|An inquiry Into The Currency Principle|
MISTAKEN VIEW BY THE CURRENCY THEORY OF THE WORKING OF THE EXISTING SYSTEM.
If sufficient grounds have here been adduced to give rise to, at least, a suspicion that the propounders of the currency theory are unaware, or rather are under a total misconception, of what would be the working of a purely metallic circulation, we are inevitably led to suspect, or rather I should say to conclude, that they may and do labour under a misconception fully as great, not only as to what would be the working of a mixed circulation of coin and bank notes, administered according to the currency principle, that is, so as to conform to what they suppose would be the working of a metallic circulation, but as to what the working of it actually has been and is under the existing banking system.
The misconception which, as it should seem, they labour under, may be referred mainly to the view which they take of bank notes, as being essentially distinct in all their attributes and functions from each and every other of the component parts of the circulating medium, and as coming exclusively along with coin under the designation of money.
Bank notes, accordingly, they call paper money, and ascribing, as they do, a direct influence to the quantity of money on the state of trade, of confidence, and credit, and on prices, they attach great importance to the fact of any increase or diminution of bank notes in circulation, more especially as regards a conformity, or non-conformity, of such increase or diminution to variations in the amount of bullion. As therefore they conceive that it is in the power of the banks of issue so to regulate the amount of their notes in circulation, as to conform to variations in the amount of bullion, or, as it is more commonly termed, to regulate their issues, by the exchanges (inasmuch as attention to the exchanges will serve to indicate whether gold is coming in or going out, or likely to come in or go out), they consider the conformity or discrepancy between the fluctuations in the amount of bank notes in circulation and the amount of bullion in the coffers of the Bank of England, as the test or criterion of the good or bad management of the banks.
On occasions of marked discrepancy, the persons who espouse the currency principle, and are, at the same time, favourable to the Bank of England, charge the country banks with counteracting, by their inattention to the exchanges in regulating their issues, all attempts of the Bank of England to restrain the general circulation within due bounds; while the country banks, both private and joint-stock, maintain, through their organs, that it is not in their power to determine what shall be the amount of their notes in the hands of the public. And not content with thus repelling the charge made upon them, they retort it upon the Bank of England, which, according to them, has the controul of the whole circulation, and expands or contracts the amount according as suits its own purpose.
It appears to me that neither of these parties is right in charging the other; and, moreover, that those persons who, on the part of the public, judging only by the Criterion set up by the currency theory, namely, by the conformity of variations in the amount of bank notes to variations in the amount of bullion, charge the present system with causing irregularity in the circulation, and with all the evils which flow from bad regulation, are equally far from a right judgment.
I am quite convinced, and will endeavour to show, that the amount of bank notes in circulation, that is, out of the walls of the issuing banks, and in the hands of the public, furnishes no criterion of good or bad management by the banks of issue, and is not an efficient cause operating upon trade and confidence and credit, and upon prices; and that, excepting the greater inconvenience attending the insolvency of an issuing than of a non-issuing bank, there is no difference between the two descriptions of banks as regards their influence on the value of the currency.
I cannot help thinking that there is a lurking impression among the doctrinaires of the currency theory, arising mainly from their use of the term "issue of paper money," which leads them to confound bank notes strictly convertible into coin, with a compulsory and inconvertible paper currency. It is true, no doubt, that they are aware that the liability to payment on demand in gold will eventually check any excess of issue in the one, and will thus distinguish it from the other. But it seems to me equally true, judging by all their expressions and the whole course of their arguments, that they are misled by a false analogy, and that although they admit in general terms that there must be a check to the power of issue by its being brought to the test of convertibility, they are of opinion that there is a power in each individual bank of issue, and in the banks of issue collectively, to operate at any given time in adding directly to the amount of bank notes in circulation, and in withdrawing them from it. The presumption that the advocates of the currency principle are under the influence of this mistaken analogy will be strengthened when we come to the consideration of the effects on trade, credit, and prices, which they ascribe to the influence of the quantity of money, meaning bank notes and coin. In the meantime it may be proper to bestow some remarks on the reasoning by which it is proposed to be proved that bank notes differ in all essential properties, as regards the performance of the functions of money, from all other forms of paper credit employed in the business of interchange.