Butthesupposedanomalyexistsonlyinsemblance。Thecauses
whichbringmoneyintoorcarryitoutofacountrythroughthe
exchanges，torestoretheequilibriumoftrade，andwhichthereby
raiseitsvalueinsomecountriesandloweritinothers，arethe
verysamecausesonwhichthelocalvalueofmoneywoulddepend，
ifitwereneverimportedexceptasamerchandize，andnever
exceptdirectlyfromthemines。Whenthevalueofmoneyina
countryispermanentlyloweredbyaninfluxofitthroughthe
balanceoftrade，thecause，ifitisnotdiminishedcostof
production，mustbeoneofthosecauseswhichcompelanew
adjustment，morefavourabletothecountry，oftheequationof
internationaldemand:namely，eitheranincreaseddemandabroad
forhercommodities，oradiminisheddemandonherpartforthose
offoreigncountries。Nowanincreasedforeigndemandforthe
commoditiesofacountry，oradiminisheddemandinthecountry
forimportedcommodities，aretheverycauseswhich，onthe
generalprinciplesoftrade，enableacountrytopurchaseall
imports，andconsequentlythepreciousmetals，atalowervalue。
Thereisthereforenocontradiction，butthemostperfect
accordanceintheresultsofthetwodifferentmodesinwhichthe
preciousmetalsmaybeobtained。Whenmoneyflowsfromcountryto
countryinconsequenceofchangesintheinternationaldemandfor
commodities，andbysodoingaltersitsownlocalvalue，it
merelyrealizes，byamorerapidprocess，theeffectwhichwould
otherwisetakeplacemoreslowly，byanalterationinthe
relativebreadthofthestreamsbywhichthepreciousmetalsflow
intodifferentregionsoftheearthfromtheminingcountries。As
thereforewebeforesawthattheuseofmoneyasamediumof
exchangedoesnotintheleastalterthelawonwhichthevalues
ofotherthings，eitherinthesamecountryorinternationally，
depend，soneitherdoesitalterthelawofthevalueofthe
preciousmetalitself:andthereisinthewholedoctrineof
internationalvaluesasnowlaiddown，aunityandharmonywhich
isastrongcollateralpresumptionoftruth。
4。Beforeclosingthisdiscussion，itisfittingtopointout
inwhatmanneranddegreetheprecedingconclusionsareaffected
bytheexistenceofinternationalpaymentsnotoriginatingin
commerce，andforwhichnoequivalentineithermoneyor
commoditiesisexpectedorreceived;suchasatribute，or
remittancesofrenttoabsenteelandlords，orofinterestto
foreigncreditors，oragovernmentexpenditureabroad，suchas
Englandincursinthemanagementofsomeofhercolonial
dependencies。
Tobeginwiththecaseofbarter。Thesupposedannual
remittancesbeingmadeincommodities，andbeingexportsfor
whichthereistobenoreturn，itisnolongerrequisitethat
theimportsandexportsshouldpayforoneanother:onthe
contrary，theremustbeanannualexcessofexportsoverimports，
equaltothevalueoftheremittance。If，beforethecountry
becameliabletotheannualpayment，foreigncommercewasinits
naturalstateofequilibrium，itwillnowbenecessaryforthe
purposeofeffectingtheremittance，thatforeigncountries
shouldbeinducedtotakeagreaterquantityofexportsthan
before:whichcanonlybedonebyofferingthoseexportson
cheaperterms，orinotherwords，bypayingdearerforforeign
commodities。Theinternationalvalueswillsoadjustthemselves
thateitherbygreaterexports，orsmallerimports，orboth，the
requisiteexcessonthesideofexportswillbebroughtabout;
andthisexcesswillbecomethepermanentstate。Theresultis
thatacountrywhichmakesregularpaymentstoforeigncountries，
besideslosingwhatitpays，losesalsosomethingmore，bythe
lessadvantageoustermsonwhichitisforcedtoexchangeits
productionsforforeigncommodities。
Thesameresultsfollowonthesuppositionofmoney。Commerce
beingsupposedtobeinastateofequilibriumwhenthe
obligatoryremittancesbegin，thefirstremittanceisnecessarily
madeinmoney。Thislowerspricesintheremittingcountry，and
risestheminthereceiving。Thenaturaleffectisthatmore
commoditiesareexportedthanbefore，andfewerimported，and
that，onthescoreofcommercealone，abalanceofmoneywillbe
constantlyduefromthereceivingtothepayingcountry。Whenthe
debtthusannuallyduetothetributarycountrybecomesequalto
theannualtributeorotherregularpaymentduefromit，no
furthertransmissionofmoneytakesplace;theequilibriumof
exportsandimportswillnolongerexist，butthatofpayments
will;theexchangewillbeatpar，thetwodebtswillbesetoff
againstoneanother，andthetributeorremittancewillbe
virtuallypaidingoods。Theresulttotheinterestofthetwo
countrieswillbeasalreadypointedout:thepayingcountrywill
giveahigherpriceforallthatitbuysfromthereceiving
country，whilethelatter，besidesreceivingthetribute，obtains
theexportableproduceofthetributarycountryatalowerprice。
NOTES:
1。ThesubjoinedextractfromtheseparateEssaypreviously
referredto，willgivesomeassistanceinfollowingthecourseof
thephenomena。Itisadaptedtotheimaginarycaseusedfor
frustrationthroughoutthatEssay，thecaseofatradebetween
EnglandandGermanyinclothandlinen。
\"Wemay，atfirst，makewhateversuppositionwewillwith
respecttothevalueofmoney。Letussuppose，therefore，that
beforetheopeningofthetrade，thepriceofclothisthesame
inbothcountries，namely，sixshillingsperyard。Astenyards
ofclothweresupposedtoexchangeinEnglandfor15yardsof
linen，inGermanyfor20，wemustsupposethatlinenissoldin
Englandatfourshillingsperyard，inGermanyatthree。Costof
carriageandimporter’sprofitareleft，asbefore，outof
consideration。
\"Inthisstateofprices，cloth，itisevident，cannotyetbe
exportedfromEnglandintoGermany:butlinencanbeimported
fromGermanyintoEngland。Itwillbeso;and，inthefirst
instance，thelinenwillbepaidforinmoney。
\"TheeffluxofmoneyfromEngland，anditsinfluxinto
Germany，willraisemoneypricesinthelattercountry，andlower
themintheformer。LinenwillriseinGermanyabovethree
shillingsperyard，andclothabovesixshillings。Linenin
England，beingimportedfromGermany，will（sincecostof
carriageisnotreckoned）sinktothesamepriceasinthat
country，whileclothwillfallbelowsixshillings。Assoonas
thepriceofclothislowerinEnglandthaninGermany，itwill
begintobeexported，andthepriceofclothinGermanywillfall
towhatitisinEngland。Aslongastheclothexporteddoesnot
sufficetopayforthelinenimported，moneywillcontinueto
flowfromEnglandintoGermany，andpricesgenerallywill
continuetofallinEnglandandriseinGermany。Bythefall，
however，ofclothinEngland，clothwillfallinGermanyalso，
andthedemandforitwillincrease。Bytheriseoflinenin
Germany，linenmustriseinEnglandalso，andthedemandforit
willdiminish。Asclothfellinpriceandlinenrose，therewould
besomeparticularpriceofbotharticlesatwhichthecloth
exportedandthelinenimportedwouldexactlypayforeachother。
Atthispointpriceswouldremain，becausemoneywouldthencease
tomoveoutofEnglandintoGermany。Whatthispointmightbe，
wouldentirelydependuponthecircumstancesandinclinationsof
thepurchasersonbothsides。Ifthefallofclothdidnotmuch
increasethedemandforitinGermany，andtheriseoflinendid
notdiminishveryrapidlythedemandforitinEngland，much
moneymustpassbeforetheequilibriumisrestored;clothwould
fallverymuch，andlinenwouldrise，untilEngland，perhaps，had
topaynearlyasmuchforitaswhensheproduceditforherself。
Butif，onthecontrary，thefallofclothcausedaveryrapid
increaseofthedemandforitinGermany，andtheriseoflinen
inGermanyreducedveryrapidlythedemandinEnglandfromwhat
itwasundertheinfluenceofthefirstcheapnessproducedbythe
openingofthetrade;theclothwouldverysoonsufficetopay
forthelinen，littlemoneywouldpassbetweenthetwocountries，
andEnglandwouldderivealargeportionofthebenefitofthe
trade。Wehavethusarrivedatpreciselythesameconclusion，in
supposingtheemploymentofmoney，whichwefoundtoholdunder
thesuppositionofbarter。
\"Inwhatshapethebenefitaccruestothetwonationsfrom
thetradeisclearenough。Germany，beforethecommencementof
thetrade，paidsixshillingsperyardforbroadcloth:shenow
obtainsitatalowerprice。This，however，isnotthewholeof
heradvantage。Asthemoney—pricesofallherothercommodities
haverisen，themoney—incomesofallherproducershave
increased。Thisisnoadvantagetotheminbuyingfromeach
other，becausethepriceofwhattheybuyhasriseninthesame
ratiowiththeirmeansofpayingforit:butitisanadvantage
totheminbuyinganythingwhichhasnotrisen，and，stillmore，
anythingwhichhasfallen。They，therefore，benefitasconsumers
ofcloth，notmerelytotheextenttowhichclothhasfallen，but
alsototheextenttowhichotherpriceshaverisen。Supposethat
thisisone—tenth。Thesameproportionoftheir[48these]
money—incomesasbefore，willsufficetosupplytheirother
wants;andtheremainder，beingincreasedone—tenthinamount，
willenablethemtopurchaseone—tenthmorecloththanbefore，
eventhoughclothhadnotfallen:butithasfallen;sothatthey
aredoublygainers。Theypurchasethesamequantitywithless
money，andhavemoretoexpendupontheirotherwants。
\"InEngland，onthecontrary，generalmoney—priceshave
fallen。Linen，however，hasfallenmorethantherest，having
beenloweredinpricebyimportationfromacountrywhereitwas
cheaper;whereastheothershavefallenonlyfromtheconsequent
effluxofmoney。Notwithstanding，therefore，thegeneralfallof
money—prices，theEnglishproducerswillbeexactlyastheywere
inallotherrespects，whiletheywillgainaspurchasersof
linen。
\"Thegreatertheeffluxofmoneyrequiredtorestorethe
equilibrium，thegreaterwillbethegainofGermany，bothbythe
fallofclothandbytheriseofhergeneralprices。Thelessthe
effluxofmoneyrequisite，thegreaterwillbethegainof
England;becausethepriceoflinenwillcontinuelower，andher
generalpriceswillnotbereducedsomuch。Itmustnot，however，
beimaginedthathighmoney—pricesareagood，andlow
money—pricesanevil，inthemselves。Butthehigherthegeneral
money—pricesinanycountry，theNeaterwillbethatcountry’s
meansofpurchasingthosecommoditieswhich，beingimportedfrom
abroad，areindependentofthecauseswhichkeeppriceshighat
home。\"
Inpractice，theclothandthelinenwouldnot，ashere
supposed，beatthesamepriceinEnglandandinGermany:each
wouldbedearerinmoney—priceinthecountrywhichimportedthan
inthatwhichproducedit，bytheamountofthecostofcarriage，
togetherwiththeordinaryprofitontheimporter’scapitalfor
theaveragelengthoftimewhichelapsedbeforethecommodity
couldbedisposedof。Butitdoesnotfollowthateachcountry
paysthecostofcarriageofthecommodityitimports;forthe
additionofthisitemtothepricemayoperateasagreatercheck
todemandononesidethanontheother;andtheequationof
internationaldemand，andconsequentequilibriumofpayments，may
notbemaintained。Moneywouldthenflowoutofonecountryinto
theother，until，inthemanneralreadyillustrated，the
equilibriumwasrestored:and，whenthiswaseffected，one
countrywouldbepayingmorethanitsowncostofcarriage，and
theotherless。
2。PrinciplesofPoliticalEconomyandTaxation，3rd。ed。p。143。
ThePrinciplesofPoliticalEconomy
byJohnStuartMill
Book3:Distribution
Chapter22
InfluenceoftheCurrencyontheExchangesandonForeignTrade
1。Inourinquiryintothelawsofinternationaltrade，we
commencedwiththeprincipleswhichdetermineinternational
exchangesandinternationalvaluesonthehypothesisofbarter。
Wenextshowedthattheintroductionofmoneyasamediumof
exchange，makesnodifferenceinthelawsofexchangesandof
valuesbetweencountryandcountry，nomorethanbetween
individualandindividual:sincethepreciousmetals，underthe
influenceofthosesamelaws，distributethemselvesinsuch
proportionsamongthedifferentcountriesoftheworld，asto
allowtheverysameexchangestogoon，andatthesamevalues，
aswouldbethecaseunderasystemofbarter。Welastly
consideredhowthevalueofmoneyitselfisaffected，bythose
alterationsinthestateoftradewhicharisefromalterations
eitherinthedemandandsupplyofcommodities，orintheircost
ofproduction。Itremainstoconsiderthealterationsinthe
stateoftradewhichoriginatenotincommoditiesbutinmoney。
Goldandsilvermayvarylikeotherthings，thoughtheyare
notsolikelytovaryasotherthings，intheircostof
production。Thedemandfortheminforeigncountriesmayalso
vary。Itmayincrease，byaugmentedemploymentofthemetalsfor
purposesofartandornament，orbecausetheincreaseof
productionandoftransactionshascreatedagreateramountof
businesstobedonebythecirculatingmedium。Itmaydiminish，
fortheoppositereasons;orfromtheextensionofthe
economizingexpedientsbywhichtheuseofmetallicmoneyis
partiallydispensedwith。Thesechangesactuponthetrade
betweenothercountriesandtheminingcountries，anduponthe
valueofthepreciousmetals，accordingtothegenerallawsof
thevalueofimportedcommodities:whichhavebeensetforthin
thepreviouschapterswithsufficientfulness。
WhatIproposetoexamineinthepresentchapter，isnot
thosecircumstancesaffectingmoney，whichalterthepermanent
conditionsofitsvalue;buttheeffectsproducedon
internationaltradebycasualortemporaryvariationsinthe
valueofmoney，whichhavenoconnexionwithanycausesaffecting
itspermanentvalue。Thisisasubjectofimportance，onaccount
ofitsbearinguponthepracticalproblemwhichhasexcitedso
muchdiscussionforsixtyyearspast，theregulationofthe
currency。
2。Letussupposeinanycountryacirculatingmediumpurely
metallic，andasuddencasualincreasemadetoit;forexample，
bybringingintocirculationhoardsoftreasure，whichhadbeen
concealedinapreviousperiodofforeigninvasionorinternal
disorder。Thenaturaleffectwouldbeariseofprices。This
wouldcheckexports，andencourageimports;theimportswould
exceedtheexports，theexchangeswouldbecomeunfavourable，and
thenewlyacquiredstockofmoneywoulddiffuseitselfoverall
countrieswithwhichthesupposedcountrycarriedontrade，and
fromthem，progressively，throughallpartsofthecommercial
world。Themoneywhichthusoverflowedwouldspreaditselftoan
equaldepthoverallcommercialcountries。Foritwouldgoon
flowinguntiltheexportsandimportsagainbalancedoneanother:
andthis（asnochangeissupposedinthepermanentcircumstances
ofinternationaldemand）couldonlybe，whenthemoneyhad
diffuseditselfsoequallythatpriceshadriseninthesame
ratioinallcountries，sothatthealterationofpricewouldbe
forallpracticalpurposesineffective，andtheexportsand
imports，thoughatahighermoneyvaluation，wouldbeexactlythe
sameastheywereoriginally。Thisdiminishedvalueofmoney
throughouttheworld，（atleastifthediminutionwas
considerable）wouldcauseasuspension，oratleastadiminution，
oftheannualsupplyfromthemines:sincethemetalwouldno
longercommandavalueequivalenttoitshighestcostof
production。Theannualwastewould，therefore，notbefullymade
up，andtheusualcausesofdestructionwouldgraduallyreduce
theaggregatequantityofthepreciousmetalstoitsformer
amount;afterwhichtheirproductionwouldrecommenceonits
formerscale。Thediscoveryofthetreasurewouldthusproduce
onlytemporaryeffects;namely，abriefdisturbanceof
internationaltradeuntilthetreasurehaddisseminateditself
throughtheworld，andthenatemporarydepressioninthevalue
ofthemetal，belowthatwhichcorrespondstothecostof
producingorofobtainingit;whichdepressionwouldgraduallybe
corrected，byatemporarilydiminishedproductioninthe
producingcountries，andimportationintheimportingcountries。
Thesameeffectswhichwouldthusarisefromthediscoveryof
atreasure，accompanytheprocessbywhichbanknotes，oranyof
theothersubstitutesformoney，taketheplaceoftheprecious
metals。SupposethatEnglandpossessedacurrencywholly
metallic，oftwentymillionssterling，andthatsuddenlytwenty
millionsofbanknotesweresentintocirculation。Ifthesewere
issuedbybankers，theywouldbeemployedinloans，orinthe
purchaseofsecurities，andwouldthereforecreateasuddenfall
intherateofinterest，whichwouldprobablysendagreatpart
ofthetwentymillionsofgoldoutofthecountryascapital，to
seekahigherrateofinterestelsewhere，beforetherehadbeen
timeforanyactiononprices。Butwewillsupposethatthenotes
arenotissuedbybankers，ormoney—lendersofanykind，butby
manufacturers，inthepaymentofwagesandpurchaseofmaterials，
orbythegovernmentinitsordinaryexpenses，sothatthewhole
amountwouldberapidlycarriedintothemarketsforcommodities。
Thefollowingwouldbethenaturalorderofconsequences。All
priceswouldrisegreatly。Exportationwouldalmostcease;
importationwouldbeprodigiouslystimulated。Agreatbalanceof
paymentswouldbecomedue;theexchangeswouldturnagainst
England，tothefullextentofthecostofexportingmoney;and
thesurpluscoinwouldpouritselfrapidlyforth，overthe
variouscountriesoftheworld，intheorderoftheirproximity，
geographicallyandcommercially，toEngland。Theeffluxwould
continueuntilthecurrenciesofallcountrieshadcometoa
level;bywhichIdonotmean，untilmoneybecameofthesame
valueeverywhere，butuntilthedifferenceswereonlythosewhich
existedbefore，andwhichcorrespondedtopermanentdifferences
inthecostofobtainingit。Whentheriseofpriceshadextended
itselfinanequaldegreetoallcountries，exportsandimports
wouldeverywherereverttowhattheywereatfirst，wouldbalance
oneanother，andtheexchangeswouldreturntopar。Ifsuchasum
ofmoneyastwentymillions，whenspreadoverthewholesurface
ofthecommercialworld，weresufficienttoraisethegeneral
levelinaperceptibledegree，theeffectwouldbeofnolong
duration。Noalterationhavingoccurredinthegeneralconditions
underwhichthemetalswereprocured，eitherintheworldat
largeorinanypartofit，thereducedvaluewouldnolongerbe
remunerating，andthesupplyfromthemineswouldceasepartially
orwholly，untilthetwentymillionswereabsorbed;（1*）after
whichabsorption，thecurrenciesofallcountrieswouldbe，in
quantityandinvalue，nearlyattheiroriginallevel。Isay
nearly，forinstrictaccuracytherewouldbeaslight
difference。Asomewhatsmallerannualsupplyoftheprecious
metalswouldnowberequired，therebeingintheworldtwenty
millionslessofmetallicmoneyundergoingwaste。Theequilibrium
ofpayments，consequently，betweentheminingcountriesandthe
restoftheworld，wouldthenceforthrequirethatthemining
countriesshouldeitherexportrathermoreofsomethingelse，or
importratherlessofforeigncommodities;whichimpliesa
somewhatlowerrangeofpricesthanpreviouslyinthemining
countries，andasomewhathigherinallothers;ascantier
currencyintheformer，andratherfullercurrenciesinthe
latter。Thiseffect，whichwouldbetootriflingtorequire
noticeexceptfortheillustrationofaprinciple，istheonly
permanentchangewhichwouldbeproducedoninternationaltrade，
oronthevalueorquantityofthecurrencyofanycountry。
Effectsofanotherkind，however，willhavebeenproduced。
Twentymillionswhichformerlyexistedintheunproductiveform
ofmetallicmoney，havebeenconvertedintowhatis，oris
capableofbecoming，productivecapital。Thisgainisatfirst
madebyEnglandattheexpenseofothercountries，whohavetaken
hersuperfluityofthiscostlyandunproductivearticleoffher
hands，givingforitanequivalentvalueinothercommodities。By
degreethelossismadeuptothosecountriesbydiminished
influxfromthemines，andfinallytheworldhasgainedavirtual
additionoftwentymillionstoitsproductiveresources。Adam
Smith’sillustration，thoughsowellknown，deservesforits
extremeaptnesstobeoncemorerepeated。Hecomparesthe
substitutionofpaperintheroomofthepreciousmetals，tothe
constructionofahighwaythroughtheair，bywhichtheground
nowoccupiedbyroadswouldbecomeavailableforagriculture。As
inthatcaseaportionofthesoil，sointhisapartofthe
accumulatedwealthofthecountry，wouldberelievedfroma
functioninwhichitwasonlyemployedinrenderingothersoils
andcapitalsproductive，andwoulditselfbecomeapplicableto
production;theofficeitpreviouslyfulfilledbeingequallywell
dischargedbyamediumwhichcostsnothing。
Thevaluesavedtothecommunitybythusdispensingwith
metallicmoney，isacleargaintothosewhoprovidethe
substitute。Theyhavetheuseoftwentymillionsofcirculating
mediumwhichhavecostthemonlytheexpenseofanengraver’s
plate。Iftheyemploythisaccessiontotheirfortunesas
productivecapital，theproduceofthecountryisincreased，and
thecommunitybenefited，asmuchasbyanyothercapitalofequal
amount。Whetheritissoemployedornot，depends，insome
degree，uponthemodeofissuingit。Ifissuedbythegovernment，
andemployedinpayingoffdebt，itwouldprobablybecome
productivecapital。Thegovernment，however，maypreferemploying
thisextraordinaryresourceinitsordinaryexpenses;may
squanderituselessly，ormakeitameretemporarysubstitutefor
taxationtoanequivalentamount;inwhichlastcasetheamount
issavedbythetaxpayersatlarge，whoeitheraddittotheir
capitalorspenditasincome。Whenpapercurrencyissupplied，
asinourowncountry，bybankersandbankingcompanies，the
amountisalmostwhollyturnedintoproductivecapital:forthe
issuers，beingatalltimesliabletobecalledupontorefund
thevalue，areunderthestrongestinducementsnottosquander
it，andtheonlycasesinwhichitisnotforthcomingarecases
offraudormismanagement。Abanker’sprofessionbeingthatofa
moneylender，hisissueofnotesisasimpleextensionofhis
ordinaryoccupation。Helendstheamounttofarmers，
manufacturers，ordealers，whoemployitintheirseveral
businesses。Soemployed，ityields，likeanyothercapital，wages
oflabourandprofitsofstock。Theprofitissharedbetweenthe
banker，whoreceivesinterest，andasuccessionofborrowers，
mostlyforshortperiods，whoafterpayingtheinterest，gaina
profitinaddition，oraconvenienceequivalenttoprofit。The
capitalitselfinthelongrunbecomesentirelywages，andwhen
replacedbythesaleoftheproduce，becomeswagesagain;thus
affordingaperpetualfund，ofthevalueoftwentymillions，for
themaintenanceofproductivelabour，andincreasingtheannual
produceofthecountrybyallthatcanbeproducedthroughthe
meansofacapitalofthatvalue。Tothisgainmustbeaddeda
furthersavingtothecountry，oftheannualsupplyofthe
preciousmetalsnecessaryforrepairingthewearandtear，and
otherwaste，ofametalliccurrency。
Thesubstitution，therefore，ofpaperfortheprecious
metals，shouldalwaysbecarriedasfarasisconsistentwith
safety;nogreateramountofmetalliccurrencybeingretained
thanisnecessarytomaintain，bothinfactandinpublicbelief，
theconvertibilityofthepaper。Acountrywiththeextensive
commercialrelationsofEnglandisliabletobesuddenlycalled
uponforlargeforeignpayments，sometimesinloans，orother
investmentsofcapitalabroad，sometimesasthepriceofsome
unusualimportationofgoods，themostfrequentcasebeingthat
oflargeimportationsoffoodconsequentonabadharvest。To
meetsuchdemandsitisnecessarythatthereshouldbe，eitherin
circulationorinthecoffersofthebanks，coinorbulliontoa
veryconsiderableamount，andthatthis，whendrawnoutbyany
emergency，shouldbeallowedtoreturnaftertheemergencyis
past。Butsincegoldwantedforexportationisalmostinvariably
drawnfromthereservesofthebanks，andisneverlikelytobe
takendirectlyfromthecirculationwhilethebanksremain
solvent，theonlyadvantagewhichcanbeobtainedfromretaining
partiallyametalliccurrencyfordailypurposesis，thatthe
banksmayoccasionallyreplenishtheirreservesfromit。
3。Whenmetallicmoneyhadbeenentirelysupersededand
expelledfromcirculation，bythesubstitutionofanequalamount
ofbanknotes，anyattempttokeepastillfurtherquantityof
paperincirculationmust，ifthenotesareconvertible，bea
completefailure。Thenewissuewouldagainsetinmotionthe
sametrainofconsequencesbywhichthegoldcoinhadalready
beenexpelled。Themetalswould，asbefore，berequiredfor
exportation，andwouldbeforthatpurposedemandedfromthe
banks，tothefullextentofthesuperfluousnotes;whichthus
couldnotpossiblyberetainedincirculation。If，indeed，the
noteswereinconvertible，therewouldbenosuchobstacletothe
increaseoftheirquantity。Aninconvertiblepaperactsinthe
samewayasaconvertible，whilethereremainsanycoinforitto
supersede:thedifferencebeginstomanifestitselfwhenallthe
coinisdrivenfromcirculation（exceptwhatmayberetainedfor
theconvenienceofsmallchange），andtheissuesstillgoon
increasing。Whenthepaperbeginstoexceedinquantitythe
metalliccurrencywhichitsuperseded，pricesofcourserise;
thingswhichwereworth5l。inmetallicmoney，becomeworth6l。
ininconvertiblepaper，ormore，asthecasemaybe。Butthis
riseofpricewillnot，asinthecasesbeforeexamined，
stimulateimport，anddiscourageexport。Theimportsandexports
aredeterminedbythemetallicpricesofthings，notbythepaper
prices:anditisonlywhenthepaperisexchangeableatpleasure
forthemetals，thatpaperpricesandmetallicpricesmust
correspond。
LetussupposethatEnglandisthecountrywhichhasthe
depreciatedpaper。SupposethatsomeEnglishproductioncouldbe
bought，whilethecurrencywasstillmetallic，for5l。，andsold
inFrancefor5l。10s。，thedifferencecoveringtheexpenseand
risk，andaffordingaprofittothemerchant。Onaccountofthe
depreciationthiscommoditywillnowcostinEngland6l。，and
cannotbesoldinFranceformorethan5l。10s。，andyetitwill
beexportedasbefore。Why？Becausethe5l。10s。whichthe
exportercangetforitinFrance，isnotdepreciatedpaper，but
goldorsilver。andsinceinEnglandbullionhasrisen，inthe
sameproportionwithotherthings—ifthemerchantbringsthegold
orsilvertoEngland，hecansellhis5l。10s。for6l。12s。，and
obtainasbefore10percentforprofitandexpenses。
Itthusappears，thatadepreciationofthecurrencydoesnot
affecttheforeigntradeofthecountry:thisiscarriedon
preciselyasifthecurrencymaintaineditsvalue。Butthoughthe
tradeisnotaffected，theexchangesare。Whentheimportsand
exportsareinequilibrium，theexchange，inametalliccurrency，
wouldbeatpar;abillonFrancefortheequivalentoffive
sovereigns，wouldbeworthfivesovereigns。Butfivesovereigns，
orthequantityofgoldcontainedinthem，havingcometobe
worthinEngland6l。，itfollowsthatabillonFrancefor5l。
willbeworth6l。When，therefore，therealexchangeisatpar，
therewillbeanominalexchangeagainstthecountry，ofasmuch
percentastheamountofthedepreciation。Ifthecurrencyis
depreciated10，15，or20percent，theninwhateverwaythereal
exchange，arisingfromthevariationsofinternationaldebtsand
credits，mayvary，thequotedexchangewillalwaysdiffer10，15，
or20percentfromit。Howeverhighthisnominalpremiummaybe，
ithasnotendencytosendgoldoutofthecountry，forthe
purposeofdrawingabillagainstitandprofitingbythe
premium;becausethegoldsosentmustbeprocured，notfromthe
banksandatpar，asinthecaseofaconvertiblecurrency，but
inthemarketatanadvanceofpriceequaltothepremium。In
suchcases，insteadofsayingthattheexchangeisunfavourable，
itwouldbeamorecorrectrepresentationtosaythattheparhas
altered，sincethereisnowrequiredalargerquantityofEnglish
currencytobeequivalenttothesamequantityofforeign。The
exchanges，however，continuetobecomputedaccordingtothe
metallicpar。Thequotedexchanges，therefore，whenthereisa
depreciatedcurrency，arecompoundedoftwoelementsorfactors;
therealexchange，whichfollowsthevariationsofinternational
payments，andthenominalexchange，whichvarieswiththe
depreciationofthecurrency，butwhich，whilethereisany
depreciationatall，mustalwaysbeunfavourable。Sincethe
amountofdepreciationisexactlymeasuredbythedegreeinwhich
themarketpriceofbullionexceedstheMintvaluation，wehavea
surecriteriontodeterminewhatportionofthequotedexchange，
beingreferabletodepreciation，maybestruckoffasnominal;
theresultsocorrectedexpressingtherealexchange。
Thesamedisturbanceoftheexchangesandofinternational
trade，whichisproducedbyanincreasedissueofconvertible
banknotes，isinlikemannerproducedbythoseextensionsof
credit，which，aswassofullyshowninaprecedingchapter，have
thesameeffectonpricesasanincreaseofthecurrency。
Whenevercircumstanceshavegivensuchanimpulsetothespirit
ofspeculationastooccasionagreatincreaseofpurchaseson
credit，moneypricesrise，justasmuchastheywouldhaverisen
ifeachpersonwhosobuysoncredithadboughtwithmoney。All
theeffects，therefore，mustbesimilar。Asaconsequenceofhigh
prices，exportationischeckedandimportationstimulated;though
infacttheincreaseofimportationseldomwaitsfortheriseof
priceswhichistheconsequenceofspeculation，inasmuchassome
ofthegreatarticlesofimportareusuallyamongthethingsin
whichspeculativeovertradingfirstshowsitself。Thereis，
therefore，insuchperiods，usuallyagreatexcessofimports
overexports;andwhenthetimecomesatwhichthesemustbepaid
for，theexchangesbecomeunfavourable，andgoldflowsoutofthe
country。Inwhatprecisemannerthiseffluxofgoldtakeseffect
onprices，dependsoncircumstancesofwhichweshallpresently
speakmorefully;butthatitseffectistomakethemrecoil
downwards，iscertainandevident。Therecoil，oncebegun，
generallybecomesatotalrout，andtheunusualextensionof
creditisrapidlyexchangedforanunusualcontractionofit。
Accordingly，whencredithasbeenimprudentlystretched，andthe
speculativespiritcarriedtoexcess，theturnoftheexchanges，
andconsequentpressureonthebankstoobtaingoldfor
exportation，aregenerallytheproximatecauseofthe
catastrophe。Butthesephenomena，thoughaconspicuous
accompaniment，arenoessentialpart，ofthecollapseofcredit
calledacommercialcrisis;which，asweformerlyshowed，（2*）
mighthappentoasgreatanextent，andisquiteaslikelyto
happen，inacountry，ifanysuchtherewere，altogether
destituteofforeigntrade。
NOTES:
1。Iamheresupposingastateofthingsinwhichgoldandsilver
miningareapermanentbranchofindustry，carriedonunderknown
conditions;andnotthepresentstateofuncertainty，inwhich
gold—gatheringisagameofchance，prosecuted（forthepresent）
inthespiritofanadventure，notinthatofaregular
industrialpursuit。
2。Supra，pp。540—1。
ThePrinciplesofPoliticalEconomy
byJohnStuartMill
Book3:Distribution
Chapter23
OftheRateofInterest
1。Thepresentseemsthemostproperplacefordiscussingthe
circumstanceswhichdeterminetherateofinterest。Theinterest
ofloans，beingreallyaquestionofexchangevalue，falls
naturallyintothepresentdivisionofoursubject:andthetwo
topicsofCurrencyandLoans，thoughinthemselvesdistinct，are
sointimatelyblendedinthephenomenaofwhatiscalledthe
moneymarket，thatitisimpossibletounderstandtheonewithout
theother，andinmanymindsthetwosubjectsaremixedupinthe
mostinextricableconfusion。
IntheprecedingBook（1*）wedefinedtherelationinwhich
intereststandstoprofit。Wefoundthatthegrossprofitof
capitalmightbedistinguishedintothreeparts，whichare
respectivelytheremunerationforrisk，fortrouble，andforthe
capitalitself，andmaybetermedinsurance，wagesof
superintendence，andinterest。Aftermakingcompensationfor
risk，thatis，aftercoveringtheaveragelossestowhichcapital
isexposedeitherbythegeneralcircumstancesofsocietyorby
thehazardsoftheparticularemployment，thereremainsa
surplus，whichpartlygoestorepaytheownerofthecapitalfor
hisabstinence，andpartlytheemployerofitforhistimeand
trouble。Howmuchgoestotheoneandhowmuchtotheother，is
shownbytheamountoftheremunerationwhich，whenthetwo
functionsareseparated，theownerofcapitalcanobtainfromthe
employerforitsuse。Thisisevidentlyaquestionofdemandand
supply。Norhavedemandandsupplyanydifferentmeaningor
effectinthiscasefromwhattheyhaveinallothers。Therate
ofinterestwillbesuchastoequalizethedemandforloanswith
thesupplyofthem。Itwillbesuch，thatexactlyasmuchassome
peoplearedesiroustoborrowatthatrate，othersshallbe
willingtolend。Ifthereismoreofferedthandemanded，interest
willfall;ifmoreisdemandedthanoffered，itwillrise;andin
bothcases，tothepointatwhichtheequationofsupplyand
demandisre—established。
Boththedemandandsupplyofloansfluctuatemore
incessantlythananyotherdemandorsupplywhatsoever。The
fluctuationsinotherthingsdependonalimitednumberof
influencingcircumstances;butthedesiretoborrow，andthe
willingnesstolend，aremoreorlessinfluencedbyevery
circumstancewhichaffectsthestateorprospectsofindustryor
commerce，eithergenerallyorinanyoftheirbranches。Therate
ofinterest，therefore，ongoodsecurity，whichalonewehave
heretoconsider（forinterestinwhichconsiderationsofrisk
bearapartmayswelltoanyamount）isseldom，inthegreat
centresofmoneytransactions，preciselythesamefortwodays
together;asisshownbythenever—ceasingvariationsinthe
quotedpricesofthefundsandothernegotiablesecurities。
Nevertheless，theremustbe，asinothercasesofvalue，some
ratewhich（inthelanguageofAdamSmithandRicardo）maybe
calledthenaturalrate;somerateaboutwhichthemarketrate
oscillates，andtowhichitalwaystendstoreturn。Thisrate
partlydependsontheamountofaccumulationgoingoninthe
handsofpersonswhocannotthemselvesattendtotheemployment
oftheirsavings，andpartlyonthecomparativetasteexistingin
thecommunityfortheactivepursuitsofindustry，orforthe
leisure，ease，andindependenceofanannuitant。
2。Toexcludecasualfluctuations，wewillsupposecommerce
tobeinaquiescentcondition，noemploymentbeingunusually
prosperous，andnoneparticularlydistressed。Inthese
circumstances，themorethrivingproducersandtradershavetheir
capitalfullyemployed，andmanyareabletotransactbusinessto
aconsiderablygreaterextentthantheyhavecapitalfor。These
arenaturallyborrowers:andtheamountwhichtheydesireto
borrow，andcanobtaincreditfor，constitutesthedemandfor
loansonaccountofproductiveemployment。Tothesemustbeadded
theloansrequiredbyGovernment，andbylandowners，orother
unproductiveconsumerswhohavegoodsecuritytogive。This
constitutesthemassofloansforwhichthereisanhabitual
demand。
Nowitisconceivablethattheremightexist，inthehandsof
personsdisinclinedordisqualifiedforengagingpersonallyin
business，amassofcapitalequalto，andevenexceeding，this
demand。Inthatcasetherewouldbeanhabitualexcessof
competitiononthepartoflenders，andtherateofinterest
wouldbearalowproportiontotherateofprofit。Interestwould
beforceddowntothepointwhichwouldeithertemptborrowersto
takeagreateramountofloansthantheyhadareasonable
expectationofbeingabletoemployintheirbusiness，orwould
sodiscourageaportionofthelenders，astomakethemeither
forbeartoaccumulate，orendeavourtoincreasetheirincomeby
engaginginbusinessontheirownaccount，andincurringthe
risks，ifnotthelabours，ofindustrialemployment。
Ontheotherhand，thecapitalownedbypersonswhoprefer
lendingitatinterest，orwhoseavocationspreventthemfrom
personallysuperintendingitsemployment，maybeshortofthe
habitualdemandforloans。Itmaybeingreatpartabsorbedby
theinvestmentsaffordedbythepublicdebtandbymortgages，and
theremaindermaynotbesufficienttosupplythewantsof
commerce。Ifso，therateofinterestwillberaisedsohighas
insomewaytore—establishtheequilibrium。Whenthereisonlya
smalldifferencebetweeninterestandprofit，manyborrowersmay
nolongerbewillingtoincreasetheirresponsibilitiesand
involvetheircreditforsosmallaremuneration:orsomewho
wouldotherwisehaveengagedinbusiness，maypreferleisure，and
becomelendersinsteadofborrowers:orothers，underthe
inducementofhighinterestandeasyinvestmentfortheir
capital，mayretirefrombusinessearlier，andwithsmaller
fortunes，thantheyotherwisewouldhavedone。Or，lastly，there
isanotherprocessbywhich，inEnglandandothercommercial
countries，alargeportionoftherequisitesupplyofloansis
obtained。Insteadofitsbeingaffordedbypersonsnotin
business，theaffordingitmayitselfbecomeabusiness。A
portionofthecapitalemployedintrademaybesuppliedbya
classofprofessionalmoneylenders。Thesemoneylenders，
however，musthavemorethanamereinterest;theymusthavethe
ordinaryrateofprofitontheircapital，riskandallother
circumstancesbeingallowedfor。Butitcanneveranswertoany
onewhoborrowsforthepurposesofhisbusiness，topayafull
profitforcapitalfromwhichhewillonlyderiveafullprofit:
andmoney—lending，asanemployment，fortheregularsupplyof
trade，cannot，therefore，becarriedonexceptbypersonswho，in
additiontotheirowncapital，canlendtheircredit，or，in
otherwords，thecapitalofotherpeople:thatis，bankers，and
persons（suchasbill—brokers）whoarevirtuallybankers，since
theyreceivemoneyindeposit。Abankwhichlendsitsnotes，
lendscapitalwhichitborrowsfromthecommunity，andforwhich
itpaysnointerest。Abankofdepositlendscapitalwhichit
collectsfromthecommunityinsmallparcels;sometimeswithout
payinganyinterest，asisthecasewiththeLondonprivate
bankers;andif，liketheScotch，thejointstock，andmostof
thecountrybanks，itdoespayinterest，itstillpaysmuchless
thanitreceives;forthedepositors，whoinanyotherwaycould
mostlyobtainforsuchsmallbalancesnointerestworthtaking
anytroublefor，aregladtoreceiveevenalittle。Havingthis
subsidiaryresource，bankersareenabledtoobtain，bylendingat
interest，theordinaryrateofprofitontheirowncapital。In
anyothermanner，money—lendingcouldnotbecarriedonasa
regularmodeofbusiness，exceptupontermsonwhichnonewould
consenttoborrowbutpersonseithercountingonextraordinary
profits，orinurgentneed:unproductiveconsumerswhohave
exceededtheirmeans，ormerchantsinfearofbankruptcy。The
disposablecapitaldepositedinbanks;thatrepresentedbybank
notes;thecapitalofbankersthemselves，andthatwhichtheir
creditinanywayinwhichtheyuseit，enablesthemtodispose
of;these，togetherwiththefundsbelongingtothosewho，either
fromnecessityorpreference，liveupontheinterestoftheir
property，constitutethegeneralloanfundofthecountry:and
theamountofthisaggregatefund，whensetagainstthehabitual
demandsofproducersanddealers，andthoseoftheGovernmentand
ofunproductiveconsumers，determinesthepermanentoraverage
rateofinterest;whichmustalwaysbesuchastoadjustthese
twoamountstooneanother。（2*）Butwhilethewholeofthismass
oflentcapitaltakeseffectuponthepermanentrateofinterest，
thefluctuationsdependalmostentirelyupontheportionwhichis
inthehandsofbankers;foritisthatportionalmost
exclusively，which，beinglentforshorttimesonly，is
continuallyinthemarketseekinganinvestment。Thecapitalof
thosewholiveontheinterestoftheirownfortunes，has
generallysoughtandfoundsomefixedinvestment，suchasthe
publicfunds，mortgages，orthebondsofpubliccompanies，which
investment，exceptunderpeculiartemptationsornecessities，is
notchanged。
3。Fluctuationsintherateofinterestarisefromvariations
eitherinthedemandforloans;orinthesupply。Thesupplyis
liabletovariation，thoughlesssothanthedemand。The
willingnesstolendisgreaterthanusualatthecommencementof
aperiodofspeculation，andmuchlessthanusualduringthe
revulsionwhichfollows。Inspeculativetimes，money—lendersas
wellasotherpeopleareinclinedtoextendtheirbusinessby
stretchingtheircredit;theylendmorethanusual（justasother
classesofdealersandproducersemploymorethanusual）of
capitalwhichdoesnotbelongtothem。Accordingly，thesearethe
timeswhentherateofinterestislow;thoughforthistoo（as
weshallhereaftersee）thereareothercauses。Duringthe
revulsion，onthecontrary，interestalwaysrisesinordinately，
because，whilethereisamostpressingneedonthepartofmany
personstoborrow，thereisageneraldisinclinationtolend。
Thisdisinclination，whenatitsextremepoint，iscalleda
panic。Itoccurswhenasuccessionofunexpectedfailureshas
createdinthemercantile，andsometimesalsointhe
non—mercantilepublic，ageneraldistrustineachother’s
solvency;disposingeveryonenotonlytorefusefreshcredit，
exceptonveryonerousterms，buttocallin，ifpossible，all
creditwhichhehasalreadygiven。Depositsarewithdrawnfrom
banks;notesarereturnedontheissuersinexchangeforspecie;
bankersraisetheirrateofdiscount，andwithholdtheir
customaryadvances;merchantsrefusetorenewmercantilebills。
Atsuchtimesthemostcalamitousconsequenceswereformerly
experiencedfromtheattemptofthelawtopreventmorethana
certainlimitedrateofinterestfrombeinggivenortaken。
Personswhocouldnotborrowatfivepercent，hadtopay，not
sixorseven，buttenorfifteenpercent，tocompensatethe
lenderforriskingthepenaltiesofthelaw:orhadtosell
securitiesorgoodsforreadymoneyatastillgreatersacrifice。
Intheintervalsbetweencommercialcrises，thereisusually
atendencyintherateofinteresttoaprogressivedecline，from
thegradualprocessofaccumulation:whichprocess，inthegreat
commercialcountries，issufficientlyrapidtoaccountforthe
almostperiodicalrecurrenceofthesefitsofspeculation;since，
whenafewyearshaveelapsedwithoutacrisis，andnonewand
temptingchannelforinvestmenthasbeenopenedinthemeantime，
thereisalwaysfoundtohaveoccurredinthosefewyearsso
largeanincreaseofcapitalseekinginvestment，astohave
loweredconsiderablytherateofinterest，whetherindicatedby
thepricesofsecuritiesorbytherateofdiscountonbills;and
thisdiminutionofinteresttemptsthepossessortoincurhazards
inhopesofamoreconsiderablereturn。