|An inquiry Into The Currency Principle|
MODE OF OPERATION OF A METALLIC CIRCULATION.
Admitting, for the sake of argument, that a metallic circulation is the type of a perfect currency, it should seem that those who confidently pronounce it to be so, labour under a most egregious misconception of what the working of it would be.
Upon the grounds which I have now to state, it will be evident that the operation of a perfectly metallic circulation would not be attended with the advantages which they contemplate; nor, on the other hand, with the disadvantages which might be appre- hended, if it were to work as they seem to imagine it would.
According to the Currency principle, every export of the precious metals under a metallic circulation, would be attended with a contraction of the amount and value of the currency, causing a fall of prices, until the degree of contraction and consequent fall of prices should be such, as by inducing a diminished import and increased export of commodities, to cause a reflux of the metals and a restoration of prices to their proper level. So, on the other hand, an influx of the precious metals would raise prices, till they reached a level at which the converse of the process would take place. This oscillating process of a rise and fall of prices with every influx or efflux of the precious metals, independently of circumstances connected with the cost of production of commodities, and the ordinary rate of consumption, would be perplexing enough, and any thing but convenient to the commercial, or the manufacturing, or the agricultural community.
The advocates, however, of the doctrine contend that, although thus the oscillations might be more frequent, the scale of them would be more contracted, every divergence being more quickly checked. I firmly believe, however, that if every export and import of the precious metals were attended with the effects imputed to them by this theory, the inconvenience would be felt to be intolerable; and that some of what Mr. Norman calls economising expedients would be devised and applied as a remedy. But the operation would not be that which the theory, as it is stated in the following passages, supposes: "It is universally admitted by persons acquainted with monetary science, that paper money should be so regulated as to keep the medium of exchange, of which it may form a part, in the same state, with respect to amount and to value, in which the medium of exchange would exist, were the circulating portion of it purely metallic. Now, it is self- evident, that if the circulation were purely metallic, an adverse exchange, causing an exportation of the metals to any given amount, would occasion a contraction of the circulating currency to the same amount; and that a favourable exchange, causing an importation of the metals to a given amount, would cause an expansion of the circulating currency to the same amount. If the currency of the metro- polis consisted of gold, an adverse exchange, causing an exportation of gold to the amount of 1,000,000 l., would withdraw from circulation one million of sovereigns." TORRENS. Letter to Lord Melbourne, pp. 29, 30.
"The amount of the import or export of the precious metals, is a pretty sure measure of what would have been the increase or decrease of the amount of a metallic currency." S. J. LOYD. Further Reflections on the Currency, page 34.
And Mr. Norman, after explaining the manner in which the exchanges, as between two countries, A and B, may be rendered adverse to A, so as to cause an export of coin or bullion, goes on to say
"The export of coin and bullion will cause general prices to fall in country A, and to rise in B, supposing the debt to B not to be sooner discharged, until it becomes more advantageous to export goods than money." Letter to C. Wood, Esq. M.P., p. 17.
In these passages, and many more that might be cited, it is assumed that the precious metals, gold, and silver, and bullion, are synonymous with currency and money, and are convertible terms. And accordingly every export of the precious metals is not only considered, in the supposition of a metallic circulation, as a contraction of the currency of this country; but as so much added to the currency of the country to which it is exported. Such alteration in the relative quantity of the metals in the respective countries from which or to which they are transmitted being, according to this theory, an abstraction or addition of so much money; and prices, that is, the general prices of commodities, being considered as depending on the quantity of money, a corresponding rise or fall of them is assumed to be the consequence. In this view some very important considerations are overlooked.
Before entering upon them, however, I must premise, that throughout this discussion the value of gold in the commercial world is assumed to be constant, i.e., that the cost of production and the general demand are unvaried; also that the tariffs of foreign countries are in statu quo, so as to confine the consideration to the effects of an influx or efflux of bullion on the currencies of the respective countries, divested of any reference to disturbing causes, beyond those incidental to the course of trade and international banking.
There is, and must generally be, in a country like this or like France, a stock greater or less of gold and silver, beyond that which is in use as money or as plate, or which is in the mint, and in goldsmiths' and silversmiths' hands, in preparation for use as either. This surplus or floating stock may be considered as seeking a market, whether for internal purposes or for export; and, be the quantity greater or less, can it be said of it, if it is exported, that the amount is so much abstracted from the currency of the country, any more than if an equal value of tin or zinc, or lead or iron were exported?
Moreover, of that part of the stock existing in the shape of coin in this country it may be observed, that as the coinage is not subject to a seignorage, there may be, and frequently is, in that shape a considerable amount of the precious metals which may not be in the hands of the public, circulating as money, nor in the reserves of the different banks, the Bank of England excepted; but may, like the uncoined metals, be seeking a market at home or abroad. It may be in the coffers of the Bank of England; but held as bullion, being in the shape of coin equally convenient for every purpose, and more convenient for some purposes, in that form, besides that of serving for currency, than in uncoined gold, that is, in bars or ingots.
The idea of gold seeking a market, and not immediately finding one, may seem strange, and by the firm believers in the currency-principle doctrine may be set down as paradoxical and absurd.
Gold is an object in such universal demand, or in other words so universally marketable, that its being supposed to be kept on hand at all, under the uncertainty of finding a suitable market for it, appears to be inconceivable, or almost a contradiction in terms.
I am ready to admit that gold is a commodity in such general demand that it may always command a market, that it can always buy all other commodities; whereas, other commodities cannot always buy gold. The markets of the world are open to it as merchandise at less sacrifice upon an emergency, than would attend an export of any other article, which might in quantity or kind be beyond the usual demand in the country to which it is sent. So far there can be, I presume, no difference of opinion.
But there will be found to be no inconsiderable difference, if we distinguish as we ought to do, for the purpose whether of theory or practice, between gold considered as merchandise, i.e., as capital, and gold considered as currency circulating in the shape of coin among the public.
Mr. Senior, in one of his lectures on the value of money, observes, "The value of the precious metals as money must depend ultimately on their value as materials of jewellery and plate; since if they were not used as commodities, they could not circulate as money." And he makes a remark to the same effect in an article in the "Edinburgh Review" for July last, on Free trade and Retaliation. "The primary cause of the utility of gold is of course its use as the material of plate. The secondary cause is its use as money." Of the truth of these propositions there can be no doubt.
In a new and enlarged edition, just published, of that vast repertory of various and important information, "The Commercial Dictionary," Mr. M'Culloch, after weighing different authorities, gives the following estimate of the consumption of the precious metals for purposes distinct from their use as money
"According to this view of the matter, the present annual consumption in the arts will be the United Kingdom 2,500,000 l.; France, 1,000,000 l.; Switzerland, 450,000 l.; the rest of Europe, 1,600,000 l.; in all, 5,550,000 l. To which adding 500,000 l. for the consumption of North America, the total consumption will be 6,050,000 l.
"But a portion of the gold and silver annually made use of in the arts, is derived from the fusion of old plate, the burning of lace, picture frames, etc.
"Assuming that, as a medium, twenty per cent, or one-fifth part, of the precious metals annually made use of in the arts, is obtained from the fusion of old plate, we shall have, by deducting this proportion from the 6,050,0001. applied to the arts in Europe and America, 4,840,000 l. as the total annual appropriation of the new gold and silver dug from the mines to such purposes, leaving about 4,400,000 l. a year to be manufactured into coin, and exported to India," etc.
Mr. M'Culloch estimates the present annual produce of the precious metals from the American, European, and Russo-Asiatic mines, at 9,250,000 l.
As this country is not only a large consumer of the precious metals for purposes other than money, but is also an entrepôt for receiving from the mines, and distributing the greater portion of the quantity applicable to the consumption of other countries, the bullion trade, totally independently of supplying the currency, must of necessity be very considerable. In resorting to this entrepôt the metals can only be considered as merchandise in transit, seeking a market for consumption either in this country or abroad.
But beyond the stock which is requisite for this purpose, and which must always include more or less of surplus to meet occasional extra demand, there must be a very considerable amount of the precious metals applicable and applied as the most convenient mode of adjustment of international balances, being a commodity more generally in demand, and less liable to fluctuations in market value than any other. I will not venture, in the absence of any recognised grounds for computation, to hazard an estimate of the amount so required; but bearing in mind the immense extent of international transactions; and the vicissitudes of the seasons, and other circumstances affecting the relative imports and exports of food, and raw materials, and manufactures, besides the variations in the market value of national and private securities interchangeable, it cannot but be that the quantity of bullion required to be constantly available for the purpose must be very large; the principal deposits of it being in the Bank of England, the Bank of France, and the public banks of Hamburg and Amsterdam. These deposits may, moreover, in some of the public banks, be swelled by coins which have become superfluous in the circulation.
If, therefore, we take into account the magnitude of the stock necessarily imported, partly for the consumption of plate in this country, and partly for that abroad, and of the amount required as available funds for the adjustment of international balances, it may not be deemed an extravagant supposition that there might occasionally be under a perfectly metallic circulation fluctuations, within moderately short periods, to the extent of at least five or six millions sterling in the import and export of bullion, perfectly extrinsic of the amount or value of the coin circulating as money in the hands of the public, and perfectly without influence on the general prices of commodities, as equally without general prices having been a cause of such fluctuations.
It may be objected that the quantity of bullion which I have supposed to be in deposit among the principal public banks of the commercial world, applicable to the adjustment of international balances, should be looked upon as performing the functions of money, in restoring the level of the currencies, which the very fact of the necessity for the transmission of money from one country to another proves to have been disturbed. This objection is founded on the assumption that gold and silver are money or currency, and it is supposed that the transmissions of bullion for the purposes in question have a direct operation upon the amount of money or currency in actual circulation in the several countries. But in this objection the consideration is overlooked, that the coins only which enter into, that is, form part of the internal circulation of the country, can be designated as currency, while bullion can only be viewed in the light of capital.
The distinction between bullion, as merchandise or capital, and coins, as money or currency, may be exemplified in the case of coins which are subject to a seignorage, and in cases such as that of Hamburg, where the money current for all the ordinary expenditure of income consists chiefly of a variety of foreign coins, passing from hand to hand at a conventional value, while all mercantile payments are made by transfers of capital, deposited in the form of fine silver, and called. bank-money.
In such a case as that of Hamburg there have been, and must often again be, very great fluctuations in the amount of silver in the bank, and consequently of bank money, without any obviously corresponding variations in the amount of money in circulation for current purposes of expenditure by the community, or any variation as arising from that cause in the general prices of their commodities. And if a seign- orage were imposed on the gold coin of this country on correct principles (that is, accompanied by a limitation of tender, and by a power on the part of the holders to demand gold bullion at 3 l. 17s. 10½d. per ounce), there might be, and there would be, supposing a purely metallic circulation, occasionally very considerable variation in the amount of bullion in the coffers of the national bank, or in the hands of dealers in bullion, without necessarily in the slightest degree affecting the amount of the currency actually in circulation, in the ordinary daily transactions arising out of the expenditure of individuals composing the public, and without variation in general prices.
The views, of which an outline has here been sketched, distinguishing bullion as a commodity, constituting the readiest means of international transfers of capital, from the currency employed for internal purposes, will be rendered more clear when I come to point out, as I shall presently endeavour to do, an important distinction between that part of the circulating medium which is employed in the transfer and distribution of capital, from that which is employed in the expenditure of incomes, that is, in the retail trade of the country. And I do not now enter more fully into detail as to what I conceive would be the working of a purely metallic circulation, because that question does not form the main ground of the present inquiry, which is as to the sufficiency of the arguments adduced in accordance with the theory of the currency principle, in favour of an entire separation of the functions of banks of issue from those of ordinary banking.
In the doctrine which it is my purpose here to examine, the perfection of a metallic circulation is assumed to be beyond question; while the imperfection of our present system of paper credit, quite apart from the danger of inconvertibility, is pointed out and enlarged upon, by reference to the degree in which it is asserted to depart from this assumed model of perfection, a model of whose properties and mode of operation the most erroneous notions seem to be entertained by those who set it up.(5)