metal, may be employed, sometimes in the one circulation and sometimes in the other, yet as both are constantly going on at the same time, each requires a certain stock of money of one kind or another to carry it on. The value of the goods circulated between the different dealers with one another never can exceed the value of those circulated between the dealers and the consumers, whatever is bought by the dealers being ultimately destined to be sold to the consumers. Paper money may be so regulated as either to confine itself very much to the circulation between the different dealers, or to extend itself likewise to a great part of that between the dealers and the consumers. When no bank notes are circulated under ten pounds value, as in London, paper money confines itself very much to the circulation between the dealers. When a ten pound bank note domes into the hands of a consumer he is generally obliged to change it at the first shop where he has occasion to purchase five shillings' worth of goods, so that it often returns into the hands of a dealer before the consumer has spent a fortieth part of the money."
There can be no doubt that the distinction here made is substantially correct. Bearing in mind this distinction, the reason is obvious why, as far as relates to the interchange between dealers and consumers (including the payment of wages, which constitute the principal means of the consumers), coin, and the smaller denomination of notes serving as coin, are essential to such interchange, and why, consequently, if those smaller notes are withdrawn, their place must be supplied by coin; but not so as regards the interchange between dealers and dealers. Bank notes are not only not essential to that interchange, but it must be manifest to any one having even a slight knowledge only of the manner in which such interchange is conducted, that, in point of fact, bank notes are rarely used in the larger dealings of sales and purchases.
The great bulk of the wholesale trade of the country is carried on and adjusted by settlements or sets-off of debts and credits, the written evidences of which are in bills of exchange (including in that term all promissory notes payable to order after date), while current payments for what are called cash sales are mostly discharged by cheques; the ultimate balance only, arising out of the vast mass of such transactions, requiring liquidation in a comparatively small amount of bank notes. The principal exceptions to this, I apprehend, are in the provision trade, and in the sheep and cattle and horse fairs, in which the payments are mostly made in coin and bank notes; but there can be no question that for amounts of 10 l. and upwards, bills of exchange might be, as they formerly were, and, but for the increased stamp duty, would be, substituted.
Of the fact that, with the exception of these, and perhaps of some few other wholesale trades in which no credit is given, there is little or no intervention of bank notes in purchases or sales among wholesale dealers, no doubt can be entertained. And I have now to state the explanation, which I am not aware of having met with among the various lucubrations on the subject of the currency which it has been my lot to see, of the reason why, with the exceptions I have pointed out, such sales and purchases are effected without actual payment in money, which, by the currency theory, is defined to be coin or bank notes.
The reason is, that all the transactions between dealers and dealers, by which are to be understood all sales from the producer or importer, through all the stages of intermediate processes of manufacture or otherwise to the retail dealer or the exporting merchant, are resolvable into movements or transfers of capital. Now transfers of capital do not necessarily suppose, nor do actually as a matter of fact entail, in the great majority of transactions, a passing of money, that is, bank notes or coin I mean bodily, and not by fiction at the time of transfer. All the movements of capital may be, and the great majority are, effected by the operations of banking and credit without the intervention of actual payment in coin or bank notes, that is, actual, visible, and tangible bank notes, not supposititious bank notes, issued with one hand and received back by the other, or, more properly speaking, entered on one side of the ledger with a counter-entry on the other. And there is the further important consideration, that the total amount of the transactions between dealers and dealers must, in the last resort, be determined and limited by the amount of those between dealers and consumers.
The business of bankers, setting aside the issue of promissory notes on demand, may be divided into two branches, corresponding with the distinction pointed out by Dr. Smith of the transactions between dealers and dealers, and between dealers and consumers. One branch of the banker's business is to collect capital from those who have not immediate employment for it, and to distribute or transfer it to those who have. The other branch is to receive deposits of the incomes of their customers, and to pay out the amount, as it is wanted for expenditure, by the latter in the objects of their consumption. The former may be considered as the business behind the counter, and the latter before or over the counter: the former being a circulation of capital, the latter of currency.
The distinction or separation in reasoning of that branch of banking which relates to the concentration of capital on the one hand and the distribution of it on the other, from that branch which is employed in administering the circulation for local purposes of the district, is so important in its bearing on the question of regulating the circulation by the foreign exchanges, and on that of the connection between the currency and prices, that the fullest elucidation of the practical operation of that distinction may naturally be required. I have, therefore, as the best method of elucidating this point, drawn largely on the examinations by the Committee on Banks of Issue in 1841; and if it be objected that more than enough of the evidence is here adduced for the purpose, seeing that the point is so clear when simply stated, my answer to the objector is, that simple and clear as the distinction may appear to him, so imbued were the members of the Committee who took a prominent part in the examination, with the tenets of the currency theory, as to have remained apparently (judging at least by the reiteration of their questions to the same effect) unconvinced of the powerlessness of the banks of issue to influence directly the amount of the circulation. And even to this day, with all the light of subsequent experience, it should seem, judging by speeches and publications, and the declamations against excessive paper issues, which still appear occasionally on the subject, that the dogma of the power of banks of issue to create paper money ad libitum prevails to nearly as great an extent as ever.