Thesevariousdemandsfell
principally，assuchdemandsalwaysdo，ontheloanmarket。A
great，thoughnotthegreatestpartoftheimportedfood，was
actuallypaidforbytheproceedsofagovernmentloan。Theextra
paymentswhichpurchasersofcornandcotton，andrailway
shareholders，foundthemselvesobligedtomake，wereeithermade
withtheirownsparecash，orwithmoneyraisedfortheoccasion。
Onthefirstsupposition，theyweremadebywithdrawingdeposits
frombankers，andthuscuttingoffapartofthestreamswhich
fedtheloanmarket;onthesecondsupposition，theyweremadeby
actualdraftsontheloanmarket，eitherbythesaleof
securities，orbytakingupmoneyatinterest。Thiscombination
ofafreshdemandforloans，withacurtailmentofthecapital
disposableforthem，raisedtherateofinterest，andmadeit
impossibletoborrowexceptontheverybestsecurity。Some
firms，therefore，whichbyanimprovidentandunmercantilemode
ofconductingbusinesshadallowedtheircapitaltobecomeeither
temporarilyorpermanentlyunavailable，becameunabletocommand
thatperpetualrenewalofcreditwhichhadpreviouslyenabled
themtostruggleon。Thesefirmsstoppedpayment:theirfailure
involvedmoreorlessdeeplymanyotherfirmswhichhadtrusted
them;and，asusualinsuchcases，thegeneraldistrust，commonly
calledapanic，begantosetin，andmighthaveproduceda
destructionofcreditequaltothatof1825，hadnot
circumstanceswhichmayalmostbecalledaccidental，giventoa
verysimplemeasureofthegovernment（thesuspensionoftheBank
CharterActof1844）afortunatepowerofallayingpanic，to
which，whenconsideredinitself，ithadnosortofclaim。（1*）
4。Thegeneraloperationofcredituponpricesbeingsuchas
wehavedescribed，itisevidentthatifanyparticularmodeor
formofcreditiscalculatedtohaveagreateroperationon
pricesthanothers，itcanonlybebygivinggreaterfacility，or
greaterencouragement，tothemultiplicationofcredit
transactionsgenerally。Ifbanknotes，forinstance，orbills，
haveagreatereffectonpricesthanbookcredits，itisnotby
anydifferenceinthetransactionsthemselves，whichare
essentiallythesame，whethertakingplaceintheonewayorin
theother:itmustbethattherearelikelytobemoreofthem。
Ifcreditislikelytobemoreextensivelyusedasapurchasing
powerwhenbanknotesorbillsaretheinstrumentsused，than
whenthecreditisgivenbymereentriesinanaccount，tothat
extentandnomorethereisgroundforascribingtotheformera
greaterpoweroverthemarketsthanbelongstothelatter。
Nowitappearsthatthereissomesuchdistinction。Asfaras
respectstheparticulartransactions，itmakesnodifferencein
theeffectonpricewhetherAbuysgoodsofBonsimplecredit，
orgivesabillforthem，orpaysforthemwithbanknoteslent
tohimbyabankerC。Thedifferenceisinasubsequentstage。If
Ahasboughtthegoodsonabookcredit，thereisnoobviousor
convenientmodebywhichBcanmakeA’sdebttohimameansof
extendinghisowncredit。Whatevercredithehas，willbedueto
thegeneralopinionentertainedofhissolvency;hecannot
specificallypledgeA’sdebttoathirdperson，asasecurityfor
moneylentorgoodsbought。ButifAhasgivenhimabillforthe
amount，hecangetthisdiscounted，whichisthesamethingas
borrowingmoneyonthejointcreditofAandhimself:orhemay
payawaythebillinexchangeforgoods，whichisobtaininggoods
onthesamejointcredit。Ineithercase，hereisasecondcredit
transaction，groundedonthefirst，andwhichwouldnothave
takenplaceifthefirsthadbeentransactedwithoutthe
interventionofabill。Norneedthetransactionsendhere。The
billmaybeagaindiscounted，oragainpaidawayforgoods，
severaltimesbeforeitisitselfpresentedforpayment。Nor
woulditbecorrecttosaythatthesesuccessiveholders，ifthey
hadnothadthebill，mighthaveattainedtheirpurposeby
purchasinggoodsontheirowncreditwiththedealers。Theymay
notallofthembepersonsofcredit，ortheymayalreadyhave
stretchedtheircreditasfarasitwillgo。Andatallevents，
eithermoneyorgoodsaremorereadilyobtainedonthecreditof
twopersonsthanofone。Nobodywillpretendthatitisaseasya
thingforamerchanttoborrowathousandpoundsonhisown
credit，astogetabilldiscountedtothesameamount，whenthe
draweeisofknownsolvency。
IfwenowsupposethatA，insteadofgivingabill，obtainsa
loanofbanknotesfromabankerC，andwiththempaysBforhis
goods，weshallfindthedifferencetobestillgreater。Bisnow
independentevenofadiscounter:A’sbillwouldhavebeentaken
inpaymentonlybythosewhowereacquaintedwithhisreputation
forsolvency，butabankerisapersonwhohascreditwiththe
publicgenerally，andwhosenotesaretakeninpaymentbyevery
one，atleastinhisownneighbourhood:insomuchthat，bya
customwhichhasgrownintolaw，paymentinbanknotesisa
completeacquittancetothepayer，whereasifhehaspaidbya
bill，hestillremainsliabletothedebt，ifthepersononwhom
thebillisdrawnfailstopayitwhendue。Bthereforecan
expendthewholeofthebanknoteswithoutatallinvolvinghis
owncredit;andwhateverpowerhehadbeforeofobtaininggoods
onbookcredit，remainstohimunimpaired，inadditiontothe
purchasingpowerhederivesfromthepossessionofthenotes。The
sameremarkappliestoeverypersoninsuccession，intowhose
handsthenotesmaycome。ItisonlyA，thefirstholder，（who
usedhiscredittoobtainthenotesasaloanfromtheissuer，）
whocanpossiblyfindthecredithepossessesinotherquarters
abatedbyit;andeveninhiscasethatresultisnotprobable;
forthough，inreason，andifallhiscircumstanceswereknown，
everydraftalreadymadeuponhiscreditoughttodiminishbyso
muchhispowerofobtainingmore，yetinpracticethereverse
morefrequentlyhappens，andhishavingbeentrustedbyone
personissupposedtobeevidencethathemaysafelybetrusted
byothersalso。
Itappears，therefore，thatbanknotesareamorepowerful
instrumentforraisingpricesthanbills，andbillsthanbook
credits。Itdoesnot，indeed，followthatcreditwillbemore
usedbecauseitcanbe。Whenthestateoftradeholdsoutno
particulartemptationtomakelargepurchasesoncredit，dealers
willuseonlyasmallportionofthecreditpower，anditwill
dependonlyonconveniencewhethertheportionwhichtheyuse
willbetakeninoneformorinanother。Itisnotuntilthe
circumstancesofthemarkets，andthestateofthemercantile
mind，rendermanypersonsdesirousofstretchingtheircreditto
anunusualextent，thatthedistinctivepropertiesofthe
differentformsofcreditdisplaythemselves。Creditalready
stretchedtotheutmostintheformofbookdebts，wouldbe
susceptibleofagreatadditionalextensionbymeansofbills，
andofastillgreaterbymeansofbanknotes。Thefirst，because
eachdealer，inadditiontohisowncredit，wouldbeenabledto
createafurtherpurchasingpoweroutofthecreditwhichhehad
himselfgiventoothers:thesecond，becausethebanker’scredit
withthepublicatlarge，coinedintonotes，asbullioniscoined
intopiecesofmoneytomakeitportableanddivisible，isso
muchpurchasingpowersuperadded，inthehandsofevery
successiveholder，tothatwhichhemayderivefromhisown
credit。Tostatethematterotherwise;onesingleexertionofthe
credit—powerintheformofbookcredit，isonlythefoundation
ofasinglepurchase:butifabillisdrawn，thatsameportion
ofcreditmayserveforasmanypurchasesasthenumberoftimes
thebillchangeshands:whileeverybanknoteissued，rendersthe
creditofthebankerapurchasingpowertothatamountinthe
handsofallthesuccessiveholders，withoutimpairinganypower
theymaypossessofeffectingpurchasesontheirowncredit。
Credit，inshort，hasexactlythesamepurchasingpowerwith
money;andasmoneytellsuponpricesnotsimplyinproportionto
itsamount，buttoitsamountmultipliedbythenumberoftimes
itchangeshands，soalsodoescredit;andcredittransferable
fromhandtohandisinthatproportionmorepotent，thancredit
whichonlyperformsonepurchase。
5。Allthispurchasingpower，however，isoperativeupon
prices，onlyaccordingtotheproportionofitwhichisused;and
theeffect，therefore，isonlyfeltinastateofcircumstances
calculatedtoleadtoanunusuallyextendeduseofcredit。In
suchastateofcircumstances，thatis，inspeculativetimes，it
cannot，Ithink，bedenied，thatpricesarelikelytorisehigher
ifthespeculativepurchasesaremadewithbanknotes，thanwhen
theyaremadewithbills，andwhenmadebybillsthanwhenmade
bybookcredits。This，however，isoffarlesspractical
importancethanmightatfirstbeimagined;because，inpointof
fact，speculativepurchasesarenot，inthegreatmajorityof
cases，madeeitherwithbanknotesorwithbills，butaremade
almostexclusivelyonbookcredits。\"ApplicationstotheBankfor
extendeddiscount，\"saysthehighestauthorityonsuch
subjects，（2*）（andthesamethingmustbetrueofapplicationsto
otherbanks）\"occurrarelyifeverintheoriginorprogressof
extensivespeculationsincommodities。Theseareenteredinto，
forthemostpartifnotentirely，inthefirstinstance，on
credit，forthelengthoftermusualintheseveraltrades;thus
entailingonthepartiesnoimmediatenecessityforborrowingso
muchasmayhewantedforthepurposebeyondtheirownavailable
capital。Thisappliesparticularlytospeculativepurchasesof
commoditiesonthespot，withaviewtoresale。Butthese
generallyformthesmallerproportionofengagementsoncredit。
Byfarthelargestofthoseenteredintoontheprospectofa
riseofprices，aresuchashaveinviewimportationsfrom
abroad。Thesameremark，too，isapplicabletotheexportof
commodities，whenalargeproportionisonthecreditofthe
shippersortheirconsignees。Aslongascircumstancesholdout
theprospectofafavourableresult，thecreditofthepartiesis
generallysustained。Ifsomeofthemwishtorealize，thereare
otherswithcapitalandcreditreadytoreplacethem;andifthe
eventsfullyjustifythegroundsonwhichthespeculative
transactionswereenteredinto（thusadmittingofsalesfor
consumptionintimetoreplacethecapitalembarked）thereisno
unusualdemandforborrowedcapitaltosustainthem。Itisonly
whenbythevicissitudesofpoliticalevents，oroftheseasons，
orotheradventitiouscircumstances，theforthcomingsuppliesare
foundtoexceedthecomputedrateofconsumption，andafallof
pricesensues，thatanincreaseddemandforcapitaltakesplace;
themarketrateofinterestthenrises，andincreased
applicationsaremadetotheBankofEnglandfordiscount。\"So
thatthemultiplicationofbanknotesandothertransferable
paperdoesnot，forthemostpart，accompanyandfacilitatethe
speculation;butcomesintoplaychieflywhenthetideis
turning，anddifficultiesbegintobefelt。
Oftheextraordinaryheighttowhichspeculativetransactions
canbecarrieduponmerebookcredits，withoutthesmallest
additiontowhatiscommonlycalledthecurrency，veryfew
personsareatallaware。\"Thepowerofpurchase，\"saysMr
Tooke，（3*）\"bypersonshavingcapitalandcredit，ismuchbeyond
anythingthatthosewhoareunacquaintedpracticallywith
speculativemarketshaveanyideaof……Apersonhavingthe
reputationofcapitalenoughforhisregularbusiness，and
enjoyinggoodcreditinhistrade，ifhetakesasanguineviewof
theprospectofariseofpriceofthearticleinwhichhedeals，
andisfavouredbycircumstancesintheoutsetandprogressof
hisspeculation，mayeffectpurchasestoanextentperfectly
enormous，comparedwithhiscapital。\"MrTookeconfirmsthis
statementbysomeremarkableinstances，exemplifyingtheimmense
purchasingpowerwhichmaybeexercised，andriseofpricewhich
maybeproduced，bycreditnotrepresentedbyeitherbanknotes
orbillsofexchange。
\"Amongsttheearlierspeculatorsforanadvanceintheprice
oftea，inconsequenceofourdisputewithChinain1839，were
severalretailgrocersandtea—dealers。Therewasageneral
dispositionamongthetradetogetintostock:thatis，tolayin
atonceaquantitywhichwouldmeettheprobabledemandfrom
theircustomersforseveralmonthstocome。Some，however，among
them，moresanguineandadventurousthantherest，availed
themselvesoftheircreditwiththeimportersandwholesale
dealers，forpurchasingquantitiesmuchbeyondtheestimated
demandintheirownbusiness。Asthepurchasesweremadeinthe
firstinstanceostensibly，andperhapsreally，forthelegitimate
purposesandwithinthelimitsoftheirregularbusiness，the
partieswereenabledtobuywithouttheconditionofanydeposit;
whereasspeculators，knowntobesuch，arerequiredtopay2l。
perchest，tocoveranyprobabledifferenceofpricewhichmight
arisebeforetheexpirationoftheprompt，which，forthis
article，isthreemonths。Without，therefore，theoutlayofa
singlefarthingofactualcapitalorcurrencyinanyshape，they
madepurchasestoaconsiderableextent;andwiththeprofit
realizedontheresaleofapartofthesepurchases，theywere
enabledtopaythedepositonfurtherquantitieswhenrequired，
aswasthecasewhentheextentofthepurchasesattracted
attention。Inthisway，thespeculationwentonatadvancing
prices（100percentandupwards）tillnearlytheexpirationof
theprompt，andifatthattimecircumstanceshadbeensuchasto
justifytheapprehensionwhichatonetimeprevailed，thatall
futuresupplieswouldbecutoff，thepricesmighthavestill
furtheradvanced，andatanyratenothaveretrograded。Inthis
case，thespeculatorsmighthaverealized，ifnotalltheprofit
theyhadanticipated，averyhandsomesum，uponwhichtheymight
havebeenenabledtoextendtheirbusinessgreatly，ortoretire
fromitaltogether，withareputationforgreatsagacityinthus
makingtheirfortune。Butinsteadofthisfavourableresult，it
sohappenedthattwoorthreecargoesofteawhichhadbeen
transhippedwereadmitted，contrarytoexpectation，toentryon
theirarrivalhere，anditwasfoundthatfurtherindirect
shipmentswereinprogress。Thusthesupplywasincreasedbeyond
thecalculationofthespeculators:andatthesametime，the
consumptionhadbeendiminishedbythehighprice。Therewas，
consequently，aviolentreactiononthemarket;thespeculators
wereunabletosellwithoutsuchasacrificeasdisabLedthem
fromfulfillingtheirengagements，andseveralofthem
consequentlyfailed。Amongthese，onewasmentioned，whOhavinga
capitalnotexceeding1200l。whichwaslockedupinhisbusiness，
hadcontrivedtobuy4000chests，valueabove80，000l。，theloss
uponwhichwasabout16，000l。
\"TheotherexamplewhichIhavetogive，isthatofthe
operationonthecornmarketbetween1838and1842。Therewasan
instanceofapersonwho，whenheenteredonhisextensive
speculations，was，asitappearedbythesubsequentexamination
ofhisaffairs，possessedofacapitalnotexceeding5000l。，but
beingsuccessfulintheoutset，andfavouredbycircumstancesin
theprogressofhisoperations，hecontrivedtomakepurchasesto
suchanextent，thatwhenhestoppedpaymenthisengagementswere
foundtoamounttobetween500，000l。and600，000l。Other
instancesmightbecitedofpartieswithoutanycapitalatall，
who，bydintofmerecredit，wereenabled，whiletheaspectof
themarketfavouredtheirviews，tomakepurchasestoavery
greatextent。
\"Andbeitobserved，thatthesespeculations，involving
enormouspurchasesonlittleornocapital，werecarriedonin
1839and1840，whenthemoneymarketwasinitsmostcontracted
state;orwhen，accordingtomodernphraseology，therewasthe
greatestscarcityofmoney。\"
Butthoughthegreatinstrumentofspeculativepurchasesis
bookcredits，itcannotbecontestedthatinspeculativeperiods
anincreasedoestakeplaceinthequantitybothofbillsof
exchangeandofbanknotes。Thisincrease，indeed，sofarasbank
notesareconcerned，hardlyevertakesplaceintheearliest
stageofthespeculations:advancesfrombankers（asMrTooke
observes）notbeingappliedforinordertopurchase，butin
ordertoholdonwithoutsellingwhentheusualtermofcredit
hasexpired，andthehighpricewhichwascalculatedonhasnot
arrived。ButtheteaspeculatorsmentionedbyMrTookecouldnot
havecarriedtheirspeculationsbeyondthethreemonthswhichare
theusualtermofcreditintheirtrade，unlesstheyhadbeen
abletoobtainadvancesfrombankers，which，iftheexpectation
ofariseofpricehadstillcontinued，theyprobablycouldhave
done。
Since，then，creditintheformofbanknotesisamore
potentinstrumentforraisingpricesthanbookcredits，an
unrestrainedpowerofresortingtothisinstrumentmaycontribute
toprolongandheightenthespeculativeriseofprices，andhence
toaggravatethesubsequentrecoil。Butinwhatdegree？andwhat
importanceoughtwetoascribetothispossibility？Itmayhelp
ustoformsomejudgmentonthispoint，ifweconsiderthe
proportionwhichtheutmostincreaseofbanknotesinaperiodof
speculation，bears，Idonotsaytothewholemassofcreditin
thecountry，buttothebillsofexchangealone。Theaverage
amountofbillsinexistenceatanyonetimeissupposedgreatly
toexceedahundredmillionssterling。（4*）Thebanknote
circulationofGreatBritainandIrelandseldomexceedsforty
millions，andtheincreaseinspeculativeperiodsatmosttwoor
three。Andeventhis，aswehaveseen，hardlyevercomesinto
playuntilthatadvancedperiodofthespeculationatwhichthe
tideshowssignsofturning，andthedealersgenerallyarerather
thinkingofthemeansoffulfillingtheirexistingengagements，
thanmeditatinganextensionofthem:whilethequantityofbills
inexistenceislargelyincreasedfromtheverycommencementof
thespeculations。
6。Itiswellknownthatoflateyears，anartificial
limitationoftheissueofbanknoteshasbeenregardedbymany
politicaleconomists，andbyagreatportionofthepublic，asan
expedientofsupremeefficacyforpreventing，andwhenitcannot
prevent，formoderating，thefeverofspeculation;andthis
opinionreceivedtherecognitionandsanctionofthelegislature
bytheCurrencyActof1844。Atthepoint，however，whichour
inquirieshavereached，thoughwehaveconcededtobanknotesa
greaterpoweroverpricesthanispossessedbybillsorbook
credits，wehavenotfoundreasontothinkthatthissuperior
efficacyhasmuchshareinproducingtheriseofpriceswhich
accompaniesaperiodofspeculation，norconsequentlythatany
restraintappliedtothisoneinstrumentcanbeefficaciousto
thedegreewhichisoftensupposed，inmoderatingeitherthat
rise，ortherecoilwhichfollowsit。Weshallbestillless
inclinedtothinkso，whenweconsiderthatthereisafourth
formofcredittransactions，bychequesonbankers，andtransfers
inabanker’sbooks，whichisexactlyparallelineveryrespect
tobanknotes，givingequalfacilitiestoanextensionofcredit，
andcapableofactingonpricesquiteaspowerfully。Inthewords
ofMr。Fullarton，（5*）\"thereisnotasingleobjectatpresent
attainedthroughtheagencyofBankofEnglandnotes，whichmight
notbeaseffectuallyaccomplishedbyeachindividualkeepingan
accountwiththebank，andtransactingallhispaymentsoffive
poundsandupwardsbycheque。\"Abank，insteadoflendingits
notestoamerchantordealer，mightopenanaccountwithhim，
andcredittheaccountwiththesumithadagreedtoadvance:on
anunderstandingthatheshouldnotdrawoutthatsuminany
othermodethanbydrawingchequesagainstitinfavourofthose
towhomhehadoccasiontomakepayments。Thesechequesmight
possiblyevenpassfromhandtohandlikebanknotes;more
commonlyhoweverthereceiverwouldpaythemintothehandsof
hisownbanker，andwhenhewantedthemoney，woulddrawafresh
chequeagainstit:andhenceanobjectormayurgethatasthe
originalchequewouldverysoonbepresentedforpayment，whenit
mustbepaideitherinnotesorincoin，notesorcointoan
equalamountmustbeprovidedastheultimatemeansof
liquidation。Itisnotso，however。Thepersontowhomthecheque
istransferred，mayperhapsdealwiththesamebanker，andthe
chequemayreturntotheverybankonwhichitwasdrawn:thisis
veryoftenthecaseincountrydistricts;ifso，nopaymentwill
becalledfor，butasimpletransferinthebanker’sbookswill
settlethetransaction。Ifthechequeispaidintoadifferent
bank，itwillnotbepresentedforpayment，butliquidatedby
set—offagainstothercheques;andinastateofcircumstances
favourabletoageneralextensionofbankingcredits，abanker
whohasgrantedmorecredit，andhasthereforemorechequesdrawn
onhim，willalsohavemorechequesonotherbankerspaidtohim，
andwillonlyhavetoprovidenotesorcashforthepaymentof
balances;forwhichpurposetheordinaryreserveofprudent
bankers，one—thirdoftheirliabilities，willabundantlysuffice。
Now，ifhehadgrantedtheextensionofcreditbymeansofan
issueofhisownnotes，hemustequallyhaveretained，incoinor
BankofEnglandnotes，theusualreserve:sothathecan，asMr。
Fullartonsays，giveeveryfacilityofcreditbywhatmaybe
termedachequecirculation，whichhecouldgivebyanote
circulation。
Thisextensionofcreditbyentriesinabanker’sbooks，has
allthatsuperiorefficiencyinactingonprices，whichwe
ascribedtoanextensionbymeansofbanknotes。Asabanknote
of20l。，paidtoanyone，giveshim20l。ofpurchasing—power
basedoncredit，overandabovewhatevercredithehadofhis
own，sodoesachequepaidtohimdothesame:for，althoughhe
maymakenopurchasewiththechequeitself，hedepositsitwith
hisbanker，andcandrawagainstit。Asthisactofdrawinga
chequeagainstanotherwhichhasbeenexchangedandcancelled，
canberepeatedasoftenasapurchasewithabanknote，it
effectsthesameincreaseofpurchasingpower。Theoriginalloan，
orcredit，givenbythebankertohiscustomer，ispotentially
multipliedasameansofpurchase，inthehandsofthesuccessive
personstowhomportionsofthecreditarepaidaway，justasthe
purchasingpowerofabanknoteismultipliedbythenumberof
personsthroughwhosehandsitpassesbeforeitisreturnedto
theissuer。
Theseconsiderationsabateverymuchfromtheimportanceof
anyeffectwhichcanbeproducedinallayingthevicissitudesof
commerce，bysosuperficialacontrivanceastheonesomuch
reliedonoflate，therestrictionoftheissueofbanknotesby
anartificialrule。Anexaminationofalltheconsequencesof
thatrestriction，andanestimateofthereasonsforandagainst
it，mustbedeferreduntilwehavetreatedoftheforeign
exchanges，andtheinternationalmovementsofbullion。Atpresent
weareonlyconcernedwiththegeneraltheoryofprices，ofwhich
thedifferentinfluenceofdifferentkindsofcreditisan
essentialpart。
7。Therehasbeenagreatamountofdiscussionandargument
onthequestionwhetherseveraloftheseformsofcredit，andin
particularwhetherbanknotes，oughttobeconsideredasmoney。
Thequestionissopurelyverbalastobescarcelyworthraising，
andonewouldhavesomedifficultyincomprehendingwhysomuch
importanceisattachedtoit，iftherewerenotsomeauthorities
who，stilladheringtothedoctrineoftheinfancyofsocietyand
ofpoliticaleconomy，thatthequantityofmoneycomparedwith
thatofcommodities，determinesgeneralprices，thinkit
importanttoprovethatbanknotesandnootherformsofcredit
aremoney，inordertosupporttheinferencethatbanknotesand
nootherformsofcreditinfluenceprices。Itisobvious，
however，thatpricesdonotdependonmoney，butonpurchases。
Moneyleftwithabanker，andnotdrawnagainst，ordrawnagainst
forotherpurposesthanbuyingcommodities，hasnoeffecton
prices，anymorethancreditwhichisnotused。Creditwhichis
usedtopurchasecommodities，affectspricesinthesamemanner
asmoney。Moneyandcreditarethusexactlyonapar，intheir
effectonprices;andwhetherwechoosetoclassbanknoteswith
theoneortheother，isinthisrespectentirelyimmaterial。
Since，however，thisquestionofnomenclaturehasbeen
raised，itseemsdesirablethatitshouldbeanswered。Thereason
givenforconsideringbanknotesasmoney，is，thatbylawand
usagetheyhavetheproperty，incommonwithmetallicmoney，of
finallyclosingthetransactionsinwhichtheyareemployed;
whilenoothermodeofpayingonedebtbytransferringanother，
hasthatprivilege。Thefirstremarkwhichheresuggestsitself
is，thatonthisshowing，thenotesatleastofprivatebanksare
notmoney;foracreditorcannotbeforcedtoacceptthemin
paymentofadebt。Theycertainlyclosethetransactionifhe
doesacceptthem;butso，onthesamesupposition，wouldabale
ofcloth，orapipeofwine;whicharenotforthatreason
regardedasmoney。Itseemstobeanessentialpartoftheidea
ofmoney，thatitbelegaltender。Aninconvertiblepaperwhich
islegaltenderisuniversallyadmittedtobemoney;inthe
Frenchlanguagethephrasepapier—monnaieactuallymeans
inconvertibility，convertiblenotesbeingmerelybilletsa
porteur。ItisonlyinthecaseofBankofEnglandnotesunder
thelawofconvertibility，thatanydifficultyarises;those
notesnotbeingalegaltenderfromtheBankitself，thougha
legaltenderfromallotherpersons。BankofEnglandnotes
undoubtedlydoclosetransactions，sofarasrespectsthebuyer。
WhenhehasoncepaidinBankofEnglandnotes，hecaninnocase
berequiredtopayoveragain。ButIconfessIcannotseehowthe
transactioncanbedeemedcompleteasregardstheseller，whenhe
willonlybefoundtohavereceivedthepriceofhiscommodity
providedtheBankkeepsitspromisetopay。Aninstrumentwhich
wouldbedeprivedofallvaluebytheinsolvencyofa
corporation，cannotbemoneyinanysenseinwhichmoneyis
opposedtocredit。Iteitherisnotmoney，oritismoneyand
credittoo。Itmaybemostsuitablydescribedascoinedcredit。
Theotherformsofcreditmaybedistinguishedfromitascredit
iningots。
8。Somehighauthoritieshaveclaimedforbanknotes，as
comparedwithothermodesofcredit，agreaterdistinctionin
respecttoinfluenceonprice，thanwehaveseenreasontoallow;
adifference，notindegree，butinkind。Theygroundthis
distinctiononthefact，thatallbillsandcheques，aswellas
allbook—debts，arefromthefirstintendedtobe，andactually
are，ultimatelyliquidatedeitherincoinorinnotes。Thebank
notesincirculation，jointlywiththecoin，aretherefore，
accordingtotheseauthorities，thebasisonwhichalltheother
expedientsofcreditrest;andinproportiontothebasiswillbe
thesuperstructure;insomuchthatthequantityofbanknotes
determinesthatofalltheotherformsofcredit。Ifbanknotes
aremultiplied，therewill，theyseemtothink，bemorebills，
morepaymentsbycheque，andIpresume，morebookcredits;andby
regulatingandlimitingtheissueofbanknotes，theythinkthat
allotherformsofcreditare，byanindirectconsequence，
broughtunderasimilarlimitation。IbelieveIhavestatedthe
opinionoftheseauthoritiescorrectly，thoughIhavenowhere
seenthegroundsofitsetforthwithsuchdistinctnessasto
makemefeelquitecertainthatIunderstandthem。Itmaybe
true，thataccordingastherearemoreorfewerbanknotes，there
isalsoingeneral（thoughnotinvariably），moreorlessofother
descriptionsofcredit;forthesamestateofaffairswhichleads
toanincreaseofcreditinoneshape，leadstoanincreaseofit
inothershapes。ButIseenoreasonforbelievingthattheone
isthecauseoftheother。Ifindeedwebeginbyassuming，asI
suspectistacitlydone，thatpricesareregulatedbycoinand
banknotes，thepropositionmaintainedwillcertainlyfollow;
for，accordingaspricesarehigherorlower，thesamepurchases
willgiverisetobills，cheques，andbookcreditsofalargeror
asmalleramount。Butthepremiseinthisreasoningisthevery
propositiontobeproved。Settingthisassumptionaside，Iknow
nothowtheconclusioncanbesubstantiated。Thecreditgivento
anyonebythosewithwhomhedeals，doesnotdependonthe
quantityofbanknotesorcoinincirculationatthetime，buton
theiropinionofhissolvency:ifanyconsiderationofamore
generalcharacterentersintotheircalculation，itisonlyina
timeofpressureontheloanmarket，whentheyarenotcertainof
beingthemselvesabletoobtainthecreditonwhichtheyhave
beenaccustomedtorely;andeventhen，whattheylooktoisthe
generalstateoftheloanmarket，andnot（preconceivedtheory
apart）theamountofbanknotes。Sofar，astothewillingnessto
givecredit。Andthewillingnessofadealertousehiscredit，
dependsonhisexpectationsofgain，thatis，onhisopinionof
theprobablefuturepriceofhiscommodity;anopiniongrounded
eitherontheriseorfallalreadygoingon，oronhis
prospectivejudgmentrespectingthesupplyandtherateof
consumption。Whenadealerextendshispurchasesbeyondhis
immediatemeansofpayment，engagingtopayataspecifiedtime，
hedoessointheexpectationeitherthatthetransactionwill
haveterminatedfavourablybeforethattimearrives，orthathe
shallthenbeinpossessionofsufficientfundsfromtheproceeds
ofhisothertransactions。Thefulfilmentoftheseexpectations
dependsuponprices，butnotespeciallyupontheamountofbank
notes。Hemay，doubtless，alsoaskhimself，incaseheshouldbe
disappointedintheseexpectations，towhatquarterhecanlook
foratemporaryadvance，toenablehim，attheworst，tokeephis
engagements。Butinthefirstplace，thisprospectiverejection
onthesomewhatmoreorlessofdifficultywhichhemayhavein
tidingoverhisembarrassments，seemstooslenderaninducement
tobemuchofarestraintinaperiodsupposedtobeoneofrash
adventure，anduponpersonssoconfidentofsuccessastoinvolve
themselvesbeyondtheircertainmeansofextrication。And
further，Iapprehendthattheirconfidenceofbeinghelpedoutin
theeventofill—fortune，willmainlydependontheiropinionof
theirownindividualcredit，with，perhaps，someconsideration，
notofthequantityofthecurrency，butofthegeneralstateof
theloanmarket。Theyareawarethat，incaseofacommercial
crisis，theyshallhavedifficultyinobtainingadvances。Butif
theythoughtitlikelythatacommercialcrisiswouldoccur
beforetheyhadrealized，theywouldnotspeculate。Ifnogreat
contractionofgeneralcreditoccurs，theywillfeelnodoubtof
obtaininganyadvanceswhichtheyabsolutelyrequire，provided
thestateoftheirownaffairsatthetimeaffordsinthe
estimationoflendersasufficientprospectthatthoseadvances
willberepaid。
NOTES:
1。Thecommercialdifficulties，nothoweveramountingtoa
commercialcrisis，of1864，hadessentiallythesameorigin。
heavypaymentsforcottonimportedathighprices，andlarge
investmentsinbankingandotherjointstockprojects，combined
withtheloanoperationsofforeigngovernments，madesuchlarge
draftsupontheloanmarketastoraisetherateofdiscounton
mercantilebillsashighasninepercent。
2。Tooke’sHistoryofPrices，vol。iv，pp。125—6。
3。InquiryintotheCurrencyPrinciple，pp。79and136—8。
4。ThemostapprovedestimateisthatofMrLeatham，groundedon
theofficialreturnsofbillstampsissued。Thefollowingarethe
results:——
Billscreatedin
GreatBritainAverageamountinYear
andIreland，circulationatone
foundedontimeineachyear
Yearreturnsof
BillStamps
issuedfromthe
StampOffice
1832？56，153，409？9，038，352
1833383，659，58595，914，896
1834379，155，05294，788，763
1835405，403，051101，350，762
1836485，943，473121，485，868
1837455，084，445113，771，111
1838465，504，041116，376，010
1839528，493，842132，123。460
\"Mr。Leatham，\"saysMr。Tooke，\"givestheprocessbywhich，
uponthedatafurnishedbythereturnsofstamps，hearrivesat
theseresults;andIamdisposedtothinkthattheyareasnear
anapproximationtothetruthasthenatureofthematerials
admitsofarrivingat。\"——InquiryintotheCurrencyPrinciple，
p。26。Mr。Newmarch（AppendixNo。39toReportoftheCommittee
ontheBankActsin1857，andHistoryofPrices，vol。vi。p。587）
showsgroundsfortheopinionthatthetotalbillcirculationin
1857wasnotmuchlessthan180millionssterling，andthatit
sometimesrisesto200millions。
5。OntheRegulationofCurrencies，p。41。
ThePrinciplesofPoliticalEconomy
byJohnStuartMill
Book3:Distribution
Chapter13
OfanInconvertiblePaperCurrency
1。Afterexperiencehadshownthatpiecesofpaper，ofno
intrinsicvalue，bymerelybearinguponthemthewritten
professionofbeingequivalenttoacertainnumberoffrancs，
dollars，orpounds，couldbemadetocirculateassuch，andto
produceallthebenefittotheissuerswhichcouldhavebeen
producedbythecoinswhichtheypurportedtorepresent;
governmentsbegantothinkthatitwouldbeahappydeviceif
theycouldappropriatetothemselvesthisbenefit，freefromthe
conditiontowhichindividualsissuingsuchpapersubstitutesfor
moneyweresubject，ofgiving，whenrequired，forthesign，the
thingsignified。Theydeterminedtotrywhethertheycouldnot
emancipatethemselvesfromthisunpleasantobligation，andmakea
pieceofpaperissuedbythempassforapound，bymerelycalling
itapound，andconsentingtoreceiveitinpaymentofthetaxes。
Andsuchistheinfluenceofalmostallestablishedgovernments，
thattheyhavegenerallysucceededinattainingthisobject:I
believeImightsaytheyhavealwayssucceededforatime，and
thepowerhasonlybeenlosttothemaftertheyhadcompromised
itbythemostflagrantabuse。Inthecasesupposed，the
functionsofmoneyareperformedbyathingwhichderivesits
powerforperformingthemsolelyfromconvention:butconvention
isquitesufficienttoconferthepower;sincenothingmoreis
needfultomakeapersonacceptanythingasmoney，andevenat
anyarbitraryvalue，thanthepersuasionthatitwillbetaken
fromhimonthesametermsbyothers。Theonlyquestionis，what
determinesthevalueofsuchacurrency;sinceitcannotbe，as
inthecaseofgoldandsilver（orpaperexchangeableforthemat
pleasure），thecostofproduction。
Wehaveseen，however，thateveninthecaseofametallic
currency，theimmediateagencyindeterminingitsvalueisits
quantity。Ifthequantity，insteadofdependingontheordinary
mercantilemotivesofprofitandloss，couldbearbitrarilyfixed
byauthority，thevaluewoulddependonthefiatofthat
authority，notoncostofproduction。Thequantityofapaper
currencynotconvertibleintothemetalsattheoptionofthe
holder，canbearbitrarilyfixed;especiallyiftheissueristhe
sovereignpowerofthestate。Thevalue，therefore，ofsucha
currency，isentirelyarbitrary。
Supposethat，inacountryofwhichthecurrencyiswholly
metallic，apapercurrencyissuddenlyissued，totheamountof
halfthemetalliccirculation;notbyabankingestablishment，or
intheformofloans，butbythegovernment，inpaymentof
salariesandpurchaseofcommodities。Thecurrencybeingsuddenly
increasedbyone—half，allpriceswillrise，andamongtherest，
thepricesofallthingsmadeofgoldandsilver。Anounceof
manufacturedgoldwillbecomemorevaluablethananounceofgold
coin，bymorethanthatcustomarydifferencewhichcompensates
forthevalueoftheworkmanship;anditwillbeprofitableto
meltthecoinforthepurposeofbeingmanufactured，untilas
muchhasbeentakenfromthecurrencybythesubtractionofgold，
ashadbeenaddedtoitbytheissueofpaper。Thenpriceswill
relapsetowhattheywereatfirst，andtherewillbenothing
changedexceptthatapapercurrencyhasbeensubstitutedfor
halfofthemetalliccurrencywhichexistedbefore。Suppose，now，
asecondemissionofpaper;thesameseriesofeffectswillbe
renewed;andsoon，untilthewholeofthemetallicmoneyhas
disappeared:thatis，ifpaperbeissuedofaslowadenomination
asthelowestcoin;ifnot，asmuchwillremain，asconvenience
requiresforthesmallerpayments。Theadditionmadetothe
quantityofgoldandsilverdisposableforornamentalpurposes，
willsomewhatreduce，foratime，thevalueofthearticle;and
aslongasthisisthecase，eventhoughpaperhasbeenissuedto
theoriginalamountofthemetalliccirculation，asmuchcoin
willremainincirculationalongwithit，aswillkeepthevalue
ofthecurrencydowntothereducedvalueofthemetallic
material;butthevaluehavingfallenbelowthecostof
production，astoppageordiminutionofthesupplyfromthemines
willenablethesurplustobecarriedoffbytheordinaryagents
ofdestruction，afterwhich，themetalsandthecurrencywill
recovertheirnaturalvalue。Weareheresupposing，aswehave
supposedthroughout，thatthecountryhasminesofitsown，and
nocommercialintercoursewithothercountries;or，inacountry
havingforeigntrade，thecoinwhichisrenderedsuperfluousby
anissueofpaperiscarriedoffbyamuchpromptermethod。
Uptothispoint，theeffectsofapapercurrencyare
substantiallythesame，whetheritisconvertibleintospecieor
not。Itiswhenthemetalshavebeencompletelysupersededand
drivenfromcirculation，thatthedifferencebetweenconvertible
andinconvertiblepaperbeginstobeoperative。Whenthegoldor
silverhasallgonefromcirculation，andanequalquantityof
paperhastakenitsplace，supposethatastillfurtherissueis
superadded。Thesameseriesofphenomenarecommences:prices
rise，amongtherestthepricesofgoldandsilverarticles，and
itbecomesanobjectasbeforetoprocurecoininorderto
convertitintobullion。Thereisnolongeranycoinin
circulation;butifthepapercurrencyisconvertible，coinmay
stillbeobtainedfromtheissuers，inexchangefornotes。All
additionalnotes，therefore，whichareattemptedtobeforced
intocirculationafterthemetalshavebeencompletely
superseded，willreturnupontheissuersinexchangeforcoin;
andtheywillnotbeabletomaintainincirculationsucha
quantityofconvertiblepaper，astosinkitsvaluebelowthe
metalwhichitrepresents。Itisnotso，however，withan
inconvertiblecurrency。Totheincreaseofthat（ifpermittedby
law）thereisnocheck。Theissuersmayaddtoitindefinitely，
loweringitsvalueandraisingpricesinproportion;theymay，in
otherwords，depreciatethecurrencywithoutlimit。
Suchapower，inwhomsoevervested，isanintolerableevil。
Allvariationsinthevalueofthecirculatingmediumare
mischievous:theydisturbexistingcontractsandexpectations，
andtheliabilitytosuchchangesrenderseverypecuniary
engagementoflongdateentirelyprecarious。Thepersonwhobuys
forhimself，orgivestoanother，anannuityof100l。，doesnot
knowwhetheritwillbeequivalentto200l。orto50l。afew
yearshence。Greatasthisevilwouldbeifitdependedonlyon
accident，itisstillgreaterwhenplacedatthearbitrary
disposalofanindividualorabodyofindividuals;whomayhave
anykindordegreeofinteresttobeservedbyanartificial
fluctuationinfortunes;andwhohaveatanyrateastrong
interestinissuingasmuchaspossible，eachissuebeingin
itselfasourceofprofit。Nottoadd，thattheissuersmayhave，
andinthecaseofagovernmentpaper，alwayshave，adirect
interestinloweringthevalueofthecurrency，becauseitisthe
mediuminwhichtheirowndebtsarecomputed。
2。Inorderthatthevalueofthecurrencymaybesecurefrom
beingalteredbydesign，andmaybeaslittleaspossibleliable
tofluctuationfromaccident，thearticlesleastliableofall
knowncommoditiestovaryintheirvalue，thepreciousmetals，
havebeenmadeinallcivilizedcountriesthestandardofvalue
forthecirculatingmedium;andnopapercurrencyoughttoexist
ofwhichthevaluecannotbemadetoconformtotheirs。Norhas
thisfundamentalmaximeverbeenentirelylostsightof，evenby
thegovernmentswhichhavemostabusedthepowerofcreating
inconvertiblepaper。Iftheyhavenot（astheygenerallyhave）
professedanintentionofpayinginspecieatsomeindefinite
futuretime，theyhaveatleast，bygivingtotheirpaperissues
thenamesoftheircoins，madeavirtual，thoughgenerallya
false，professionofintendingtokeepthematavalue
correspondingtothatofthecoins。Thisisnotimpracticable，
evenwithaninconvertiblepaper。Thereisnotindeedthe
self—actingcheckwhichconvertibilitybringswithit。Butthere
isaclearandunequivocalindicationbywhichtojudgewhether
thecurrencyisdepreciated，andtowhatextent。Thatindication
is，thepriceofthepreciousmetals。Whenholdersofpaper
cannotdemandcointobeconvertedintobullion，andwhenthere
isnoneleftincirculation，bullionrisesandfallsinprice
likeotherthings;andifitisabovetheMintprice，ifanounce
ofgold，whichwouldbecoinedintotheequivalentof3l。17s。
101/2d。，issoldfor4l。or5l。inpaper，thevalueofthe
currencyhassunkjustthatmuchbelowwhatthevalueofa
metalliccurrencywouldhe。If，therefore，theissueof
inconvertiblepaperweresubjectedtostrictrules，onerule
beingthatwheneverbullionroseabovetheMintprice，theissues
shouldhecontracteduntilthemarketpriceofbullionandthe
Mintpricewereagaininaccordance，suchacurrencywouldnotbe
subjecttoanyoftheevilsusuallydeemedinherentinan
inconvertiblepaper。
Butalsosuchasystemofcurrencywouldhavenoadvantages
sufficienttorecommendittoadoption。Aninconvertible
currency，regulatedbythepriceofbullion，wouldconform
exactly，inallitsvariations，toaconvertibleone;andthe
onlyadvantagegained，wouldbethatofexemptionfromthe
necessityofkeepinganyreserveofthepreciousmetals;whichis
notaveryimportantconsideration，especiallyasagovernment，
solongasitsgoodfaithisnotsuspected，needsnotkeepso
largeareserveasprivateissuers，beingnotsoliabletogreat
andsuddendemands，sincetherenevercanbeanyrealdoubtof
itssolvency。Againstthissmalladvantageistobeset，inthe
firstplace，thepossibilityoffraudulenttamperingwiththe
priceofbullionforthesakeofactingonthecurrency;inthe
mannerofthefictitioussalesofcorn，toinfluencethe
averages，somuchandsojustlycomplainedofwhilethecornlaws
wereinforce。Butastillstrongerconsiderationisthe
importanceofadheringtoasimpleprinciple，intelligibletothe
mostuntaughtcapacity。Everybodycanunderstandconvertibility;
everyoneseesthatwhatcanbeatanymomentexchangedforfive
pounds，isworthfivepounds。Regulationbythepriceofbullion
isamorecomplexidea，anddoesnotrecommenditselfthroughthe
samefamiliarassociations。Therewouldbenothinglikethesame
confidence，bythepublicgenerally，inaninconvertiblecurrency
soregulated，asinaconvertibleone:andthemostinstructed
personmightreasonablydoubtwhethersucharulewouldbeas
likelytobeinflexiblyadheredto。Thegroundsoftherulenot
beingsowellunderstoodbythepublic，opinionwouldprobably
notenforceitwithasmuchrigidity，and，inanycircumstances
ofdifficulty，wouldbelikelytoturnagainstit;whiletothe
governmentitselfasuspensionofconvertibilitywouldappeara
muchstrongerandmoreextrememeasure，thanarelaxationofwhat
mightpossiblybeconsideredasomewhatartificialrule。Thereis
thereforeagreatpreponderanceofreasonsinfavourofa
convertible，inpreferencetoeventhebestregulated
inconvertiblecurrency。Thetemptationtoover—issue，incertain
financialemergencies，issostrong，thatnothingisadmissible
whichcantend，inhoweverslightadegree，toweakenthe
barriersthatrestrainit。
3。Althoughnodoctrineinpoliticaleconomyrestsonmore
obviousgroundsthanthemischiefofapapercurrencynot
maintainedatthesamevaluewithametallic，eitherby
convertibility，orbysomeprincipaloflimitationequivalentto
it;andalthough，accordingly，thisdoctrinehas，thoughnottill
afterthediscussionsofmanyyears，beentolerablyeffectually
drummedintothepublicmind;yetdissentientsarestill
numerous，andprojectorseverynowandthenstartup，withplans
forcuringalltheeconomicalevilsofsocietybymeansofan
unlimitedissueofinconvertiblepaper。Thereis，intruth，a
greatcharmintheidea。Tobeabletopayoffthenationaldebt，
defraytheexpensesofgovernmentwithouttaxation，andinfine，
tomakethefortunesofthewholecommunity，isabrilliant
prospect，whenonceamaniscapableofbelievingthatprintinga
fewcharactersonbitsofpaperwilldoit。Thephilosopher’s
stonecouldnotbeexpectedtodomore。