|An inquiry Into The Currency Principle|
STATEMENT OF THE CURRENCY PRINCIPLE.
The theory of the Currency principle numbers among its advocates many distinguished names. The fullest and most elaborate statements of it, however, are to be found in the publications of Mr. Norman, Mr. Loyd, and Colonel Torrens, and in the evidence of the two former gentlemen before the Committee of the House of Commons on Banks of Issue in 1840. I therefore avail myself mainly of their exposition of the doctrine, and their arguments in support of it, as affording the best grounds for an examination of the theory, and of the practice recommended as an application of it. The following extract from Mr. Norman's evidence conveys a concise statement of the theory, and of the proposed application of it, as the only sound rule for the paper portion of the currency, namely bank notes, which he limits to those notes which are in the hands of the public:
"I consider a metallic currency to be the most perfect currency, except so far as respects inconvenience in some respects, and cost. In every thing else a metallic currency is the most perfect, and should be looked upon as the type of all other currencies; and as from their superior convenience and greater cheapness, bank notes are introduced to supply the place of a certain portion of metallic currency, I think that bank notes should be so managed, that they should possess all the other attributes of a metallic currency, and among those attributes, I conceive the most important to be tbat they should increase and decrease in the same way that a metallic currency would increase and decrease. I do not think it is possible to improve upon a metallic currency, except in the two points of convenience and cheapness."
Mr. Norman afterwards explained, that by convenience he meant the easier transfer, and by cheap- ness, the economy of using the less costly material; so that the paper, thus regulated, would be so far an improvement on a metallic currency.
The following are the chief evils which present themselves, according to Mr. Norman's view, in our existing paper circulation, from its not conforming to such rule:
1. A tendency to vary, both as to excess and deficiency, in an unnecessary degree, and at unsuitable periods.
2. A liability to discredit, both mercantile and political, in a large portion of it, if not the whole.
3. Temporary or permanent insolvency on the part of many of the issuers.
Mr. Loyd in his evidence gives the following view of the inconvenience, which he ascribes to the present system:
Q. 2748. "Are there any other evils besides the danger of nonconvertibility that arise out of the present system?"
A. "There can be no doubt about it; the state of the circulation has a very direct effect upon the state of credit, of confidence, of prices, and of banking; and if the state of the circulation be allowed to become an unnatural one, unnatural and pernicious effects will be produced upon all those. If your circulation is subject either to depreciation from excess of its amount, or to violent fluctuations of amount, then undoubtedly that will be followed by corresponding effects upon confidence, upon credit, upon prices, upon banking, and so forth. Those things are also affected by other considerations. I do not see that it is possible to analyse the effects, and to attribute to each cause its respective share in producing those effects; all that can certainly be understood is, that if you regulate the paper circulation upon sound principles, you may be quite sure that you have then removed that portion of the evil effects which was attributable to the want of due regulation."
By an unnatural state of the circulation, and the want of due regulation, must be understood, in the sense in which Mr. Loyd uses the term, a non-conformity of the amount of bank notes to the amount of bullion.